Specialty chemical stock down 36% in 2022. Edelweiss has ‘Buy’ tag


Aarti Industries (AIL) reported weak results as lower demand in segments like dyes, paints, pigments etc. impacted volume growth and hurt margins, highlighted domestic brokerage and research firm Edelweiss in a note. 

“Adjusted for the pharma demerger, sales grew by 34% YoY with EBITDA growth of 5%; higher interest and depreciation led to PAT declining 17% YoY. We adjust our model to factor in the pharma demerger (each five shares of AIL have been issued one share of Aarti Pharma to be listed by Dec-22) along with moderation in FY23E/24E earnings by 12-13%,” the brokerage note stated. The brokerage has retained its Buy rating on the specialty chemical stock with a revised target price of 805 per share.

“Although management’s single-digit growth guidance for FY23 is below our estimates, capex commissioning will likely drive FY24-25E growth at 25% p.a. Adjusting our model to factor in the pharma demerger and to moderate our FY23/24 estimates,” it added.

AIL has demerged its pharma business (contributing around 18% to revenues, EBIT and assets in FY22) and thus Q2 FY23 results are ex-pharma. Overall, sales increased by 34% YoY while EBITDA grew by 5% with EBITDA margins of 15.8%. Top-line growth is primarily driven by price as volumes were impacted in end-user industries like dyes, paints, pigments etc. 

“AIL maintained its FY23 single-digit EBITDA growth guidance at 11 bn – which was disappointing. However, riding on strong capex and operating leverage, FY24-25E to witness strong growth at 25% p.a. The pharma business’ demerger and moderation in capex commissioning impact our estimates, resulting in a 12-13% cut in our earlier estimates,” Edelweiss said.

Large capex commissioning in FY23 led to lower utilisation and M-T-M FX losses had adversely impacted FY23 profits. However, with utilisation picking up, FY24 should witness better operating leverage, as per the brokerage house. Management maintains its capex plans of 11-12 bn in FY23.

Aarti Industries Limited (AIL) is a leading Indian manufacturer of speciality chemicals and pharmaceuticals. The stock is down about 36% in 2022 (YTD) so far.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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