Target: ₹612
CMP: ₹744.55
Despite shortage of nitric acid, revenues of Aarti's speciality chemicals business rose by a stunning 43.8 per cent to ₹1,765.59 crore in Q1 compared to ₹1,227.70 crore in the same quarter a year ago. Higher share of value added products (74 per cent) too galvanised product realisations, thus propping revenues.
Thanks to its pricing model - absolute margins per kg - speciality chemicals EBIT dropped to 14.2 per cent as against 18.9 per cent in the same quarter a year ago. Higher volume ramp up is expected largely due to higher capacity utilization of assets related to first and second long term contracts.
The stock currently trades at 31.9x FY23 EPS of ₹22.98 and 26.4x FY24 EPS of ₹27.81. With fall in crude oil prices, sales growth would moderate somewhat (compared to FY22's) over the next two years while margins would inch upwards.
Balancing odds, we maintain our reduce rating on the stock with revised target of ₹612 (previous target: ₹765) based on 22x FY24 earnings over a period of 9-12 months.