Why Aarti Industries Share Price is Falling

The Indian specialty chemical sector is a key player in the country's industrial landscape. It supports a wide range of industries such as pharmaceuticals, agrochemicals, and textiles.

With its highly technical production processes and innovation-driven nature, this sector caters to both domestic and international markets.

Before a year, this sector was experiencing a surge, primarily driven by supply chain disruptions in China, which positioned India as a favorable alternative for global buyers.

Indian chemical companies capitalised on the high demand, and the industry rapidly grew, with both exports and domestic sales on the rise. However, challenges started to emerge, clouding the industry with uncertainty.

Aarti Industries, one of the key players in the Indian specialty chemical sector, wasn't spared from this. Known for manufacturing benzene-based intermediates, specialty chemicals, and pharmaceuticals, Aarti caters to global markets, supplying high-value products.

However, like the rest of the sector, Aarti Industries' rally has slowed down.

In the past year, its stock price reported a modest growth of 14.5%. Yet, 2024 hasn't been favourable so far, as its share price slipped 12.5%, and in the past month, the downward trajectory steepened with a 22.3% fall.

Let's explore the key factors that have contributed to this decline.

#1 Lowered Guidance and Margin Pressures

Shares of Aarti Industries took a hit after its Q1FY25 earnings report. The company's decision to suspend its FY25 guidance raised concerns among investors.

This move was driven by significant margin volatility and growing competitive pressure from China. Last month the management revealed that a precise EBITDA forecast of Rs 14.5 billion (bn) would be possible only after assessing the global economic environment.

The company is grappling with price fluctuations and the threat of Chinese dumping, which could harm its margins. Adding to the challenges, Aarti's debt is projected to rise to Rs 35-36 bn due to ongoing capital expenses.

Although Aarti remains optimistic about achieving 20-30% volume growth for FY25, logistical disruptions in the Red Sea could affect some segments.

For Q1FY25, Aarti Industries reported a net profit of Rs 1.4 bn, a 96% YoY increase, and revenue rose to Rs 20.1 bn, a 28% YoY jump. EBITDA also grew by 55% YoY to Rs 3.1 bn.

Despite positive growth figures, the uncertainty surrounding margins and increased debt is causing investors to worry. Lower guidance, in particular, deteriorates market confidence, as it signals potential challenges in the company's financial outlook.

#2 Strong Headwinds

Aarti Industries is facing increasing pressure from Chinese competition, a challenge that continues to affect the chemicals sector. 70-80% of its products face direct competition from China.

This pressure is especially significant because Chinese manufacturers often produce similar products at much lower costs, forcing Aarti to compete on price after an initial period of premium pricing.

Aarti can only charge higher prices for new products for a few years before Chinese rivals enter the market with cheaper alternatives.

To stay competitive in this tough environment, Aarti has focused on continuous product development.

Over the past three years, the company has developed more than 45 new products. However, developing new products comes with its own set of challenges, as it requires constant innovation and investment to stay ahead of the competition.

Aarti also has more than 40 new products in the pipeline, which indicates that it is pushing to maintain its market position by regularly introducing new products.

Despite these efforts, Aarti is no longer in a position to set prices for many of its products. Instead, it can only forecast growth in terms of volumes. This shift in dynamics has made it harder for the company to drive profitability through pricing.

In response, Aarti has begun to secure large, multi-year contracts with global firms. These deals provide more stability and predictable revenue streams, helping to mitigate the impact of volatile pricing and intense competition.

What Next?

Aarti Industries is now focusing on long-term strategies to tackle the challenges posed by Chinese competition and market volatility. The company has started to shift its business model from being a price setter to securing large, multi-year deals to ensure stable revenue streams.

One such deal, signed last December, is a nine-year agreement with a global agrochemicals company, which has a total revenue potential of Rs 30 bn. This type of contract allows Aarti to maintain predictable income despite competitive pressures.

In addition to this, Aarti Industries is targeting niche specialty chemicals through similar long-term contracts. In January 2024, it secured a four-year agreement with a multinational firm to supply a specific specialty chemical.

Such deals help the company lock in its customers and reduce reliance on fluctuating market prices.

Importantly, no additional capital expenditure is needed to fulfill these contracts, meaning the company can improve its cash flow without incurring heavy new investments.

Another key part of its future strategy is its 50/50 joint venture with UPL, initiated in May 2024. This venture involves a capex of Rs 3 bn over 2-3 years and aims to produce essential raw materials for specific chemicals.

The joint venture is expected to generate Rs 3-5 bn in revenue within 2-3 years of operations. This partnership is part of the company's broader plan to expand its product portfolio and strengthen its position in the specialty chemicals market.

Looking ahead, its ability to achieve 60-80% capacity utilisation will be crucial in driving profitability. The company has already reduced its capex intensity, indicating a more focused and efficient use of its resources.

In summary, the company's future strategy revolves around securing long-term contracts, maintaining innovation in its product offerings, and improving capacity utilisation.

How Aarti Industries Share Price has Performed Recently

In the past five days, Aarti Industries share price has tumbled 7.7%. In the last month, it has slipped 22.7%.

The stock price has tumbled 12.9% in the 2024. Additionally, it has rallied 13.9% in the last year.

The stock touched its 52-week high of Rs 769.5 on 29 April 2024 and a 52-week low of Rs 438.1 on 26 October 2023.

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 speciality 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.

To know more, check out Aarti Industries' factsheet.

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