Aarti Industries faced continuing shortage of nitric acid in Q4 that impacted volumes of nitric acid based products. The company plans to setup concentration capacity of 225-250 TPD to mitigate supply shortfall and also evaluating a comprehensive nitric acid strategy.

Major expansion projects (second & third long-term contract, pharma US FDA expansion, NCB capacity expansion) expected to come on-stream in FY23. Capex guidance for FY23-24 at ~Rs 30-35 bn (FY22 capex at Rs 13 bn).

Q4FY22 Revenue/ EBITDA/ PAT growth of 45%/30%/42% YoY led by improvement in realizations (cost pass through) and volumes (restricted due to shortage of nitric acid). Commencement of revenue generation from long-term contracts and ramp-up of recently commissioned plants to drive specialty chemical revenue while pharma revenue to be driven by higher volumes from regulated markets, value-added products and new intermediate products. Upcoming projects to aid penetration in some key therapies (anti-hypertension, cardio-vascular, oncology, corticosteroids).

We expect healthy revenue/ EBITDA/ PAT CAGR of 18%/20%/24% over FY22-24E, on increasing capacity utilization (high capex intensity of Rs 45-50 bn over FY22-24E, with focus on high value derivatives) leveraging import substitution, rising domestic demand and China +1 strategy. 

Q4FY22 performance healthy, amidst challenges: Consolidated net revenue +45% YoY/ +0.6% QoQ to Rs 17.5 bn (adjusted for Rs 6.3 bn termination fees in Q3FY22) led by improvement in realizations (cost inflation pass through) and volume growth. Spec chem gross revenue was up 49% YoY/ -2% QoQ to Rs 16.3 bn while Pharmaceutical gross revenue was up 52% YoY/ 12% QoQ to Rs 3.9 bn.

Meeting takeaways: (1) Production of NCB was 19,550 mt in Q4FY22 (vs 19,100 YoY and 18,500 mt QoQ), hydrogenated products was 3,029 tpm (1935 tpm YoY and 2878 QoQ), nitro toluene was 5155 tons (vs 2935 YoY and 3630 QoQ) (2) Volume growth of 10-12% in Q4 and ~18-20% in FY22 (3) Dyes and pigments to witness weakness in demand, while agrochemicals expected to continue strong. (4) Long term contracts - Expect ~70-80% capacity utilization by FY24. Commercial manufacturing of second long-term project related contract commenced in Q4. (5) Nitric acid concentration plant (225-250 tpd) expected to commercialize plant by FY24 end (outlay Rs 1.5-2 bn on this plant). (6) NCB expansion - Phase 1 delay on logistics and labour availability issues. Phase 2 commissioning in FY23.