Aarti Industries Ltd. - Moneycontrol

Aarti Industries Ltd.

RESULT UPDATE

17th May, 2018

India Equity Institutional Research II

II 17th May, 2018

Result Update – Q4FY18

Page 2

Aarti Industries Ltd.

Growth pace to continue !

CMP

Target

Potential Upside

Market Cap (INR mn)

Recommendation

Sector

INR 1300

INR 1429

10 %

105,698

Accumulate

Specialty Chemicals

Result highlights

• The revenue of the company grew by 23% y-o-y to INR 10.29 bn almost in line with our estimates of INR 10.89 bn. The revenue growth was led by pharmaceutical segment (+46% y-o-y). • On the raw material front, OPM fell by 78 bps y-o-y to 17.5% primarily on account of higher RMAT cost, however lower other cost restricted further stress on the operational performance. EBITDA grew by 18% y-o-y to INR 1.80 bn. • The bottom-line increased by 14% y-o-y to INR 847 mn, impacted by higher tax outgo (22% v/s 19% in Q4FY17). NPM stood at 8.2% (-68 bps y-o-y). Exhibit 1: Key Financials

MARKET DATA Shares outs (mn)

Particulars (INR Mn) Revenue EBITDA PAT EBITDA Margin PAT Margin EPS P/E

81

Equity Cap (INR mn)

407

Mkt Cap (INR mn)

105698

52 Wk H/L (INR)

1359/810

Volume Avg (3m K)

101

Face Value (INR)

5

Bloomberg Code

ARTO IN

FY15 29,080 4,657 2059 16.0% 7.1% 23.2 15.1

FY16 30,066 5,723 2569 19.0% 8.5% 30.8 16.7

FY17 31,635 6,535 3158 20.7% 10.0% 38.5 19.9

FY18 38061 6991 3330 18.4% 8.7% 41.0 31.7

FY19E 47604 10254 4414 18.3% 9.3% 54.3 23.9

FY20E 52369 11114 4648 18.0% 8.9% 57.2 22.7

Source: Company, KRChoksey Research

Potent growth on the back of capex plans: During Q4FY18 and FY18, Aarti Industries Limited (AIL) reported net sales of INR 10,294 mn (up 23% y-o-y; 4% q-o-q) and INR 38,061 mn (up 20%) respectively. The higher revenue contribution was attributed from the direct linkage and pass through model of AIL owing to increase in raw material prices. In terms of segmental performance, Speciality segment grew by 19% y-o-y during the quarter contributing by 76% of the overall revenue supported by higher utilizations. Pharmaceutical segment registered remarkable 46% growth y-o-y to INR 1,743 mn on account of higher volumes coupled with improved business across markets for various value added products.

SHARE PRICE PERFORMANCE 425

300

175

Aarti Industries Ltd

May-18

Nov-17

May-17

Nov-16

May-16

Nov-15

May-15

50

Sensex

MARKET INFO SENSEX

35388

NIFTY

Going forward, with promising outlook in speciality chemicals industry, continued stellar performance in the pharmaceutical segment coupled with on going capex plans and commencement of multi year contracts, we believe AIL to be one of the key beneficiaries in favorable market scenario. Likewise, we expect the top line to increase to INR 52,369 mn by FY20E from INR 38,061 mn in FY18 translating into a CAGR of 17.3%. Margins to remain range bound: EBITDA for Q4FY18 and FY18 stood at INR 1803 mn (up 18.1% y-o-y; 1.4% q-o-q) and INR 6991 mn (up 7%) respectively. Increase in benzene prices resulted in lower OPM for the Company (17.5% for Q4FY18 vis-à-vis 18.2% in Q4FY17). However the impact was limited due to sustained other expenses (-70 bps y-o-y). Further, during the quarter, the company witnessed a increase of 5% y-o-y while observing a drop of 19% q-o-q in its bottom line with NPM at 8.23% on account of higher taxes. Going forward, we believe surge in crude prices will continue to impact GPM and OPM for the company. However, increase in volumes on the back of commissioning of plants should provide AIL with operating efficiencies as well as operating leverage. Likewise, we expect EBITDA/PAT to grow at 16.2%/18.3% CAGR over FY18-FY20E with OPM to remain range bound at 18.02% by FY20E.

