Aarti Drugs share price: Fresh investments, better realisations to boost profits; retaining a Buy with price target of Rs 848 says Anand Rathi

Aarti Drugs Q3 FY21 margins surpassed our expectation. Its EBITDA margin expanded 569 bps to 19.9%, driven by better realisations in APIs and import-duty imposition on key products such as ciprofloxacin. Sales grew 12% to Rs 5.3 bn. The API division contributed 87% to sales and grew 13.1% to Rs.4.6bn. Formulations sales were up 5.2% to Rs 697 mn. Through organic growth and capacity addition, Aarti expects sales to record a 15% CAGR over FY21-26 to Rs 45 bn and the EBITDA margin to scale up to 24-25%. Anand Rathi raised their FY21e/FY22e/FY23e EPS 8%/7.6%/5.2%. Anand Rathi retains Buy rating on Aarti Drugs and raises target to Rs848 (earlier Rs813) based on 18x FY23e earnings.

Aarti Drugs Management aims at Rs 45 bn sales by FY26:

On its current API capacity the company could achieve sales of Rs.25bn. Further, the new capacities for seven projects could add Rs.15bn in sales on full commercialisation (Rs 6 bn capex with 2.5x asset turn). Stable API realisations and the greater contribution from the higher-margin business are likely to lift EBITDA margins to 24-25%.

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Aarti Drugs Momentum in APIs unhurt:

Driven by strong domestic and international demand, API sales grew 13.1% to Rs.4.6bn. The share of sales of antibiotics in Q3 was 44% while the contribution of anti-inflammatory APIs rose to 14%. New capacities and better realisations would lead to an 18% CAGR in API sales over FY20-23.

Aarti Drugs Formulations growth uninterrupted:

Formulations grew 5.2% to Rs 697 mn. The company plans to raise metformin capacity to 2000 tonnes a month by next year, which can be scaled up to 3000 tonnes in 2-3 years.

Aarti Drugs Valuation:

The strong base-business momentum and fresh investment in the margin-accretive business are likely to boost sales/EBITDA/PAT 19%/36.4%/ 47% over FY20-23. At the CMP of Rs 696, Aarti Drugs trades at 22.3x/18.7x/ 14.8x FY21e/FY22e/FY23e earnings.

Aarti Drugs Key Risks:

Delay in capacity addition; keener competition in generic APIs and deterioration in API pricing