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CD Equisearch Pvt Ltd March 24, 2020
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
S
Aarti Industries Ltd
No. of shares (m) 174.2
Mkt cap (Rs crs/$m) 11783/1571.0
Current price (Rs/$) 676/9.0
Price target (Rs/$) 890/11.9
52 W H/L (Rs.) 1071/662
Book Value (Rs/$) 168/2.2
Beta 0.8
Daily volume NSE (avg. monthly) 341080
P/BV (FY20e/21e) 3.9/3.3
EV/EBITDA (FY20e/21e) 13.4/11.9
P/E (FY20e/21e) 21.2/18.2
EPS growth (FY19/20e/21e) 49.5/6.0/16.0
OPM (FY19/20e/21e) 20.5/22.0/23.9
ROE (FY19/20e/21e) 23.8/20.0/19.8
ROCE(FY19/20e/21e) 14.8/13.4/14.8
D/E ratio (FY19/20e/21e) 0.9/0.6/0.4
BSE Code 524208
NSE Code AARTIIND
Bloomberg ARTO IN
Reuters ARTI.NS
Shareholding pattern %
Promoters 48.3
MFs / Banks / FIs 16.7
Foreign Portfolio Investors 7.5 .3 Govt. Holding 0.0
Public & Others 27.6
Total 100.0
As on Dec 31, 2019
Recommendation
BUY
Analyst
KISHAN GUPTA, CFA, FRM
Phone: + 91 (33) 4488 0043
E- mail: kishan.gupta@cdequi.com
Consolidated (Rs crs)
FY17 FY18 FY19 FY20e
FY21e
Income from operations (gross) 3163.46 3806.06 4705.51 4592.25 4756.16
Other Income 1.96 7.77 2.11 8.92 8.00
EBITDA (other income included) 655.44 706.89 967.20 1019.02 1146.51
Profit after MI 315.12 327.94 490.40 556.92 646.05
EPS(Rs) 19.19 20.17 30.16 31.96 37.08
EPS growth (%) 24.7 5.1 49.5 6.0 16.0
Company Brief
AIL is one of India's leading manufacturers of chemicals and pharmaceutical
intermediates: dyestuff; pigment; agro chemicals; speciality chemicals; active
pharmaceutical ingredient (API); intermediates of API.
Quarterly Highlights
� Impacted by shortage of nitric acid, Aarti Industries reported no small stress
in its speciality chemicals business EBIT margins for it shrunk to 20.6% in
Q3 from a gravity-defying 23.9% in Q2, resulting in flat lining of its EBIT.
Wherefore, NCB production plunged 16.1% to 14900 tons while Aarti could
churn out just 1666 tons of nitro toluene last quarter when compared to 4000
tons in the same quarter a year ago. Volumes barely showed any buoyancy
whatsoever not least due to stress in US automobile and agrochemical
sectors.
� Backed by fall in raw material cost and improved product mix, Aarti
reported no obscure increase in margins for the same jumped by nearly 300
bps to 20.4% on yoy basis. EBIT as a consequence of higher margins grew by
20.2% to Rs 35.97 crs compared to Rs 29.92 crs in the same quarter a year
ago. Yet risk of supply bottlenecks in pharma business due to no smallish
raw material dependence on China which has of late seen production
disruption due to Corona virus scare.
� Despite rise in overall OPMs by 100bps to 20.8% last quarter, operating
profit barely grew for revenues tumbled by 4.5%. Yet fall in finance costs
from Rs 42 crs to Rs 28.71 crs helped modest growth in post tax earnings. In
view of global turbulence brought about by Corona virus, Aarti is trying to
curb import of raw materials and efforts are being made to scout for more
Indian sources to boost raw material security.
� The stock currently trades at 21.2x FY20e EPS of Rs 31.96 and 18.2x FY21e
EPS of Rs 37.08. Nail-biting fall in crude oil prices precipitated earning cut
by just over 6% for next fiscal for revenue growth is now projected to
dramatically fall, though aptly counterbalanced by higher margins and
lower inventories. Yet post tax earning is projected to rise by some 16% on
stable return on capital. Yet risk of disruption in specialty chemicals demand
from US automotive and agrochemical sectors barely escape attention. Given
no inapt valuation post recent stock price correction, we recommend buying
the stock with revised target of Rs 890 (previous target: Rs 871) based on 24x
FY21e earnings.
