Aarti Industries to list pharma business by mid-December — here's what Street makes of it

Aarti Industries shares tanked on Thursday after Morgan Stanley double-downgraded the stock and cut its target price by 28 percent citing raw material sourcing challenges, downside risks to volume growth and muted expansion in margins until the year ending 2024.

The stock of Mumbai-based Aarti — which operates in specialty chemicals and pharmaceuticals — plummeted by as much as Rs 41.3 or 5.3 percent to hit Rs 739.6 apiece on BSE.

Morgan Stanley downgraded Aarti Industries to 'underweight' from 'overweight', and reduced its target price from Rs 957 to Rs 685 — implying a downside of 12.3 percent from Wednesday's closing price.

The company's management said it aims to demerge its pharma business into a separate entity, Aarti Pharmalabs, with October 20 as the record date, as it aims to focus on the pharma opportunity separately.

“The demerged entity will list around mid-December,” Rashesh Gogri, Vice Chairman and Managing Director at Aarti Industries, told CNBC-TV18. The management expects the revenue and profit in the pharma business to deliver growth of 15-20 percent.

Gogri said that both the specialty chemical and pharma segments are performing well. "In the chemical sector, we have given a large capex guidance and also growth guidance in terms of topline and bottomline of 1.52x for the last two years going forward," he said.

The company is not buying nitric acid — one of the key inputs for its operations — from the spot market, and has a long-term contract for the commodity instead, he said.

"Raw material prices have started declining on the back of lower crude oil prices and that will result in a little bit of destocking at the consumer end, which will result in some pressure on pricing... We feel that this is a shorter-term phenomenon and once the price stabilises, we will be able to maintain our margins in the products," he said.

Aarti Industries has highlighted challenges on material sourcing in its past two calls, Morgan Stanley pointed out.

"We see limited respite to these issues in F2H23, with its remedial measures (setting up its own nitric acid capacity) bearing fruit only by end-F24. Aarti has received NCLT approval for its pharma demerger,a key issue that has weighed on the stock since the pharma segment has been attributed a lower multiple relative to its core specialty value chain," the brokerage said.

Morgan Stanley also lowered its earnings per share estimates for the company by up to seven percent for three years ending March 2025 reflecting the challenges.

Aarti Industries shares have lost 9.4 percent of their value in the past one month, a period in which the Nifty50 benchmark has declined 2.8 percent.