Aarti Industries

Volume recovery back-ended; initiate with Reduce

Spec Chem, Agri | Initiating Coverage | September 22, 2022

REDUCE Aarti’s volume growth has been relatively subdued over FY21-22 due to inadequate
Current Price (Rs) : 876 supply of Nitric Acid (NA; used for 2/3rd of products). Supply constraints are likely to
ease in medium term on (a) expected capacity addition by GNFC (FY23 end) and
Target Price (Rs) : 810
(b) partial backward integration initiatives by Aarti (full benefits in FY25). However,
Potential Upside : -8%
volatility in NA availability and higher overheads (capex commissioning) remain a threat
to near term earnings. Our FY23-24 EPS estimates are 10-12% below consensus as we
Market Data expect recovery to be back-ended. Initiate with REDUCE and TP of Rs 810 (25x Sep’24E
No. of shares : 363 mn EPS) as current valuations (consolidated and ex-pharma business) do not factor in
the same.
Free Float : 56%
Market Cap (USD) : 3,929 mn
Largest player in Benzene; expanding capacity in adjacencies…
52-week High/ Low (Rs) : 1,168/ 669
Aarti Industries (Aarti) is India’s largest player in Benzene value chain with leadership in
Avg. Daily Volume (6M) : 0.80 mn
key products (holds first to fourth position for 75% of its products), given its integrated
Avg. Daily Value (6M;USD) : 7.97 mn operations across Benzene and Toluene product chain. It manufacturers intermediates in
Bloomberg Code : ARTO IB specialty chemicals (83% revenue share) & pharmaceuticals (to be demerged w.e.f.
Promoters Holding : 44% 1st July 2021) with 200+ products for 700+ domestic and 400+ international clients (major
FII / DII : 12% / 15% presence in US, Europe, Japan, China and India). Apart from expansion in existing
capacities (Nitro-chloro-Benzene, commissioning in FY23), Aarti expanded into Nitro-
Price Performance Toluene earlier (in FY18) and is now diversifying in Chloro-Toluene (expected in H2FY24).
(%) 1M 3M 12M
…key concern on inadequate RM expected to ease FY25 onwards
Absolute 11.3 26.7 (4.3)
Aarti saw 11% EBITDA CAGR over FY19-22 (vs. 15% CAGR over FY09-19), largely on
Relative 10.8 12.6 (4.6) slower volume growth due to inadequate supply of its second largest RM, Nitric Acid (NA).
Source: Bloomberg While near term supply challenges may impact FY23-24 growth, Aarti is working to raise
medium term NA procurement through (a) new concentration plant (benefits in FY25E); to
help convert imported weak NA into concentrated NA and (b) expectations of higher
offtake from existing/ newer suppliers as new NA plants commission by FY23 end.

Return ratios rebound to be back ended on volume recovery

Aarti’s current RoCE is ~14% vs. 17-18% over FY16-19 on account of (a) elevated capex of
Rs 37 bn over FY19-22 (ex-capex of Rs 8 bn for contract 1; 23% CAGR in gross block),
partially led by higher CWIP and spends on ETP, plant upkeep etc (non-profit generating)
and (b) slower volume growth due to inadequate RM availability. Adjusted RoCE (ex CWIP)
declined to ~19% over FY21-22 vs. ~28% earlier. Expect back-ended revival in RoCE (FY25
onwards) as volume growth accelerates (on easing NA availability) and ramp up in new
segments (Chlorotoluene, long term contracts; margin accretive).
Financial summary (Consolidated)
Y/E March FY21 FY22 FY23E FY24E FY25E
Sales (Rs mn) 50,233 72,883 83,911 93,605 1,11,039
EBITDA (Rs mn) 9,815 13,178 14,475 17,945 22,593
Adj. PAT (Rs mn) 5,235 7,840 8,087 10,169 13,270
Con. EPS* (Rs) - - 25.1 31.9 39.0
EPS (Rs) 15.0 21.6 22.3 28.1 36.6
Change YoY (%) (2) 44 3 26 30
Ankur Periwal, CFA, FRM Previous EPS (Rs) - - - - -
ankur.periwal@axiscap.in RoE (%) 16.2 16.6 12.9 14.5 16.5
Meet Vora RoCE (%) 11.8 13.0 11.7 12.9 14.7
meet.vora@axiscap.in P/E (x) 58.3 40.5 39.3 31.2 23.9
Kruti Karani EV/E (x) 34.9 25.9 23.9 19.6 15.7
kruti.karani@axiscap.in Source: *Consensus broker estimates, Company, Axis Capital

Download Axis Capital is also available on Bloomberg (AXCP<GO>), Reuters.com, Firstcall.com and Factset.com.
1
FOR IMPORTANT DISCLOSURES AND DISCLAIMERS, REFER TO THE END OF THIS MATERIAL
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 Aarti Industries
Initiating Coverage

Table of Contents

Volume recovery hinges on nitric acid supply .............................................................................. 3

Elevated capex to keep return ratios depressed ......................................................................... 4

Segmental performance – Spec chem subdued, Pharma improving ....................................5

Valuation and outlook ........................................................................................................................... 6

Porter’s Five Forces Model .................................................................................................................. 8

Specialty chemicals – global leader in benzene value chain .................................................... 9

Aarti’s right to win in Nitro Chloro Benzene (NCB)................................................................. 11

Pass through business model – with a quarter lag ................................................................... 12

Long-term contracts offer revenue visibility for Aarti ........................................................... 14

Expanding into chlorotoluene value chain and adjacencies … ............................................. 15

Pharmaceuticals – demerger ahead .............................................................................................. 16

Financial analysis .................................................................................................................................. 19

Annexure I ............................................................................................................................................... 22

Annexure II ............................................................................................................................................. 24

September 22, 2022 2

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 Aarti Industries
Initiating Coverage

Volume recovery hinges on nitric acid supply

Nitric Acid (NA) is the second largest raw material (after Benzene, in volume terms) for Aarti and
is used in more than 2/3rd of its overall products. It sources most of its NA demand from Deepak
Fertilizers (DFCPL; contracted volumes) which is the largest producer in India and the only
player selling in open market; largely captive consumption by other players like RCF and GNFC.

Aarti has been witnessing inconsistent supply of NA since FY21 (impacting its volume growth),
largely due to demand-supply mismatch given (a) steady rise in end-use demand of NA
(fertilizers, ammonium nitrate and other downstream products), (b) delays in capacity ramp up
at DFCPL and (c) limited supply from China partially due to plant shutdowns (pollution-led).
Demand-supply mismatch led to 2-3x rise in NA prices in last 2 years.

Exhibit 1: Nitric Acid prices have risen 2-3x YoY on demand-supply mismatch

India WPI Nitric Acid

275
(Indexed to 2011-12)

225

175

125

75
Jan

Jan

Jan

Jan

Jan

Jan

Jan

Jan
Apr

Apr

Apr

Apr

Apr

Apr

Apr

Apr

Apr
Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul
Oct

Oct

Oct

Oct

Oct

Oct

Oct

Oct
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
Source: Bloomberg, Axis Capital

To address these supply constraints, Aarti plans to commission a concentration plant (capex of
Rs ~2 bn; expected in H2FY24), wherein it will be able to convert weak NA (imported) to
concentrated NA, reducing its dependence on third party sourcing. Aarti is also evaluating a
dedicated backward integrated NA plant (from ammonia), which would further ease its
long-term requirements. While management expects NA sourcing issues to ease on new
capacity addition (by GNFC; expected by FY23 end), inadequate NA availability in the interim
will pose a challenge to Aarti’s volume recovery across Benzene and Toluene value chain.

