Q1FY19 RESULT UPDATE RETAIL EQUITY RESEARCH Aarti Industries Ltd SpecialityChemicals BSE CODE:524208 NSE CODE: AARTIIND Bloomberg CODE: ARTO:IN SENSEX: 37,666 Accumulate Rating as per Midcap 12months investment period CMP Rs. 1,330 TARGETRs. 1,493 RETURN12% 8 th August, 2018 Shining performance...earnings outlook robust AARTI Industries Ltd (ARTO) is a global leader in Benzene based derivative products. Has a diversified product portfolio with end users in pharma, agrochemicals, specialty polymers, paints & pigments. Q1FY19 Revenue & PAT grew by robust 36% & 42% YoY led by broad based growth across segments. EBITDA grew by 36% YoY, whereas EBITDA margins were to flat YoY due to Rs29cr MTM loss on hedge. Capacity additions, focus on high margin products and robust off-take from Pharma segment, we reiterate our positive stance on ARTO. We increase our EPS estimates by 2.9% & 2.5% for FY19E & FY20E to factor in better than expected performance in Q1 and weexpect PAT to grow by healthy 29% CAGR over FY18-20E. We value ARTO at P/E of 22x (21x earlier) FY20E given strong earnings outlook and ROE of above 25%.Given sharp run-up in stock prices we downgrade to Accumulate from Buy with a target price of Rs1,493. Revenue growth strong... Q1Revenue grew by 36% YoY, largely led by strong growth across business segments with Speciality chemical business grew by 35% YoY.The revenue growth was supported by pass through of higher RM cost and better pricing power. Speciality segment volumes grew by 12% YoY. The capacity utilization for NCB was at 90% for Q1FY19. The nitrotoluene capacity utilization was at 40% andexpected to reach 80%-90% utilisation by FY20. The Pharma segment reported a robust growth of 41% YoY led by better realizations and higher sales of intermediates. While Home & personal care business 35% YoY. Management is looking for Demerger of Home and Personal Care segment which is expected completed by the end of the year. We expect strong off-take from Specality chemicals and Pharma segmentto continue. We increase our revenue estimates by 6.1% & 6.5% and we factor revenue to grow 17% CAGR over FY18- FY20E. EBITDA to grow at healthy 22% CAGR over FY18-20E... Gross margins declined by 530bps YoY to 38.3%due to higher raw material cost. However, the decline in EBITDA margins was limited to 10bps YoY to 17.4% due to lower other expenses. PAT grew by 42% YoY to Rs89cr. We lower our EBITDA margin estimates by10bps &40bps for FY19E & FY20E to factor in the impact on gross margins in Q1FY19. However, we increase our EPS estimates by 2.9% & 2.5% for FY19E& FY20Eand we expect PAT to grow by 29% CAGR over FY18-20E. Valuations At CMP, ARTO is trading at 25x and 19x FY19E & FY20E EPS of Rs53.3& Rs68.2 respectively. We are constructive on ARTO given capacity additions, launch of new products, and robust off-take from Speciality and Pharma segment. Given robust earnings outlook of 29% CAGR over FY18-20E, we value ARTO at 22x (21x earlier) on FY20E.However, given