Tata Chemicals Vs Aarti Industries: Chemical companies were the trend a few quarters ago with almost all of them giving multi-bagger returns. However, the margins and volume came down, and so did the stock prices.
However, they are in fashion again with heavy CAPEX announcements. Are they expanding for a brighter future and are attractive to investors again?
In this article, we’ll do a comparative analysis of Tata Chemicals Vs Aarti Industries and attempt to know which of them is better suited for an investor.
Tata Chemicals Vs Aarti Industries
For our study, we’ll read about the business and financials of both stocks. Further, we’ll learn about the chemicals industry landscape and their future plans. So without further ado, let us move ahead.
As the first step, we’ll understand the business, scale of operations and segments of both the stocks
Part of the salt to software conglomerate the Tata Group, Tata Chemicals Ltd. (TCL) is the 3rd largest soda ash and 6th largest sodium bicarbonate manufacturer worldwide. The business group holds a 38% shareholding in the chemicals company.
Set up in 1939, TCL has evolved into one of the leading chemicals and specialty chemicals companies in India with a global presence. It manufactures basic chemistry and specialty products such as table salt, soda ash, halogen chemicals, silica, prebiotics, and more.
The chemicals produced by the company are consumed in a variety of sectors such as glass manufacturing, paper products, medicines & drugs, pharmaceutical and more.
It has a large operational base with 13 production units and 3 R&D centres located in the US, United Kingdom, Kenya and India. Over the years, it has built a robust marketing network in 30 nations of the world.
In addition to this, TCL has a listed subsidiary, Rallis India, which manufactures and processes seeds and crop care chemicals.
Business Segments of Tata Chemicals
As for its business segments, the basic chemistry division is the largest division accounting for 81% of the income generated in FY23. The balance of 19% came from specialty products.
Talking about geographical revenue contribution, India and America bought the majority of 43% and 33% of revenue while the balance came from other Asian countries, Europe, Africa and other regions respectively.
Aarti Industries Ltd. (AIL) was started in 1984 as Aarti Organic Private Limited. Over the last 40 years, it has grown into one of the leading chemical companies in India with a global presence. It ranks among the top three chlorination & nitration and top two hydrogenation companies worldwide.
Aarti Industries manufactures a wide variety of benzene, sulphuric and toluene specialty chemicals. Furthermore, it produces fuel additives, calcium chloride granules, SSP, and more.
Its products find applications in agrochemicals, pharmaceuticals, pigments, polymer additives, FMCG, rubber, and other industries. DuPont, Indian Oil, BASF, Sumitomo Chemical, Atul, and UPL are some of the high-profile clients of the company.
It employs over 6,000 people across its 16 manufacturing plants, 2 research & development centres, 11 discharge plants, 5 captive power plants, 1 corporate office and 1 project & engineering office.
The chemicals maker has an extensive portfolio of 100+ products which are used by 1,100+ Indian & international customers from more than 60 countries.
Business Segments of Aarti Industries
Talking about its revenue segments, agrochemicals and polymer & additives are the two largest divisions for the company accounting for 30% and 26% of income share respectively.
The contribution of pharmaceuticals, dyes & pigments and FMCG stood at 18%, 12%, and 2% respectively with the balance of 12% coming from a mix of discretionary sectors.
As for the geographical income distribution, Indian and overseas customers brought an equitable revenue share of 52% and 48% respectively.
Indian chemicals industry commands a 4% market share (worth $ 186 billion) in the global chemicals industry valued at $ 5,027 billion. China, the European Union and the US are the largest markets commanding 39%, 15% and 13% share respectively.
The sector worldwide is segmented into bulk commodity chemicals (80% share) and specialty chemicals (20% share). As for the sector-wise distribution in India, basic chemistry formulations (25%), biotech & pharmaceuticals (20%), specialty grade (21%), and petrochemicals (21%) are the primary industry segments.
Talking about the future industry prospects, the global chemicals industry is expected to grow at an annualised rate of 6.2% to touch $ 6,780 by the year 2025. The outlook for India’s chemicals sector is stronger.
For the domestic industry, the market experts have projected a CAGR of 12.2% during the period to become $ 330 billion in value. A variety of factors including higher income, a steady rise in healthcare expenditure, rapid urbanization, faster growth in certain sub-segments (personal care, home care, & food processing), and more will be the primary demand drivers going forward.
Tata Chemicals Vs Aarti Industries
Revenue & Net Profit Growth
The operating revenue of Tata Chemicals increased at a faster annualised rate of 13% in the past five fiscals than that of Aarti Industries at 9%. Similarly, the former’s net profit growth was also impressive at 20% against 3% of the latter.
