Q2FY24 Review: Aarti Industries: Gradual recovery priced-in

7 Nov 2023 , 12:47 PM

Though Aarti Inds’ Q2 performance witnessed a sequential improvement, it remained well below its FY23 quarterly runrate. The management gave a positive outlook on gradual recovery and hinted few more quarters for normalized demand across various segments and product lines. It now guides for Rs9.5-10bn Ebitda in FY24 and ~Rs14.5-16.1bn in FY25. Analysts of IIFL Capital Services make minor cuts their estimates and remain at the lower end of the guidance and believe the optimism largely stems from base getting favourable. The stock is already pricing in the guidance and hence does not offer much upsides, in analysts of IIFL Capital Services view. Analysts of IIFL Capital Services TP, rolled over to Dec’24, now stands at Rs520 (22x 1-YF PE multiple). Maintain REDUCE. 

Recovery underway, but will be gradual: 

As per the management, demand recovery was visible in dyes, pigments and polymers and few specialty applications while slowdown continued in agrochemicals, pharma, additives and other discretionary applications. It will take few more quarters for normalized demand across various segments. Margin improvement is visible in segments where there is a demand recovery. Both regular and non-regular markets have witnessed margin recovery. 

Lowers FY25 guidance:

For FY24, management has guided for Ebitda of Rs9.5-10bn and lowered guidance for FY25 as it now expects it to be 5-15% lower than its earlier guidance of Rs17bn. Analysts of IIFL Capital Services make minor cuts their estimates and remain at the lower end of the guidance and believe the optimism largely stems from base getting favourable. Over, FY23-26 EBITDA is expected to grow at a Cagr of 19%. 

Capex on track: 

Capex for FY24 is pegged at Rs12-13bn, while overall capex over FY24-25 will be Rs25-30bn. During Q2, the company commercialized phase-1 of acid unit revamp. Other projects, including expansion of Ethylation and Nitro Toluene capacities are expected to be commissioned in phase wise manner from Q1FY25. Chloro-toluene project too is progressing well. Offtake from long-term contracts yet to pick-up and material offtake will only be visible from FY25.