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Aarti Industries! (Aarti) Q1FY15 revenue of INR7.4bn (up 24.6% YoY) came
in line with our estimate. However, EBITDA margin at 15.3% surpassed our
expectation due to improved product mix (higher gross margin), lower raw
material prices and improvement in home & personal care segment. We
like Aarti due to its consistent RoE of ~20%. With planned expansion
underway, we estimate FY14-16 EBITDA/EPS CAGR of 23%/30%. Maintain
"BUY! with revised target price of INR310 (earlier INR259).

Home & personal care segment: Turn around a big positive
Revenue was higher 24.6% YoY to INR7.4bn, but lower 0.6% QoQ due to lower
revenue from the specialty segment. Specialty segment production fell as nitration
capacity was unavailable due to shut down for expansion. Lower Benzene prices led to
higher EBIT margin in Q1FY15. Pharma business revenue grew lower at 6.5% YoY due
to shut down of its plant for expansion. We expect H2FY15 to report better numbers.
Home & personal care segment turned around during the quarter, which is a positive.
Focus on high margin business led to improvement in EBIT margin. In FY14, home &
personal care segment had reported EBIT of INR41mn compared to INR26mn in
Q1FY15. Consequently, EBITDA margin at 15.3% was higher than 13.5% expected and
up from 12.8%/14.2% in Q1FY14/Q4FY14.

EBIT growth offset by higher tax rate, lower other income
Depreciation was lower by 19.2% QoQ due to alignment as per the Companies Act 2013.
Impact of the same for Q1FY15 was INR54.9mn. Consequently, EBIT was higher by 68% YoY
and 14.4% QoQ. Other income at INR1.2mn was meager compared to INR23.6mn/43.6mn
in Q1FY14/Q4FY14 due to absence of exceptional income. Interest expenses increased by
INR62.8mn (20% QoQ) due to one-time expenses on NCD origination and debt
realignment. Higher debt as on March 2014 also impacted interest expenses. Higher tax
rate in Q1FY15 at 26.6% compared to 15% in Q4FY15 due to lower depreciation expenses.
PAT was higher by 83.9% YoY due to impact of higher capacity and production.

Increasing FY15E/16E EPS by 4.6%/7.8%; Maintain "BUY!
We have revised up FY15/16E EPS 4.6%/7.8% to INR22.9/31.0 to incorporate lower
depreciation expenses. We are moving to P/E based valuation and now value Aarti at 10.0x
FY16E P/E, implying target price of INR310 (earlier INR259). We reiterate "BUY!.

RESULT UPDATE
AARTI INDUSTRIES
Good performance despite shutdowns
EDELWEISS RATINGS
Absolute Rating BUY
Investment Characteristics Growth
MARKET DATA (R: ARTI.BO, B: ARTO IN)
CMP : INR 260
Target Price : INR 310
52-week range (INR) : 267 / 62
Share in issue (mn) : 88.6
M cap (INR bn/USD mn) : 23 / 376
Avg. Daily Vol. BSE/NSE (!000) : 91.0
SHARE HOLDING PATTERN (%)
Current Q4FY14 Q3FY14
Promoters *
60.9 60.9 60.8
MF's, FI's & BKs
8.8 8.1 7.6
FII's 0.2 0.1 0.1
Others 30.2 30.9 31.8
* Promoters pledged shares
(% of share in issue)
: NIL
PRICE PERFORMANCE (%)
BSE Midcap
Index
Stock
Stock over
Index
1 month (0.9) 4.9 5.8
3 months 23.1 62.0 38.8
12 months 59.9 177.0 117.1
Niraj Mansingka, CFA
+91 22 6623 3315
niraj.mansingka@edelweissfin.com

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India Equity Research| Chemical
August 12, 2014
Financials (Standalone) (INR mn)
Year to March Q1FY15 Q1FY14 YoY (%) Q4FY14 QoQ (%) FY13 FY14 FY15E
Revenue 7,398 5,936 24.6 7,441 (0.6) 26,325 31,632 37,889
EBITDAR 1,130 762 48.2 1,056 7.0 4,015 4,907 6,065
Net profit 414 225 83.9 468 (11.5) 1,624 1,905 2,587
Diluted EPS (INR) 4.7 2.5 83.9 5.3 (11.5) 18.3 22.9 31.0
Diluted P/E (x) 11.9 9.8 7.9
EV/EBITDA (x) 6.5 6.1 5.5
ROAE (%) 20.0 20.0 21.0


