Aarti Industries Limited (524208) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Aarti Industries Limited Q3 FY '20 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Shiv Muttoo from CDR India. Thank you, and over to you, sir.

Thank you, Stanford. Good afternoon, everyone, and thank you for joining us on Aarti Industries Q3 FY '20 Earnings Conference Call. We have with us on this call, Mr. Rajendra Gogri, Chairman and Managing Director; Mr. Rashesh Gogri, Vice Chairman and Managing Director; and Mr. Chetan Gandhi, CFO of the company. Before we begin the call, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation shared with all of you earlier. I would now like to invite Mr. Rajendra Gogri to take you through the performance of the company and his outlook on the business. We will then open the forum for an interactive Q&A session. Over to you, Mr. Gogri.

Good afternoon and very -- welcome to all of you. Our financial performance during Q3 is in line with the guidance given earlier during the last call. From the revenue standpoint, there are a couple of key points that needs to be considered while we look at the performance of the quarter. We have covered our revenues from the erstwhile Home and Personal Care segment, which will be listed as Aarti Surfactants. In Q3 FY '20, we had witnessed a sharp increase in the raw material pricing, trailing the full price increase on account of the increased tension between the U.S. and Iran. This price increase was passed on to the customer resulting into increase in the top line. As a consequence, this sector reported revenue at a higher compared to the Q2 FY '20 and flattish as compared to the same quarter last year. Export remained relatively stable, contributing to over 40% of the total revenues. Overall, we see this as a positive performance from the perspective of our long-term business objective amidst macro challenges. While gross profit and operating profit are the more appropriate parameters to evaluate our business, and both of these were largely stable on Y-o-Y basis. On the lower base of revenue, reported margins have expanded significantly. The PAT for the quarter grew by 3% Y-o-Y to close at INR 137 crores. These numbers need to be looked at the backdrop of continuing macro challenges in the U.S., agrochemical and global automobile sectors. Aarti Industry with differentiated capability relationship and wide range of chemical products continue to be well recognized by most of the largest customers globally. We maintain low concentration on geography, client and product parameters, thereby significantly de-risking the business. Our standalone specialty chemical business revenue was marginally lower by 1.2% Y-o-Y in Q3, however, was higher by 19% on Q-o-Q basis. This was an account of increased volume of nitrogen product and also the raw material price increase, which was witnessed in Q3 versus Q2 FY '20. As explained earlier, the impact of certain end user segment were felt on the demand of various products. Despite that the company was able to report the segment EBITDA INR 205 crores for Q3 FY '20 as against INR 210 crores for Q3 FY '19 and INR 200 crores for Q2 FY '20. We have been continuously leveraging our tangible capacity to optimize our product mix to maximize the EBIT. Contribution from downstream products further increased from 70% to 75%, which is a trend driving our business to the next level of customer engagement and into a segment that sees relatively less competitive intensity. We've produced about 14,900 metric tonnes of nitrochlorobenzene during Q3 FY '20 as against 17,765 metric tonnes of Q3 FY '19. We have discussed during the last call that there was a temporary shortage in key material nitric acid which had originated during Q2 FY '20 and prevail till October 20. This had impacted the volume of some of our products. Our major ongoing projects such as specialty chemical complex and chlorination plant in Jhagadia, projects at Dahej SEZ in Gujarat are progressing as planned and expected to be commissioned in this quarter. Likewise, our 4th R&D and scale-up center, which is coming up at New Mumbai is going to commence activity during this quarter, this center will facilitate further enhancement of product portfolio and also help improve our manufacturing processes. The pharma business showed a marginal increase in revenue on Y-o-Y basis, however the EBIT for the segment grew by over 20% to INR 36 crores for Q3 FY '20 as compared to INR 30 crores for Q3 FY '19. This was partly attributed to continuing change in product mix towards higher value addition, which is evident from the strong growth and profitability both on absolute basis and as a proportion of revenue. Segment margin expanded by more than 300 basis points to 20.4%, with overall capacity utilization has been running at a higher level due to some lines being occupied by new products, where we are undergoing an evaluation trial. On CapEx front, we had invested over INR 830 crores during the 9-month period and are on track for the planned full year CapEx of around INR 1,200 crores. The company continues to operate at a healthy gearing level, we will utilize the remaining surplus cash flow from the QIP fund raise for the ongoing CapEx program during this year. Summarizing on our performance. Despite macro challenges, we have been able to achieve a consolidated PAT of INR 426 crores for 9 months FY '20 as against full year consolidated PAT of INR 491 crores for FY '19. Looking at this in the current situation, we are confident to be able to meet our guidance of bottom line growth of about 10% to 15% for the year. To conclude, we believe that India is emerging as a more significant player in the global chemical supply chain with its scalable low cost manufacturing ecosystem, improving infrastructure and established SSC compliance framework. The company is well positioned to expand its market share globally and there are also opportunities to replace import with domestic production. Investment into operational excellence and new product development, and clear differentiation and strong long-term business visibility. We are making several initiatives and investment to participate in this growing potential. On that note, I conclude my opening remarks. We would be very happy to give you our perspective on any questions that you may have. I request the operator on this call to open question-and-answer session.

