Aarti Industries - Integrated Diversified Player on Benzene Derivatives

Trying to play the Devils Advocate here. Open for a healthy discussion

  1. My guess is that since the Termination Fee is part of the contractual terms with the customer, it may be considered as BAU while doing accounting.
  2. This is almost similar to take or pay contracts companies enter with their customers.
  3. They had in the past also recognized the same as part of Rev from Ops. (Attached pic of the concall).
  4. They have given a proper division in the PPT

Thanks finsight for helping us searching through calls so easily :smile:



Q4 and FY22 results were pretty good even considering, without the termination income. In the concall the management commentary was also quite bullish about FY24 and beyond. Despite that, the stock is continuing to fall, when most other stocks are recovering.

One thing, I noticed was their receivables and inventory have gone up significantly this year leading to lower CFO, inspite of receiving the termination income this year. This could be due to valid reasons as well, like, higher inventory to manage RM volatility. Higher receivables could be due to higher share of exports this year (exports increased from 39% to 41% of revenue share).

Is this a matter of concern?

Can someone following this company , please share your views?

@Dev_S , @dd1474 Could you please share your views if you are still following this company? Is the increase in receivables, something to be concerned about?



While your comment about increase in working capital is valid, but in a high inflation environment, value of RM and Receivable would likely to go up. Too an extent same being funded by Suppliers (trade payable), but balance amount need to be funded from working capital. The management did touch upon same in commentary in Q4FY22 con call.

Let me try to simply. Assume company is selling 1 tonne of material in month at price of Rs 100 with Debtors day 30, inventory day 30 and Payable days 30 and let us assume Cost of material consumed/purhcased is Rs 50 per month and Cost of manufacturing Rs 80 per month. In this case, working capital requirment for business would Receivable Rs 40 (1200/30)+ Inventories ~ Rs 32 (8012/30) and Payables Rs 20 (5012/30). So net working capital is Rs 52.

Now let us assume 50% increase in next 12 months in all three component (sales, cost of material and cost of manufacturing). With same volume of 1 tonne, without any other change, Net working capital would increase to Rs 78. (Receivable Rs 60: 1800/30; Inventories Rs 48: 1440/30, Payable Rs 30: 900/30). So in my opinion, till receivable days, inventoried day and payable day move in range of 10-20% of last 10 years average, I would not see it as unusal development. However, constant increase in working capital days, every year would need to be closely monitored.

Hope this address the issue.

Thanks for seeking my view. Please note that my understanding may be incorrect.

Discl: Among top 5 investment ideas. No Trade in last 3 months. Not SEBI registered advisor, not suggesting any investment action.


While @dd1474 has nicely covered key aspects, regarding stock price movements, my submission is that it is broadly function of

  1. Overall market and sector sentiments - both are weak
  2. Street doesn’t seem to like single digit growth guidance for FY 23. There are 138 cr of one offs( comp from client), besides 630 cr of contract closure in this year ebdita. Thus creating very high base.
  3. Margin pressure etc makes near future more uncertain hence active money may be exiting for other opportunities.

Having said that, these are my interpretations and could be off,



Can you please explain this calculation in more detail. I am not able to figure it out. Thanx

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Q1FY23 Key Concall Takeaways

  1. Demand Outlook: Although AIL has slightly outperformed in the current quarter in terms of topline guidance company has maintained its guidance for FY23, of 10% top-line growth& 8-9% EBITDA growth as management witnesses little turbulence in demand from Textile and FMCG (dyes & pigments segment) & raw material costs pressure from core products like benzene & higher utility prices.

  2. Production Volumes for Specialty Chemicals: For Q1FY23 volumes across product segments were:
    NCB - 20515 MT in
    Hydrogenation – 3295 tonnes/month
    Nitro Toulene – 5252 MT

  3. Specialty Chemicals top-line: Specialty chemicals grew 44% YoY, with about 75% share of the revenue from value-added products during the quarter. Growth came in from increased realisations from value-added products &the price hikes taken to pass on the increase in cost. The pass-on of cost increase happens in a month in the domestic market, whereas in the export market, the lag is of 2-3 months.

  4. Pharma Division: The segment reported 48% growth on a YoY basis &5% growth on a QoQ basis. Robust growth in topline performance was attributable to a positive demand landscape for key products. Higher uptake from Generic Pharma companies aiding topline growth and strong revenue visibility. The expansion of capacity for the USDA-approved API facility is in the final stages and is expected to commercialize in Q1 FY23.

