Maintain BUY on Aarti Industries - Decent performance - HDFC Securities

Mr. Nilesh Ghuge & Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities

We maintain a BUY recommendation on Aarti Industries (AIL) with a target price of INR 1,285/share. We expect AIL's PAT to grow at a 22% CAGR over FY21-23E, led by a 14% CAGR in revenue. AIL's constant focus on R&D will enable the company to remain competitive and expand its customer base. The toluene segment in India is mainly untapped and catered to through imports; AIL will benefit in the long term by entering this segment. 2Q EBITDA was 26% above our estimates, mainly attributable to a higher-than-anticipated revenue, offset by higher-than-anticipated operating expenditure. APAT was 53% above our estimates owing to a lower-than-expected interest cost.

Financial performance: Revenue grew 25/9% QoQ/YoY to INR 11.7bn, owing to a strong performance in both the segments. EBITDA was up 40% QoQ, owing to an outstanding performance in the Speciality chemicals segment. Sequentially, interest cost has fallen by 13% QoQ to INR 222mn. This has resulted in a 71% QoQ jump in APAT to INR 1.4bn. The company has announced an interim dividend of INR 1.5/share in the quarter.

Speciality Chemicals segment: Revenue/EBIT jumped 32/47% QoQ to INR 11.1/1.9bn on the back of higher volumes. EBIT margin for the segment improved by 171bps QoQ to 17%.

Pharma segment: Revenue/EBIT jumped 14/25% QoQ to INR 2.2/0.6bn. EBIT margins for the segment jumped up 218bps QoQ to 25.5%. Growth in the segment was driven by increasing contribution from regulated markets and value-added products.

Takeaways from earnings call: (1) Capex spent in 2Q/1HFY21 was INR 3/5bn. Capex target for FY21 is of INR 10-12bn. (2) Capacity utilisation of the Speciality Chemicals segment in 2Q was around 80-90% as the segment is gaining traction. (3) Part commercialisation of the new chlorination unit in Jhagadia was done in 2Q. (4) AIL acquired land in Dahej, Gujarat, at the cost of INR 0.5bn for further expansion of the business. (5) Flattish guidance provided for the bottom-line in FY21 by the management.

Change in estimates: We raised our FY21/22 EPS estimates by 12.7/2.6% to INR 24.9/28.3 on account of a better-than-anticipated performance in 2Q.

DCF-based valuation: Our target price is INR 1,285 (WACC 10%, terminal growth 3%). The stock is currently trading at 37.1x FY22E EPS.

Shares of AARTI INDUSTRIES LTD. was last trading in BSE at Rs.1099.7 as compared to the previous close of Rs. 1083.55. The total number of shares traded during the day was 10284 in over 1410 trades.

The stock hit an intraday high of Rs. 1108 and intraday low of 1075. The net turnover during the day was Rs. 11176073.

Source : Equity Bulls

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