Aarti Ind

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 investing.com 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.”


Demerger will help maintain focus and direction for both segments – Aarti industries

Update on the Indian Equity Market:

On Tuesday, Indian stocks closed in the green aided by positive global cues, and positive U.S. vaccination news. Nifty 50 ended at 16,625 (+0.8%) led higher by BAJAJFINSV (+7.8%), HINDALCO (+3.9%), and ADANIPORTS (+3.8%). The top laggards were BRITANNIA (-1.4%), NESTLEIND (-1.4%), and ASIANPAINT (-1.1%). Among the sectoral indices, METAL (+2.9%), MEDIA (+2.0%), and PSU BANK (+1.8%) led the gainers. Typically considered defensives, FMCG (-0.7%), and IT (-0.2%) led the laggards.

The Board of Aarti Industries recently approved the demerger of its pharma business.  Mr. Rajendra Gogri, MD, Aarti Industries (AARTIIND) discussed the rationale behind this move with Economic Times on 24th August 2021:

  • In the last few years, the pharma business revenues have almost doubled and EBIT has grown four times, with EBIT margins around 20 percent plus. The company foresees a significant opportunity in both, the pharma and specialty chemicals businesses. It has been decided to have a separate company so that there can be a separate focus and strategic direction for both the segments.
  • The process for demerger is expected to be completed in the next 9-15 months depending on the Covid situation.
  • Earlier AARTIIND had announced a Rs 50bn capex plan, out of which Rs7.5 bn will now be spent on the pharma division, and the balance on chemicals.
  • Both the segments have separate manufacturing facilities as well as R&D centres. The customer base also is separate. There is virtually no overlap in manufacturing as well as R&D in the market between both the segments.
  • In pharma, they are looking to add more than 50 products in the next 5-6 years. For pharma intermediates and API, a new greenfield expansion at Atali, Gujarat is being set up.
  • With a strong customer base across the world, AARTIIND expects a sizeable revenue growth over the next few years. In the next five years, the Company is looking at top line 2.5 to 3.5 times and three to four times at EBIT level for both the segments.
  • AARTIIND is totally backward integrated, especially in the Chemicals segment. Benzene is a key raw material which is domestically available and the Company does not foresee any raw material shortages but container freight is an issue. Usually, AARTIIND is able to pass on the freight increase to the customers but the availability of containers is impacting exports.

Asset Multiplier Comments

  • China had imposed penalties on chemical companies causing pollution and environmental damage. As a result, many chemical companies’ plants have been shut or relocated outside China. Additionally, with Covid-19 imposed restrictions, supply chain challenges have increased. Chemical companies in India have emerged as a beneficiary due to these challenges under the China+1 strategy.
  • AARTIIND is able to pass on the freight cost hikes to domestic customers almost immediately. There is a quarter’s lag while passing on the freight hikes to overseas customers. As the freight cost is eventually passed fully to the customers, the Company is able to maintain and improve its bottom line.

Consensus Estimate: (Source: market screener website)

  • The closing price of AARTIING was ₹ 920/- as on 24-August-2021. It traded at 43x/ 34x/ 33x the consensus earnings estimate of ₹ 21.3/ 26.7/ 28.0 for FY22E/ 23E/ 24E.
  • The consensus target price of ₹ 927/- implies a PE multiple of 33x on FY24E EPS of ₹ 28.0/-.

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.”

Will incur Rs 10000 mn Capex per year over next 3-4 years – Aarti Industries

 Update on the Indian Equity Market:

On Tuesday, Nifty closed in the red at 14,910 (-0.1%). Among the sectoral indices, IT (+1.3%), FMCG (+0.9%), and AUTO (+0.2%) closed higher. PSU Bank (-1.3%), PVT Bank (-1.0%), and Financial Services (-0.8%) closed in the red. Asian Paints (+4.7%), Dr. Reddy’s Laboratories (+2.6%), and HUL (+1.59%) closed on a positive note. CIPLA (-1.6%), Tata Steel (-1.6%), and ICICI Bank (-1.5%) were among the top losers.

Excerpts from an interview of Mr. Rajendra V Gogri, Chairman and MD, Aarti Industries with CNBC-TV18 dated 15th March 2021:

  • Gogri said the demand is higher. The discretionary sector demand has picked up.
  • Considering China plus one factor, demand is diverted to India. India comes ahead of other countries like Vietnam, Bangladesh, and Malaysia when it comes to specialty chemicals.
  • The company is expecting pre-Covid demand in Q4FY21E.
  • Speaking on capacity, he said the company will incur a Capex of Rs 10,000 mn each year for the next 3-4 years.
  • This Capex will be utilized to introduce new products as well as the expansion of existing products.
  • The company will not directly participate in the Pharma PLI scheme, however, the Pharma PLI Scheme is expected to benefit the general chemical sector indirectly.
  • The company has posted single-digit revenue growth in 9MFY21 and a flat bottom line YoY is expected in FY21E. However, Mr. Gogri guided for a 20% growth in top-line as well as in bottom line in FY22E.
  • Exports are usually 40-45% of total revenues and the rest is domestic sales. The major growth is expected on the discretionary side which was badly affected in 1FY21.
  • Speaking on capacity utilization, he said some plants are running at 80-90% utilization levels and new capacities are running at 20-30% utilization levels.
  • Speaking on the demerger of the Pharmaceutical business, he said a committee has been set up to look at the available option. The decision of the committee is yet to come on board.


