Best Midcap Stocks in India

Introduction

In this article, we are going to do a analysis of Aarti Industries Ltd. stock. Aarti Industries is a leading Indian manufacturer of Speciality Chemicals and Pharmaceuticals with a global footprint.

Aarti Industries Ltd – Stock Analysis

CHemical Industry Overview

  • The chemical industry is simplified into two main sub-industries :
    1. Bulk chemicals :
      • These are chemicals that are made on a very large scale in order to satisfy global markets – which is why they are sometimes referred to as Commodity chemicals. 
      • The basic manufacturing goal of bulk chemical plants is to produce bulk chemicals on a large enough scale that costs are kept as low as possible, to make the maximum amount of profit.
    2. Speciality chemicals :
      • Specialty chemicals are often customized offerings, based on an in-depth understanding of customer needs and problems.
      • While plant capital costs are lower than those for commodity chemicals, the speciality chemicals business requires significant application development and R&D investments to stay relevant.
  • The overall total current market size of chemical industry is about $3 Trillion, out of which Bulk chemicals holds $2.25 Trillion. While Speciality chemicals’ industry is $750 Billion currently and it is expected to grow to around $1 Trillion by 2024 with a growth rate of 12%-14%. The Bulk chemicals industry is expected to grow at a rate of 6%-7% and is estimated to double in market size by 2035.
Speciality Chemicals Industry – Global Players
  • As far as the total global market of Speciality Chemicals industry is concerned, China is having about 25% of the market share. China is the world’s largest producer and exporter of Speciality Chemicals. But, from last 2-3 years, China has employed a Blue Sky Policy to control the pollution with respect to the pollutants discharged from these Speciality chemicals plants.
  • Strict pollution norms have disrupted in China. Companies are either being shifted to dedicated areas or restrictions are being placed on production. Either of these has the potential to increase costs of manufacturing for Chinese firms. Companies that previously sourced from China are now looking for alternate supply sources like India.
  • So India is getting a competitive advantage of China’s pain. The decline in supply from China offers immense opportunity for Indian players to boost their supply to the world market and explore new markets for sustained exports.
  • India’s specialty chemical companies are set to invest the highest ever on capacity expansions in the financial year 2019 and continue capital expenditure to cater to rising demand from domestic and overseas markets, following plant shutdowns in China, .

Company Overview

Aarti Industries Ltd – Stock Analysis
  • Aarti Industries Limited (AIL), an Aarti Group company was incorporated in 1984, headquartered in Mumbai. It operates in India, United States of America, Europe and Japan.
  • AIL is the leading and highly integrated speciality chemical manufacturer involved in mainly manufacturing of various Benzene based Derivative products.
  • Aarti is one of the leading suppliers to global manufacturers of Dyes, Pigments, Agrochemicals, Pharmaceuticals, Additives, Rubber chemicals etc.
  • The products of the company are exported to various countries like United States, United Kingdom, Germany, Spain, Italy, Switzerland, Belgium, Japan, Korea, China, and Russia.
  • The Vision of the company is to emerge as ‘a global partner of choice’ to leading consumers of speciality chemicals and intermediates.

Business Overview

  • There are 3 business segments in Aarti Industries : Speciality chemicals, Pharma and Home and personal care.
  • Speciality chemical segment includes Agrochemicals, Polymer, Dyes and pigments, etc
  • Company is having a strong focus on R&D and Process Innovation : 3 R&D facilities; dedicated pool of over 170 engineers & scientists; IPRs for developing customized products.
  • 17 manufacturing units located in close proximity to large ports of western India. 11 – Speciality chemicals, 4 – Pharma, 2 – Home & Personal Care (HPC)
  • Pharma segment has a significant growth with diversification across products and geographies.

REVENUE MIX FY 2019- Segmental & Geographical

Aarti Industries Ltd FY2019 Revenue Mix

Key Financials – Revenue & EBITDA

Aarti Industries Ltd Revenue & EBITDA FY2019

KeY Parameters

  • Current Market Cap = Rs.15,625.49 Cr, Mid Cap Company
  • Promoter Holding = 49.4%, indicating the strong backing of the promoter group.
  • PE Ratio = 32.58
  • ROCE = 16.30%, positive sign for the company.
  • ROE = 22.4%
  • Debt to Equity Ratio = 0.78. Debt consideration is analysed along with the Interest coverage ratio.
  • Interest Coverage Ratio = 4.19, which is very good.
  • Capex in FY2019 – Rs 797 crore and the Planned capex of Rs.1,000‐1,200 crore in FY2020. Company is expected to give good quarters in future.
  • Specialty chemical companies in India have witnessed a sharp increase in demand of their products over the recent years. Thus, profit margins of India’s chemical companies are likely to remain robust in the next couple of years due to improved demand.

Notes :

  • The numbers that are used are approximate and have been rounded for presentation purposes.
  • We are not in any way saying that this is a bad company or that the stock of this company is bad.
  • We are also not suggesting anyone to immediately go and buy this stock or invest in the stock markets.
  • Only an analysis has been presented here. No judgments or final statements are being made here.