Dess Equity Advisors www.prudentequity.

com
AARTI INDUSTRIES LTD.
22
rd
December, 2013 CMP : Rs.92.20
OVERVIE
Aarti Industries is a Mumbai based chemical company with 17 manufacturing units spread
over u!arat" Maharashtra and Madhya #radesh. $he company operates in four verticals
namely %
1. #erformance &hemicals
'. Agri(intermediates ) *ertili+ers
,. #harmaceuticals
-. .ome ) #ersonal &are &hemicals
#erformance &hemicals
#erformance chemicals is the largest segment in terms of revenues and it contributed /,0 to
the total sales in *11,. $hese consists of %
a2 #olymers ) Additives % $his is used in the transport sector as a replacement of metal parts
in order to reduce the weight and improve the fuel efficiency. In addition to this" these
polymers are also used in high growth segments such as electronic media )
telecommunication devices 3towers and batteries2 and various other Electrical Instruments.
4ome of its products are used in 5il E6ploration and de(icing activities.
b2 Dyes" #igments" #aints" #rinting In7s % $he demand is increasing in developing
economies on account increasing per(capita income ) consumption " growth in education
and healthcare facilities.
c2 5il ) as Additives" 8ubber &hemicals" *lavours ) *ragrances" 9ater $reatment"
&onstruction &hemicals" 8esins % Each of these are high growing sectors. Aarti industries
has several products in each of these categories with high mar7et share.
Dess Equity Advisors 1 www.prudentequity.com
Dess Equity Advisors www.prudentequity.com
Agri(intermediates ) *ertili+ers
$he company is a manufacturer of various agrochemicals intermediates and has presence
across all the sub(segments vi+. herbicides" insecticides" and other agrochemicals. It is also
manufacturing 4ingle 4uper #hosphate 344#2. 4tates of Maharashtra" u!arat" Madhya
#radesh and 8a!asthan accounts for over /:0 of India;s total consumption of 44#. $he
company en!oys locational benefits of having manufacturing unit in u!arat" thereby also
benefiting from the reduced freight costs as compared to other states. $his segment
contributed '10 to the total sales in *11,.
#harmaceuticals
$his is the fastest growing segment in the company. $hough presently it contibutes only
about <0 to the total sales of the company. It has four manufacturing units" two of which are
=4*DA approved facilities ) other two are 9.5 M# approved facilities. $he ones that
are not approved by =4*DA are meant for intermediates and hence the company has no
plans of getting them approved either. $hese plants are cM# compliant > meeting I&. ?7
standards > thus enabling buyers to use A#Is in all regulated mar7ets. $he pharmaceutical
segment also has the highest E@ID$ amongst all the segments of the company.
Dess Equity Advisors ' www.prudentequity.com
Dess Equity Advisors www.prudentequity.com
.ome ) #ersonal &are &hemicals
.ere" the company manufactures a wide range of cosmetic chemicals li7e concentrates for
shampoo" hand wash ) dish wash" health care products as well as hygiene products using
performance chemicals" polymers and oleo chemicals. It has two manufacturing units" one
each at #ithampur ) at 4ilvassa.$his segment was hitherto in a marginal loss but has
recently turned around. $his segment has the lowest E@ID$ margins and contributed about
70 to total sales.
Dess Equity Advisors , www.prudentequity.com
Dess Equity Advisors www.prudentequity.com
MER!ER
At the end of *11," the company merged the manufacturing operations of its associate
company" Anusha7ti &hemicals and Drugs Aimited into Aarti Industries Aimited. Anusha7ti
&hemicals had manufacturing units at @hachau in the 4tate of u!arat" $arapur and
Dombivali in the 4tate of Maharashtra which are now merged into the company. $he
company has allotted <-"71"/1- equity shares to the shareholders of Anusha7ti &hemicals
and Drugs Aimited which has increased the outstanding shares by about 1'0 to
--"'<"B:"-,B divided into :":B"<1"/:7 equity shares of 8s.BC( each fully paid up. $hough
the equity has gone up" it has brought with it increased sales" profits" higher margins and
broadened the revenue profile of the company.
"#$% &e#r$' (&1) Per%*rm#+ce
*or the first half" Aarti Industries reported a total income of 8s.1',:.<< crores which shows
a growth of ,-.:<0 over last year. $he following were the segmental growth rates %
D #erformance &hemicals % B/.<<0
D Agri(intermediates ) *ertili+ers % 3(2 1'.7<0 3mainly due to monsoon and floods2
D #harmaceuticals % /'.E-0
D .ome ) #ersonal &are &hemicals % E./'0
$he Fet #rofit grew to 8s./-.:: crores from 8s.B,.,E crores with a growth of '1.7'0. It is
to be noted that the .1 of *11, does not include the financials of merged entity Anusha7ti
&hemicals. If included" the growth loo7s muted. .owever" the first quarter of *11- was
mired with bad performance of Agri and *ertili+er segment and plant closure due to
maintainence 31B days2 and water clogging in and around the factory premises due to floods.
Dess Equity Advisors - www.prudentequity.com
Dess Equity Advisors www.prudentequity.com
E,PORTS
$he sales profile of Aarti Industries has a high component of e6ports. In *1 1," e6ports
constituted BE.BB0 to the total sales. In the first half" the revenue mi6 is -<0 e6ports and
B10 domestic. $he depreciation of the IF8 to =4D has given a fillip to e6ports as well as
margins. $his bodes well for the company. (*r e-er' *+e R./ee %#$$, 01e P2T 3+cre#ses
b' Rs.2 cr*res #++.#$$'.
Mentioned below is the segmental brea7 up of sales in the first half of *11- %
*igures in IF8 crores
4egment E6ports Domestic E6ports as 0 of $otal
#erformance &hemicals
--1./B -E7./: B1.<<0
Agri(intermediates ) *ertili+ers
:/.7, <,.</ -7.<<0
#harmaceuticals
//.7< // BE.'<0
.ome ) #ersonal &are &hemicals
1,./< /'.-: 17.<70

