Aarti Industries Ltd August-10

Industry: Chemicals CMP Rs 53

Recommendation: BUY Target Rs 82
Key Data About the Company
BSE Code : 524208 Aarti Industries Ltd (AIL) is the flagship company of the Rs 12.65 bn Aarti Group
NSE Code : AARTIIND of Industries. It is the largest producers of Benzene based basic and intermediate chemicals
52-Week Range(H/L) : 57 / 40 in India. AIL is basically engaged into manufacturing of organic chemicals, mainly benzene-
based intermediates, Sulphuric acid and allied products.
Face Value : 5
Equity Capital (Rs. Mn) 384 Investment Rationale:
Global scale in operation results in economies of scale: AIL is a leading manufacturer
Industry Snapshot of downstream benzene derivatives enjoying leading market share in the domestic market.
Customers Open Large scales of operations results in economies of scale which keeps AIL ahead of its peers
Market Presence India/Intl in terms of better pricing power. Aarti is ranked amongst the top 5 global manufacturers for
Govt Regulations Medium its key products.
View Positive
Diversified revenue portfolio de-risks dependability: AIL enjoys leadership hand with
Promoters/ Management multi product and multi manufacturing locations which is ideally placed to serve global
Chandrakant V Gogri Chairman customers. Basic Chemicals contributes nearly 22%, Speciality Chemicals 68%, Agro
Rajendra V Gogri VC & MD Chemicals 4% and Pharmaceuticals around 6% to the revenue line.
Shantilal T Shah VC
Rashesh C Gogri WT Dir Upgradation of Hydrogenation Technology to boost prod capacity and
performance: During the month of June 2010, AIL has completed the process of
Shareholding as on June 10 upgradation of its Hydrogenation Technology which will gradually increase the capacities
Promoters (%) 49.92
from around 700 tpm to around 1500 tpm over next 12-15 months.
Foreign (%) 0.17
Institutions (%) 8.38
Focus on expanding pharmaceuticals ingredients: At present AIL is working on
Public & Others (%) 41.53
lifestyle drugs such as steroids and those of cancer and hypertension space. Its product
range also includes APIs used in manufacturing cardiovascular, anti-asthma, anti-cancer,
Key market Ratios
anti-thalassaemia, anti hypertension and anti-depressant drugs. With the above focus we
Price/BV 0.98
expect that the overall contribution from this segment to move from 6% to 10% in next 2-3
EV/TTM Sales(x) 0.61
years.
Lat Book Value 54.55
Industry PE 9.99
Stable Dividend payout and high yield: We believe high dividend payout can be used to
Market Cap (Rs Mn) 4066
EV (Rs Mn) 8363 gauge the health and profitability of the company. Aarti has been consistently paying
dividend with a payout ratio of around 25%.

Price Charts MView & Valuation

We believe Aarti Industries is a value play and a good medium term investment opportunity
in the space of basic and specialty chemical industry. On the Valuation per se the stock is
attractive in the chemical space which is available at PE of 3.9x to its expected 201103E
earnings of Rs 13.7 and 3.2x to its 201203E earning of Rs 16.6 which can be considered as
a decent earning growth on conservative basis. Hence considering the above rationales we
recommend BUY rating on Aarti with a medium term target of Rs 82.

Financial Overview (Rs.Mn) 2009 2010 2011E 2012E 2013E

Net Sales 14613 13012 15562 18390 21511
PBIDT 2459 2030 2482 2977 3606
Research Analyst EBIDTA % 16.8% 15.6% 15.9% 16.2% 16.8%
Prashanth Tapse PAT 946 823 1048 1273 1579
prashanth.tapse@mehtagroup.in PAT % 6.0% 5.3% 5.7% 5.9% 6.3%
Contact: 022-40070156 EPS 13.0 10.7 13.7 16.6 20.6
Disclaimer: The information contained in this report is obtained from reliable sources and is directed at institutional investors. In no circumstances should it be considered as an offer to sell/buy or, a solicitation of
any offer to, buy or sell the securities or commodities mentioned in this report. No representation is made that the transactions undertaken based on the information contained in this report will be profitable, or
that they will not result in losses. Mehta Equities Ltd and/or its representatives will not be liable for the recipients’ investment decision based on this report.
Investment Idea Aarti Industries Ltd
About the Company

Aarti Industries Ltd (AIL) is the flagship

company of the Rs 12.65 bn Aarti Group of
Industries. It is amongst the largest producers of
Benzene based basic and intermediate chemicals in
India.

