Aarti Inds - Techno Funda Pick

(bala) #42

10775125 is the shares below 2 lakh rs at face value. you shouldn’t consider this, you need to arrive at number of shares at the cmp as on record date. Assume 1100 rs as record date cmp then around 190 will be cut-off for retail. you need to know total number of shares below 190. if you look at AR 2017 Distribution of ShareHolding, they gave 1-500 category (18.6 lakhs), but we need 1-190 category, so take a guess. assuming 10 lakhs, then entitlement ratio would be around 16% and the actual AR would be around 30-40%. but we really don’t know how many shares are there upto 190

alternatively, in 2016 they did similar buyback. , around 2.19 lakh shares were tendered for 1.8 lakh shares resulting in a 82% AR. Based on this pattern we may have 70% AR. But there is lot of awareness among investors on the arbitrage opportunity, so we may see lesser AR. in any case with cmp of 1120 and buyback price of 1200 there is not much juice left now


@dd1474 Thanks for sharing your point of view. This was enlightening and interesting to know. The company seems to have smart finance team.

I am writing what I understood from your post. Let me know if I have understood it correctly.
So for an action like this is, the company is at a better position where it can say that it has passed on their profits to investors by declaring dividend (in this case a buyback) and this action is efficient by 15-20% for the same benefits passed on.
While for retail investors this is not necessarily good/efficient as not all retail investors will get benefitted. In case of dividends which would otherwise be given to all investors and would have been tax-free for investors, only those who participate/get accepted in buyback will get the so called benefit of dividend (here buyback).

(Dhiraj Dave) #44

For retail investor it provide two advantages. First a general advantage of at least 15% of cashflow being available for buyback through open offer as against dividend. If retail investor is holding share for 12 monhts it is nil tax on capital gain otherwise 15% short term capital gain. So benefit for retail long term investor as it would get 15% higher cash inflow from the company, while Company outflow would be same.

Second advantage for retail investor holding share value less than 2,00,000 is 15% of buyback amount would be reserverd for this category. Other thing being same, they are likely to gain more at cost of the majority shareholder due to higher acceptance ratio vis those holding more than 2 lakh market value of shares.

If retail investor is not efficient, it is his/her choice and if someone benefit more due to inaction, it is neither fault of the company nor the other investors. One supreme principle of investing “Buyers be aware” shall be applicable here as well. For instance, the company issue right issue and retail investor does not participate. The retail investor are trated equally and all given same option. If someone is more proactive vis other, I would not consider it bad.

Against this benefit, there is one action required from retail investor is to participate in buyback through the brocker. It is not a difficult task in my opinion, considering the benefit it offer. Finally, it is individual choice.

(Yogesh Sane) #45

Source http://www.bseindia.com/xml-data/corpfiling/AttachLive/103393aa-cf80-4095-8fd7-9816f16d41c3.pdf

This is second big deal this year. Aarti is getting this big long term contracts for which it will have to invest in building capacities and still paying large dividends and buybacks. It must be confident of generating steady cash flow from these businesses.

(Hashims) #46

Hello @dd1474, @Yogesh_s

The proposed AIL investment of $35 -$40 Million against this deal, would it be in addition to the 42$ Million advance expected to be received as part of the contract terms?

(Abhishek Basumallick) #47

Reasonably good set of results:

(Dhiraj Dave) #48

In my understanding, the company would get capex required as advance from SABIC. These advance would be interest free and would be adjusted against future delivery from plant to SABIC. So it would be cash neutral for Aarti as what is spend on capex it would recover from SABIC advace. Howerver, aarti may have to finance for working capital on new sales. (I am not sure as the contract term may have some clause on working capital funds as well, however in conservative way that is what Aarti would be investing for this project) So only around $ 40 MN advance and not $ 40 million advance for capex + additional $ 40 million as commitment fees (total around $80 MN) in my opinion.

