Buy Aarti Industries Ltd For Target Rs.450 By Emkay Global Financial Services Ltd
Aarti’s Q1 EBITDA at Rs2.1bn (-31% YoY, -21% QoQ) was below street’s expectations and our estimates, owing to a) a steep decline in prices of raw materials like benzene and aniline (15-20%), resulting in inventory loss of Rs300mn, b) logistics issues arising from the Middle East conflict leading to postponement of bulk shipments to July, from June, and c) impact on Kutch operations, led by MMA catalyst replacement/capacity expansion and the IndoPak conflict. In Q1, the environment remained challenging for the company; however, the management reiterated guidance of Rs18-22bn EBITDA by FY28, led by cost-optimization and capacity additions in Zone-4. We cut FY26/27/28E EBITDA by 19/12/8% to factor in weak near-term macro. Also, we are now baking in the lower-end of FY28 EBITDA guidance, to factor in uncertainty in the overall business environment created by MMA. We maintain BUY with a revised TP of Rs450 (25x Jun-27E EPS), from Rs525 earlier.
Macro uncertainty led to a volatile environment in Q1
Aarti posted Rs2.1bn EBITDA (-31% YoY/-21% QoQ) in Q1FY26. The decline in EBITDA was primarily due to pressure on pricing, led by 15-20% correction in benzene and aniline prices (Rs300mn inventory loss). Non-energy and energy businesses saw volume increases of 9% and 3% YoY, respectively. Unfavorable macro situations like a) the US tariff uncertainty led to lower utilization in MMA (US customers are concerned about affordability) and DCB (auto manufacturers turned cautious; competition from the EU); b) MMA operations being impacted by India-Pak/Israel-Iran conflicts led to postponement of bulk shipments to Jul-25 (net impact: Rs200mn; MMA exports in Jul-25: 20-22kt). The company expects RM prices to remain range-bound (flat over the last 1-1.5M) and FG prices to remain under pressure across product chains.
Capacity expansion to drive growth in a staggered manner
Aarti increased NT/ethylation capacities in Q4FY25. It debottlenecked its MMA capacity from 200ktpa to 260ktpa in Q1FY26 and may further expand with a limited capex. The ramp-up in these underutilized capacities is expected to add Rs3.5-5.5bn to EBITDA by FY28E. MPP and Zone-4 (calcium chloride) plants are expected to commercialize by Dec25, along with utility blocks. The remaining 5 blocks in Zone-4 pertain to chlorotoluene and dichlorotoluene and are expected to be commissioned in a phased manner over Jan to May-26. MPP will be catering to 4-5 products in phase 1 (out of 10 products), with end-application segments of polymers, agro, and pharma. Aarti can manufacture 35-40 downstream products, with a combination of Zone-4 and MPP.
FY28 EBITDA guidance stays; we revise estimate to lower-end of guidance
The management reiterated its guidance of Rs18-22bn EBITDA by FY28, led by costoptimization, ramp-up in existing capacities, and capex-led growth from MPP and Zone4. While the management did not commit to any FY26 guidance, we bake in ~10% growth in EBITDA for FY26E, with back-ended commissioning of projects. Also, we bake in the lower-end of FY28 EBITDA guidance to factor in uncertainty in the overall business
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