[Operator Instructions] The first question is from the line of Surya Patra from Philip Capital.

Yes. Congrats for the good set of numbers sir. Sir, just a couple of clarification about the global opportunity, what you had talked about in the opening remarks. So seeing the kind of situation that is prevailing in China, and the kind of capability of India, what you have pointed out and your initiative to play important role in the global business. So can you just highlight about what incremental initiative that you have been taking to play a important role there? And do you really see any benefit to be -- that you will be seeing because of this China situation, either because of the price advantage or volume advantage that you may see in the near future?

We have been always maintaining that there's more and more appetite for sourcing from India. So volume demand for Indian consumption as well as for global consumption is continuing to remain high from India. And another thing now, people are looking at supply chain, which is totally independent of China. So there is no intermediate also comes from China. Under that circumstances, company like us who are totally backward integrated in our chemical business with no input from China, we are in a more advantageous position. And so that demand appetite is definitely there. As far as the margin appetite, obviously as the Chinese costs have increased, Indian margin have expanded. And if there are short-term shortages, it can give a short term spike. But in general, the long-term secular margins have expanded.

Yes. Okay. And sir, just on the price behavior of the chemicals because of the China situation. So there is a general perception that okay, there would be a shortage situation and hence there would be a meaningful spike, what possibly we have witnessed in the last year. But against that a contrarian theme is also there that China being one of the largest chemical market. And the demand there is also significantly low. And simultaneously, the crude price situation is also significantly low compared to the earlier situation. So given that there is a meaningful lower demand situation, which is keeping the prices lower against the thought process of a spike likely because of the supply disruption. Do you agree that? Or have you seen any kind of a price behavior, which is favoring us or something like that in the global market, sir?

Yes. In general, because of this Coronavirus situation, the demand for chemicals and some margin expansion, product to product is there. And as far as the demand from China itself is concerned unless those plants are impacted, consumption plant, overall, goods demands are not going to be impacted much. Currently, more the services are impacted within China. So we don't see any Chinese demand getting so much less to have an impact on global production. But short term, because crude and oil are very volatile and all those bulk commodities, which are highly volatile, they give the response of this volume reduction. For more value-added chemicals, I don't think this is going to have much impact on the global demand.

Okay. Sir, just in the 9 months, what is the volume growth that we have seen in the export side, sir?

Export this quarter was 40%.

No, in terms of volume growth.

In general, no, now we have not been giving volume growth. We are giving more on a value-added percentage.

Yes. Just from the standpoint of the export opportunity, what are the kind of trends that we are witnessing? From that standpoint, I was trying to -- is, okay, what could be the volume growth for the export market that you have been seeing? Generally, I don't really...

Yes, export growth, basically with our new projects starting we will have a huge jump in export because they are 100% export. As far as per our regular business, as we mentioned in the past also that the downstream consumption has started increasing in India. So we see that demand growing, both in India as well as export our regular business, but this new contract will give a big jump on the exports.

Okay. One question on the supply deal, sir, say the agro supply deal, which was supposed to initially be commenced from the fourth quarter. And the polymer supply deal, which was likely to commence in the second quarter of next year. So is there any update or the time line? And in what manner the ramp-up will happen, whether it would be kind of instantly from the starting year, first year itself, there would be a kind of evenly distributed revenue that once you'd see or a gradual staggered ramp up for the deals that we should see on those time lines? As well as the kind of the way it should really ramp up, can you just give some update on that?