AIL is basically engaged into manufacturing of organic chemicals, mainly benzene-

based intermediates, Sulphuric acid and allied products. It operates in four segments:
Speciality chemicals, Basic chemicals, Pharmaceuticals and Agro chemicals. Its products find
applications in Pharmaceuticals, Dyes & Pigments, Agrochemicals, Rubber Chemicals,
Perfumeries, Polymers and Surfactants.

Aarti currently manufactures organic and inorganic chemicals at its facilities at Vapi,
Sarigam, and Jhagadia, in Gujarat. It also manufactures API, at Tarapur and Dombivali unit
in Maharastra. Aarti’s API facility at Tarapur has recently been awarded the USFDA
approval.

AIL has a strong management team promoted by first generation technocrats Mr.
Gogri & family and Mr Shah & family with decade of industry experience with proven track
record. The Key management has vast experience in chemical industries ranging from
encompassing Projects, Operations, Process Development and Local & International
Marketing in the Chemical Industry.

Total Segment Profile Export Geographical Profile

4% 13%
8% 18%

13% 41%

70%
33%

Basic Chemicals Speciality Chemicals

Pharmaceuticals Agro Chemicals Europe Asia USA Others

Product Profile:

Segment Profile Products base End Use Industries

Basic Chemicals Nitro Chloro Benzenes (NCB's) Dyestuff & Dyestuff Intermediates

Speciality Chemicals Ortho Phenylene Diamine (OPDA) Pharma & Pharma Intermediates

Agro Chemicals Sulphuric Acid & Allied Products Pigment Intermediates

Pharmaceuticals Quinalphos Agro Chemical Intermediates

Others Others Rubber chemicals.

August, 2010 Msearch…Converting data into knowledge

Investment Idea Aarti Industries Ltd
Investment Rationale

1) Global scales in operation results in economies of scales: AIL is leading

manufacturer of downstream benzene derivatives enjoying leading market share in
the domestic market. Large scale of operations resulting in economies of scale which
keeps AIL ahead of its peers in terms of better pricing power. AIL is 4 times bigger
than its closest competitor capable of 15000 TPA. We believe there is increase in
demand for Basic Chemical due to shifting of chemical manufacturing industry to
India and also due to continuous growth of Indian economy. To meet the same Aarti
is expanding the Basic Chemical range by introducing Nitro Toluenes and its
Derivatives. Aarti is ranked amongst the top 5 global manufacturers for its key
products.

Product Capacity (TPA) Market Position

India Global
Chlorination 110000 No.1 Top 5
Nitration 110000 No.1 Top 5
Ammonolysis 20000 No.1 Top 5
Reduction 20000 No.1 -
Dimethyl Sulphate 51000 No.1 Top 3
Sulphuric Acid and Allied products 200000 - -
Source: Crisil report & Company

2) Diversified revenue portfolio de-risks dependability: AIL has managed to

diversify its product base as Basic Chemicals contributes nearly 22%, Speciality
Chemicals contributes 68%, Agro Chemicals contributes 4% and Pharmaceuticals
segment contributes around 6% to the revenue line. The above diversification helps
AIL to lowers it’s segmental risk of dependency and fairly well balanced export –
domestic sales. While some of the sectors were impacted due to the recession, the
other sectors such as parts of FMCG, Agrochemicals, and Pharmaceuticals had
performed better and thus the diversity in the product base has helped the Company
in the current Global Slowdown. AIL enjoys leadership hand with multi product
advantage as customers get the one stop deal for all kinds of chemical ranges. Aarti
manufacturers more than 125 different products and Diversified customer base with
over 150 export customers and 500 domestic customers.

