Aarti Industries' Q4FY19 results (Outperformer) - Strong performance continues

Q4FY19 results

• Aarti Industries (AIL) reported revenue growth of 17.7% yoy to Rs12.1bn (est: Rs13bn) largely led by improvement in product mix and realisations. Volume growth for speciality chemicals  was 3%
• Revenues from the speciality chemical segment (76% of revenues) grew by 17%yoy, while pharma segment (17% of revenues) and HPC segment grew by 22% and 9% respectively.
• Gross margins improved by 180bps to 42.8% (est:41.7%) led by improvement in product mix
• Lower operating expenditure led to  200bps yoy improvement in EBITDA margins to 19.6% (est: 19.1%).EBITDA increased by 31.4%yoy to Rs2.36bn (est : Rs2.49bn)
• Lower tax rate 19.2% vs 21.7% in Q4FY18 led to 47% increase  in PAT to Rs1.24bn  (est : Rs1.28bn)

Key positives: Strong PAT growth

Key negatives: Decline in pharma margins

Impact on financials: Increase EPS by 4.5%/3.7% in FY20/21E respectively to factor in strong revenue/EBITDA growth potential

Valuations & view

Aarti Industries delivered strong all-round growth in FY19 despite volatility in crude and currency led by increase in contribution from value added products.  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. We believe AIL is in a pole position to capitalise new opportunities in the Indian specialty chemical space. AIL’s aggressive capex plan of Rs10-12bn over FY20-2021E (~40% increase in gross block over FY14-18), three multi-year contracts with global players exhibit AIL’s potential. We estimate 17%/24% revenue/PAT CAGR, respectively, over FY19-21E, with potential upside from new contract wins. At 16x FY21E earnings, we see room for upside, given AIL’s strong earnings visibility and healthy return ratios. Maintain Outperformer with revised target price of Rs2025 (22XFY21E EPS)