Shares of Aarti Industries crashed over 9% to a 52-week low of Rs 430 on November 11, after the specialty chemicals company reported a massive drop in net profit during the second quarter, or Q2, for the July-September period. A wider-than-expected decline in margins led to the sell-off. Even as the long-term call from brokerages has remained largely upbeat, they have revised earnings estimates and reiterated comfort with valuation post the correction in the stock.
Stock sinks to a 52-week low as trading volume surges
At 9.54 am, the NSE share prices of Aarti Industries traded at Rs 440.10. The heavy selling activity was accompanied by higher trading volume as over 78 lakh shares were traded in the first hour of trading, way more than one month’s average daily trading of 17 lakh shares. The high intensity of trading conveys how rattled investors are at the company’s short-term performance and prospects.
- Dismal Q2 Performance: Profit and Margins Take a Hit
Aarti Industries’ Q2 net profit declined 43% year-on-year to Rs 52 crore from Rs 91 crore in the year-earlier quarter. Profits had taken a hit mainly due to increased expenses and below-par operational efficiency. From the same quarter a year ago, revenues grew by 12% to Rs 1,628 crore from Rs 1,454 crore. The company continues to expand its market and product offerings. However, these were offset by a steep decline in EBITDA margins, now at 12.1%, compared with 16% a year ago.
Margin contraction was the major drag on Aarti Industries’ quarterly performance, Nuvama Institutional Equities feels. General adjustment in the margins of MMA, a key product, and also lower utilisation levels at higher channel inventory would have been the two main reasons that had largely dented the firm’s results.
- Revised Guidance and Earnings Forecasts
Not only the margin pressure but also the very meagre comfort of short-term relief. Against such a backdrop, Aarti Industries’ management has guided EBITDA in the range of Rs 1,800–2,200 crore by FY28. Going by the current dynamics, it projects EBITDA of around Rs 1,050 crore in the current year FY25.
Aarti’s Q2 results led Nuvama Institutional Equities to cut its FY25, FY26 and FY27 EPS estimates by 56%, 41% and 34%, respectively. However, Nuvama feels the recent correction brings in a more attractive valuation, which makes it feel comfortable enough not to change a ‘buy’ rating, though, naturally enough, at a reduced target of Rs 600, down 34% from the earlier target.
Emkay Institutional Equities echoes similar views as well, It believes that guidance on EBITDA has been lowered on account of volatility in the macroeconomic environment disruption which the volumes in Aarti’s flagship toluene saw. It maintained a ‘buy’ call saying valuation upside post correction in the stock, while also setting a price target at Rs 675.
- Long-term: Potential in the toluene market and CRAMS expansion
The short-term headwinds notwithstanding, Aarti Industries has exciting prospects for growth to enable it to come back. As HDFC Securities mentions, the company has sustained emphasis on capex and R&D, which is going to be a good opportunity to seize upon open-to-date market opportunities as available, especially in the segment of toluene in India. Now that this market is mostly served through imports, Aarti Industries will emerge as one of the bright contenders to consolidate its market share while establishing itself as a credible domestic player.
Currently, Aarti is also expanding its product line and adding to the portfolio of its CRAMS business. The CRAMS market is a growth area and could contribute to the company’s incremental revenues. HDFC Securities maintained an ‘add’ call with a target price of Rs 532. The company’s long-term strategic focus and resilience against the current macro-driven pressures have been recognized.
Strategic Positioning in the Market
Aarti Industries is one of the prominent speciality chemical players in India, serving various industries like pharmaceuticals, agrochemicals, and polymers. The diversified strategy of the company, coupled with the investment in R&D that has been ongoing to this date, somewhat defends the company against cyclical challenges. However, developments over the last year in global markets, particularly volatile commodity prices and supply chain disruptions, have pressed the management team’s patience to the limit. Aarti’s entry into the toluene market is considered a step towards reduced import dependency, which not only secures its domestic footprint but also makes its operations stable.
- Road Ahead: Margin Pressures
Exports from the back-end have supported Aarti’s revenue growth, but real estate itself is not reflecting profitability yet. Continuous endeavours by Aarti Industries to maintain margin pressures are expected. The downturn in margins during Q2 would have reflected some difficulties in managing resultant input cost inflation as well as some demand fluctuations for a few product lines. Further, with the company having narrowed its EBITDA guidance for the next couple of years, Aarti Industries is likely to look at operational efficiencies and even some price invariance adjustments to recover margins.
While the CRAMS segment has higher margins and is less sensitive to price volatility, which makes it an interesting growth area, it appears that Aarti is still leveraging its technical strength and long-standing industry relationships to strengthen its CRAMS portfolio, pursuing the increasing global demand for outsourced manufacturing in pharmaceuticals and speciality chemicals.
- Brokerage Outlook: Near-term risks notwithstanding, upside room
Aarti Industries: Brokerages are cautious over the near-term view, but the recent correction in Aarti Industries’ stock price offers a value buy opportunity. Adjusted earnings estimates and more cautious valuation parameters witnessed by the brokerage houses, including Nuvama and Emkay, see some respite for Aarti in the near term. “While the current environment is challenging, we believe its initiatives to expand into less explored markets as well as continued R&D put the company on an eventual growth trajectory,” noted the brokerage houses.
HDFC Securities shares the same view, which focuses on the efforts the company was making to go ahead in the toluene space. This development coupled with a focus by Aarti on new product launches and also infrastructure development is likely to position it strongly as a competitive player in the specialty chemicals space.
Conclusion: Negotiating Obstacles
Significant challenges for the industry, such as the sharp fall in Q2 net profit of Aarti Industries and then the stock dip during the current economic scenario, exist. Though margin pressures and higher operational costs have been weighing down on the recent performance of the company, diversified revenue streams and investment in promising segments of CRAMS and toluene markets by Aarti look promising and expected to be recovered.
Commitment to R&D along with a long-term vision for expansion in underpenetrated markets underlines a strategy of steady growth, despite short-term setbacks. Relenting to the wait till the next update, brokerages are going to track Aarti’s performance. Against this backdrop, though still there is wider consensus that the stock has upside potential, specifically for longer-term investors who can endure near-term volatility.
In summary, though Aarti Industries has a tough road ahead in managing its margin and winds of macroeconomic headwinds, strategic investments and efforts at market diversification remain foundational for growth strategies. Investors would be very keen to see how the management plays through the current issues and whether renewed thrusts in niche markets produced results and helped in the steady redemption of earnings and stock performance.
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