CD Equisearch Pvt Ltd March 24, 2020 Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance S Aarti Industries Ltd No. of shares (m) 174.2 Mkt cap (Rs crs/$m) 11783/1571.0 Current price (Rs/$) 676/9.0 Price target (Rs/$) 890/11.9 52 W H/L (Rs.) 1071/662 Book Value (Rs/$) 168/2.2 Beta 0.8 Daily volume NSE (avg. monthly) 341080 P/BV (FY20e/21e) 3.9/3.3 EV/EBITDA (FY20e/21e) 13.4/11.9 P/E (FY20e/21e) 21.2/18.2 EPS growth (FY19/20e/21e) 49.5/6.0/16.0 OPM (FY19/20e/21e) 20.5/22.0/23.9 ROE (FY19/20e/21e) 23.8/20.0/19.8 ROCE(FY19/20e/21e) 14.8/13.4/14.8 D/E ratio (FY19/20e/21e) 0.9/0.6/0.4 BSE Code 524208 NSE Code AARTIIND Bloomberg ARTO IN Reuters ARTI.NS Shareholding pattern % Promoters 48.3 MFs / Banks / FIs 16.7 Foreign Portfolio Investors 7.5 .3 Govt. Holding 0.0 Public & Others 27.6 Total 100.0 As on Dec 31, 2019 Recommendation BUY Analyst KISHAN GUPTA, CFA, FRM Phone: + 91 (33) 4488 0043 E- mail: [email protected]Consolidated (Rs crs) FY17 FY18 FY19 FY20e FY21e Income from operations (gross) 3163.46 3806.06 4705.51 4592.25 4756.16 Other Income 1.96 7.77 2.11 8.92 8.00 EBITDA (other income included) 655.44 706.89 967.20 1019.02 1146.51 Profit after MI 315.12 327.94 490.40 556.92 646.05 EPS(Rs) 19.19 20.17 30.16 31.96 37.08 EPS growth (%) 24.7 5.1 49.5 6.0 16.0 Company Brief AIL is one of India's leading manufacturers of chemicals and pharmaceutical intermediates: dyestuff; pigment; agro chemicals; speciality chemicals; active pharmaceutical ingredient (API); intermediates of API. Quarterly Highlights Impacted by shortage of nitric acid, Aarti Industries reported no small stress in its speciality chemicals business EBIT margins for it shrunk to 20.6% in Q3 from a gravity-defying 23.9% in Q2, resulting in flat lining of its EBIT. Wherefore, NCB production plunged 16.1% to 14900 tons while Aarti could churn out just 1666 tons of nitro toluene last quarter when compared to 4000 tons in the same quarter a year ago. Volumes barely showed any buoyancy whatsoever not least due to stress in US automobile and agrochemical sectors. Backed by fall in raw material cost and improved product mix, Aarti reported no obscure increase in margins for the same jumped by nearly 300 bps to 20.4% on yoy basis. EBIT as a consequence of higher margins grew by 20.2% to Rs 35.97 crs compared to Rs 29.92 crs in the same quarter a year ago. Yet risk of supply bottlenecks in pharma business due to no smallish raw material dependence on China which has of late seen production disruption due to Corona virus scare. Despite rise in overall OPMs by 100bps to 20.8% last quarter, operating profit barely grew for revenues tumbled by 4.5%. Yet fall in finance costs from Rs 42 crs to Rs 28.71 crs helped modest growth in post tax earnings. In view of global turbulence brought about by Corona virus, Aarti is trying to curb import of raw materials and efforts are being made to scout for more Indian sources to boost raw material security. The stock currently trades at 21.2x FY20e EPS of Rs 31.96 and 18.2x FY21e EPS of Rs 37.08. Nail-biting fall in crude oil prices precipitated earning cut by just over 6% for next fiscal for revenue growth is now projected to dramatically fall, though aptly counterbalanced by higher margins and lower inventories. Yet post tax earning is projected to rise by some 16% on stable return on capital. Yet risk of disruption in specialty chemicals demand from US automotive and agrochemical sectors barely escape attention. Given no inapt valuation post recent stock price correction, we recommend buying the stock with revised target of Rs 890 (previous target: Rs 871) based on 24x FY21e earnings.