  5. New Capex and Expansion plans:
    The management has also guided for a Capex of Rs 3000 Cr for the next 2 years. Out of the projected Capex company has spent 200 Cr in the current quarter.

    The Capex will be majorly for adding more downstream products in the current benzene chain, new Chloro Toluene chain and debottlenecking of the existing products.

    All the capacities set up during FY22 should ramp up and clock utilisation of ~70-90% by FY24-end. Incremental Capex would be mainly utilized for high-value products.

    50% of the Capex will be for the existing products and contracts, while the remaining for the new product development. A large part of the Capex would be towards chemical products 2500-3000 Cr, whereas for Pharma it would be in the range of 350-500 Cr. Site development work to commence on100+ acre land at Jhagadia. AIL also acquired over 120 acres of land at Atali, Gujarat. Environmental Clearances obtained / inprocess. Construction from FY22 – FY24

    The company will be coming up Concentrated Nitric Acid plant by FY24 to take care of Nitric Acid requirements, the company is evaluating the feasibility of going for a Weak Nitric Acid integrated plant to be completely self-sufficient, the management has a project cost of 150-200 cr for CNA plant whereas Capex of 500CR + for WNA & CNA plant.

  6. Long-term Contracts:
    Capacity created for 1st long-term contract should ramp up utilization levels to the tune of 70-80% by FY24- end

    The company commissioned a second long-term contract during Q1FY23and is expected to contribute to revenue starting from Q1FY23. The annual contracted sales for this contract are 500 Cr and shall be seen adding to the topline with a ramp-up in utilization over FY23.

    The 3rd contract should start by Q2 FY23 and ramp up over the next two years FY23-24.

  7. RM Availability: Nitric acid shortage continues to affect the production of a few linked products. Management is planning a Capex for Concentrated Nitric Acid to the tune of 150-200 Cr with a capacity of 60,000 MTPA. The plant will commission by the end of FY24 as a backup to reduce the company’s dependency on local players. In the near-term company expects supply to resume from H2FY23 onwards as new capacity in India will be ready.


Source Kotak


This impact would be in chemical division or pharma division?

Intimation of order of the NCL T approving the scheme of Arrangement between Aarti Industries Limited and Aarti Pharmalabs Limited and their Shareholders.

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AGM doc:

AIL says there will be growth but in fact it is degrowth (not even well hidden by the makers of this pdf).

See the slides. Whatever is projected as growth for FY24 (over FY21) is already achieved or over achieved in FY22. Kudos to the management for these infographics.

Very long term investor but haven’t tracked the AGMs since the stock has given phenomenal returns.


Price discovery in demerger?

So Aarti Industries is going to demerge its pharma business and 20th October is record date. Today the share price is quoting around Rs 702. And closing price last two days is…

Oct 18, 2022 → Rs 744

Oct 17, 2022 → Rs 788

The demerged entity will be listed in mid-december.

Wanted to understand how is the price of stock (parent and demerged companies) determined.

The pre-demerger company valued is at Rs 788 / share (17th oct). Now only chemicals business is valued at Rs 702 / share (ex record date). How has market came to this price? Will the new pharma business will be valued around Rs 88 per share? If not then at what price will be the pharma business listed?



When will Aarti pharmalabs be listed?


The more one reads into chemistries of chemical companies, the more one gets scarred.
I was reading into halex chemistry for which this business is the only manufacturer and I was not happy about the effects of these.

This is certainly a niche and not an easy chemistry. However, mild and general synthetic methods for the preparation of aromatic fluorides are lacking, and traditional methods used to generate them, such as the Balz–Schiemann reaction and the Halex process, typically require harsh conditions, curtailing functional group compatibility and requiring fluorine installation at an early stage in the synthesis.

Largely as a result of their unique biological properties, organofluorine compounds have consistently found their place among top-selling pharmaceuticals and agrochemicals. In particular, substituting a hydrogen atom of an aromatic ring with fluorine can retard oxidative metabolic pathways, thereby effectively increasing the lifetime of an administered therapeutic.

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When will be Aarti Pharma credited in demat account and be listed?