September 22, 2022 3

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 Aarti Industries
Initiating Coverage

Elevated capex to keep return ratios depressed

Aarti’s gross block nearly doubled over FY19-22 on capacity expansion across Chlorination, long
term contracts (1 & 2), pharma API & intermediates as well as plant upkeep, environment
treatment plant (ETP) etc. Apart from non-revenue generating capex, most of this capacity
addition has been relatively underutilized, which coupled with elevated CWIP (Rs 14 bn, 24% of
gross block) led to decline in its RoCE to ~15% in FY21-22 vs. 18-20% over FY16-20.

Exhibit 2: Return ratios flat till FY25E

ROE ROCE Capex (RHS)

30 20

25 15.0 15.0 15.0

16
13.1
20 11.0 12.0
12

(Rs bn)
(%)

15
6.1 6.2 8
10 4.9 5.3

5 4
23 20 24 20 21 17 22 21 19 18 16 15 17 15 13 13 14 14 17 15
0 0
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Source: Company, Axis Capital

Aarti plans to spend Rs 15 bn annually over FY23-25E, largely to expand capacity across its
existing portfolio (one-third) and balance two-third for expansion in new products (including
Rs ~15 bn for Chlorotoluene) and chemistries. Given (a) our expectations of back-ended volume
recovery (as NA availability eases) and (b) management guidance for elevated capex, return
ratios are likely to be lackluster over FY22-25E.
Exhibit 3: Key capex details
Type of
Projects Location Capacity details Commissioning details
Expansion
Capacities commissioned during FY19-22
175 ktpa from 105
Chlorination complex Jhagadia Greenfield Commissioned in FY21
ktpa earlier
Phase-1 SEZ for agrochemicals intermediates &
Dahej Greenfield Commissioned in FY20
specialty chemicals
Commissioned in FY21; this was part of
Phase-2 SEZ for agrochemicals intermediates Dahej/Jhagadia Expansion
the contract manufacturing project
Fourth R&D unit Navi Mumbai Greenfield Commissioned in FY20
Land acquisition Gujarat 100 acres Commissioned in FY21
NCB capacity expansion Phase-I Commissioned in H1FY22
Second long-term contract project Dahej SEZ Greenfield Commissioned in Q4FY22
Capex to be commissioned over FY23-24E
Pharma API capacity Tarapur Expansion Doubling of capacity Commissioned in Q1FY23
Pharma API intermediate Vapi Greenfield Commissioned in Q1FY23
108 ktpa from 75
NCB capacity expansion Phase-II Vapi Expansion Commissioning expected in H1FY23
ktpa earlier
Third long-term contract project Dahej SEZ Greenfield Commissioning expected in Q2FY23
Capacity expansion for USFDA approved API facility Tarapur Expansion Commissioning expected in FY23
Acid Unit revamp and expansion Vapi Expansion Commissioning expected in FY23
Universal Multi-Purpose Plant Jhagadia Greenfield Commissioning expected in FY24
Nitric Acid concentration plant Jhagadia Greenfield 225-250 TPD Commissioning expected in FY24
Chlorotoluene Jhagadia Greenfield Commissioning expected in H2FY24
Source: Company, Axis Capital

September 22, 2022 4

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 Aarti Industries
Initiating Coverage

Segmental performance – Spec chem subdued, Pharma improving

Our workings on Aarti’s segmental performance suggests steady decline in its Spec chem return
ratios even after adjusting for (a) Rs 8 bn capex for contract 1 and (b) elevated CWIP, presumed
to be 100% for Spec chem business. However, pharma business has shown steady improvement
across profitability and return ratios. While expected ease in RM availability going ahead will
drive 15% EBIT CAGR in Spec Chem over FY22-25E, segmental RoCE may remain relatively
subdued in the medium term. Pharma business to see steady ~22% CAGR over FY22-25E (in line
with management guidance).

Spec chem RoCE declined from 20-23% over FY16-19 to 13-16% in FY21-22; adjusted RoCE
(ex CWIP, non-productive) declined from 25-30% over FY16-19 to 19-22% over FY21-22.
Decline was largely led by (a) slower earnings growth over FY19-22 (6% CAGR vs. 17% CAGR
earlier), partially due to limited RM availability and (b) continued elevated capex (~20% CAGR
in capital employed) for capacity expansion across productive (existing and new products; EBIT
accretive) and non-productive assets (plant upkeep, ETP etc. given older plants) which do not
contribute to profitability.

Exhibit 4: Spec chem RoCE on a decline on slower earnings growth and elevated capex
(Rs bn) FY16 FY17 FY18 FY19 FY20 FY21 FY22*
Capital employed Spec Chem (A) 17.8 21.2 25.7 30.4 36.3 44.0 53.2
EBIT Spec Chem (B) 4.4 4.9 4.8 7.1 6.8 5.9 8.4
RoCE (B/A) 25% 23% 19% 23% 19% 13% 16%
Capital employed Spec Chem Ex CWIP (C) 14.7 18.5 21.3 22.5 22.1 31.0 38.3
Adj. RoCE (B/C) 30% 26% 23% 31% 31% 19% 22%
Source: Company, Axis Capital; * FY22 workings exclude Rs 8 bn capex and Rs xx bn EBIT for 1 st long term contract

Pharma business continued its strong performance over FY19-22 (24% EBIT CAGR; 42% EBIT
CAGR over FY16-19) on healthy revenue growth by entering into new therapeutic areas and
ramping up existing products. This led to 13-16% improvement in Pharma RoCE over FY21-22
vs. 6-7% over FY16-19, partially offsetting subdued Spec Chem performance. Management is
awaiting final order (NCLT approval in place) to demerge its Pharma business and list it
independently as a separate entity.

Exhibit 5: Pharma business performance healthy

(Rs bn) FY16 FY17 FY18 FY19 FY20 FY21 FY22
Capital employed Pharma (A) 5.3 5.7 7.3 8.5 8.6 10.3 14.3
EBIT Pharma (B) 0.3 0.4 0.7 1.0 1.1 1.6 1.9
RoCE (B/A) 6% 7% 9% 11% 13% 16% 13%
Source: Company, Axis Capital

September 22, 2022 5

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 Aarti Industries
Initiating Coverage

Valuation and outlook

Aarti management has guided for 1.7-2x EBITDA and PAT over FY21-24E. This implies 7-16%
EBITDA and 13-22% PAT CAGR respectively and 12-15% volume CAGR over FY22-24E. To our
mind, ease in NA availability would be pertinent for the same, which would be visible
mid-FY24/25 onwards. This poses a risk to Aarti’s near-term volume and earnings growth.

Given its strong chemistry skills, Aarti is well placed to benefit from China+1 and may attract
more take-or-pay contracts from global players in the medium term. However, risk-reward is
not attractive at CMP as stock trades at PE of 31/24x and EV/EBITDA of 20/16x our FY24/25E
earnings.

Aarti is awaiting final order to demerge its Pharma business (NCLT hearing already completed).
Assuming Pharma business to be valued at PE of 20x FY24/25E (similar to other pharma
companies), Specialty chemical business trades at an implied PE of 34/25x FY24/25E Spec Chem
EPS – much higher vs. peers given our expectations of 19% EPS CAGR over FY22-25E and
relatively subdued return ratios. We value Aarti at PE of 25x Sept’24E EPS, implying TP of
Rs 810 for the stock. Initiate with REDUCE.

