Buy Aarti Industries Ltd For Target Rs.600 by Motilal Oswal Financial Services Ltd
Fuel additives lead; core chemistry gains momentum
Aarti Industries (ARTO) is an integrated specialty-chemical intermediate manufacturer catering to energy, agrochemicals, pharmaceuticals, dyes and pigments, printing inks, and polymers. Its capabilities span nitration, chlorination, hydrogenation, and ethylation processes.
* MMA’s (Mono Methyl Aniline - a gasoline octane enhancement additive) competitive octane-enhancement economics (~50% cheaper than MTBE), restrictions on additives such as MTBE due to groundwater contamination concerns, and limits on oxygen content in gasoline support its adoption. ARTO expanded its energy segment capacity by ~24% to 360ktpa in Jul’26, creating headroom for deeper penetration across the US, Europe, and Africa. Further, 3-5 products under development could broaden the portfolio beyond MMA and support energy segment’s growth.
* Three key drivers are expected to drive growth across ARTO’s core chemistry platforms:
1) DCB capacity expansion from 120ktpa to 140ktpa would increase exposure to polyphenylene sulphide (PPS) demand from EVs and electronics
2) NCB spread recovery is supported by China’s export-rebate withdrawal, aiding price growth
3) NT isomer imbalance is being addressed through downstream ethylation capacity expansion (from 10kt to 30kt), with long-term contracts in agrochemical and the commissioned 4ktpa PEDA facility further enhancing DEA value addition.
* INR18b capex for Zone IV (multipurpose plant) provides the next leg of growth through phased product launches. Its flexible chemistry platform can support 35–40 products, with launches planned to reach 5-10 in FY27 and 25-30 by FY28. We estimate Zone IV EBITDA of INR1.5b/INR2.9b in FY28/FY29, with full potential expected by FY30.
* We expect ARTO to deliver revenue/EBITDA/PAT CAGR of 16%/23%/35% over FY26-29, driven by fuel additive growth, higher utilization, and the Zone IV ramp-up. We value it at 30x FY28E EPS with a TP of INR600 and initiate coverage with a BUY rating.
Fuel additives: Capacity expansion and rising MMA adoption to drive growth
* ARTO’s MMA business benefits from refiners and gasoline blenders seeking economical ways to meet octane requirements. Wider gasoline– naphtha spreads (USD10+) make lower-octane naphtha more attractive for gasoline production, thereby increasing demand for octaneenhancement additives.
* ARTO’s geographic diversification supports capacity absorption while reducing dependence on individual markets (largest destination market shifted from the UAE at ~80% in FY23 to US at ~33% in FY26). It is expanding its customer base across the US, Europe, and Africa, while Southeast Asia remains relatively untapped.
* Further, the company has a pipeline of 3-5 products with applications beyond octane boosting, which could broaden its participation in customer formulations.
Valuation and view: Initiate coverage with BUY and a TP of INR600
1) MMA’s capacity expansion to 360ktpa from 290ktpa, competitive blending economics, and geographical diversification should support fuel additives growth.
2) Improving NCB spreads, ethylation and downstream integration (such as PEDA) to address isomer imbalances, and DCB expansion to meet growing PPS demand should drive core chemistry growth.
3) Zone IV (MPP) adds multiyear growth through new products, while Augene and Re–Aarti JVs extend ARTO’s presence into higher-value derivatives and chemical recycling.
4) We expect revenue/EBITDA/PAT CAGR of 16%/23%/35% over FY26-29. The stock currently trades at 28x/23x/16x FY27E/FY28E/FY29E EPS, with FY29E RoE/RoCE of 13.3%/10.7%. We value ARTO at 30x FY28E EPS (12% discount to 10-year average), arriving at a TP of INR600, and initiate coverage with a BUY rating.
Key risks
1) Fuel additives concentration
2) delayed project ramp-up
3) raw-material and pricing volatility
4) operational and environmental risks.
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