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Reliance Securities
Aarti Industries (Buy)
Target: ₹1,232
CMP: ₹900.85
The management expects earnings from specialty chemical business to clock nearly 25-35 per cent CAGR FY21-FY24, driven by higher demand, project commissioning, rising share of high-margin products and business from new chemistries.
We have upwardly revised our revenue estimate by 9 per cent and 21 per cent for FY22 and FY23, respectively. We have also increased our reported PAT estimate by 68 per cent and 7 per cent for FY22 and FY23, respectively. Introducing our estimates for FY24, we expect Aarti Industries' revenue, EBITDA and PAT to witness 26 per cent, 28 per cent and 32 per cent CAGR, respectively over FY21-FY24, which will lead to improvement in return ratios.
Accordingly, we expect Aarti Industries RoCE/RoE to improve by 310bps/257bps over FY21-FY24. Hence, we are increasing our valuation multiple to 23x now from 14x earlier, we value the company's chemicals business at 24x of FY24 EBITDA and pharma business at 15x of FY24 EBITDA.
We have compared Aarti Ind’s chemical business with PI Industries (PI) and observed that our target multiple is at 10 per cent discount to PI. Hence, we are comfortable with our 23x target EV/ EBITDA multiple for Aarti Industries. We maintain Buy on Aarti Industries with an upwardly revised two-year target price of ₹1,232 (from ₹1,209 pre-bonus issue of 1:1), which implies 29 per cent upside from the current level.
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