Buy Aarti Drugs Ltd For Target Rs.610 Axis Securities Ltd
Margin Gains & Expansion Plans Fuel Optimism for H2
Est. Vs. Actual for Q1FY26: Revenue – INLINE; EBITDA Abs.– BEAT PAT – BEAT
Changes in Estimates post Q1FY26
FY26E/FY27E: Revenue: 0.0%/0.0%; EBITDA: 0.0%/0.0%; PAT: 0.0%/0.0%
Recommendation Rationale:
* Uptick in Revenue and Profitability: Revenue, EBITDA, and Adjusted PAT increased by 6.3%, 13.9%, and 14% YoY, respectively, driven by strong demand in API, leading to volume growth of 9% and negative variance of ~5%.
* Encouraging Segment-Wise Performance: The Formulations business saw a significant jump of 14% annually, while the API reported muted growth of 3.5%. The company is now focused on expanding into more international markets.
* Capex Investments for Future Growth: During Q1FY26, the company incurred a Capex of ~Rs 49 Cr, primarily for capacity expansion, backward integration, and new product launches. For FY26, planned capex is expected to be around Rs 150-200 Cr.
Sector Outlook: Positive
Company Outlook & Guidance: In the API sector, prices have bottomed out and are now stable. The export landscape is expected to improve in the near future, driven by optimal capacity utilisation, low stock levels, and an upswing in demand. According to the management, it has a potential standalone revenue of over ~Rs 3,000 Cr for FY27E, with the company targeting 12– 15% volume growth for FY26. From H2FY26 onward, stable to improved pricing is anticipated.
Current Valuation: PE 24x fo FY27E earnings (Earlier Valuation:PE 19x)
Current TP: Rs 610/share (Earlier TP: Rs 475/share)
Recommendation: BUY
Financial Performance
Aarti Drugs reported revenue of Rs 591 Cr, marginally below our estimate of Rs 598 Cr, yet broadly in line with expectations. Revenue grew by 6.3% YoY, supported by a recovery in demand and volume growth, particularly in the API segment. EBITDA stood at Rs 74 Cr, exceeding our estimate of Rs 69 Cr, registering a 13.9% YoY increase. The EBITDA margin improved to 12.5%, driven by a 154 bps expansion in gross margin, resulting in an 83 bps YoY expansion in EBITDA margin. Adjusted PAT stood at Rs 38 Cr, up 14% YoY, while reported PAT came in at Rs 54 Cr, benefiting from earlier tax advantages.
API Segment witnessed volume recovery and improved demand, although annual revenue growth remained muted. Formulations Segment reported robust growth of 14%, outpacing the Indian Pharmaceutical Market (IPM) of 7-8%. Speciality Chemicals and Intermediates delivered strong growth of 24% and 22%, respectively.
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SEBI Registration number is INZ000161633
