Will incur Rs 10000 mn Capex per year over next 3-4 years – Aarti Industries

 Update on the Indian Equity Market:

On Tuesday, Nifty closed in the red at 14,910 (-0.1%). Among the sectoral indices, IT (+1.3%), FMCG (+0.9%), and AUTO (+0.2%) closed higher. PSU Bank (-1.3%), PVT Bank (-1.0%), and Financial Services (-0.8%) closed in the red. Asian Paints (+4.7%), Dr. Reddy’s Laboratories (+2.6%), and HUL (+1.59%) closed on a positive note. CIPLA (-1.6%), Tata Steel (-1.6%), and ICICI Bank (-1.5%) were among the top losers.

Excerpts from an interview of Mr. Rajendra V Gogri, Chairman and MD, Aarti Industries with CNBC-TV18 dated 15^th March 2021:

• Gogri said the demand is higher. The discretionary sector demand has picked up.
• Considering China plus one factor, demand is diverted to India. India comes ahead of other countries like Vietnam, Bangladesh, and Malaysia when it comes to specialty chemicals.
• The company is expecting pre-Covid demand in Q4FY21E.
• Speaking on capacity, he said the company will incur a Capex of Rs 10,000 mn each year for the next 3-4 years.
• This Capex will be utilized to introduce new products as well as the expansion of existing products.
• The company will not directly participate in the Pharma PLI scheme, however, the Pharma PLI Scheme is expected to benefit the general chemical sector indirectly.
• The company has posted single-digit revenue growth in 9MFY21 and a flat bottom line YoY is expected in FY21E. However, Mr. Gogri guided for a 20% growth in top-line as well as in bottom line in FY22E.
• Exports are usually 40-45% of total revenues and the rest is domestic sales. The major growth is expected on the discretionary side which was badly affected in 1FY21.
• Speaking on capacity utilization, he said some plants are running at 80-90% utilization levels and new capacities are running at 20-30% utilization levels.
• Speaking on the demerger of the Pharmaceutical business, he said a committee has been set up to look at the available option. The decision of the committee is yet to come on board.

Asset Multiplier comments:

• As per a study conducted by McKinsey & Company, the Indian specialty market is expected to grow to $40bn over the next 4 years from $28bn in 2018.
• Within the specialty chemical segments in India, surfactants, specialty polymers, and textile chemicals and dyes are among the top segments expected to further grow in line with market demand.
• Indian specialty companies need to ramp up capacities and infrastructure to get maximum advantage from specialty chemical sector growth prospects.

Consensus Estimate: (Source: Market screener website)

• The closing price of Aarti Industries was ₹ 1,286 as of 16-March-2021.  It traded at 41x/29x/25x the consensus Earnings per share estimate of ₹ 31.0/44.0/52.1 for FY21E/FY22E/FY23E respectively.
• The consensus average target price is ₹ 1,241/- which implies a PE multiple of 24x on FY23E EPS of 52.1/-.

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