CD Equisearch Pvt Ltd

June 9,2015

Company Brief

Aarti Industries Ltd (AIL)

No. of shares (crore)
Mkt cap (Rs crs)
Current price (09/06/2015)

8.9
2814
318

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.

Price target (Rs)

396

Quarterly Highlights

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)
EPS growth (FY15/16e/17e)
ROE (FY15/FY16e/FY17e)

12.6/9.6

Thanks to relentless decline in crude oil prices, Aartis 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; hpcs 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 - pharmaceuticals 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.

30.2/10.5/30.8
21.5/20.4/22.6

Beta

1.1

Daily volume (avg. monthly)

BSE Code
NSE Code
Bloomberg
Reuters

76396
524208
AARTIIND
ARTO IN
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: kishan.gupta@cdequi.com

Consolidated figures (Rs crs)

FY13
2096.25

FY14

FY15

FY16e

FY17e

2632.49

2907.96

2916.22

3602.48

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

Income from operations

Other Income

Equities

Derivatives

Commodities

Distribution of Mutual Funds

Distribution of Life Insurance

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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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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)

Cross Sectional Analysis

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

Company

TTM P/E; * Figures in Rs crs;

Companies in the exhibit not exactly comparable as their product portfolios are dissimilar.

Equities

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Financials
Standalone Quarterly Results

Figures in Rs crs

Q4FY15

Q4FY14

% chg.

FY15

FY14

% chg.

677.48

744.14

-9.0

2870.65

2632.78

9.0

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

Income from operations

Other Income

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

69.51

55.09

26.2

245.80

200.94

22.3

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

EPS (F.V. 5)

49.28

46.84

5.2

184.32

142.04

29.8

5.56

5.29

5.2

20.80

16.03

29.8

PBT
Tax

Segment Results

Figures in Rs crs

Q4FY15

Q4FY14

% chg.

FY15

FY14

% chg.

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

677.48

744.14

-9.0

2870.65

2632.77

9.0

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

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

69.51

55.09

26.2

245.80

200.94

22.3

Segment Revenue

Total
Segment EBIT
Speciality Chemicals

Total

PBT

Equities

Derivatives

Commodities

Distribution of Mutual Funds

Distribution of Life Insurance

5

CD Equisearch Pvt Ltd

Consolidated Income Statement

Figures in Rs crs

FY13

FY14

FY15

FY16e

FY17e

2096.25
25.3

2632.49
25.6

2907.96
10.5

2916.22
0.3

3602.48
23.5

3.76

10.97

9.01

5.44

5.84

2100.01
1735.05

2643.46
2231.01

2916.97
2442.27

2921.66
2414.42

3608.32
2998.31

Interest

364.96
95.37

412.45
117.84

474.70
137.97

507.23
139.53

610.01
136.55

EBDT
Depreciation

269.59
82.84

294.61
88.52

336.73
81.98

367.70
93.94

473.46
107.17

Tax

53.75

54.03

61.03

60.23

84.25

133.00
1.00

152.06
0.51

193.72
1.74

213.53
1.25

282.04
1.25

2.41

10.88

13.90

14.60

15.32

Net profit after MI

Extraordinary item

134.41
0.36

162.43
6.92

205.88
3.48

226.88
3.20

296.12
3.52

Adjusted Net Profit

EPS (Rs.)

134.05
16.94

155.51
17.55

202.40
22.84

223.68
25.25

292.60
33.02

Income from operations

Growth (%)
Other Income
Total Income
Total Expenditure
EBITDA (other income included)

Net profit
Minority interest
Profit/loss of associate

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

2096.25

2632.49

2907.96

2916.22

3602.48

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

333.43
95.37

366.48
117.84

447.17
137.97

464.32
139.53

565.88
136.55

Net sales
Segment EBIT
Speciality Chemicals

Sub Total
Interest
Other Unallocable Exp. (net of income)
PBT

51.30

42.55

54.45

51.03

63.04

186.76

206.09

254.75

273.76

366.29

Equities

Derivatives

Commodities

Distribution of Mutual Funds

Distribution of Life Insurance

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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
Total Shareholders Funds

716.70
756.26

826.46
870.76

972.11
1016.41

1132.87
1177.17

1362.87
1407.17

Minority Interest

4.26

4.26

5.86

7.11

8.36

Long term debt

Total Liabilities

117.27
877.79

255.25
1130.27

419.06
1441.33

387.27
1571.55

402.27
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
Capital Work in Progress