(Hashims) #49

Thanks @Dhiraj for the reply, much appreciated.
I’m very much impressed by your financial dissection to unearth flaws in companies books and manipulated business models. That’s really helps novice like me who doesn’t have ability to understand these kind of financial frauds.

I’m just sharing few news links about the new projects under discussion by Saudi Aramaco & SABIC targeting on downstream industries (I hope, this is already a news across the globe).
They are very much ambitious to achieve greater contribution from downstream products income than upstream and just exports of crude. Still there is time to bring this to production stage and marketing & export to the world, but will it affects our Indian companies who are mostly into chemical exports in similar area?

Also another view, if Aarti execute well and gain good trust, will that will open up expanding future business to these oil giants Saudi Aramco & SABIC? or is this duplication of Aarti’s product portfolio?


(Dhiraj Dave) #50

Find enclosed key points dicussed on Aarti Industries on Q3FY18 earning call held on Feb 5 2018.
1) SABIC contract: The company would be receiving USD 42 million as Advance for future material supply. So funding would be minimal at the company end. In addition, SABIC would be supplying intermediate and technology support. The product is current manufactured by SABIC and they found Aarti being suitable partner for future requirement. For Aarti, since this is a very large size order with stable growth over couple decade and also establishes it as a strong partner in global market. Hence, while margin on the project would be lower, IRR would be significantly higher (due to no investment except for working capital). The company has yet to get environment approval for this project. They already have part of land. They expect environment approvals (for both outsourcing projects) to come in couple of months. From receipt of enviroment approval, it would take around 15-18 months to complete installation and commence the operations. The resultant capacity is specific for one product and alternative use would be limited. The company generally does IRR of 15-20% on the project, however, due to Capex support from Partner, IRR on this project would be significantly higher.

2) Rs 4000 Cr Contract over 10 years: This contract is higher margin contract as technology for same being provided by Aarti industries is a benzene based product from Aarti specialty products. The client of Aarti is a large MNC with topline higher than USD 10 billion. After contract term, Aarti would be able to utilise same plant to manufacture other products. The management expect to reach full capacity and sales value within 2-3 years of commencement of plant.

3) Market risk
a) Exchange rate risk: In multi year contract, either client or Aarti hedge for the exchange rate. In case it is Aarti responsibility, Aarti entered into forward contract to mitigate exchange risk.
b) Crude price: In almost all product, Crude price relate hike in input cost are passed on to customer within 1-3 months. Given the volatile input and end product prices, the company focus on absolute margin rather then % margin. Generally, when crude price were lower, margin are constant in USD term and hence as % of revenue is higher and vice versa.

4) Volume growth expectation:
In Second half FY18, the company guided 10% volume growth vis same period in FY17. In Q3FY18, it achieved volume growth of 8% and expect to achieve around 12% growth in Q4FY18. In FY19 Volume growth are expected to be better then FY18. Further, going forward, with two contract in hand, the company expects around 10-15 over next few years.
The company has achieved Nitro Toluene plant utilisation at 25% which is expected to reach around 50-70% level during FY19. At current utilisation level, the company is not breaking even while during FY19, with around 60% utilisation, it would achieve breakeven.
In Pharmaceutical business, the company could ramp up production due to some new product launches. It also intend to expand some drug intermediates which is expected to drive sales growth in FY19.
In Home and Personal care business, the company has installed powder processing units. The margin in powder processing products are better than liquid products. While one machine of powdering is already operational, the other two are under implementation. On commencement of these units, the company is confident to report higher margin then what were reported in past. The company has two set of client. One is large reputed MNCs who source material regularly from the company. The change on oleochemical is passing through for such customers. For other customers, the prices are open. Further, nearly 25% of open businesses is exported.

5) Seperaration home and personal chemical
In the coming AGM, the company may consider to hive off Home and personal chemical business from Speciality/Pharmaceutical business.