Chemical
2 Edelweiss Securities Limited

Financial snapshot (INR mn)
Year to March Q1FY15 Q1FY14 % change Q4FY14 % change FY14 FY15E FY16E
Net revenues 7,398 5,936 24.6 7,441 (0.6) 26,325 31,632 37,889
Staff costs 201 166 21.5 217 (7.5) 788 945 1,134
Direct costs 4,827 3,926 22.9 4,800 0.6 16,846 20,245 24,059
Other expenses 1,240 1,082 14.6 1,368 (9.4) 4,677 5,536 6,631
EBITDA 1,130 762 48.2 1,056 7.0 4,015 4,907 6,065
Depreciation & amortization 187 202 (7.3) 232 (19.2) 885 852 958
EBIT 942 560 68.2 824 14.4 3,130 4,054 5,107
Other income 1 24 (94.9) 44 (97.2) 110 78 15
Interest 379 264 43.9 317 19.8 1,178 1,473 1,534
Profit before tax 564 320 76.2 551 2.4 2,061 2,659 3,588
Tax 150 95 57.9 83 81.8 540 758 1,005
Core profit 414 225 83.9 468 (11.5) 1,521 1,901 2,583
Extraordinary items
Net profit 414 225 83.9 468 (11.5) 1,624 1,905 2,587
Diluted EPS (INR) 4.7 2.5 83.9 5.3 (11.5) 18.3 22.9 31.0

As % of net revenues
Direct costs 65.2 66.1 64.5 64.0 64.0 63.5
Employee cost 2.7 2.8 2.9 3.0 3.0 3.0
Other expenses 16.8 18.2 18.4 17.8 17.5 17.5
EBITDA 15.3 12.8 14.2 15.3 15.5 16.0
Reported net profit 5.6 3.8 6.3 6.2 6.0 6.8
Tax rate 26.6 29.7 15.0 26.2 28.5 28.0

Change in Estimates
FY15E FY16E
New Old % change New Old % change Comments
Net Revenue 31,632 31,632 0.0 37,889 37,889 0.0
EBITDA 4,907 4,907 0.0 6,065 6,065 0.0
EBITDA Margin 15.5 15.5 16.0 16.0
Core profit 1,902 1,819 4.6 2,583 2,396 7.8 Reduction in depreciation partially
offset by reduction in Other Income
PAT Margin 6.0 5.7 6.8 6.3
Capex 2,600 2,600 0.0 1,500 1,500 0.0


Aarti Industries
3 Edelweiss Securities Limited
Company Description
AIL, incorporated in 1975, is a well-diversified chemicals company and is headquartered at
Mumbai. It is one of the leading global suppliers of dyes, pigments, agrochemicals,
pharmaceuticals and rubber chemicals and is one of the largest producers of Benzene-based
basic and intermediate chemicals in India. AIL"s manufacturing units are located in Gujarat
and Maharashtra#two states dominating the chemical industry in India. It has three
different business segments:

(1) Specialty chemicals $ earlier part of two segments (a) Performance chemicals, and (b)
Agri-intermediates & Fertilisers segment.
(2) Pharmaceuticals.
(3) Home and personal care.

Investment Theme
Integrated, flexible and diversified operations key strengths: Superior R&D, process
flexibility and an ample dose of backward and forward integration equip AIL to offer a
palette of more than 125 products with applications in multiple industries. Further, it is also
converting by-products into commercially viable products. Ergo, it enjoys cost
competitiveness and is sheltered from vagaries of downturn in any particular consumer
industry.

Preferred supplier for global customers, MNCs: AIL is a cost competitive manufacturer of
various chemicals. Its competitiveness can be exemplified by its exports of chemicals to
China. This has led to AIL being a strategic supplier to various global MNCs offering multiple
products. Exports contribute ~50% to revenue with incremental capex on anvil to enhance
its standing in the export market.

Key Risks
Sustained increase in benzene prices: AIL"s model is to pass on the cost changes with one
quarter lag to customers. While increase in Benzene prices may lead to lower earnings
temporarily, we see lower risks over a longer period as the same is passed on to customers.

Increasing environmental regulation: Environment regulations in India are becoming
stringent, leading to most chemical companies in the country investing time and money to
increase their compliance with environmental laws. There are risks of further tightening of
these laws, which will lead to increased costs for chemical companies. The silver lining is
that with China tightening controls on compliance, there are chances that the margins may
increase to compensate for higher compliance globally. Aarti has invested in having zero-
discharge facilities for Jhagadia and a unit in Vapi. It has invested INR1.0bn to mitigate the
risks associated with the same.

