HDFC Securities expects Aarti Industries Limited’s (AIL) PAT to grow at a 15% CAGR over FY21-23E. AIL's constant focus on R&D will enable the company to remain competitive and expand its customer base.

The toluene segment in India is mainly untapped and catered to through imports; AIL will benefit in the long term by entering this segment. 3Q EBITDA/APAT were 15/22% above our estimates, attributable to lower-than-anticipated raw material expenses, a lower-than-expected interest cost, offset by a higher-than-expected tax outgo.

Financial performance: Revenue grew 10/1% YoY/ QoQ to INR 11.9bn, with revenue growth driven mainly by volume expansion and 76% contribution attributable to value-added products. EBITDA was up 12/12% YoY/ QoQ to INR 2.9bn, owing to a significant reduction in raw material expenses. Sequentially, interest cost has fallen by 40/22% YoY/QoQ to INR 173mn. APAT grew 18/18% YoY/ QoQ to INR 1.7bn.

Speciality Chemicals segment: Revenue/EBIT grew 4/4% YoY to INR 10.8/2.2bn. Revenue growth was backed by 90% utilisation across operationalised facilities. EBIT margin for the segment was reported at 20.7%. Return of demand from established markets drove margin improvement.

Pharma segment: Revenue/EBIT grew 32/54% YoY to INR 2.3/0.6bn, with the highest-ever revenue reported in a quarter, owing to more share of value-added products in the product basket. EBIT margins for the segment grew by 338bps YoY to 23.8% on the back of a better operating leverage.

Concall takeaways: (1) Capex spent in 3Q/9MFY21 was INR 4/9bn. (2) Interest cost has fallen significantly due to lower cost of funds and forex- linked revaluation gains on long-term borrowings. (3) AIL is considering demerging its Pharma segment as it is performing well and has a different manufacturing process and market from the rest of the company's.