Buy Aarti Industries Ltd Target Rs.845 - Yes Securities
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Volatile macro weighs on 2Q; prognosis strong
Our View:
ARTO’s 2QFY23 Adj. Ebitda at Rs 2.7bn (+31.5% YoY; ?5.2%), stood largely in?line with our estimates. The YoY growth stemmed from adjustment for shortfall fee of Rs 520mn in base quarter. Higher raw material volatility, lower volume due to maintainance shutdown at Jhagadia and muted demand for discretionary products (dyes & pigments) coupled with QoQ higher operating expense led to sequential drop in operating profits. Going ahead, while Ebitda for 2HFY23 could remain flat (vs 1H), a stronger 25% CAGR is expected over FY24?25e driven by a) expansion in NCB and Ethylation capacities, b) ramp?up in LT?2 (revenue potential : Rs 5.5bn) c) commissioning and ramp?up of LT?3 (revenue potential: Rs 940mn) and d) launch of 50+ molecules currently under R&D. Maintain BUY
Result Highlights
* Revenue: The Revenue for the quarter stood at Rs 16.8bn (+34% YoY; +4.6% QoQ). As the statements are restated, so the revenue pertains only to Specialty Chemicals. Volatility in raw material prices, forex and muted demand for Dyes & Pigmenst impacted business during the quarter. However esports demand picked up as proportion of exports in the mix increased to 50%
* Consolidated Ebitda & PAT: Consol. Adj. Ebitda stood at Rs 2.7bn (+31% YoY; ? 5.2% QoQ) and Consol. PAT stood at Rs 1.25bn (?17% YoY; ?8.2% QoQ). The sequential decline in Ebitda/Ebitda margin stemmed from contraction in gross margin to 47% (1Q: 54%) and 11% QoQ increase in operating expenses. ARTO has guided for FY23 Ebitda to be in excess of Rs 11bn (1HFY23: 5.5bn), followed by an EBITDA growth CAGR of ~ 25% over FY24?25e.
* Pharma Demerger: Given the approval for de?merger of Pharma business (effective 17th Oct’2022), the assets and liabilities pertaining to the Pharma Business Undertaking, including supporting manufacturing units, employees, cash and cash equivalents and investments (including investments in subsidiaries and joint ventures), as defined in the Scheme, stand transferred and vested into the Aarti Pharmalabs Ltd from its appointed Date i.e. from 1st Jul’21. Accordingly, the financial statement for Aarti Industries Ltd. stands restated.
* Capex: The planned Capex for FY23 is estimated at Rs 11?12bn, with Rs 5.7bn invested in 1HFY23.
Valuation
We maintain BUY rating on ARTO with a revised TP of Rs 845/sh, as we align our estimates to re?stated, post demerger financials and roll estimates forward to FY25e. Our TP is premised upon an operating earnings growth CAGR of 10% (FY22?30e) and RoEs of ~15?16%.
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