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Aarti Industries (Buy)
CMP: ₹698
Target: ₹890
Dire fall in crude oil prices would cap expansion of revenue growth next fiscal, though operating profit is projected to grow in low double digits all thanks to entrenched focus on improving product mix of specialty chemicals. Value addition coupled with increased supplies to regulated markets explains much of the rise in pharmaceutical margins in the last few quarters. Expecting higher API demand from India, Aarti Industries could commission both API and intermediate facilities sometime next fiscal. Its new pharma capacities are aimed at higher penetration in some key therapies such as antihypertension, cardiovascular, oncology, corticosteroids, etc.
The stock’s risks-to-earnings ratio all but conceal from revenue concentration (product wise) of its specialty chemicals portfolio, raw material supply disruption from China, global economic slowdown from Corona virus scare and entrenched moderation in crude oil prices. Yet powering focus on modest volume initiating value added products would support margins next fiscal — 23.9 per cent versus 22 per cent in FY20.
Capacity utilisation of contract manufacturing projects would get a boost sometime in the second half of next fiscal, partially making up for some slowdown in domestic demand. Balancing odds, we advise buying the stock with revised target of ₹890 (previous target: ₹871) based on 24x FY21e earnings.
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