Aarti Industries - Integrated Diversified Player on Benzene Derivatives

Same, I expect this is the time to sit tight and let the demand cycle recover. There might be some loss in the near term but I expect it to bounce back

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Aarti Industries Q2

Revenue/EBITDA: ₹197 crores, down from ₹233 crores YoY (~15.47% decline YoY).
Profit: 52Cr, down 42%
EBITDA Margin: 12.10%, down from 16.02% YoY.

I have lowered holding, will average up when the cycle turns.

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One must take into consideration the demergers done over the same period and the business being continued now. So historical numbers may require adjustments.

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The point is most of it is circular business … That is what future group did …

Aarti Industries need to increase confidence now by getting promoters to buy the stock now that the stock is down significantly and they believe EBITDA will increase by 100% in next 3 years …

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Aarti Industries: Navigating Challenges and Driving Growth in India’s Specialty Chemicals Sector

December 16, 2024

India’s chemical sector is undergoing rapid development, projected to grow from $186 billion in FY20 to an impressive $330 billion by FY25. One of the key drivers behind India’s chemical industry growth is the booming specialty chemicals sector. Expected to grow at a stellar 11% CAGR, the specialty chemicals market in India is anticipated to reach $148 billion by FY25

India is emerging as a key player in the global chemical supply chain. The ā€œChina plus oneā€ strategy, adopted by many global enterprises, along with government support for import substitution, has bolstered domestic manufacturing and export demand. This provides a huge opportunity for Indian chemical companies, including Aarti Industries, to expand their market share both locally and globally.

In this blog, we will explore Aarti Industries’ performance, the impact of market volatility, and the company’s strategy to overcome these hurdles while positioning itself for future growth.

AARTI INDUSTRIES: A LEADER IN SPECIALTY CHEMICALS

Aarti Industries has been at the forefront of India’s specialty chemicals revolution. Started in 1984, Thay manufactured everything from daily essentials to complex industrial solutions. The company is a leading producer of a wide range of products, including dyes, pigments, agrochemicals, and pharmaceutical intermediates.

The company operates with integrated processes across the Benzene, Sulphur, and Toluene product chains and holds a position among the top three global producers of Nitro Chloro Benzene (NCB) and Di-chloro Benzenes (DCB).

10 years back (2013-14), revenue contribution of specialty chemical was around 50% and now this contribution is increased to 70%. This itself shows how the company has progressed over the last decade.

SECTOR OUTLOOK: CAUTIOUSLY OPTIMISTIC

Aarti Industries faces near-term challenges but remains cautiously optimistic for the long term. The company is diversifying its revenue base, reducing reliance on the energy sector, and expanding into high-growth areas. With capacity expansion and new chemistries, it expects consistent volume growth. Despite margin pressure from Chinese overcapacity and energy sector competition, Aarti is confident in its ability to adapt and achieve sustainable growth through cost optimization and strategic investments.

RESETTING EBITDA GROWTH AND CAPEX PLANS

Management had initially guided for an EBITDA target of ₹1,450-1,700 crore for FY25 during the Q4FY24 conference call. However, in Q1FY25, the company achieved ₹300 crore in EBITDA, but this figure significantly dropped to ₹197 crore in Q2FY25 due to prevailing industry conditions. Following these results, the management revised its guidance, withdrawing the previous EBITDA target. The new revised estimate for FY25 is ₹1,000-1,050 crore, with the expectation to double EBITDA over the next three years, aiming for ₹1,800-2,000 crore by FY28

Aarti Industries has taken proactive steps to reset its growth trajectory. The company is focusing on cost optimization, ramping up volumes, and pursuing capex-led growth to return to its target EBITDA growth.

Benzene prices are directly linked to crude oil prices, so when crude oil rises, Benzene becomes more expensive. Aarti Industries counters this by maintaining a consistent rupee margin per kilo, ensuring profitability even when raw material costs fluctuate.

Aarti Industries, operating in a capital-intensive sector, aims to drive revenue growth through strategic investments in capacity expansion and operational efficiency. The revised capex budget for FY25 is ₹1,300-1,500 crore, down from the previous ₹1,500-1,800 crore estimate, with an additional ₹1,000 crore planned for FY26. These investments are focused on increasing capacity and ensuring sustained growth across its business segments.

In addition, Aarti Industries plans to invest in new and emerging sectors, such as chemical recycling and battery chemicals, to future-proof its business. The company aims to tap into these ā€œsunrise sectorsā€ to offset the challenges in its traditional energy business. Aarti’s strategic focus on innovation, particularly through its R&D capabilities, will help maintain its competitive edge and facilitate asset-light growth through strategic alliances.

KEY CONCALL HIGHLIGHTS

Aarti Industries’ recent concall revealed several insights into its financial performance and outlook:

  1. Margin Pressure: The company expects continued margin compression due to Chinese competition and volatility in energy applications. However, it believes that volume growth and higher utilization of new capacities will offset some of these pressures.

  2. Capacity Utilization: Aarti Industries is ramping up capacities in Nitro Toluene (NT), Ethylation, MMA, and PDA. The capacity expansions for NT and Ethylation are already being commissioned, with expectations to grow from 10KT to 25-30KT. A ramp-up for these products is expected over the next 6-18 months. For PDA, there is competition from China, and utilization is currently down. The company is exploring partnerships to develop high-end products in this area.

