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Aarti Industries' shares declined 8.3 per cent to Rs 511 apiece on the BSE on Wednesday after analysts turned cautious on the stock post the company's March quarter results.
Phillip Capital, for instance, have downgraded Aarti Industries to 'Neutral' as the company's Q4 performance slipped below their expectations on account of cost pressure.
"We believe Aarti Industries to sustain volume growth led by multi-year supply contracts and multiple expansions but the elevated cost (on account of weak visible demand scenario, unabsorbed cost led by multiple expansions, negative operating leverage, etc) will mount margin pressure in the near future. Hence, in order to factor the uncertain macro factors and earnings miss in Q4, we cut our FY24/FY25 estimates by 12 per cent/15 per cent," the brokerage said in its Q4 result review report.
Also factoring the volatility and little control on cost, the brokerage cut valuation multiples to value the stock at Rs 600 (16x FY25 EV/ EBITDA vs Rs 750 i.e 18x FY25 EV/EBITDA earlier), implying limited upside in the near term.
Aarti Industries, on May 8, reported 11 per cent year-on-year rise in consolidated sales at Rs 1,826 crore, driven by high prices and supply ramp up under multi-year supply contracts.
Ebitda margin, however, slipped 180bps below the brokerage's estimates to 13.7 per cent (down 200bps YoY) on account of higher than expected staff cost and other expenses. Also, an incremental cost of Rs 10 crore due to maintenance shutdown of its acid plant and Kutch unit, resulted in 5 per cent miss in Ebitda at Rs 251 crore (down 14 per cent QoQ and 4 per cent YoY).
Reported net profit came in at Rs 149 crore, on account on net tax credit of Rs 14 crore (relating MAT credit and tax write back of earlier year), while core PAT on normal taxes of 17 per cent was Rs 106 crore (down 29 per cent QoQ and 27 per cent YoY), implying an earning miss of 12 per cent to the brokerage's estimate and 19 per cent against Street's consensus estimates.
While the management remain cautious about the potential impact of global slowdown in next couple of quarters, it believes that the growth will be complemented by planned commissioning of NCB capacity expansion and specialty chemicals plant in H1FY24. FY25 will see the benefit from the Nitrotoluene and ethylation expansion projects, the anagement said. The company targets Chlorotoluene and multipurpose plant led value growth starting FY26.
"Management has guided to 25 per cnt volume growth for FY24, but a relatively more modest 15 per cent Ebitda growth, as the company expects to sell more volumes into non-regular markets (such as China) that typically generate margins 10-15 percentage points below those on sales into regular markets such as Europe and the US. This shift in geographical mix will be necessitated by the subdued demand environment, which is seen progressively improving through FY24. Yet, management continues to guide to Rs 1,700 crore in Ebitda for FY25; achieving this target will require over 35 per cent Ebitda growth in that year," said analysts at Kotak Institutional Equities.
The brokerage firm has 'Reduce' rating on the stock with a target price of Rs 520 as it sees limited earnings visibility.
"The slowdown across important end-uses such as dyes & pigments, agrochemicals and polymers is a headwind for the next few quarters, while the resurgence of competition from Chinese producers—as visible in certain segments such as agrochemicals— could be an added challenge. In this context, valuations at 32X FY2024E P/E remain rich, underpinning our continued cautious stance on the stock," it added.
