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CD Equisearch
Aarti Industries (Buy)
CMP: ₹316/90
Target: ₹396
If the forecast of The American Chemistry Council is anything to go by, then the speciality chemicals market appears to be one of the most promising globally. It predicts this market to grow by 3.6 per cent annually over the next five years. In fact, the growth would peak to as high as 4.4 per cent in 2016 before settling at 2.6 per cent in 2019. For Aarti, the decline in crude oil prices has played havoc as it has trimmed realisations for its benzene based finished products — benzene prices for instance has tumbled to ₹50/kg in the fourth quarter from ₹85/kg in Q2FY15. Volumes also took a knock — just 5-7 per cent growth in Q3FY15 — as its customers cut down on their inventories, fearing losses. Revenues as a result slid 5.5 per cent in the second half of last fiscal.
Despite all odds — related to lower sales realisation and inventory mark downs — the company would still manage earnings growth of 10.5 per cent in the current year. Sparked by combined effect of base effect and double digit volume growth (though in low teens), earning is estimated to climb by 31 per cent in FY17. Intense volatility in crude oil markets pose colossal risks for Aati’s speciality chemical business.
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