4000 3768 18000 Speciality Chem icals

3609 Basic Chem icals 16128
3500 3277 16000
13668
2849 14000
3000
2544 11265 11583
12000
2500 10072
10000
2000
8000
1500
6000
1000 4000
500 2000

0 0
2009 2010 2011E 2012E 2013E 2009 2010 2011E 2012E 2013E
Source: Msearch & Company

August, 2010 Msearch…Converting data into knowledge

Investment Idea Aarti Industries Ltd
3) Upgradation of Hydrogenation Technology to boost prod capacity and
performance: During the month of June 2010, AIL has completed the process of
upgradation of its Hydrogenation Technology which will gradually increase the
operative production capacities for its speciality chemicals from around 700 tpm to
around 1500 tpm over next 12-15 months, thereby we believe this upgradation will
contribute to the expected growth on the topline and bottom-line of the Company.
Operating profits of the Company had been impacted due to the aforesaid
expansion/ up-gradation activity taken up in the first quarter of current financial
year.

4) Focus on expanding pharmaceuticals ingredients: At present pharma segment

contributes around 6% to the overall business. Pharma being a high growth
segment, Aarti is continuously focusing to increase its role by adding more and more
active pharma ingredients (API). Currently Aarti has files 15-20 drugs master files
(DMF), some of the molecules are in the advance stages of developing new
ingredients which may get commercialised shortly. It is also working on lifestyle
drugs such as steroids and those of cancer and hypertension space. Its product
range also includes APIs used in manufacturing cardiovascular, anti-asthma, anti-
cancer, anti-thalassaemia, anti hypertension and anti-depressant drugs. With the
above focus we expect that the overall contribution from this segment to move from
6% to 10% in next 2-3 years. The lifestyle drugs market in India is growing at 15-
20% CAGR and globally at 2000
Pharm a Segm ent sales 1793
25% CAGR from last 3 1800 1559
years and expects to 1600
1356
1400 1179
remain the same going 1200 1002
forward. The USFDA 1000
800
approved unit will help for 600
higher revenues from 400
200
export to regulated 0
pharma markets and out 2009 2010 2011E 2012E 2013E

sources contacts from the

global pharma players.

5) Stable Dividend payout and high yield: Aarti has consistently shown strong
earnings growth also has a high dividend yield from past 5 years. Aarti has been
consistently paying 14
dividend with a payout 12 11.8
11.4
10.75 10.54
ratio of around 25%. We 10 9.47 10.15
believe high dividend 8 7.25

payout can be used to 6 4.79 4.82

5.27

gauge the health and 4 4

3.39
2.41
profitability of the 2
company. 0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Key Concerns

Any surge in raw material price could impact the growth estimations: historically AIL has
faced unusually fluctuations in benzene prices, so any future variations can have a adverse
effect on the margins.

Foraying into real estate space: AIL has plans for investing real estate venture by way of
partnerships or joint ventures in building properties with a price focus in Mumbai region.

August, 2010 Msearch…Converting data into knowledge

Investment Idea Aarti Industries Ltd
A Brief on Indian Chemical Industry

Chemicals and Petrochemicals find wide usage in

practically every aspect of people’s daily lives. From
chemical fertilisers, pesticides and plant growth 17%
regulators that are essential for agriculture to
synthetic yarn, which is used in garments, chemicals
have an important role in everyday life. 57%
26%

Broadly, chemicals can be classified into

polymerisation products, basic chemicals, fine
chemicals and pharmaceuticals. Polymerisation
products include items of everyday use such as Basic Chemicals
Speciality Chemicals
polyethylene sheets, plastic articles, PET containers, Know ledge Chemicals
etc. Basic chemicals are those that go into production
of consumer items like paints dyes, soaps, medicines, toiletries, cosmetics, etc. Besides,
there are fine and speciality chemicals which have very specific uses and are essential for
increasing industrial production. Pharmaceuticals cover the whole range of medicines and
life-saving drugs.

