Aarti Industries' Q3FY19 results (Outperformer) - Robust performance
Q3FY19 results
- Aarti Industries (AIL) reported revenue growth of 28% yoy to Rs12.7bn (above our est: Rs12bn) largely led by improvement in product mix and realisations. Volume growth in Q3FY19 was ~4%
- Revenues from the speciality chemical segment (80% of revenues) grew by 31%yoy, while the Pharma segment (13% of revenues) and HPC segment grew by 23% and 8% respectively.
- Gross margins declined by 60bps to 41.1% (est:41.3%) on higher crude-linked raw material costs.
- Lower staff costs and operating expenditure led to 150bps improvement in EBITDA margins to 19.5% (est: 18.8%).EBITDA increased by 39%yoy to Rs2.47bn (est : Rs2.27bn)
- Despite higher interest cost and depreciation ,PAT increased by 47% yoy to RS1.33bn (est : Rs1.16bn)
Key positives: Improved product mix, EBITDA margin expansion
Key negatives: Decline in gross margins, lower than expected volume growth
Impact on financials: Increase EPS by 7.7%/4.4%/8% in FY19/20/21E respectively to factor in strong revenue and EBITDA growth
Valuations & view
Aarti Industries continued to deliver strong all-round growth despite volatility in crude and currency led by improvement in product mix. In the near term we expect the growth momentum to continue with strong volume growth and 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. We believe AIL is in a pole position to capitalise new opportunities in the Indian specialty chemical space. AIL’s aggressive capex plan over FY19-2021E (~30-40% increase in gross block over FY14-18),two multi-year contracts (worth Rs140bn) with global players exhibit AIL’s potential. We estimate 22%/29% revenue/PAT CAGR, respectively, over FY18-21E, with potential upside from new contract wins. At 19.3x FY21E earnings, we see room for upside, given AIL’s strong earnings visibility and healthy return ratios. Maintain Outperformer with revised target price of Rs1,862 (21XFY21E EPS).​
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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