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aarti indTRANSCRIPT
CD Equisearch Pvt Ltd June 9,2015
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
Aarti Industries Ltd (AIL)
No. of shares (crore) 8.9
Mkt cap (Rs crs) 2814
Current price (09/06/2015) 318
Price target (Rs)
396
52 week H/L (Rs.) 381/172
Book Value (Rs.) (fv:5) 115
P/BV (16e/17e)
2.4/2.0
P/E (16e/17e) 12.6/9.6
EPS growth (FY15/16e/17e) 30.2/10.5/30.8
ROE (FY15/FY16e/FY17e) 21.5/20.4/22.6
Beta 1.1
Daily volume (avg. monthly) 76396
BSE Code 524208
NSE Code AARTIIND
Bloomberg ARTO IN
Reuters ARTI.BO
Shareholding pattern % Promoters 59.2
MFs / Banks / FIs 12.3
Foreign 1.1
Non-Promoter Corp. 1.4
Public & others 25.9
Total 100.0
As on Mar 31, 2015
Recommendation
BUY
Analyst
KISHAN GUPTA, CFA, FRM
Phone: + 91 (33) 4488 0043
E- mail: [email protected]
Consolidated figures (Rs crs)
FY13 FY14 FY15 FY16e FY17e
Income from operations 2096.25 2632.49 2907.96 2916.22 3602.48
Other Income 3.76 10.97 9.01 5.44 5.84
EBITDA (other income included) 364.96 412.45 474.70 507.23 610.01
Net Profit after MI & EO item 134.05 155.51 202.40 223.68 292.60
EPS (Rs) 16.94 17.55 22.84 25.25 33.02
EPS growth (%) 32.1 3.6 30.2 10.5 30.8
Company Brief AIL is one of India's leading manufacturers of chemicals and
pharmaceutical intermediates: dyestuff; pigment; agro chemicals; speciality
chemicals; active pharmaceutical ingredient (API); intermediates of API.
Quarterly Highlights
� Thanks to relentless decline in crude oil prices, Aarti’s standalone sales
tumbled 9% last quarter, the first downtick in at least eight quarters.
Sale of speciality chemicals slid 12% to Rs 554 crs, while that of
pharmaceuticals’ advanced by 26.8% to Rs 82 crs; hpc’s also fell by
16.2%. EBIT margins of speciality chemicals though rose to 19% ( up
420 bps), the best quarterly showing in at least three years, helped by
its business model of pricing contracts on absolute EBITDA; margins
got a bump up as prices of finished products declined. Other
businesses showed much less gyration in margins - pharmaceutical’s at
10.2% (+10bps); that of home & personal care chemicals(hpc) at 2.1% (-
90 bps).
� Windfall gains in margins buoyed operating profit by 12.3% and post
tax profit by 5.2% last quarter. For the full year, standalone sales
jumped 9% precipitated by solid growth in both pharmaceuticals
(+21.8%) and hpc (+24%), whereas the speciality chemicals reported a
mere 6.5% growth. Higher EBIT margins in speciality chemicals (16.7%
vs 15%) - the flagship business - helped save the blushes for it still
accounts for over 90% of total allocable EBIT. EBIT margins in
pharmaceuticals have started to stabilize at 12%, thus providing
stability to earnings. Net profit grew by eye-popping 29.8% not least
due to combined effect of higher operating margins and lower
depreciation and taxes.
� Despite meltdown in crude oil prices, Aarti is going full hog to
commence new projects. For instance, the second phase of nitro chloro
benzne (ncb) expansion at Vapi (from 66000 tpa to 75000 tpa) would
get over by Q3FY16, while the second phase of phenylene di amine
(pda) would finish by H2FY16.
� The stock currently trades at 12.6x FY16e EPS of Rs 25.25 and FY17e
EPS of Rs 33.02. We reiterate our buy rating on the stock with revised
target of Rs 396 (previous target of Rs 355) based on 12x FY17e
earnings over a period of 9-12 months.
