On Monday, November 11, shares of Aarti Industries, the Aarti Group’s main firm, fell 10% to ₹427 per share, reaching a 4-year low. This drop came after the company’s terrible September quarter performance when a steep increase in operating costs and poor energy segment performance caused net profit and EBITDA to hit multi-quarter lows.
In comparison to a net profit of ₹91 crore in the same quarter last year and ₹137 crore in the June-ending quarter (Q1FY25), the company reported a net profit of ₹52 crore, a notable 43% year-on-year (YoY) decline.
Revenue increased from ₹1,454 crore to ₹1,628 crore, a 12% YoY increase. Nevertheless, EBITDA experienced a steep decline of 13.3% year over year and 35.9% quarter over quarter (QoQ), amounting to ₹202 crore. EBITDA margins decreased to 12%, a 400 basis point YoY decrease.
With overall volume growth of 22% YoY and 11% QoQ in Q2, Aarti saw robust growth in all areas except the energy sector. End applications like dyes, pigments, and polymer additives saw volume increases, but the agrochemicals segment remained poor.
However, because of fewer gasoline-naphtha cracks, the energy company suffered a volume decrease of 1% QoQ and 36% YoY. Additionally, MMA volumes fell by about 35% QoQ, which had an effect on overall performance.
The business anticipates that the gasoline-naphtha delta will stay low in Q3, with a possible improvement in Q4 due to summer demand and standards in the USA. Even if a few companies from China and India have begun producing MMA, their current capacities still pale in comparison to Aarti Industries.
Overall, increasing capacity from China also caused margin pressure in several segments, which resulted in uncompetitive pricing. In addition, the management has given a cautious EBITDA projection of ₹1,800–2,200 crore by FY28, taking into account the continuous margin pressure on its main product and the lack of immediate relief. Additionally, management reduced its FY25E/FY26E capital expenditure forecast to ₹1,300–1,500 crore/₹1,000 crore.
“Entire swing was due to subdued demand for its flagship product, Mono Methyl Aniline (MMA/NMA), volumes of which were lower 35% QoQ, impacted by lower Gasoline-Naphtha cracks. However, excluding the energy business segment (MMA, CaCl2), volume uptick was healthy with 22% YoY and 11% QoQ growth,” said domestic brokerage firm Centrum Broking.
According to the brokerage, the company is attempting to climb up the value chain for certain items because of competition in certain of them brought on by new capacity expansions in China. The management unveiled a new growth path with an FY28E EBITDA guidance of Rs1,800–2,200 crore, Debt/EBITDA less than 2.5x, and a RoCE of more than 15%, outlining a new strategy under its new professional leadership.
Centrum Broking has lowered its target price to ₹443 per share, down from ₹730, and dropped its recommendation on the company from ‘Reduce’ to ‘Sell’ due to short-term concerns. The brokerage downgraded Aarti Industries’ FY25E and FY26E EBITDA projections to ₹960 crore and ₹1,290 crore, respectively, by 35.9% and 30.3%.
The primary factor affecting Aarti Industries’ quarterly earnings, according to Nuvama Institutional Equities, was poor margin performance. The brokerage pointed out that decreased utilization and a steep drop in the margins of the company’s main product, MMA, had a detrimental effect on the Q2 FY25 results.
With a ‘Hold’ recommendation on the stock, Nuvama also lowered its target price to ₹600 per share.
