Target: ₹490

CMP: ₹400.90

Aarti Drugs reported Q3-FY23 results lower than expected due to low uptick in volume and fall in realisations of finished products. Aarti Drugs reported lowest Gross margins 30 per cent y-o-y in the last four years due to price correction of high-cost inventory that includes raw materials like DCDA and Ammonia.

Revenue grew 4.6 per cent y-o-y to ₹664 crore, majorly driven by commencement of new capacities in the diabetic segment. Reported Gross margins, about 30 per cent, was lowest in recent times despite fall in base chemical prices by 180 bps y-o-y. Reported PAT fell 37 per cent y-o-y due to low operating profitability and higher interest costs. Debt levels have increased as the company has increased capacity in diabetic and pain segment.

Due to fall in API realisations, the company undertook inventory loss of about ₹6 crore that led to fall in gross margins by almost 100 bps during the last quarter. API sector is experiencing the low export demand and high competition in domestic market due to Chinese products, led to overall fall in realisations. We believe demand could revive in H1-FY24E with the improvement in global economy.

The company is eyeing to double the revenue from Specialty Chemicals business within the next 12 months through the ongoing brownfield expansion.