Fundamental Analysis Of Aarti Industries – Financials & Growth Potential

Fundamental Analysis Of Aarti Industries

Introduction

Specialty chemicals have become essential in various industries ranging from pharmaceuticals, electronics, agriculture, and automotive. The specialty chemical market has witnessed significant growth over the years, owing to its wide range of applications and India’s unique position to benefit from MNCs adopting the ‘China+1’ post-pandemic.

Company Overview

Aarti Industries was established in 1984 by first-generation technocrats and is the leading manufacturer of speciality chemicals. It is one of the highly integrated and most competitive benzene-based speciality chemical companies in the world.

Geographic Presence

As of FY23, the company has a wide range of customers that includes more than 700 domestic customers and more than 400 global customers spread across 60 countries.

Product Offerings

Aarti Industries has a diverse product offering of more than 100 products that serves leading consumers across the globe for Speciality Chemicals and Intermediate for Pharmaceuticals, Agro Chemicals, Pigments, Polymers, Printing Inks, Dyes, Fuel additives, Surfactants, Aromatics, and various other Speciality Chemicals.

Industry Overview

The Indian chemical industry is one of the most crucial parts of our economy, accounting for around 7% of the country’s Gross Domestic Product (GDP). The Indian chemicals industry was valued at $178 billion in 2019 and is expected to grow to $304 billion by 2025, at a CAGR of 9.3%. By FY 2040, the sector is estimated to reach $1 trillion.

Aarti Industries – Financials

Revenue and Net Profit Growth

The operating revenue of the company has increased from ₹4,706 Crores to ₹7,283 Crores from FY19 to FY23, resulting in a 5-year CAGR of 11.54% on its revenue. The net profit grew from ₹492 Crores to ₹1,186 Crores from FY19-22 but dipped to ₹545 Crores in FY23, resulting in a CAGR growth of only 2.59% in the last five years.

Margin Analysis

The company posted its highest-ever operating profit margin and net profit margin of 14.80% and 7.50%, respectively, in FY22 but declined to 14.80% in operating profit margin and 7.50% in net profit margin in FY23 due to increased operating expenses.

Return Ratios: RoCE and RoE

In FY21, the company reported a ROE and a RoCE of 29.50% and 22.37%, respectively. During FY23, the ROE and RoCE declined to 11.5% and 13.44%, respectively, due to a decline in revenues.

Debt & Interest Coverage Ratio

The company has a healthy debt condition with the debt-to-equity ratio ranging around 0.55 to 0.58 in the last two financial years. The interest coverage ratio of FY23 suggests that the company has earned enough profits to repay its interest on outstanding loans 6.48 times.

Future Plans of Aarti Industries

The company plans to allocate a CAPEX of approximately Rs. 2,500-3,000 crore for its chemical projects in FY23. It has initiated site development work on over 100 acres in Jhagadia to expand its business. The company is introducing over 40 new chemical products along an integrated value chain and plans to increase its EBITDA margins to 25-30%.

Key Metrics of Aarti Industries

CMP: ₹ 456
Market Cap (Cr.): ₹ 16,894
EPS: ₹ 15.0
Stock P/E: 34
RoCE (%): 13.44%
RoE(%): 11.50%
Promoters Holding: 43.6%
Book Value: ₹ 136
Debt to Equity: 0.58
Price to Book Value: 3.42
Net Profit Margin(%): 14.80%
Operating Profit Margin(%): 7.50%

Conclusion

Despite a temporary setback in margins due to the Russia-Ukraine war, Aarti Industries holds promise for the future with increasing revenue and expansion plans. Investors should monitor the company’s revenue growth and management’s execution of their communicated plans.

The company is a promoter with high ROI and profitability. The stock price has been rising steadily since the beginning of the