Edel - EQ
Edel - EQ
Edel - EQ
RESULT UPDATE
AARTI INDUSTRIES
Stable volume growth in challenging times
India Equity Research| Miscellaneous
Aarti Industries’ (AIL) Q3FY17 revenue at INR7.7bn jumped 3.4% YoY. EDELWEISS RATINGS
Despite demonetisation impact and sustained weakness in the global Absolute Rating BUY
agrochemical market, volume grew a decent 10% YoY (Q2FY17: 2%). Investment Characteristics Growth
EBITDA growth came in higher at 16% YoY to INR1.5bn driven by higher
value addition in the speciality chemicals segment. However, pharma
segment clocked a muted quarter, impacted by USFDA inspections and MARKET DATA (R: ARTI.BO, B: ARTO IN)
certain one-off costs. As we roll over to FY19E, we factor in 14%/21% CMP : INR 784
revenue/PAT growth driven by completion of ongoing capex and estimate Target Price : INR 929
RoCE improvement to 23.0% from 20.5% in FY16. We, therefore, raise our 52-week range (INR) : 818 / 417
target P/E multiple to 16.0x (14.0x earlier) with a revised target price of Share in issue (mn) : 82.1
INR929. M cap (INR bn/USD mn) : 64 / 955
Avg. Daily Vol. BSE/NSE (‘000) : 48.1
impact on the quarter was INR80-100mn, primarily due to weakness in domestic Current Q2FY17 Q1FY17
textile and FMCG segments. In addition, weak global agrochemical continued to Promoters * 54.8 54.8 54.8
impact, though sequentially situation has improved. However, despite this, volumes MF's, FI's & BKs 11.5 11.5 12.1
jumped a decent 10% YoY (Q2FY17: 2%). Also, EBIT margin jumped 165bps YoY to FII's 3.6 3.6 3.4
20.9% as value addition component increased by leveraging range of products. Others 30.0 30.0 29.7
* Promoters pledged shares : NIL
(% of share in issue)
USFDA inspection dents pharma growth
Pharma revenue growth at 4% YoY was lower than 10% clocked till H1FY17. Margin PRICE PERFORMANCE (%)
contracted 64bps YoY to 9.2%. During Q3FY17, the pharma segment was also impacted BSE Midcap Stock over
because of holiday season, FDA inspection and increase in maintenance expenses Stock
Index Index
(one-off cost of INR15-20mn). Post the USFDA inspection, AIL has replied to the 1 month 8.8 12.1 3.3
observations received. There was a one month notice from FDA for repair, renovation 3 months 3.8 7.4 3.6
and colouring, because of which there was some slowdown in current quarter.
12 months 29.7 62.8 33.1
Dil. EPS (INR) 9.0 7.3 23.4 9.1 (1.4) 30.8 39.8 47.8 Nihal Mahesh Jham
Dil. P/E (x) 25.5 19.8 16.5 +91 22 6623 3352
[email protected]
EV/EBITDA (x) 13.8 12.2 10.4
ROAE (%) 24.5 26.9 26.4
February 7, 2017
Note: Quarterly financials are for standalone and annual financials for consolidated entity
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Miscellaneous
Q2FY17 highlights
• Exports comprised 47% of net revenues in Q2FY17.
• EBITDA grew following decline in raw material prices and improved product mix.
• Depreciation increased as new production facilities have been operationalised.
Speciality Chemicals:
• Volumes grew by mere 2% YoY.
• Agrochemical volumes fell ~10% YoY. However, the company is not witnessing much
pressure in other sectors.
• Hydrogenation
AIL mentioned its toluene customer base is very similar to current customers, i.e.,
agrochemicals, dyes, etc
The company expects toluene utilisation to reach 25% by this year end and 80% in
next 2-3 years.
• The ethylation unit at the Dahej SEZ has capacity to manufacture 8,000-10,000tpa of
ethylene derivatives. It will be used initially in herbicides production. Initially, the plant
will be used for ehtylene, and will start propylene next year also.
