Aarti Industries: Building war chest

Aarti Industries has taken a series of measures for enhancing its business across instruments amid Covid-19 outbreak.
Last Thursday, Aarti Industries announced that they have commissioned and commercialised the initial phase of upcoming unit/ project at Dahej SEZ and had also exported few shipments to our global customers in Q4.
Additionally, their fourth R&D centre located at Navi Mumbai was also made operational in March 2020.
Aarti Industries expect this centre to facilitate further enhancement of its product portfolio and also augment reaction capabilities in other niche speciality chemical segments.

According to Aarti Industries these and other upcoming expansions, are expected to create significant benefits as India strengthens its position and market share in global supply chains that are increasingly looking to source from fully-integrated players with no dependency on China.
After securing the supply chain, logistics and mandatory compliance requirements, the company has resumed operations at all our manufacturing units since the first half of April Industries.
Currently, the units are operating at about 50-80% capacity utilization.

The Company has incurred capex of Rs8.3bn in the first nine months and expects to close the year within the guided range of Rs10-12 bn. All key projects including the expansion of chlorination capacity, investments underlying various long-term contracts, etc. are on track to be commissioned at scheduled timelines.
Chemical business is not dependent on imports from China. It is fully backward integrated. In case for pharma business, if the current situation continues for more than 2 months it could impact 10% to 20% impact on due to supply disruption. Also, the management guided that on net basis the overall business will be benefitted from Coronavirus situation

Meanwhile ARTO signed a 10-year US$620mn supply contract from an agrochemical major for a key herbicide intermediate. The total capital outlay estimated for the contract is US$62mn with (expected COD by 4QFY20E) and ramp-up is expected from 1QFY21E.
Also ARTO has signed a second contract is worth US$1.54bn >20 years from a specialty chemicals conglomerate. The total capital outlay estimated for the contract is US$40mn fully funded by the customer (expected COD by 2QFY21E). The company guided that both of these contracts will ramp-up in FY21, 80% capacity in FY22 and expected full ramp in FY23 only

Lower crude prices driven by covid-19 led correction would benefit ARTO to maintain margins in FY21E/22E although dip in absolute revenues could be seen. In Q3FY20, AIL reported EBITDA Margin of 20.6% versus 19.5% in Q3FY19. Further, we believe long term margin drivers like favourable product mix change, 75% contribution from value added downstream products) and operating leverage continuing to be strong

Also presently 20% APIs are imported from China. While, Chinese economy came out of lockdown, we witnessed nationwide lockdown in India that could impact overall business. However, we believe the essential nature of the product could salvage some of the business lost during the lockdown period.
From medium to long term perspective we expect the division to report healthy revenue growth alongwith margin expansion led by higher contribution of value added products, focus on off-patented generics in regulated markets and healthy new product launch pipeline ahead.

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