OUTLOO4
A structural shift is ta7ing place in the chemical industry with the falling 8upee vis(a(vis the
=4 Dollar ma7ing the domestic industry competitive and closure of large chemical factories
in the western world. $he Eastern shift in demand and low cost manufacturing is fastening
this shift. &ompanies li7e Aarti Industries with competitive positioning and large scale of
operations are the ones to benefit most from this change.
E6pansion across all verticals

.ydrogenation
$he company had in ?, of *1'E1, e6panded its .ydrogenation capacity from 1"BEE tonnes
per month 31:"EEE tonnes per annum2 to ,"EEE tonnes per month 3,/"EEE $#A2. $his
doubling of capacity has already started contributing to higher sales. $his enchanced
capacity is sufficient to enable the company to grow at 'E('B0 for the ne6t , years. 4ince
the e6pansion" the company is recording increased sales volume.
Dess Equity Advisors B www.prudentequity.com
Dess Equity Advisors www.prudentequity.com
Fitro &holro @en+ene
Aarti Industries is a large manufacturer of Fitro &holro @en+ene. In December 'E1'"
Aan6ess" a large erman producer of Fitro &holro @en+ene closed its plant. $he said plant
had a capacity of 'B"EEE tonnes per annum. $his has led to high demand for the Fitro
&holro @en+ene based products such as #F&@ and 5F&@. Aarti Industries has a capacity
of B7"EEE tonnes per annum 3BE0 of which is consumed in(house2 and is further e6panding
to :E"EEE tonnes per annum at a cost of 8s.,E crores. $he plant will commission in two
phases. #hase I is e6pected to be operational by ?- of *11- and #hase II by the first half of
*11B.
5il ) as and #lastici+er
.ere" the company is underta7ing debottlenec7ing of its &alcium &hloride ranulation
output. $he present capacity is being enchanced from 1"'EE tonnes per month to '"EEE
tonnes per month. $his e6pansion will commence in ?- of *11-.
44# 3single super phosphate2
$he company has earlier plans to set up a large plant Ghagadia" u!arat. $his plant has now
been shelved. Instead" the company is e6panding its e6isting plant at Hapi from 1"EE"EEE
$#A to 1"-E"EEE $#A. $his e6pansion will get completed in the first half of *11B.
Dess Equity Advisors / www.prudentequity.com
Dess Equity Advisors www.prudentequity.com
#igmentation Intermediate
9ith demand rising" the company has in ?1 *11-" increased the manufacturing capacity of
pigmentation intermediates by BE0" from ,EE tonnes per month to -BE tonnes per month.
#harmaceuticals
In this segment" the company is recording year on year growth of ,B0. In the
pharmaceutical segment" e6ports to regulated mar7ets have improved. *rom a sales of 8s.1E
crores in ?1" it has doubled to 8s.'E crores in ?' 3regulated mar7ets are mainly the =4 and
European countries2. $he overall pharmaceutical sales are growing at 1E0 quarter on
