Stock pulse is a format where we explore the most important questions to understand the company's performance.
What are the revenue drivers for the company and future outlook?
Aarti Industries Ltd (AIL) is a leading global specialty chemical company specializing in benzene-based derivatives. Key value chains include Nitro Chloro Benzenes, Di-Chlorobenzenes, Phenylenediamines, Nitro Toluene value chain and Sulphuric Acid as well as other downstream products. With a presence in over 60 countries, it caters to various industries such as Agrochemicals, Polymer and additives, Pharmaceuticals, Dyes, pigments, and printing inks. Half the revenues earned by the company are from exports and major export markets are North America, Europe, and China.
AIL has recorded 15% revenue/EBITDA CAGR over FY18-23. Recently, in Q1FY24 revenue declined 12% YoY; while Q2FY24 witnessed volume-backed recovery. H2FY24 is anticipated to be better than the first half. The medium-to-long-term trend continues to be appealing backed by steady demand recovery in key end-user industries, management expects FY25 to be a normalizing year.
Source: Annual report, Moneyworks4me research
Can the company continue to maintain its margin profile?
AIL demerged its pharma business effective 1st July, 2021. This strategic decision was taken with the rationale of achieving operational efficiencies by streamlining the businesses. Currently, the company only deals in the specialty chemical segment (FY19-22 avg. EBITDA margin 20%+). Management hinted that margins have bottomed out in H1FY24 (~15%). We expect margin recovery from FY25E, on improvement in demand from the agro and pharma sector.
What are the Capex plans of AIL?
The company incurred a CAPEX of approximately Rs. 575 crore in H1FY24 for various expansion opportunities (including chlorotoluenes value chain, comprising over 40 value-added specialty products). The products from this project are characterized by their niche and high-value range, with a potential strong EBITDA margin of around 25-30%.
The targeted annual CAPEX for FY24 is expected to fall within the range of Rs. 1200-1300 crores. Overall, the company is dedicated to allocating Rs. 2,500 to 3,000 crores for the outlined growth initiatives over two years, anticipating rapid growth in the Indian Chemical industry. This commitment aims not only to strengthen proficiency and capabilities in existing and newer high-end chemistries but also to expand the addressable market size and meet the rising demand from key customers.
Source: Annual report, Moneyworks4me research
What are the concern areas?
Demand slowdown- The global macroeconomic slowdown, primarily driven by Europe, along with uncertainty regarding the resurgence of demand in China, has resulted in a global imbalance between supply and demand. This has consequently affected pricing and demand for products such as dyes, dyestuff, pigments, etc., collectively contributing to ~30% of Aarti's overall revenue.
Return ratios to remain subdued- Capex plans of Rs. 2500+ Crore over FY24-25E will require the company to raise debt. This will impact RoEs over the medium term.
Disclosure: MoneyWorks4me's employees may have exposure in the securities mentioned in the above report. For detailed disclosure click here.
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