UBS' double upgrade lifts Aarti Industries shares 3% higher, 31% upside predicted
Anticipating a potential cyclical recovery in Aarti Industries, global
brokerage
firm
UBS
has issued a double upgrade on the stock, raising its rating from 'sell' to 'buy' and setting a target price of Rs 625. Following the upgrade,
shares
of
Aarti Industries
jumped 3.4% to hit an intraday high of Rs 494 on the
BSE
.
The stock's target price denotes an upside of 30.8% from its previous closing price on the BSE.
The brokerage firm noted that their 'seel' rating was set against the backdrop of a peaking chemical cycle and risk to guidance/consensus expectations for the energy segment (n-methyl aniline, MMA). However, these factors have largely played out, with a likely bottoming of chemical cycles and a reset of MMA volume growth expectations after a sharp correction in gasoline-naphtha spreads.
'The stock is down c35% from the Aug 2024 peak. We now expect meaningful improvement in company performance aided by the new CEO's strategic initiatives to optimise costs and new growth drivers,' UBS said in its report.
Analysts at UBS expect a gradual improvement in the business cycle for Aarti Industries, supported by low channel inventory levels. They also anticipate a steady pickup in MMA volumes, which has been evident over the past two quarters despite rangebound spreads.
Further, the company's continued focus on market development is seen as a key factor in sustaining MMA volumes amid ongoing volatility. Additionally, strategic initiatives aimed at enhancing operational efficiency are expected to support long-term growth.
'We do not believe the market is fully pricing in these factors as the stock is trading below its five-year average EV/EBITDA,' UBS added.
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The company guidance is for EBITDA to increase Rs 8-12 billion by FY28, supported by cost optimisation (Rs 1.5-2 billion), volume and margin ramp-up (Rs 3.5-5.5 billion), and capex-led growth (Rs 3-4.5 billion).
The global brokerage firm believes that this range is achievable, considering initial green shoots across chemistries; however, new capex contribution could be lower.
'We expect an EBITDA increase of about Rs 10bn in FY25-28, factoring in: 1) higher end of guidance for fixed cost optimisation and improving capacity utilisation; 2) steady rise in realisation from FY27; and 3) only nominal contribution from new capacity in FY28,' UBS analysts noted.
Further to this, an improvement in MMA volume is expected along with a focus on market creation from geographical diversification, customised shipments, and better pricing.
The gasolinenaphtha spread has been healthy (average $13/barrel) during Q1FY26TD, despite a sharp correction in the crude oil price, and close to the long-term average before Q4 FY22.
While cognizant of volatile spreads, UBS expects strategic initiatives to cushion volume/profitability volatility.
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