Hold Aarti Industries; target of Rs 730: Sharekhan

Sharekhan's research report on Aarti Industries

Q2FY2023 results were muted with a 5%/8% q-o-q decline in operating profit/PAT to Rs. 267 crore/Rs. 124 crore amid muted revenue growth, steep contraction of 455 bps/164 bps y-o-y/q-o-q in OPM to 15.8%, maintenance shutdown at Jhagadia unit, and rise in depreciation/interest cost. Subdued revenue growth was due to demand slowdown for certain products from the dyes/pigment industry. Management expects recovery for dyes from Q3FY2023 and that for pigments from Q4FY2023. Prior-period financials have been restated to reflect the demerger of the pharma business into Aarti Pharmalabs (aims to list by December 2022). Management’s FY2023 EBITDA guidance of Rs 1,100 crore would mean flat q-o-q EBITDA in H2FY2023. Management is expected to continue with its capex plan despite slowdown as it is confident of long-term demand visibility and has guided for 25% EBITDA CAGR over FY2023E-FY2025E.

Outlook

We downgrade our rating on Aarti Industries to Hold with a revised PT of Rs. 730, given limited upside potential as valuation of 32x its FY24E EPS largely factors in expectation of earnings recovery over FY2024-FY2025. H2FY23 earnings outlook is muted while capex is likely to remain high with potential rise in debt.

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Aarti Industries - 18-11-2022 - khan