During our recent visit to Aarti Industries’ (AIL) Jhagadia (Gujarat) plant we interacted with Renil R. Gogri (whole-time director) and Chetan Gandhi (CFO). This plant (~20% of revenue) boasts of complex chemistries like chlorination, nitration and hydroge-nation, among others, with complete backward integration and zero discharge. While AIL is investing further INR4bn in this plant, it has raised overall capex guidance to INR7bn p.a., from INR5-6bn, over the next two years. This further bolsters our thesis of burgeoning opportunities in the specialty chemical space (refer to, The Right Chemistry). Maintain ‘BUY’ and retain AIL as our top pick in specialty chemical space.
In the near term, AIL will benefit from commissioning of brownfield expansion of chlorination and hydrogenation plant at Jhagadia, Gujarat. Simultaneously, management aims to sustain focus on driving efficiencies through integration and expansion in downstream chain by improving the share of value-added offerings and exploring new products.
Our interaction with the plant’s managers indicates that: 1) AIL provides consistency and quality which fulfills customers’ key demand; 2) the plant benefits from availability of chlorine and hydrogen connected via pipeline from neighbouring plant; 3) forward integrated to make calcium chloride for value-added products; and 4) not all the products can be categorised as specialty but creating scale is clear USP.
We believe AIL’s integrated operations coupled with its capability to combine various chemistries will help the company widen its product portfolio and carve a niche for its co- and by-products. Supported by strong capex of INR7bn p.a. over the next two years in brownfield, entry in new chemistries imparts growth visibility as we estimate EPS CAGR of 36% over FY18-20. We maintain ‘BUY’ valuing the stock at 20x FY20E P/E.
Of AI’s 17 manufacturing plants, Jagadia with total available land of 175acres (currently utilises only 32acres) is the largest and contributes 20% to the company’s overall revenue. Of the company’s 200 products, Jagadia has the capacity to produce 25 major ones with separate plants for hydrogenera-tion, nitration, PDA, calcium chloride and manufacturing hydrogen.