Q4FY23 Review: Aarti Industries: Estimates at risk amid uncertain demand

10 May 2023 , 10:57 AM

Aarti’s Q4 results were subdued on maintenance shutdowns of certain units, loss of volumes and revenue shift towards lowmargin markets. Demand for products linked to dyes and pigments continued to remain subdued, due to global slowdown and correction in inventory prices. While Aarti is sustaining earnings from Agrochemical intermediates, global supply glut may pose a risk in near term. With an Ebitda growth estimate of 15% in FY24, implied growth rate for FY25 is very high at 35% (to attain Rs17bn in FY25); which could be at risk.

Q4 argins came under pressure: 

Aarti’s Q4 earnings were operationally below estimates. Management attributed higher costs (Rs100mn) and loss of volumes from maintenance shutdown of acid unit and the unit at Kutch, Gujarat. During Q4FY23, share of volumes shifted towards non-regulated markets, resulting in margin dilution at contribution level. Demand for Aarti’s products across Agrochemicals and Polymers holds steady at decent levels.

Capex progressing as per schedule: 

Aarti incurred capex of Rs13.4bn in FY23. Annual capex for FY24 and FY25 would each be Rs15bn, largely attributable to chloro-toluenes value chain under development at the new site in Jhagadia, Gujarat. Capex on the NCB facility is progressing well and is expected to be commissioned by Q1FY24. Management expects agrochemical-dedicated plant to achieve 70% utilisation and 3rd longterm contract to operate at 60% by FY25.

Growth projections at risk: 

FY24 volume growth is targeted at 25%. But Ebitda growth will be merely 15%, owing to margin dilution. Management guidance of Rs17bn Ebitda by FY25, skews a large part of growth towards the aforesaid timelin. With an Ebitda growth of merely 15% in FY24, implied growth rate for FY25 is very high at 35% (over FY24). Analysts of IIFL Capital Services believe that management projections could be at risk and are difficult to attain amid existing market conditions. Hence, they retain their cautious view on stock.

Analysts of IIFL Capital Services maintain reduce with target price Rs 525.