PL Stock Report: Aarti Industries (ARTO IN) - Q2FY24 Result Update – Sequential growth to continue - Upgrade to 'Accumulate'

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

Rating: ACCUMULATE | CMP: Rs510 | TP: Rs584

Q2FY24 Result Update – Sequential growth to continue

Quick Pointers:

♦ QoQ recovery seen due to growth in exports.

♦ CY25 to see volume bounce back across core segments.

We upward revise our FY24/FY25E EPS estimates by 2%/9%, post factoring in growth from discretionary segments. Aarti Industries (ARTO) consolidated net topline dropped 14% YoY to Rs 14.5 bn led by drop in realizations. Topline improved 3% QoQ driven by higher exports (27% YoY). Domestic sales impacted significantly (realization driven), while export revenues dropped 8% YoY in Q2FY24. Gross margin stood at 41.3% down ~100bps YoY due to lag in full pass through of higher costs, however sequentially improved by 250bps. For FY24E, management maintained muted outlook on account of subdued demand and lower capacity utilization across business segments.

We expect recovery to be seen post H2FY24 with 1) higher capacity utilization of its products, 2) increasing contribution from LT- contracts and 3) volume growth from newer projects. The stock currently trades at ~35x TTM P/E, we value the stock at 28x P/E on FY26E EPS of Rs 20.8 and arrive at TP of Rs 584 (earlier Rs 472). Upgrade to ‘ACCUMULATE’.

♦ Sluggish performance YoY: EBITDA dropped -12% YoY; however, was up 16% QoQ to Rs 2.3bn in Q2FY24. EBITDA margins stood at 16.1% vs 15.8% in Q2FY23 led by lower operating expenses.

♦ PAT dropped 26% YoY, but was up 30% QoQ to Rs 920mn in the quarter. QQ performance was on account of better operational performance, further aided by lower tax provisions and accrual of deferred tax assets. PAT margins stood at 6.3% vs 7.4%/5.0% in Q2FY23/Q1FY24. Drop in bottom-line YoY was led by higher depreciation costs & interest costs.

♦ Interest costs for Q2FY24 stood higher on account of revaluation loss of about Rs 120mn wrt upheld long term loans.

♦ For H1FY24, topline dropped 13% YoY to Rs 28.7 bn, while EBITDA dropped to Rs 4.36bn and EBITDA margins to 15.2%. PAT stood at Rs 1.63bn and margins were at 5.7% vs 7.9% in the same period.

♦ H2FY24 to see recovery: As per management, recovery is expected only in H2FY24 with industries such as dyes, pigments and textiles recovering sequentially.

♦ Concall takeaways: (1) Production volumes of NCB stood at 19,014 MT vs 17,293 MT in Q1FY24 (vs 20,276 YoY), hydrogenated products were 1036/2868 TPM in Q2FY24/Q1FY24 vs (2558 TPM YoY), Nitro toluene at 7560/9320 MT in Q2/Q1FY24 (vs 4954 MT YoY) while PDA volumes were at 316 TPM vs (375 TPM YoY) (2) Exports witnessed recovery, management expects growth to be sustained going ahead (3) Other expenses higher YoY led by power & freight costs in the quarter. (4). For H1FY24, Rs 5.8 bn capex was spent, while capex of Rs 12-13bn to be spent in FY24E (5). Dyes, pigments, polymers saw sequential recovery in Q2FY24, agrochemicals to witness slow recovery (6) Management is confident of achieving volume growth in CY25 led by inventory correction (7) Net debt to stand at Rs 27bn, while cash and equivalents stood at Rs 4 bn in the quarter (8) (9) QoQ basis, topline improved primarily on account of higher exports (up 27% QoQ) (10) Despite heavy capex, Net Debt/Equity to be maintained at 0.6-0.7x. (11) Ethylation & Nitrotoluene facility to be commissioned in Q1FY25. (12) Company commissioned phase-1 of scale-up of acid unit revamp. (13) company’s 25-35% of product portfolio is impacted by Chinese competition in Q2FY24 (14) export share to topline to be 40-50% going ahead (15) Management expects Rs 14-16 bn EBITDA for FY25E (Click on the Link for Detailed Report)