  3. Free cash flow- Aarti Industries has faced negative free cash flow due to its high Capex aimed at expansion. In FY24, the company spent ₹1,280 crore on various projects, including the Phase 2 Acid Revamp cum Expansion. While this results in negative FCF in the short term, these investments are crucial for long-term growth and profitability, and the company expects positive returns once these expansions come into operation.

  4. Volatility in MMA Business- Aarti Industries’ MMA business faced challenges in Q2FY25 due to a sharp decline in gasoline-naphtha cracks (difference in price between gasoline and naphtha, which are both refined petroleum products), affecting octane-boosting economics. However, MMA demand showed signs of improvement in October, with a potential recovery expected in Q4 driven by seasonal demand from the USA. Despite volume decline, Aarti remains the largest player in the MMA market, leveraging its leadership position to navigate volatility.

TECHNICAL ANALYSIS -

Aarti Industries is currently trading in an oversold zone and has taken support at the 445 level, which was last tested in October 2023. The weekly chart shows a notable volume buildup at this level, suggesting potential stability. If the stock manages to hold above this support, it could move towards the first resistance at 590. A breakout above this resistance could lead to further gains, with the next key target at 762.

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CONCLUSION AND OUTLOOK

Aarti Industries is navigating a period of near-term challenges but is well positioned for long-term growth. The company is actively managing margin pressures, particularly from Chinese competition and volatility in the energy sector, while focusing on diversifying its revenue streams and expanding into high-growth areas like chemical recycling and battery chemicals. Its strategic investments in capacity expansion, cost optimization, and innovation through R&D will enable it to maintain competitiveness and drive sustainable growth. Despite a revised EBITDA guidance for FY25, Aarti’s strong market position, proactive strategy, and focus on emerging sectors make it a promising player for future success.

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Breached Monthly Support but 350 400 looks delicious levels for next 3 years technically

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the company is guiding for doubling EBIDA in the next 3 years and they seem very confident about it.

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Aarti Ind. is guiding for 20-25% EBITDA growth for next 5 years.
I just did back of the envelope calculation for taking 20% growth rate, PAT came around 1500 Cr. If I give 20 exit PE for growth company M. Cap comes ~30k Cr.
Today M. Cap is ~15K Cr.
Disc- Recently Bought. DYOD

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Did you factor in impact on US export revenues and the potential impact of tarriffs?
Operating leverage needs to kick in for management’s guidance to play out.

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Us tariff policy is basically eye for an eye, we do not have any tariff with the us in terms of chemicals,

so basically no impact.

Most likely exports of chemicals would increas with US, as companies from US would like to reduce risk with supply from china.

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Our government has signed a deal to import oil and defense equipment from US.

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I am invested in Aarti from 2018 and have been adding to my position for last 2 years. Honestly I just don’t trust this management anymore. After covid crash they were screaming China+1 and golden era of speciality chemicals etc and pumped stock to 1100 then they started talking about excess inventory by customers which is supposed to last few quarters then slow down in some of the end user industries which was supposed to last few quarters then china dumping which was supposed to last few quarters and pumped stock to 700 then they back tracked on their guidance. Reality is Aarti industry chemistries are easily replicated by chinese and are selling it for very low price hence Aarti is getting into long term contracts to get around this.

When I bought promoter holding was 52% which is now at 42% so they have been very successful in pumping and getting rid of bulk of their shares into retail hands. Market don’t trust them anymore unless they show results until then stock will be range bound.

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when chemical sector as a whole is not performing, the overall market is correcting, it is obvious that stock will get hammered as profits are shrinking,
However, their sales are not declining, in fact there is growth, which indicates they are able to retain the business and add some. margins are under pressure as raw material cost is up, scope for raw material prices to cool down will always be there. Depreciation is also high.
Borrowings have gone up but still not looking bad.

management selling shares can be for various reasons, and 42% is still a lot of skin in the game to conclude pumping and getting rid.

personally I feel when sector is going through bad phase is when you get stocks cheaper, and one can decide how cheap is good enough to add :slight_smile:

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Sure Chemicals are going through rough patch but Vinati organics which is also a chemical company is down 20% while Aarti is down 60% from top. Their sales are growing but margins are compressed due to Chinese companies selling at depressed prices. First they said it will be gone in years time and margins should be back (They were targeting 25% EBITDA margins!) and now they struggle to even maintain 15%. Their margins are not down due to raw material but competition from China in fact their sales look good if raw material prices go up because of pass through clause. I haven’t sold my shares in fact I have added more shares in this downturn but management is not something that can be trusted anymore and I am not planning to add anymore. Lets see how that plays out

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Chemical is tough industry .. ++ it is cyclical .

Look at Global big players BASF , DOW , BAYER etc .
Inspite of multiple patents and brands they grow slowly ..

Aarti , SRF , UPL etc had tough time between late 90s to 2008 .. Then because of China focus on environment esp for Olympics … all chemical companies had a big opportunity .. This opportunity is done way with .. Now we should tone down expectation at these chemical companies should trade at

Price / Sales : 0.5 to 1
Price to Book : < 1
EV / EBITDA : 4 - 8

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Biotechnology threatens Aarti Industries benzene products by offering sustainable, cost competitive and regulatory friendly alternatives.

Sir would request to throw more light on this topic. Would like to know more on this sir.
In what time do you see biotechnology can start showing its impact on aarti’s business? Is it already in usage? secondly cant aarti enter in biotechnology or can get partnership with someone or within its group businesses.
Asking for learning purpose
Thanks in advance

while the threat is not immediate ,its a structural risk that could erode aarti’s position. Company will have to monitor biotech advancements, Invest in R&D or consider strategic partnerships.

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