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Outlook & Recommendation
Global specialty chemicals update
According to the latest update of ResearchAndMarkets, the global specialty chemicals market is estimated to grow at a CAGR
of 5.2% during 2019-26. Part of the growth in this market has been attributed to continuous R&D which has facilitated
development of products with optimum and advanced features. Rapid industrialization in China and India coupled with rise
in investments in construction and infrastructure development projects in Asia-Pacific has boosted demand for such products.
Yet fluctuations in raw material cost and stricter government regulations could impede growth.
For factors mentioned above, Asia-Pacific is estimated to further see increase in its global specialty chemicals market share
from one-third in 2018. More than 50% of the global specialty chemical market in 2018 was collectively accounted by North
America and Europe with oil field chemicals and food additives as major contributors. Industry reports also opine that
advancements in the major electronics producing countries, such as Japan, South Korea, Taiwan and China, have fostered
consumption of specialty chemicals in Asia -Pacific region.
As per some industry report, the surge in high-performance coatings and increased demand in end-user industries such as
construction, automotive and electronics are factors that would support growth of global specialty chemicals market over the
next few years. In the quench for reducing vehicle weight for increasing fuel efficiency, the global automotive industry is
gradually replacing welding activities of engine parts assembly with adhesives and sealants products.
As most of the specialty chemicals are manufactured using petroleum-based chemicals, fluctuations in crude oil prices can
significantly impact input costs of specialty chemicals, thereby impinging profits of market players. Revenues of producers also
take a hit if crude oil prices sharply fall not least due to fall in finished product prices.
Financials & Valuation
Much of the low double digit growth in Indian specialty chemicals industry over the next few years would manifest not least
due to GOI's increased focus on affordable housing and greater use in end-user industries such as textiles, automotive,
personal care, construction and agriculture. Industry growth will barely waver all thanks to ever-tightening environmental
norms in China and acceleration in Indian R&D outlay. Affordable and ample feedstock availability coupled with low cost
skilled labor would all but stymie throughput at Indian chemical factories. Sufficient efforts are being made by GOI to improve
global competitiveness of Indian chemical industry with an aim to boost chemical industry's GDP share.
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Plans have scarcely wavered to put forth capex of some Rs 1000 crs this fiscal followed by at least half that amount next fiscal.
Yet shutdown precipitated by corona virus scare could delay project commissioning by some months. NCB capacity
expansion from 75000 tons to 108000 tons is not expected to see light of the day before FY21. The R&D facility which is being
mainly set up to boost Aarti's R&D capabilities and development of niche value-added products and process chemistries is
expected to be commissioned in the current fiscal along with a couple of global contract manufacturing projects. Yet not only
delay in commencement of contract manufacturing projects but also ramp up in throughput cannot be ruled out due to global
demand disruption emanating from Corona virus scare.
Dire fall in crude oil prices would cap expansion of revenue growth next fiscal, though operating profit is projected to grow in
low double digits all thanks to entrenched focus on improving product mix of specialty chemicals. Value addition coupled
with increased supplies to regulated markets explains much of the rise in pharmaceutical margins in last few quarters.
Expecting higher API demand from India, Aarti could commission both API and intermediate facilities sometime next fiscal.
Its new pharma capacities are aimed at higher penetration in some key therapies such as antihypertension, cardiovascular,
oncology, corticosteroids, etc. Indian pharma manufacturers have all but avoided evolving CRAMS opportunities from
developed markets as rich countries prepare to increasingly outsource research and clinical trials to developing economies
with an aim to reduce costs and increase product development capacity.