Exhibit 6: Specialty chemical implied PE multiple at 34/25x FY24/25E EPS

FY24E FY25E FY24E FY25E
Spec chem EBIT* 10.9 14.1 Pharma EBIT* 3.1 3.8
Finance Cost 1.1 1.2 Finance Cost 0.3 0.3
Spec Chem PBT 9.8 12.9 Pharma PBT 2.8 3.5
Tax @ 19% 1.9 2.4 Tax @ 19% 0.5 0.7
Spec Chem PAT 7.9 10.4 Pharma PAT 2.3 2.8
FY24E workings (Rs bn)
Target P/E - Pharma FY24E (x) 15 18 20 22 25
Target Mkt cap Pharma 34 41 45 50 56
Current Mkt cap 318 318 318 318 318
Implied Mkt cap - Spec Chem 284 277 273 268 261
Implied Spec Chem PE FY24E (x) 36 35 34 34 33
FY25E workings (Rs bn)
Target P/E - Pharma FY25E (x) 15 18 20 22 25
Target Mkt cap Pharma 42 51 56 62 71
Current Mkt cap 318 318 318 318 318
Implied Mkt cap - Spec Chem 275 267 261 255 247
Implied Spec Chem PE FY25E (x) 26 26 25 24 24
Source: Company, Axis Capital; *after reducing proportionate unallocated expenses

Exhibit 7: 1-year forward P/E Exhibit 8: 1-year forward EV/EBITDA

PEG Avg +1 SD -1 SD EV-E Avg +1 SD -1 SD
6 30
(x) (x)
4 26
2 21
22
2
1 18 18
0
14
(0) 14
(2) 10
(4) 6
Apr-19

Apr-20

Apr-21

Apr-22

Apr-19

Apr-20

Apr-21

Apr-22
Oct-18

Oct-19

Oct-20

Oct-21

Oct-18

Oct-19

Oct-20

Oct-21
Jan-19

Jan-19
Jan-20

Jan-21

Jan-22

Jan-20

Jan-21

Jan-22
Jul-18

Jul-19

Jul-20

Jul-21

Jul-22

Jul-18

Jul-19

Jul-20

Jul-21

Jul-22

Source: Bloomberg, Axis Capital Source: Bloomberg, Axis Capital

September 22, 2022 6

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 Aarti Industries
Initiating Coverage

Exhibit 9: Despite lower return ratios, Aarti trades at expensive valuations vs. peers
EPS CAGR% ROE P/E (x)
Market Cap
Companies FY22-25E FY22 FY25E FY24E FY25E
(Rs bn)
Anupam Rasayan 79 38% 9% 17% 25 20
Navin Fluorine 233 37% 15% 24% 41 32
Vinati Organics* 218 30% 21% 25% 38 29
Sudarshan Chemical 30 26% 16% 11% 16 12
PI Industries 479 25% 15% 18% 36 30
Clean Science 199 24% 35% 29% 53 45
Aarti Industries 318 23% 17% 17% 28 23
Atul Ltd* 277 22% 15% 13% 31 26
Fine Organics 216 21% 31% 25% 47 43
SRF Ltd 778 19% 24% 23% 27 25
Galaxy Surfactants* 113 17% 18% 20% 31 26
Laxmi Organic 96 15% 22% 19% 28 23
Tata Chemicals* 293 14% 8% 8% 15 16
Deepak Nitrite* 295 13% 38% 24% 23 20
Source: Axis Capital, * Bloomberg estimates; companies name in the order of EPS CAGR

Exhibit 10: Peer valuation

Ratings P/E (x) EV/E (x) RoE (%)
Peers (Domestic)
FY23E FY24E FY25E FY23E FY24E FY25E FY23E FY24E FY25E
Specialty Chemicals
Aarti Industries Ltd REDUCE 35 27 22 21 17 14 14 15 16
Anupam Rasayan India Ltd ADD 37 25 20 21 17 13 12 15 17
Atul Ltd NR 37 31 26 25 20 17 16 16 13
Camlin Fine Sciences NR 14 11 9 8 7 6 17 17 19
Clean Science & Technology Ltd ADD 71 54 45 53 40 33 32 31 29
Deepak Nitrite Ltd NR 27 23 20 18 15 13 28 26 24
Fine Organic Industries Ltd SELL 46 50 46 35 38 34 39 27 25
Galaxy Surfactants NR 34 31 26 23 21 na 19 19 20
Gujarat Fluorochemicals Ltd NR 35 31 23 24 21 16 25 22 na
Laxmi Organic Industries Ltd ADD 37 30 25 24 19 16 18 19 19
Navin Fluorine International Ltd REDUCE 61 45 35 45 32 24 19 22 24
Neogen Chemicals NR 58 41 32 33 25 21 14 17 18
PI Industries Ltd ADD 44 35 29 31 25 21 17 18 18
Rossari Biotech Ltd NR 36 27 22 20 16 13 17 19 19
Sudarshan Chemical Industries Ltd BUY 23 15 11 13 9 8 15 20 11
SRF Ltd BUY 31 27 24 20 17 16 26 25 23
Vinati Organics Ltd NR 48 37 32 36 29 23 22 24 26
Source: Bloomberg, Axis Capital

Key risks (to our estimates):

 Faster than expected easing of Nitric acid supply on ramp up in domestic or global supply.
 Quicker commissioning of nitric acid concentration plant or backward integrated plant by
Aarti to reduce dependence on external NA sourcing and drive higher-than-expected
volume growth.
 Ramp up in utilization of existing value chains and new products across Chlorotoluene
value chain.

September 22, 2022 7

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 Aarti Industries
Initiating Coverage

Porter’s Five Forces Model

Aarti has scaled from 2 products and 1 manufacturing unit company in 1984 to a leading
integrated specialty chemicals company with 200+ products and 21 manufacturing units in
2022. It ranks among top-4 for 75% of its product portfolio, given its backward integration and
low-cost production (competitive advantage). Over the years, it has expanded its range of
value-added products and created a business model that is difficult to replicate.

Aarti is a preferred supplier/partner of choice for major global and domestic customers due to
its timely delivery and proven track record. The company is well placed given its expertise and
experience in benzene and toluene value chains which it plans to replicate in chlorotoluene value
chain. It has already entered into few long term contracts with global majors, indicating its
chemistry strengths and client relations.

Exhibit 11: Porter’s Five Forces Model

⧫ Aarti ranks among top 1-4th in 75% of its
product portfolio.
⧫ It has entered benzene chain much early
and gradually expanded its product
portfolio by applying new chemistries and
making more value-added products.
⧫ Some new players are entering the
market; however, Aarti has created a
business model that is difficult to replicate.
⧫ Aarti is fully backward integrated up to
Threat of new entrants benzene, which gives it cost advantage
– MODERATE and ensures an edge over competition.
⧫ It has 25-40% market share for most of its
products and a proven track record of
timely execution/delivery of products
which has made it a preferred
supplier/partner of choice for major global
and domestic downstream customers.

Bargaining power Rivalry among

of suppliers – Bargaining power of
existing Buyers – MODERATE
MODERATE competitors –
LOW
⧫ Major raw material for Aarti are ⧫ Substitution challenge of the core
benzene, toluene (petrochemicals) underlying products is limited given
and nitric acid that Aarti is doing multi-step processes
⧫ Petrochemicals are available in using newer chemistries with specific
abundance given India is a net refining end use application.
surplus country; while nitric acid has ⧫ Possible use to make similar products/
been an issue off lately given demand- intermediates is possible with alternate
supply mismatch . Threat of Substitute raw material/chemistry but not
⧫ Aarti is relatively less dependant on
China for most of its RM in speciality
Products – economical as ultimate source is crude
oil link even for substitutes.
chemical business. MODERATE

Source: Company, Axis Capital

September 22, 2022 8

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 Aarti Industries
Initiating Coverage

Specialty chemicals – global leader in benzene value chain

In specialty chemicals, Aarti’s products are spread across three value chains (1) benzene,
(2) toluene and (3) sulphuric acid. Besides these, Aarti manufactures single super phosphate
(SSP), export grade calcium chloride granules, fuel additives and phthalates which are more of
by-products.

