Buy Aarti Drugs; target of Rs 705: Motilal Oswal

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26 Aug, 2025 12:21

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Motilal Oswal's research report on Aarti DrugsRevenues at INR 265cr, +2% YoY were 3% lower than our estimate of INR 273cr. Although the company increased its capacity specifically in metformin, during the current quarter, it did not have any impact on revenue as most of it is exported to nations in Africa and Middle East which have witnessed a demand slowdown due to decline in crude oil prices. Thus exports for the company witnessed a double digit decline. Slowdown is particularly observed in case of governments of many of these nations who are curbing imports and depleting their inventories. However domestic revenues which form 60% of the overall topline, recorded double digit growth. EBITDA at INR 43.1cr is lower by 1% YoY and is 6% below our estimate of INR 45.8cr. EBITDA margins at 16.3% were 60bp lower YoY. PAT at INR 17.0cr declined 23% YoY which is 10% below our estimate of INR 18.9cr. Higher tax rate of 25% in the current quarter against 16% in 3QFY15 impacted PAT growth. PBT growth stood at -13%. The company is likely to witness gradual improvement in topline growth from 4QFY16 onwards when it starts the sale of high value products initially in the anti-diarrheal and anti-diabetic segment viz. metformin and later in anti-biotics. We believe FY17E topline growth will recover to 15% which should translate into 22% growth in profits on the back of higher operating leverage. Aarti Drugs is a high quality proxy play on the pharma industry. The company is climbing higher in the API value chain by selectively expanding into those APIs which are being currently imported and are of higher value. Based on the below expected performance in 3QFY16, we reduce our earnings estimates for the company by 11%/ 17% for FY16/17E. Despite this we expect the company to grow its profits at 20% CAGR over FY16-18E. We value Aarti Drugs at 18x Sep 2017E EPS which is a 20% discount to the mean multiple commanded by formulation companies and maintain our BUY rating on the stock with a target price of INR 705/share (earlier INR 800) For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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