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Outlook & Recommendation
Speciality chemicals outlook
If the forecast of The American Chemistry Council is anything to go by, then the speciality chemicals market appears to be one
of the most promising globally. It predicts this market to grow by 3.6% annually over the next five years (see chart). In fact, the
growth would peak to as high as 4.4% in 2016 before settling at 2.6% in year 2019. It reckons that the production of speciality
chemicals, particularly in US, will be driven by strong demand from end-use markets, most notably light vehicles and housing.
According to FICCI, the Indian speciality chemical industry is expected to reach $42 bn by 2018 from $23 bn in 2013 (average
growth of 13%), driven by fast growth in end-user industries such as paints & coatings, speciality polymers and home care
surfactants. Export opportunities abound not least because of Indian chemical industry's global regulation compliance and
manufacturing competitiveness - global chemical majors' strategy to reduce dependence on China has also helped. Emergence
of new technologies in electronics, food, textiles and tools has the potential to boost demand for speciality chemicals. Further,
the Indian industry would get fillip from a host of government induced initiatives: port based chemical parks in SEZ; duty
structure rationalization; relaxation in FDI.
Speciality chemicals sales shriveled
For Aarti, the decline in crude oil prices has played havoc as it has trimmed realizations for its benzene based finished
products - benzene prices for instance has tumbled from Rs 85/kg in Q2FY15 to Rs 50/kg in the fourth quarter. Volumes also
took a knock - just 5-7% growth in Q3FY15- as its customers cut down on their inventories, fearing losses. Revenues as a result
slid 5.5% in the second half of last fiscal.
Although crude oil prices appear to have scraped the bottom, high base of last year - particularly of the first half - would keep
Aarti's speciality chemicals sales in check; benzene prices are still down more than 35% (y-o-y). Yet strong export demand
especially in end user industries such as engineering polymers and agrochemicals would keep producers of speciality
chemicals busy; Aarti's FY15 exports bettered domestic market growth (10.9% vs 5.3%).
For all its plans to add new products - hydrogenated products; toulene derivatives; ethylene compounds - and boost capacities
of nitro chloro benzene (ncb), nitro toulene and others, sales growth seems elusive at least for next one year. We estimate the
base effect to start kicking in by the fourth quarter of current fiscal which together with volume growth of 12-13% would
propel revenue growth to 26% in FY17. Margins expansion though would somewhat soothe nerves - EBIT margin estimated to
jump 100 bps in FY16.
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Pharma business – racing ahead
Backwardly integrated facilities for most APIs and developed markets'
regulatory approvals for steroids and anti-cancer products (sort of
narrow economic moat) manifest themselves in its Aarti's double digit
revenue growth in pharmaceuticals business. Volumes have zoomed
not least due to debottlenecking and expansion at its existing plants.
Growth over the next two years would be led by exports, which grew
by a third last fiscal. It is working on developing a dozen new APIs
and exploring API intermediates opportunities with innovators to
boost exports.
Capex
Despite meltdown in crude oil prices, Aarti is going full hog to
commence new projects. For instance, the second phase of ncb
expansion at Vapi (from 66000 tpa to 75000 tpa) would get over by
Q3FY16, while the second phase of phenylene di amine (pda) would
finish by H2FY16. The current fisacl could also see commencement of
nitration unit (nitro toulene & downstreams) and calcium chloride
granulation at Jhagadia. It also commissioned a new unit for caffeine
dedicated to meet the demand for cola / energy drinks manufacturers
last fiscal.
Restructuring proposed
To simplify the promoters' shareholding structure, Aarti proposes to merge four companies - two associates (Anushakti
Holdings Ltd and Anushakti Chemical And Drugs Ltd) and two promoter companies (Gorgi & Sons Investments Pvt. Ltd
and Alchemie Leasing And Financing Pvt. Ltd ) with itself; the merger scheme has been cleared by stock exchanges, RBI
and CCI and is now awaiting High Court approval. Upon the scheme becoming effective, Aarti Industries paid up capital
would reduce by 5.95% resulting in 83.32 m fully paid shares; we have not yet considered the merger effect in our
financials.
