Reduce Aarti Industries Ltd for Target Rs. 394 - PL Capital
Agrochem continues to remain soft
Quick Pointers:
* Non-Energy Business and energy business saw 14% and 21% increase in volumes sequentially
* Capex for FY26 to be around Rs10bn, of which 1.5-2bn will be maintenance while rest will be for new projects
ARTO reported revenue of Rs19.5bn reflecting a 6% sequential increase, driven primarily by higher volumes in the dyes, pigments, polymer additives, and energy segment. However, the agrochemical business continues to face challenges. The energy segment, which has the highest contribution to revenue, saw a 21% sequential volume increase, supported by widening in customer base and geographical outreach, however pricing pressure led to lower than historical margins. Management has guided for FY28 EBITDA in the range of Rs18–22bn, implying a 30% CAGR over the next three years to be driven by contributions from recently commissioned projects and ongoing capex at Zone 4.
While we expect moderate volume growth in dyes, pigments, and polymer-related products, the agrochemical segment is likely to remain weak in the near term. Additionally, MMA continues to struggle amid soft realizations and rising competition from both Indian and Chinese players. The stock trades at 27x FY27E P/E. We maintain a Reduce rating, valuing it at 24x FY27E EPS, and arrive at a target price of Rs394.
* Revenue increased by 6% sequentially: Consolidated net revenue stood at Rs19.5bn (10% YoY/ 6% QoQ) (PLe: Rs18.6bn, Consensus: Rs19bn), reported revenue was 4.3% higher than our estimates. Sequential revenue growth was driven by volumes driven by 14% and 21% increase in volumes of non-energy and energy business respectively. FY25 revenue was up by 14% to Rs72.7bn.
* EBITDAM declined 220 bps YoY: EBITDA stood at Rs2.7bn, down 5% YoY but increased 14% QoQ (vs Rs2.8bn in Q4FY24 and Rs2.4bn in Q3FY25). EBITDA margin decreased to 13.8% in Q4FY25, from 16% in Q4FY24 but improved slightly from 12.8% in Q3FY25, due to decreased raw material cost. Reported PAT declined 28% YoY but increased QoQ by 102% largely due to decrease in interest charges. The tax rate remained negative and is expected to be a lower single digit in FY26.
* Key concall takeaways: (1) Volume increased across end applications of Dyes, Pigments, Polymer Additives, while Agrochemicals continued to remain soft. (2) Overcapacity in China continues to remain concern for agrochemical intermediates. (3) MMA which was concentrated in the middle east before has increasingly been shipped to USA and other geographies. (4) Overall mix impact of US tariffs for Aarti products, MMA is not part of the exempt list for tariffs. (5) Export: Domestic mix for Q4FY25 was 55:45, with absolute exports standing at Rs12.4bn. (6) A large part of volume growth in FY26 will come from existing assets, zone 4 capex’s commercialization in FY26 will add significant volumes from FY27. (7) Guidance: EBITDA of Rs 1.8-2.2 bn, Debt/EBITDA <2.5x, ROCE >15%, FY26 tax mid-single digit, depreciation of Rs 6-6.2 bn by FY28. (8) NCB: large customers are increasing capacity; it has application in pharma. (9) DCB utilization to be maintained in FY26. (10) Nitrotoluene and Ethylation utilization are expected to have higher utilization compared to FY25.
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