Benzene value chain

Aarti is among few players globally who are completely integrated in the benzene value chain,
where it applies chemistries like chlorination, nitration, amonolysis, hydrogenation etc. on
benzene to manufacture products under 3 chains – Nitro Chloro Benzene (NCB) chain,
Di Chloro Benzene (DCB) chain, and Nitro Benzene (PDA) chain.

Over the years, Aarti has expanded its product portfolio in benzene value chain by entering
newer chemistries and manufacturing more value-added products (>70% revenue share, as per
management). This has helped it become a preferred source for benzene-based products
globally due to cost leadership and technical capabilities. It commands 25-40% market share
globally and ranks 1-4th in 75% of its product portfolio.

Exhibit 12: Benzene value chain

Source: Company, Axis Capital

Toluene value chain

Aarti manufactures products under toluene value chain by applying chemistries like nitration,
hydrogenation, and some other downstream chemistries. These products are having application
in agrochemicals, pharmaceuticals, polymers etc. Aarti started manufacturing products under
toluene value chain from FY18, however this value chain is still relatively small in its specialty
chemical revenue (7-8%). The company has not been able to replicate success in its toluene value
chain as it has done in benzene, primarily due to inadequate availability of nitric acid.

September 22, 2022 9

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 Aarti Industries
Initiating Coverage

Exhibit 13: Toluene value chain

Source: Company, Axis Capital

Suplhuric acid value chain

In the sulphuric acid value chain, Aarti manufactures oleum, dimethyl sulphate, diethyl sulphate,
chloro sulphonic acid and other products. It is backward integrated starting from sulphur in this
value chain. Aarti has recently expanded and upgraded its asset for acid unit at Vapi.

Exhibit 14: Sulphuric acid value chain and other products

Source: Company, Axis Capital

September 22, 2022 10

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 Aarti Industries
Initiating Coverage

Aarti’s right to win in Nitro Chloro Benzene (NCB)

Aarti has competitive advantage in the NCB value chain given its (a) Backward integration,
driving cost efficiencies, (b) Limited dependence on China for its RM procurement, and (c) thrust
on value added products across multiple chemistries as the company has been increasing its
chemistry skills and handling multi-step/ high-end reactions. Rising share from value added
products coupled with pass-through business model for RM inflation cushions Aarti’s absolute
margin (on Rs/kg basis), despite global volatility.

Lowest cost producer due to complete backward integration

Aarti is among the lowest cost producers globally in benzene value chain, as it is completely
backward integrated, right from benzene (basic crude derivative) to end products. This enables
it to have a strict control on its costs and overheads. Such cost advantage has enabled it to gain
25-40% market share globally in these products. Continuous addition of chemistries and scaling
up the value chain (value-added products with 7-10 steps) has enhanced Aarti’s competitive
positioning and client stickiness.

Limited dependence on China for RM procurement

Large portion of Aarti’s raw material are petrochemical derivatives like benzene, toluene etc
which are available from domestic refineries (India being a net refining surplus country). Other
feedstock like chlorine, nitric acid etc. required for chemistries are also procured locally. Aarti is
thus largely independent of China for its specialty chemical business making it a prominent
choice for global customers who want to derisk their global supply chain. The company intends
to fully backward integrate Nitric acid, which will reduce its dependence on third party suppliers
over the medium term.

Competitive intensity on rise, but well positioned

Select players like Bodal Chemicals, Meghmani Finechem have announced capex in benzene
downstream and chlorotoluene where Aarti operates or is planning to operate. Other players
like Chemieorganic Chemicals and Panoli Intermediates are already operating in benzene chain.
However, we believe Aarti’s cost competitive positioning (backward integrated) and strong
product offering will be difficult to replicate for competition.

Exhibit 15: Key industry players in Aarti’s product value chain

Products Players
Chemieorganic Chemicals
Panoli Intermediates
Benzene value chain
Bodal Chemicals
Deepak Nitrite
Toluene value chain
Panoli Intermediates
Chlorotoluene Meghmani Finechem
Source: Company, Axis Capital
Comments
Chlorobenzenes, Chloroanilines and
Dinitrochlorobenzenes.
Chlorination, Nitration and Hydrogenation on benzene.
Recently announced a 55,000MT capacity expansion
in benzene downstream and 3,40,000MT capacity
expansion for sulphuric acid derivatives at a total
capex of Rs 3 bn and a combined revenue expectation
of Rs 4 bn
Nitration on toluene
Nitration and Hydrogenation on toluene
Recently announced a capex of Rs 1.8 bn with a revenue
expectation of Rs 3 bn for chlorotoluene - to be
commissioned by FY24

September 22, 2022 11

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 Aarti Industries
Initiating Coverage

Pass through business model – with a quarter lag

Aarti’s business model operates on full pass-through of raw material inflation (with a quarter lag,
subject to client contracts). As benzene, toluene (both linked to crude oil) and Nitric acid are
global commodities, any RM inflation is typically passed through to the customers. Owing to
volatility in crude oil price, revenue/realization for end products may see volatility in the short
term. However, the pass-through model insulates Aarti from any absolute earnings impact over
the medium term as it earns margin on Rs/kg basis (and not % margin). So, in an inflationary
environment, its % EBITDA margin would decline and vice-versa in a deflationary scenario.

Exhibit 16: Inflationary trend in its key RM…

Benzene India WPI Nitric Acid

250
Prices rebased to Apr'2019

230
210
190
170
150
130
110
90
70
50
Dec

Dec

Dec
Apr

Apr

Apr

Apr
Aug

Aug

Aug

Aug
Jun

Jun

Jun

Jun
Feb

Feb

Feb
Oct

Oct

Oct
FY20 FY21 FY22 FY23

Source: Industry, Axis Capital

Exhibit 17: …has been passed through, as visible in higher end-product prices

DCNB DCBH DNCB ONCB

300
Prices rebased to Apr'2019

250
200
150
100
50
0
Dec

Dec

Dec
Apr

Apr
Apr

Apr
Aug

Aug

Aug

Aug
Jun

Jun

Jun

Jun
Feb

Feb

Feb
Oct

Oct
Oct

FY20 FY21 FY22 FY23

Source: Industry, Axis Capital; DCNB - Di Chloro Nitro Benzene, DCBH - Di Chloro Benzedine, DNCB - Di Nitro Chloro
Benzene, ONCB - Ortho Nitro Chloro Benzene

September 22, 2022 12

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 Aarti Industries
Initiating Coverage

Exhibit 18: Spreads for one of its top products remain largely intact (quarterly pass through)

Para Di Chloro Benzene (PDCB) Benzene*

140
120
100
Price (Rs/kg) 80
60
40
20
0

Dec

Dec

Dec

Dec
Apr

Apr

Apr

Apr

Apr
Aug

Aug

Aug
Aug

Aug
Jun

Jun

Jun

Jun

Jun
Feb

Feb

Feb

Feb
Oct

Oct

Oct

Oct
FY19 FY20 FY21 FY22 FY23

Source: Industry, Axis Capital; * 1 unit of chlorobenzene requires 0.7 units of benzene

Aarti has maintained PDCB-benzene spreads historically with a quarterly pass through;
however, spreads contracted in Q1FY22 on Covid led disruption. Benzene prices have started
correcting from June’22 (in sync with decline in crude prices); we expect PDCB prices to
moderate going forward, in sync with benzene prices as Aarti maintains its Rs per/kg margin.