The stock currently trades at 21.2x FY20e EPS of Rs 31.96 and 18.2x FY21e EPS of Rs 37.08. Risks to earnings all but conceal
from revenue concentration (product wise) of its specialty chemicals portfolio, raw material supply disruption from China,
global economic slowdown from Corona virus scare and entrenched moderation in crude oil prices. Yet powering focus on
modest volume initiating value added products would support margins next fiscal - 23.9% Vs 22% in FY20. Capacity
utilization of contract manufacturing projects would get a boost sometime in the second half of next fiscal, partially making
up for some slowdown in domestic demand. Balancing odds, we advise buying the stock with revised target of Rs 890
(previous target: Rs 871) based on 24x FY21e earnings. For more info,. refer to our Aug report.
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Cross Sectional Analysis
Company Equity (Rs crs)
CMP (Rs crs)
Mcap (Rs crs)
Inc. from ops.
(Rs crs) Profit
(Rs crs) OPM (%)
NPM (%)
Int. cov.
ROE (%)
Mcap / IO P/BV P/E
Aarti Inds. 87 676 11783 4401 490 22.9 12.9 6.3 20.0 2.7 4.0 24.0
Atul Ltd 30 3505 10396 4186 637 21.9 15.2 95.7 22.9 2.5 3.4 16.3
Deepak Nitrite 27 319 4353 4179 531 22.9 12.7 7.0 43.1 1.0 3.1 8.2
Sudarshan Chem 14 304 2105 1689 93 15.3 5.5 12.0 16.0 1.2 3.6 22.5
calculations on ttm basis; Aarti income from operations approximated Companies not truly comparable due to product dissimilarity
Helped by modest increase in raw material cost, Sudarshan Chemical managed to report 58.3% growth in operating profit in Q3
with OPM s expanding to 14.8% from 10.1% in the same quarter a year ago, resulting in 122.7% rise in PBT. Yet sales advanced
by a barely robust 8.3% to Rs 423.52 crs, largely buttressed by nearly 12% growth in pigments business revenues. Volumes
barely moderated for specialty pigments portfolio volumes grew by 13% while that of non-specialty portfolio increased 10%.
Exports scarcely dwindled for it accounted for 48% of total revenues in the first nine months of current fiscal from some 47% in
the same period a year ago.
Suppression in revenues of both life science chemicals and performance and other chemicals barely stymied margins for
operating profit of Atul last quarter grew by 16.8% - OPMs expanded to 23.9% from 20.7% in the same quarter a year ago. PBT,
as a result, rose by a surprising 26.4% while post tax earnings advanced by a blistering 44.3%. Both the flagship performance and
other chemicals and life science chemicals businesses showed no little gains in margins for the former reported EBIT margin of
22.1% compared to 18.6% , while the latter disclosed 17.9% VS 16.3% in the same quarter a year ago.
No grim outcome of Deepak Nitrite's performance products segment so far this fiscal - EBIT of Rs 343.24 crs Vs Rs 35.33 crs)
explain the stupendous growth (over five fold) in post tax earnings. Much of this advance could be attributed to higher
realizations of some key products. Despite demand challenges in phenol and acetone market globally and slowdown in
domestic economy, DNL's phenolics business reported its first ever profits last quarter on over 100% capacity utilization. Yet this
slowdown has barely swayed its plan to launch derivatives through forward integration. Much of its business is seemingly
secured from global turbulence from Corona virus (not to count the fluctuations in global phenol and acetone prices) for it
procures most of its raw materials locally.
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Financials
Quarterly Results - Consolidated Figures in Rs crs
Q3FY20 Q3FY19 % chg. 9MFY20 9MFY19 % chg.
