Buy Aarti Industries Ltd For Target Rs.525 by Axis Securities Ltd
A Weak Quarter Dampened by External Factors; Maintain BUY
Est. Vs. Actual for Q1FY26: Revenue: MISS; EBITDA: MISS; PAT: MISS
Changes in Estimates post Q1FY26
FY26E/FY27E: Revenue: -2%/-2%; EBITDA: -4%/-8%; PAT: -2%/-3%
Recommendation Rationale
* Stable Volumes Amidst Challenging Environment: Aarti Industries reported a 10% YoY decline in revenue, primarily attributable to the correction in key RM prices and deferment in export volumes. The quarter was marked by a highly volatile macro environment, characterised by sharp price corrections in major raw materials, ongoing geopolitical tensions, and persistent global trade disruptions. Despite these challenges, the company ensured operational continuity and maintained stable volumes. The non-energy segment posted a 9% YoY increase in volumes, while the energy segment registered a 3% YoY growth.
* Deferred Export Volumes Expected to be Recouped in Q2: EBITDA for the quarter was adversely affected by a sharp decline (15–20%) in Benzene and Aniline prices, leading to an inventory valuation loss of ~Rs 30 Cr. Additionally, geopolitical disruptions in the Middle East caused logistical delays, resulting in the deferment of bulk exports from Jun’25 to Jul’25. Management anticipates that around Rs 15–20 Cr in EBITDA, related to these deferred shipments, will be recouped in Q2FY26.
* Continues to Make Progress on Capacity Enhancements: The company incurred a capex of Rs 280 Cr during Q1FY26, primarily towards ongoing expansion projects. Execution of Zone IV projects is progressing as scheduled, with phased commissioning expected to commence from H2FY26. These projects mark its strategic entry into advanced chemistries. Moreover, the scale-up of MMA capacity to 260 KTPA is expected to support sustained volume growth in the upcoming quarters.
Sector Outlook: Cautiously Optimistic
Company Outlook & Guidance: The company is actively working on expanding its product portfolio, with a strategic focus on the ethylation value chain, where recent capacity additions are aimed at improving product diversity and boosting capacity utilisation. In parallel, AIL is advancing backward integration into select downstream products to support margin expansion. Looking ahead, it plans to pursue its growth plans in a measured and disciplined manner, with a planned capital expenditure of less than Rs 1,000 Cr for FY26. Over the next three years, AIL is targeting an EBITDA range of Rs 1,800–2,200 Cr. To support this, the company will continue to drive operating leverage and implement cost efficiency initiatives. Management has guided for a Debt/EBITDA ratio of below 2.5x and aims to achieve a ROCE of over 15% by FY28.
Current Valuation: 25x FY27E (Unchanged)
Current TP: Rs 525/share (Earlier TP: Rs 540/share).
Recommendation: We maintain our BUY rating on the stock with a revised target price of Rs 525/share, implying a 29% upside from the CMP.
Financial Performance: AIL’s performance was weaker than expected, mainly due to uncontrollable external factors. Revenue came in at Rs 1,675 Cr, down 10% YoY and 14% QoQ, missing our estimates. EBITDA stood at Rs 212 Cr, down 30% YoY and 21% QoQ, missing our estimates by 25%. EBITDA margin stood at 12.7%, compared to 16.4% in Q1FY25 and 13.7% in Q4FY25. The company’s PAT was Rs 43 Cr, down 69% YoY and 55% QoQ, missing our estimates of Rs 97 Cr due to higher interest cost and depreciation, while the revenue declined.
Relative Performance
Outlook
AIL intends to make calibrated investments in expanding its product pipeline, with an eye on evolving market opportunities. While the growth during the quarter was impacted by external factors and one-off losses, the company is expected to recoup some of the growth in the coming quarters. As macro conditions stabilise, management expects capacity additions and entry into advanced chemistries to aid in restoring growth momentum and margin improvement. Additionally, it aims to diversify its energy vertical, which shall provide long-term business resilience.
Valuation
We have made minor downward revisions to our near-term estimates to reflect the prevailing macroeconomic pressures, trade headwinds— particularly with the US—and ongoing geopolitical risks. Nonetheless, our long-term thesis remains intact. We continue to value the stock at 25x FY27E earnings, arriving at a revised target price of Rs 525/share (earlier Rs 540/share), indicating an upside potential of 29% from the CMP.
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