Asset Multiplier comments:

  • As per a study conducted by McKinsey & Company, the Indian specialty market is expected to grow to $40bn over the next 4 years from $28bn in 2018.
  • Within the specialty chemical segments in India, surfactants, specialty polymers, and textile chemicals and dyes are among the top segments expected to further grow in line with market demand.
  • Indian specialty companies need to ramp up capacities and infrastructure to get maximum advantage from specialty chemical sector growth prospects.


Consensus Estimate: (Source: Market screener website)

  • The closing price of Aarti Industries was ₹ 1,286 as of 16-March-2021.  It traded at 41x/29x/25x the consensus Earnings per share estimate of ₹ 31.0/44.0/52.1 for FY21E/FY22E/FY23E respectively.
  • The consensus average target price is ₹ 1,241/- which implies a PE multiple of 24x on FY23E EPS of 52.1/-.

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.”


Mr Rajendra Gogri on why Aarti Industries will continue to be a multi-bagger.

Update on the Indian Equity Market:

On Friday, Nifty closed 1% higher at 12,245. Among the stocks, Coal India (+3.5%), Axis Bank (+3.3%) and BPCL (+2.7%) were the gainers. Yes Bank (-1.4%), Wipro (-1.0%), and Infratel (-0.8%) ended in the red. Nifty PSU Bank (+2.9%), Nifty Realty (+1.6%) and Nifty Bank (+1.3%) were the top sectoral gainers. All the sectors ended in the green. 

Excerpts from an interview of Mr Rajendra Gogri, CMD, Aarti Industries Ltd (Aarti Ind) with ET NOW on 24th December 2019

  • Aarti Industries is a specialty chemical manufacturer with B2B sales to major global companies for a variety of end-use – polymer, agrochemicals, dyes, and pigments. The company has a value-added product chain. Because of this business model and multi-customer relations, Aarti Ind has been able to grow the business sizably. In the last few years, the overall competitiveness of India against China has increased, which has expanded margins for the chemical industry and also for Aarti Ind as well. That is a major reason for both volume growth as well as bottom-line growth.
  • According to him, India is in a very sweet spot as far as the specialty chemical industry is concerned because the cost-wise, now Chinese labour cost is double that of India and because of the trade war issue also, there is a big appetite for India. Now the buzz word is that the company is getting extra benefits in the global supply chain because they do not import anything from China for their specialty chemical business. They are totally backward integrated.
  • According to Mr Gogri, the key in the chemical industry will continue to be backing businesses with relatively better chemistry skills, operating in molecules, markets with oligopoly. With more chemistry skill and with a strong customer base, Aarti Ind is able to have a substantial market share in their line of products.
  • Two factors have impacted the growth this year:
  1. climate impact on US agrochemical market is specifically restricted this year.
  2. the global automobile sector slowdown was led by a slowdown in China, for some of the products which are going in the auto sectors, there is some demand pressure.
  • Aarti Ind is well spread in the product line as well as geography and is expected to grow.
  • There is a sizable scope for an import substitution with about $1 billion worth of chemicals within Aarti Ind chain being imported. The Company has identified quite a few products now which are virtually not made in India. The entire chlorotoluene chain which they have identified is not made in India and some of the downstream products are also not manufactured in India. They have also considered import substitution. That is one of the major criteria for identifying the products in addition to the direct demand for global markets.
  • Aarti Ind has signed 2-3 major contracts. Out of this, the first two contracts will be commissioning in 4QFY20 and that has the potential to give a substantial boost to their top line going forward. A first contract is a 10-year contract. It is a high value-added product and EBITDA is almost expected to be about 40%. Topline growth will be relatively less from that project but EBITDA growth will be substantially more.

Consensus Estimate: (Source: market screener website)

  • The closing price of Aarti Industries Ltd was ₹ 833 /- as of 27-December-19. It traded at 25x/ 20x/17x the consensus EPS estimate for FY20E/ FY21E/ FY22E of ₹ 33.0/40.9/48.2 respectively.
  • Consensus target price of ₹ 925/- implies a PE multiple of 19x on FY22E EPS of ₹ 48.2/-.