Why Aarti Industries Share Price is Falling

Editor's note: Share price of Aarti Industries tanked up to 15% on 13 August 2024 after the company posted its earnings for the first quarter of FY25.

Even though the specialty chemical player reported decent growth in its topline and bottom-line, investors on Dalal Street were concerned about the company's EBITDA margins.

The company's management dropped the EBITDA guidance of Rs 1,450 - Rs 1,700 crore for FY25 considering the volatile environment.

The management indicated that the company's core product margin is at a level reasonably lower than the old normal and considering competition from China, the margins are expected to be under pressure... at least until China continues its dumping.

Reacting to the above commentary, the stock price plunged and erased most of the gains made in 2024 so far.

After this correction, market experts are divided with their views on the stock. While some say that this is a temporary blip, some critics are also of the view that the downtrend is here to stay.

Aarti Industries does have strong growth plans in place. The company wants to improve its revenue and margin growth through a multi-pronged strategy.

It's looking to collaborate with leading chemical companies to improve its contract manufacturing business.

The company is also focussing on expanding its product portfolio by entering new chemicals segments.

It remains to be seen how the above developments pan out...

Since you're interested in Aarti Industries, we wrote a similar piece on the stock in 2022 and explained the probable reasons why the specialty chemical stock was falling.

Continue reading...

Why Aarti Industries is Falling

Nowadays, investing in share markets is like sitting on a beach.

While sitting on the shore you never know when the waves will come and crash on you. You can't precisely predict the ebb and flow of the water.

Similarly, markets across the globe have become unpredictable and very volatile.

Markets will fall for seven consecutive sessions just to recover all those losses on the eighth day.

In this turbulent phase, the share price of Aarti Industries has fallen around 9% in the past five days.

It has fallen 26% in the last 12 months.

Aarti Industries was once a multibagger stock, having surged post the Covid-19 crash. But recently, the company's share price has been under pressure.

Let's find out why this could have happened.

Rising input prices

Up until December 2021, all chemical stocks were booming and so was Aarti Industries.

Specialty chemical companies delivered multibagger gains as many countries cut dependence on China, among other reasons.

But with the announcement of the Russia-Ukraine war, the dream run of chemical stocks was halted.

Due to rising crude oil prices and disruptions in the supply chain, raw material cost for chemical stocks increased. This directly impacted the profit margins of these companies including Aarti Industries.

This effect was visible on the company's quarterly performance.

The quarterly results show a sharp increase in expenses and a sharp fall in profit margins. Net profit increased but net profit margins fell. In we compare the fall in margin for the last five quarters, profit margins have fallen around 3%.

Quarterly Performance

Particulars (Rs in m)	21-Jun	21-Sep	21-Dec	22-Mar	22-Jun
Turnover	13,168	15,521	23,760	17,558	19,724
Expenses	10,030	12,418	14,099	14,165	16,027
EBITDA*	3,139	3,104	9,661	3,392	3,697
PAT	1,651	1,761	7,725	1,938	1,891
Net profit margin (%)	12.5	11.3	32.5	11	9.6

Source: Equitymaster
*For EBITDA interest is pre-tax

For the quarter ended September 2022 too, Aarti Industries' performance was below estimates. This, on the back of lower demand in segments like dyes, paints, pigments etc., which directly impacted volume growth and hurt margins.

The company's management has guided for a single-digit growth for this financial year.

In the conference call, Aarti Industries talked about how the slowdown in textile sector is impacting the company's dyes and pigments segment. Even going forward, the company is of the view that the next couple of quarters would be tough.

Update: On 8 May 2023, Aarti Industries reported a 11% growth in its revenue, driven by high prices and supply ramp up under multi-year supply contracts.

The operating margin, however, slipped 180 basis points on account of higher than expected staff costs and other expenses.

There was also an incremental cost of Rs 100 million due to maintenance shutdown of its acid plant and Kutch unit.

The specialty chemical company's profit grew 2% to Rs 1.5 billion.

Following these lower than estimated numbers, several brokerage houses turned cautious on the stock which resulted in 8% fall in its share price on 10 May 2023.

Even the company's management is cautious about the potential impact of global slowdown in next couple of quarters.

For now, the volatility may stay but in the next two years, Aarti Industries could be in a totally different spot. The company's management said that it will start to see the benefit from the Nitrotoluene and ethylation expansion projects starting 2025.

To know more, you can check out the quarterly results of Aarti Industries.

Minor stake sale by promoters and FIIs

The promoter's holding indicates the promoter's trust in the company. When promoters sell a stake in the company it leads to distrust in shareholders and they also start selling shares.

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

Coming to FIIs...

Interest rates are rising in developed markets like the USA. This makes the emerging markets less attractive for FIIs because the risk-free rate of return reduces.

Hence FIIs sell their holdings in companies operating in emerging markets like India to return to the safety of dollars. The same has happened with Aarti Industries.

FII stake was reduced to 11.8% in the June 2022 quarter from 12.46% in March 2022.

For more, check out Aarti Industries' latest shareholding pattern.

Update: Promoters again sold a minor stake in the September 2022 quarter. Indian mutual funds too have now turned bearish and sold Aarti Industries shares for two consecutive quarters.

What followed was promoters again reducing stake from 44.16% in December 2022 to 44.07% in March 2023.

Investment Takeaway

One more reason why the share price of Aarti Industries took a hit recently is because a brokerage house downgraded the stock owing to margin pressure.

One more concern is the management commentary. The management has guided that consolidated operating profit will grow at high single digit in 2022-23.

The management added that the slowdown in growth would be because of lack of receipts from Bayer and new projects at lower margins.

However, the company's share price may be falling owing to the current scenario but in the long run, the prospects look bright.

Falling crude oil prices result in lower input costs. Hence, if the downtrend continues, quarterly results of this quarter will see a better position.

Also, speaking of input costs, European gas prices are increasing. It means that the input costs of European companies will increase, and this will benefit Indian chemical companies as Indian companies can sell the product at cheaper prices.

Being the largest producer of benzene-based chemicals and derivatives, with a market share of 25-40% for various products, Aarti Industries enjoys high economies of scale and hence low cost of production.

This makes Aarti Industries one of the top 5 stocks to benefit from China plus one strategy, as companies globally move to Indian counterparts instead of Chinese companies.

Also, the company is demerging its pharma business. The company's management said it aims to demerge its pharma business into a separate entity as it aims to focus on the pharma opportunity separately.

Here's an excerpt of what the company's MD said in an interview:

• In the chemical sector, we have given a large capex guidance and also growth guidance in terms of topline and bottomline of 1.52x for the last two years going forward

Update: What's more, the company has guided big capex for the coming three years. The profitability has impacted due to large capex commissioning.

According to reports, Aarti has a planned capex of Rs 30 billion over the next two years, which it plans to fund via both internal accruals and debt.

Once the company along with other chemical companies finish multiple capex expansion plans, it could witness strong growth.

It remains to be seen how and when the value unlocking for shareholders pans out.

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.

The company also has a capex of Rs 45 bn planned over 2022-24 in multiple value chains to increase market share.

To know more, check out Aarti Industries' factsheet.

You can also compare Aarti Industries with its peers.

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