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Business News/ Markets / Stock Markets/  Aarti Drugs listed as ‘top pick of the week’ by Axis Securities – 4 key reasons
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Aarti Drugs listed as ‘top pick of the week’ by Axis Securities – 4 key reasons

The brokerage has a ‘buy’ recommendation on the stock with a target price of ₹528, indicating an upside of 10 percent from its current market price of ₹480.30.

The brokerage has a ‘buy’ recommendation on the stock with a target price of ₹528, indicating an upside of 10 percent from its current market price of ₹480.30. (Pixabay)Premium
The brokerage has a ‘buy’ recommendation on the stock with a target price of 528, indicating an upside of 10 percent from its current market price of 480.30. (Pixabay)

After around 5 percent rise in the stock in November, brokerage house Axis Securities has picked Aarti Drugs as its top pick of the week. This is on the back of industry tailwinds in API, strong presence in niche segments and margins expansions due to fall in raw material prices.

The brokerage has a ‘buy’ recommendation on the stock with a target price of 528, indicating an upside of 10 percent from its current market price of 480.30.

Aarti Drugs is a prominent manufacturer of APIs, Pharma Intermediates, and Specialty Chemicals. The company operates as part of the Aarti Group, a conglomerate with a net worth of $900 million. 

With over 50 compounds for antibiotics, antiprotozoal, anti-inflammatory, anti-diabetic, and antifungal, Aarti Drugs has emerged as a market leader in APIs. The consolidated revenue for this year stood at 2,700 crore, with a significant contribution of 39 percent coming from export revenues. The company’s exports of essential molecules to North America, Latin America, and Africa have further strengthened its reach. Regulated exports constituted 64 percent of the comprehensive export portfolio, which necessitated rigorous product approvals and facility enhancements. Semi-regulated market contributes 35 percent and non-regulated is 1 percent.

Read here: Bharti Airtel, Bharat Forge, DMart among 12 stocks to buy this week

Stock Price Trend

The stock has gained 6.5 percent in the last 1 year and almost 9 percent in 2023 YTD. However, it has given positive returns in just 5 of the 11 months in the current calendar year, gaining the most in July, almost 28 percent, and shedding the most in January, down around 13 percent.

It has risen around 5 percent in November so far, snapping losses after 3 straight months of decline. Between August and October, the stock shed 21 percent

Currently trading at 480.30, the stock is over 25 percent away from its 52-week high of 645.00, hit on July 25, 2023. Meanwhile, it has advanced around 55 percent from its 52-week low of 310.80, hit on March 20, 2023.

Read here: Sai Silks: Up 35% from IPO price in just two months, should you buy this newly listed stock?

Earnings

In the September quarter, the firm's net profit fell over 5 percent to 34.58 crore from 36.58 crore in the year-ago period. Meanwhile, its revenue also shed almost 8 percent to 577.54 crore as against 624.83 crore in the same quarter last year. Its EBITDA as well, declined around 6 percent to 66.16 crore in the September 2023 quarter versus 70.27 crore in the September 2022 quarter.

Investment Rationale:

Anti-diabetic in the API and specialty chemicals to support incremental growth: The company has augmented new capacities in antdiabetics and specialty chemicals and is expected to add incremental revenue of 400 crore- 500 crore over the next 3 years, said the brokerage. The growth is already contributed by the newly-launched niche product Chlorosulphonation in Q2FY24. The overall revenue is contributed by products like the antibiotic and therapeutic category which contributed 45 percent, antiprotozoal - 16 percent, anti-inflammatory -12 percent, anti-diabetic - 16 percent, antifungal - 8 percent, and the rest at 3 percent, it noted. The API segment witnessed a moderation in realisations for most of the API products along with moderation in input costs, it added.

Read here: PB Fintech stock sees sharp recovery, up 82% in 2023 so far

Healthy capex plans: The brokerage pointed out that the company has incurred a capex of 315 crore in the last 2 years, mainly towards capacity expansion, backward integration, and new product launches. Revenue growth in FY24 is expected to be supported by Tarapur Greenfield Capex for dermatology and specialty chemicals, which are expected to commence operations in Q4FY24 and Q2FY25, respectively. The company plans to make an additional capex of 250-300 crore in FY24E, it further stated.

Specialty chemicals: The demand visibility in the industry around the globe has been weak. Moreover, the absence of a couple of campaign-based products in H1 FY24 has impacted this segment. There’s also some spillover of execution of campaign-based specialty products into the next quarter, said Axis.

Industry outlook: Axis expects demand for API to continue in the upcoming quarters with the ease of supply-chain bottlenecks. An increase in volumes fall in solvent prices, and operating leverage also led to improvement in the EBITDA margins. It believes Aarti Drugs, being the leader in the domestic industry, is well-placed to grab this opportunity in the future.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.

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Published: 28 Nov 2023, 01:31 PM IST
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