Exhibit 19: Spec chem EBIT margin declined on absolute pass through

Spec Chem EBIT Spec Chem EBIT margin (RHS)

16 21.1 22
20.6
19.5 19.2 20
12
16.8 18
17.0
(Rs bn)

8 16

(%)
16.0
15.5
14
4
12
6 8 8 8 10 11 12 15
0 10
FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Source: Company, Axis Capital

Aarti maintains absolute margin (Rs/kg) on its products and thus % margin may look depressed
in inflationary pricing environment. However, absolute EBIT growth is the correct evaluation
measure for spec chem business; EBIT has posted 15% CAGR over FY18-22, while margin has
declined in FY22 on inflationary pricing. Spec chem business EBIT is expected to register
~16% CAGR over FY23-25.

September 22, 2022 13

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 Aarti Industries
Initiating Coverage

Long-term contracts offer revenue visibility for Aarti

Backed by its backward integration and cost efficiencies, Aarti is globally competitive in its key
product value chain. Hence it has been able to attract global players and enter into
take-or-pay contracts to source its intermediates/specialty chemical requirements; signed
three long term contracts till date. Aarti is evaluating opportunities in this space and may enter
into new contracts with global players as and when an attractive proposition is seen.
 Contract 1 with Bayer for Dicamba intermediate – terminated now given change in
business strategy by Bayer. Aarti has received a termination fee of Rs ~9 bn (over FY21 and
FY22), covering up its full capex for the project. Aarti has commercialized this plant and will
be looking to sell this intermediate in open market to other customers.
 Contract 2 with SABIC; commissioned in Q4FY22. Full revenue ramp up expected
by FY25.
 Contract 3 with an MNC (names undisclosed); to be commercialized in FY23 – management
expects to reach full revenue run rate by FY25.

Exhibit 20: Details of long-term contracts

All long-term contracts to start contributing to revenue from FY23 and achieve full ramp up by FY25
Total amount Contract terms
Details Current status
(Rs bn) (years)
Long-term 40 10 Supply of intermediate for Contract terminated; Aarti has received termination fees
contract -1 Dicamba Active Ingredient to of ~ Rs 8 bn in FY21 and FY22 cumulatively. Plant has
Bayer been commissioned in Q3FY22. It will utilize the plant for
selling the intermediate to other customers and expects to
reach peak revenue of Rs 4 bn from FY25.
(70-80% utilization in FY24)
Long-term 100 20 Supply of specialty chemicals Commissioned in Q4FY22 and would contribute Rs 5 bn
contract -2 intermediate to SABIC per year from FY25 (70-80% utilization in FY24).
Customer provided basic
technology and gave
US$ 42 mn to Aarti for capex
Long-term 10 10 To be commission in Q2FY23
contract -3
Source: Company, Axis Capital

September 22, 2022 14

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 Aarti Industries
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Expanding into chlorotoluene value chain and adjacencies …

Aarti is expanding into chlorotoluene value chain in addition to its steady expansion in value-
added products (>75% share currently) across current value chain of NCB and DCB. It plans to
introduce other downstream chemistries like photochlorination, oxidation, hydrolysis,
bromination, Balz-Schiemann Reaction, HG Fluorination. Most of the downstream products
under chlorotoluene chain are imported in India (Rs 15 bn currently) and hence offer a strong
import substitution led growth opportunity. Management expects market share gains at a fast
pace; expected to reach full potential within 3-4 years of introduction of chlorotoluene chain
(FY25 onwards).

Aarti will benefit from leveraging its existing customer relationships for faster ramp up of
chlorotoluene-based products as customers are largely likely to remain the same. Further, in
chlorotoluene, Aarti will sell higher value-added products instead of 1-2 step reaction products
as it currently does in benzene – this will be margin accretive.

Expansion through Universal Multi-Purpose Plants (UMPP)

Aarti is setting up UMPP for exploring additional custom manufacturing opportunity. UMPP is
designed to facilitate different product with different chemistries enabling much faster
commercialization of end products. This will help Aarti to address demand from multiple
customers across various products. The main purpose of introducing UMPP is to expand into
other value-added products by customizing requirements.

September 22, 2022 15

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 Aarti Industries
Initiating Coverage

Pharmaceuticals – demerger ahead

Aarti’s pharmaceuticals portfolio consists of (1) Pharma APIs, (2) Pharma intermediates and
(3) Xanthine derivatives. Pharmaceutical’s revenue share is 18% of the total revenue (FY22);
within pharma, Pharma APIs and intermediates account for 66% of revenue, while Xanthine
derivatives account for the balance.

Exhibit 21: Pharma business snapshot

4 WHO/
GMP
facilities

2 US FDA
4 R&D
approved
facilities
facilities

Xanthine
derivatives APIs
36% Pharmaceuticals 35%
Revenue mix
44 Patents
44 US DMF
filed
approvals
(11 Awarded)
Intermediates
29%

45+ APIs 20 CEP

commercialized (1 under
till date assessment)

Source: Company, Axis Capital

Exhibit 22: Intermediates portfolio

APIs of Intermediates Manufactured

Contract research and manufacturing services (CRAMs) activity focused on Intermediates

• Abemaciclib • Enzalutamide • Lumacaftor • Ranolazine

• Acalabrutinib • Epagliflozin • Montelukast • Ribociclib
• Afatinib • Ertugliflozin • Moxifloxacin • Rotigotine
• Apalutamide • Fluoxetine • Neratinib • Teneligliptin
• Apixaban • Fumarate • Osimertinib • Ter-Butylamine
• Bazedoxifene • Hydrochloride • Palbociclik • Tofacitinib
• Bosutinib • Ibrutinib • Perindopril • Vardenafil
• Canagliflozin • Idelalisib • Quetiapine • Venetoclax
• Duloxetine • Ivabradine • Quinapril • Venlafaxine
• Eluxadoline • Lacosamide • Ramipril
Source: Company, Axis Capital

September 22, 2022 16

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 Aarti Industries
Initiating Coverage

Exhibit 23: API business portfolio

APIs (Active Pharmaceutical Ingredients) are chemicals used in manufacturing pharmaceutical drugs.

Anti-hypertensive Ramipril; Quinapril; Benazepril; Perindopril; Tert-butylamine; Perindopril Arginine; Ranolazine

Anti-asthmatic Budesonide; Bambuterol; R-Salbutamol Sulphate; Levalbuterol; Salmeterol Xinafoate;

Ipratropium Bromide; Ciclesonide;
Fluticasone Propionate; Fluticasone Furoate; Mometasone Furoate Monohydrate; Formoterol
Fumarate; Motelukast Sodium

Bicalutamide; Ifosfamide; Ifosfamide Sterile; Cyclophosphamide; Cyclophosphamide Sterile;

Anti-cancer
Mesna; Mercaptopurine; Azathioprine

Anti-thalassaemic Deferiprone; Deferasirox

Central Nervous
System (CNS) Agents Venlafaxine; Quetiapine Fumarate; Bupropion

Skin Care Mometasone Furoate; Desonide; Adapalene

Ophthalmologic Loteprednol Etabonate; Olopatadine

Decongestant Phenylephrine

Analgesic Diflusina

Calcimimetic Cinacalcet

Source: Company, Axis Capital

Exhibit 24: Xanthine derivatives

Xanthine Derivatives Manufactured

 Caffeine Anhydrous
 Theophylline
 Aminophylline
 Acephylline Piperazine
 Theobromine

Competitive advantages: End usage:

 Two dedicated plants  APIs and intermediates for
 Key certifications – Star Kosher; innovators and generic companies
HACCP; GMP in manufacturing and for varied applications such as anti-
testing cancer, anti-asthma, anti-
hypertensive drugs, oncology
therapies, etc.
 Xanthine derivatives for applications
in beverages, and for nutraceutical
and other pharma applications

Source: Company, Axis Capital

September 22, 2022 17

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 Aarti Industries
Initiating Coverage

Business ramped up over FY16-22…

Aarti’s management has focused on improving its pharma segment by entering into new
therapeutic areas and ramping up existing products. This focus combined with entry into new
APIs and improving operational efficiency has led to turnaround of this segment. The company
has completed API unit expansion at Tarapur and Intermediates unit expansion at Vapi in
Q1FY23; post this capex, Aarti will be N-5 stage in most of the APIs leading to cost efficiencies.

