In s titu tio n a l E q u itie s

Aarti Industries
01 November, 2021

Reuters: ARTI.BO; Bloomberg: ARTO IN

Tracking expectations ACCUMULATE
Aarti Industries’ (ARTO) 2QFY22 EBITDA came ~10% below our estimate on account
of RM inflation, fuel & logistics costs led margin pressure. Revenue growth of ~32% Sector: Chemicals
YoY came in line with our estimate wherein Specialty Chemicals and Pharma
business grew by 37% and 15% YoY, respectively. Management highlighted that
CMP: Rs972
ARTO could pass on the impact of RM inflation with a lag. Typically, in case of Target Price: Rs1,000
domestic clients, there is a 1-month lag whereas in case of exports, there is a
2QFY22 Result Update

quarter’s lag. Demand environment is robust, but the domestic segment has Upside: 3%
contributed in a big way compared to exports because of logistics challenges and
Abhishek Navalgund
rising cases in certain geographies. Most of the key capacities operated at 85-90%
utilisation during the quarter. While both the segments witnessed margin moderation, Research Analyst
impact on the Pharma segment was significantly higher on account of lower revenue abhishek.navalgund@nirmalbang.com
booking at the end of the quarter and trial runs at the expanded block of the +91-22-6273-8013
intermediate facility. Management maintained its capex and earnings growth
guidance for FY22. While 2QFY22 earnings came slightly below our estimates, we
Key Data
don’t see a risk to our FY22 earnings and hence without earnings revision, we
maintain Accumulate on ARTO with an unchanged Target Price (TP) of Rs1,000. Current Shares O/S (mn) 362.2
2QFY22 performance highlights: ARTO’s consolidated revenue grew by ~32% YoY in Mkt Cap (Rsbn/US$bn) 358.1/4.8
2QFY22 wherein Specialty Chemicals and Pharma segments grew by ~37% YoY and ~15% 52 Wk H / L (Rs) 1,168/495
YoY, respectively. Volume growth in Specialty Chemicals segment stood at 7% YoY.
Daily Vol. (3M NSE Avg.) 1,377,854
Established markets’ demand reached pre-Covid levels in Specialty Chemicals and already
operational capacities operated at 90% utilisation. While ARTO was able to pass on the
higher costs in the Pharma segment, margin came under pressure on account of lower Price Performance (%)
revenue booking at the end of the quarter and trial runs at the expanded block of the 1M 6M 1 Yr
intermediate facility.
Aarti Industries 4.9 23.1 97.5
No change in guidance: Management indicated that the second long-term contract and the
Nifty Index 2.3 22.5 53.7
third long term contract should be commissioned from 3QFY22 and 1QFY23, respectively.
With regards to the cancelled contract, ARTO is planning to ramp up the capacity starting Source: Bloomberg
FY23 and expects peak utilisation during FY24, wherein the company would deal with new
set of clients for the same intermediate. Also, on the overall earnings growth in FY22, 2QFY22 result update
management maintained its guidance of 25-35% considering the strong demand outlook 2QFY22 presentation
going ahead. Pharma demerger approval is expected over the next 9-12 months. Out of the FY21 AR
total capex guidance of Rs12-15bn, the share of Pharma segment capex is ~30-35%.
Overall, we are building in Consolidated Revenue/EBITDA/APAT CAGR of 22%/25%/29%
over FY21-24E.

Consolidated (Rsm) 2QFY21 1QFY22 2QFY22 YoY QoQ 1HFY21 1HFY22 YoY
Net Sales 11,726 13,168 15,516 32.3% 17.8% 21,100 28,683 35.9%
Speciality chemicals (gross) 10,892 12,277 14,935 37% 22% 19,300 27,212 41%
Pharmaceuticals (gross) 2,412 2,757 2,785 15% 1% 4,355 5,541 27%
Gross margin 50.7% 53.7% 47.0% -368bps -665bps 51.4% 50.1% -134bps
Staff costs 935 995 989 5.8% -0.6% 1,832 1,984 8.3%
Other expenses 2,467 2,934 3,209 30.1% 9.4% 4,654 6,143 32.0%
Total expenses 9,184 10,030 12,418 35.2% 23.8% 16,737 22,448 34.1%
EBITDA 2,543 3,138 3,098 21.8% -1.3% 4,363 6,236 42.9%
EBITDA margin 21.7% 23.8% 20.0% -172bps -387bps 20.7% 21.7% 106bps
Depreciation 550 686 711 29% 4% 1,070 1,397 31%
EBIT 1,993 2,452 2,387 19.8% -2.7% 3,293 4,839 47.0%
Interest 222 383 185 -16.6% -51.7% 475 568 19.6%
PBT 1,739 2,068 2,208 27.0% 6.8% 2,775 4,276 54.1%
Tax 337 419 447 32.8% 6.7% 554 866 56.4%
APAT 1,438 1,700 1,820 26.6% 7.1% 2,292 3,521 53.6%
Source: Company, Nirmal Bang Institutional Equities Research
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Exhibit 1: Detailed quarterly financial performance (Consolidated)