Income from operations (gross) 1218.48 1276.03 -4.5 3430.79 3735.07 -8.1
Other Income 0.37 4.03 -90.8 8.42 5.22 61.3
Total Income (gross) 1218.85 1280.06 -4.8 3439.21 3740.29 -8.0
Total Expenditure 964.27 1022.90 -5.7 2672.39 3018.29 -11.5
EBIDTA (other income included) 254.58 257.16 -1.0 766.82 722.00 6.2
Interest 28.71 42.00 -31.6 90.80 140.55 -35.4
Depreciation 47.04 43.67 7.7 135.93 125.98 7.9
PBT 178.83 171.49 4.3 540.09 455.47 18.6
Tax 36.12 31.80 13.6 103.68 83.99 23.4
PAT 142.71 139.69 2.2 436.41 371.48 17.5
Minority Interest 2.87 5.99 -52.1 10.88 13.38 -18.7
PAT post MI 139.84 133.70 4.6 425.53 358.10 18.8
Extraordinary Item - - - - - -
Adjusted Net Profit 139.84 133.70 4.6 425.53 358.10 18.8 EPS (F.V. 5) 8.03 8.22 -2.4 24.42 22.02 10.9
Segment Results Figures in Rs crs
Q3FY20 Q3FY19 % chg. 9MFY20 9MFY19 % chg.
Segment Revenue (Gross)
Speciality Chemicals 1042.33 1022.11 2.0 2881.41 2990.72 -3.7
Pharmaceuticals 176.15 171.10 3.0 549.38 513.02 7.1
Home & Personal Care Chemicals 0.00 82.82 -100.0 0.00 231.33 -100.0
Total 1218.48 1276.03 -4.5 3430.79 3735.07 -8.1
Segment EBIT
Speciality Chemicals 215.10 215.09 0.0 642.08 605.31 6.1
Pharmaceuticals 35.97 29.92 20.2 101.63 85.10 19.4
Home & Personal Care Chemicals 0.00 -0.52 -100.0 0.00 -2.28 -100.0
Total 251.07 244.49 2.7 743.71 688.13 8.1
Interest 28.71 42.00 -31.6 90.80 140.55 -35.4
Other Unallocable Exp. (net of income) 43.53 31.00 40.4 112.82 92.11 22.5
PBT 178.83 171.49 4.3 540.09 455.47 18.6
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Income Statement - Consolidated Figures in Rs crs
FY17 FY18 FY19 FY20e FY21e
Income from operations (net) 3163.46 3806.06 4705.51 4592.25 4756.16
Growth (%) 5.2 20.3 23.6 -2.4 3.6
Other Income 1.96 7.77 2.11 8.92 8.00
Total Income 3165.42 3813.83 4707.62 4601.17 4764.16
Total Expenditure 2509.98 3106.94 3740.42 3582.15 3617.66
EBITDA (other income included) 655.44 706.89 967.20 1019.02 1146.51
Interest 117.34 131.65 182.54 127.43 108.66
EBDT 538.10 575.24 784.66 891.59 1037.85
Depreciation 122.52 146.23 162.68 186.90 224.21
Tax 88.06 82.88 117.80 133.89 154.59
Net profit 327.52 346.13 504.18 570.80 659.05
Minority interest 11.76 13.17 12.43 13.88 13.00
Net profit after MI 315.76 332.96 491.75 556.92 646.05
Extraordinary item 0.64 5.02 1.35 - -
Adjusted Net Profit 315.12 327.94 490.40 556.92 646.05
EPS (Rs.) 19.19 20.17 30.16 31.96 37.08
Segment Results Figures in Rs crs
FY17 FY18 FY19 FY20e FY21e
Segment Revenue
Speciality Chemicals 2569.29 2985.49 3979.70 3840.72 3929.48
Pharmaceuticals 426.07 556.22 725.81 751.53 826.68
Home & Personal Care Chemicals 168.10 264.35 0.00 0.00 0.00
Total (gross) 3163.46 3806.06 4705.51 4592.25 4756.16
Segment EBIT
Speciality Chemicals 565.75 581.07 819.57 843.54 903.78
Pharmaceuticals 48.13 79.20 112.68 142.06 161.20
Home & Personal Care Chemicals 0.77 2.75 - - -
Sub Total 614.65 663.02 932.25 985.60 1064.98
Interest 117.34 131.65 182.54 127.43 108.66
Other Unallocable Exp. (net of income) 81.72 102.36 127.74 153.47 142.68
PBT 415.58 429.01 621.98 704.69 813.64
