ValuePickr Forum

Aarti Industries - Integrated Diversified Player on Benzene Derivatives

Aarti - Long Term Buy.png


Aarti Inds Ltd


Market Cap:Rs.716.25 CroresCurrent Price:Rs.90.55

Book Value:Rs.71.55Stock P/E:6.85

Dividend Yield:**3.80%**Stock isRs.5.00 paid up

Sales :1672 cr ( 2012)Div Payout a29%

Technical Observations

*The stock has crossed above 90 which was a 6 year resistance. We have seen big outperformance in stocks which have

Crossed multi-year highs. The current breakout is an indication of a major change in trend for the stock.

*Itas a breakout from a huge Cup And Handle where Handle size is 45 points and Cup size is 67 points.

*A minimum target projection in this case would be 135/155 and higher.

*The stock is consolidating after first attempt at 90 + and this period could be an excellent time to accumulate the stock.

*Accumulate the stock at 82-92 levels with a target price of 135/155.

*We may even expect higher targets in long term.


It is an encouraging chart.

fundamentally the fly in the ointment is the high debt.

and consistently increasing debt is what should be worrying. as on half year ending sep 12, debt amounted to around 590 crores. and this has consistently increased over the years.

this is one feature i dont like in companies – increasing debt and at same time increasing dividend amount. ek haath chori karta hai doosra haath daan karta hai.

Ideal situation for any situation should be to focus on reducing debt as earnings increase and then once debt comes to manageable levels, focus on dividend payout front.

having said that, since earnings have kept pace and since there seems to be strong market fancy, stock is likely to continue its uptrend.

2 Likes,%202016.pdf

A link to latest investor presentation. Hugely informative and encouraging.

Disc: holding from Rs 520 Levels

Also read its annual report. It is one of the most detailed and informative report I have ever read.

Aarti Industries Ltd has informed BSE to buyback up to 12,00,000 fully paid-up equity shares representing up to 1.44% of the total number of Equity Shares of the Company at a price of Rs. 800/- per Equity Share. link to bse message

I did not expect management to pay Rs.800/- (the proof is in the pudding, transactions and brokerage cost already amount to close to 10% which is included in this 800), nevertheless a very good sign from management.

Disc: Invested from 460 levels

Its just dividend in form of buyback …


@nooreshtech…Agree. But it is a far better way of distributing money as it is super tax efficient. Specially after the introduction of the new additional dividend distribution tax.
Overall a good sign. Also the buyback amount is Rs 96 cr ( vs fy16 net profit of 252 cr and eps of rs 30 per share). That would amount to a dividend of Aprox Rs 12 per share. Not Bad at all.

Received the Buy back offer doc.Small investors are entitled for 33 shares for every 203 shares held by them.That is a bonanza. Small investors are defined as whose holding’s market value does not exceed Rs 2 lacs. all others entitlement is 1.44%.

Any feedback about promoter group of Aarti Industries?

Business Overview
• Aarti Industries (AIL) has 3 divisions –
o Specialty chemicals - Polymer & additives, Agrochemicals & intermediates, Dyes, Pigments, Paints & Printing Inks, Pharma Intermediates, Fuel Additives, Rubber chemicals, Resins, Fertilizer & Nutrients
o Pharmaceuticals – APIs, Intermediates for Innovators & Generic Companies
o Home & Personal Care - Non-ionic Surfactants, Concentrates for shampoo, hand wash & dishwash
• One of the leading supplier to global manufacturers of Dyes, Pigments, Agrochemicals, Pharmaceuticals & rubber chemicals.
• Manufacturing units (16):
o Specialty chemicals - 10
o APIs - 4
o home & personal care chemicals – 2

Specialty Chemicals
• Largest nitro-chlorobenzene producer of India with a capacity of 60,000 TPA
• Amongst the largest producers of Benzene based basic and intermediate chemicals in India
Lowest cost producer of Benzene in the world
• Exports account for 51% of specialty chemicals division with 90% of exports USD denominated
• Offers 100+ products to MNCs globally; has “strategic supplier” status with many
• Globally ranks at 1st – 4th position for 75% of its portfolio
• Works on a cost+ model. Increase in cost of benzene will increase working capital requirement funded by short term debt. Decrease may lead to inventory losses and revenue reduction
• Benzene accounts for ~60% of the company’s revenues, while aniline and sulphuric acid compounds contribute ~12% to revenues.
• With start of the Dahej facility of 30,000 TPA capacity in Q1FY18, AIL will also enter toluene chemistry.
• Exports contribute ~50% to revenue with incremental capex planned to enhance standing in the export market.
• Co supplies products to more than 500 domestic customers and over 150 international customers from 50 countries with a major presence in USA, Europe, China, Japan and India. The customer list comprises marquee brands like BASF, Bayer, Clariant, Dow, DuPont, Flint Ink, Hunstman, Makhteshim Agan, Micro Inks, Solvay, Sudarshan, Sun Chemicals, Syngenta, Teijin, Ticona, Toray, UPL Limited

• Pharma business has broken even in FY12 and can aid in growth
• Company has two USFDA facilities one for API and another for Intermediates.
• Comprises of about 15% of total revenues
• 48 commercial APIs with 33 EDMF, 28 USDMF and 16 CEP. 12 new APIs under development