Particulars (Rsm) 2QFY21 1QFY22 2QFY22 YoY QoQ 1HFY21 1HFY22 YoY
Net Sales 11,726 13,168 15,516 32.3% 17.8% 21,100 28,683 35.9%
COGS 5,781 6,101 8,220 42.2% 34.7% 10,251 14,321 39.7%
Gross Profit 5,945 7,067 7,296 22.7% 3.2% 10,849 14,363 32.4%
Staff costs 935 995 989 5.8% -0.6% 1,832 1,984 8.3%
Other expenses 2,467 2,934 3,209 30.1% 9.4% 4,654 6,143 32.0%
Total expenses 9,184 10,030 12,418 35.2% 23.8% 16,737 22,448 34.1%
EBITDA 2,543 3,138 3,098 21.8% -1.3% 4,363 6,236 42.9%
Depreciation 550 686 711 29.2% 3.6% 1,070 1,397 30.5%
EBIT 1,993 2,452 2,387 19.8% -2.7% 3,293 4,839 47.0%
Interest 222 383 185 -16.6% -51.7% 475 568 19.6%
Other income 0 1 5 1200.0% 940.0% 3 6 119.2%
Share of minority int/associates -33 -2 1 -101.8% -127.3% -46 -2 -96.5%
PBT 1,739 2,068 2,208 27.0% 6.8% 2,775 4,276 54.1%
Tax 337 419 447 32.8% 6.7% 554 866 56.4%
PAT 1,402 1,649 1,761 25.6% 6.8% 2,221 3,410 53.5%
APAT 1,438 1,700 1,820 26.6% 7.1% 2,292 3,521 53.6%
Margins (%) 2QFY21 1QFY22 2QFY22 YoY QoQ 1HFY21 1HFY22 YoY
Gross margin 50.7% 53.7% 47.0% -368bps -665bps 51.4% 50.1% -134bps
EBITDA margin 21.7% 23.8% 20.0% -172bps -387bps 20.7% 21.7% 106bps
EBIT margin 17.0% 18.6% 15.4% -161bps -324bps 15.6% 16.9% 127bps
PBT margin 14.8% 15.7% 14.2% -60bps -148bps 13.1% 14.9% 176bps
PAT margin 12.3% 12.9% 11.7% -53bps -118bps 10.9% 12.3% 141bps
Common size (% of Net sales) 2QFY21 1QFY22 2QFY22 YoY QoQ 1HFY21 1HFY22 YoY
Staff costs 8.0% 7.6% 6.4% -160bps -118bps 8.7% 6.9% -177bps
Other expenses 21.0% 22.3% 20.7% -36bps -160bps 22.1% 21.4% -64bps
Depreciation 4.7% 5.2% 4.6% -11bps -63bps 5.1% 4.9% -20bps
Interest 1.9% 2.9% 1.2% -70bps -172bps 2.2% 2.0% -27bps
Other income 0.0% 0.0% 0.0% 3bps 3bps 0.0% 0.0% 1bps
Tax as % of PBT 17.3% 17.8% 17.6% 24bps -22bps 17.4% 17.7% 26bps
Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 2: Quarterly segment performance (Consolidated)

Particulars (Rsm) 2QFY21 1QFY22 2QFY22 YoY QoQ 1HFY21 1HFY22 YoY
Segment revenue
Speciality chemicals 10,892 12,277 14,935 37.1% 21.7% 19,300 27,212 41.0%
Pharmaceuticals 2,412 2,757 2,785 15.5% 1.0% 4,355 5,541 27.2%
Less: GST collected 1,577 1,866 2,104 33.4% 12.8% 2,555 3,970 55.4%
Total 11,726 13,168 15,616 33.2% 18.6% 21,100 28,783 36.4%
Revenue share %
Speciality chemicals 81.9% 81.7% 84.3% 241bps 262bps 81.6% 83.1% 149bps
Pharmaceuticals 18.1% 18.3% 15.7% -241bps -262bps 18.4% 16.9% -149bps
EBIT
Speciality chemicals 1,880 2,325 2,420 28.7% 4.1% 3,176 4,745 49.4%
Pharmaceuticals 585 523 413 -29.4% -21.1% 1,038 936 -9.8%
EBIT share %
Speciality chemicals 76.3% 81.6% 85.4% 915bps 381bps 75.4% 83.5% 815bps
Pharmaceuticals 23.7% 18.4% 14.6% -915bps -381bps 24.6% 16.5% -815bps
EBIT margin
Speciality chemicals 17.3% 18.9% 16.2% -106bps -273bps 16.5% 17.4% 98bps
Pharmaceuticals 24.2% 19.0% 14.8% -942bps -416bps 23.8% 16.9% -694bps
Source: Company, Nirmal Bang Institutional Equities Research

