AARTI IND

Aarti Industries is a leading Indian manufacturer of Speciality Chemicals and Pharmaceuticals with a global footprint. Chemicals
manufactured by Aarti are used in the downstream manufacture of pharmaceuticals, agrochemicals, polymers, additives, surfactants,
pigments, dyes, etc. Began in 1984, with just two products and one manufacturing unit operations. have made us the global
partner of choice for over 400 global and 700 local customers.

All figures are in crore

SALES

The above screenshot is for 10 years financial report where company avg growth 15% and company growth rate was single from
2015 to 2017, but during that time company hold their profit. Company sales increased from 1289cr on 2010 to 4706cr on 2019 and
last 12month sales 4401 (Jan 2019 to Dec 2019).

EBITDA Margin, OPM, NPM. Higher is good :

Company over the 10 years PAT has been increased from 68cr to 492 (2010 – 2019). If we can check company sales from 2015 to
2017 during that time company sales were flat but company able to make their profit. While analyzing the company OPM we can
see that it was increased from 16% to 21%(2009 – 2019) and 10 years avg OPM is 21%. Over the years company never loss and
maintain the healthy OPM & NPM margin. We can see that company from 2011 to 2016 the NPM margin was single digit and from
2011 to 2016 company NPM margin was 6% and during that time no NPM increased.

Debt to Equity ratio : best 0.5

Over the year company increased their debt due to this company DEBT & EQUITY ratio +1% over the 10 Years. It was 438cr in 2010
and 2019 it was increased 2401. Company making profit YOY, but company failed to reduce their debt. B

Company CASES/CRIME/SEBI FINE/Inside trading.

Search on the internet and found income dept already raid their office later no news came up about the raid
Conversion of Profits into Cash

Company able to convert PAT into CASH FLOW. If we check the PAT and they have earn last 10 years around 2153cr and same time
period they have earn 3372 cr from CASH FLOW(CF). Based on that result they are able to convert PAT into CF. But we can see there
is huge GAP in between PAT & CF we have to check. Company FCF (Free CASH FLOW) is negative so company investment is higher
than FCF which is negative.

India rating FEB 2020

Self-Sustainable Growth Rate (SSGR) :

Company SSGR growth should be above the SALES growth else raising debt or diluting their equity to generate funds needed for
investments to generate the sales growth. Company aarti ind is happening the same as company SSGW is below the sales hence
company increasing the DEBT and diluting their equity to meet the sales growth. Its negative for the company. Also, company SALES
is increasing but as well as DEBT is increasing. Details In below.

Current ratio : measures a firm’s ability to pay off its current liabilities( Low is better).

Company current ratio is high which is not good for the company.

High cash with high debt : avoided by companies as raising funds by debt and keep them as cash.

Cash : 804 & DEBT : 2401 –

Aarti ind raising money for investment. Cash increased as company raised money from QIP on 2019 FY (financial year).

Traders payable and receivable:

Company Traders PAYABLE & RECEIVABLE days has been reduced last couple of years which good. Based on that ration we can says
company paying the supplier with in 21days and getting payment from customer with 2month as a result inventory is turnover
6times in year.

Net working capital 2019 High CL is not good for the company
CR ( Current assets) : - 2577.11 CL ( Current Labilities) 1932.17

Utilization of the Capacity? Q1 FY 2020 Conference Call Transcript August 14, 2019 (P.2)

Over the year company capacity utilization is 70%-90%

cash to repay the debts

Company total liabilities (NCL+CL) – 3067 and reserves 2523 , Total Assets : - 5627

High Promoter holding Pledge

Company YOY making profit from the business but at the same company reduce their shareholding in
company. Details below
interest company is paying every quarter/year

Company paying interest one time without any issue.

Inventory Turnover Ratio high is good

Over the year company inventory turnover ratio is flat.

Asset Turnover Ratio indicates high is good

As compared previous mar10 company NFA turnover is very low which means company less investing in NFA.

Loan & ADV

94.2 cr loan & adv is pending from Aarti Surfactants Limited and it has been created of the total assets & liabilities of
demerger of Nascent Chemical Industries Limited as per the scheme of arrangement .
Interest coverage

From above company making profit more than the interest paying.

How much company transfer the profit in reserve & surplus and DEBT status all figure are in Crore.

