Aarti industries stock tanks over 16% on guidance concerns post Q1 results

Shares of Aarti Industries plunged over 16% in intra-day trading on Tuesday, August 13, following the company's Q1FY25 earnings report. The sharp decline was driven by investor concerns over the company's guidance and margin pressures, compounded by ongoing market uncertainties and increasing competitive pressures from China.

The stock lost as much as 16.3 percent to its day's low of ₹614.70. It is now over 20 percent away from its 52-week high of ₹769.50, hit on April 29, 2024. Meanwhile, the stock has still advanced over 40 percent from its 52-week low of ₹438.05, hit on October 26, 2023. It has surged almost 61 percent in the last 1 year and is down over 5 percent in 2024 YTD.

The specialty chemicals firm suspended its financial year 2025 guidance due to significant margin volatility and mounting pressure from Chinese competitors. During a conference call with analysts on August 12, management indicated that they would be able to provide a more accurate EBITDA guidance of ₹1,450 crore only after a thorough evaluation of the global economic landscape. The company is facing volatility in global prices and concerns about the impact of Chinese dumping on its margins.

Additionally, Aarti Industries' debt is expected to rise to ₹3,500-3,600 crore as a result of ongoing capital expenditures. Despite these challenges, the company remains optimistic about achieving a volume growth of 20-30 percent for FY25. However, it acknowledged that logistical disruptions in the Red Sea could potentially impact volumes in some segments. The company is confident, though, in reaching 40-50 percent capacity utilisation within the current financial year.

For Q1FY25, the company reported a net profit of ₹137 crore, reflecting a 4 percent sequential growth and a substantial 96 percent year-on-year (YoY) increase. Revenue for the quarter stood at ₹2,012 crore, up 3 percent quarter-on-quarter and 28 percent YoY. EBITDA (earnings before interest, taxes, depreciation, and amortization) also saw a significant increase, rising 10 percent sequentially and 55 percent YoY to ₹311 crore.

It also noted that its discretionary portfolio continues to recover, and the management anticipates a broader revival later in the fiscal year. They are hopeful that a combination of volume recovery, capacity ramp-up, and higher operating leverage will drive EBITDA growth in the coming months.

Brokerage Views

Nuvama has a "buy" call on the stock and increased its price target to ₹903 from ₹854. This new target reflects a 23 percent potential upside based on the stock's last closing price on August 12. Nuvama attributes Aarti Industries’ revenue growth primarily to increased volumes. The firm observed that while the non-discretionary segment maintained its sequential growth momentum, discretionary segments such as agrochemicals have shown early signs of recovery, with expectations for further growth in the latter half of the financial year.

In contrast, brokerage firm Emkay has reduced its earnings per share (EPS) forecasts for Aarti Industries for FY25 and FY26 by 11 percent and 5 percent, respectively, to account for margin volatility.

Moreover, Morgan Stanley has adopted an equal-weight rating on Aarti Industries with a price target of ₹615, indicating a potential downside of 16 percent from the stock’s current levels. However, Morgan Stanley has highlighted some positive developments in the agrochemicals sector and noted a marginal sequential increase in implied EBIT per tonne based on disclosed volumes.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.