SECTOR: CHEMICALS
Aarti Industries Limited
STOCK INFO.
BLOOMBERG
BSE Sensex:25,779
S&P CNX:7,843
ARTO:IN
REUTERS CODE
30 September 2015
Initiating Coverage
(INR CRORES)
Buy
INR516
ARTI.NS
Y/E MARCH
Revenue
EBITDA
EBITDA Margin
NP (Adj.)
EPS (Adj.)
EPS Growth
BV/share
Core ROE (%)
Core ROCE (%)
P/E (x)
P/BV (x)
FY15
2,908
466
16.0%
209
23.6
29%
115
22
17
21.8
4.5
FY16E
2,980
562
18.9%
257
30.8
23%
144
23
18
16.7
3.6
FY17E
3,454
684
19.8%
333
39.9
29%
174
25
21
12.9
3.0
KEY FINANCIALS
Diluted Shares (cr)
Market Cap. (Rs cr)
Market Cap. (US$ m)
Past 3 yrs Sales Growth (%)
Past 3 yrs NP Growth (%)
8.3
4,593
695
18%
26%
STOCK DATA
52-W High/Low Range (INR)
Major Shareholders
(as of 28nd September 2015)
Promoter
Institutions
Public & Others
Average Daily Turnover(6 months)
Volume
Value (Rs cr)
1/6/12 Month Rel. Performance (%)
1/6/12 Month Abs. Performance (%)
525/232
59.1
13.3
27.6
94,598
3.6
23/65/86
20/59/82
We recommend to BUY Aarti Industries Ltd (AIL) for a target
of INR 630- valuing the company on SOTP basis.
De-merger to be value accretive:
Company plans to demerge its
three business verticals: (a) specialty chemicals, (b) pharma API and
(c) home & personal care chemicals, and list each separately. This
will help re-rate the specialty chemicals business (EBIT margin of 16-
19%) as well as pharma API (Revenue CAGR 2013-15: 27%).
Pharma is a high-margin and potential high-growth business in a nascent
stage. Most of the investment in pharma facilities is already complete
and the segment broke even in FY12. Now, incremental volumes would
only contribute to expansion in segment margins and ROE.
Geared for growth with global leadership in Speciality
Chemicals:
AIL has a strong understanding of chlorine derivative
chemistry and has the largest nitro-chlorobenzene capacity in India.
Exports account for 51% of speciality chemicals division. It offers
over 100+ products to MNCs globally(globally ranks 1st -5th for most
of its key products) having end-user applications in polymers, additives,
pigments, paints, dyes, agro chemicals, etc to 800+ clients. It has a
"Strategic Supplier" status with many MNCs due to its wider product
portfolio, cost competitiveness and ability to supply consistently. The
Indian Speciality Chemical Industry is expected to reach $60-70bn by
2020 from $23bn in 2013. Aarti Industries should gain from this growth
given its strong customer linkages and command over Chlorine
chemistry.
Capex to lead to revenue growth as well as margin expansion:
The company is looking to expand capacities across benzene, toluene
& ethylene, and nitro toluene based value chain with a capex of ~INR
500cr over the next 3yrs (~asset turnover of 3-4 times) to cater growing
end-user markets and space vacated by closing down of few capacities
in developed markets & reduced global supplies from China. The
company is expected to have firm off-take commitments from global
agrochemical majors for exclusive supply. The addition of value added
products will further aid in margin expansion over the next 3yrs.
Valuations & View:
As a diversified specialty chemicals company,
AIL is a play on two key emerging trends: (1) rising demand for specialty
chemicals in India (15% CAGR FY15-FY20E) and (2) eastward
migration of global chemical manufacturing (Asia to have 70%
production share by 2030). We believe Aarti Industries is available at
attractive valuations of 9.6x FY17E EBITDA. Our SOTP based price
target for Aarti Industries is at INR 630 providing for an upside of
22%.
Maximum Buy Price :INR540
Ravi Shenoy (ravi.shenoy@MotilalOswal.com); Tel: +91 22 30896865

Aarti Industries Limited
INVESTMENT CONCERNS
High sensitivity to currency movement:
AIL's exports accounted for ~50% for FY15 revenue expose
AIL to risk of foreign exchange fluctuations. A significant appreciation of INR against USD also poses a risk
to AIL's competitiveness in global markets.
Benzene prices (short term risk):
Though AIL works on a cost plus basis model in its speciality chemical
segment, any significant fluctuation in benzene prices will affect profitability in the short term. Further, any
significant increase in benzene prices will increase the working capital requirement for the business funded by
short term debt, leading to increase in interest outgo and decline in profitability.
Demergers take time:
Investors will find their patience tested in demerger cases given the long list of
approvals required for demerger and subsequent listing of the demerged entity. Further, one needs to be ready
to loose substantial liquidity for the time until relisting of the demerged entity.
Company background:
Aarti Industries manufactures speciality chemicals, pharmaceuticals drugs (API's), and home & personal care
chemicals. Mr. Rajendra Gogri (MS Chemical Engineering) is the Chairman & Managing Director of the
company. The company has 10 manufacturing units for the speciality chemicals division, 4 units for the
pharmaceutical division, and 2 units for the home& personal care division. The group has a strong market
position in the benzene-based specialty chemicals segment. It also has a full-fledged research and development
centre, recognised by the Department of Scientifiand Industrial Research, Government of India.
SOTP Target
SEGMENT
METHOD
FY17 MULTIPLE
VALUE PER SHARE
CONTRIBUTION
Speciality Chemicals
Pharmaceuticals
Home & Personal
Total
CMP
Upside
EV/EBITDA
EV/EBITDA
EV/EBITDA
10
6
10
605
24
1
630
516
22%
96.00%
3.80%
0.20%
100%
30 September 2015
2