It seems that company YOY investing in PPM(Property, plant & machinery) through the debt and even they are paying dividend
through the debt and 2018 buy back was done through the debt.

Possible reason for increase debt

1) Currency volatility and few

2) Long term contract where profit margin will be reduced rupee deprecation can help bit, but longer term is not ok .
Company already raised 203 cr for long term out of this already given security 138cr bank security

3)
4) Company hedging the dollar to safeguard the loss but last made loss around 22 cr for the same

Company business
Speciality chemicals and Pharmaceuticals. Below three point is matter for the company.

1) Speciality chemicals main raw material is crude OIL and based on the crude OIL price company NPM & OPM will be
fluctuate and 27% revenue come from the TOP 10 customer, so that is the reason company 400 global partner and 700
local partners. AR 2019 P. 20.
2) As 45% earing come from the international export so dollar valuation is matter company. Increase the dollar price
its impact of the company profit
3) As 85% revenue was from customers of over 5 years. 3rd long-term supply contract with a global player for a
period of 10 years. For long term contract it will impact on the NPM when RAW material price will be increased.
85% revenue come from exiting those are with company long term (Those contracts are more that 5years and 15% come
from new customer. So good relationship with exiting customer.AR 19 P.25.

a) RAW material will be sale at base price when cost will be high and new contract will created when RAW price
will be low.
Concall Q2 FY20

Q2 FY20 P-4

Q1 FY20 P-15

When impact in the RAW material and product will be supply as RAW material price to safeguard the currency loss
company will do hedge on FX . One of reason for DEBT increasing.
Q1 FY20 P-2 –
 Last couple of year company HEDGING the FX. Company faced losses due to Forex (FX) hedge to safeguard the export loss
during the Q1 2020 which make losses.

Company maximum revenue generate from the Speciality chemicals. Company maximum revenue earn from the domestic
and 48% revenue come from the export. Out of 48% maximum revenue come from the Europe and America. company
total export their product on 60 countries.

Over the years, the company has delved into the following key business segments.

Chemical

1) Agrochemicals > used for pesticides, insecticides, herbicides, etc.

2) Polymer additives > Used for aircrafts, automobiles, bullet proof jackets,
3) Dyes, pigments, paints and printing Inks > Used for Dyes, Pigments, Paints, Printing Inks,
4) Rubber chemicals, Resins, FMCG applications, etc.
5) Fuel additives > Used for rubber chemicals, Resins, FMCG, etc.

API

6) Pharma Intermediates, APIs > used for anticancer, anti-asthma and anti-hypertensive drugs as well as oncology
therapies
7) Beverages and Nutraceutical > bronchodilators, especially for the asthma symptoms.  

It seems company exposure

“In FY 2018-19, 85% revenue was from customers of over 5 years”

AR 2019 P. 52

Cont. AR 2019 p.56

6 direct subsidiary and 2 indirect

AR 2019 P.126

Once the home and personal care business will get demerged into Aarti Surfactants and shareholders of Aarti Industries will get one
share of Aarti Surfactants for every 10 shares held. Aarti Surfactants will be listed at a later stage.

AR 2019 P 124
Company making losses from the contract

Valuation

Earnings Yield (EY): Earnings Yield being higher than 10 years bond yield (Government Securities). High is good
Earning Yield = EPS/CMP or NP / Market CAP
EPS : 40.65 CMP 1065 EY : 4%
Price to Earnings ratio (P/E ratio of <10): 34.1 (High is not good)
P/E TO GROWTH RATIO (PEG Ratio) . should be <1 = 0.81 (below one good)
PRICE TO SALES RATIO (P/S ratio) : If P/S ratio of a stock is <3, then the stock is considered overvalued. =
4.06(overvalued)

DIVIDEND YIELD (DY) : Higher is good = 0.52 % (Low)

ENTERPRISE VALUE (EV) TO EBITDA RATIO (EV/EBITDA values below 10): 27 (Not good)

Price to Book value ratio (P/B ratio): should be <1 = 7.1 times

Company EPS : 40.65

ROE = 23%
ROCE = 16%
Industry PE : 8.64

Market CAP : 18,553 Cr.

Check the company technical pattern (50/200 DMA)

Check RSI : 60