Aarti Industries is a hold, says broker

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Aarti Industries is a hold, says broker

Broking house, Emkay Share and Stock Brokers is confident about Aarti Industries, AIL. It has maintained a 'hold rating' on the company.

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Broking house, Emkay Share and Stock Brokers is confident about Aarti Industries , AIL. It has maintained a 'hold rating' on the company.

About the company's itself and its second quarter results review, the report says,

Exports - continues to be the strong growth area

"Ability to produce wide range of benzene based derivative products catering to wide user segment and direct relationships with large MNC players has been the forte for Aarti's consistent export performance. In Q2 FY2006, Company reported robust 43% growth in its export sales to Rs 7090 million as against Rs 496 million in Q2 FY2005 with 20% growth driven by volumes."

"Export now accounts for 39% of total sales vis-a-vis 37% in FY2005. Key products that led to export includes 2,3 DCNB (export to china), 3,5 DCA (export to Europe and Japan) and 3,4 DCA (export to North and Latin America)."

Margins up - with commissioning of new hydrogenation facility

"With commissioning of new cost efficient hydrogenation facility at its Jagadia plant and soft benzene prizes (key Raw material) resulted in 50 basis points, bps, YoY improvement in operating margins from 14.16% to 14.71%. As a result despite lower volumes, operating profit was up 11% to Rs 269 million from Rs 242 million."

"PBT was up 9.7% to Rs 172 million from Rs 158 million. Net profit however stood flat at Rs 123.7 million due to higher tax charge."

To raise USD 25 million - if required

"The company at its board meeting has taken approval for raising funds to the tune of USD 25 million to finance expansions and ongoing capex through issue of securities by way of FCCB, GDRs etc."

Issue of warrants on preferential basis

"The company at its board meeting has decided to issue 1.32 million shares on preferential basis to promoters and related parties with an option to convert each warrant into one equity shares of Rs 10 each (or 2 equity shares of Rs 5 each) at Rs 137 per share. As indicated, promoters will be subscribing to 70% of total issue."

Low cost structure - enabling it to fight with Chinese players

"Low labour overheads, captive power plant and implementation of efficient process technologies (like hydrogenation) at regular intervals have been the key success factor for AARTI to consistently perform over years. Its manpower cost is one of the lowest in the chemical industry given its size. With setting up of captive power plant the company has been in a position to save 4-5 crore per annum in power cost."

"Further gainful usage of its by-products has further enabled the company to reduce its overall cost. All these efforts have given AARTI strength to compete with Chinese players considerably in the world market."

About the company's valuations, the report says, "At Rs 140, AIL trades at a P/E multiple of 6.8x and 5.2x FY2007E EPS of Rs 20 and CPS of Rs 26.6 respectively and dividend yield at 3.6%. Despite Aarti's robust business model negating RM volatility, given lack of clear information on companies new expansion program and FCCB issue we retain our Hold on the stock. Risk to our estimates would be any sharp rise in prices of key raw material."