recent sharp runup in stock prices we downgrade to Accumulate from BUY with target price of Rs1,493. Company Data Market Cap (cr) Rs. 10,810 Enterprise Value (cr) Rs. 12,651 Outstanding Shares (cr) 8.2 Free Float 46% Dividend Yield 0.08% 52 week high Rs. 1,359 52 week low Rs. 829 6m average volume (cr) 0.1 Beta 0.9 Face value Rs. 5 Shareholding (%) Q3FY18 Q4FY18 Q1FY19 Promoters 53.6 51.1 53.1 FII s 3.9 3.6 3.8 MFs/Institutions 13.2 14.2 14.3 Public 25.9 25.6 25.7 Others 3.4 5.5 3.1 Total 100.0 100.0 100.0 Price Performance 3 Month 6 Month 1 Year Absolute Return 0.7% 16.9% 42.0% Absolute Sensex 6.6% 9.5% 16.7% Relative Return* -6.0% 7.5% 25.3% *over or under performance to benchmark index 1400 1200 1000 800 Standalone (Rs.cr) FY18A FY19E FY20E Sales 3,806 4,570 5,227 Growth (%) 20.3 20.1 14.4 EBITDA 699 887 1,040 Margin (%) 18.4 19.4 19.9 PAT Adjusted 333 432 552 Growth (%) 5.4 29.8 27.6 Adj.EPS 41.0 53.2 67.9 Growth (%) 5.4 29.8 27.6 P/E 32.5 25.0 19.6 P/B 6.8 5.6 4.5 EV/EBITDA 18.1 14.2 12.0 ROE (%) 22.6 24.7 25.5 D/E 1.2 1.0 0.8 Anil R Analyst ARTO Sensex Rebased Jul-17 Oct-17 Jan-18 Apr-18 Jul-18
Standalone Financials Profit & Loss Account (RsCr) Q1FY19A Q1FY18A YoY Growth % Q4FY18A QoQ Growth % Sales 1,078 792 36.2 1,029 4.8 EBITDA 188 138 35.8 180 4.2 EBITDA margins 17.4 17.5 (10bps) 17.5 (10bps) Depreciation 38 32 19.0 37 2.3 EBIT 150 107 40.7 143 4.7 Interest 46 29 57.7 36 26.6 Other Income 3 - - 1 - Exceptional Items - - - PBT 107 78 38.6 108 (0.6) Tax* 18 15 25.5 23 (22.3) Other comprehensive income (15) 3 - - Reported PAT 75 60 23.2 85 (4.5) Adjustment 15 3 - - Adjusted PAT 89 63 41.6 85 5.4 No. of shares (mn) 8.2 8.2 8.2 - EPS (Rs) 10.98 7.8 41.6 10.4 5.4 Change in estimates Old estimates New estimates Change % Year / Rscr FY19E FY20E FY19E FY20E FY19E FY20E Revenue 4,308 4,908 4,570 5,227 6.1 6.5 EBITDA 840 996 887 1,040 5.5 4.4 Margins (%) 19.5 20.3 19.4 19.9 (10bps) (40bps) PAT 422 540 432 552 2.4 2.1 EPS 51.9 66.5 53.2 67.9 2.4 2.1
Consolidated Financials Profit & Loss Account Sales 3,007 3,163 3,806 4570 5227 % change 3.4 5.2 20.3 20.1 14.4 EBITDA 572 653 699 887 1040 % change 22.9 14.2 7.0 26.8 17.3 Depreciation 99 123 146 166 189 EBIT 474 531 553 721 851 Interest 117 117 132 187 169 Other Income 6 2 8 9.5 12.0 PBT 363 416 429 544 694 % change 42.4 14.6 3.2 26.8 27.6 Tax 95 88 83 111 142 Tax Rate (%) 26.1 21.2 19.3 20.5 20.5 Reported PAT 246 322 330 432 552 Adj* 11 (6) 3 - - Adj PAT 257 316 333 432 552 % change 24.8 22.9 5.4 29.8 27.6 No. of shares (mn) 8.3 8.2 8.1 8.1 8.1 Adj EPS (Rs) 31.6 38.8 41.0 53.2 67.9 % change 24.8 22.9 5.4 29.8 27.6 DPS (Rs) 10.2 10.2 10.3 10.3 10.3 CEPS (Rs) 42.7 53.4 58.9 73.5 91.1 Balance Sheet Cash 29 29 32 42 151 Accounts Receivable 523 525 591 710 812 Inventories 495 571 747 864 985 Other Cur. Assets 319 361 476 570 652 Investments 41 47 47 47 48 Gross Fixed Assets 2,045 2,614 3,061 3561 3861 Net Fixed Assets 1,248 1,695 1,996 2331 2441 CWIP 313 270 436 200 180 Intangible Assets 4 21 17 21 21 