quarter. $he asset turn too is the highest in this segment at ,.:E. $he company caters to
$herapeutical areas such as Antihypertensive" Anti &ancer" &orticosteroids 3used in Asthma2
and &F4 3central nervous system2 range. It is investing 8s.-E crores in e6panding the
manufacturing capacity.

Dahe! 4EI
It has a plot of about BE"EEE sq. mtrs at Dahe! 4EI and is in the process of setting up an
Ethylenation unit for manufacturing ethylene based products with end(user application as
Agro &hemicals and 4peciality &hemicals" ma!orly in global mar7ets. $he company will get
ta6 brea7s from the Dahe! plant as the income from this plant will be ta6 free 3e6cept MA$2.
$his plant has been pushed from *11B to *11/.
(INANCIALS
*igures in IF8 crores
*1'EE< *1'E1E *1'E11 *1'E1' *1'E1,
4hare 5utstanding 7.': 7./7 7./7 7.<1 :.:/
Fetworth ,7-.7- -B-.-- BE:.<B B<E.11 7B/.'/
Debt -:,.B7 -,:.-< B':.B, B::.EB :E-.B-
ross @loc7 //'.B< 7'7.-' 7:E., :-'.E- 11<<.:/
Investments -E.BB B-.,/ 7/.-' <,.B7 <B.-'
Fet &urrent Assets -1:.E/ -'B.1' B,<.:- B<E.E' 7'7.'<
4ales 1-BE.:1 1'<7.,' 1-7-.' 1/7,., '1EE
Depreciation -E.1, -7.E7 -<.:1 B-.:B :'.:-
Fet #rofit 7<.B' B-./' //.< <E.E, 1,-.-1
Dividend 38s.2 , '.B '.B ,.B -
85&E 302 ',.-- 1:./B 1,.<, 1/.-< 1,.-:
85F9 302 '1.'' 1'.E1 1,.1- 1B.'B 17.B:
Dess Equity Advisors 7 www.prudentequity.com
Dess Equity Advisors www.prudentequity.com
J $he equity has increased mainly due to merger of an associate company. $he benefits of
this merger were commensurate with its benefits. $he company has no plans to increase
the paid up capital.
J Debt has been ta7en mainly for wor7ing capital and cape6. *or a capital intensive
business" a debt equity ratio of 1.E/%1 in a year when ma6imum cape6 too place is very
reasonable. $he management has indicated that it wants to bring the ratio to E.<E%1 in the
near future.
J $he business is capital intensive. $he company has invested 8s.B,7 crores in the last four
years to increase its capacity. $his resulted in increase in sales of almost an equal
amount. .owever" it is to be noted that bul7 of this cape6 38s.,B: crores2 was
incurred in *11, itself. $he benefit of this will accrue from *11- onwards. $he
capital e6penditure for *11- has been set at about 8s.1EE crores.
J 4ales started to pic7 up only from *11E. *rom then" sales grew at a &A8 of 17.-E0. A
sales growth of 'E('B0 is e6pected for *11- and *11B. #rofit after ta6 grew at a &A8
of ,B0 over the last , years. #A$ growth of 'E0 is e6pected in *11- and *11B.
J Dividend has been increasing each year. At the current price of 8s.<'" the dividend yield
comes to -.,-0.
J 8eturn ratios are very poor. $his has happened due to the large cape6 incurred by the
company. *rom here on" both the 85&E and 85F9 are li7ely to march higher on the
bac7 of rising earnings and reduction in debt. 9ith the commissioning of the ta6 free
Dahe! plant" the ratios will get a fillip.