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Cross Sectional Analysis
Company Equity* CMP Mcap* Sales* Profit* OPM NPM
Int.
coverage ROE
Mcap
/ sales P/BV P/E
Aarti Industries 44 318 2814 2908 202 16.0 7.0 2.8 21.5 1.0 2.8 13.9
Atul Ltd 30 1149 3408 2656 226 15.1 8.5 13.7 24.1 1.3 3.3 15.1
BASF India 43 1079 4673 4706 -96 2.8 -2.0 0.3 - 1.0 4.0 -
Sudarshan Chem 14 90 624 1218 54 10.6 4.5 2.9 20.4 0.5 2.4 11.5
TTM P/E; * Figures in Rs crs;
Companies in the exhibit not exactly comparable as their product portfolios are dissimilar.
Financials & valuation
Despite all odds - related to lower sales realization and inventory mark downs- the company would still manage earnings
growth of 10.5% in the current year. Sparked by combined effect of base effect and double digit volume growth (though in low
teens), earning is estimated to climb by 31%in FY17. Both working capital and asset turnover ratios would improve with
commissioning of ncb, pda, nitration and chlorination units. Yet intense volatility in crude oil markets pose colossal risks for
Aati's speciality chemical business still accounts for over eight -tenths of revenues and nine -tenths to allocable EBIT.
But the current valuation of 12.6x FY16earnings and 9.6xFY17e EPS of Rs 33.02 deserves attention. Factoring in less brutal fall
in sales of speciality chemicals, we have upped our current year earning estimates by 6.6%. Notwithstanding high
susceptibility of earnings to external factors - crude oil prices; regulatory approvals for pharmaceuticals; emerging benefits
from geographical diversification cannot be by any means gainsaid. We, therefore, retain our buy rating on the stock with
target of Rs 396 (implying peg ratio of 0.6 on average earnings growth of 21%; previous target: Rs 355) based on 12xFY17e
earnings over a period of 9-12 months. (For more info, refer to our dated Jan 22, 2015)
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Financials
Standalone Quarterly Results Figures in Rs crs
Q4FY15 Q4FY14 % chg. FY15 FY14 % chg.
Income from operations 677.48 744.14 -9.0 2870.65 2632.78 9.0
Other Income 3.83 4.36 -12.2 5.45 10.42 -47.7
Total Income 681.31 748.50 -9.0 2876.10 2643.20 8.8
Total Expenditure 558.94 638.57 -12.5 2414.17 2237.29 7.9
PBIDT (other income included) 122.37 109.93 11.3 461.93 405.91 13.8
Interest 32.00 31.65 1.1 137.48 117.53 17.0
Depreciation 20.86 23.19 -10.0 78.65 87.44 -10.1
PBT 69.51 55.09 26.2 245.80 200.94 22.3
Tax 16.75 8.25 103.0 58.00 52.25 11.0
PAT 52.76 46.84 12.6 187.80 148.69 26.3
Extraordinary Item 3.48 0.00 - 3.48 6.65 -47.7
Adjusted Net Profit 49.28 46.84 5.2 184.32 142.04 29.8 EPS (F.V. 5) 5.56 5.29 5.2 20.80 16.03 29.8
Segment Results Figures in Rs crs
Q4FY15 Q4FY14 % chg. FY15 FY14 % chg.
