Mr Rajendra Gogri on why Aarti Industries will continue to be a multi-bagger.

Update on the Indian Equity Market:

On Friday, Nifty closed 1% higher at 12,245. Among the stocks, Coal India (+3.5%), Axis Bank (+3.3%) and BPCL (+2.7%) were the gainers. Yes Bank (-1.4%), Wipro (-1.0%), and Infratel (-0.8%) ended in the red. Nifty PSU Bank (+2.9%), Nifty Realty (+1.6%) and Nifty Bank (+1.3%) were the top sectoral gainers. All the sectors ended in the green. 

Excerpts from an interview of Mr Rajendra Gogri, CMD, Aarti Industries Ltd (Aarti Ind) with ET NOW on 24^th December 2019

• Aarti Industries is a specialty chemical manufacturer with B2B sales to major global companies for a variety of end-use – polymer, agrochemicals, dyes, and pigments. The company has a value-added product chain. Because of this business model and multi-customer relations, Aarti Ind has been able to grow the business sizably. In the last few years, the overall competitiveness of India against China has increased, which has expanded margins for the chemical industry and also for Aarti Ind as well. That is a major reason for both volume growth as well as bottom-line growth.
• According to him, India is in a very sweet spot as far as the specialty chemical industry is concerned because the cost-wise, now Chinese labour cost is double that of India and because of the trade war issue also, there is a big appetite for India. Now the buzz word is that the company is getting extra benefits in the global supply chain because they do not import anything from China for their specialty chemical business. They are totally backward integrated.
• According to Mr Gogri, the key in the chemical industry will continue to be backing businesses with relatively better chemistry skills, operating in molecules, markets with oligopoly. With more chemistry skill and with a strong customer base, Aarti Ind is able to have a substantial market share in their line of products.
• Two factors have impacted the growth this year:

1. climate impact on US agrochemical market is specifically restricted this year.
2. the global automobile sector slowdown was led by a slowdown in China, for some of the products which are going in the auto sectors, there is some demand pressure.

• Aarti Ind is well spread in the product line as well as geography and is expected to grow.
• There is a sizable scope for an import substitution with about $1 billion worth of chemicals within Aarti Ind chain being imported. The Company has identified quite a few products now which are virtually not made in India. The entire chlorotoluene chain which they have identified is not made in India and some of the downstream products are also not manufactured in India. They have also considered import substitution. That is one of the major criteria for identifying the products in addition to the direct demand for global markets.
• Aarti Ind has signed 2-3 major contracts. Out of this, the first two contracts will be commissioning in 4QFY20 and that has the potential to give a substantial boost to their top line going forward. A first contract is a 10-year contract. It is a high value-added product and EBITDA is almost expected to be about 40%. Topline growth will be relatively less from that project but EBITDA growth will be substantially more.

Consensus Estimate: (Source: market screener website)

• The closing price of Aarti Industries Ltd was ₹ 833 /- as of 27-December-19. It traded at 25x/ 20x/17x the consensus EPS estimate for FY20E/ FY21E/ FY22E of ₹ 33.0/40.9/48.2 respectively.
• Consensus target price of ₹ 925/- implies a PE multiple of 19x on FY22E EPS of ₹ 48.2/-.