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Demand recovery in sight...eyeing new opportunities

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.

* Q4FY21 revenue grew by 12% YoY, led by revival in specialty chemicals & stable growth in Pharma segment.

* EBITDA margins improved by 120bps YoY to 21.5% led by better volume & value added products. PAT grew by 23% YoY.

* Revival in discretionary portfolio ~40% of specialty chemicals (Auto, industrial, dyes/pigments) to pre-Covid levels is positive.

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

* CAPEX plans for FY22-23 is Rs.1,500cr. To exploit long term opportunities, management guided Rs.3,500cr over FY24-27.

* Given niche execution capabilities, expanding value-added products in specialty chemicals & Pharma segments, strong clientele and improved outlook on account China issues, we maintain our positive outlook.

* Given positive trends in the chemical sector, strong earnings outlook and RoE of ~21% (5yr avg.), we value ARTO at P/E of 33x on FY23E and maintain to Accumulate, with a target price of Rs.1,902.

Growth picks-up...focus is on to add more products

Q4FY21 Revenue grew by 12% YoY, as revenue from Specialty chemicals grew by 14% & Pharma business grew by 9% YoY. The overall revenue growth was aided by better volumes from regulated market. During the quarter, shut down of its Acid plant in Vapi and Jhagadia for annual maintenance led to loss of Rs.12cr in revenues.

Though revenue growth from Pharma segment was stable in Q4FY21, the volumes were partly impacted by maintenance shutdowns. Over FY22-23, ARTO to 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 growth opportunities in the sector. ARTO will continue to benefit from higher volumes due to China plus one strategy adopted by global chemical players to de-risk their supply chains. We expect revenue to grow by 25% CAGR over FY21-23E.

Earnings momentum to pick-up...

EBITDA grew by 19% YoY and margins improved 120bps YoY to 21.5%. Specialty chemicals & Pharma, EBIT margins improved by 120bps & 380bps YoY respectively. Margins expansion was supported by revival in regulated markets and higher share of value added products. Consequently, PAT grew by 23% YoY. We expect Specialty chemical margins to improve going ahead led by better improved off-take from its discretionary product portfolio and new products. We upgrade our EPS estimates by 1.7% & 8.1% for FY22 & FY23. We expect PAT to grow by 38% CAGR over FY21-23E.

Valuations

Focus on new products either through backward/forward integration, strong customer and opportunities on account China issues, will benefit the company in the medium term. Considering positive momentum in the chemical sector and strong earnings outlook, we value ARTO at 33x on FY23 and maintain to Accumulate with target price of Rs1,902.

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