Pharma
• De-bottlenecking and expansion activities have spurred growth in pharma volumes.
• AIL expects segment margins to ramp up. Margins depend on the approvals the
company’s clients receive.
Capex
• AIL incurred ~INR1.4bn in H1FY17.
• Looking at INR4bn in FY17, and INR2.5-3bn in FY18. Further capex for FY18 will be
finalised in second half of the year.
• Capex for pharma and consumer segments will be INR0.8-1bn this year and INR0.8bn
next year.
• The company does not see any threat from the change in leadership in the US.
• GST will be a positive for industry. AIL is paying inter-state taxes of INR180-200mn
which would be saved post GST.
Buyback
• AIL has a general payout policy and has been maintaining its payout over many years.
Guidance
• Tax rate to be ~19-20%.
• None of the capex capitalised has had any revenue impact.
• Does not see significant volume contribution from Dahej this year.
22.0
14.0
(%)
6.0
(2.0)
(10.0)
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Speciality chemicals Pharma Homes & Personal care
Source: Company, Edelweiss research
As % of net revenues
Direct costs 55.3 60.4 52.9 - 53.5 54.0
Employee cost 4.7 3.9 4.8 - 5.0 5.0
Other expenses 20.5 18.2 21.0 - 20.0 19.5
EBITDA 19.5 17.4 21.3 - 21.5 21.5
Reported net profit 9.6 8.2 10.7 - 11.1 11.4
Tax rate 18.7 24.4 19.6 - 20.0 20.0
Company Description
AIL incorporated in 1975, is a well-diversified chemicals company headquartered in
Mumbai. It is one of the largest producers of Benzene-based basic and intermediate
chemicals in India and manufactures 125 products with chemistry of benzene, aniline,
sulphuric acid, toluene and methanol. AIL is one of the leading global suppliers of dyes,
pigments, agrochemicals, pharmaceuticals and rubber chemicals. Benzene accounts for
~60% of the company’s revenues, while aniline and sulphuric acid compounds contribute
~12% to revenues. With start of the Dahej facility, AIL will also enter toluene chemistry.
AIL’s manufacturing units are located in Gujarat and Maharashtra. It has three different
business segments:
• (3) Home & personal care – currently at low margins, AIL plans to alter mix and explore
new markets
Investment Theme
Integrated, flexible, diversified operations: Superior R&D, process flexibility and integration
operations equips AIL to offer more than 125 products with applications and customer base
across multiple industries.
Cost competitiveness: Backward and forward integration and commercial viability of by-
products enables AIL to enjoy cost competitiveness.
Preferred supplier for global customers, MNCs: AIL is a preferred supplier for global
customers, as exports contribute ~50% to revenue with incremental capex on anvil to
enhance standing in the export market.
Key Risks
Benzene Prices: AIL’s passes on the cost changes with one quarter lag to customers, any
increase in Benzene prices may lead to lower earnings temporarily. We however see lower
risks over a longer period as the same is passed on to customers.
High Shale gas prices: High shale gas prices in US may imply long-term risks of reducing
profits due to higher production of ethylene-based products. This will reduce AIL’s market
opportunity, leading to lower growth rates in the future.
