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ICICI Securities Report
Brokerage firm ICICI Securities has initiated coverage on Aarti Industries Ltd. with an Add rating and a target price of Rs 520, based on an FY28E EV/Ebitda multiple of 13x (1-SD below long-term mean).
The company has traded at a one-year forward EV/Ebitda of 22x over the past five-years. The brokerage expects a sharp operational recovery over the next two years, driven by:
- Stronger Ebitda growth exhibiting a CAGR of 22.5% over FY26–28E.
- Positive FCF generation, after a decade of heavy capital expenditure.
- Balance sheet deleveraging and a subsequent rise in return ratios.
A time-tested, integrated business model Aarti Industries boasts a resilient business model that has successfully withstood global competition to achieve market leadership.
This was achieved through large-scale operations, deep backward/forward integration, multi-chemistry capabilities, and diversified end-applications. Deeper customer relationships and long-term agreements validate Aarti Industries' manufacturing prowess. These contracts secure dedicated facilities with baseline profitability, offer clear growth visibility, and enable the company to capture a higher share of customer wallets.
Risks
Upside risks
- Pricing recovery: Faster-than-expected recovery in isomer chain pricing could drive a structural turnaround in overall profitability. This would lead to a meanreversion of Ebitda as a % of gross block toward its historical 28–30% range.
- Outperformance in key projects: Higher-than-anticipated volumes or margins from the MMA portfolio and the Zone-4 project could accelerate earnings growth.
- New long-term contracts: Securing additional multi-year commercial agreements would likely provide faster revenue visibility and boost profitability ahead of current consensus estimates.
Downside risks
- Resurgence in Chinese competition: A renewed wave of competitive intensity from China could suppress global chemical prices, placing further pressure on manufacturing margins. Additionally, the entry of new market players could depress MMA prices and compress spreads.
- Guidance miss: Aarti Industries could fail to meet the lower end of its Ebitda guidance due to margin erosion in its base operations or a slower-than-expected production rampup at the Zone-4 facility.
- Post-FY28 growth stagnation: Operational growth could moderate significantly after FY28, if the company faces execution delays in pivoting toward high-value, margin-accretive products and joint ventures.
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