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Consolidated Balance Sheet Figures in Rs crs
FY17 FY18 FY19 FY20e FY21e
SOURCES OF FUNDS
Share Capital 41.06 40.65 43.33 87.12 87.12
Reserves 1321.38 1537.76 2587.42 2976.69 3509.48
Total Shareholders Funds 1362.44 1578.41 2630.75 3063.80 3596.60 Minority Interest 63.85 77.02 83.95 97.83 110.83
Long term debt 596.44 908.27 814.80 573.90 362.55
Total Liabilities 2022.73 2563.70 3529.50 3735.53 4069.98
APPLICATION OF FUNDS
Gross Block 2654.61 3100.69 3361.80 4211.80 4961.80
Less: Accumulated Depreciation 957.59 1102.79 1215.12 1402.02 1626.23
Net Block 1697.02 1997.90 2146.68 2809.78 3335.57
Capital Work in Progress 269.52 436.23 794.57 900.00 600.00
Investments 46.96 47.22 33.16 33.16 33.16
Current Assets, Loans & Advances
Inventory 571.41 747.30 771.79 810.38 729.34
Sundry Debtors 524.67 654.75 776.04 853.64 810.96
Cash and Bank 28.50 32.10 804.20 17.70 25.51
Other Assets 192.61 250.79 225.08 156.31 161.43
Total CA & LA 1317.19 1684.94 2577.11 1838.03 1727.25
Current liabilities 1292.57 1555.29 1889.75 1587.89 1424.88
Provisions 27.83 31.04 42.42 49.42 59.55
Total Current Liabilities 1320.40 1586.33 1932.17 1637.31 1484.43
Net Current Assets -3.21 98.61 644.94 200.72 242.82
Net Deferred Tax (net of liability) -155.44 -177.41 -193.01 -210.59 -228.24
Other Assets (Net of liabilities) 167.91 161.18 103.19 2.47 86.67
Total Assets 2022.73 2563.70 3529.50 3735.53 4069.98
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Key Financial Ratios
FY17 FY18 FY19 FY20e FY21e
Growth Ratios
Revenue (%) 5.2 20.3 23.6 -2.4 3.6
EBIDTA (%) 13.3 7.0 37.8 5.5 12.5
Net Profit (%) 22.9 4.1 49.5 13.6 16.0
EPS (%) 24.7 5.1 49.5 6.0 16.0
Margins
Operating Profit Margin (%) 20.7 18.4 20.5 22.0 23.9
Gross Profit Margin (%) 17.0 14.9 16.6 19.4 21.8
Net Profit Margin (%) 10.3 9.0 10.7 12.4 13.9
Return
ROCE (%) 15.4 13.3 14.8 13.4 14.8
ROE (%) 25.3 22.5 23.8 20.0 19.8
Valuations
Market Cap / Sales 2.0 2.4 2.9 2.6 2.5
EV/EBIDTA 11.9 16.2 15.8 13.4 11.9
P/E 20.0 28.4 26.2 21.2 18.2
P/BV 4.6 5.9 5.3 3.9 3.3
Other Ratios
Interest Coverage 4.5 4.2 4.4 6.5 8.5
Debt-Equity Ratio 1.1 1.3 0.9 0.6 0.4
Current Ratio 1.0 1.1 1.3 1.1 1.1
Turnover Ratios
Fixed Asset Turnover 2.1 2.1 2.3 1.9 1.5
Total Asset Turnover 1.7 1.7 1.6 1.3 1.2
Debtors Turnover 6.0 6.5 6.6 5.6 5.7
Inventory Turnover 4.7 4.7 4.9 4.5 4.7
Creditors Turnover 8.3 9.5 11.7 13.8 14.4
WC Ratios
Debtor Days 60.5 56.6 55.5 64.8 63.9
Inventory Days 77.6 77.5 74.1 80.6 77.7
Creditor Days 44.0 38.6 31.1 26.5 25.4
Cash Conversion Cycle 94.0 95.4 98.5 118.9 116.1
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Cumulative Financial Data
Figures in Rs crs FY10-12 FY13-15 FY16-18 FY19-21e
Income from operations (gross) 4696 8220 9976 14054
Operating profit 650 1229 1925 3114
EBIT 504 982 1566 2557
PBT 324 631 1200 2139
Profit after MI & associate profit 249 490 899 1693
OPM (%) 13.8 14.9 19.3 22.2
NPM (%) 4.7 5.7 9.4 12.3
Interest coverage 2.8 2.8 4.3 6.1
ROE (%) 17.1 19.9 22.9 22.2
ROCE (%) 11.9 14.4 13.6 15.6
Debt-equity ratio* 1.0 1.1 1.3 0.4
Fixed asset turnover 3.7 3.9 2.2 1.8
