UBS has issued a double upgrade on Aarti Industries, raising its stance from Sell to Buy and revising the target price from ₹615 to ₹625. The upgrade comes as the brokerage believes that the downturn in the chemical cycle and concerns in the energy segment — notably around n-methyl aniline (MMA) — have largely played out.
UBS had earlier placed a Sell rating on the stock, anticipating pressure from a peaking chemical cycle and risks to guidance, especially in the MMA segment. However, a sharp correction in gasoline-naphtha spreads and a reset in MMA volume expectations have signaled a likely bottoming of the cycle. Aarti Industries stock is down around 35% from its August 2024 peak, but UBS now sees a meaningful turnaround ahead.
The brokerage noted early signs of recovery, supported by strategic steps taken under the new CEO to enhance operational efficiency and pursue growth. UBS outlined three main drivers behind the upgrade:
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A gradual recovery in the chemical cycle, aided by low channel inventories.
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A visible uptick in MMA volumes over the last two quarters, despite price volatility.
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Strategic market development initiatives and cost optimisation that are not yet fully reflected in the company’s valuation, which is currently below its five-year average EV/EBITDA.
UBS believes that Aarti Industries’ EBITDA guidance — an increase of ₹8,000–12,000 crore by FY28 — is achievable. This includes ₹1,500–2,000 crore from cost savings, ₹3,500–5,500 crore from margin and volume improvements, and ₹3,000–4,500 crore from capex-driven growth. UBS expects EBITDA to rise by about ₹10,000 crore during FY25–28, projecting a 25% CAGR over the period.
In its view, MMA volume should improve gradually due to the company’s focus on market creation via geographic diversification, tailored shipments, and pricing leverage. UBS also noted that gasoline-naphtha spreads have averaged $13/barrel so far in Q1FY26, aligning with long-term levels prior to Q4FY22.
Despite slashing FY26E and FY27E EPS estimates by 32% and 25%, respectively, to account for a lower base in FY25, UBS remains optimistic. It has rolled forward estimates to June 2027 and values the stock at 30x P/E — in line with the long-term average — implying a 15.5x EV/EBITDA multiple for that period.
Disclaimer: The views and target prices mentioned in this article are as stated by UBS. They do not represent the opinions or recommendations of this publication. Readers are advised to consult their financial advisors before making any investment decisions.