Yes, we will be commencing the plant in Q4 this year and ramp up in the first year will be a gradual ramp-up for both the projects.

Okay. The customer delaying their own project would not really mean anything for us, right, sir?

So the first year, the ramp-up will be slower, basically. It will be a gradual ramp-up.

Okay. And just one last question about the margin performance sir, for next year. Given -- or in the light of the lower crude prices. For the -- which is likely to prevail in the near future. And we have already seen a kind of a meaningful improvement so far as the value-added product contribution is concerned. And the underutilized operation of the new projects that we would be seeing in next year. So what are the kind of trajectory one should really look if we see that in the first 9 months, we are slightly more than 22% kind of margin we have reported so far?

Yes, margins will improve because of the value-added production is expected to increase in FY '21 and '22. So margin as a percentage, even at the constant raw material prices, are expected to increase.

Okay. This under utilization of the assets -- newly added asset, would not really impact the margin that you meant to guide, sir. Is that correct, sir?

Yes.

The next question is from the line of Naushad Chaudhary from Systematix.

Two or 3 questions, I have. First, if you can sir, share the volume number? You shared the NCV production number. So other, if you can share the remaining hydrogenation, PDA and nitrotoluene production number of this quarter?

Yes, hydrogenation number 2,330 tonnes per month and PDA was about 417 tonnes per month. And nitrotoluene was 1,666 per quarter for the quarter.

If I'm correct, nitrotoluene last quarter was around 4,000. If this number is correct and seen 600 as a sharp decline in the production number?

No. Last quarter was 1,363 for the entire quarter.

Okay. Okay. Do you have your balance sheet numbers with you, if I ask you about the inventory and data days?

Yes, you can go ahead.

So what is the current inventory days, we are running with and data days?

The current inventory days are almost like 61 days and the receivable days would be around 73, 75 days.

Okay. As I remember, last quarter, we had some issue in the raw material in our pharma business, and that had impacted the inventory overall in '19. So has that thing resolved? Or what is the status there, sir?

What we had was considering the challenges what we've been witnessing on some of the materials, which are coming in from China. We were creating additional inventory for some of those products. So even -- I mean, more from the perspective of pollution and other regulatory issues in China. So in current situation, to an extent that inventory position would help us how out to mitigate our requirement, we would have roughly more than 1/4 of inventory at this point of time. So we will probably look at continuing the same strategy.

Okay. Do we have any alternate source apart from China for those raw materials if Corona is going to effect that supply chain system then do we have any alternate source for that?

We are trying to develop more and more aggressively Indian sources for all our raw material as risk mitigation. And -- but there are certain products where like steroid intermediates, there is no production which is happening in India. And the technology itself is not available. We will have to be dependent on China. So that's where we stand. But I hope the situation should resolve early next quarter. And we have been in contact with the suppliers overall. So they are also hopeful that the situation will improve in another month or 1.5 months. So we are getting inventory. So we should not have any major issue. It could be 10% to 20% production may get hampered in salt and steroid or such products, but otherwise no issues.

10% to 20% of pharma business?

Yes. There -- so in that steroid segment, particularly if this continues beyond 1.5, 2 months further than we may face some challenge. But everyone is hopeful that this would resolve, let us see.

And typically, once you put the order for these raw materials, how much time it takes to reach our factory from start to end?

Basically for key raw materials, we have annual quarterly contracts. So the orders are already there for key raw materials with the suppliers. So as soon as they start the shipment of production, we will get the product.

From supplier gate to our gate, how much time it takes to reach the product?

25 days, 20 to 25 days.

The next question is from the line of Ritesh Gupta from Ambit Capital.

Sir, could you just update us on some of the other CapEx initiatives that you are taking apart from the 2 contract manufacturer projects that are supposed to be commissioned in quarter 4. Are there some other projects also which are in the pipeline? So if you could just guide a bit on that?

So as regards to the third long-term contract, where we were targeting the commissioning by March 21, we are on track, looking at targeting the same commissioning time line. On the other major one on NCB project, we'd earlier announced that we would be looking at commissioning towards the end of FY '21, we should be able to fairly be around that time. But what happened is some of these projects, there are certain delivery items and ordering and all those stuff. So we'll just have to take a stock and give a more detailed update by next quarter. But as of now, fairly, we should be able to be investing with a time line.