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Exhibit 3: Major projects over FY19-23

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 4: Management guidance

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 5: New projects under pipeline in the medium term

Source: Company, Nirmal Bang Institutional Equities Research

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Exhibit 6: Financial summary

Y/E March (Rsmn) FY20 FY21 FY22E FY23E FY24E
Net Sales 41,863 45,061 57,886 71,374 81,930
Growth YoY% 0.4% 7.6% 28.5% 23.3% 14.8%
Gross margin % 50.9% 52.8% 51.4% 51.6% 51.7%
EBITDA 9,773 9,815 12,622 16,331 19,369
EBITDA margin % 23.3% 21.8% 21.8% 22.9% 23.6%
Adj PAT 5,361 5,352 7,282 9,901 11,585
Adj EPS 15.4 15.4 20.1 27.4 32.0
Growth YoY% 9.0% -0.2% 36.0% 36.0% 17.0%
RoCE 16.6% 13.9% 14.5% 16.5% 17.6%
RoE 19.1% 16.5% 16.7% 17.7% 18.3%
P/E 63.2 63.3 48.3 35.5 30.4
EV/EBITDA 36.0 36.1 28.5 22.6 19.0
P/BV 11.4 9.7 6.7 5.9 5.2
Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 7: Change in earnings estimates

Old Estimates New estimates Change (%)
Consolidated (Rsmn)
FY22E FY23E FY24E FY22E FY23E FY24E FY22E FY23E FY24E
Revenue 57,886 71,374 81,930 57,886 71,374 81,930 - - -
EBITDA 12,622 16,331 19,369 12,622 16,331 19,369 - - -
EBITDA margin % 21.8% 22.9% 23.6% 21.8% 22.9% 23.6% - - -
APAT 7,282 9,901 11,585 7,282 9,901 11,585 - - -
Source: Nirmal Bang Institutional Equities Research

Exhibit 8: Change in valuation and TP

Old New Change
Target PE TP Target PE TP Target PE TP
33 1,000 33 1,000 - -

Source: Nirmal Bang Institutional Equities Research

Exhibit 9: 1-yr Forward PE Exhibit 10: 1-yr Forward EV/EBITDA

Source: Bloomberg, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

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Financials (Consolidated)
Exhibit 11: Income statement Exhibit 12: Cash flow
Y/E March (Rsm) FY20 FY21 FY22E FY23E FY24E Y/E March (Rsm) FY20 FY21 FY22E FY23E FY24E
Net Sales 41,863 45,061 57,886 71,374 81,930 PBT 6,762 6,646 8,855 12,038 14,174
Growth YoY% 0.4 7.6 28.5 23.3 14.8 Depreciation 1,852 2,313 2,931 3,519 4,225
COGS 20,563 21,286 28,137 34,559 39,612 Interest 1,248 864 922 847 1,072
Gross margin % 50.9 52.8 51.4 51.6 51.7 Other adjustments -105 -57 -86 -73 -102
Staff costs 3,052 3,714 4,624 5,564 5,836 Change in Working capital 2,902 -72 -7,476 1,662 -1,607
Other expenses 8,474 10,246 12,503 14,920 17,113 Tax paid -1,638 -966 -1,573 -2,136 -2,590
EBITDA 9,773 9,815 12,622 16,331 19,369 Operating cash flow 11,021 8,727 3,573 15,856 15,173
Growth YoY% 1.3 0.4 28.6 29.4 18.6 Capex -11,533 -13,148 -15,000 -12,404 -15,000
EBITDA margin % 23.3 21.8 21.8 22.9 23.6 Free cash flow -512 -4,421 -11,427 3,452 173
Depreciation 1,852 2,313 2,931 3,519 4,225 Other investing activities 292 -73 1,687 -440 550
EBIT 7,921 7,502 9,691 12,812 15,145 Investing cash flow -11,241 -13,221 -13,313 -12,844 -14,450
Interest 1,248 864 922 847 1,072 Issuance of share capital - - 12,000 - -
Other income 88 7 86 73 102 Movement of Debt -3,032 7,459 -3,760 1,102 606
PBT (bei) 6,762 6,646 8,855 12,038 14,174 Dividend paid (incl DDT) -1,064 -451 -2,068 -2,821 -3,299
PBT 6,762 6,646 8,855 12,038 14,174 Other financing activities -1,254 -864 2,745 803 -1,072
ETR 17.5 19.5 17.8 17.7 18.3 Financing cash flow -5,349 6,145 8,917 -916 -3,765
PAT 5,361 5,235 7,176 9,806 11,489 Net change in cash flow -5,569 1,650 -824 2,095 -3,043
Adj PAT 5,361 5,352 7,282 9,901 11,585 Opening C&CE 8,042 2,473 4,123 3,299 5,394
Growth YoY% 9.0 -0.2 36.0 36.0 17.0 Closing C&CE 2,473 4,123 3,299 5,394 2,352
Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 13: Balance sheet Exhibit 14: Key ratios