I have got Aarti PharmaLab share credited in my demat account. Also, Aarti Pharmalab declared dividend of Rs 2 per dividend with 17 Jan 2023 bring record date. I assume Aart Ind Investor who got share on restructuring would be eligible for dividend payment as same being held by an investor on record date.

After almost 8 years plus holding, I have systematically reduced my Aarti Industries holding to around 1% of my portfolio. Over the period, there were great turning points in investing, companywise and market wise, from Demonetisation, GST implementation, Covid related uncertainty, China+1 to Getting 3 long term contracts, termination of one high margin long term contract and constant selling by promoters during the period. My decision to trim my holding was mainly due to my estimate stable to lower profit for Aarti Ind in FY23 as FY22 has significant income booking from termination fees for agreement. Also, I had significant exposure to Specialty chemical including Aarti Industries/ SRF/ Transpek Industries/Andhra Sugar/ Kama Holding (SRF holding company). Among all companies, I found Aarti Industries being reasonably valued considering in capex and growth prospect.

In my Investment Career, Aarti Industries has special place. In absolute amount wise, this company has rewarded me highest post tax realized wealth in my more than 25 years of investing career. I would always be grateful to the management of the company for this support.

Find enclosed my Aarti Industries holding in my portfolio (I have not considered Surfactant and Pharma lab in my calculation).

Despite large capex, the company constantly increased dividend at CAGR of 13.8% (adjusted for bonus), plus two tender buyback and two bonus issue. This growth in dividend was main factor which assisted me hold the companies over long period. Aarti Ind and Eicher were two investment which I made during August 2014 and September 2014. By December 2014, Eicher was 18% Weight in Portfolio while Aarti Ind was 8%. Despite great performance from Eicher and my higher conviction, my XIRR (including dividend) from Eicher as on 31 March 2022 was 17% (over 7.5 years) while for Aarti Industries was 47% (over same period). Though Eicher I started selling within year of holding, Aarti I continue to hold. By September 2018, Aarti Ind even exceeded Eicher (partly due to selling of Eicher shares and partly due to superior performance of Aarti Industries, reflected in market price). From Sep 2018 to Dec 2019, Aarti reached as top holding for me with more than 16-18% of my portfolio.

I did not have any view when I invested in Aarti Industries that it would be the highest absolute wealth creator for me in next 8 years. This again reinforce the point, at least for me, I do not understand how business and valuation would change over period. Also, in my view, I was lucky to hold for long period and skillful to read annual reports and con call to develop my conviction in the company.

Since I had been regular contributor to the thread, I thought to update the forum members (apology for being late by 6 months only :pray:)

Thanks VP members for being major force to assist me to develop my conviction in the company and management for such wonderful execution. I wish we all are lucky/skillful to have many such Aarti’s being identified early and held for longer period when the company is performing.

Discl: I am not SEBI Registered advisor. I am not suggesting any investment action. Reader shall do her/his own due dilgience. My view may be biased.


I think now it has entered the <30 P/E zone. I feel it is at reasonable levels now. Less than 25 may make it cheap. This is a rough calculation. Subject to correction : I’m a newbie to this.

FY21 Net profit = 535
FY22 Net profit = 535+139.15 = 674.15 ~ 675 (Excluding termination)

Reported PAT - 675+631crs (Termination income) ~= 1307
Outstanding shares = 362,504,035

General EPS (adjusted) - 1288 cr /362,504,035. = 35.5
General P/E = 536/35.5 = 15.09

Actual EPS (adjusted) - 675 ~ 665 cr /362,504,035 = 18.34
Actual P/E = 536/18.34 = 29.22

Correction :
As the demerger is already done, pharma net profit has to subtracted.
so adjusted profit is 675-150 = 525 cr. so EPS would be around ~14.5.
So p/e would still be around 37. Credits for correction @Amudha


aarti pharma profits have to deducted from fy22 numbers, since demerger has been completed.
For fy22, Pharma EBIT was 220 cr.
Assuming, 20cr interest charges and 25% tax, 150cr have to be subtracted from fy22 PAT.

Then the eps would be 14.5 and pe ~37


the TTM EPS is 33.82 and Aarti Drugs use to contribute ~13% of earnings
which makes Aarthi Ind current TTM EPS as ~29.4 so the PE is ~ 525.25/29.4 = 17.8.

Please correct me if I am wrong in my understanding.