Buy This Chemical Stock, Shares Have Fallen 35%, Has Strong Business & Capacity Expansion

Anand Rathi has recommended buying the shares of Aarti Industries with a decent upside on the stock. The company is one of the top players in the speciality chemicals and pharmaceuticals with a good export presence.

Revenues at the company rise supported by strong volume growth

According to Anand Rathi, Aarti's Q4 revenue grew 45% to Rs 17.6 billion, supported by volume growth, higher prices (to take care of the rise in raw material prices), and the rising share of value-added products. Q/q, though, it was flat as Q3 FY22 figures were adjusted for the Rs 6.3 billion termination fees from the cancelled first long-term contract.

"The gross margin contracted a steep 631bps y/y to 47.5% (but q/q was up 137bps) because of the steep rise in prices of raw materials. Despite the huge contraction in the gross margin, the EBITDA margin contracted only 221bps y/y to 19.3% (but q/q was up 12bps), helped by the higher raw material and logistics & fuel costs passed on to customers and lower operating expenses. Absolute EBITDA grew 30% y/y, 1.3% q/q, to Rs3.4bn, aided by greater capacity utilisation and a better product-mix. PAT was up 42.3% y/y, 2.7% q/q, to Rs.1.9bn, on the strong operating performance and higher topline growth. Finance costs increased 42% y/y, 14% q/q, to Rs 306m," Anand Rathi said in its report.

Strong outlook going forward

According to Anand Rathi, Aarti's FY22 capex was Rs13 bn. Its major expansion projects (third long-term contract, pharma US FDA expansion, NCB capacity expansion) are progressing and expected to come on-stream in FY23. Capex is being finalised for FY23. "The company guided to Rs 30 billion capex by FY24 to add capacity for the chloro-toluene value chain, to setting up universal multi-purpose plants (UMPP), a new range of value-added and specialty products and custom manufacturing. Management guided high single digit growth in EBITDA in FY23 and significant increase in EBITDA in FY24 as capacity utilisation to reach 80-90%," Anand Rathi has said in its report. The stock of Aarti Industries is already down almost 35% from 52-week highs, significantly higher than the benchmark indices.

Valuations

Anand Rathi maintains its buy rating at the target price of Rs.1,065, valuing the company at 32x FY24e and 20x FY24e EV/EBITDA. According to the broking firm, the key risks for the company would be a delay in implementing capex and a slow ramp-up of added capacities and delay in long term contracts.

Disclaimer

The above stock is picked from the brokerage report of Anand Rathi. Investors are advised caution as the markets have become exceedingly volatile. Neither Greynium Information Technologies, nor the author, nor the brokerage house would be responsible for any losses based on a decision reading the above article. Every effort has been made to provide accurate information and readers should understand the inherent risks before investing in the markets. The author and his family do not own shares of the above company.