Investing Rs 3,500mn for making API, KSM and Intermediates – Aarti Industries

Investing Rs 3,500mn for making API, KSM and Intermediates – Aarti Industries

Update on the Indian Equity Market:

On Thursday, Indian benchmarks ended in the green amid weekly F&O expiry, weak global cues, and omicron fears. NIFTY50 ended 218points higher at 17,402 (+1.4%). IT (+2.1%), METAL (+1.6%), and MEDIA (+1.6%) were the top sectoral gainers. There were no sectoral losers for the day. Among the NIFTY50 stocks, ADANIPORTS (+4.5%), POWERGRID (+3.8%), and HDFC (+3.8%) were the top gainers while CIPLA (-0.8%), ICICIBANK (-0.6%), and AXISBANK (-0.5%) were the only losers.

Excerpts of an interview with Mr. Rashesh Gogri, Vice Chairman and MD, Aarti Industries (AARTIIND) with CNBC-TV18 on 1st December 2021:

  • AARTIIND has qualified for Pharma companies PLI scheme under Group C, which will get a PLI (Production linked incentive) of Rs 17.5bn over 6 years and a minimum investment of Rs 500mn.
  • AARTIIND has qualified under the manufacturing of API, KSM and Drug Intermediates (Category II). It will be investing Rs 3500mn in a new large complex for manufacturing these products. Capex will start in FY22.
  • The funding for the Capex will be a mix of debt and equity. Most of the funding for Capex will be through the QIP proceeds and internal accruals.
  • AARTIIND had announced plans to split the company-into pharma and specialty chemical companies.
  • It expects the pharma business to report 25% topline growth in FY22. The company expects the pharma business to maintain 20-25% topline growth going forward as well.
  • 3QFY22 has seen commodity price volatility. The commodity prices have peaked out now and going down. This volatility impacts the company’s ability to pass on the raw material price inflation.
  • High levels of commodity prices did not remain for more than 1 quarter, so there could be some margin pressure for overall industry.
  • The shutdown in China on certain products, and policy issues has benefitted AARTIIND. Some of their products are doing well.
  • On demand trends, he said that in the specialty chemical segment, agro chemicals and polymers are doing well. Pent up demand was missing in polymer sector. Now the company is witnessing good demand in both these sectors.
  • Consumer centric sectors like dyes, intermediates are not doing well.
  • As the company operates on a cost plus model, it passes on the cost increase/reduction to customers. It tries to maintain its margin on a per kg basis.

Asset Multiplier Comments

  • In speciality chemical segment, pass through of raw materials hike for domestic customers is on a monthly basis while for exports on a quarterly basis. In Pharma, the increased raw material costs will take time to be passed on to end customers which may keep margins under pressure for the next one or two quarters. This may limit the share price increase/upside in the 2HFY22.
  • Two of the company’s long term contracts are expected to be commissioned by 3QFY22, and 1QFY23 respectively. This will help in increasing the topline, and is in-line with management’s revenue guidance of Rs 90,000 mn by FY24E.
  • We expect the company to benefit from its operating leverage in the quarters to come, which will help it in sustaining its operating margins.

Consensus Estimate (Source: market screener and websites) 

  • The closing price of Aarti Industries was ₹ 977/- as of 02-December-21. It traded at 39x/ 35x/ 29x the consensus EPS estimate of ₹ 25/ 28/ 34 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 964/- implies a PE multiple of 28x on FY24E EPS of ₹ 34/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”


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