Aarti Surfactants Ltd, an investment opportunity or bubble?

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Little Background

    Aarti Surfactants Ltd was formed after demerger with Aarti Industries. The home and personal care segment of Aarti Industries was not doing well so management decided to split it, for every 10 shares held by Aarti Industries investor they got an option of either getting one equity or redeemable preference share of Aarti Surfactants. The demerger was approved in June 2019 by NCLT and the demerged entity got listed in July 2020. Now you already know the promoters are great and they have created wealth for investors.

Turnaround

    The company was loss-making in FY18-19, but they made a profit of 2.09 crore in FY19-20 as compared to a Net Loss of 6.47 crore in FY18-19 which implies demerger was a good call by promoters and it worked.

Company Overview

    Aarti surfactant is one of the leading producers of ionic and non-ionic surfactants and specialty products.

What are surfactants you ask?

    Well, surfactants are surface-active agents that reduce the surface tension of a liquid and increases its wetting properties. Surfactants are widely used in detergents, cleaners, soaps, shampoos, and other related products for removing dirt, oil, stains, and various unwanted foreign particles from the surface they are applied to.

The company has a product portfolio of

  • Surfactants
  • UV Blocker
  • Pearlising Agent
  • Mild Surfactants
  • Preservatives Blends.

These products find their end-use in

  • Home Care
  • Hair Care
  • Skin and Personal Care
  • Oral Care
  • Baby Care
  • Industrial Applications

    As is evident by, the company is largely linked to FMCG industries and they are the users of their products.

The company has two manufacturing facilities situated at

  • Pithampur, Madhya Pradesh
  • Silvassa, Dadra, and Nagar Haveli.

Future growth focus

The company is focusing on eco surfactants which are organic but the cost is high, the reason being the consumers across the world prefer eco-friendly products and are willing to pay the premium. Due to pandemic this segment would have subdued demand in the short run.

Global Surfactant Market Outlook

    The global surfactants market, from US$ 30.64 billion in 2016, is projected to reach US$ 39.86 billion by 2021, registering a CAGR of 5.4%.

    Apart from already mentioned use cases surfactants are used in Cosmetics, textile processing, oilfield chemicals, industrial and institutional cleaning, crop protection, food and beverages, emulsifier, and foaming agents in the global surfactant market.

Indian Surfactant Market Outlook

    Indian surfactant market grew at a healthy rate of 13% from 2018 to 2020. India is expected to be the fastest-growing market for industrial surfactants due to the country’s increasing economic growth.


Let us have a look at how has the company performed



    As we can see the company had topline growth of 23% and from making a net loss of 6.5cr in FY18-19 it made a net profit of 2 crores. This positive change gives confidence that demerger has helped and the company has been doing the right thing.


Now let us look at the valuations of the company

    The company has a book value of 147Rs, and at the time of writing this article, it is trading at a price of 519 Rs with a Market Capitalization of 394 cr.

    EPS of 2.75 last year implies the Price to Earnings (PE) of 188
    Price to Book (PB) of 3.53

    Looking at the PE multiple of 188, valuations seem stretched. Q1 result is not out yet so clear impact of Pandemic on the business is not clear yet. Although they being a supplier to FMCG majorly, they were operational as essential services.






Final Verdict

    Although the company is small promoters are good and have created wealth for investors. Demerger worked and the company turned profitable, PE valuations are really expensive, and clear impact is not known as Q1 result is awaited. It is not advisable to buy in bulk at current valuations without clarity, but this is definitely a company to track and can be accumulated during good corrections for someone who is looking at an investment horizon of 5 to 10 years.

Location: Mumbai, Maharashtra, India

Comments

  1. ExplorerOctober 3, 2020 at 5:04 AM

    Thank you for the Nice Detailed Research.

    ReplyDelete
  2. FinbloggersOctober 8, 2020 at 4:01 AM

    Hi,

    Good evening.
    First of all, let us start by saying Thank you for writing such fab blogs and we Finbloggers would like to publish your articles on our platform under your name.

    Finbloggers is an aggregator of blogs related to the Indian Stock Market with an active reader base of 10000+ users across 151 countries

    ReplyDelete

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