Business Overview

Aarti Industries is India’s largest producer of benzene derivatives and a leading global player in specialty chemicals, holding a 25–40% global market share across 75% of its portfolio. It ranks among the top three globally in chlorination and nitration, top two in hydrogenation, and is the only Indian player in Halex chemistry for nitro-fluoro aromatics. The company offers over 100 specialty chemicals catering to agrochemicals, dyes, pigments, polymer additives, and surfactants, serving over 1,100 customers across 60 countries, with exports accounting for ~60% of FY25 revenue. Backed by an integrated business model and 16 strategically located manufacturing plants, over 70% of its revenue comes from value-added derivatives—ensuring competitive moat and scale advantages.

1. Low Valuation With Margin Of Safety

At a current price-to-book ratio of 3.1x, AIL trades 1.6 standard deviations below its 10-year median of 5.2x, placing it in the lowest 6% of historical valuations. This statistical undervaluation alone isn't sufficient to invest, but presents a compelling risk-reward proposition. Should fundamentals hold or improve, rerating potential is significant. Conversely, the current valuation offers downside protection, creating an attractive entry point for long-term investors.

2. Long-Term Conviction Backed By Disciplined Capex

Despite industry-wide pricing pressure, Aarti Industries has continued to invest aggressively in long-term growth, expanding its net fixed assets at a 20% CAGR—from Rs. 3,621 crore in FY22 to Rs. 6,505 crore in FY25. This growth is part of a Rs. 4,700 crore capex program planned over FY23–FY26E, with ~50% directed toward Zone IV (Rs. 2,350 crore), ~30% toward expanding core chemistries (Rs. 1,400 crore), and ~20% for process optimization and sustainability (Rs. 940 crore). Capex is set to peak at ~Rs. 1,000 crore in FY26 and taper off thereafter. This sustained investment, despite weak realizations, clearly reflects management’s strong conviction in the structural demand outlook and the company’s long-term earnings potential.

3. Clear Roadmap to Profitability Expansion

The current investment cycle is backed by a well-defined strategic roadmap. Management has guided for EBITDA of Rs. 1,800–2,200 crore by FY28, nearly doubling from FY25 levels (Rs. 1,000 crore). Growth will be driven by cost optimization initiatives (Rs. 150–200 crore), volume and margin uplift from better utilization across core chemistries (Rs. 350–550 crore), and capex-led expansion from Zone IV and the UPL joint venture (Rs. 300–450 crore). The guidance assumes current pricing levels, implying conservatism on behalf of the management. Importantly, if and when the pricing environment improves, it would directly enhance margins and enable EBITDA to exceed current guidance. This leaves room for upside in a more favorable market scenario.

4. Financial Performance Shows Operating Efficiencies

Gross margins compressed from 51% to 36%, largely due to pricing pressures. However, employee and operating cost discipline (CAGR ~7%) cushioned the EBITDA margin decline from 23% to 14%. 

Profitability was further impacted by rising depreciation and interest, linked to aggressive capex. We do not look at these costs unfavourably as these are necessary for the long term growth of the company and do not represent the current earnings power of the company.

5. Strong Volume Ramp-Up Signals Operating Leverage

Aarti Industries recorded a 17.5% CAGR in total volumes over FY22–FY25, driven primarily by significant ramp-up in MMA (74.6% CAGR), Ethylation (26.3%), and Nitro Toluene (22.5%). Although reported utilizations for these capacities appeared modest in FY25 (ranging between 48–65%), this was largely due to their commissioning in H2 FY25. On a normalized basis, utilizations for these capacities are already in the range of 85–98%, reflecting strong execution and healthy underlying demand.

Key capacity additions during this period included:

• MMA: from 144 KTPA to 200 KTPA in Q3FY25

• Nitro Toluene (NT): from 30 KTPA to 45 KTPA in Q4FY25

• Ethylation: from 10–15 KTPA to 25–30 KTPA in Q4FY25

This volume growth sets a solid foundation for operating leverage and margin recovery as these capacities stabilize and scale fully in the coming quarters.

*Utilization based on commissioned capacity by end-FY25.

Abbreviations: 

1. NCB - Nitro chloro benzene

2. DCB -  Dichlorobenzene

3. PDA - Phenylenediamine

4. NT - Nitrotoluene

5. MMA - Mono Methyl Aniline

The ramp-up indicates a solid foundation for margin recovery as demand picks up. 

PDA continues to face pressure from Chinese competition (33% utilization), but overall portfolio utilization is set to improve from FY26 onward—unlocking operating leverage and earnings growth.

6. Future Outlook and Strategic Growth Drivers

Aarti Industries is well-positioned to benefit from favorable macro and sector-specific developments:

• Agrochemicals (18% of revenue): Inventory normalization and just-in-time procurement are driving volume-led recovery.

• Energy Additives (36%): Strong gasoline–naphtha spread continues to support MMA margins.

• Polymers (15%): U.S. tariffs on Chinese PDA open export opportunities; current utilization of PDA at just 33%.