Pharma business EBIT posted 33% CAGR over FY16-22 and margin gradually improved from
9% in FY16 to 16-22% for FY21-22. This led to improvement in RoCE from 6% in FY16 to
13-16% in FY21-22. We build in management guidance of 20% revenue CAGR and 18% EBIT
margin for Pharma business for FY23-25.

Exhibit 25: Pharma segment showing steady revenue and profitable growth…

Pharma EBIT Pharma EBIT margin (RHS)

2.5 25
21.5
2.0
18.2 20
16.9
1.5 15.5
14.2
(Rs bn)

15

(%)
2.0 2.2
1.0 11.3
9.1 1.4
1.1 10
0.5
0.8
0.4 0.5
0.0 5
FY16 FY17 FY18 FY19 FY20 FY21 FY22
Source: Company, Axis Capital

Exhibit 26: …driving return ratios

Capital employed RoCE (RHS)

16 20%
16%
16%
12 13% 13%
11%
12%
(Rs bn)

9%
8
7% 14.3
6% 8%
10.3
4 8.5 8.6
7.3 4%
5.3 5.7

0 0%
FY16 FY17 FY18 FY19 FY20 FY21 FY22
Source: Company, Axis Capital

…to be demerged
Management has received in-principle approval for demerger of pharma business and allied
activities from NCLT and is awaiting written order. Demerger will be effective from 1st July 2021
and the new entity Aarti Pharmalabs Ltd will get listed. There is no integration between pharma
and specialty chemicals business except for basic raw materials like sulphuric acid and
dimethyl sulphate.

September 22, 2022 18

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 Aarti Industries
Initiating Coverage

Financial analysis
Aarti registered 18% revenue CAGR over FY18-22; 10% CAGR over FY18-21, excluding FY22.
Aarti’s historical revenue growth has been largely led by volume growth, as prices have not been
as volatile. However, given global supply chain issues, there was a sharp rise in its product prices
(in sync with RM inflation), resulting in sharp 40% YoY rise in FY22 revenue (~25% led by pricing,
balance led by volume).

Thus, we need to evaluate Aarti on absolute EBITDA growth (and not revenue growth) as
volatility in prices may impact its revenue growth. Aarti’s asset turns have been on a decline
(barring uptick in FY22, pricing led) due to elevated capex, which is still underutilized.

Exhibit 27: Revenue growth to slow down on muted volume growth and normalized pricing

Revenue Asset Turn (RHS)

120 1.5 1.6

1.3 1.3 1.3
100 1.1
1.2 1.1
1.1 1.2
80
(Rs bn)

60 0.8

(x)
40
0.4
20
38 47 46 50 73 84 94 111
0 0.0
FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Source: Company, Axis Capital

Expect elevated pricing to normalize going ahead, as we expect 15% CAGR in revenue over
FY22-25E. Revenue growth will be driven by pharma revenue growth at ~20% CAGR (in line
with management guidance), while spec chem will growslower at ~14% CAGR over FY22-25E.
Once chlorotoluene chain is commissioned, Nitric acid availability is resolved and long-term
contracts start operating at full utilization, spec chem revenue growth will pick up but this will
be back-ended largely FY24-25 onwards.

Exhibit 28: Specialty chemicals revenue to post 14% CAGR over FY22-25E

Speciality Chemicals Pharma Home & Personal Care

120

100 22

19
80 16
13
(Rs bn)

60
3 7 8 10 89
40 75
6 68
60
20 40 39 39
30
0
FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Source: Company, Axis Capital

September 22, 2022 19

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 Aarti Industries
Initiating Coverage

Consolidated PAT to post 19% CAGR over FY23-25E and margin to improve by expanding into
value-added products with multiple step processes. Contribution from long term contracts to
aid earnings growth in FY23 and FY24; chlorotoluene chain to start contributing from FY25.

Exhibit 29: PAT to post 19% CAGR over FY22-25E

EBIT PAT EBIT margin (RHS)

20 17.1 17.1 18

16.1
15 14.9 16
14.9
14.5
14.1 13.3
(Rs bn)

10 14

(%)
18
14 13
5 10 11 10 12
8 8 8 8 8
6 5 5 5
3
0 10
FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Source: Company, Axis Capital

Capex has been historically funded by a combination of OCF, debt and equity (QIP). FY18-22
capex was funded from OCF generated during FY17-21 and equity fund raise (QIP) in FY19.
Aarti has a capex plan of around Rs 42-45 bn over FY23-25E which can be funded through
internal accruals of Rs 33 bn (OCF generated during FY22-24) and Rs 12 bn received from equity
fund raise (QIP) in FY22.

Exhibit 30: FY18-22 capex Exhibit 31: FY23-25E capex

Source: Company, Axis Capital Source: Company, Axis Capital

Aarti’s spec chem business has 85-90 days working capital, while pharma business has
130-140 days working capital. Working capital days rose to 116 days in FY22 on elevated
pricing environment, higher receivables, and lower payables. This elevated working capital will
ease out FY23 onwards, aiding healthy OCF generation which will support its capex plans from
FY23-25E.

September 22, 2022 20

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 Aarti Industries
Initiating Coverage

Exhibit 32: Working capital to remain stable around 100 days

FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Inventory Days 60 66 68 71 67 67 67 67
Receivable Days 63 60 60 58 70 60 60 60
Payable Days 34 22 27 42 25 25 25 25
Working Capital Days 100 98 98 84 116 102 102 102
Source: Company, Axis Capital

Exhibit 33: OCF to improve from FY23 on normalized working capital

OCF FCF Capex (RHS)

20
15 15 15
15 13
11 12

10 6 6
14
(Rs bn)

11 12 13
5 9
7
3 5
0
(0.55) (0.23) (2.18) (0.51)
(5) (2.79) (4.42) (2.88)

(10) (8.35)
FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Source: Company, Axis Capital

Bended RoE and RoCE to largely bottom out in FY23 and improve FY24 onwards on ramp up in
existing value chains, increase in utilization of existing assets and contribution from long term
contracts. Capex to be largely funded by OCF and funds received from QIP; thus, additional debt
may not required, gradually improving net debt/EBITDA profile for Aarti.

