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Multi Baggers

Ventura Securities

12.00 AM Dec 30th 2015

Aarti Ind

BSE ID : 524208     NSE ID : AARTIIND


PEAK FROM RECO 1358.95 162.40%

CURRENT PRICE 1237.40 138.93%

Aarti is one of the leading suppliers to global manufacturers of dyes, pigments, agrochemicals, pharmaceuticals and rubber chemical manufacturers. We initiate coverage on Aarti Industries Ltd as a BUY with a price objective of Rs 678.

Aarti Industries

Aarti Industries Ltd (Aarti) is strategically placed to exploit growth opportunities in the chemical industry with products available across value chains of benzene, toluene and ethylene, and nitro toluene. With 16 manufacturing units in Gujarat and Maharashtra, the company has customers spread across the globe in 60 countries with a major presence in USA, Europe, Japan and India. Aarti has aggressive expansion plans not only in its specialty chemicals segment, but also in the pharmaceuticals and the personal care space.

We expect revenues to grow at a CAGR of 13.5% to Rs 3,743 crore by FY17 on the back of growth across all segments. The EBITDA margins are expected to grow from 16% in FY15 to 19% by FY17 amounting to Rs 716.6 crore due to a reduction in operating expenditures and an improvement in utilization levels. PAT is expected to grow at a robust 27% to Rs 333 crores by FY17 on account of lower interest costs and a reduction in taxes.

We are upbeat on the prospects of Aarti given that:

The Indian Specialty Chemical Industry is expected to reach $60- 70bn by 2020 from $23bn in 2013. With more than 80% of revenues being accounted for by specialty chemicals, Aarti with its strong knowledge of chlorine derivative chemistry and largest nitro-chlorobenzene capacity in India, is best placed to maximize the available opportunity. We expect the revenues to grow to Rs 3,060 crore by FY17 (CAGR of 13%).

Debottlenecking and expansion activities have facilitated growth in pharma volumes. Going forward, newly commissioned capacities for Caffeine manufacturing, dedicated to meet the demand form cola/energy drinks manufacturers, are expected to bring in incremental revenues. We expect the revenue contribution of the pharma segment to go up marginally to 11% over the next two years. The segment revenues are expected to grow to Rs 415 crore by FY17 (CAGR of 17%).

In the home and personal care segment, Aarti is focusing on growing its export market. We expert margins to recover to ~4% from the current levels with pharma revenues growing at a CAGR of 14% from Rs 206 crore in FY15 to Rs 268 crore by FY17.

We initiate coverage on Aarti Industries Ltd as a BUY with a price objective of Rs 678 representing a potential upside of 31% from the CMP of Rs 519 over a period of 15 months. We have used the PE multiple approach to value Aarti Industries and assigned a multiple of 17x on FY17 EPS of Rs 39.9 to arrive at the target price. There exists scope for further value unlocking post the demerger of its business units. We have not built this into our valuation model and remains an upside risk to our estimates.

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