Debtors turnover 4.7 6.5 6.1 6.4
Inventory turnover 5.1 5.3 4.1 4.9
Creditors turnover 10.6 10.9 8.9 11.7
Debtors days 78.5 56.3 60.0 57.1
Inventory days 72.0 68.7 88.3 73.9
Creditor days 34.4 33.4 41.2 31.1
Cash conversion cycle 116.1 91.7 107.1 99.9
FY10-12 implies three years ending fiscal 12; *as on terminal year
Combined effect of demerger of Aarti's home and personal care business into Aarti Surfactants and nerve-wracking fall in crude
oil prices recently would preclude spectacular expansion in revenues over FY19-21e period compared to the previous three year
period. Increasing allegiance to value added products, particularly in Aarti's flagship specialty chemicals business, would
anything but constrict margin expansion - OPM projected at 22.2% in FY19-21e period compared to 19.3% - thus enabling
cumulative post tax earnings to grow by a respectable 88.3%.
Yet sluggishness in ramp up of supplies from a couple of global chemical supply contracts next fiscal coupled with dreadful
correction in global crude oil prices would stymie fixed asset turnover to 1.8 in the projected period from 2.2 (see table). Stellar
margin expansion (NPM 12.3% Vs 9.4%) would barely help propel return on equity (ROE: 22.2% Vs 22.9% in FY16-18 period) not
least due to stingy asset utilization. Gradual reduction of financial liabilities in FY20 and next fiscal would support a healthy debt
– equity ratio in FY21 (see table). Cash conversion cycle though would improve all thanks to discernible improvements in both
inventory and debtor days in the ensuing period.
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Financial Summary – US dollar denominated
million $ FY17 FY18 FY19 FY20e FY21e
Equity capital 6.3 6.2 6.3 11.6 11.6
Shareholders funds 208.6 241.2 369.8 400.3 470.2
Total debt 241.2 320.2 347.1 252.6 199.2
Net fixed assets (incl CWIP) 303.3 374.2 425.2 494.6 524.7
Investments 7.2 7.3 4.8 4.4 4.4
Net current assets -2.0 13.7 82.7 18.6 23.1
Total assets 310.4 392.6 499.7 489.9 533.3
Revenues (Gross) 471.5 590.6 673.3 612.2 634.1
EBITDA 97.6 108.7 138.1 135.9 152.9
EBDT 80.1 88.3 112.0 118.9 138.4
PBT 61.8 65.6 88.8 94.0 108.5
Profit after MI 47.0 50.9 70.2 74.2 86.1
EPS($) 0.29 0.31 0.43 0.43 0.49
Book value ($) 1.27 1.48 2.13 2.30 2.70
income statement figures translated at average rates; balance sheet and cash flow at year end rates; projections at current rates(Rs 75.01/$). All dollar denominated figures are adjusted for extraordinary items.
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buy: >20% accumulate: >10% to ≤20% hold: ≥-10% to ≤10% reduce: ≥-20% to <-10% sell: <-20%
Exchange Rates Used- Indicative
Rs/$ FY14 FY15 FY16 FY17 FY18 FY19
Average 60.5 61.15 65.46 67.09 64.45 69.89
Year end 60.1 62.59 66.33 64.84 65.04 69.17
All $ values mentioned in the write-up translated at the average rate of the respective quarter/ year as applicable. Projections converted at
current exchange rate. Cumulative dollar figure is the sum of respective yearly dollar value.
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