Why Aarti Industries Share Price is Falling

Editor's note: In August 2021, Aarti Industries had announced a demerger to separate its pharma and chemical businesses.

Shares of the company have underperformed big time since then.

In 2022 so far, Aarti Industries shares have slipped over 25%.

Is the underperformance because of the demerger? Or are there other factors dragging the stock?

Continue reading to find out.

Why Aarti Industries Shares are Under Pressure

Up until the end of 2021, chemical stocks were investor favorites. Since the March 2020 crash, the whole lot of chemical stocks rallied big time.

This was because the sector got a re-rating owing to earnings growth.

Companies bettered their operational performance, led by unsustainable price increases of the underlying chemicals due to the China factor.

Supply disruptions from China was a key reason for price increases along with high logistic costs due to container issues.

But the sharp rally came to an end in 2022 as chemical stocks started to fall.

One such stock which fell in line with its peers was Aarti Industries. Today, Aarti Industries share price hit a new 52-week low.

Let's take a look at the various reason why Aarti Industries is facing the heat lately...

Earnings effect?

In its Q4 results, Aarti Industries reported a net profit of Rs 1.9 bn as compared to Rs 1.4 bn reported a year ago, thereby registering a 42% growth.

The topline also saw a 45% growth while operating profit rose 30% to Rs 3.4 bn.

These are good numbers. So why did Mr Market punish Aarti Industries? Is there more than meets the eye in the quarterly results?

Well, it could be because the sequential growth is abysmal.

Have a look at the table below which compares the company's Q4 results with year ago and sequential quarterly numbers.

Financial Snapshot

(Rs m, consolidated)	Mar-22	Mar-21	Dec-21	YoY (%)	QoQ (%)
Net Sales	17,556.4	12,093.5	23,759.8	45%	-26%
Operating Profit	3,392.8	2,603.1	9,661.8	30%	-65%
Profit After Tax	1,937.3	1,361.0	7,724.9	42%	-75%

Data Source: Ace Equity

One should note that while sequential quarterly results don't paint a pretty picture, the company's annual results are improving for the past few years.

Net profit for fiscal 2022 was reported at Rs 13.1 bn as compared to Rs 5.4 bn in fiscal 2021.

Annual Financial Snapshot

(Rs m, consolidated)	FY17	FY18	FY19	FY20	FY21
Net Sales	31,634.6	38,060.6	41,675.6	41,863.1	45,061.0
Sales Growth (%)	5.2%	20.3%	9.5%	0.4%	7.6%
Operating Profit	6,554.6	7,068.9	9,671.9	9,861.7	9,822.3
Operating Profit Growth (%)	21%	19%	23%	24%	22%
Profit After Tax	3,157.8	3,329.6	4,917.3	5,360.8	5,234.7
PAT Margin (%)	10%	9%	12%	13%	12%

Data Source: Ace Equity

Sectoral effect

Chemical stocks were booming last year. The period of October 2021 to January 2022 saw most specialty chemical stocks hitting their 52 week highs.

The whole sector had a re-rating.

But the scenario changed totally when the Russia-Ukraine war started to show its aftermath.

The cost of raw materials increased which has a direct effect on the company's margins. To be sure, the price rise was seen in the previous quarter too. But when the cost of raw material increases, it becomes tough for companies to pass on the cost.

Too much price volatility and the dependence on global and Chinese prices gives chemical stocks the characteristics of a commodity.

Hence, the cyclicality played a big role in bringing down these stocks.

Look at the table below which shows how the top specialty chemical companies performed this year.

Company	YTD Change (%)	Fall from peak (%)
Pidilite Industries Ltd.	-11%	-21%
Deepak Nitrite Ltd.	-21%	-35%
Aarti Industries Ltd.	-28%	-38%
Atul Ltd.	-11%	-27%
Clean Science And Technology Ltd.	-28%	-33%
Navin Fluorine International Ltd.	-10%	-13%
Godrej Industries Ltd.	-24%	-29%
Alkyl Amines Chemicals Ltd.	-24%	-43%
Balaji Amines Ltd.	-6%	-39%
Laxmi Organic Industries Ltd.	-15%	-41%
Chemplast Sanmar Ltd.	-14%	-42%
Anupam Rasayan India Ltd.	-31%	-38%

Source: Equitymaster

Shareholding activity

Promoters of Aarti Industries have been consistently reducing their stake over the quarters.

Five out of the past six quarters showed a decrease in their holdings. This raises a red flag.

Promoters selling their stake in the business can usually mean many things. Maybe all is not well with the underlying business, or the stock is trading at a large premium to its fair value, or the business profitability and growth have peaked.

Update: Aarti Industries' promoters have been continuously selling their stake in the company since September 2020, except for the quarter that ended in June 2022 and December 2021.

Currently, promoters hold a 44.2% stake in the company.

Qtr. Ending	20- Sep	20- Dec	21- Mar	21- Jun	21- Sep	21- Dec	22- Mar	22- Jun
Indian Promoters	47.4	47.19	46.67	44.76	44.07	44.07	44.05	44.05
Foreign Promoters	0.15	0.15	0.15	0.14	0.14	0.14	0.14	0.14
Total Promoters	47.55	47.34	46.82	44.9	44.21	44.21	44.19	44.19

Source: Equitymaster

We recently covered another editorial which highlights the recent developments as to why Aarti Industries could be falling.

You can check it out here: Why Aarti Industries Share Price is Falling.

Recent developments on Aarti Industries demerger

Shares of Aarti Industries slipped 8% on 19 October 2022. But in hindsight, that doesn't paint a clear picture.

This decline versus the previous close is due to the upcoming record date for demerger, i.e. 20 October 2022.

Only shareholders who had bought Aarti Industries till 18 October 2022 can receive shares of the pharma entity (which is yet to be listed).

Allow us to explain some more from the excerpt which appeared in an article of Hindu Business line today:

• On a theoretical basis, while shareholders could have expected a 10-15% decline (equal to the value of the new business - APL, being demerged), the actual decline is lower, reflecting investor perception on the benefits of value unlocking from the demerger.
  
  The new shares of APL will be listed by mid-December, according to the company.

How Aarti Industries has performed recently

In the past one year, shares of Aarti Industries have fallen by 14% while on a YTD basis, they are down 28%.

Aarti Industries share price has a 52 week high quote of Rs 1,168 touched in October last year while it hit a new 52 week low of Rs 715.95 today.

At the current price, Aarti Industries trades at a PE multiple of 19.7 and a price to book value multiple of 7.35.

About Aarti Industries

Aarti Industries, the flagship company of the Aarti group, manufactures organic and inorganic chemicals at its major facilities in Vapi, Jhagadia, Dahej and Kutch, in Gujarat.

It also manufactures active pharmaceutical ingredients (API) at its units in Tarapur and Dombivali in Maharashtra, and at Vapi.

The group has a strong market position in the NCB-based specialty chemicals segment.

Aarti Industries has carried out debt-funded capex of about Rs 42 bn during the five years through 2021, including just over Rs 30 bn in the last three years.

The company also has a capex of Rs 45 bn planned over 2022-024 in multiple value chains to increase market share.

To know more, check out Aarti Industries factsheet and quarterly results.

You can also compare Aarti Industries with its peers.

Aarti Industries vs Alkyl Amines

Aarti Industries vs Atul

Aarti Industries vs Clariant Chemicals

Aarti Industries vs Pidilite Industries

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...