673.65
68.69

826.23
117.44

1049.90
110.00

1095.96
110.00

1208.79
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

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

Total Current Liabilities

Equities

Derivatives

Commodities

Distribution of Mutual Funds

Distribution of Life Insurance

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Cash Flow Statement

FY13

FY14

FY15e

Figures in Rs crs
FY16e
FY17e

Net Income (a)

133.00

152.06

193.72

213.53

282.04

Non cash exp. & others (b)

Depreciation

97.61
82.84

92.05
88.52

95.03
81.98

108.23
93.94

122.70
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)

Inventory

-90.03
-82.82

-77.62
-143.97

-73.00
54.39

30.85
-27.59

-156.04
-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
Investing cash flow (d)

0.36
-229.42

0.30
-290.83

0.30
-301.54

0.30
-134.73

0.30
-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

Equities

Derivatives

Commodities

Distribution of Mutual Funds

Distribution of Life Insurance

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Key Financial Ratios

Growth Ratios
Revenue (%)
EBIDTA (%)
Net Profit (%)
EPS (%)
Margins
Operating Profit Margin (%)
Gross Profit Margin (%)
Net Profit Margin (%)
Return
ROCE (%)
RONW (%)
Valuations
Market Cap / Sales
EV/EBIDTA
P/E
P/BV
Other Ratios
Interest Coverage
Debt-Equity Ratio
Current Ratio
Turnover Ratios
Fixed Asset Turnover
Total Asset Turnover
Debtors Turnover
Inventory Turnover
Creditors Turnover
WC Ratios
Debtor Days
Inventory Days
Creditor Days
Cash Conversion Cycle
Cash Flows (Rs crs)
Operating Cash Flow
FCFF
FCFE

FY13

FY14

FY15e

FY16e

FY17e

25.3
45.5
32.1
32.1

25.6
10.6
16.0
3.6

10.5
16.9
30.2
30.2

0.3
6.8
10.5
10.5

23.5
20.3
30.8
30.8

17.2
12.8
6.3

15.3
10.8
5.5

16.0
11.5
6.5

17.2
12.5
7.2

16.8
13.0
7.7

14.3
19.9

13.6
19.1

14.8
21.5

14.8
20.4

17.0
22.6

0.3
4.1
4.8
0.9

0.4
5.2
7.0
1.2

1.1
9.1
15.4
3.1

1.0
7.9
12.6
2.4

0.8
6.6
9.6
2.0

3.0
1.1
1.0

2.7
1.2
1.0

2.8
1.2
1.1

2.9
0.9
1.2

3.7
0.7
1.4

3.8
2.7
5.0
4.4
8.6

3.5
2.6
6.0
4.2
7.5

3.1
2.3
6.6
4.2
7.9

2.7
1.9
6.6
4.3
9.2

3.1
2.1
7.7
4.7
9.9

72.8
82.9
42.6
113.1

60.5
87.4
48.8
99.1

55.4
86.5
46.2
95.7

55.5
85.5
39.5
101.5

47.2
77.6
37.0
87.8

140.6
-18.3
37.3

166.5
-32.1
56.8

215.8
21.7
79.1

352.6
318.5
74.7

248.7
202.2
39.6

Equities

Derivatives

Commodities

Distribution of Mutual Funds

Distribution of Life Insurance

9

CD Equisearch Pvt Ltd

Disclosure& Disclaimer
CD Equisearch Private Limited (hereinafter referred to as CD Equi) is a Member registered with National Stock Exchange of India Limited,
Bombay Stock Exchange Limited and Metropolitan Stock Exchange of India Limited (Formerly known as MCX Stock Exchange Limited). CD
Equi is also registered as Depository Participant with CDSL and AMFI registered Mutual Fund Advisor. The associates of CD Equi are
engaged in activities relating to NBFC-ND - Financing and Investment, Commodity Broking, Real Estate, etc.
CD Equi has applied for registration under SEBI (Research Analysts) Regulations, 2014. Further, CD Equi hereby declares that

No disciplinary action has been taken against CD Equi by any of the regulatory authorities.

CD Equi/its associates/research analysts do not have any financial interest/beneficial interest of more than one percent/material
conflict of interest in the subject company(s).

CD Equi/its associates/research analysts have not received any compensation from the subject company(s) during the past twelve
months.

CD Equi/its research analysts has not served as an officer, director or employee of company covered by analysts and has not been
engaged in market making activity of the company covered by analysts.
This document is solely for the personal information of the recipient and must not be singularly used as the basis of any investment decision.
Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such
investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to
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Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading
volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals.
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believed to be true but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for
general guidance only. CD Equi or any of its affiliates/group companies shall not be in any way responsible for any loss or damage that may
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Equities

Derivatives

Commodities

Distribution of Mutual Funds

Distribution of Life Insurance

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