6) Capex: During FY19, the capex may be higher than Rs 500-600 Cr normal capex depending on implementation of new contact plants. The company is increasing Hydrogenation capacity which is expected to commence in FY19. Beside this, there would normal debottlenecking and expansion at existing product lines.

Discl: Aarti Industries is among my Top 5 holding. I have sold small quantity of my holding during last 15 days to align my portfolio allocation in equity. My view may be biased due to my holding. Investor are advised to do their own due diligence before taking any action. While I attempt to cover all points, there may scope of transmission loss/miscommunication and reader shall take note of this factor while reading this post.

(Karanops) #54

Many things in favour of aarti inds including the current scenario in China. Many plants in china have either closed or increased the price on account of pollution issues. Aarti is one of largest chemical company in India and for many products they are in top 3 manufacturers of world.

(JKS) #55

Q1 results came out today (Sat)

Another good set of numbers, at first glance. The numbers were a tad better than the expected numbers announced in pre-result estimate by KR Choksey https://www.moneycontrol.com/news/business/earnings/aarti-industries-q1-pat-seen-up-38-4-yoy-to-rs-87-3-cr-kr-choksey-2746991.html
Stock has been in a bit of up momentum, sensing these results perhaps.

Disc - invested

(Deepak Venkatesh) #56


I think these are good results indeed.
36% increase in revenues QoQ
42% increase in PAT QoQ
43% increase in EPS QoQ
OPM remains exact same over Q2FY18 as well as Q1FY19




(Dhiraj Dave) #57

Highlight from Aarti Industries Q1FY19 Con call.

Upward revision in Profit Guidance
While the management maintained volume growth guidance in past of ~12%, the PAT guidance for FY19 has been revised upward to 25% and for next 3-4 years to 20% CAGR. The past guidance of the company for PAT was around 15-20%.The change global trade dynamics of chemical (mainly reducing production in China and indirectly benefiting India with higher realisation and also better volume), expected increase share of higher margin products were the main factor behind revision in guidance.

Q1FY19 Review
The company achieved around 30% revenue growth of which around 12% was driven by volume and balance was factor of price growth. In FY18Q1, the sulphuric plant was closed which was operational during the quarter which also resulted in higher margin.
The decline in exports was mainly due to increased domestic demand. With issue from China in supply of chemicals, many Indian companies are benefiting from increased exports demand. Domestic demand continues to grow at normal rate. As a result, share of exports is declining while the domestic market growth has been significant during Q1. The company expects this trend continue for medium term. The raw material cost for the company broadly remain stable (Benzene price decline from Rs 59.6 per kg during Q4FY18 to Rs 58.2 per kg during Q1FY19). The rupee depreciation is also assisting to improve the margin of the company.

Pharma business
The company has around 20 DMF filed with US FDA of which around 13-14 are commercialised. The company has superior cost structure and competitive advantage as compared with competitor due to backward integration and scale. The margin in intermediate has also improved during the quarter due to limited supply from China. Overall, Pharmaceutical business would continue to show better performance during medium term with guidance of 25% pa Topline growth.

Capex and Outsource Contract
The company incurred Rs 160 Cr+ capex during Q1FY19. It would come up with capex plan for next 2-3 years once same being finalised. During FY19, the company expect to spent Rs 600 Cr which would be for dettolenecking, setting up outsource contract manufacturing facility and also setting up R&D facility and pilot plant (expected to commission in Q1FY20 with capex of around Rs 75 Cr).
On outsourced contract, the company would be receiving payment as advance toward supply based on milestone achieved. It expects to receive first tranche of payment during Q2FY18. The company has received Environment approval for these projects.

Global market and China factor
The shifting in global market share from China to India is long term structural change. While it is possible that in many products, China may restart production with setting up new environment compliant capacities. However, that would take around 2-3 years’ time and also came with higher cost of production. For Aarti Industries, in specialty products, there has been decline in China sales which is offset by higher domestic sales. Due to China constrained supply, prices of many chemicals have increased and provide better margin for medium term. Further, rupee depreciation would also assist Aarti to achieve better margin. Thirdly, the share of higher margin products in medium term is expected to increase which give confidence to management to increase PAT guidance from 15-20% range to 20% in medium term.

