Why Aarti Industries Share Price is Falling

The specialty chemicals sector in India has seen robust growth in recent years. This sector is essential for industries like pharmaceuticals, agrochemicals, and personal care, providing high-value, complex chemical solutions.

Many Indian specialty chemical companies are expanding their global reach and investing in R&D to meet the rising demand. With the support of government initiatives and favourable market dynamics, the specialty chemicals sector is positioned for continued growth.

Aarti Industries is a major player in India's specialty chemicals market. The company manufactures a wide range of chemicals used in diverse industries, including pharmaceuticals, agrochemicals, and polymers.

Known for its extensive product portfolio, Aarti Industries serves both domestic and international markets. Recently, the company's share price has been under investor scrutiny, dropping 13.9% in just five days following its quarterly earnings announcement.

To understand why Aarti Industries share price is falling, let's examine its recent quarterly results.

#1 Weak Quarterly Results

Aarti Industries faced a challenging September quarter, with net profit and earnings before interest, tax, depreciation, and amortisation (EBITDA) both hitting multi-quarter lows, mainly due to rising operating costs and lackluster performance in the energy segment.

Its net profit dropped by 43% year-on-year (YoY) to Rs 520 million (m), down from Rs 910 m in the same quarter last year. This steep decline highlights how rising costs and slowing demand are impacting profitability.

Revenue for the quarter increased 12% YoY to Rs 16.3 bn, showing some resilience in demand across certain segments. However, this growth in revenue was not enough to offset the sharp fall in EBITDA, which declined 13.3% YoY to Rs 2 bn.

EBITDA margins also fell by 400 basis points YoY to 12%, reflecting the impact of escalating costs and intensified competition, especially from new Chinese capacities, on profitability.

Aarti Industries' quarterly performance was further impacted by weakness in its energy business, where volumes declined by 1% QoQ and 36% YoY. The sharp drop in margins for its key product, Mono Methyl Aniline (MMA), was a significant factor in this underperformance.

Lower utilisation rates and high channel inventory contributed to the reduced margins in MMA, causing a 35% sequential fall in volumes. This decline in MMA volumes added considerable pressure on the company's overall results.

The weak performance in MMA, alongside disappointing financial metrics, signal weakening profitability and competitiveness, raising concerns among investors.

The sharp fall in net profit, EBITDA, and margins has eroded confidence, leading to Aarti Industries share price drop after the release of these quarterly results.

#2 Dull Outlook

Aarti Industries faces a challenging outlook with expectations of low gasoline-naphtha margins in Q3, followed by a potential recovery in Q4. Moreover, the company has provided a conservative EBITDA guidance of Rs 18-22 bn by FY28, alongside a reduced capex plan of Rs 13-15 bn for FY25 and Rs 10 bn for FY26.

Additionally, the company has a limited window to charge premium prices for newly launched products before Chinese manufacturers catch up and begin offering them at lower prices. This pressure necessitates frequent product innovation.

Given these headwinds, Aarti Industries has acknowledged that it is no longer a price maker and can only forecast volume growth. These challenges and the shift in guidance towards volume growth contribute to the muted outlook for Aarti Industries, further weighing on its share price.

What Next?

Looking ahead, Aarti Industries faces several challenges in the specialty chemicals sector, particularly due to increasing competition from Chinese manufacturers.

In response to these market dynamics, Aarti has shifted its guidance approach. Instead of focusing on EBITDA-based targets, it is now forecasting volume growth. The company expects a 20-30% volume growth for FY25, reflecting a shift towards achieving growth through higher volumes rather than premium pricing.

To counter competitive pressure, Aarti Industries is securing large multi-year deals. For example, it signed a nine-year agreement with a global agrochemicals company in December, with a total revenue potential of Rs 30 bn.

Additionally, Aarti entered into a four-year deal with a multinational company to supply a niche specialty chemical. Notably, these deals do not require additional capital expenditure, which will help manage costs.

Furthermore, in May, Aarti Petrochemicals formed a joint venture with UPL for a capital expenditure of Rs 3 bn over two to three years. This venture aims to supply raw materials for the production of specific chemicals, with an expected revenue potential of Rs 3-5 bn over the next few years.

While the short-term outlook is challenged by competitive intensity and margin pressure, Aarti expects the additional capacities from its ventures to be earnings accretive if the company achieves 60-80% utilisation levels. This should lead to improved profitability in the long term.

In conclusion, while Aarti Industries faces tough competition and margin pressures in the near term, its strategic focus on product innovation, long-term deals, and joint ventures will be key to sustaining its growth.

The company's future growth will depend on its ability to navigate these challenges, manage its costs effectively, and increase its volume growth.

How Aarti Industries Share Price has Performed Recently

In the past five days, Aarti Industries share price has tumbled 13.4%. In the last month, it has slipped 16.5%.

The stock price has tumbled 31.7% in the 2024. Additionally, it has slipped 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 427.3 on 11 November 2024.

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.

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