10741

SHARE HOLDING PATTERN (%) Particulars

Mar 18

Dec 17

Sep 17

Promoters

51.08

53.63

53.7

FIIs

3.64

3.88

3.97

DIIs

14.17

13.22

12.65

Others

31.12

29.27

29.7

100

100

100

Total

ANALYST Dhavan Shah, [email protected], +91-22-6696 5568 Neha Mehta, [email protected], +91-22-6696 5568

17.3%

18.2%

Revenue CAGR between FY17 and FY20E

PAT CAGR between FY17 and FY20E

KRChoksey Research is also available on Bloomberg KRCS Thomson Reuters, Factset and Capital IQ

+91-22-6696 5555 / +91-22-6691 9576 www.krchoksey.com

India Equity Institutional Research II

Result Update – Q4FY18

II 17th May, 2018

Page 3

Aarti Industries Ltd. Valuation & Outlook: On the back of commissioning of various projects including specialty complex, acid reconcentration, API and pharma intermediates, pickup in nitro toluene, new R&D facility and various other debottlenecking exercises coupled with multiyear contracts, we believe the growth pace for AIL will continue. Consequently, we factor in a total capex to the tune of INR 13,000 mn and total FCF generation of INR 277 mn over FY18-FY20E with debt/equity ratio to improve to 0.8x by FY20E. Likewise, we estimate ROCE/ROE to remain stable and reach 17%/19% by FY20E from 16%/21% in FY18. Further, we expect revenue/EBITDA/PAT to grow at 17.3%/ 16.2%/18.2% CAGR over FY18-FY20E on account of 1) higher volumes supported by capacity addition plans; 2) rising demand from end user segments like agrochemicals, specialty chemicals, pharmaceuticals engineering polymers and so on; and 3) steady balance sheet despite higher capital requirements. On valuation front, at the CMP of INR 1300/share the company trades P/E of 23.9x FY19E and 22.7x FY20E. We value the company at two year forward P/E of 25x and arrive at a target price of INR 1429/share resulting into an upside of 10%. We assign an “ACCUMULATE” rating on the stock. Exhibit 1: Revenue Split by Segment Segmental Revenue a) Specialty Chemicals q-o-q / y-o-y

Q4FY18

Q3FY18

Q4FY17

FY17

FY18

7,874

7,742

6,636

25,693

29855

2%

12%

5%

6%

16%

% of revenue

76%

78%

80%

81%

78%

b) Pharmaceuticals

1,743

1,390

1,197

4,261

5562

q-o-q / y-o-y

25%

2%

16%

0%

31%

% of revenue

17%

14%

14%

13%

15%

c) Home & Personal Care

677

770

511

1,681

2,644

q-o-q / y-o-y

-12%

28%

34%

12%

57%

% of revenue

7%

8%

6%

5%

7%

Source: Company, KRChoksey Research

ANALYST Dhavan Shah, [email protected], +91-22-6696 5568 Neha Mehta, [email protected], +91-22-6696 5568

KRChoksey Research is also available on Bloomberg KRCS Thomson Reuters, Factset and Capital IQ

+91-22-6696 5555 / +91-22-6691 9576 www.krchoksey.com

India Equity Institutional Research II

Result Update – Q4FY18

II 17th May, 2018

Page 4

Aarti Industries Ltd. Exhibit 2: Result Snapshot Particulars (INR Mn) Total Sales Total Expenditure Cost of Raw Materials Purchase of Stock in trade Changes in inventory, FGs, WIPs Employee Benefit Expenses Other expenses PBIDT (Excl OI) EBITDA Margins (%) Depreciation Other Income EBIT before Exceptional Item Exceptional Items EBIT after Exceptional Item Interest EBT Tax PAT PAT Margin (%) EPS

Q4 FY18 10,294 8,491 6,217 256 (401) 509 1,910 1,803 17.5% 369 12 1,445 1,445 364 1,081 234 847 8.2% 10.4

Q3FY18 9,902 8,124 5,702 246 (174) 457 1,893 1,778 18.0% 342 8 1,444 1,444 337 1,107 205 902 9.1% 11.0

Q4FY17 8,344 6,818 4,443 243 152 371 1,609 1,526 18.3% 309 10 1,227 1,227 305 922 179 743 8.9% 9.1

Q-o-Q 3.96% 4.52% 9.04% 3.86% 130.82% 11.37% 0.93% 1.37% -45 bps 7.84% 48.72% 0.10%