Segment Revenue
Speciality Chemicals 553.85 629.70 -12.0 2360.65 2216.96 6.5
Pharmaceuticals 81.75 64.48 26.8 303.20 248.98 21.8
Home & Personal Care Chemicals 41.88 49.96 -16.2 206.80 166.83 24.0
Total 677.48 744.14 -9.0 2870.65 2632.77 9.0
Segment EBIT
Speciality Chemicals 105.14 93.04 13.0 395.16 332.62 18.8
Pharmaceuticals 8.30 6.50 27.7 35.81 29.75 20.4
Home & Personal Care Chemicals 0.89 1.52 -41.4 3.27 4.11 -20.4
Total 114.33 101.06 13.1 434.24 366.48 18.5
Interest 32.00 31.65 1.1 137.48 117.53 17.0
Other Unallocable Exp. (net of income) 12.82 14.32 -10.5 50.96 48.01 6.1
PBT 69.51 55.09 26.2 245.80 200.94 22.3
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Consolidated Income Statement Figures in Rs crs
FY13 FY14 FY15 FY16e FY17e
Income from operations 2096.25 2632.49 2907.96 2916.22 3602.48
Growth (%) 25.3 25.6 10.5 0.3 23.5
Other Income 3.76 10.97 9.01 5.44 5.84
Total Income 2100.01 2643.46 2916.97 2921.66 3608.32
Total Expenditure 1735.05 2231.01 2442.27 2414.42 2998.31
EBITDA (other income included) 364.96 412.45 474.70 507.23 610.01
Interest 95.37 117.84 137.97 139.53 136.55
EBDT 269.59 294.61 336.73 367.70 473.46
Depreciation 82.84 88.52 81.98 93.94 107.17
Tax 53.75 54.03 61.03 60.23 84.25
Net profit 133.00 152.06 193.72 213.53 282.04
Minority interest 1.00 0.51 1.74 1.25 1.25
Profit/loss of associate 2.41 10.88 13.90 14.60 15.32
Net profit after MI 134.41 162.43 205.88 226.88 296.12
Extraordinary item 0.36 6.92 3.48 3.20 3.52
Adjusted Net Profit 134.05 155.51 202.40 223.68 292.60
EPS (Rs.) 16.94 17.55 22.84 25.25 33.02
Segment Results Figures in Rs crs
FY13 FY14 FY15 FY16e FY17e
Segment Revenue
Speciality Chemicals 1757.79 2216.67 2397.96 2314.56 2906.93
Pharmaceuticals 186.84 248.98 303.20 363.84 422.054
Home & Personal Care Chemicals 151.62 166.84 206.80 237.82 273.493
Net sales 2096.25 2632.49 2907.96 2916.22 3602.48
Segment EBIT
Speciality Chemicals 318.95 332.62 408.09 416.62 508.71
Pharmaceuticals 9.45 29.75 35.81 43.66 51.70
Home & Personal Care Chemicals 5.03 4.11 3.27 4.04 5.47
Sub Total 333.43 366.48 447.17 464.32 565.88
Interest 95.37 117.84 137.97 139.53 136.55
Other Unallocable Exp. (net of income) 51.30 42.55 54.45 51.03 63.04
PBT 186.76 206.09 254.75 273.76 366.29
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Balance Sheet Figures in Rs crs
FY13 FY14 FY15e FY16e FY17e
SOURCES OF FUNDS
Share Capital 39.56 44.30 44.30 44.30 44.30
Reserves 716.70 826.46 972.11 1132.87 1362.87
Total Shareholders Funds 756.26 870.76 1016.41 1177.17 1407.17
Minority Interest 4.26 4.26 5.86 7.11 8.36
Long term debt 117.27 255.25 419.06 387.27 402.27
Total Liabilities 877.79 1130.27 1441.33 1571.55 1817.80
APPLICATION OF FUNDS
Gross Block 1236.79 1477.03 1782.67 1922.67 2142.67
Less: Accumulated Depreciation 563.14 650.80 732.77 826.72 933.88
Net Block 673.65 826.23 1049.90 1095.96 1208.79
Capital Work in Progress 68.69 117.44 110.00 110.00 40.00
Investments 95.42 117.24 139.20 153.79 169.12
Current Assets, Loans & Advances
Inventory 462.15 606.12 551.73 579.32 695.18
Sundry Debtors 429.01 443.21 438.98 447.76 483.58
