Aarti Industries Shares Get Double Upgrade From UBS On Likely Cycle Recovery, Strategic Growth Initiatives

UBS has upgraded Aarti Industries Ltd. from 'Sell' to 'Buy', raising the target price slightly to Rs 625 from Rs 615. This follows a 35% decline in the stock since its August 2024 peak, with signs now pointing to a bottoming of the chemical cycle and early recovery in key segments, particularly in the energy business, said UBS.

Previously the brokerage had downgraded the stock due to peaking cycle conditions and amid risks to its energy segment (particularly MMA – n-methyl aniline). However, several adverse factors have now largely played out. The chemical cycle appears to be bottoming out, and expectations for MMA volumes have been recalibrated following a correction in gasoline-naphtha spreads despite continued volatility.

This rise in MMA volumes was supported by customised shipments and deeper client engagement. UBS anticipates a gradual uptick in demand, helped by geographical diversification and sustained healthy gasoline-naphtha spreads (around $13 per perbarrel), a key margin driver.

Though MMA is not exempt from US tariffs and faces potential post-relaxation headwinds, Aarti remains committed to developing the US market, banking on its strengthened customer base and strategic bulk shipment model.

Additionally, the brokerage added that under the leadership of new CEO Suyog Kotecha (since June 2024), the company is executing a strategic shift and focusing on market development, cost optimisation, and strengthening long-term client relationships.

Management’s guidance of an Rs 800-1,200 crore Ebitda increase by financial year 2028 is seen as achievable. UBS forecasts Rs 1,000 crore Ebitda growth over financial years 2025-2028, driven by fixed-cost savings from renewable energy use, better capacity utilisation, and gradual price realisation improvements. New capex is expected to have limited impact initially but should support long-term growth.

Recent capacity expansions across MMA, nitrotoluene, and ethylation suggest ample headroom for volume growth. However, the DCB segment, linked to the global auto sector, may remain weak due to softness in the global automotive sector.

Meanwhile, exports in agrochemicals and pharma have increased, aided by seasonality and recovering demand. The shift towards a "product-push" strategy supported by long-term relationships offers resilience against market fluctuations.

Despite high net debt of Rs 3,500 crore and a fiscal 2026E net debt/Ebitda of 2.8 times, UBS does not view leverage as a major concern. Instead, it may enhance earnings leverage as the cycle turns and utilisation rises.

Aarti's stock has remained largely flat over the past six months and trades below its five-year average EV/Ebitda, indicating that the market has yet to price in the company’s recovery and strategic transformation.

UBS estimates a 25% CAGR in Ebitda and 41% CAGR in profit for the financial years 2025-2028, driven by increasing utilisation, improved margins, and cost controls.