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Q3FY24 Review: Aarti Industries: Displays sequential improvement

12 Feb 2024 , 04:14 PM

Aarti Industries continued to display sequential improvement in performance during Q3’24 and with the base turning favourable, the company is slated to report earnings growth from Q4’24 onwards. However, the business model of balancing isomers will continue to pose challenges in a volatile demand environment. The earnings therefore will remain at risk if the demand recovery takes longer than expected to normalize. The management now guides for FY25 Ebitda to be in the range of Rs14.5-17.0bn (up from Rs14.5-16.0bn) which analysts of IIFL Securities believe is aggressive given the uncertain demand environment in some of the user industries viz. Agrochemicals and Pharma. Analysts of IIFL Securities raise FY24 earnings estimates by 15% on the back of higher deferred tax, while FY25-26 earnings rise by 0-2%. Capex for FY24 is pegged at Rs12-13bn, while overall capex over FY24-25 will be Rs25-30bn. Capex execution is on track, though ramp-up of new capacities is keenly awaited. 

Sequential improvement continues: 

Though Aarti delivered sales growth of 3.9% YoY to Rs17.3bn, Ebitda declined by 10% to Rs2.6bn. However, the company continues to display sequential improvement with Ebitda rising 11% QoQ. The management attributed the improvement to better demand for products targeted at applications within the discretionary segment while non-discretionary barring select products remained tepid. 

New contracts positive, but doesn’t alter estimates much: 

The Company’s recent Rs30bn 9-yr contract with global agrochemical major to make key intermediate and Rs60bn 4-yr contract with a multinational conglomerate for a niche speciality chemical is modestly positive. However it does not alter estimates much. Aarti’s Ebitda guidance of Rs14.5-17.0bn for FY25 already implies sharp YoY growth. 

Valuations rich, earnings remain vulnerable: 

Though Aarti has a core competency in place, analysts of IIFL Securities believe balancing isomers using downstream chemical processing will remain a challenge in a volatile demand environment and pose risks to earnings estimates. Post sharp run up in the recent months, valuations at 26x FY26 earnings are rich. Analysts of IIFL Securities raise FY25-26 estimates by 0-2% and revise TP to ₹580 (23x 1-YF PE multiple). Maintain REDUCE.

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