Aarti Industries (NS:ARTI): We maintain our BUY recommendation on Aarti Industries (AIL), with a target price of INR 726/share. AIL's constant focus on Capex and R&D will enable it to remain competitive and expand its customer base. The toluene segment in India is mainly untapped and catered to through imports AIL will benefit in the long term by entering this segment. EBITDA was 10% below our estimate, mainly owing to higher-than-expected other expenses. APAT was 14% above our estimate owing to an unanticipated MAT credit entitlement and a prior period tax set-off that led to a taxable income in Q4.
Westlife Foodworld: Westlife’s Q4FY23 performance was largely in line with estimates. Revenue, restaurant EBITDA (ROM), and EBITDA (pre-IND AS) were up by 22/34/27% YoY. SSSG was at 14% on a double-digit increase in dine-in guest count. RoM expansion of 220bps YoY to 24.5% (HSIE: 23.4%) was aided by underlying GM expansion of 370bps YoY to 72%. The management has maintained its medium-term guidance of high single-digit SSSG and 40-45 store addition yearly. In the near term, we expect pressure margins for QSR companies on decelerating discretionary spending. However, we believe Westlife is better placed and we expect it to fare better vs. its peers, given (1) it is sustaining dine-in footfall (2) McD’s has a wide price offering that is well-supported by beverage (3) there are enough levers for margin expansion (full McCafe roll-out, menu expansion, etc.). We raise our EPS by 2-3% over FY24-26 and value Westlife at 55x P/E on Jun’25 EPS to arrive at TP of INR 750. Maintain ADD.
Kalpataru Power (NS:KAPT) Transmission: Kalpataru Power (KPTL) reported Q4FY23 revenue/EBITDA/APAT of INR 44/3.1/1.1bn, beating/(missing) our estimates by 12/(10)/(21)%. It also reported an exceptional gain of INR 540mn. KPTL secured new orders worth INR 252.4bn in FY23, taking the order book (OB) to an all-time high of INR 459.2bn. The net debt as of Mar’23 stood at INR 16.8bn. KPTL has guided for FY24 revenue to grow by 30% YoY with the PBT margin between 4.5-5%. It also guided for order inflow of INR 260bn. It plans to incur finance costs at ~2% of revenue and capex of INR 2.5-2.8bn. ROCE guidance is 18-20%. It further expects to monetize one of its road boot assets and balance inventory in Indore Real assets in FY24. While maintaining a BUY rating on the stock we have recalibrated our FY24/25 estimates higher by 0.8/2.1% to factor in the robust order book and synergy gains available to the combined entity. We increase the SOTP-based valuation to INR 756/sh.
Aarti Industries
Financial performance: Revenue grew 15% YoY to INR 16.6bn, on account of higher volumes from expanded capacities for key products as well as higher contributions from value-added products. EBITDA came in at INR 2.5bn (-4% YoY) with EBITDA margin falling by 300bps YoY to 15% in Q4. EBITDA was negatively impacted by a maintenance shutdown at the acid unit in Kutch, the downturn witnessed in the textiles industry, increased key raw material prices, and the supply of certain discretionary products to non-regular markets, resulting in lower-than-normal margins. APAT remained flat YoY at INR 1.5bn, owing to lower finance costs, MAT credit entitlement, and prior period tax set-off that led to a tax income of INR 140mn in Q4.
Concall takeaways: (1) The third long-term contract which was commissioned in Q3 is being ramped up in a phase-wise manner; higher volume will be visible in FY24 and FY25. (2) The company has guided for INR 15bn Capex p.a. in FY24/25, which shall be used to add new chemistries and value-added products having an EBITDA margin of ~25-30%. These products will cater to agrochemical and pharmaceutical industries and drive growth from FY25.
Change in estimates: We cut our FY24/25 EPS estimates by 15.4/7.4% to INR 17.7/24.6/sh, to factor in EBITDA guidance provided by the management, increase in interest cost on account of higher debt and increased depreciation courtesy a higher Capex guidance.
DCF-based valuation: Our target price is INR 726 (WACC 11%, terminal growth 4%). The stock is currently trading at 23x FY25E EPS.