The table below showcases the growth in operating revenue and net profit of Tata Chemicals and Aarti Industries over the last five financial years.
|Tata Chemicals - Operating Revenue||16,789||12,622||10,200||10,357||10,337||13%|
|Tata Chemicals - Net Profit||2,452||1,400||436||1,028||1,163||20%|
|Aarti Industries - Operating Revenue||6,619||6,086||4,506||4,186||4,706||9%|
|Aarti Industries - Net Profit||545||1,186||523||536||492||3%|
(figures in Rs Cr except for CAGR)
Note: Aarti Industries FY22 net profit is inflated on account of the demerger of its pharmaceutical business.
In FY23, Tata Chemicals reported better margins than Aarti Industries on the back of heavy volumes and strong demand. Previously, AIL’s margins were more than that of its counterpart.
The figures below represent the operating profit margin and net profit margin of Tata Chemicals and Aarti Industries for the past few years.
|Tata Chemicals - Operating Profit Margin||18.8||13.9||6.6||15.4||15.7|
|Tata Chemicals - Net Profit Margin||14.5||9.3||4.3||9.9||12.5|
|Aarti Industries - Operating Profit Margin||11.8||23.4||16.7||19.1||17.1|
|Aarti Industries - Net Profit Margin||8.2||18.7||11.9||13.1||10.7|
(figures in %)
We read above in our comparative analysis of Tata Chemicals Vs Aarti Industries that the Tata Group company saw a turnaround in the recent fiscal. Higher profitability helped the company to post better return ratios for investors. Similarly, Aarti’s RoCE and RoE fell on account of lesser profits.
The table below compares the two return ratios: RoCE and RoE of Tata Chemicals and Aarti Industries for the previous few financial years.
|Tata Chemicals - Debt / Equity||0.3||0.4||0.4||0.4||0.4|
|Tata Chemicals - Interest Coverage||10.0||8.5||4.7||4.7||4.6|
|Aarti Industries - Debt / Equity||0.6||0.4||0.7||0.6||0.8|
|Aarti Industries - Interest Coverage||6.5||16.9||8.7||6.4||4.4|
(figures in %)
During the study period, the debt situation of Tata Chemicals improved significantly with improvement in its interest coverage ratio and debt-to-equity. The reduction in Aarti Industries’ figures was not pronounced because of the large capital expenditure underway.
The table below showcases the debt/equity ratio and interest coverage ratio of Tata Chemicals and Aarti Industries over the last five fiscals.
|Tata Chemicals - RoCE||10.4||6.6||4.1||7.7||7.1|
|Tata Chemicals - RoE||11.7||6.9||1.8||7.5||9.4|
|Aarti Industries - RoCE||13.4||22.4||14.3||18.1||20.5|
|Aarti Industries - RoE||11.1||22.1||14.9||18.0||18.7|
Tata Chemicals Vs Aarti Industries – Future Plans
So far we looked at the previous fiscals’ data for our comparative study of Tata Chemicals vs Aarti Industries. Let us try to get some sense of what lies ahead for the two companies and their investors.
- The Tata Group company spent Rs 2,100 in FY23 as capital expenditure to increase production capacity. Furthermore, the management has guided Rs 800 crore CAPEX for FY24.
- For the medium-term period till FY27, Tata Chemicals has CAPEX plans worth Rs 2,000 crore.
- Along these lines, the management has anticipated achieving volume growth of 30%, 40%, and 400% for soda, bicarbonate, and silica respectively. This growth guidance is after incorporating current CAPEX as the base.
- Lastly, its listed subsidiary Rallis India is also putting efforts to grow its product portfolio and drive sales growth in the future.
- Aarti Industries has consistently spent over Rs 1,000 crore every year over the last four years towards capital expenditure. Its CAPEX stood at Rs 1,306 crore in FY23.
- Furthermore, the management has earmarked additional CAPEX of roughly Rs 3,000 crore for the next few years.
- The chemicals maker had 40+ products in its R&D pipeline at the end of FY23, highlighting growth opportunities in the future.
- Along these lines, the company has plans to increase production capacity for Chlorotoulene, NCB, NT, Ethylation, and more products.
Tata Chemicals Vs Aarti Industries – Key Metrics
We are almost at the end of our Tata Chemicals Vs Aarti Industries comparative analysis. Let us take a quick look at some of the key metrics of the two stocks.
|Particulars||Tata Chemicals||Aarti Industries|
|Market Cap (Cr.)||₹25,571||₹16,385|
|Price to Book Value||1.31||3.49|
As we conclude our comparative study of Tata Chemicals Vs Aarti Industries, we can say that the recent fiscal was not good for AIL while for TCL it turned out to be a stellar one. However, Aarti Industries still trades at an expensive valuation highlighting investors’ belief in the future prospects and CAPEX execution.
In your opinion, which of the two is better placed? The legacy business of Tata Chemicals of Aarti Industries? How about we continue this conversation in the comments below?
Written By Vikalp Mishra
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