Cash and Bank 12.42 14.85 33.71 49.00 26.85
Other Assets 116.01 160.66 173.24 175.88 216.12
Total CA & LA 1019.59 1224.84 1197.66 1251.96 1421.73
Current liabilities 978.86 1157.41 1053.75 971.69 956.91
Provisions 27.71 29.90 34.05 36.71 36.71
Total Current Liabilities 1006.57 1187.31 1087.80 1008.41 993.62
Net Current Assets 13.02 37.53 109.86 243.55 428.10
Net Deferred Tax (net of liability) -70.89 -84.66 -102.66 -121.81 -142.61
Other Assets (Net of liabilities) 97.89 116.49 135.03 90.06 114.39
Total Assets 877.79 1130.28 1441.33 1571.55 1817.80
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Cash Flow Statement Figures in Rs crs
FY13 FY14 FY15e FY16e FY17e
Net Income (a) 133.00 152.06 193.72 213.53 282.04
Non cash exp. & others (b) 97.61 92.05 95.03 108.23 122.70
Depreciation 82.84 88.52 81.98 93.94 107.17
Profit / loss on sale of assets / inv 0.50 -9.38 -4.09 -4.00 -4.40
Dividend income -0.63 -0.56 -0.56 -0.56 -0.56
Lease income -0.36 -0.30 -0.30 -0.30 -0.30
Deferred tax & others 15.27 13.77 18.00 19.15 20.80
(Increase) / decrease in NWC (c) -90.03 -77.62 -73.00 30.85 -156.04
Inventory -82.82 -143.97 54.39 -27.59 -115.86
Debtors -22.03 -14.20 4.23 -8.78 -35.82
Other assets & liabilities 14.83 80.55 -131.62 67.21 -4.36
Operating cash flow (a+b+c) 140.59 166.50 215.75 352.61 248.71
Capex -231.39 -287.85 -298.43 -139.59 -149.78
Associate & other investments 0.97 -3.83 -3.97 4.00 4.40
Dividend income 0.63 0.56 0.56 0.56 0.56
Lease income 0.36 0.30 0.30 0.30 0.30
Investing cash flow (d) -229.42 -290.83 -301.54 -134.73 -144.51
Net borrowings 127.08 177.27 160.95 -139.14 -60.23
Dividends & others -36.38 -50.52 -56.31 -63.45 -66.12
Financing cash flow (e) 90.70 126.76 104.64 -202.59 -126.34
Net change (a+b+c+d+e) 1.86 2.43 18.86 15.29 -22.15
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Key Financial Ratios
FY13 FY14 FY15e FY16e FY17e
Growth Ratios
Revenue (%) 25.3 25.6 10.5 0.3 23.5
EBIDTA (%) 45.5 10.6 16.9 6.8 20.3
Net Profit (%) 32.1 16.0 30.2 10.5 30.8
EPS (%) 32.1 3.6 30.2 10.5 30.8
Margins
Operating Profit Margin (%) 17.2 15.3 16.0 17.2 16.8
Gross Profit Margin (%) 12.8 10.8 11.5 12.5 13.0
Net Profit Margin (%) 6.3 5.5 6.5 7.2 7.7
Return
ROCE (%) 14.3 13.6 14.8 14.8 17.0
RONW (%) 19.9 19.1 21.5 20.4 22.6
Valuations
Market Cap / Sales 0.3 0.4 1.1 1.0 0.8
EV/EBIDTA 4.1 5.2 9.1 7.9 6.6
P/E 4.8 7.0 15.4 12.6 9.6
P/BV 0.9 1.2 3.1 2.4 2.0
Other Ratios
Interest Coverage 3.0 2.7 2.8 2.9 3.7
Debt-Equity Ratio 1.1 1.2 1.2 0.9 0.7
Current Ratio 1.0 1.0 1.1 1.2 1.4
Turnover Ratios
Fixed Asset Turnover 3.8 3.5 3.1 2.7 3.1
Total Asset Turnover 2.7 2.6 2.3 1.9 2.1
Debtors Turnover 5.0 6.0 6.6 6.6 7.7
Inventory Turnover 4.4 4.2 4.2 4.3 4.7
Creditors Turnover 8.6 7.5 7.9 9.2 9.9
WC Ratios
Debtor Days 72.8 60.5 55.4 55.5 47.2
Inventory Days 82.9 87.4 86.5 85.5 77.6
Creditor Days 42.6 48.8 46.2 39.5 37.0
Cash Conversion Cycle 113.1 99.1 95.7 101.5 87.8
Cash Flows (Rs crs)
Operating Cash Flow 140.6 166.5 215.8 352.6 248.7
FCFF -18.3 -32.1 21.7 318.5 202.2
FCFE 37.3 56.8 79.1 74.7 39.6
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