Aarti Industries – A portfolio candidate

Aarti Industries is a leading Indian manufacturer of Speciality Chemicals and Pharmaceuticals with a global footprint. Chemicals manufactured by Aarti are used in the downstream manufacture of pharmaceuticals, agrochemicals, polymers, additives, surfactants, pigments, dyes, etc.
Short term growth of Aarti Industries is highly obscured on account of poor earnings growth and the stunted tenacity of demand.

Company Highlights

Aarti Industries is facing many challenges for global trade and on demand. Difficulties into logistics and raw material inflation are being improvised.

The company is facing a problem which is the shortage of raw material named nitric acid. However, the company has announced a 20-year contract for the supply of nitric acid with Deepak Fertilizers.          

The near-term growth profile is unclear by a heavy decline in earnings growth and the continued weakness in demand in a few discretionary end markets. The company faces a heightened risk of recession.

Aarti Industries currently displays a manifestation of vertically integrated aromatic chemical business after the demerger of the pharma business. Furthermore, they are investing in new chemical value chains, which will define its growth and margin trajectory for the second half of the decade.

The company’s top line has grown by 34 percent mainly due to better fulfillments. Aarti faces poor progress in demand for dyestuff/pigments from the textile industry. Barring that, the demand ecosystem is highly stable as reported by the management. Sequentially sales have grown by 5 percent. Production volume has dropped on a QoQ basis, the culprit being the maintenance shutdown at the Jhagadia unit for 3 weeks.

Quarterly Growth

Compared to last year, there was a sharp drop in the EBITDA margins mainly because of the suppression at the gross level. An adjustment for a shortfall in income of Rs 52 crore in Q2 FY22, the EBITDA margin has contracted by 102 basis points. Furthermore, Net profit had an impact by higher interest cost and deprecation due to commissioning of a new plant.

In FY23 & FY24, the capex outlay is about Rs 3,000 crore. The company will be focusing on downstream products in existing chemistries and newer chemistry value chains such as the chlorotoluene, along with custom manufacturing opportunities.

Technical Analysis

Aarti Industries Weekly Candlestick Chart on Sharekhan’s TradeTiger

Aarti Industries has taken a full retracement from its lifetime high of Rs 1168 to the 61.8% retracement level twice and currently the price seems to be holding this level. Hence a strong support is present at the 61.8% retracement level. The price is hovering around the 200-day exponential moving average which makes it relatively oversold and the weekly MFI is at 21 points which indicates that this stock is hugely oversold and the price is currently cheap for the long-term.

Long-term prospects

The whole of the chemical sector is facing a slowdown in global demand because of energy crises in Europe, complex Covid policy in China, and the elevated inflationary dominion which is curbing retail demand. Despite India being a bright spot concerning discretionary demand, Aarti Industries, with 50 percent of sales backed by exports, is materially exposed to the global recession risk. The top-end markets to observe is the demand for dyestuff/pigments from textiles and FMCG.

The company expects the overall demand to pick up from Q4 FY23 as chemical prices are assimilating. The near-term will display some stagnancy as a pick-up in volume if present will be compensated by a moderation in realization.

Investors can focus on Aarti industries on the long- term growth. The company is a vertically integrated aromatic chemicals company, which benefits from both import substitution and the China trends.

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