Debt Equity and Asset turnover
Aarti can see visible trend in shift in demand in global market and hence would like to get benefit by doing capex in the products. The new capex on capacity also include moderately higher cost of environment compliance. Hence, asset turnover ratio may decline as compared with past. The company is likely to manage debt equity ratio in range of 1-1.1 times as it is still in Capex mode.

Discl: Aarti Industries is among my Top 2 holding. view may be biased due to my holding. Investors are advised to do their own due diligence before taking any action. While I attempt to cover all points, there may scope of transmission loss/miscommunication and reader shall take note of this factor while reading this post.

(fabregas) #58

I have never invested in a pharma or chemical company. I recently started evaluating Aarti Industries. I was going through the Q1FY19 presentation and I noticed that the company bagged 2 big contracts recently.

In June 2017, AIL signed Rs. 4,000 crore multi-year deal with a Global Agriculture Company for supply of a high value agrochemical intermediary, for use in herbicides, over a 10-year period

In Dec 2017, AIL signed Rs. 10,000 crore multi-year, exclusive supply contract with a leading global chemical conglomerate over a 20-year period

Is this is the norm among suppliers in the chemical/pharma space to not name their clients publicly when they get new contracts? As an investor I would be more comfortable if the name of the client was mentioned.

I went through the cashflow statement on screener.

As you can see since 2011 onwards the company has been spending almost all the cash generated from operations as CAPEX. Cumulative CAPEX from FY13 onwards is about 1000 crore. On the other hand incremental revenue (FY18 - FY13) is about 2000 crore. So in laymen terms it looks like the company needs to invest 1 rupee for every 2 rupee of revenue. @dd1474 Any thoughts on whether this is good or bad or mediocre for a manufacturing company?

Disclosure: Not invested. Evaluating.

(Dhiraj Dave) #60


In my opinion, we need to understand difference between secular growth companies like Hindustan Lever, P&G, ITC and Cyclical companies. Cyclical companies would require capex to expand capacity which can not be met from internal cash generation. In cyclicals also there are certain industries which have very high capital intensity like Steel, Fertiliser, Paper versus others like Automobile and chemicals which have relatively lower capital intensity.

Hence, generally market give very high discount rate to secular growth companies. However, there are some excellent wealth creator even in cyclical industries if growth path is long and managment is good. If we consider Finance being Cyclical then HDFC Bank, Kotak would be such example.

In case of Aarti Industries, the company has done constant capex to grow its business over period. It has moved from pure benezene chemical company to expanded to tolune based chemical and now offering various products to its customers on global scale. In order to achieve this, the company has incurred large capex due to which there is limited free cashflow.Now the point to consider is whether the company has incurred capex without resulting in any benefit and how capex has been funded? In case of Aarti, despite such large capex, the company has managed debt equity mix of aroud 1-1.2x of Net worth. Secondly, the capex has resulted also in higher revenue growth and profit growth.

While the company has got very large orders from two large MNCs giving certaininty to growth path for around 5-10 years; the tight rope of limited free cash flow would continue to be chellange. In my limited understanding, share price movement in Aarti Industries henceforth would be more driven by growth in cashflows then revision in PE. The company is already trading at highest PE ratio in last 2 decade. Investor shall look at his/her own risk profile and he/she is the best person to take investment decision in any company including Aarti Industries .

Discl: Aarti Industries is among my Top 2 holding and my view may be biased due to my investment in the company. Investor shall do his/her own due dilgence before taking investment decision.