• Pharma (10%): The U.S. Biosecure Act and China+1 sourcing strategy are likely to boost PNCB demand, starting H1 FY26.

Risks

Chinese price pressure – If Chinese dumping intensifies, it could further depress prices and margins, particularly in agrochemicals and PDA, which could hinder our assumptions and delay the achievement of guided EBITDA. 

Gasoline-naphtha spread volatility – If gasoline-naphtha spreads remain unfavourable, MMA demand and profitability could come under further pressure, as the economics for refiners would become unattractive. This, in turn, could lead to underutilization of Aarti’s capacities or sub-optimal margins. However, considering the 13-year spread history, current spreads appears to be bottoming out, suggesting limited downside from here.

Contract cancellations – If key long-term contracts are cancelled, it could result in underutilised capacities, impacting earnings and returns on the capex as planned. 

Capex execution risk – If end-user demand remains sluggish, the ramp-up of new capacities could be delayed, affecting returns on capex.

Stock pulse is a format where we explore the most important questions to understand the company's performance.

What are the revenue drivers for the company and future outlook?

Aarti Industries Ltd (AIL) is a leading global specialty chemical company specializing in benzene-based derivatives. Key value chains include Nitro Chloro Benzenes, Di-Chlorobenzenes, Phenylenediamines, Nitro Toluene value chain and Sulphuric Acid as well as other downstream products. With a presence in over 60 countries, it caters to various industries such as Agrochemicals, Polymer and additives, Pharmaceuticals, Dyes, pigments, and printing inks. Half the revenues earned by the company are from exports and major export markets are North America, Europe, and China. 

AIL has recorded 15% revenue/EBITDA CAGR over FY18-23. Recently, in Q1FY24 revenue declined 12% YoY; while Q2FY24 witnessed volume-backed recovery. H2FY24 is anticipated to be better than the first half. The medium-to-long-term trend continues to be appealing backed by steady demand recovery in key end-user industries, management expects FY25 to be a normalizing year.   

Source: Annual report, Moneyworks4me research

Can the company continue to maintain its margin profile?

AIL demerged its pharma business effective 1^st July, 2021. This strategic decision was taken with the rationale of achieving operational efficiencies by streamlining the businesses. Currently, the company only deals in the specialty chemical segment (FY19-22 avg. EBITDA margin 20%+). Management hinted that margins have bottomed out in H1FY24 (~15%). We expect margin recovery from FY25E, on improvement in demand from the agro and pharma sector. 

What are the Capex plans of AIL? 

 The company incurred a CAPEX of approximately Rs. 575 crore in H1FY24 for various expansion opportunities (including chlorotoluenes value chain, comprising over 40 value-added specialty products). The products from this project are characterized by their niche and high-value range, with a potential strong EBITDA margin of around 25-30%. 

The targeted annual CAPEX for FY24 is expected to fall within the range of Rs. 1200-1300 crores. Overall, the company is dedicated to allocating Rs. 2,500 to 3,000 crores for the outlined growth initiatives over two years, anticipating rapid growth in the Indian Chemical industry. This commitment aims not only to strengthen proficiency and capabilities in existing and newer high-end chemistries but also to expand the addressable market size and meet the rising demand from key customers.

Source: Annual report, Moneyworks4me research

What are the concern areas?

Demand slowdown- The global macroeconomic slowdown, primarily driven by Europe, along with uncertainty regarding the resurgence of demand in China, has resulted in a global imbalance between supply and demand. This has consequently affected pricing and demand for products such as dyes, dyestuff, pigments, etc., collectively contributing to ~30% of Aarti's overall revenue. 

Return ratios to remain subdued- Capex plans of Rs. 2500+ Crore over FY24-25E will require the company to raise debt. This will impact RoEs over the medium term. 

Results were subdued on global inventory destocking, recessionary trends across end markets and slowdown in exports though EBITDA margin recovery needs to be noted. 

Slowdown in end user industries, China oversupply, and inventory correction across export markets contributed to weak performance.

Result: Good

Aarti Industries reported 12% growth in sales over previous year, and 20% growth in operating profit in Q4FY21. The company is growing backed by rapid capacity expansion and robust orderbook. Aarti Industries largely has cost plus business wherein costs are passed with additional margin. One must not look at operating margin but absolute profit as margins would change based on raw material costs.

Our Opinion: Chemical sector is at the core of China+1 beneficiaries as China stopped chemical manufacturing due to heightened pollution concerns in China as well as developed markets searching for alternatives sourcing away from China. Aarti Industries has consistently grown over last 10 years and one of the remarkable growth stories. Currently these positives are already known and priced for. 

Even if the profit doubles in next 3 years (management guidance), the stock price already reflects this growth which lowers upside potential from current price. We recommend 50% SELL based on elevated valuation. Chemicals companies unlike other asset light business have limited positive surprises as their growth is capped to their investment in capacities. Besides, it operates on fixed profit margin with limited pricing power, any slippage in execution or raw material costs can impact/delay profit growth.