Y-o-Y 23.38% 24.55% 39.92% 5.40% -363.10% 37.32% 18.76% 18.12% -78 bps 19.43% 20.83% 17.81%

0.10% 8.07% -2.33% 14.20% -6.09% -88 bps -5.14%

17.81% 19.41% 17.28% 31.15% 13.95% -68 bps 15.10%

Source: Company, KRChoksey Research

Key Con-call Highlights: • The company achieved volume growth of 9% q-o-q and 7% y-o-y for the quarter ended March 31, 2018 and financial year ended March 31, 2018 respectively. NCBs segments reached a utilization level of ~92% for FY18 and nitro toluene plant that commenced production in H2FY18 has reached utilization of 40% during the quarter. Going ahead, management sees the same to reach 80% utilization by FY20E. • In terms of top line, during the quarter, the growth was mainly driven by contribution from pharmaceutical segment (up 46% y-o-y ) on the back of higher volumes (especially from caffeine plant) and improved market prospects. Whereas, Speciality segment grew by 19% y-o-y and Home & Personnel Care (HPC) segment grew by 33%. However, on EBIT level, pharmaceutical segments reported a 100% growth y-o-y with larger contribution from high end value added products. HPC segmental EBIT was adversely impacted due to hurricane in the US. • Going ahead, the management has guided 12-15% volume growth for FY19E and FY20E with bottom line growth of 18-20% over the same period. • The company envisions capital outlay in the range of INR 6,000 mn–7,000 mn in FY19E and FY20E towards investment of the following: – new R&D facility at New Bombay which is expected to commercialize by end of FY19E (speciality chemicals segment) – INR 40,000 mn multi year contract – Debottlenecking of various capacities in their core business. This includes organic capex in the range of INR 2000-2500 mn. • The management also highlighted that the debt/equity ratio was higher (1.2x) on account of delay in the refund for exports (impact of ~INR 700 mn). However, going forward, the same is expected to be in the range of 0.8x-1.2x. • The management has proposed to demerge its HPC business and merger of Nascent Chemicals Industries Limited. Nascent Chemicals is engaged into manufacturing and trading of various specialty chemicals. AIL already holds 50.49% stake in the said company through one of its wholly owned subsidiary (WOS).

ANALYST Dhavan Shah, [email protected], +91-22-6696 5568 Neha Mehta, [email protected], +91-22-6696 5568

KRChoksey Research is also available on Bloomberg KRCS Thomson Reuters, Factset and Capital IQ

+91-22-6696 5555 / +91-22-6691 9576 www.krchoksey.com

India Equity Institutional Research II

Result Update – Q4FY18

II 17th May, 2018

Page 5

Aarti Industries Ltd. Exhibit 3: Financials Income Statement (INR mn)

FY15

FY16

FY17

FY18

FY19E

FY20E

Net Revenues

29,080

30,066

31,635

38061

47604

52369

Cost Of Revenues (incl Stock Adj)

18,321

17,678

17,433

21815

27571

30645

Gross Profit

10,758

12,388

14,202

16245

20033

21724

Employee Cost

937

1,207

1,523

1901

2282

2624

Other Operating Expenses

5,165

5,458

6,144

7353

7498

7986

EBITDA

4,657

5,723

6,535

6991

10254

11114

Other Income

55

59

20

78

97

107

Depreciation

820

985

1,225

1462

1691

1958

EBIT

3,892

4,797

5,329

5,607

7,136

7,587

Net Interest Exp.

1380

1170

1173

1317

1665

1826

EBT

2548

3627

4156

4290

5471

5761

Taxes

610

946

881

829

1057

1113

Net Income

2059

2569

3158

3330

4414

4648

Basic & Diluted EPS (INR)

