Q1FY24 Review: Aarti Industries: Can’t escape the storm

10 Aug 2023 , 12:55 PM

Aarti’s Q1 performance was disappointing as the company faced challenges of global destocking, subdued demand and rising exports from China. Ebitda margins too were under pressure and declined ~220bps sequentially. While management expects recovery to begin in H2FY24, it stated that there is ~10-15% downward risk to the ~Rs17bn Ebitda guidance for FY25. Capex projects are on track. Analysts of IIFL Capital Services trim FY24-26 EPS estimates by 10-35%, moderating their growth expectation owing to delay in recovery of the underlying demand. Their TP, rolled over to Sep’24, now stands at Rs500 (previously Rs525), as they cut their 1yr PE multiple from 23x to 22x. 

Facing multiple challenges: 

While demand from the discretionary end use industry has been challenged, agrochemical demand has now started to come under pressure due to the ongoing inventory destocking. Additionally, the slowdown in China has increased exports from the country and pressurised margins. Management highlighted that global markets have been more impacted than the domestic markets (where volumes sold remain steady). 

Risk to guidance: 

The company expects Q2 Ebitda to be similar to Q1; FY24 is likely to be a tough year even if demand recovers from H2. Management stated that there is some downside risk to the previously stated guidance of ~Rs17bn Ebitda in FY25. Recovery expectation is based on the current preliminary discussions with customers, but this can change closer to time. 

Growth projections at risk: 

While growth in FY24 seems unlikely, analysts of IIFL Capital Services believe FY25 could be poised to deliver healthy growth, should demand recover. Nonetheless, management guidance of Rs17bn Ebitda by FY25, will likely be missed. Demand across key segments such as dyes, pigments and textiles remains weak and are currently not showing any signs of recovery. The stock is currently trading at ~24x FY25 PE, which we believe to be expensive, given the subdued return ratios, ongoing challenges and subdued growth displayed historically. They maintain their REDUCE rating.