Exhibit 34: Return ratios improvement from FY25E

ROE ROCE Net Debt/EBITDA (RHS)

2.9
25 3.0
2.5
20 2.5
1.9 2.0 1.9
1.8 1.7
1.7 2.0
15
(%)

1.5
(x)

10
1.0
5 0.5
21 17 22 21 19 18 16 15 17 15 13 13 14 14 17 15
0 0.0
FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Source: Company, Axis Capital

September 22, 2022 21

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 Aarti Industries
Initiating Coverage

Annexure I

Company Background
Established in 1984 by first generation technocrats, Aarti Industries Ltd (Aarti) is a leading
Indian manufacturer of specialty chemicals and pharmaceuticals with a global footprint across
60 countries. The company holds first to fourth position for 75% of its product portfolio and is a
‘partner of choice’ for various major global and domestic customers.

Over the past 3 decades, Aarti has emerged as global partner of choice with 200+ products for
over 400+ international and 700+ domestic customers across the world with a major presence
in USA, Europe, Japan, China, and India.

Exhibit 35: Aarti – the growth journey

Set up a large-scale  Commenced functioning of the  Operationalized Phase 2 Unit at Dahej

hydrogenation and nitration unit calcium chloride facility SEZ for agrochemical intermediates
at Jhagadia (Hydrogen gas via  Started operations at co-generation  Operationalized New Chlorination Unit at
pipeline and solar power plants Jhagadia, capacity enhanced to 175 KTPA

 Upgraded hydrogenation unit  Commissioned Nitro

from batch to continuous Toluene hydrogenation
Commenced a 1,200 Tonnes  Received US FDA approval for facility at Jhagadia
Per Annum (TPA) unit for custom synthesis division at Vapi  Signed another multi-
Nitro Chloro Benzenes (NCB)  Commenced bulk shipment for year contract with a
in Sarigram, Gujarat global markets global player

1984 1986 1990 2001 2005-08 2011 2016 2017 2018 2019 2020 2021 2022

Incorporated  Expanded the NCB and sulphuric  Commercialized the

 Commissioned the Nitro
Aarti Organics acid capacity unit at Dahej SEZ for
Toluene plant
Private Limited  Set up a large-scale speciality the project related to
 Signed two large multiyear
chemical unit in Kutch 2nd Long-Term
contracts with global players
 Received US FDA approval for Contract
 Manufacturing facility being
an Active Pharmaceutical  Completed Phase I of
set up at Dahej SEZ
Ingredient (API) unit in Tarapur NCB capacity expansion

 Operationalized Aarti Research and

 Commissioned ethylation facility at Dahej
Set up the first large-scale Technology Centre (ARTC) at Mahape,
SEZ (ethylene gas via pipeline)
organic plant in Vapi – a Navi Mumbai
 Expanded the NCB capacity from 57 KTPA
4,500 TPA unit for NCB  Commissioned two units at Dahej SEZ
to 75 KTPA
for high-value speciality chemicals

Source: Company, Axis Capital

September 22, 2022 22

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 Aarti Industries
Initiating Coverage

Business overview
Aarti has scaled from a 2 product and 1 manufacturing unit company in 1984 to a leading
integrated specialty chemicals company with 200+ products and 21 manufacturing units in
2022. It operates under 2 major business segments – specialty chemicals and pharmaceuticals.
Specialty chemicals makes up its core business segment, contributing 83% to revenue.

Within specialty chemicals, it uses feedstock like benzene, toluene, nitric acid, chlorine,
methanol, aniline, sulphur etc. along with a wide range of reactions to manufacture products for
agrochemicals, polymers, pigments, printing ink, dyes, fuel additives, aromatics, surfactants, and
various other specialty chemicals, across the globe. Within pharmaceuticals segment, it
manufactures APIs, intermediates, and xanthine derivatives for pharmaceutical, food and
beverage industry. It has a CSM division to manufacture pharmaceutical intermediates for
meeting specific customer requirements in Indian and international markets.
Exhibit 36: Segmental overview
Specialty Chemicals Pharmaceuticals

Revenue (FY22) Rs 60 bn (82% share) Rs 13 bn (18% share)

 Benzene value chain  APIs

 Toluene value chain  Intermediates and
 Sulphuric acid value chain  Xanthine derivatives
Product profile:  Other specialty chemicals: Single Super Phosphate
(SSP); Export-grade calcium chloride granules (for oil
exploration and de-icing); Fuel additives; Phthalates.

 Polymer & additives  Active Pharmaceutical

 Dyes, Pigments, Paints & Printing Inks Ingredients (APIs)
 Fuel Additives, Rubber chemicals, Resins, etc.  Intermediates for
Key end users:  Agrochemicals & intermediates Innovators & Generic
 Fertilizer & Nutrients Companies
 Pharma Intermediates

BASF, Solvay, Chemipro, DOW, Dupont, Coromandel, UPL, Sanofi, Cipla, Dr.Reddys,
Key clients: Syngenta, FMC, Bayer, Hunstman, Sudarshan, Clariant, Lupin, Pfizer, SunPharma,
Atul, FlintInk, Eastman, SunChemicals etc Sandoz

6 plants at Tarapur,
Facilities: 15 plants at Vapi, Jhagadia, Dahej, Kutch, Tarapur
Dombivali, Vapi
Source: Company, Axis Capital

September 22, 2022 23

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Exhibit 37: Management profile
Board members
Mr. Chandrakant V. Gogri
Rajendra V. Gogri
Rashesh C. Gogri
Mr. Parimal H. Desai
Mr. Manoj M. Chedda
Miss Hetal Gogri Gala
Mr. Renil R. Gogri
Mr. Kirit R. Mehta
Mr. Narendra Salvi
Mr. K. V. S. Shyamsunder
Mr. P. A. Sethi
Prof. Ganapati D. Yadav
Bhavesh R. Vora
Miss Priti Savla
Dr. Vinay Nayak
Mr. Lalitkumar Naik
Smt. Natasha Treasurywala
Source: Company, Axis Capital
September 22, 2022
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Aarti Industries
Initiating Coverage
Annexure II
Designation Profile
Holds a Chemical Engineering degree from Institute of Chemical Technology and
Chairman Emeritus
is founding Chairman of the company.
Holds a master’s degree in Chemical Engineering from the US. In addition to
Chairman & Managing Director technical acumen, he possesses a keen understanding of the financial and
commercial aspects of the chemical industry.
Vice Chairman & Managing Holds a Production Engineering degree from Mumbai University. He heads the
Director pharma segment and handles the commercial aspects of the chemicals business.
Chemical Engineer from UDCT (ICT), Mumbai. He has more than 34 years of
Whole Time Director
experience in process development and project implementation.
Whole Time Director Over 25 years of experience in the marketing of speciality chemicals.
Manages Pharmaceuticals segment and is also involved in supply chain
Whole Time Director
management of the company.
Holds a B.Tech (Mechanical) degree from IIT Bombay. He oversees the
manufacturing operations, various people and excellence initiatives, adoption of
Whole Time Director
IT advancements, sustainability initiatives and projects for the Speciality
Chemicals segment of the company.
Over 32 years of experience in the industry in the field of corporate affairs
Whole Time Director
management.
33 years of experience. Overseas operations, projects, regulatory compliances
Whole Time Director
and sustainability initiatives for the pharmaceuticals segment of the company.
Independent Director A seasoned banker with over 31 years of enriched banking experience.
Holds the Certified Associate of Indian Institute of Bankers (CAIIB) qualification,
Independent Director
with more than 47 years of experience in the banking sector.
Recently retired from the position of Vice Chancellor of Institute of Chemical
Technology (ICT). He has numerous honours and distinctions for his contributions
Independent Director
to green chemistry and engineering, catalysis science and engineering, chemical
reaction engineering, nanotechnology and energy engineering.
Practicing Chartered Accountant, with more than 24 years of experience in the
Independent Director field of stock brokers’ audits, compliances, derivatives,
futures and options, accounting standards and internal management audit.
With more than 10 years of experience, she is a practising Chartered Accountant
Independent Director
and a partner in KPB & Associates.
A pharmaceutical professional with technical background, he has worked with
Independent Director organizations such as Cipla, Lupin, Watson, Marksans, Alembic and Emcure
Pharmaceuticals for the past 32 years.
Holds a B.Tech degree in Chemical Engineering from IIT, Kanpur and a PGDM
Independent Director from IIM, Ahmedabad. He has more than 25 years of rich experience in the field of
chemicals/ building materials and nutrition.
Partner in the legal firm Desai & Diwanji. She is an expert in business law,
Independent Director including mergers and acquisitions, private equity, and debt financing. She has
been practising law for more than 15 years.
24
 Aarti Industries
Initiating Coverage