23.2

30.8

38.5

41.0

54.3

57.2

FY15

FY16

FY17

FY18

FY19E

FY20E

443 9721 10164 4191 1027 2 3059

417 10956 11373 5268 1271 2 0

411 13214 13625 5964 1554 5 0

407 15378 15784 9083 1774 0 0

407 19620 20027 10265 1774 1350 0

407 24088 24494 10028 1774 2700 0

6483 2488 1566 341 10878 29378

7064 3052 910 205 11231 29665

8393 2997 1536 278 13204 34990

10125 3575 1853 310 15863 43275

11443 4532 2318 388 18681 52867

11179 5121 2550 427 19277 59044

9669 1930 0 1392 0

12455 3130 4 413 1323

16966 2695 4 470 1684

19975 4362 4 472 2252

25283 4362 4 472 2252

29325 4362 4 472 2252

5517 4390 337 1409 323 11977 29378

4952 5234 290 1679 185 12340 29665

5714 5247 285 1687 239 13172 34990

7473 5908 321 2248 260 16209 43275

9291 7434 834 2608 325 20493 52867

10159 8178 777 3156 358 22629 59044

Source: Company, KRChoksey Research

Balance Sheet (INR mn) SOURCES OF FUNDS Share Capital Reserves Total Shareholders Funds Long Term Borrowings Net Deferred Tax liability Other long term liabilities Long term provisions Current Liabilities and Provisions Short term borrowings Trade Payables Other Current Liabilities Short Term Provisions Total Current Liabilities Total Liabilities APPLICATION OF FUNDS : Net Block Capital Work in Progress Goodwill Non-current investments Other Non-Current Assets Current Assets, Loans & Advances Inventories Sundry Debtors Cash and Bank Loans and Advances Other Current assets Total Current Assets Total Assets Source: Company, KRChoksey Research

ANALYST Dhavan Shah, [email protected], +91-22-6696 5568 Neha Mehta, [email protected], +91-22-6696 5568

KRChoksey Research is also available on Bloomberg KRCS Thomson Reuters, Factset and Capital IQ

+91-22-6696 5555 / +91-22-6691 9576 www.krchoksey.com

India Equity Institutional Research II

Result Update – Q4FY18

II 17th May, 2018

Page 6

Aarti Industries Ltd. Cash Flow Statement (INR mn)

FY15

FY16

FY17

FY18

FY19E

FY20E

PBT & Extraordinary

2513

3627

4156

4290

5471

5761

Depreciation

820

985

1225

1462

1691

1958

(Inc) / Dec in Working Capital

(688)

964

(869)

(2427)

(920)

18

Taxes

(583)

(978)

(975)

(658)

(1057)

(1113)

Others

(36)

(6)

(8)

1317

1665

1826

Cash from Operations

3395

5736

4701

4115

6850

8450

(3031)

(4665)

(5302)

(4471)

(7000)

(6000)

41

126

11

(1667)

0

0

(2977)

(4520)

(5289)

(6141)

(7000)

(6000)

Purchase of Fixed Assets Others Cash from Investing Proceeds from issue of shares

0

0

2000

132

0

0

1633

837

2722

4850

2500

(500)

Others

(1863)

(2121)

(1179)

(1940)

(1837)

(2007)

Cash from Financing

(230)

(1284)

583

2062

663

(2507)

Net Change in Cash

189

(68)

(5)

36

513

(57)

BF cash

149

337

290

285

321

834

END Cash

337

290

285

321

834

777

FY15

FY16

FY17

FY18

FY19E

FY20E

Total Sales

10.5%

3.4%

5.2%

20.3%

25.1%

10.0%

EBITDA

16.0%

22.9%

14.2%

7.0%

24.9%

8.1%

APAT

26.7%

24.8%

22.9%

5.4%

32.6%

5.3%

16.0%

19.0%

20.7%

18.4%

18.3%

18.0%

Adj. Net Profit Margin

7.1%

8.5%

10.0%

8.7%

9.3%

8.9%

ROCE

19%

20%

19%

16%

17%

17%

ROE

20%

23%

23%

21%

22%

19%

AEPS

23.2

30.8

38.5

41.0

54.3

57.2

BVPS

115

136

166

194

246

301

PE(x)

15.1

16.7

19.9

31.7

23.9

22.7

P/BV (x)

3.1

3.8

4.6

6.7

5.3

4.3

Debtor Days

55

64

61

57

57

57

Inventory Days

110

102

120

125

123

121

Payable Days

50

63

63

60

60

61

1.05

1.08

1.05

1.22

1.08

0.87

Borrowings (Net)

Source: Company, KRChoksey Research

Ratio Analysis Growth (%)

Profitability (%) EBITDA Margin

Per Share Data (Rs.)

