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Strong sequential recovery; improved visibility for FY25E

Unlike other large chemical companies, Aarti Industries(Aarti) reported strong sequential recovery in its Q2FY24 EBITDA supported by volumes and better margins. Thus, Q2 EBITDA/ PAT soared 16.5%/ 28.2% QoQ at Rs2.3bn / Rs0.9bn. Discretionary segments such as dyes, polymers, additives, and few specialty applications witnessed sequential recovery, which was prominent in exports market, benefitting overall performance. However, agrochemicals is still reeling under pressure in both domestic and exports market while pharma is lagging too. Nonetheless, management remained optimistic on sequential recovery in 2H with QoQ EBITDA expansion. Demand is expected to be normalised in FY25E based on which the management has guided EBITDA range of Rs14.5bn-16.1bn while guiding FY24E EBITDA at ~Rs10bn. Consequently, we have lowered our FY24E EBITDA estimates by 8% while marginally lowering FY25E EBITDA estimates by 2%. Introducing FY26E numbers and rolling over our valuations to 1HFY26E, we maintain Buy with a revised TP of Rs604 (earlier Rs561).

Volume growth, better margins in some products benefits Q2

During Q2, Aarti’s revenues rose marginally by 2.8% QoQ at Rs14.5bn aided by volume gains in several products. EBITDA expanded substantially by 16.5% QoQ owing to volume expansion, product mix, recovery in regular markets, and better contribution from some of the products. Discretionary segments such as dyes, polymers, additives, and few specialty applications witnessed good sequential recovery.

FY25E to witness normalised demand

Management remained optimistic on Q2 recovery and expects the same to continue in ensuing quarters with normalised demand from Q1FY25E onwards. Additionally, new projects commissioned in FY23-24E coupled with some projects commissioning in early-FY25E are likely to contribute significantly to FY25E EBITDA resulting in robust YoY growth.

Capex guidance remains intact, project commissioning as per schedule

During Q2, Aarti commissioned its Phase I Acid Unit revamp project post capacity expansion of NCB. Ethylation and Nitrotoluene debottlenecking projects are likely to be commissioned in Q1FY25E. Aarti’s large Chlorotoluenes project (Phase I capex at ~Rs15bn) is expected to come up by end-FY25E. The company has not deferred any projects and continues to maintain its FY24-25E capex guidance of Rs25-30bn.

Watch out for sequential improvement in EBITDA, maintain Buy

Post Aarti’s QoQ improvement in EBITDA in Q2, management cited continued improvement in QoQ performance in ensuing quarters with demand normalisaiton in FY25E. Sequential growth in EBITDA remains a key trigger for the stock In near to medium term. We believe that alleviating global headwinds incrementally, may benefit Aarti’s QoQ recovery as suggested by the management. The stock is currently trading at 48.2x/ 24.5x FY24E/ FY25E EPS of Rs10.6/ Rs20.9. Rolling over our valuations to 1HFY26E and valuing the company at 25x P/E, we maintain Buy with an increased TP of Rs604 (earlier Rs561).

Risks – Delay in demand recovery, project execution delays

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