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Journalism of Courage
Between March 2014 and January 2022, Aarti Industries Ltd (AIL) delivered a staggering 80x return, hitting an all-time high of Rs 970/share in January 2022. Since then, the stock has corrected by nearly 60% to Rs 380/share.
However, over the last three years, AIL has significantly underperformed the NIFTY 500 index.
Even after factoring in the 150% price return of Aarti Pharmalabs Ltd (APL) — demerged from AIL in January 2023 — the combined return of both entities is just ~22% versus 58% for the NIFTY 500 over the same period. (Assuming shareholders retained APL in the 1:4 ratio received at demerger.)
Note: APL is a market leader in Xanthine derivatives and provides CDMO (Contract Development and Manufacturing Organisation) services.
This raises the question: why is a dominant chemical player like AIL struggling?
AIL has maintained its dominant market position in the Nitro-chlorobenzene (NCB) and Dichlorobenzene (DCB)-based specialty chemicals segment. NCB is used as an intermediate in dyes/pigments, agrochemicals, rubber, and pharma. DCB is used as a solvent and chemical intermediate for mothballs/deodorizers and to make engineering plastics.
AIL is also the largest producer of benzene derivatives in India, and a major player among global manufacturers, with a 25-40% global market share across various products. Additionally, the company operates in other chemical value chains, such as toluene and sulphuric acid.
A diversified product and end-use industry mix allows it to calibrate its revenue in line with the demand, pricing, and margin environment in respective chemistries.
However, the financial performance over the last three years indicates that margin and pricing contractions have been severe, despite a strong balance sheet.
Over the last three years, sales grew at just 6% CAGR, and EBITDA margins have contracted from 28.3% in March 2022 to 13.7% in March 2025. Depreciation and interest costs have increased too, leading to a decline in net profit from Rs 1,186 crore in March 2022 to Rs 331 crore in March 2025.
A decline in operating margins and increasing depreciation and interest expense is reflective of both global and company-specific challenges.
According to the company’s FY25 annual report, “The influx of low-cost Chinese chemical products has pressured prices and impacted segment margins.”
Severe demand-supply imbalances (Chinese overcapacity), both globally and domestically, mean end-market demand has been weak and volatile in industrial, polymer, agrochemical, and energy segments.
For example, through FY25, domestic players in the agrochemical intermediates suppliers (including AIL) suffered acute margin drops due to “uneven rainfall and elevated inventory levels, resulting in delayed buying decisions and continued destocking across various channels.” (Annual Report FY25)
To maintain global leadership, AIL focused on volume-led growth, which means operating at lower per-unit margins in order to keep plants running at high utilisations.
In an otherwise grim demand-supply environment, large committed CAPEX, which was initiated over two years ago, resulted in new capacities coming online just as market growth slowed down, leading to lower utilisation. This resulted in adding depreciation, interest, and idle-asset drag on the income statement without the benefits of these new capacities.
For example, new capacities in MMA (end usage in energy), NCB, and Ethylation increased carrying costs. Meanwhile, utilisation has not scaled up, and with four of AIL’s six product segments operating below 70% utilisation in the June 2025 quarter, “fixed cost absorption per tonne was not optimal” (Annual Report, Concall August 2025).
On a short-term basis, the last quarter was hit by demand volatility in Europe and the US, and tariff/trade uncertainty. Furthermore, logistics challenges (e.g., Red Sea shipping crisis, Indo-Pak conflict, etc.) led to deferred shipments and suboptimal plant utilisation.
In the Q1 FY25 conference call with investors, CEO Suyog Kotecha said the company expects “pricing to remain down”. He added that “the pressure on pricing and hence on margins is significantly high, especially on the agrochemical side from the Chinese competition. We are nowhere close to our cycle average margins…we don’t see within one or two quarters the margins going back to normal, we see this is a sort of long road ahead.”
However, in the Q1 FY26 conference call, things seemed to be looking up. “We have been in a falling price environment, not only in the last quarter, but (over) the last five or six quarters. If you plot raw material trends for the last five, six quarters, aniline has practically come down from $1,600 per ton to $1,000 per ton. Benzene, which used to be as high as Rs 85-86, has come down to Rs 58-59. At least current judgment is we have practically bottomed out…we are not seeing further room for raw material to go down.”
Declining raw material prices and, therefore, declining pricing/unit of product have been an issue, which, according to the management, has hit bottom.
AIL’s three-year plan offers visibility for a turnaround.
Over FY6-28, key EBITDA growth drivers include:
1. Cost optimisation: Rs 150-200 crore
2. Volume and margin ramp-up: Rs 350-550 crore
3. Capex-led expansion: Rs 300-450 crore
These are getting implemented at various stages.
The company has carried out sizeable capex of over Rs 6,800 crore during 2019 to 2025 and is expected to incur further capex of Rs 1,000 crore over FY26, after which capex is expected to be lower.
As a result, RoCE has moderated over the years from 17.2% in fiscal year 2019 to 7.8% in fiscal year 2025. In addition, termination of a long-term contract in FY22 (refer to image #5) also weighed on RoCE.
Investors need to closely watch the scale-up of newly added capacities and offtake of projects in zone-4 (Jhagadia, Gujarat), leading to an increase in scale of operation and improvement in return metrics.
AIL’s price-to-book value is below its 10-year median of 5.1x, suggesting undervaluation. However, we must factor in the time risk and change in competitive intensity in the global chemical market.
Between 2014 and 2020, Chinese players were restricted from participating in the global chemical market owing to China’s ‘Blue Skies Campaign’, which sought to reduce air pollution by tightening emissions, capping/relocating heavy industries, and shifting from coal to cleaner fuels. This temporarily led to a disruption in China’s chemical industry, leading to a more open space for companies like AIL.
This trend has reversed, and competitive intensity has increased.
However, based on lead indicators such as bottoming out of prices and the end of a large capex cycle, a two- to three-year turnaround looks plausible for AIL.
Note: We have relied on data from http://www.Screener.in and http://www.tijorifinance.com throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
Rahul Rao has helped conduct financial literacy programmes for over 1,50,000 investors. He also worked at an AIF, focusing on small and mid-cap opportunities.
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