Aarti Industries Limited
IVRCL: Financials and Valuation
Aarti Industries Limited Financials & Valuation
INCOME STATEMENT (Consolidated)
Y/E MARCH
FY13
FY14
(INRCR)
FY15 FY16E FY17E
RATIOS (Consolidated)
Y/E MARCH
FY13
FY14
FY15 FY16E FY17E
Net sales
Growth
COGS
Employee Cost
Other Expenses
EBITDA
EBITDA Margin
Depreciation
Other Income
Interest Cost
PBT
Tax
Rate
Adjusted PAT
Growth
PAT Margin
2,096 2,632 2,908 2,980 3,454
-
1,283
65
386
361
83
2
95
185
54
29%
132
-
26%
79
467
402
89
11
118
206
54
26%
162
23%
10%
94
516
466
82
6
138
251
61
209
29%
2%
113
547
562
90
9
146
335
87
257
23%
16%
2,031
131
608
684
99
10
158
437
114
333
29%
1,685 1,832 1,758
Adjusted EPS (INR)
Book Value
Div Per Share
Dividend Payout
Net Debt / Equity
Valuation
P/E
P/BV
Dividend Yield
Return Ratios
ROCE
ROE
W.Cap. Ratios
Debtor days
Inventory days
Creditor days
W.Cap cycle
14.9
96
4.7
32%
1.0
34.6
5.4
0.9%
19%
20%
75
84
65
94
18.3
98
4.7
26%
1.1
28.2
5.2
0.9%
18%
20%
61
89
80
71
23.6
115
5.5
23%
1.0
21.8
4.5
1.1%
17%
22%
55
67
50
72
30.8
144
7.1
23%
1.0
16.7
3.6
1.4%
18%
23%
60
73
58
75
39.9
174
8.4
21%
0.8
12.9
3.0
1.6%
21%
25%
60
66
62
64
17.2% 15.3% 16.0% 18.9% 19.8%
24% 26.0% 26.0%
6.3% 6.2% 7.2% 8.6% 9.6%
BALANCE SHEET (Consolidated)
Y/E MARCH
FY13
FY14
(INRCR)
FY15 FY16E FY17E
CASH FLOW
(Consolidated)
(INRCR)
FY13
FY14
FY15 FY16E FY17E
Y/E MARCH
Share Capital
Share application money
Reserves
Networth
Minority interest
Loans
40
5
712
756
4
805
44
0
826
871
4
942
85
7
44
0
42
0
42
0
972 1,160 1,411
1,016 1,202 1,452
6
6
6
1,068 1,205 1,285
103
306
85
156
85
36
Less Net Def. Tax Liab
71
Less other long term liability 0
SOURCES OF FUNDS
Net Fixed Assets
Capital WIP
Inventories
Debtors
Cash & Investments
Loans & Advances
Other Curr Assets
Current investments
Curr. Assets
Creditors and Prov.
Net Current Assets
1,636 1,909
673
826
69
462
429
12
91
25
117
606
443
15
131
30
2,499 2,653 2,864
967 1,099 1,163
193
552
439
34
141
32
193
506
490
42
125
15
193
584
568
92
135
17
1
0
1,020 1,225
540
481
761
464
0
0
0
1,198 1,178 1,396
439
758
340
838
411
985
PBT
185
206 251 335 437
Adjustments
179
196 215 238 292
(Inc)/Dec in W.Cap
(156)
(92) (72) (49) (217)
Others
76
59
6 (77)
(6)
Pre Tax OCF
284
369 401 447 506
Tax Paid
(54)
(54) (61) (87) (114)
CF from Operations
230
315 339 360 392
(Inc)/Dec in FA
(231) (288) (295) (252) (202)
Net investments
1
(4)
(4)
0
0
Others
1
1
1
0
0
CF from Investing act.
(229) (291) (298) (252) (202)
Equity issuance/ Share buy back0
0
0
0
0
Inc/(Dec) in Debt
130
138 163 100
80
Interest Paid
(95) (116) (138) (135) (145)
Divd Paid (incl Tax)
(37)
(42) (49) (59) (70)
Others
3
(2)
1
(6)
(6)
CF from Financing act.
1 (22) (23) (100) (141)
Inc/(Dec) in Cash
1
2
19
9
50
Add: Opening Balance
11
12
15
34
42
Closing Balance
12
15
34
42
92
Other LT Assets
414
502
APPLICATION OF FUND 1,636 1,909
30 September 2015
581 524 524
2,499 2,653 2,864
3

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