PL Stock Report: Aarti Industries (ARTO IN) - Q1FY24 Result Update - Headwinds persist, H2FY24 to see recovery - HOLD

Aarti Industries (ARTO IN) - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt Ltd

Rating: HOLD | CMP: Rs473 | TP: Rs495

Q1FY24 Result Update - Headwinds persist, H2FY24 to see recovery

Quick Pointers:

§ Subdued demand across user industries led to sluggish performance.

§ Exports impacted at larger extent, expect recovery only in H2FY24

We revise our FY24/FY25 EPS estimates downwards by 3%/7% on account of muted outlook due to subdued demand, lower capacity utilization across business segments and higher cost pressures. Stretched balance sheet leads to cautious view in short term. We believe recovery to be seen post H2FY24, with higher capacity utilization of its products, increasing contribution from LT- contracts and volume growth from newer projects. The stock currently trades at ~37x TTM P/E, we value the stock at 28x P/E on FY25E EPS of Rs 17.7 and arrive at TP of Rs 495. Maintain Hold.

§ Sluggish performance, led by challenges in key industries: Consolidated net revenue dropped 12%/14.6% YoY & QoQ to Rs 14.1 bn led by drop in realizations. QoQ basis, exports impacted significantly (realization driven) while domestic sales were flat. Gross margin stood at 39.7% down -300bps YoY/ -200bps QoQ due to lag in full pass through of higher costs. EBITDA declined -28% YoY/ -19.5% QoQ to Rs 2.0 bn; while margins stood at 14.3% vs 17.5% in Q1FY23 led by lower utilization of key products, demand weakness in key user industries etc.

§ Higher depreciation expenses dragged bottom-line: PAT dropped 48%/52% YoY & QoQ to Rs 0.7bn while margins stood at 5% vs +8% each in Q1 & Q4FY23. The drop in bottom-line was led by lower operating profit coupled with higher depreciation YoY & QoQ.

§ H2FY24 to see recovery: As per management, recovery is expected only in H2FY24, while industries such as dyes, pigments and textiles to post strong growth post FY24E.

§ Concall takeaways: (1) Production volumes of NCB stood at 17,293 MT in Q1FY24 (vs 20,515 YoY), hydrogenated products were 2868 TPM (3295 TPM YoY), Nitro toluene at 9327 MT (vs 5252MT YoY) while PDA volumes were at 135 TPM vs (375 TPM YoY) (2) Volumes to grow at ~10% in FY24E, lower due to exports being majorly hit (3) 1st long-term contract – a Diacamba intermediate impacted significantly while second long-term project to grow with absolute EBITDA growth. (4). For the quarter, Rs 26 bn capex was spent, while capex of Rs 25-30bn to be spent over FY24-25E (5). Pigments as a sector seems to have bottomed out post Q1FY24 (6) Exports share to overall topline stands at 70%, with deemed/indirect exports at 20%. (7) Gross debt at Rs 34bn, while Net debt at Rs 26.5bn in the quarter (8) Company completed expansion of NCB in the quarter (9) QoQ basis, topline dropped on account of subdued exports (27% drop QoQ) (10) RM price pass through with a lag of month in domestic business, while, for export, pass through done in a quarter (11) Chlorotoluene facility of 42,000 MTPA to be commercialized in FY25E, capex invested – Rs 15bn (12) Despite heavy capex, Net Debt/Equity to be maintained at 0.6-0.7x.

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