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Earning beat…likely margin volatility prompts earnings cut 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.

* Revenue grew by 31% YoY, although at a lower base, it was supported by high volume growth of 30% YoY.

* EBITDA grew by 52% YoY and margins expanded by 220bps, led by higher volumes and a fall in employee expenses & lower other expenses, which was better than expected.

* Considering heighted competition and dumping from China, management has hinted that margins are likely to remain under pressure. Given this scenario, management has suspended their earlier EBITDA guidance of Rs.1,450cr -Rs1,700cr for FY25E-26E.

* Although our estimates remained lower than consensus, we have cut our EPS estimates by 12.4% & 6.5% for FY25E-26E given the potential impact on earnings in the near term.

* However, we remain positive given the green shoots of recovery shown in Q1FY25, intact volume growth guidance of 20%-30%, and healthy offtake from the long-term contract. Further, any improvement in the pricing scenario in the near term will also boost earnings.

* Post-earnings downgrade, we anticipate PAT to grow by 31% CAGR (at a lower base) over FY24-26E. We value ARTO at a P/E of 36x in FY25E, and we reiterate our Accumulate rating on the stock with a target price of Rs.737.

Volume growth strong....

In Q1FY25, ARTO revenue saw a 31% YoY increase, although at a lower base. Revenue growth was supported by a 30% YoY increase in volume as the company witnessed demand recovery across several end-use industries, including polymers, pharma, dyes, & pigments. Supply of MMA long term contracts witnessed continued traction. However, overall realization is still lower than 3 years ago, which remains a concern. The company has maintained its volume growth guidance at 20-30% for FY25. While, given continued pricing pressure owing to dumping by Chinese suppliers’ the overall realisation is likely to remain under pressure in the near term, as per management commentary. However, given healthy volume growth guidance, green shoots of recovery in discretionary portfolios, and offtake from long-term supply contracts, we remain optimistic about growth revival in H2FY24. We project a revenue growth of 19.2% CAGR from FY24 to FY26E

EBITDA margins to improves…EBITDA guidance downgrades

In Q1FY25, EBITDA grew by 51%YoY, supported by improved volume growth and lower cost. EBITDA margins improved by 220bps YoY to 16.5%, driven by lower other expenses and employee costs. Reported Net profit doubled YoY to Rs.138cr. However, management has turned cautious on account of pricing and its likely impact on margin amid heightened competition from China. Given limited visibility in improvement in margin, management has suspended their earlier EBITDA guidance of Rs1,450-1,700cr over FY25-26. Though our earlier estimates were lower than consensus, we cut our EBITDA margin estimates by 50bps & 10bps for FY25E & FY26E. Due to a downgrade in our margin estimates and a change in depreciation & interest assumptions, the impact on our EPS estimates is 12.4% & 6.5% for FY25E & FY26E.

Valuations

The worst impact on earnings attributed to destocking, demand slowdown, and volatility in input prices are largely behind us. While the pressure on realization and margin volatility, amid aggressive dumping by China still remain a concern. However, we believe that these concerns are factored-in the stock prices, while strong volume recovery in Q1 and any pricing recovery in H2 will drive earnings. We value ARTO at a P/E of 36x on FY25E, and however, given premium valuation, we downgrade to Accumulate rating from BUY rating with a target price of Rs.737

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