Aarti Industries targets earnings monetisation as fuel additives and Zone IV ramp up

Investment View and Earnings Monetisation

ICICI Securities retains a BUY view on Aarti Industries, with a target price of Rs 565 against a CMP of Rs 480. The brokerage's outlook is supported by the company's transition from a heavy capital-expenditure cycle towards earnings monetisation.

Key growth drivers over the next two years include the expanding fuel-additives portfolio, phased commissioning of Zone IV projects, the Augene Chemicals joint venture, opportunities in the NCB value chain and selective debottlenecking.

Aarti Industries operates across the Nitro Chloro Benzene, Dichloro Benzene, Phenylenediamines and Nitro Toluene value chains. It serves the energy, agrochemicals, dyes, pharmaceuticals and polymers industries.

Q1 FY27 Financial Performance

Operating income in Q1 FY27 was Rs 2,387 crore, increasing 43 per cent year on year and 8 per cent sequentially. Revenue growth was primarily driven by higher input prices being passed through to customers. Volumes recovered from the prior year but declined sequentially as West Asia-related supply-chain disruptions affected the business.

Gross profit margin was 35.8 per cent, up approximately 280 basis points year on year. EBITDA increased 72 per cent year on year to Rs 336 crore, while EBITDA margin rose approximately 240 basis points year on year to 14.1 per cent, although it declined sequentially. Monetisation of low-cost inventory and foreign-exchange gains supported EBITDA growth.

Profit after tax was approximately Rs 155 crore, up 260 per cent year on year.

Fuel Additives and Energy Business

Management stated that the West Asia conflict reduced the region's contribution to company revenue from approximately 15 per cent to roughly 2 per cent in Q1 FY27. However, a significant portion of the lost Middle East volumes was redirected to other global markets.

In the energy business, fuel-additives capacity has increased from 290 KTPA to 360 KTPA. Management expects utilisation to ramp up rapidly and potentially reach high levels in Q2 FY27. The business remains in a market-development phase, with the company broadening its portfolio beyond MMA through three to five additional fuel-additive products under development or commercialisation.

Healthy gasoline-naphtha crack spreads of approximately US$15-20 per barrel support demand. Management, however, expects seasonal weakness from late October and November.

NCB Value Chain and Zone IV Expansion

The NCB value chain may benefit from China's suspension of export tax rebates, according to management. Any capacity expansion will be aligned with the growth of domestic pharmaceutical demand.

Zone IV has been delayed by approximately three to six months because of labour shortages and war-related supply-chain disruptions, rather than demand weakness. Most equipment installation is complete, with piping and insulation work remaining. Five chemistry blocks have faced delays, while the multipurpose plant and calcium chloride facility are expected to start during FY27.

Zone IV commissioning is planned in phases during FY27, with ramp-up extending through FY28 and FY29. Management expects to launch five to 10 products in FY27 and approximately 25-30 products by FY28. Most products have completed pilot-scale customer qualification.

Augene Chemicals Joint Venture and Capital Expenditure

The Augene Chemicals joint venture is expected to be commissioned in Q2 FY27, with a meaningful financial contribution anticipated within two to four quarters. Management is targeting steady-state Augene revenue of Rs 300-400 crore, primarily from coatings and subsequently agrochemicals. Joint-venture margins are expected to be above Aarti Industries' current company average.

FY27 capital-expenditure guidance remains at Rs 700-800 crore, of which approximately Rs 180 crore had been spent in Q1 FY27. Management expects capital intensity to decline significantly from FY28 as investments shift towards niche, higher-return opportunities.

The company has retained its long-term EBITDA guidance of Rs 1,800-2,200 crore by FY28E.

Earnings Estimates and Valuation

ICICI Securities' target price of Rs 565 is based on 14 times FY28E EBITDA of Rs 1,779 crore.

Key Risks and Management Changes

• Continued pricing pressure from Chinese competition.
• Further delays in Zone IV capital expenditure and commissioning.

The Board has appointed Suyog Kotecha as Managing Director and Chief Executive Officer, effective October 1, 2026. Promoter executive directors will move to non-executive leadership roles.