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY16 FY17E FY18E FY19E Year to March FY16 FY17E FY18E FY19E
Macro Net revenue 27,796 29,380 34,452 39,414
GDP(Y-o-Y %) 7.2 6.5 7.1 7.7 Cost of mat. Consumed 15,219 15,718 18,604 21,283
Inflation (Avg) 4.9 4.8 5.0 5.2 Employee costs 1,207 1,460 1,709 1,965
Repo rate (exit rate) 6.8 6.0 5.8 5.8 Other Expenses 5,647 5,876 6,718 7,489
USD/INR (Avg) 65.0 67.5 69.0 69.0 Total operating expenses 22,074 23,054 27,031 30,737
Sector EBITDA 5,723 6,325 7,421 8,677
Brent Crude (USD/bbl) 47.6 50.0 55.0 56.1 Depreciation 985 1,099 1,397 1,597
Company EBIT 4,738 5,226 6,024 7,079
Financial assumptions Add: Other income 59 31 29 31
Spec chem rev gwth(%) (5.6) 9.9 14.1 13.8 Less: Interest Expense 1,170 933 867 832
Pharma chem rev gwth(%) 26.4 13.0 20.0 20.0 Profit Before Tax 3,627 4,324 5,186 6,278
H&P EBIT margin(%) (36.3) 8.0 5.0 5.0 Less: Provision for Tax 946 865 1,037 1,256
Spec chem EBIT margin(%) 22.2 20.3 20.4 19.6 Less: Minority Interest 112 193 222 255
Pharma EBIT margin(%) 10.1 11.5 12.5 12.5 Reported Profit 2,569 3,266 3,927 4,767
H&P EBIT margin(%) (0.2) 0.5 1.0 1.0 Adjusted Profit 2,569 3,266 3,927 4,767
Interest(% of Avg loans) 8.5 7.0 6.8 6.6 Shares o /s (mn) 83 82 82 82
Tax rate (%) 26.1 20.0 20.0 20.0 Basic EPS (INR) 30.8 39.8 47.8 58.1
B/S assumptions Diluted shares o/s (mn) 83 82 82 82
Capex (INR mn) 5,164 3,500 3,500 4,000 Adj. Diluted EPS (INR) 30.8 39.8 47.8 58.1
Tr. Pay. % of cost(%) 20.1 18.0 17.0 17.0 Adjusted Cash EPS 44.0 55.5 67.5 80.6
Inventory % of costs 32.5 31.0 31.0 31.0 Dividend per share (DPS) 8.5 1.0 8.0 8.0
Debtors % of revenues 18.8 16.0 16.0 16.0 Dividend Payout Ratio(%) 33.4 3.0 20.2 16.7
Additional Data
Directors Data
Chandrakant V. Gogri Chairman Emeritus Rajendra V. Gogri Chairman & Managing Director
Rashesh C. Gogri Vice Chairman & Managing Director Shantilal T. Shah Vice Chairman
Parimal H. Desai Whole Time Director Manoj M. Chheda Whole Time Director
Hetal Gogri Gala Whole Time Director Renil R. Gogri Whole Time Director
Kirit R. Mehta Whole Time Director Ramdas M. Gandhi Independent Director
Laxmichand K. Jain Independent Director Vijay H. Patil Independent Director
K.V.S. Shyam Sunder Independent Director P.A. Sethi Independent Director
Bhavesh R. Vora Independent Director Prof. Ganapati D. Yadav Independent Director
Priti P. Savla Independent Director
Holding – Top10
Perc. Holding Perc. Holding
HDFC Asset management 8.24 DSP Blackrock 2.37
Pictet & CIE 0.99 Dimensional Fund Advisors 0.58
L&T Invst Mgmt 0.52 L&T Mutual Fund 0.38
Ashmore Group 0.11 BOI AXA Invst Mgmt 0.09
IDBI Asset Management 0.05 Victory Capital Management 0.04
*as per last available data
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*as per last available data
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
06 Jan 2017 RASHESH CHANDRAKANT GOGRI Sell 100000.00
03 Jan 2017 HETAL GOGRI GALA Sell 100000.00
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: [email protected]
Manoj Bahety
Deputy Head Research
[email protected]
800
700
(INR)
600
500
400
Dec-16
Aug-16
Oct-16
Apr-16
Nov-16
May-16
Feb-16
Sep-16
Jan-17
Feb-17
Mar-16
Jun-16
Jul-16
Aarti Industries
This Report has been prepared by Edelweiss Securities Limited in the capacity of a Research Analyst having SEBI Registration
No.INH200000121 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or
solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Securities as
defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 includes Financial Instruments and Currency
Derivatives. The information contained herein is from publicly available data or other sources believed to be reliable. This report is
provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The
user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it
deems necessary to arrive at an independent evaluation of an investment in Securities referred to in this document (including the
merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The
investment discussed or views expressed may not be suitable for all investors.
