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Our View:

ARTO’s 3QFY23 Adj. Ebitda at Rs 2.887bn (+36% YoY; +8%), stood below ours but above street estimates. The YoY growth stemmed from adjustment for shortfall fee of Rs 6.8bn in base quarter. The 9MFY23 Ebitda stands at Rs 8.4bn, as against an annual guidance of Rs 11bn for FY23. While demand environment is challenging and tepid, specially in the textile segment, but ARTO expects to achieve its annual Ebitda guidance. The operating earnings CAGR over FY24-25 is expected at ~25%, with growth being back-ended towards FY25 leading to an Ebitda of Rs 17bn (FY25e), as brownfield NCB expansion, along with specialty chemical blocks at Vapi gets commissioned by 1HFY24. The LT-3 contracts is also commissioned and ramping up to contribute to earnings in FY24 and FY25. Growth beyond FY25 would be aided by the Rs 30bn capex being undertaken over FY24-25, most of which is aimed at production of new higher value molecules. Maintain BUY

Result Highlights

* Revenue: The Revenue for the 3QFY23 stood in-line with our and street estimates at Rs 16.7bn (+16% YoY; -1% QoQ). The Revenue for 9M stood at Rs 49.63bn, which is 25% YoY higher than adjusted revenue (adjusted for one-time revenue from contract cancellation) for the same period last year.

* Consolidated Ebitda & PAT: The Ebitda for 3QFY23 stood at Rs 2.89bn (+36% YoY; +8.1% QoQ), implying a margin of 17%. The Ebitda for the base quarter (i.e 3QFY22) has been adjusted for one-time income of Rs 6.8bn, stemming from cancellation of long-term contract-1 (LT-1). Of the aforementioned Rs 6.8bn, the impact only on revenue was Rs 6.3bn and Rs 470mn gain was accounted for only in Ebitda for 3QFY22. The base quarter Revenue and Ebitda are accordingly adjusted for our calculations. The 9M Ebitda stood at Rs 8.37bn, which is 20% higher YoY on adjusted basis, implying a operating margin of 16.9% as against 17.5% last year

The Adjusted PAT during the quarter at Rs 1.365bn (+16.4% YoY; +9.7% QoQ), stood below our estimates (YES: Rs 1.5bn) but above consensus estimates (Rs 1.26bn). The 9M PAT stood at Rs 3.96bn (+9% YoY)

* Capex: The capex for the 9MFY23 stood at Rs 8.4bn, with annual target of Rs 11- 12bn for FY23, followed by cumulative capex of Rs 30bn over FY24-25e.

Valuation

We maintain BUY rating on ARTO with a revised TP of Rs 795/sh, Our TP is premised upon an operating earnings growth CAGR of 10% (FY22-30e) and RoEs of ~15-16%

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