Mumbai-based specialty chemicals maker Aarti Industries has seen its stock price nearly double to a 52-week high as the company posted a 27% profit growth in FY12 after two years of stagnation. What also appears to have helped is that the promoters raising their stake to 53.97% from 50.07% during the last three quarters. With crude prices softening and the rupee remaining weak, the company’s expansion plans and inexpensive valuations seemed to have attracted investor interest.
Aarti Industries is a leading manufacturer of benzene-based specialty chemicals & pharmaceuticals with diversified end-users in industries such as pharmaceuticals, agrochemicals, polymer, additives, surfactants, pigments and dyes. It occupies the top to fifth slot for the majority of its key products globally. It counts most global majors such as DuPont, BASF, Clariant, Huntsman, Unilever and Pfizer among its clients. The company operates in four segments — with the biggest segment being performance chemicals, which contributes 58% to its total revenues, while smaller segments such as home and personal care chemicals, agrochemicals and pharmaceuticals contribute the rest.
During FY12, the company upgraded its hydrogenation technology and doubled capacity to 1,500 tonne per month (TPM). In FY13, it plans to set up its own captive hydrogen generation plant, which will double its output of hydrogenated compounds to 3,000 TPM, which enjoy better margins.
The company is also expanding its pharma business, which contributes 10% to its revenues at present and has achieved a breakeven for the first time in FY12. It exports 4 active pharmaceutical ingredients to the US and 16 to Europe from its two USFDA-approved plants and expects a couple of more approvals in 2012. Besides, the recent fall in crude oil prices has helped the company by way of lowering raw material costs, while depreciation in the rupee is good for its exports, which accounts for 42% of its total sales.
In the last five years, Aarti Industries’ net sales grew at a compounded annual growth rate of 17.9%, while net profit grew at 32.5%. The company has maintained its operating profit margin between 12.3% and 16.8% during the last five years.
The company has two main problems. First, since it makes prompt payments on raw material purchases, its working capital has gone up with the turnover. Also the management has always maintained a policy of consistently paying dividends every year rather than conserving cash for debt repayments.
This has resulted in a bloated debt of . 588 crore at the end of March 2012, which was almost equal to its net worth. For FY12, its interest burden stood at . 72 crore, with interest coverage ratio below 3.
Second, the company operates through a number of subsidiaries and joint ventures where the promoters hold stake in their personal capacity. This could raise corporate governance concerns. Nevertheless, the company has already taken steps to merge all these businesses into one and plans to merge this associate company with itself during FY13. Such a step would be a big positive for the company.
Aarti Industries is trading at 6.2 times its earnings for last 12 months, but is still below book value. The company paid . 2.5 per share as dividend in FY11, which translates into a yield of 3.5%. The company needs to take swift steps to address its problems to sustain and improve its current valuation.
Aarti Industries is a leading manufacturer of benzene-based specialty chemicals & pharmaceuticals with diversified end-users in industries such as pharmaceuticals, agrochemicals, polymer, additives, surfactants, pigments and dyes. It occupies the top to fifth slot for the majority of its key products globally. It counts most global majors such as DuPont, BASF, Clariant, Huntsman, Unilever and Pfizer among its clients. The company operates in four segments — with the biggest segment being performance chemicals, which contributes 58% to its total revenues, while smaller segments such as home and personal care chemicals, agrochemicals and pharmaceuticals contribute the rest.
During FY12, the company upgraded its hydrogenation technology and doubled capacity to 1,500 tonne per month (TPM). In FY13, it plans to set up its own captive hydrogen generation plant, which will double its output of hydrogenated compounds to 3,000 TPM, which enjoy better margins.
The company is also expanding its pharma business, which contributes 10% to its revenues at present and has achieved a breakeven for the first time in FY12. It exports 4 active pharmaceutical ingredients to the US and 16 to Europe from its two USFDA-approved plants and expects a couple of more approvals in 2012. Besides, the recent fall in crude oil prices has helped the company by way of lowering raw material costs, while depreciation in the rupee is good for its exports, which accounts for 42% of its total sales.
In the last five years, Aarti Industries’ net sales grew at a compounded annual growth rate of 17.9%, while net profit grew at 32.5%. The company has maintained its operating profit margin between 12.3% and 16.8% during the last five years.
The company has two main problems. First, since it makes prompt payments on raw material purchases, its working capital has gone up with the turnover. Also the management has always maintained a policy of consistently paying dividends every year rather than conserving cash for debt repayments.
This has resulted in a bloated debt of . 588 crore at the end of March 2012, which was almost equal to its net worth. For FY12, its interest burden stood at . 72 crore, with interest coverage ratio below 3.
Second, the company operates through a number of subsidiaries and joint ventures where the promoters hold stake in their personal capacity. This could raise corporate governance concerns. Nevertheless, the company has already taken steps to merge all these businesses into one and plans to merge this associate company with itself during FY13. Such a step would be a big positive for the company.
Aarti Industries is trading at 6.2 times its earnings for last 12 months, but is still below book value. The company paid . 2.5 per share as dividend in FY11, which translates into a yield of 3.5%. The company needs to take swift steps to address its problems to sustain and improve its current valuation.
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