US shale gas may imply long-term risks of reducing profits: With shale gas prices remaining
high in the US, there are chances that higher production of ethylene-based products may
lead to lower prices. This will reduce AIL"s market opportunity, leading to lower growth
rates in the future.




Chemical
4 Edelweiss Securities Limited
Financial Statements

Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E
Net revenue 20,962 26,325 31,632 37,889
Cost of materials consumed 12,832 16,846 20,245 24,059
Employee costs 654 788 945 1,134
Other Expenses 3,864 4,677 5,536 6,631
Total operating expenses 17,350 22,310 26,725 31,824
EBITDA 3,612 4,015 4,907 6,065
Depreciation & Amortization 828 885 852 958
EBIT 2,784 3,130 4,054 5,107
Other income 38 110 78 15
Interest expenses 954 1,178 1,473 1,534
Profit before tax 1,868 2,061 2,659 3,588
Provision for tax 538 540 758 1,005
Net profit 1,330 1,521 1,901 2,583
Profit After Tax 1,330 1,521 1,901 2,583
Minority int. and others - (14) (104) (4) (4)
Profit after minority interest 1,344 1,624 1,905 2,587
Basic EPS (INR) 15.2 18.3 22.9 31.0
Shares outstanding (mn) 89 89 83 83
Diluted EPS (INR) 15.2 18.3 22.9 31.0
CEPS (INR) 24.5 28.3 33.1 42.5
Dividend per share (INR) 4.0 4.5 5.0 6.0
Dividend payout (%) 26.4 24.5 21.9 19.3

Common size metrics
Year to March FY13 FY14 FY15E FY16E
Cost of revenues 61.2 64.0 64.0 63.5
EBITDA margins 17.2 15.3 15.5 16.0
EBIT margins 13.3 11.9 12.8 13.5
Net profit margins 6.3 5.8 6.0 6.8

Growth ratios (%)
Year to March FY13 FY14 FY15E FY16E
Revenues 25.3 25.6 20.2 19.8
EBITDA 44.9 11.1 22.2 23.6
EBIT 43.2 12.4 29.5 26.0
PBT 48.0 10.3 29.0 34.9
Net profit 47.7 14.3 25.0 35.8
EPS 16.2 20.9 24.6 35.8

Key Assumptions
Year to March FY13 FY14 FY15E FY16E
Macro
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3
Inflation (Avg) 7.4 6.2 5.5 6.0
Repo rate (exit rate) 7.5 8.0 7.8 7.3
USD/INR (Avg) 54.4 60.5 58.0 56.0
Sector
Brent Crude (USD/bbl) 111.4 107.6 105.0 105.0
Company
Financial assumptions
Speciality chemicals revenue growth (%) 30.2 26.1 19.4 19.1
Pharma chemicals revenue growth (%) 13.5 33.3 30.0 30.0
Home and Personal care chemicals revenue (4.3) 10.0 10.0 10.0
Speciality chemicals EBIT margins (%) 16.1 18.1 15.0 15.6
Pharma chemicals EBIT margins (%) 2.5 5.1 11.9 15.0
Home and Personal care chemicals EBIT margins 3.1 3.3 2.5 5.0
Interest (% of Avg loans) 11.9 11.9 12.0 11.5
Tax rate (%) 28.8 26.2 28.5 28.0
Balance sheet assumptions
Capex (INR mn) 3,962 2,898 2,600 1,500
Trade payables as % of total costs (%) 17.7 21.9 19.0 19.0
Inventory as % of total costs (%) 36.0 36.0 35.0 35.0
Receivables as % of net revenues (%) 20.5 16.8 17.5 17.5
Aarti Industries
5 Edelweiss Securities Limited
Cash flow metrics
Year to March FY13 FY14 FY15E FY16E
Operating cash flow 2,298 3,256 2,011 3,014
Investing cash flow (2,294) (3,007) (1,816) (1,485)
Financing cash flow 9 (225) (288) (1,962)
Net cash flow 12 24 (93) (433)
Capex (2,348) (2,899) (2,600) (1,500)
Dividends paid (342) (466) (488) (585)

Profitability & efficiency ratios
Year to March FY13 FY14 FY15E FY16E
ROAE (%) 20.0 20.0 21.0 24.8
ROACE (%) 18.8 17.3 19.2 21.4
Inventory day 112 116 119 118
Debtors days 73 60 58 59
Payable days 58 65 68 64
Cash conversion cycle (days) 127 112 108 112
Current ratio 2.7 2.2 2.4 2.4

