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Thursday, Ambit Capital initiated coverage on Aarti Industries (NS:ARTI) Ltd (ARTO:IN) stock with a Buy rating and set a price target of INR 550.00. The firm highlighted Aarti Industries as their top selection within the basic chemicals segment to leverage the anticipated global chemical sector recovery.
The recommendation is based on several factors: the company's early response to sector recovery, underutilized capacities which stand at 63% allowing for a swift operational turnaround, and the establishment of long-term supply agreements that are expected to account for approximately 17% of revenue share by fiscal year 2025.
Aarti Industries is projected to experience an improvement in return ratios, with an anticipated increase of 4-5 percentage points over fiscal years 2025 to 2027. This is attributed to the operating leverage from capacity ramp-up. The company's adoption of new processes and investment in chloro-toluene downstream derivatives are believed to be accretive to return on capital employed (RoCE).
Despite concerns regarding the company's growth outlook due to the high relevance of energy and agrochemical applications, which make up about 55% of its application share, Ambit Capital expects a normalization in the agrochemical market.
The analyst from Ambit Capital mentioned that while crude oil price stability is challenging to predict, there is an expectation for the agrochemical market to normalize. A reverse discounted cash flow (DCF) analysis suggests the market has factored in a 13% compound annual growth rate (CAGR) in revenue over fiscal years 2024 to 2037.
Ambit Capital's own DCF estimate incorporates a slightly higher 14% revenue CAGR over the same period, with a 13% cost of equity (CoE) and a 12% weighted average cost of capital (WACC). This valuation approach justifies the INR 550 price target, which is equivalent to 30 times fiscal year 2027's projected earnings.
The report also delineates key risks that could impact Aarti Industries' performance. These include a potential extended slowdown in demand and the high significance of one key product in the company's portfolio. Ambit Capital's initiation of coverage with a Buy rating and a significant price target reflects a positive outlook on Aarti Industries' stock, considering the company's strategic positioning and financial projections.
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