Buy Aarti Industries Ltd Target Rs.1,195 - Yes Securities
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Resilient performance amidst challenging macro
Our View:
ARTO’s 1QFY23 EBitda at Rs 3.7bn (+18% YoY; +9%), stood largely in-line with estimates. While operating earnings reported a healthy growth on a YoY basis, however if we adjust for one-time income of Rs 320mn in the base quarter, the growth stands even higher at 31% YoY. The Ebitda margin however stood lower on YoY& QoQ basis at 18.7% on account of raw material and utility cost inflations. Demand from textile and FMCG segment was also tepid due to inflationary environment. The second LT contract (annual revenue potential of ~Rs 5.5bn), which started in 4QFY22, is gradually ramping up, and is expected to reach 80% utilization by FY24 end. The third LT contract, with revenue potential of Rs ~940mn is expected to start in 2QFY23, ARTO remain on track to invest its way into 3-4x earnings growth by FY27e (over FY21). BUY.
Result Highlights
* Revenue: The consolidated net-revenue during the quarter stood at Rs 19.7 bn (+50% YoY; +12.3% QoQ) , driven by improved pricing and higher volumes
* Consolidated Ebitda & PAT: Ebitda and PAT stood at Rs 3.7bn (17.7% YoY; +9% QoQ) and Rs 1.9bn(+14.5%; -2.2% QoQ). Given that 1QFY22 (base quarter) had a onetime gain of Rs 320mn, adjusted for the same the YoY growth stood at 31%. The Gross & Ebitda margins stood lower sequentially at 43.6% (4Q: 48.6%) and 18.7% (4Q: 19.3%) on higher raw material and utility costs
* Chemicals Segment: Segment revenue at Rs 17.7bn stood higher by 44% YoY and by 8.4% QoQ. The segment EBIT clocked in at 2.5bn (+7.7% YoY; +2% QoQ).
* Pharma segment: Segment Revenue and Ebit stood at Rs 4.0bn (+48% YoY; +5% QoQ) and Rs 762mn (+46% YoY; +14.2% QoQ), respectively. The demerger of segment is on track, with hearing at NCLT complete and order expected soon.
Valuation
We maintain BUY on ARTO with a Mar’23 TP of Rs 1,195/sh. On backs of elaborate investment plan laid out by ARTO over FY22-25, we estimate an operating earnings CAGR of ~ 13% (FY22-30e). Our DCF based TP, implies a target multiple of 30.6x FY24e, as against the 21x FY24e the stock is currently trading at.
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