Operating ratios
Year to March FY13 FY14 FY15E FY16E
Total asset turnover 1.4 1.5 1.5 1.6
Fixed asset turnover 3.8 3.4 3.3 3.5
Equity turnover 3.1 3.2 3.5 3.6

Valuation parameters
Year to March FY13 FY14 FY15E FY16E
Diluted EPS (INR) 15.2 18.3 22.9 31.0
Y-o-Y growth (%) 16.2 20.9 24.6 35.8
CEPS (INR) 24.5 28.3 33.1 42.5
Diluted PE (x) 17.1 14.2 11.4 8.4
Price/BV (x) 3.0 2.6 2.3 1.9
EV/Sales (x) 1.1 0.9 0.8 0.7
EV/EBITDA (x) 8.7 8.2 6.9 5.7
EV/EBITDA (x)+1 yr forward 5.8 5.0 4.4 3.7
Dividend yield (%) 1.5 1.7 1.9 2.3
Balance sheet (INR mn)
As on 31st March FY13 FY14 FY15E FY16E
Equity capital 443 443 417 417
Reserves & surplus 7,120 8,265 9,002 11,004
Shareholders funds 7,563 8,708 9,419 11,421
Minority interest (BS) 43 43 48 54
Short term debt 7,303 7,343 9,275 9,932
Long term debt 1,173 2,553 3,000 2,500
Borrowings 8,476 9,896 12,275 12,432
Deferred tax liability 709 847 1,017 1,117
Sources of funds 16,790 19,493 22,758 25,023
Tangible assets 6,735 8,736 10,483 11,025
Intangible assets 1 1 1 1
CWIP (incl. intangible) 687 700 700 700
Non current investments 954 1,172 466 466
Cash and equivalents 124 149 55 (378)
Inventories 4,622 6,061 7,086 8,421
Sundry debtors 4,290 4,432 5,536 6,631
Loans and advances 4,092 5,155 6,168 7,388
Other current assets 254 296 380 455
Total current assets (ex cash) 13,258 15,944 19,169 22,894
Trade payable 2,271 3,690 3,846 4,571
Others current liabilities 2,699 3,519 4,270 5,115
Total current liabilities & 4,970 7,209 8,117 9,686
Net current assets (ex cash) 8,288 8,735 11,052 13,208
Uses of funds 16,790 19,493 22,758 25,023
Book value per share (INR) 85.4 98.3 113.0 137.0

Free cash flow (INR mn)
Year to March FY13 FY14 FY15E FY16E
Net profit 1,344 1,624 1,905 2,587
Depreciation 828 885 852 958
Others (612) 300 (3,064) (2,687)
Gross cash flow 1,561 2,810 (307) 858
Less: Changes in WC (737) (447) (2,317) (2,156)
Operating cash flow 2,298 3,256 2,011 3,014
Less: Capex 2,348 2,899 2,600 1,500
Free cash flow (50) 358 (589) 1,514

Chemical
6 Edelweiss Securities Limited
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
08 Jul 2014 Jaya Chandrakant Gogri Sell 500000.00
08 Jul 2014 Shantilal Tejshi Shah Sell 225543.00
09 May 2014 VALIANT ORGANICS PRIVATE LIMITED Sell 15000.00
13 Dec 2013 Anushakti Chemicals And Drugs Limited Buy 15000.00
*as per last available data
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price

No Data Available
*as per last available data
Holding # Top10
Perc. Holding Perc. Holding
Anushakti Holdings 7.927 Gala hetal Gogri 4.181
HDFC Asset management 7.048 Anushakti Chemicals & drugs 4.057
Gogri and sons 6.585 Gogri Rajendra Valla 3.102
Alchemie leasing finance 5.852 Shah Shantilal Tejs 2.830
Gogri Rashesh Chandr 4.475 Gogri Jaya Chandraka 2.818
*in last one year
Additional Data
Directors Data
Mr. Chandrakant Gogri Chairman Emeritus Renil R. Gogri Whole Time Director
Rajendra V.Gogri Chairman & Managing Director Kirit R. Mehta Whole Time Director
Rashesh C. Gogri Vice Chairman & Managing Director Ramdas M. Gandhi Independent Director
Shantilal T. Shah Vice chairman Laxmichand K. Jain Independent Director
Parimal H. Desai Whole Time Director Vijay H. Patil Independent Director
Manoj M. Chheda Whole Time Director K.V.S. Shyam Sunder Independent Director
Hetal Gogri Gala Whole Time Director P.A. Sethi Independent Director
Bhavesh R. Vora Independent Director



Auditors - Parikh Joshi & Kothare
*as per last annual rep