Buy Aarti Industries Ltd for the Target Rs.450 By Emkay Global Financial Services Ltd
Resilient quarter amid volatility
Aarti’s Q2 EBITDA at Rs2.9bn (+48% YoY, +38% QoQ) was above our estimate and the street’s expectations, owing to a) a ramp-up in MMA (a key product) capacity utilization, with improved gasoline-naphtha cracks and geographical diversification, b) spillover of some MMA shipments from Q1 to Q2, and c) better fixed cost absorption, leading to operating leverage. The results have been resilient amid a challenging macro environment created out of US tariffs leading to first and second order impact across value chains. The management retained its Rs18-22bn EBITDA guidance by FY28, led by cost-optimization and capacity additions in Zone-4. We are building in the lower-end of FY28 EBITDA guidance, to factor in the volatile business environment created by MMA; thus, our estimates are unchanged. We retain BUY, with an unchanged TP of Rs450.
US tariff uncertainty prevailed in Q2; new geographies unlocked
Aarti posted EBITDA of Rs2.9bn (+48% YoY/+38% QoQ) in Q2FY26. The improvement in EBITDA was primarily because of better operating leverage, led by a) higher volumes in MMA and b) spillover of bulk MMA consignments from Q1 to Q2. Non-energy and energy businesses saw volume increases of 17% and 118% YoY, respectively. Agrochemical export volumes recovered in Q2, while margins remained under pressure. Downstream agrochemical customers deferred purchases on evolving US tariffs on India vs China. US tariffs impacted volumes for key end-applications for the dyes and polymers (PDA) business. Aarti is taking active efforts to mitigate the US tariff impact by moving into newer geographies, broadening its product base, and simultaneously maintaining relationships with US customers. The pharma business remains steady. During Q2, Aarti secured its long-term chlorine supply from DCM Shriram for its Zone-IV facility.
Zone-IV plant’s commissioning to start from Q3; further
MMA debottlenecking Zone-IV will be commissioned in a staggered manner – a) calcium chloride plant in Q3, along with utility blocks, b) MPP in Q4; here, Aarti will map PEDA (2-Phenyl Ethyl Diethyl Aniline) with a 4,000mtpa capacity, and c) 5 chloro toluene blocks with dedicated chemistries (photochlorination, hydrolysis, nitration) starting FY27. PEDA is a downstream of the ethylation value chain and is used in Pretilachlor (ADD levied on China in Jun-25). While calcium chloride and MPP will see immediate ramp-up, specialty products in chloro toluene blocks will entail customer qualifications (we expect a gradual ramp-up). MMA will be further debottlecked to 300ktpa, from 260ktpa, with a limited capex.
Firm on FY28 guidance; we keep our estimates unchanged
The management re-affirmed its FY28 EBITDA guidance of Rs18-22bn, led by costoptimization measures (renewable power, yield improvement), ramp-up of existing capacities, and sequential commissioning of MPPs and various blocks at Zone-IV. Aarti spent ~Rs5.9bn on capex in H1 and expects Rs10bn of capex in the year. There will be no substantial capex in FY27-28. The company expects the debt/EBITDA ratio to improve, going forward. We bake in the lower-end of FY28 EBITDA guidance, to factor in volatility in the energy business. Accordingly, we have kept our estimates unchanged.
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
