Aarti Industries Limited (NSE:AARTIIND), a ₹101.2b small-cap, operates in the basic materials industry which is sensitive to changes in the business cycle, as it supplies materials for construction activities. Basic material analysts are forecasting for the entire industry, a positive double-digit growth of 18% in the upcoming year , and a whopping growth of 53% over the next couple of years. However this rate still came in below the growth rate of the Indian stock market as a whole. Below, I will examine the sector growth prospects, and also determine whether Aarti Industries is a laggard or leader relative to its basic materials sector peers.

Check out our latest analysis for Aarti Industries

What’s the catalyst for Aarti Industries’s sector growth?

The sector seems like it has reached maturity in its life cycle, with highly competitive companies and inevitable consolidation. In the past year, the industry delivered growth in the twenties, though still underperforming the wider Indian stock market. Aarti Industries lags the pack with its lower growth rate of 5.4% over the past year, which indicates the company has been growing at a slower pace than its chemicals peers. However, the future seems brighter, as analysts expect an industry-beating growth rate of 27% in the upcoming year. This future growth may make Aarti Industries a more expensive stock relative to its peers.

Is Aarti Industries and the sector relatively cheap?

The chemicals sector’s PE is currently hovering around 16.15x, relatively similar to the rest of the Indian stock market PE of 17.18x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a higher 13% compared to the market’s 9.3%, potentially illustrative of past tailwinds. On the stock-level, Aarti Industries is trading at a higher PE ratio of 30.11x, making it more expensive than the average chemicals stock. In terms of returns, Aarti Industries generated 21% in the past year, which is 7.9% over the chemicals sector.

Next Steps:

Aarti Industries’s industry-beating future is a positive for shareholders, indicating they’ve backed a fast-growing horse. However, this higher growth prospect is also reflected in the company’s price, suggested by its higher PE ratio relative to its peers. If Aarti Industries has been on your watchlist for a while, now may not be the best time to enter into the stock since it is trading at a higher valuation compared to other chemicals companies. However, before you make a decision on the stock, I suggest you look at Aarti Industries’s fundamentals in order to build a holistic investment thesis.