Ashika Research - Equities

Aarti Industries Ltd.

July 01, 2016
Company Overview
Recommendation Buy
Aarti Industries Ltd (AIL) is one of the largest producers of
Closing price Rs. 520
Benzene-based basic and intermediate chemicals in India and
Target price Rs. 620
manufactures 125 products with chemistry of benzene, aniline,
Potential upside 19%
sulphuric acid, toluene and methanol. AIL is one of the leading
global suppliers of dyes, pigments, agrochemicals, Company Information
pharmaceuticals and rubber chemicals. The company has three BSE Code 524208
reportable segments - Speciality Chemicals, Pharmaceuticals and NSE Code AARTIIND
Home & Personal Care Chemicals. Aarti has 16 manufacturing Bloomberg Code ARTO
units spread across Gujarat & Maharashtra and a strong Research
ISIN INE769A01020
& Development with sophisticated instruments & pool of
Market Cap (Rs. Cr) 4329
scientists. Aarti has customers spread across the globe in 60
Outstanding shares(Cr) 8.3
countries with major presence in USA, Europe, Japan & India.
52-wk Hi/Lo (Rs.) 587 / 315.2

Investment Rationale Avg. daily volume (1yr. on NSE) 60,625

Face Value(Rs.) 5
Capacity Expansion to boost growth Book Value 121.6
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Over the next three years Aarti is undertaking a capex of ~Rs 500
Relative performance chart (one year)
crore to expand capacities across benzene, toluene and ethylene,
190 AARTIIND vs. Nifty 900
and nitro toluene based value chains. Ongoing expansion
170 800
projects of the company that are likely to be commenced in FY17
700
are Calcium Chloride Unit at Jhagadia, Ethylation Facility at Dahej, 150
600
Nitration Unit at Jhagadia (NitroToulene & Downstreams) and
130 500
NCB Expansion at Vapi. These capacities are planned to capitalize
110 400
on opportunities emerging from growing enduser markets,
300
capacity shut downs in developed markets and reduced global 90
200
supplies from China and firm off-take commitments from global 70 100
agrochemical majors for exclusive supply. With the help of these
50 0
enhanced capacities and adding several value added products in
Nov-15

Mar-16
Jan-16
Feb-16

May-16
Jul-15

Oct-15
Sep-15
Jun-15

Apr-16
Dec-15
Aug-15

its portfolio, it is expected that in the coming years both topline

and bottomline of the company will improve. Apart from this,
Aarti is also in the process of setting up a multi purpose specialty Volume('000)RHS AARTIIND Nifty
chemicals complex at Jhagadia to manufacture a range of high
end polymers and engineering plastics that are used in the Share holding pattern as on Mar 2016 (%)
automobile industry. This project will add value growth from
FY18.

Particulars (in Rs Cr) FY15 FY16 FY17E FY18E Promoters

Net Sales 2908.0 2779.6 3305.0 3817.2 54.8

Growth (%) 10.5 (4.4) 18.9 15.5

EBITDA 465.7 572.3 687.4 790.2 Others
29.5
EBITDA Margin (%) 16.0 20.6 20.8 20.7
Net profit 203.2 256.9 317.3 374.1
Net Profit Margin (%) 7.0 9.2 9.6 9.8 DII FII
12.4 3.3
EPS (Rs) 23.2 30.8 38.1 44.9
Consensus Estimate: Bloomberg, Ashika Research

1008, Raheja Centre, 214, Nariman Point, Mumbai-400 021, Ph- 022 6611 1700, Extn. - 704 www.ashikagroup.com 1
 Ashika Research - Equities

Investment Rationale Cont

Demerger plan
Pharma and personal care ingredient manufacturing are non core to Aartis specialty
chemicals operation and are relatively low efficient/profitable operations. Hence, in
order to focus more on value added specialty chemicals, Aarti is likely to demerge
these businesses which will unlock value. Previously it was expected that the
demerger plan will be executed in FY17 but now demerger plan has been postponed
due to certain financial parameters. RoCE of Pharma and home and personal care
segment are still low and it will be difficult to sustain on standalone basis. It is
expected that the demerger will happen in one or two years time as the company
want to focus on its core business and when it will happen it will unlock value for its
shareholders and will be a long term trigger for the company.

Benefit from Chinese slowdown

Aarti has established itself as one of the lowest cost manufacturers of benzene
derivatives globally, which can be evidenced from the fact that 10% of its exports are
towards China which is the lowest cost base of the world. Aarti is well set to make the
most of the opportunity of a slowdown in Chinese exports which is led by plant shut
downs due to a stricter environment policy from 1st January 2015 and rising
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manufacturing cost led by enhanced compliance requirements leading to additional

investments into Effluent Treatment Plant (ETP). Additionally, its on going and timely
capacity expansion will help it to use the enhanced export opportunity.