Sure. So if I understand correctly, let's say, for the next 6 to 9 months apart from the contract manufacturing projects, any -- there is no other major CapEx projects that we had commissioned in the next 1 or 2 -- next 2 to 3 quarters, is that the right understanding?

Yes, basically, these major projects will get commissioned now. So subsequent to that, the next 2 quarters, the commissioning will not be a major.

Yes. So plus, we will be also commissioning those expansion initiative at the pharma, U.S. FDA sites. Again, that also would be commissioned towards in next financial year. So beyond that, as of now, we don't see any major, larger projects, which will be getting into a commissioning for next year.

Got it. Got it. Got it. And on these 2 contract manufacturing projects, you are hopeful -- I mean, fully hopeful of ramping up in the second half of FY '21? Probably the first half would be more of a ramp up phase, and then second half, we could see the full revenues? Is it the right understanding?

Yes. Overall, utilization will improve in second half.

Okay. Okay. Okay. And just sir on the pharma side, you have talked about some of the expansions into couple of other therapies. So if you could just elaborate a bit on that? And if you could just guide for, like what kind of CapEx, let's say in pharma, you're looking at? Or what kind of growth trajectory you're looking at in pharma, let's say over next 2 to 3 -- 2 to 3 years?

Basically, in pharma segments, now we are targeting some of the antidiabetic newer age drugs, flozin. And also anticoagulant, we have taken up 3 drugs for R&D. So these are the new products as a part of our 12 product portfolio, which will get validated over a period of next year or so. And we are implementing a project to make additional stock of API manufacturing in our Tarapur site, which is going to share CapEx of around INR 75 crores. So these are the products that will get commercialized over the next 3, 4 years. And also in terms of our intermediates manufacturing, we are also going to commercialize 1 additional block of production at our custom synthesis plant. And that will also add around 15% to 20% capacity for intermediate manufacturing. So these 2 will add for next year, capacities overall.

Sure. And I just joined the call late, there is no raw material-related impact, as you probably saw in the second quarter into this quarter, right? There's no -- on the specialty chemicals side there is no impact to that?

So I guess, nitric acid was something which we had discussed during the last con call, continued until October. So that's the only -- at least on the supply chain that was the only product which is impacted on the specialty chemicals front.

Got it. And so both your projects get commissioned in quarter 4, let's say, at the beginning, because I am just trying to understand, let's say, from a next quarter point of view, when do -- I mean, do you have exact commissioning dates for these projects in your mind? So is it like...

Not as of now.

Okay. So most likely, they'll get spilled over to probably quarter 1 of next year?

No, Q4. They will get commissioned this year.

The next question is from the line of Ketan Thakkar from ASK Investments.

Sir I just missed the NCB production volume for the quarter.

That is 14,900 tonnes.

The next question is from the line of Rahul Jain from Lionrock Capital.

Yes. Two, 3 questions. One is with respect to both your long-term projects, have there been any discussion from the customers given the macro situation and everything to change the ramp-up time line at all? Or when you say the first year of ramp up would be gradual, it is essentially the nature of this contract, where first year, you do all the proofs and everything and then it settles down and ramp up?

Yes. Basically the first year ramp-up is expected to be gradual.

Is it driven by the customer request or it is because of the nature that typically when you're commissioning a big plant, you go slow?

Yes, simultaneously they will be also commissioning their plant also. So because of that, also the ramp-up in the first year is expected to be slower.

And the second is, both your plants will be commissioned in Q4 before March 20 or 1 of them will be March '20 and second would be 3, 6 months later?

Both will be commissioned in Q4 '20, but the second project, we have split into 2 different product lines. So it will be in kind of 2 phases.

Sir, sorry, I didn't understand that. So the second project is...

The second project we have divided into 2 parts. So the first part will be commissioned in Q4; and second, maybe after second quarter.

Okay. Okay. And the third part of the question is, with respect to all the supply disruption potentially happening in China, if there are any -- so, are there any specific products where you have seen significant spike in prices? Or right now, it's not much of an impact in terms of profit margins or prices for some of the products?

No, because the impact, in general, we are seeing that some of the products demand and the prices might go up. But it will be more impact -- more towards maybe -- towards the end of this month things will start getting more crystalized.

