Hold Aarti Industries; target of Rs 500: Sharekhan

Sharekhan's research report on Aarti Industries

Q1FY24 consolidated revenues of Rs. 1,414 were down 12% q-o-q as revenue was impacted by high channel inventory, lower raw material prices and excessive supply from China. OPM declined by 93 bps q-o-q to 14.3% as the lower capacity utilisation, loss of competitiveness due to Yuan depreciation and weak demand from some key industries led to lower profit margins. Within key end-user industries, textiles are experiencing a prolonged downturn, agrochemical segment is seeing destocking, which may take another 2-3 quarters to clear, and polymers & additives are amid a downturn which might bottom out in H2FY24. Weak industry demand will lower capacity utilization, which would impact operating leverage, return ratios and cash generation. Recovery would be more gradual, thus capex cycle seems to be at wrong time of industry slowdown. Management has withdrawn its FY25 EBITDA guidance of Rs. 1700 crore. We cut our FY24E/F25E EPS by 25%/20%.

Outlook

We maintain a Hold rating on Aarti Industries with a revised PT of Rs. 500 given muted earnings outlook (expect 25% PAT degrowth in FY24) amid a challenging demand/pricing environment.