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Growth outlook intact...premium valuation to stay

AARTI Industries Ltd (ARTO) is a global leader in Benzene based derivative products. The company has a diversified product portfolio with end users in pharma, agrochemicals, specialty polymers, paints & pigments.

9MFY22 revenue grew by 40% YoY & PAT grew by 41% YoY, led by improved realization and volume off-take

9M EBITDA margins fell by 60bps YoY to 21.2% on account higher input cost.

Focus is on new products/import substitutes, by value addition through backward integration /forward integration.

Going ahead, contribution from new projects starting from FY23, pass through of cost and improved performance in Pharma segment will drive earnings.

Given expanding portfolio of value-added products, strong clientele and improving sector outlook, we continue to maintain our positive stance.

The earnings outlook remains strong at 30% CAGR over FY21-24E and RoE of ~21% (5yr avg.). We value ARTO at P/E of 33x on FY24E and recommend to Buy, with a target price of Rs.1,038.

Focus on value added products...

9MFY22 Revenue grew by 40% YoY, led by Specialty chemicals segment which grew by 45% & Pharma business 34% YoY. The overall revenue growth was aided by higher realization and better volumes from regulated market. While overall demand situation has improved driven by domestic demand. Capacity utilization in specialty chemicals remained at 85% across plants. While value added products share in specialty chemicals were at 71% of overall revenues. Going forward, over FY22-23, ARTO will spent Rs.1,500cr for expansion of capacities in NCB, Pharma and for two other long term projects. Supported by these expansions and strong growth in existing product portfolios, management has guided 1.7x–2.0x jump in turnover over period of FY21-FY24. Further, ARTO plans to spent Rs.3,500cr over period of FY24-27 with strategic focus on increasing value added products, downstream products, multi purpose plants for outsourcing and new range of API Pharma intermediaries, to exploit long term growth opportunities in the sector. We expect revenue to grow by 26% CAGR over FY21-24E.

EBITDA to grow by 27% CAGR over FY21-24E...

9MFY22 EBITDA grew by 36% YoY led by improved realization and higher volumes. But margins fell by 60bps YoY to 21.2% on account of higher input cost. PAT grew by 41% YoY. Supply concerns and sharp rise in commodity prices are expected to remain elevated in the near term. But with increasing share of value added products in Specialty chemicals & Pharma and pass through of cost higher input cost, we expect gradual normalization in margins. We lower our EBITDA margin estimates by 30bps for FY22E. Consequent, to changes in estimates, our EPS estimates stand reduced by 0.4% & 2% for FY23E & FY24E. We expect PAT to grow by 30% CAGR over FY21- 24E.

Valuations

We expect commodity prices to remain elevated in the near term. However, we maintain positive stance on the stock given its focus on new products either through backward/forward integration, strong customer and improved sector outlook. We value ARTO at 33x on FY24E and recommend to Buy with target price of Rs.1,038

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