(smehta) #62

Aarti Industries Ltd
Highlights of Q1 FY19 annual results

  • Revenues grew by 36 % YOY to Rs 179 Cr over last year same quarter
  • EBITDA has increased by 38 % to Rs 128 Cr with strong contribution from specialty chemical and Pharma
  • Volume in specialty chemical segment grew by 12 % inline with the guidance given previously. Higher revenue contribution from direct linkage and pass through raw material prices. Company has entered into forward contract of exports.
  • EBITDA was impacted by 28.9 Cr due to M2M loss contract. Company forward the long term contract in ECB of Rs 7.23 Cr it has been provided under finance cost.
  • PAT register a YOY growth of 42 % to 89.28 Cr over last year same quarter
  • Realization are link to global Crude price so the key element to track is Isolated EBIT. EBIT grew by 45 % yoy despite the foreign M2M loss. Increase in EBIT is due to increase of volume growth and also due to improvement in margins for various products across our IV value-integrated chain.
  • Company was running at 90 % capacity utilization.
  • Company is planning for next level of CAPEX to further expand the capacity of NCB
  • Company has invested around Rs 153 Cr as planned in CAPEX during the quarter.
  • Nitro facility which commence in September has operate over 40 % during FY19 and expect it will reach to 80-90 % by end of FY20.
    Pharmaceutical Segment
  • Revenue grew by 42 % to Rs 150 Cr over last year same quarter
  • EBITDA grew by 86 % to 26 Cr due to improve business across market and significant operating leverage. It is growing into a sizeable business entity.
  • Company is planning for next phase of expansion in the Pharma Business because company see good growth in next 3 years
    Personal Care
  • Set the plan for demerger of women personal care in motion and expect closure later this financial year.
  • Continue to follow guideline of about 10-15 % for the current year
  • Revise guidance of PAT growth from 18-20 % to upward of 25 %. over last year same quarter
  • What was the volume growth for the business in the specialty chemical business ?
    o Overall volume growth is 12 % in specialty chemical. So out of 30 % growth in revenue 12 % is from volume and rest is from cost of inflation.
  • What was the volume for the key products ?
    o PCB and MCB number was 17000 ton and Nitrotolvin at new plant was 3070 ton which is 40 % capacity utilization and hydrogenation of 1950-2000 ton per month.
    o PDA was about 550 tons per month
  • Did company has any shutdown in this year ?
    o Company has 1 shutdown in march so next shutdown company only expect in Q4 of this year.
  • Whether the impact of M2M loss is only for the June quarter or full year impact ?
    o Only for the June quarter.
  • How the interest cost has been stable with even the debt has been doubled ?
    o There has been a benefit on account of reduction in interest rates that has started in last 9-10 months. Earlier company was having a rupee debt which is moving toward foreign currency.
    o On long term loans foreign currency loan is roughly around 15 % and on working capital it range between 25-30 % depending upon how the volatility in currencies are.
  • What would be the cost of debt around ?
    o Overseas should be in range of 3.5 to 4 % including the hedging cost . It is only the interest rate cost.
  • What will be the break up of the CAPEX ?
    o One is on the contract that company got and which will commissioned in FY20 second half which is a four step process so in various stages the CAPEX is going to incur and some of debottlenecking in some products and there will be some normal maintenance CAPEX also.
    o Also planning R&D on pilot plant set up in this year or toward first quarter of next year.
  • How will revision of profitability guidance of 25 % will play out ?
    o It is because of increase in margins in some of the products so company has increase the profit guideline upward and volume guideline same
  • Did company expect volume growth in MCB ?
    o Yes company expect good volume growth in Indian market and some of them would be for export purpose.
  • Is there any other segment where company see growth ?
    o Dyes , pigment and chemical which has more volume demand in India.
  • From where is the benefit coming from in other expense of around 3 % improvement ?
    o Generally Forex is adjusted in the revenue and expenses so this improvement come from here.
  • How sustainable the prices trend would be on the products based on lead ?
    o In some of the product company see long term sustainability and in some it will not sustain long so there is a balance between the two. Some products which are closer to China which are closer to China margin may not sustain but in products where there is structural change the margin will sustain.
