Outperformed Broader Market - Aarti Industries

Aarti Industries is a Mumbai-based company engaged in production and sales of basic and specialty chemicals. It specialises in benzene-based, basic and intermediate chemicals. Though the scrip was not completely out of the bear phase that engulfed global market since the start of the year, it outperformed the broader market index. It fell by 40 per cent compared to 54 per cent fall in Sensex. Moreover, volatility in the scrip is less than Sensex. Company’s latest result has also bucked the trend of slowing growth rate. Topline for the latest quarter has increased by 101 per cent and bottomline by 370 per cent.

Aarti Industries, which has manufacturing facilities located at Gujarat and Maharashtra, has installed capacity for nitro chloro benzene (NCB) of 60000 MT and two lakh metric tonnes for sulfuric acid and allied products.  The company is currently operating at 75 per cent. Prices of these chemicals saw rise till October, increasing around 40 per cent from the start of this year. But of late they have started showing signs of moderating with commodity cycle getting reversed. Prices of benzene, one of the basic raw materials used for manufacturing these chemicals, have dropped from Rs 70 in June to Rs 60 during October and currently it is available at Rs 36 which may come down further in December.

The chemicals produced are mainly used by manufacturers of dyes, pigments, agrochemicals and pharmaceuticals. These products are classified into basic, specialty, agro and pharmaceutical chemicals. Specialty chemicals contribute most with 65 per cent whereas basic chemicals’ share is 23 per cent. Rest 13 per cent is contributed by agro and pharmaceutical chemicals.  Aarti Industries sells its products both in India and abroad. Export market contributes 39 per cent and domestic market 61 per cent, which has resulted in outstanding financial performance of the company.

When India Inc. is staring at the fear of de-acceleration of growth in its topline, Aarti Industries has given outstanding performance. For the first half of the year the company recorded sales of Rs 739 crore against Rs 393 core it posted last year same time period, a rise of 88 per cent. Net profit has kept pace with sales and has increased by 439 per cent. It posted bottomline of Rs 67.43 crore (12.5 crore). The only concern that the company has is its interest burden. It increased to Rs 34.93 crore in H1FY09 compared to Rs 14.79 crore in H1FY08. The major chunk of increase was due to borrowing to meet working capital requirement. Going forward we feel that the interest cost will come down. Moreover financial coverage ratio of 3 times gives the required comfort. Despite this increase in interest cost, company's profitability ratios saw major improvement. It's operating margin improved by 724 basis points primarily due to control on SGA (selling, general and administration) costs. It reduced from 8.07 to 6.98 per cent of sales. Net profit margin increased by 593 basis points.  At current market price of Rs 28.20, the company's stock is discounting its FY08 earning by 5.6 times and trailing twelve-month earning by 2.24 times. FY09E EPS of Rs 18.5 discounts CMP at 1.6 times. We expect the scrip to give return of at least 25-30 per cent from this level by next year and therefore ask our readers to invest with same time frame.