Home & Personal Care Chemicals
• Low margin business
• Expected to grow on the back of larger consumption of hygiene and personal care products. Increasing consumption is driving the demand for range of cosmetic chemicals, health care products and hygiene products using performance chemicals, polymers and oleo chemicals.
• Comprises of about 5% of total revenues

Industry Overview
• Indian specialty chemicals industry is around $25 bn (FY13-14 FICCI report)
• India contributes about 3% of global specialty chemicals industry, which leaves a very large opportunity size.
• Global chemical companies are de-risking the supply chain for their raw-material by diversifying from China to India
• The most impactful regulation from an Indian perspective has been the European Union’s REACH (Registration, Evaluation, Authorization and Restriction of Chemicals), which went into effect in June 2007. This legislation addresses the production and use of chemicals and their potential impact on human health and environment. The substantial impact of REACH will come into play following the implementation of Phase 3 from June 2018 that will regulate any chemical supplied to EU at quantities of 1 tonne per annum or more. Aarti has been REACH-complaint since 2011.

Competitive Landscape
• Chlorination (ranked among the top three globally)
• Nitration (ranked among top four globally)
• Ammonolysis (ranked among the top two globally) Hydrogenation (ranked among the
top two globally), and
• Halex Chemistry (only player in India).

Risks & Concerns
• Co operates in an environmentally sensitive sector and is open to regulatory risk. Government can put in place stringent environmental guidelines which may make their products uncompetitive internationally.
• Fire and accident hazards during operations causing major disruptions cannot be ruled out.
• Issues with US FDA / cGMP on pharma APIs
• Co has exposure to foreign currency fluctuations
• Debt is high
• Though co works on a cost plus basis model in its speciality chemical segment, 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.

• Management compensation aggregates to 10.25cr and is especially high amongst the Gogri family members.
• Management has maintained a dividend payout of over 25% for the last 10 years
• Management is paying out full tax

• Net debt / Equity is 1.9 at the consolidated level, which is on the higher side. Interest coverage ratio is 4.89 which is healthy.
• Co has maintained strong operating cash flow / net profit ratio, which means they have been able to generate cash successfully over a long period of time.

Piotroski’s F-score Analysis

Co fairs well in the Piotroski’s F-score with a score of 6 (out of 9). The 3 points where it did not get a score were very near misses.

Dupont Analysis

• Majority of the ROE is being derived from the financial leverage. The co is slowly improving its margin profile and can maintain its ROE at the current level, even if they reduce debt. At the same level of leverage, ROE can be improved by better margins.
• With a large part of the capex already done, specially for the toluene plant, asset turnover is likely to improve, thus improving ROE further.
• The co is consistently improving its ROE over the last 5 years

Key Assumptions & Key Monitorables
• Growth led by capacity addition will continue
• Debt-Equity levels will not rise further
• Margins will be on an upward trend based on better product mix
• No issues with US FDA or any other regulatory compliance
• Toluene and ethylation plants get onstream with good capacity utilization


Disclosure: Invested


Thanks Abhiseikh for the research and hard work. Very nice analysis.

Disc: Invested from 520 levels

The board has approved an investment of Rs. 75 crore to set up a world class R&D, scale-up and innovation complex at Jhagadia, Gujarat spread over 50,000 sq. ft.

The co presently operates three R&D centres. Two of these centres focus on R&D initiatives for Pharmaceutical APIs and the third one on Speciality Chemicals.

The new complex would comprise an R&D centre, a scale-up facility consisting of a kilo-lab and a pilot plant, an innovation center, dedicated labs for process safety, effluent treatment, etc. It will house over 150 scientists and engineers responsible for researching and developing breakthrough innovations, as well as for commercial scale up of various Speciality Chemicals. The complex will more than double AIL’s R&D capabilities and focus on development of newer and niche value-added products and process chemistries, improving product quality and process yields of existing products, forward integration for downstream products etc, with thrust on environment friendly processes.


Interview with Mr.Gogri on CNBC

1 Like

Would you be able to share how last part about valuation was derived? DCF?

Aarti Industries Ltd, a leading global Speciality Chemicals company with significant presence in
Pharmaceuticals, today in its Board of Directors Meeting gave in-principle nod for demerger of
its Home & Personal Care business. The Board has directed the Company to initiate
discussions with merchant bankers, solicitors and other agencies for the said purposes.
Aarti-17e4-4690-8e9c-e394f85647b6.pdf (495.1 KB)

Q4Fy17 and Full Year earnings:

1 Like

Hi Abhishek Sir,

Do you use any automated tool to get results in excel format or its a manual effort…?? Its quite neet and clean approach to see the results and compare it on QoQ and YoY basis…appreciated your efforts…

If you any automated tool please do share with us…


Hi Abhishek @basumallick,

The results come out much lesser if you look at performance without the ‘other comprehensive income’. Do you know what this line actually includes and whether it is better to see the results with or without this?

As per the new Ind-AS, all listed companies has to value their investment as mart to market. notional gain/loss as on the valuation date is categorized under other comprehensive income

The co’s Other comprehensive income declared is not significant when compared to their overall results, both a quarterly basis or annual basis.