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Sequential improvement in EBITDA to endure

Aarti’s Q4 EBITDA at Rs2.8bn (+9% QoQ; +12% YoY) was in line with our estimates. Management maintained FY25 EBITDA guidance at Rs14.5-17bn and increased volume guidance to 20-30% from 20-25% on better demand visibility. This is the third quarter of sequential improvement in EBITDA, driven by higher volume growth (pricing remains stable) and operating leverage. Aarti is seeing better demand recovery in discretionary spends, whereas agro and pharma are still muted due to weak macros. Management has raised its guidance on capex to Rs15-18bn for FY25 (vs. Rs12-15bn to be spent on several growth projects, including chlorotoluene) and on debt to Rs34-38bn. We tweak our FY25/26 estimates by 1-3%, on higher-interest outlay on incremental debt. We retain BUY on Aarti, and nudge up our TP to Rs800/sh (30x Mar-26E EPS).

Strong revenue visibility from capex progression and long-term contracts

Aarti has revised its volume guidance upwards, from 20-25% to 20-30% for FY25, on the back of project completion and stabilization, visibility from long-term contracts, and demand recovery in its core portfolio. There will be phased commissioning of nitro toluene (NT) & ethylation expansion, acid phase-2 expansion, MPP, chlorotoluene units starting Q2FY25 to FY26. These projects will add >40 products through the integrated value chain and chlorotoluene base capacity of 42KT, driving increase in volumes. Second long-term contract will start contributing nearly Rs2.5bn in FY25E, coupled with 100% revenue visibility from the fifth long-term contract. As demand recovers, share of non-regular markets will shift in favor of regular markets, which have contracted ~15% over FY23- 24. We build in Rs15.5bn/19bn EBITDA for FY25E/26E, respectively.

Demonstrating cost leadership in a differentiated product portfolio

Aarti observed better demand recovery in a few applications of discretionary portfolio such as dyes, pigments, polymers, etc with continuous sequential improvement. However, non-discretionary sectors like agro and pharma remained soft, though expectations are for demand to normalize H2FY25 onwards. Aarti’s revenue mix in the discretionary and non-discretionary portfolios stood at 65% and 35%, respectively (equally split in FY23). Aarti was able to adequately pass on the increased input prices (incl. freight cost), witnessing optimized cost structure and better operational efficiency.

Return ratios to improve with enhanced growth strategies

Return ratios tapered ~3% in FY24, on high capex and relatively slow earnings growth (largely bottoming out), but are expected to improve from FY25. Though net debt/EBITDA has peaked in FY24 at 3.1x, we believe it would normalize by FY26E to less than 2x. This shift will be brought by 1) collaborating & building partnerships with global MNCs; 2) adding new value chains and chemistries, e.g. photochlorination, oxidation, etc; 3) focusing on biochemistry & circularity, and new-age sunrise sectors like battery chemicals, electronic chemicals, new age materials, high-end polymers, etc.

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