Aarti industries’ board has approved the restructuring of the pharma business and allied activities of the company, which will be demerged into Aarti Pharma labs Ltd (formerly known as Aarti Organics Ltd), a wholly owned subsidiary company of Aarti Industries Ltd.

The demerged undertaking also includes a part of the specialty chemical business, which is a backward integrated facility providing feeding material to the pharma business. This part of the specialty chemical business accounts for less than 3% of revenues of the speciality chemical business. The demerged company would continue to run and operate the remaining specialty chemical business.

Financial profile of pharma business: The pharma business recorded a revenue CAGR of 19.6% over FY17-21 to Rs 872 crore while EBIT grew at 43.8% CAGR to Rs 205 crore for the same period. The focus of the management towards increasing speciality value portfolio share has aided margins historically. Going forward, once additional capacity for APIs and intermediates comes on stream by H2FY22E, one can expect strong momentum for the segmental growth. We expect revenues to grow in high teens over the next period.

 Valuations:

As per the exchange ratio, the pharma business is valued at around Rs 6900 crore, implying a valuation EV/sales of ~6x FY23E. We expect average EBIT margins to reach normalised levels of 22%. Thus, based on our expected bottomline of the pharma segment, it is valued at ~38x PER on FY23E. We believe based on the peers’ valuation for the same stream of business line, it is on the higher side. However, any development in the CDMO space or improving margins profile ahead of estimates would support valuations, going ahead.