Aarti Industries: Return ratios to improve with better sweating of assets

Stronger Operational Efficiency to Drive Financial Performance

Aarti Industries Ltd (AIL), a leading specialty chemicals manufacturer in India, is poised for a significant improvement in return ratios, buoyed by improved asset utilization and efficient capacity deployment. With the commissioning of new capacities and recovery in end-user demand, analysts foresee a period of stronger operating leverage for the company.

Sweating of Assets a Key Growth Lever

In recent quarters, Aarti Industries has made substantial capital investments, particularly in high-value specialty chemical projects. While these expansions had temporarily weighed on return on capital employed (ROCE) and return on equity (ROE), the company is now entering a phase where these assets are set to contribute meaningfully to revenue generation.

“After a period of elevated capex, we expect Aarti’s return ratios to rebound as recently commissioned plants ramp up utilization levels,” said Jigar Shah, Head of Research at Maybank India. “The sweating of assets, combined with cost efficiencies and product mix enhancement, will aid profitability metrics from FY26 onward.”

Margins Recovering After Commodity Price Volatility

The specialty chemicals sector faced margin pressure during FY23–FY24 due to global demand slowdown and inventory destocking across key markets like the US and Europe. However, prices have stabilized and domestic demand is gradually normalizing, leading to better realization.

Aarti Industries’ management, in its recent earnings call, indicated that capacity utilization levels in most segments have reached 70–80%, with a roadmap for further scale-up in the next 12–18 months. The improved utilization is expected to translate into better fixed cost absorption and operational efficiencies.

“Despite short-term challenges, we remain confident about our medium-term margin expansion due to a favorable product mix and high-value import substitution,” said Rajendra Gogri, CMD of Aarti Industries. “The projects commissioned during the last three years are expected to meaningfully contribute to EBITDA growth starting FY26.”

Capex Cycle Nearing Completion

Between FY20 and FY24, Aarti Industries undertook a capital expenditure of over ₹4,500 crore, building capacities in pharma intermediates, high-performance polymers, and custom synthesis for global clients. The company is now in the tapering phase of its capex cycle, which is expected to moderate going forward.

This shift implies that Aarti will now focus more on sweating its existing assets rather than aggressively adding new ones. Analysts believe this strategic transition will lead to a sharp improvement in asset turnover ratios, enhancing overall capital efficiency.

According to Axis Capital, Aarti’s ROCE, which had dipped to around 11.8% in FY24, is expected to improve to 14.5% by FY26, aided by better fixed asset turnover and operating leverage. ROE is also projected to inch back to pre-capex levels of over 16%.

Market Sentiment Turns Positive

Shares of Aarti Industries have witnessed a steady recovery in recent months, gaining nearly 18% from their 52-week low amid improving sector outlook and better-than-expected earnings for Q4 FY24. On July 5, the stock closed at ₹642.75 on the NSE, up 2.3% intraday.

Brokerages remain broadly positive on the counter, citing improved visibility on growth, asset productivity, and stable raw material prices. However, near-term risks from global demand uncertainty and inventory destocking still persist.

“Valuations are reasonable at ~30x FY26E earnings, given the high-entry barrier nature of the business, long-term contracts, and improving return ratios,” noted Motilal Oswal Financial Services in a recent report. The brokerage has a target price of ₹720, implying an upside of over 12% from current levels.

Custom Synthesis and Pharma to Drive Growth

Aarti’s long-term growth trajectory is closely tied to its custom synthesis and pharma API (Active Pharmaceutical Ingredient) segments, which are expected to witness higher demand in both domestic and export markets. The company has already signed multiple long-term supply agreements with global agrochemical and pharma majors, some of which are now scaling up.

These high-margin businesses will also be pivotal in driving overall return improvement. Analysts expect contribution from custom synthesis to rise from 32% in FY24 to nearly 40% of total revenues by FY27, further boosting blended margins.

Investor Outlook: ROCE and ROE to Regain Strength

Investors looking for a medium-to-long-term play in the chemicals space may find Aarti Industries attractive given its strong pipeline, leaner capex approach, and rising asset productivity. As the company transitions from capex-heavy growth to efficiency-led profitability, return ratios are expected to mirror this change positively.

“We believe the worst is behind for Aarti. FY25–27 could be years of strong cash generation, higher free cash flow yields, and improved return metrics,” said Devansh Shah, chemicals analyst at ICICI Securities. “We expect ROCE and ROE to trend toward historical averages as new assets mature and deliver returns.”

While near-term volatility cannot be ruled out, the company’s strong balance sheet, client stickiness, and diversification across end industries lend comfort to its long-term story.