S"ARE"OLDIN! PATTERN
$he promoters sta7e is at /E.,70. $he sta7e has been continously rising. It increased by ,0
due to the merger of Anusha7ti &hemicals with the company. Even otherwise" the promoters
are on a buying spree. $hey have been buying in large quantities even at the current price.
@elow table shows their rising sta7e.

1earCMonth #romoter 4ta7e
'E1' December BB.<E0
'E1, March B/.</0
'E1, Gune /E.EE0
'E1, 4eptember /E.,70
$he remaining ,<./,0 is held by the public.
Dess Equity Advisors : www.prudentequity.com
Dess Equity Advisors www.prudentequity.com
STOC4 PRICE PER(ORMANCE
$he stoc7 was on a steady downturn till 4eptember 'E1,. $hereafter" it has been steadily
rising.
K B' wee7 high % 8s.1E:.-E
K B' wee7 low % 8s./'.EE
VALUATION
“ My system for over 30 years has been this: When stocks are attractive, you buy
them. Sure, they can go lower. Ive bought stocks at !"# that went to !#, but then
they later went to !30$ % &eter 'ynch
Aarti Industries is available at a mar7et capitali+ation of 8s.:1B crores. E#4 3earnings per
share2 in *11- is li7ely to be about 8s.17.BE. $he stoc7 at the current price of Rs.92.20 is
available at a #CE of B.'7. $he #CE moves to -.'< on *11B E#4. $his" we believe is low for
a company that is growing at 'E('B0 per annum. 4ell at Rs.130 for a return of )15 from
the current level.
D3sc$#3mer : At the time of writing this article the authorCanalyst may or may not have a position in the stoc7 covered
by this report. $he authorCanalyst or any of his dependent family members may ma7e purchases or sales of the securities
mentioned in the report while the report is in circulation. Any action you choose to ta7e in the mar7ets is totally your
own responsibility. 4iddharth 5beroi or Dess Equity Advisors or or www.prudentequity.com or any of its employee will
not be liable for any" direct or indirect" consequential or incidental damages or loss arising out of the use of this
information. 4toc7 mar7et Investing may result in losses as well as profits. 8eadersCrecipients of this report are strongly
advised to do their strict due diligence" and should be aware that the value of investments can go down as well as up.
Information presented in this report is a guide only. 4iddharth 5beroi or Dess Equity Advisors or
www.prudentequity.com does not represent that it is accurate or complete and hence" it should not be relied upon as
Dess Equity Advisors < www.prudentequity.com
Dess Equity Advisors www.prudentequity.com
such. $his report is not intended to be ta7en as financial advice nor has it been prepared with regard to the individual
investment needs and ob!ectives or financial situation of any particular person. $he author shall not be liable for any
direct or indirect losses arising from the use of the contents of this report" and readers are therefore cautioned to use the
information contained herein at their own ris7. $he dataCreport is sub!ect to change without any prior notice.$his report
is only for your personal use and not intended for any business purpose. $he service does not allow reposting of content
posted in this report and on this site. $he author certifies that all of the views e6pressed in this report reflect his personal
views about the sub!ect company at the time of writing this report.

Dess Equity Advisors 1E www.prudentequity.com