Aarti Industries CMP Rs 891; Target Rs 1,084
Aarti Industries (AIL) is one of the most competitive and a fully integrated Benzene derivatives specialty chemicals company.
AIL has been undergoing capacity expansion and setting up new Greenfield facility for Toulene-based derivatives product. The company has already completed expansion of its Chloro Benzene and PDA chain and it’s expected to improve utilisation in next few quarters. AIL has also completed its Toulene project and is expected to start commercial operations in Q2FY18.
With these capacity expansions starting operations gradually in FY18, AIL would be positioning itself in a more margin accretive specialty chemicals segment targeting existing customer base. We expect AIL to witness higher growth and subsequently improved margins in medium term.
We start our coverage on Aarti Industries with a 'buy' rating and a target price of Rs.1,084 per share.
Graphite India CMP Rs 353; Target Rs 524
Realisations are likely to improve according to management interaction, the re-negotiation of contracts would reflect in coming quarters and lead to better realisations of USD 3,300 a tonne in FY18, and USD 7,000 in FY19.
Needle coke availability will restrict electrode volumes. Due to planned maintenance, needle-coke supply will be restricted in CY18. This is likely to lead to 75% utilisation in electrode production: 60,000 tones in domestic capacity and 13,000 tones in its operations in Germany for FY19.
Profitability to significantly improve; at present, it is focusing on improving profitability hence, finalising contracts with formula linked to needle coke (the key raw material) and a multiplier effect to address other cost increases along with needle-coke prices. The company is expecting to generate USD 3,000-3,500 a tonne in FY19.
We retain our buy recommendation, assigning 9x EV/EBITDA to FY19E and arriving at a target price of Rs 524. We expect earnings to shoot up a robust 310 percent in FY18, and 173 percent in FY19.
Risks: Drops in realisations and in steel production.
Sundram Fasteners CMP Rs 333; Target Rs 535
Sundram Fasteners (SFL), the largest manufacturer and exporter of high tensile fasteners, caters to auto OEMs in the two-wheeler, four-wheeler, farm equipment and commercial vehicle segments.
During Q1FY18, revenue grew by 9.7% and EBITDA margins stood at 17.5%.
The company is moving from low margin fasteners business to high margin business. In terms of ROCE, SFL is ahead of its peers at 30%.
We expect SFL to grow its revenues by 10-13% for the next two years by FY-19E. While at profit after tax levels, we expect SFL to grow by around 15-18% in next two years.
On profitability front, we expect the company to improve its operating margins going ahead as operating leverage due to increase in value added products kicks in.
At a CMP of Rs 410, SFL is trading at a P/E multiple of 21.6x its FY18E EPS and 18.5x its FY19E EPS, which is at a discount to the peer average of 32x. Thus we initiate “BUY” with target price of Rs 535 per share.
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