AARTI INDUSTRIES LTD (MARKET CAP: INR 34,560 Cr)
Aarti Industries is a leading Indian manufacturer of Specialty Chemicals and Pharmaceuticals APIs with a global footprint. It is a manufacturer of Benzene/Toulene based Specialty Chemicals and Pharmaceutical APIs. These products are used in the downstream manufacturing of pharmaceuticals, agrochemicals, polymers & additives, fuel additive, rubber chemicals, surfactants, pigments, dyes etc. Aarti Industries ranks among the top three global players for manufacturing NCB (Nitro Chloro-Benzene) and DCB (Di Chloro-Benzene). There are no close substitutes for a number of products. Aarti Industries has a wide basket of 200+ products, which are marketed to 400 global and 700 domestic customers.
MOATS
• Top 3 globally in Nitro Chloro-Benzene and Di-Chloro benzene manufacturing
• Entry in toluene chemistry. India is net importer of toluene and there is no producer of chloro-toluene in India
• Only manufacturer in India for Nitro-Fluoro Aromatic and PDA (Phenyl Diamine) (via Halex Chemistry)
• Product and geographical diversification offer better earing stability, also Aarti has diverse customer base with largest customer contributing to less than 5% of sales. This overall diversification works as a natural hedge in challenging times
GROWTH DRIVERS
• Increase in consumption intensity compared with the developed world, the penetration of specialty chemicals within India’s end-user markets is low. The per capita consumption in India is USD 23 (in value terms) vis-à-vis global average of USD 100. With increased focus on improving products, usage intensity of specialty chemicals within these end markets will rise in India over the next decade.
• India’s urban population is expected to increase by 275 Mn people by 2030. This will result in high consumption-led growth in key end markets and an increased need for better products and services.
• Stricter environmental norms has impacted China’s chemical industry. This will be beneficial for Indian market. Also, China+1 policy being adopted by many global companies to reduce its dependence on China will make Aarti Industries a key beneficiary.
COMPETITIVE ADVANTAGE
• Aarti Industries is a leading player in benzene chemistry and deals with big chemical companies as customers across the globe. It has integrated operations and high level of cost optimisation.
• Capex intensity has gone up significantly as this year they have done around INR 1300 Cr capex, and they plan to do INR 1000-1200 Cr Capex for next 4-5 years. 3 – multi-year contracts (including the terminated one due to client’s change in strategy) indicates client’s confidence in company’s ability to deliver results. Also, these long-term contracts indicate the growth in specialty chemicals segment.
• The company’s chemical business is backward integrated and imports from China are nearly NIL. Even in pharma, Xanthene products are backward integrated. The company has highlighted 10-20 products which have import substitution opportunity and is considering to put up manufacturing units for the same.
OUTLOOK
The company has a robust plan for R&D focussed growth initiatives like introducing chlorotoluene value chain, new range of specialty chemicals and other value-added chemicals, expansion and introduction of new range of Pharma APIs and intermediates, manufacturing outsourcing and strategic alliances, and setting up of universal multipurpose plants. The only concern will be if after commissioning of expansion projects, can the company generate positive free cash flows and improve its returns.
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