Valuations (x)

Turnover days

Gearing Ratio D/E Source: Company, KRChoksey Research

ANALYST Dhavan Shah, [email protected], +91-22-6696 5568 Neha Mehta, [email protected], +91-22-6696 5568

KRChoksey Research is also available on Bloomberg KRCS Thomson Reuters, Factset and Capital IQ

+91-22-6696 5555 / +91-22-6691 9576 www.krchoksey.com

India Equity Institutional Research II

Result Update – Q4FY18

II 17th May, 2018

Page 7

Aarti Industries Ltd. Aarti Industries Ltd.

Rating Legend

Date

CMP (INR)

TP (INR)

Recommendation

17-May-18

1300

1429

ACCUMULATE

19-Mar-18

1140

1455

BUY

Our Rating

Upside

Buy

More than 15%

Accumulate

5% – 15%

Hold

0 – 5%

Reduce

-5% – 0

Sell

Less than – 5%

ANALYST CERTIFICATION: We, Dhavan Shah [B.Com, MS(Finance)], research analyst and Neha Mehta (B.Com – Financial Markets, CS), research associate, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & Conditions and other disclosures: KRChoksey Shares and Securities Pvt. Ltd (hereinafter referred to as KRCSSPL) is a registered member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX Stock Exchange Limited. KRCSSPL is a registered Research Entity vides SEBI Registration No. INH000001295 under SEBI (Research Analyst) Regulations, 2014. We submit that no material disciplinary action has been taken on KRCSSPL and its associates (Group Companies) by any Regulatory Authority impacting Equity Research Analysis activities. KRCSSPL prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analyst covers. The information and opinions in this report have been prepared by KRCSSPL and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of KRCSSPL. While we would endeavor to update the information herein on a reasonable basis, KRCSSPL is not under any obligation to update the information. Also, there may be regulatory, compliance or other reasons that may prevent KRCSSPL from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or KRCSSPL policies, in circumstances where KRCSSPL might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. 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Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. Our employees in sales and marketing team, dealers and other professionals may provide oral or written market commentary or trading strategies that reflect opinions that are contrary to the opinions expressed herein, .In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Associates (Group Companies) of KRCSSPL might have received any commission/compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of brokerage services or specific transaction or for products and services other than brokerage services. KRCSSPL or its Associates (Group Companies) have not managed or co-managed public offering of securities for the subject company in the past twelve months KRCSSPL encourages the practice of giving independent opinion in research report preparation by the analyst and thus strives to minimize the conflict in preparation of research report. KRCSSPL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither KRCSSPL nor Research Analysts have any material conflict of interest at the time of publication of this report. It is confirmed that Dhavan Shah [B.Com, MS(Finance)], research analyst and Neha Mehta (B.Com – Financial Markets, CS), research associate, of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Compensation of our Research Analysts is not based on any specific brokerage service transactions. KRCSSPL or its associates (Group Companies) collectively or its research analyst do not hold any financial interest/beneficial ownership of more than 1% (at the end of the month immediately preceding the date of publication of the research report) in the company covered by Analyst, and has not been engaged in market making activity of the company covered by research analyst. It is confirmed that, Dhavan Shah [B.Com, MS(Finance)], research analyst and Neha Mehta (B.Com – Financial Markets, CS), research associate, do not serve as an officer, director or employee of the companies mentioned in the report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other Jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject KRCSSPL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform them of and to observe such restriction.

Please send your feedback to [email protected] Visit us at www.krchoksey.com Kisan Ratilal Choksey Shares and Securities Pvt. Ltd Registered Office: 1102, Stock Exchange Tower, Dalal Street, Fort, Mumbai – 400 001. Phone: +91-22-6633 5000; Fax: +91-22-6633 8060. Corporate Office: ABHISHEK, 5th Floor, Link Road, Andheri (W), Mumbai – 400 053. Phone: +91-22-6696 5555; Fax: +91-22-6691 9576.

ANALYST Dhavan Shah, [email protected], +91-22-6696 5568 Neha Mehta, [email protected], +91-22-6696 5568

KRChoksey Research is also available on Bloomberg KRCS Thomson Reuters, Factset and Capital IQ

+91-22-6696 5555 / +91-22-6691 9576 www.krchoksey.com