Aarti Industries: Plant visit enlightens past and future strategies

31 Mar 2023 , 10:23 AM

Recommendation: Reduce

Target Price: Rs 520

The plant visit showcased Aarti’s manufacturing capabilities and strength in managing various isomers of benzene derivatives. Disclosures too improved to address concerns around capex not generating enough revenues in the last 3-4 years. Although analysts at IIFL Capital Services came out positive through this plant visit, they believe the benefits from growth capex would be pushed towards FY25/FY26. This, coupled with near-term headwinds on discretionary demand, compelled them to maintain their cautious view on the stock.

Improved disclosures on capex incurred till now

Aarti has incurred a total capex of Rs48.6 billion on Chemicals business during FY19-H1FY23. Of this, Rs25.8 billion has been incurred towards revenue generating capex. However, bulk of this capex has gone into three long-term contracts is Rs14.7 billion, which are yet to yield results. The terminated contract makes up a large portion of capex amounting to Rs9.4 billion operating at ~20% utilization.

EBITDA guidance of Rs17 billion by FY25

Management provided a like-to-like comparison for EBITDA generated by Chemicals business in past five years, along with segregating one-off incomes. Management expects EBITDA to grow from Rs11 billion in FY23 to Rs17 billion. This would be driven by volume growth to be derived from new capacities of nitrotoluenes and ethylated derivatives. Management expects capacity utilization for all existing units to be at 75-90% by FY25.

Zone 4 at Jhagadia to drive next leg of growth

Aarti acquired fresh 95 acres of land parcel at Jhagadia. This would house the new chlorotoluenes value chain, multi-purpose plants and custom manufacturing. Aarti would deploy capex of Rs25-30 billion in Zone 4. The projects would be commissioned in a phased-manner starting from H2FY25 and would generate revenues by FY26. Management is confident of generating Rs8-10 billion EBITDA from Zone 4.