Y/E March (Rsm) FY20 FY21 FY22E FY23E FY24E Y/E March (Rsm) FY20 FY21 FY22E FY23E FY24E
Share capital 871 871 938 938 938 Per share (Rs)
Reserves 28,917 34,158 51,304 58,384 66,670 Adj EPS 15.4 15.4 20.1 27.4 32.0
Net worth 30,734 35,151 52,365 59,445 67,731 Book value 85.5 100.5 144.4 164.0 186.9
Long term debt 5,808 12,681 10,144 10,144 10,144 Valuation (x)
Short term debt 12,297 12,241 11,017 12,118 12,724 EV/EBITDA 36.0 36.1 28.5 22.6 19.0
Total debt 18,105 24,921 21,161 22,263 22,869 P/E 63.2 63.3 48.3 35.5 30.4
Other non-current liabilities 7,614 4,584 8,251 9,901 9,901 P/BV 11.4 9.7 6.7 5.9 5.2
Total Equity & Liabilities 56,453 64,657 81,777 91,609 1,00,500 Return ratios (%)
Gross block 38,679 52,241 67,241 82,241 97,241 RoCE 16.6 13.9 14.5 16.5 17.6
Accumulated depreciation 14,003 16,316 19,247 22,766 26,991 RoE 19.1 16.5 16.7 17.7 18.3
Net Block 24,676 35,925 47,994 59,475 70,250 Profitability ratios (%)
CWIP 14,176 12,979 12,979 10,383 10,383 Gross margin 50.9 52.8 51.4 51.6 51.7
Intangible and others 4 1 1 1 1 EBITDA margin 23.3 21.8 21.8 22.9 23.6
Other non-current assets 4,045 3,201 1,600 2,240 1,792 PAT margin 12.8 11.9 12.6 13.9 14.1
Investments 370 635 635 508 508 Liquidity ratios (%)
Trade receivables 7,534 7,937 9,938 12,253 14,065 Current ratio 1.0 1.0 1.3 1.3 1.2
Inventories 8,357 9,357 11,378 14,029 16,104 Quick ratio 0.6 0.6 0.8 0.7 0.6
Cash & Cash equivalents 2,473 4,123 3,299 5,394 2,352 Solvency ratio (%)
Other current assets 1,685 2,259 5,226 2,613 2,613 Debt to Equity ratio 0.6 0.7 0.4 0.4 0.3
Total current assets 20,049 23,676 29,840 34,289 35,134 Turnover ratios
Trade payables 3,452 5,763 2,877 3,534 4,050 Fixed asset turnover ratio (x) 1.1 0.9 0.9 0.9 0.8
Other current liabilities 3,415 5,997 8,396 11,755 13,518 Debtor days 67 63 63 63 63
Total current liabilities 6,867 11,761 11,273 15,288 17,568 Inventory days 70 72 72 72 72
Total Assets 56,453 64,657 81,777 91,608 1,00,500 Creditor days 27 37 37 37 37
Source: Company, Nirmal Bang Institutional Equities Research Net Working capital days 110 97 97 97 97
Source: Company, Nirmal Bang Institutional Equities Research

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Rating track
Date Rating Market price (Rs) Target price (Rs)
16 October 2020 BUY 489 625
12 November 2020 BUY 526 625
7 January 2021 BUY 646 750
29 January 2021 BUY 580 670
19 May 2021 ACCUMULATE 833 800
09 August 2021 ACCUMULATE 950 920
23 September 2021 ACCUMULATE 918 1,000
1 November 2021 ACCUMULATE 972 1,000

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DISCLOSURES

This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as “NBEPL”) for private circulation. NBEPL is a
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NBEPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have
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NBEPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in
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Rahul Arora CEO rahul.arora@nirmalbang.com -

Girish Pai Head of Research girish.pai@nirmalbang.com +91 22 6273 8017 / 18

Dealing
Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com +91 22 6273 8230, +91 22 6636 8833

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Nirmal Bang Equities Pvt. Ltd.

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