Indian specialty chemicals market is likely to double to USD 40 bn by 2011,

registering a 17% annual growth rate.
Typically this industry grows twice the GDP
growth rate in emerging economies, which
further strengthens the projected estimate.
The industry is driven by twin growth
engines: domestic demand (consumption in
end user industries) and exports based
production (India becoming a preferred
destination to build global presence). The
growth in domestic demand is attributed to
both, growth in the end user industries and
to the increased usage of specialty
chemicals. For example, the textile
industry, one of the most significant consumers of specialty chemicals is expected to grow
at 20% p.a. over the next five years.

Overall Outlook: We believe India is establishing itself as a major hub for manufacturing
and R&D centers. The erstwhile cost advantage of China with respect to India in
manufacturing is becoming insignificant. Besides providing access to a rich pool of
knowledge workers, India provides a robust legal and regulatory framework for research
based development. A lot of companies are getting their products patented in India. All
these factors have contributed to India evolving into an attractive investment destination.
Of late, India is also emerging as an important base for active pharmaceutical ingredients or
API. An company can establish a chemical plant in India at 50-60 % the cost in the
developed nations and most of the savings are the result of local technology and
fabrication. Indian speciality chemical exports are projected to grow at 22%/year from
US$4bn in 2007 to US$13bn in 2013.

August, 2010 Msearch…Converting data into knowledge

Investment Idea Aarti Industries Ltd
Financial Overview:

Particulars (Rs in Mn) Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Actual Actual Expected Expected Expected
Net Sales 14613 13012 15562 18390 21511
Sales Growth % 64% -11% 20% 18% 17%
Raw Material Consumed 8513 7677 9026 10666 12369
Power & Fuel Cost 960 990 1109 1306 1549
Employee Cost 283 332 355 415 495
Other Manufacturing Expenses 1196 1313 1446 1690 1936
General and Administration Expenses 118 117 139 160 191
Selling and Distribution Expenses 826 727 913 1049 1230
Miscellaneous Expenses 129 78 92 127 135
Total Expenditure 12154 10982 13081 15412 17905
Operating Profit (Excl OI) 2459 2030 2482 2977 3606
Growth YoY 98% -17% 22% 20% 21%
EBIDTA Margins (%) 16.8% 15.6% 15.9% 16.2% 16.8%
Interest 895 521 700 828 932
Depreciation 401 471 496 586 716
Profit Before Tax 1187 1068 1332 1619 2022
Provision for Tax 316 383 444 540 674
Profit After Tax 871 685 888 1080 1348
Share of Associate 131 140 161 193 231
Consolidated Net Profit 946 823 1048 1273 1579
Growth YoY 113% -21% 27% 21% 24%
PAT Margins (%) 6.0% 5.3% 5.7% 5.9% 6.3%
Equity Capital 364 384 384 384 384
Earnings Per Share 13.0 10.7 13.7 16.6 20.6
CMP 53 53 53 53
PE 4.9 3.9 3.2 2.6
Market Cap In Mn 4066

MView: We believe Aarti Industries is a value play and a good medium term investment
opportunity in the space of basic and specialty chemical industry. We think there would be
continuous high growth in domestic demand for basic chemical ingredients. The Investment
in R&D and manufacturing augurs well for India which is emerging as a global specialty
chemicals hub, wherein AIL is well set to grab the opportunity. On the Valuation per se the
stock is attractive in the space which is available at PE of 3.9x to its expected 201103E
earnings of Rs 13.7 and 3.2x to its 201203E earning of Rs 16.6 which can be considered as
a decent earning growth on conservative basis. On dividend basis Aarti has a maintained its
high-quantity of dividend yield which is well thought-out as a good defensive strategy for
investors. Hence considering the above rationales we recommend BUY on Aarti with a
medium term target of Rs 82.
Mehta Equities Limited - INDIA. A Member of Stock Exchange, Mumbai.
Contact: Prashanth Tapse / Madhusudan Sarda in Equity Research Department
Mehta Group, 612, Arun Chamber, Near A.C.Market Tardeo, Mumbai -400034
Tel.: 91-22-4007 0100. Fax: 91-22-40070102
Web Site: www.mehtagroup.in, E-mail: prashanth.tapse@mehtagroup.in, madhu@mehtagroup.in

August, 2010 Msearch…Converting data into knowledge