Leading global player

Aarti is one of the largest producers of benzene derivatives in India as this is the
prime focused specialty chemicals segment of the company and overtime the
company ha s emerged a s one of the leading manufacturers globally. Its global market
share in this segment is 25-40% in various products. In speciality chemicals, Agro
chemicals leading target industry (30%) followed by polymers (27%), pigments
(19%), dyes (5%). Globally, Aarti has the 3rd largest capacity in chlorination, 2nd
largest in ammonolysis and hydrogenation, and 4th largest in nitration. Aartis
continued focus on process development, plant automation/upgradation, and quality
standards made it the lowest cost product of benzene derivatives in the world.
Additionally, AIL enjoys cost competitiveness through backward and forward
integration and commercial viability of byproducts. All these help the company to
maintain its global leadership position and also help in building/maintaining a strong
base of marquee clients across end user industries.

Focus on high margin products to drive value growth

AILs continuous focus is to move up the value chain for high margin products. For this
AIL is foraying in to toluene chemistry by exhibiting nitro toluene & derivatives and
Ethylation unit at Dahej SEZ. The proposed products are the high margin product
which will help AIL to improve its margin. Moreover with these proposed unit AIL will
manufacture more value added products which will place the company across the
value chain of the product under speciality chemical. Aartis margins could further
look up particularly due to supplies to its existing network of customers. With
increasing focus on downstream products, the revenue mix is likely to improve
towards more value added products that will lead to value growth for Aarti.

1008, Raheja Centre, 214, Nariman Point, Mumbai-400 021, Ph- 022 6611 1700, Extn. - 704 www.ashikagroup.com 2
 Ashika Research - Equities

Key Risks
AILs passes on the cost changes with one quarter lag to customers, any increase
in Benzene prices may lead to lower earnings temporarily.
Environment regulations in India are becoming stringent and there are risks of
further tightening of these laws.
High shale gas prices in US may imply long-term risks of reducing profits due to
higher production of ethylene-based products.

Valuation
Aarti Industries Ltd (AIL) is one of the largest producers of Benzene-based basic and
intermediate chemicals in India and global leader in various products. The ongoing
capacity expansion taken up by the company under different segment will help the
company to improve its product portfolio and will also help the company to foray into
high margin value added products. The management has reiterated its volume led
revenues CAGR guidance of 15%-20% over next 3-4 years while the PAT CAGR is
expected to be in the range of 20%-24% over the same period. The company has
guided for capex plans of Rs. 450-500cr in FY17E for capacity augmentation. The
demerger plan of Pharma and personal care division has been currently postponed but
as and when it will happen it will be a long term trigger for the company as the
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management of the company want to focus only on the core business. Chinese
slowdown in supply of speciality chemical is also positive for AIL as it has one of the
low cost production facility and is better placed to make the most of the opportunity.
Going ahead global leadership position, capacity expansion plan, going into high
margin segment and china slowdown will the major triggers for the company. Further
as and when the demerger plan will be executed, it will further rerate the company. At
current price, the stock is trading at P/E multiple of 11.58x of FY18E EPS. We advise
our investors to BUY the stock with target price of Rs. 620, valuing at P/E multiple of
13.8x FY18E EPS.

1008, Raheja Centre, 214, Nariman Point, Mumbai-400 021, Ph- 022 6611 1700, Extn. - 704 www.ashikagroup.com 3
 Ashika Research - Equities

Name Designation Email ID Contact No.

Paras Bothra VP Equity Research paras@ashikagroup.com +91 22 6611 1704
Krishna Kumar Agarwal Equity Research Analyst krishna.a@ashikagroup.com +91 33 4036 0646
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Partha Mazumder Equity Research Analyst partha.m@ashikagroup.com +91 33 4036 0647

Arijit Malakar Equity Research Analyst amalakar@ashikagroup.com +91 33 4036 0644
Chanchal Bachhawat Equity Research Analyst chanchal.bachhawat @ashikagroup.com +91 22 6611 1712

Tirthankar Das Technical & Derivative Analyst tirthankar.d@ashikagroup.com +91 33 4036 0645

SEBI Registration No. INH000000206

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their views about the subject issuer(s) or securities. Moreover, they also certify the followings:-
The Research Analyst or Ashika Stock Broking Limited or his/its Associates or his/its relative, has any financial interest in the subject company (ies)
covered in this report. Yes
The Research Analyst or Ashika Stock Broking Limited or his/its Associates or his/its relative, have actual/beneficial ownership of 1% or more in
the subject company, at the end of the month immediately preceding the date of the publication of the research report. No
The Research Analyst or Ashika Stock Broking Limited or his/its Associates or his/its relatives has any material conflict of interest at the time of
publication of the research report. No
The Research Analyst or Ashika Stock Broking Limited or his/its Associates have received any compensation or compensation for investment
banking or merchant banking or brokerage services or for product other than for investment banking or merchant banking or brokerage services
from the companies covered in this report in the past 12 months. No
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public offering of securities for the company (ies) covered in this report. No
The Research Analyst or Ashika Stock Broking Limited or his/its Associates have received any compensation or other benefits from the company
(ies) covered in this report or any third party in connection with the Research Report. No
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report. No

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