We would like to recommend Aarti Industries as a tactical pick. The company is a leading aromatic chemicals manufacturer in India and has posted a strong set of operational numbers for FY19.
Aarti Industries is among the top four manufacturer in the world for three-fourth of its product portfolio and commands a market share in the range of 25-40 percent. A significant chunk of its revenue (79 percent in FY19) comes from specialty chemicals, wherein it has positioned itself among the top five in key chemistry processes such as chlorination, nitration, ammonolysis, hydrogenation, and halex chemistry.
In the aromatic chemicals space, the company benefits from increasing domestic demand due to import substitution by downstream chemical derivative manufacturers. In FY19, domestic revenue grew 42 percent year-on-year and constitute about 60 percent of sales. Exports are also healthy (up 17 percent).
Other major division for the company is pharma (15 percent of revenue), which in involved in production of active pharmaceutical ingredients (APIs) and intermediates with applications for asthma, hypertension and cancer. In the quarter gone by, the pharma division grew 22 percent helped by the focus on off‐patented generics in regulated markets.
Strong operational results in recent times keep us positive on the business and we expect double-digit volume growth for the specialty chemicals in the near term. In this context, we take note of the management’s sales guidance of 15-20 percent for FY20. Net profit growth expectations vary between 12 percent and 20 percent, depending on the impact of disruption in China.
Following drivers keeps the long term prospect appealing:
Stable revenue visibility on account of multi-year contracts with some of the global chemical companies. It is currently executing multi-year contracts worth Rs 15,000 crore.
The company has announced a capex plan of Rs 1,800 crore, which is to be spread over the next two fiscals (FY20-21). This includes upfront investment towards the multi-year contracts with global agro-chemical companies, investment in downstream products and pharma division.
It continues to extend its product offerings. The company recently ventured into nitro-toluene value chain and now exploring the chlorotoluene chain, making it among the few with such a broad base offerings in aromatic chemicals.
The stock has recently consolidated and now trades at a multiple of 20 times FY21 estimated earnings. The counter warrants investor attention on account of the double-digit earnings growth visibility in the medium term.
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