Financial summary (Consolidated)

Profit & Loss (Rs mn) Cash Flow (Rs mn)
Y/E March FY21 FY22 FY23E FY24E FY25E Y/E March FY21 FY22 FY23E FY24E FY25E
Net sales 50,233 72,883 83,911 93,605 1,11,039 Profit before tax 6,646 15,268 9,986 12,556 16,385
Other operating income - - - - - Depreciation & Amortisation 2,313 2,885 3,313 4,033 4,676
Total operating income 50,233 72,883 83,911 93,605 1,11,039 Chg in working capital (72) (11,858) (460) (2,742) (4,986)
Cost of goods sold (26,457) (42,132) (49,297) (53,195) (61,796) Cash flow from operations 8,727 4,708 12,118 12,817 14,494
Gross profit 23,775 30,751 34,614 40,410 49,243 Capital expenditure (13,144) (13,061) (15,000) (15,000) (15,000)
Gross margin (%) 47 42 41 43 44 Cash flow from investing (13,221) (13,055) (14,990) (14,990) (14,990)
Total operating expenses (13,960) (17,573) (20,139) (22,465) (26,649) Equity raised/ (repaid) - 11,867 - - -
EBITDA 9,815 13,178 14,475 17,945 22,593 Debt raised/ (repaid) 7,459 (2,663) 4,724 3,763 4,649
EBITDA margin (%) 20 18 17 19 20 Dividend paid (451) (1,269) (1,213) (1,525) (1,990)
Depreciation (2,313) (2,885) (3,313) (4,033) (4,676) Cash flow from financing 6,145 6,792 2,323 870 1,114
EBIT 7,502 10,293 11,162 13,912 17,918 Net chg in cash 1,650 (1,555) (550) (1,303) 618
Net interest (864) (1,143) (1,186) (1,365) (1,543)
Key Ratios
Other income 7 8 10 10 10
Y/E March FY21 FY22 FY23E FY24E FY25E
Profit before tax 6,646 15,268 9,986 12,556 16,385
OPERATIONAL
Total taxation (1,293) (2,194) (1,897) (2,386) (3,113)
FDEPS (Rs) 15.0 21.6 22.3 28.1 36.6
Tax rate (%) 19 14 19 19 19
CEPS (Rs) 21.7 44.0 31.4 39.2 49.5
Profit after tax 5,352 13,074 8,088 10,171 13,272
DPS (Rs) 1.4 3.5 3.3 4.2 5.5
Minorities (118) (2) (1) (2) (2)
Dividend payout ratio (%) 9.2 9.7 15.0 15.0 15.0
Profit/ Loss associate co(s) - - - - -
GROWTH
Adjusted net profit 5,235 7,840 8,087 10,169 13,270
Net sales (%) 8.7 45.1 15.1 11.6 18.6
Adj. PAT margin (%) 10 11 10 11 12
EBITDA (%) 0.4 34.3 9.8 24.0 25.9
Net non-recurring items - 5,232 - - -
Adj net profit (%) (2.4) 49.8 3.2 25.7 30.5
FDEPS (%) (2.4) 44.0 3.2 25.7 30.5
Balance Sheet (Rs mn)
PERFORMANCE
Y/E March FY21 FY22 FY23E FY24E FY25E
RoE (%) 16.2 16.6 12.9 14.5 16.5
Paid-up capital 871 1,813 1,813 1,813 1,813
RoCE (%) 11.8 13.0 11.7 12.9 14.7
Reserves & surplus 34,158 57,332 64,206 72,849 84,129
EFFICIENCY
Net worth 35,029 59,145 66,019 74,662 85,941
Asset turnover (x) 1.1 1.3 1.2 1.1 1.1
Borrowing 28,438 25,779 30,503 34,265 38,915
Sales/ total assets (x) 0.7 0.8 0.8 0.8 0.8
Other non-current liabilities 4,584 4,903 4,903 4,903 4,903
Working capital/ sales (x) 0.2 0.2 0.3 0.3 0.3
Total liabilities 68,173 89,833 1,01,431 1,13,837 1,29,766
Receivable days 57.7 69.6 60.0 60.0 60.0
Gross fixed assets 51,543 62,719 80,086 93,579 1,07,623
Inventory days 84.5 86.3 81.0 82.9 84.1
Less: Depreciation (15,617) (18,540) (21,852) (25,886) (30,561)
Payable days 52.0 30.0 29.7 30.4 30.8
Net fixed assets 35,926 44,179 58,233 67,694 77,062
FINANCIAL STABILITY
Add: Capital WIP 12,979 14,904 12,537 14,043 15,000
Total debt/ equity (x) 0.9 0.5 0.5 0.5 0.5
Total fixed assets 48,905 59,083 70,770 81,737 92,062
Net debt/ equity (x) 0.7 0.5 0.5 0.5 0.5
Total Investment 635 731 731 731 731
Current ratio (x) 2.9 4.7 4.2 4.1 4.1
Inventory 9,357 14,113 15,403 17,182 20,383
Interest cover (x) 8.7 9.0 9.4 10.2 11.6
Debtors 7,937 13,905 13,794 15,387 18,253
VALUATION
Cash & bank 4,123 2,568 2,019 716 1,334
PE (x) 58.3 40.5 39.3 31.2 23.9
Loans & advances 160 189 218 243 288
EV/ EBITDA (x) 34.9 25.9 23.9 19.6 15.7
Current liabilities 8,244 6,895 7,938 8,855 10,504
EV/ Net sales (x) 6.8 4.7 4.1 3.8 3.2
Net current assets 15,433 25,842 25,753 27,192 32,796
PB (x) 8.7 5.4 4.8 4.3 3.7
Other non-current assets 3,201 4,177 4,177 4,177 4,177
Dividend yield (%) 0.2 0.4 0.4 0.5 0.6
Total assets 68,173 89,833 1,01,431 1,13,837 1,29,766
Free cash flow yield (%) (1.4) (2.6) (0.9) (0.7) (0.2)
Source: Company, Axis Capital

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 Aarti Industries
Initiating Coverage

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 Aarti Industries
Initiating Coverage

Axis Capital Limited

Axis House, C2, Wadia International Centre, P.B Marg, Worli, Mumbai 400 025, India.
Tel:- Board +91-22 4325 2525; Dealing +91-22 2438 8861-69;
Fax:- Research +91-22 4325 1100; Dealing +91-22 4325 3500

DEFINITION OF RATINGS
Ratings Expected absolute returns over 12 months
BUY More than 15%
ADD Between 5% to 15%
REDUCE Between 5% to -10 %
SELL More than -10%

Research Disclosure - NOTICE TO US INVESTORS:

This report was prepared, approved, published and distributed by Axis Capital Limited, a company located outside of the United States (a “non-US
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