  • For the new contract of 4000 Cr whether company get the environmental clearance and location ?
    o Yes the construction is going on and company will get the environment clearance also.
  • What is driving the business turnaround in Pharma business ?
    o Company has three parts in the Pharma business and seen significant growth in Intermediary segment in demand. Company have 2 part in Intermediate one is generic and another is normal one. So in generic intermediate there was an advantage of china shortfall and company had been backward integrated for API business also because company have least cost pressure
  • What CAPEX company is planning in Pharma ?
    o Company has done CAPEX in pharma in API and Intermediates by adding blocks in the existing sites
  • Is there any scope of further margin expansion in pharma ?
    o In pharma there is a scope of further increase of EBIT percentage . Pricing power will give company better numbers.
  • What sort of utilization will be there in API and intermediate business ?
    o 70-80 %
  • In Africa company is going to set up R&D Lab it will be finalized ?
    o Overall CAPEX it will be around 75 Cr which is expected to be operational in Q1 of FY18
  • What will be the Chinese situation going forward ?
    o In Chinese situation there will be a rationalization of capacity in China for a long term so some new capacity for the product may come up but that will be at the higher cost and it may take couple of years but overall the cost in China is increasing and that trend will continue and Chinese situation is giving higher pricing.
  • What percentage of revenue was not in existence from last year like new clients or new products ?
    o New customer only add in Nitropliner which company had added in Q4 FY18 rest in all other business the customer business remains same. But of the downstream consumption has started in India . So customer base must be same but products that they are buying is expanding.
  • What CAGR growth company is seeing for next 3-4 years ?
    o More than 25 %.
  • What is the time period of contracts that company have ?
    o In India it is generally for 1 month order booking
  • What are the structural reason other than china ?
    o Manufacturing cost going up and other expenses are also going up related to that structurally margin improvement is there.
  • Did the 400 Cr CAPEX plan of the year was for all four stages ?
    o Yes
  • For the last five year company Net-asset turnover was 3.5-2.2 times so as the asset utilization improve then will this improve by FY20-21 ?
    o Newer assets are costlier and company has done many expenses for environmental expenses so that is also the reason for reduction of asset turnover and it also depend on the raw material price also.
  • What is the debt-equity ratio in current quarter ?
    o Right now company is more into CAPEX so debt equity is on higher so it will depend when company will start the consolidation as well as CAPEX. Company is looking at a very good volume growth opportunity and as visibility will be there company will continue to invest.
  • Will the growth of Pharma sector will continue going forward ?
    o Yes company had given growth guidance of 25 % and that will happen.
  • Did company is planning any CAPEX in Intermediary in Pharma ?
    o Yes that is in planning stage
  • What will be the margins for the two projects that worth 400 Cr and 200 Cr?
    o For 400 Cr project company EBITDA margin is 40 % plus.
    o In second one company is expecting 500 Cr turnover per year that has been committing in Q4FY20 or Q1FY21 where the PBT range is about 10 % because there will be no investment from company side.
  • What is the US sales as of now and how many DMF company have filed and how many got approved and launch ?
    o In US overall sales will be close to 45-50 % of company exports and total company have filled 25 DMF out of which 13-14 have been commercialized.
  • Kindly give timeline for the merger and demerger ?
    o Expect by the end of FY19.
  • What is the status of personal care segment ?
    o There company have 2 products one is Sulfonic and specialty chemicals in which in sulfonic company is able to stabilize the SNS production , it is the powder that goes for toothpaste as well as for washing application and here company have tie up with MNC and overall capacity utilization is improving and able to manufacture the right product that has been the turning point in the topline growth and once company further utilize the capacity the bottom line growth will happen for the future. Use of the sulfonic block should be close to 65-70 %.
  • Kindly give brief of other income jump ?
    o It consist of dividend that company receive from subsidiary of 1 Cr.

(saumya) #63