Why this sudden selloff in Aarti Industries shares

Mumbai: Aarti Industries (AIL), a top mid-cap pick of analysts, is now making investors nervous after the company announced the cancellation of a three-year-old contract worth Rs 4,000 crore with a customer whose name was undisclosed.Consistent selling of shares by the company’s promoters even before this announcement and a sudden exit by American Smallcap World Fund on Monday has led to uncertainties for the stock. Analysts, however, maintain that the long-term structural story of the company is intact.AIL has informed stock exchanges that it has received a notice for termination of the contract for agrochemical intermediates. The company said the customer will pay a termination fee of $120-130 million by March 2022.The contract with a capex of Rs 400 crore for a 10-year period was expected to yield annual revenue of Rs 400 crore and 40 per cent EBITDA margin.76416834“Termination of AIL’s marquee contract is a setback, as the company has to now scout for new opportunities, which are likely to be of lower margins,” said Avishek Datta, analyst, Prabhudas Lilladher. “We remain structurally positive on AIL’s growth prospects given its diversified product portfolio, but will wait for better entry points given the macro challenges.”The company has reported consistent profit growth of 26 per cent over five years while its share price has surged five times in five years to close at Rs 925 on Tuesday, up 6.7 per cent.“Since AIL is likely to receive a compensation of $120–130 million from the customer, it will not impact profitability for the next two years,” said Rohan Gupta, analyst, Edelweiss Securities. “We believe the cash flows thus received are higher than the expected net present value and that the windfall of Rs 500 crore in FY23 is likely to be used for future capex.”Smallcap World Fund on Monday sold more than Rs 220 crore worth of shares through open market transactions. Even promoters have consistently sold nearly 11 lakh shares in the open market since February 17, 2020. Promoter holding declined to 47.65 per cent in March 2020 from 53.07 per cent in June 2018. AIL did not respond to queries until press time on Tuesday.

from Economic Times https://ift.tt/3fvmaFt