Kotak cuts Aether Industries share price target to Rs 890 from Rs 910; here's why

Aether Industries has secured a 10-year contract with Milliken's India subsidiary. This agreement involves the supply of a key strategic product, marking a significant advancement in Aether's contract manufacturing business, a crucial growth driver. The product is believed to belong to the material science domain, a notable area within Milliken's portfolio.

This partnership is built on a history of collaboration, with Aether having worked with Milliken under the CRAMS vertical for several years. Transitioning this product to a contract manufacturing model, with Aether as the "current sole contract manufacturing partner," signifies a strategic milestone, Kotak Institutional Equities said  adding that the project will fully utilise Aether's site-3+, positioning it to significantly boost revenue.

Kotak estimates that revenues from the Milliken contract will reach Rs 200 crore  by FY2029 as the site-3+ capacities are maximised. In addition to this, Aether's contract with Baker Hughes is expected to generate Rs 400 crore by FY2028. The contract manufacturing division is projected to account for more than 70% of Aether's incremental revenues from FY2025 to FY2028.

The expected revenue surge from the Milliken contract underpins a 6% increase in Aether's FY2028 earnings per share (EPS). Despite moderating assumptions for the Converge polyols and Baker Hughes contracts, Kotak has adjusted its discounted cash flow-based (DCF) fair value estimate to Rs 890, down slightly from Rs 910.

Kotak remains cautious regarding Aether's valuations, noting that despite market corrections, the stock is not considered inexpensive at 46x/36x FY2026E/27E price-to-earnings ratios. Continued earnings delivery against firm expectations is necessary for a more favourable outlook on the stock.

Aether has implemented a policy requiring a minimum internal rate of return (IRR) for new projects, a threshold met by the Milliken contract. This strategy aims to optimise working capital and enhance return ratios, suggesting improved financial performance compared to current levels.

The contract manufacturing business, bolstered by the Milliken agreement, is set to be a significant revenue driver for Aether. Additional contributions are expected from projects like the Converge polyols project for Saudi Aramco, which is projected to generate over Rs 1 billion by FY2028.

While Aether appears poised for growth, Kotak Securities advises caution, emphasising the need for sustained performance to meet market expectations and justify current valuations.