This information is strictly confidential and is being furnished to you solely for your information. This information should not be
reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in
part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or
resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use
would be contrary to law, regulation or which would subject ESL and associates / group companies to any registration or licensing
requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons
in whose possession this report comes, should observe, any such restrictions. The information given in this report is as of the date
of this report and there can be no assurance that future results or events will be consistent with this information. This information
is subject to change without any prior notice. ESL reserves the right to make modifications and alterations to this statement as
may be required from time to time. ESL or any of its associates / group companies shall not be in any way responsible for any loss
or damage that may arise to any person from any inadvertent error in the information contained in this report. ESL is committed
to providing independent and transparent recommendation to its clients. Neither ESL nor any of its associates, group companies,
directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential
including loss of revenue or lost profits that may arise from or in connection with the use of the information. Our proprietary
trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed
herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in
this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in
the report. The information provided in these reports remains, unless otherwise stated, the copyright of ESL. All layout, design,
original artwork, concepts and other Intellectual Properties, remains the property and copyright of ESL and may not be used in
any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.
ESL shall not be liable for any delay or any other interruption which may occur in presenting the data due to any reason including
network (Internet) reasons or snags in the system, break down of the system or any other equipment, server breakdown,
maintenance shutdown, breakdown of communication services or inability of the ESL to present the data. In no event shall ESL be
liable for any damages, including without limitation direct or indirect, special, incidental, or consequential damages, losses or
expenses arising in connection with the data presented by the ESL through this report.
We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers
simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of
their receiving this report.
ESL and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to
time, have long or short positions in, and buy or sell the Securities, mentioned herein or (b) be engaged in any other transaction
involving such Securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the
subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other
potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of
publication of research report or at the time of public appearance. ESL may have proprietary long/short position in the above
mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not
consider risk appetite or investment objective of any particular investor; readers are requested to take independent professional
advice before investing. This should not be construed as invitation or solicitation to do business with ESL.
Additional Disclaimers
This report is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule
15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and
Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as
specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied,
duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.
In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC
in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an
agreement with a U.S. registered broker-dealer, Edelweiss Financial Services Inc. ("EFSI"). Transactions in securities discussed in
this research report should be effected through Edelweiss Financial Services Inc.
In the United Kingdom, this research report is being distributed only to and is directed only at (a) persons who have professional
experience in matters relating to investments falling within Article 19(5) of the FSMA (Financial Promotion) Order 2005 (the
“Order”); (b) persons falling within Article 49(2)(a) to (d) of the Order (including high net worth companies and unincorporated
associations); and (c) any other persons to whom it may otherwise lawfully be communicated (all such persons together being
referred to as “relevant persons”).
This research report must not be acted on or relied on by persons who are not relevant persons. Any investment or investment
activity to which this research report relates is available only to relevant persons and will be engaged in only with relevant
persons. Any person who is not a relevant person should not act or rely on this research report or any of its contents. This
research report must not be distributed, published, reproduced or disclosed (in whole or in part) by recipients to any other
person.
This report is intended for distribution by ESL only to "Permitted Clients" (as defined in National Instrument 31-103 ("NI 31-103"))
who are resident in the Province of Ontario, Canada (an "Ontario Permitted Client"). If the recipient of this report is not an
Ontario Permitted Client, as specified above, then the recipient should not act upon this report and should return the report to
the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any Canadian person.
ESL is relying on an exemption from the adviser and/or dealer registration requirements under NI 31-103 available to certain
international advisers and/or dealers. Please be advised that (i) ESL is not registered in the Province of Ontario to trade in
securities nor is it registered in the Province of Ontario to provide advice with respect to securities; (ii) ESL's head office or
principal place of business is located in India; (iii) all or substantially all of ESL's assets may be situated outside of Canada; (iv)
there may be difficulty enforcing legal rights against ESL because of the above; and (v) the name and address of the ESL's agent for
service of process in the Province of Ontario is: Bamac Services Inc., 181 Bay Street, Suite 2100, Toronto, Ontario M5J 2T3 Canada.