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CD Equisearch Pvt Ltd March 24, 2020
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
Cumulative Financial Data
Figures in Rs crs FY10-12 FY13-15 FY16-18 FY19-21e
Income from operations (gross) 4696 8220 9976 14054
Operating profit 650 1229 1925 3114
EBIT 504 982 1566 2557
PBT 324 631 1200 2139
Profit after MI & associate profit 249 490 899 1693
OPM (%) 13.8 14.9 19.3 22.2
NPM (%) 4.7 5.7 9.4 12.3
Interest coverage 2.8 2.8 4.3 6.1
ROE (%) 17.1 19.9 22.9 22.2
ROCE (%) 11.9 14.4 13.6 15.6
Debt-equity ratio* 1.0 1.1 1.3 0.4
Fixed asset turnover 3.7 3.9 2.2 1.8
Debtors turnover 4.7 6.5 6.1 6.4
Inventory turnover 5.1 5.3 4.1 4.9
Creditors turnover 10.6 10.9 8.9 11.7
Debtors days 78.5 56.3 60.0 57.1
Inventory days 72.0 68.7 88.3 73.9
Creditor days 34.4 33.4 41.2 31.1
Cash conversion cycle 116.1 91.7 107.1 99.9
FY10-12 implies three years ending fiscal 12; *as on terminal year
Combined effect of demerger of Aarti's home and personal care business into Aarti Surfactants and nerve-wracking fall in crude
oil prices recently would preclude spectacular expansion in revenues over FY19-21e period compared to the previous three year
period. Increasing allegiance to value added products, particularly in Aarti's flagship specialty chemicals business, would
anything but constrict margin expansion - OPM projected at 22.2% in FY19-21e period compared to 19.3% - thus enabling
cumulative post tax earnings to grow by a respectable 88.3%.
Yet sluggishness in ramp up of supplies from a couple of global chemical supply contracts next fiscal coupled with dreadful
correction in global crude oil prices would stymie fixed asset turnover to 1.8 in the projected period from 2.2 (see table). Stellar
margin expansion (NPM 12.3% Vs 9.4%) would barely help propel return on equity (ROE: 22.2% Vs 22.9% in FY16-18 period) not
least due to stingy asset utilization. Gradual reduction of financial liabilities in FY20 and next fiscal would support a healthy debt
– equity ratio in FY21 (see table). Cash conversion cycle though would improve all thanks to discernible improvements in both
inventory and debtor days in the ensuing period.
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CD Equisearch Pvt Ltd
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
Financial Summary – US dollar denominated
million $ FY17 FY18 FY19 FY20e FY21e
Equity capital 6.3 6.2 6.3 11.6 11.6
Shareholders funds 208.6 241.2 369.8 400.3 470.2
Total debt 241.2 320.2 347.1 252.6 199.2
Net fixed assets (incl CWIP) 303.3 374.2 425.2 494.6 524.7
Investments 7.2 7.3 4.8 4.4 4.4
Net current assets -2.0 13.7 82.7 18.6 23.1
Total assets 310.4 392.6 499.7 489.9 533.3
Revenues (Gross) 471.5 590.6 673.3 612.2 634.1
EBITDA 97.6 108.7 138.1 135.9 152.9
EBDT 80.1 88.3 112.0 118.9 138.4
PBT 61.8 65.6 88.8 94.0 108.5
Profit after MI 47.0 50.9 70.2 74.2 86.1
EPS($) 0.29 0.31 0.43 0.43 0.49
Book value ($) 1.27 1.48 2.13 2.30 2.70
income statement figures translated at average rates; balance sheet and cash flow at year end rates; projections at current rates(Rs 75.01/$). All dollar denominated figures are adjusted for extraordinary items.
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CD Equisearch Pvt Ltd
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
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