Aarti Industries' Q2FY19 results (Outperformer) - Robust all-round performance
Q2FY19 results
- Aarti Industries (AIL) reported revenue growth of 46.4% yoy to Rs12.9bn (above our est: Rs11.09bn) led by 10% volume growth in the speciality chemical volumes coupled with improvement in product mix and crude price impact
- Revenues from the speciality chemical segment (80% of revenues) grew by 50.4%yoy, while the Pharma segment (15% of revenues) and HPC segment grew by 40.5% and 13.5% respectively.
- Gross margins declined by 230bps to 38.9% (est:39%) on higher crude-linked raw material costs.
- Stable staff costs and other expenditure led to 57bps improvement in EBITDA margins to 18.6% (est: 17.8%).EBITDA increased by 51%yoy to Rs2.42bn (est : Rs1.97bn)
- Despite higher interest cost and higher tax rate ,PAT increased by 57% yoy to RS1.2bn (est : Rs937m)
Key positives: Healthy volume growth, EBITDA margin expansion
Key negatives: Decline in Gross margins, loss in HPC segment
Impact on financials: Increase EPS by 5.5%/5.9%/3.6% in FY19/20/21E respectively to factor in strong revenue and EBITDA growth
Valuations & view
Aarti Industries delivered strong all-round growth despite volatility in crude and currency led by healthy 15% volume growth. In the near term we expect the growth momentum to continue with 14-15% volume growth and improved product mix (increasing contribution from downstream products).AIL’s presence across integrated product chains (versus standalone products), a diversified consumer base and cost-plus pricing model has enabled them to deliver consistent 20%+ earnings CAGR over past 5 years, despite significant crude and forex volatility. Besides, the company’s best-in-class manufacturing capabilities, timely delivery and quality (adherence to specifications) standards are AIL’s unique selling proposition (USP) that help it remain competitive. We believe AIL is in a pole position to capitalise new opportunities in the Indian specialty chemical space. Two multi-year contracts (worth Rs140bn) with global players exhibit AIL’s potential. At 16x FY21E earnings, we see room for upside, given AIL’s strong earnings visibility and healthy retrn ratios
Aarti Industries Limited is a manufacturer of specialty chemicals and pharmaceuticals. The Company is also engaged in the manufacture of home and personal care products. The Company operates through three segments: Speciality Chemicals, Pharmaceuticals, and Home & Personal Care Chemicals. Its Speciality Chemicals segment serves polymer and additives; agrochemicals and intermediates; dyes, pigments, paints and printing inks; pharma intermediates, and fuel additives, rubber chemicals and resins markets. Its Pharmaceuticals segment serves active pharmaceutical ingredients, and intermediates for innovators and generic companies. Its Home & Personal Care Chemicals segment serves non-ionic surfactants, and concentrates for shampoo, hand wash and dish wash markets. The Company is integrated across over 70 products. Its products include benzene-based intermediates, sulfuric acid and its allied products, active pharmaceutical ingredient, agrochemicals and dyes.
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