Add Aarti Industries Ltd For Target Rs.500 By Emkay Global Financial Services Ltd
FY28 guidance intact; maintain ADD
Aarti’s Q4 EBITDA at Rs2.7bn (+16% QoQ, -5% YoY) was above street and our estimates, owing to higher volume growth across value chains. Non-energy business volumes were up 14% QoQ (led by NCB, NT, and Ethylation) and energy business volumes were up 21% QoQ (on a lower base) owing to bulk shipment of MMA moving from Q3 to Q4. The management guided that there are signs of demand stabilization across product portfolios leading to steady volume growth amid a challenging macro environment. Owing to US tariffs, we expect Aarti to report better volume growth over the next couple of months. The company achieved its guided EBITDA of Rs10bn in FY25 and maintained FY28 EBITDA guidance of Rs18-22bn. We tweak FY25E/26E EBITDA by -2/+2% to factor in back-ended growth. We maintain ADD and revise up our TP by ~11% to Rs500 from Rs450 earlier, at 25x Mar-27E EPS.
Existing capacity utilization expected to improve further in FY26
Aarti posted Rs10bn EBITDA (+2% YoY) in FY25, in line with Q3 guidance, backed by 9% volume growth (pricing across the value chain under pressure). Volume growth was led by higher utilization in MMA, NCB, and DCB. The growth is expected to continue in FY26, given that capacities are in place and the underutilized and overall demand environment is improving. Aarti still has under-utilized capacities in PDA, NT/ethylation (commissioned in Q4FY25), and MMA. In FY26, the PDA and NCB value chains are expected to see strong volume growth owing to direct/indirect impact of US tariffs on China. The management expects further ramp-up in MMA volumes by diversifying on the geography, customer, and end-use (supply chain established, volumes grew 38% in FY25) fronts.
Overall demand environment improving gradually across value chains
Aarti’s non-energy businesses will see volume recovery due to US tariff situation in agrochemical intermediates (in terms of new market opportunities), pharmaceuticals (higher demand for paracetamol in Indian markets), and polymers (good traction in PDA exports to the US and stable demand in autos). Though volumes are bound to improve, pricing pressure will persist owing to excessive Chinese capacities. To mitigate the pricing risks, Aarti is working on several cost initiatives across the product portfolio. The share of dyes and pigments should improve in FY26, led by global consolidation within this industry. PNCB, in the PAP/downstream market, will see volume pick-up from H1FY26.
FY28 EBITDA guidance maintained at Rs18-22bn
Aarti’s FY25 EBITDA and capex within the guided range; FY28 EBITDA guidance maintained at Rs18-22bn. Progressing well on cost optimization initiatives; expects Rs1.5-2bn benefit to accrue from FY27, with material savings on power cost on the back of a hybrid power project. FY26 capex guidance at Rs10bn (Zone 4: Rs8bn; maintenance: Rs2bn). Zone 4 capex to see staggered commissioning from H2FY26, starting with MPP, calcium chloride. We build in FY28E EBITDA of ~Rs20bn, with growth largely back-ended.
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