Def. Tax (Net) (127) (155) (177) (180) (184) Other Assets - - - - - Total Assets 2,841 3,344 4,150 4586 5086 Current Liabilities 396 453 543 655 714 Provisions 21 28 31 36 40 Debt Funds 1,233 1,436 1,921 1891 1861 Other Liabilities 52 64 77 77 77 Equity Capital 42 41 41 41 41 Reserves & Surplus 1,096 1,321 1,538 1886 2354 Shareholder s Fund 1,137 1,362 1,578 1927 2395 Total Liabilities 2,839 3,344 4,150 4586 5086 BVPS (Rs) 136 166 194 237 295 Cash flow Ratios Net inc. + Depn. 367 450 476 598 741 Non-cash adj. 111 107 154 189 172 Changes in W.C 96 (87) (264) (212) (242) C.F.O 574 470 366 575 671 Capital exp. (450) (530) (614) (264) (280) Change in inv. (2) 1 (0) (0) (0) Other invest.cf - - - - - C.F - investing (452) (529) (614) (264) (280) Issue of equity - (96) - - - Issue/repay debt (33) 155 353 (217) (199) Dividends paid (95) (1) (84) (84) (84) Other finance.cf - - - - - C.F - Financing (128) 58 269 (301) (283) Chg. in cash (7) (1) 20 11 108 Closing cash 29 29 49 42 151 Y.E March FY16A FY17A FY18A FY19E FY20E Profitability& Return EBITDA margin (%) 19.0 20.7 18.4 19.4 19.9 EBIT margin (%) 15.8 16.8 14.5 15.8 16.3 Net profit margin.(%) 8.5 10.0 8.7 9.5 10.6 ROE (%) 23.3 25.3 22.6 24.7 25.5 ROCE (%) 14.9 15.3 13.6 15.9 17.0 W.C & Liquidity Receivables (days) 58.4 60.5 53.5 51.9 53.1 Inventory (days) 108.1 111.7 110.3 111.9 112.6 Payables (days) 82.8 88.9 83.3 83.2 83.4 Current ratio (x) 3.3 3.1 3.2 3.2 3.4 Quick ratio (x) 1.4 1.2 1.1 1.1 1.1 Turnover &Leverage Gross asset T.O (x) 1.6 1.4 1.3 1.4 1.4 Total asset T.O (x) 1.1 1.0 1.0 1.0 1.1 Int. coverage. ratio (x) 4.1 4.5 4.2 3.9 5.0 Adj. debt/equity (x) 1.1 1.1 1.2 1.0 0.8 Valuation ratios EV/Sales (x) 4.0 3.8 3.3 2.8 2.4 EV/EBITDA (x) 20.9 18.6 18.1 14.2 12.0 P/E (x) 42.1 34.2 32.5 25.0 19.6 P/BV (x) 9.7 8.0 6.8 5.6 4.5
Recommendation Summary (last 3 years) Dates Rating Target 1600 1400 1200 1000 800 600 400 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 25-January-2017 Buy 822 29-May-2017 Accumulate 921 17-August-2017 Accumulate 970 13-October-2017 Accumulate 1027 1-March-2018 Accumulate 1311 30-May-2018 Buy 1396 08-August-2018 Accumulate 1493 Source: Bloomberg, Geojit Research Investment Rating Criteria Large Cap Stocks; Buy - Upside is above 10%. Hold - Upside is between 0%- 10%. Reduce - Downside is more than 10%. Neutral - Not Applicable Mid Cap and Small Cap; Buy - Upside is above 15%. Accumulate - Upside is between 10% - 15%. Hold - Upside is between 0% - 10%. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Neutral- The analyst has no investment opinion on the stock under review. General Disclosures and Disclaimers CERTIFICATION I, Anil R, author of this Report, hereby certify that all the views expressed in this research report reflect our personal views about any or all of the subject issuer or securities. This report has been prepared by the Research Team of GeojitFinancial Services Limited, hereinafter referred to as Geojit. 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