Buy This Midcap Stock For Good Long Term Returns, Says Sharekhan

Why to buy the stock of Aarti Industries?

Aarti Industries has seen prices of some of its key products in the NCB value chain rise and has noted that some of the demand from high margin discretionary sectors has already recovered above pre-Covid level.

"Additionally, international freight costs have also cooled off recently while liquidation of high cost finished goods inventory in Pharma business is also largely over now.

Thus, we expect EBIT margin for its specialty chemical/pharma business to recover to over 20%/18-20% by Q4FY22 versus 16.4%/14.8% in Q2FY22. We expect Aarti Industries to be one of the biggest beneficiaries of China plus one strategy by global companies and import substitution in India and thus continued high capex intensity (Rs. 4,500-5,000 crore over FY22E-24E) to drive earnings growth (expect 33% PAT CAGR over FY21-24E)," the brokerage has said.

High capex plan to enable growth story to remain intact

The management of the company has guided for a high capex plan of Rs. 4,500-5,000 crore over FY22E-24E, which would double Aarti Industries gross block to >Rs. 10,000 crore by FY24E and provides longevity to the earnings growth cycle, Sharekhan has said.

"The management is planning to demerge the pharma business into a separate company and list it on the stock exchanges, which could unlock value for Aarti Industries and remain key near-term catalyst. The management has guided for PAT growth of 1.7x-2x/3x4 times by FY24E/FY27E over FY21.

Buy with a price target of Rs 1155 on the stock

Sharekhan has maintained a Buy on Aarti Industries with an unchanged price of Rs. 1,155 as high capex intensity would drive sustained high earnings growth and China plus one strategy would strengthen global scale (from current position of top-3 global producers of Nitro Chloro Benzene and DiChloro Benzene).

"We expect strong revenue/ EBITDA/PAT CAGR of 28%/32%/33% over FY2021-FY2024E, led by ramp-up of new capacities and sustained high capex intensity. We believe Aarti Industries would benefit immensely from strong growth outlook for the Indian specialty chemical sector supported by the China Plus One strategy by global companies, import substitution in domestic markets (identified opportunities of $1 billion), and rising domestic demand for specialty chemicals. Moreover, favourable dynamics for the Indian specialty chemicals sector are likely to support premium valuation.

Hence, we maintain Buy on Aarti Industries with an unchanged price target of Rs. 1,155. At the current market price, the stock trades at 35.3x its FY2023E EPS and 29. times its FY2024E EPS," the brokerage has said.

The shares of Aarti Industries was last seen trading at Rs 982 on the NSE.

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.