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Operating profits stand in-line

Our View:

ARTO reported a healthy set of earnings in the 3QFY22, with consolidated Ebitda adjusted for termination fee w.r.t. long term (LT) contract, clocking in at Rs 3.3bn (+17.5% YoY; +8.1% QoQ), aided by higher percentage (~71%) of value-added product in sales. Challenges in availability of nitric acid impacted production of chemicals based on the same, leading to 12.6% QoQ lower production at 23.8kt (Nitro-chloro Benzene, Hydrogenated products, Nitrotoluene and PDA). However going ahead, most logistical challenges witnessed so far are being resolved and earnings traction is expected to pick up along with a) recovery of demand in key consumption segments i.e. agrochemical, dyes and pharma, b) start of second LT contract in 4QFY22, with annual revenue potential of ~Rs 5.5bn and c) start of third LT contract, with revenue potential of Rs ~940mn, by 1Q-2Q FY23. ARTO remain on track to invest its way into 3-4x earnings growth by FY27e (over FY21).

Result Highlights

Revenue: The consolidated net-revenue during the quarter stood at Rs 23.7bn (+100% YoY; +53% QoQ), significantly ahead of estimates on account of accrual of termination fee of Rs 6.312bn (with respect to Long Term contract-1) for 3QFY22 & 9MFY22. Adjusted for the same Net-revenue stood at Rs 17.5bn (+47% YoY; +12.4% QoQ), driven by volume expansion and contribution from value added products.

Consolidated Ebitda & PAT: Consolidated Ebitda and PAT stood at Rs 9.6bn (+239% YoY; +212% QoQ) and Rs 7.7bn (+357% YoY; +339% QoQ), respectively. Adjusted for termination fee the consolidated Ebitda and PAT, as per our assessment, stood at Rs 3.3bn (+17.5% YoY; +8.1% QoQ) and Rs 2.1bn (+24.4%; +20% QoQ), respectively

Chemicals Segment: Segment revenue stood higher by 115% YoY and 54% QoQ at Rs 22.9bn and Ebit at Rs 8.9bn (+299% YoY and 270% QoQ), driven by termination fee of Rs 6.3bn at revenue level and Rs 6.1bn at Ebit level. Adjusted for the same revenue clocked in at Rs 16.6bn (+56% YoY; +12% QoQ) and Ebit at Rs 2.8bn (+27% YoY; +17% QoQ), primarily driven by high proportion of valueadded products in sales.

Pharma Segment: Segment revenue stood at Rs 3.5bn (+40%YoY; +25% QoQ) and Ebit at Rs 600mn (+10% YoY and +45% QoQ). Top line grew as higher costs were passed on to consumers, while improvement in Ebit driven by foray into new APIs. ARTO continues to invest in capacity and going ahead is expected from regulated markets and value-added products.

Capex: Capex for the quarter stood at Rs 3120mn, taking the 9M capex to Rs 9130mn, in-line with guidance of Rs 12 to 15bn for the FY22

Valuation

We value ARTO at Rs 1,350/sh, on DCF basis, implying a target P/E multiple of 36x FY27e, as against 29x the stock is currently trading at. Our TP is premised upon a Ebitda growth CAGR of ~ 19% over FY21-30e

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