Okay. Okay. And then the last question is, when I look at the overall EBITDA, operating profit, because that's the right parameter to look at. I think for the last 5 or 6 quarters, we have been doing about INR 240 crores to 250 crores of EBITDA. I'm just trying to understand, I mean, unless and until you start getting some benefit of these new contracts, possibly into second half of next year, is it fair to say that we continue to see this trajectory of INR 240 crores to INR 250 crores of EBITDA and then ramping up from there as new the contract -- new long-term contracts ramp up?

Some ramp-up will be also in the first 2 quarters also because of some other product lines of nitrotoluene and PDA volume, ramp-up will continue. So -- but the second half will have substantially more ramp than the first half. And the volume growth.

If I could just take a look back and think about like what has really caused obviously, we will probably be growing the profits at 10% to 15% this year, but that is largely going to be driven by lower finance costs than anything. Operating profits are largely going to be flattish, more or less, which generally, when I look back at the history of the company generally been growing the operating profits at the mid- to high teens, probably closer to 20% on a consistent basis. So what has gone -- what have you missed this year? Do you think that's one-off or something structural changes happened also?

But we'll have to factor or consider while we look at, the numbers is the fact that, a, in this year, for like 3 months, there was shortage in nitric acid, which is one of the key raw material, which has impacted volumes to an extent. Then there was issues related to the flooding in U.S. impacting the agrochemical demand for various products. And the third part was that volume or global volume or application for the automotives and linked to the automotive sector that also had impacted the demand. So these are factors, which has actually impacted the demand on a lower side plus the shortage of raw material impacting the production capability. So it's -- despite those challenges, those EBITDA numbers still able to be maintained at a higher level.

Okay. And one last bit is, there was a lot of news flow related to some tax issues at the company. Any comment or is it just nothing?

Yes, that is under process basically. So we don't expect much impact for that.

Okay. So there has been some -- so what exactly has happened because, obviously -- so there was no relief from the company? I just want to make sure that I get the real picture rather than hearing all those rumors around?

Yes. Basically, you know, this is -- they come and they take certain details and on that basis they will then analyze and then they will come back to us. So -- but we -- overall, we don't see much impact, because there will not be clarity, as of now there will not be any clarity.

The next question is from the line of Sneha Talreja from Edelweiss.

Could you quantify what would be the impact of price benefits in the current quarter, specifically related to the PDA?

Yes, this quarter will be around INR 10 crores.

And do you expect this sustaining because you were mentioning that we were at almost a peak in Q2, which was around INR 15 odd crores. So it has, of course, come down. But you see this figure remaining here or going away?

Yes. Q4, it should continue.

Q4, it should continue? Are you seeing this kind of a trend coming in even other products, given the current situation in China?

Yes, current -- this new event of Coronavirus impact will start to crystallize maybe towards the end of this month, regarding the prices. But overall, we see that it would be a positive for our chemical business.

Sure, sir. And sir, I just wanted to know about the pharma segment's margin, we have seen continued improvement there. And I think in the couple of quarters back, maybe you mentioned that this margin should peak out around 21-odd percent in the coming year. So where are we right now? Do we see more scope of expansion here?

Yes. I think now the margins this quarter have been at 20.5%. And this quarter, largely driven by low-cost in raw materials and overall product mix driven by high-margin products. So we -- once we have new plants coming in, it will also have an impact on overall, we will go after low-margin products also to fill up our capacities. So after all the balancing, eventually it will stabilize at 20%, 21%, 22%, this kind of a percentage. But the new capacities will come in, in next year.

Any quarter wise guidance around next year, when are those plants expected to commission?

So we have API block expansion, which is going to be more towards second half of next year. And intermediate log expansion also happening in first half of next year. So both -- we are still in the process of budgeting. So once we have growth in next quarter, we can give more guidance for next year.

The next question is from the line of Vishnu Kumar from Spark Capital.

In terms of your next year supplies to your -- across your customers, what is the feedback you're getting be it auto, agri or other segments which you are selling to?

Yes. For the U.S. Agro impact, we see that gradually, it will go up, maybe in second half should become much normalized, whatever the impact was that of U.S. Agro. And automobile, we would still see how things pan out.

Okay. In general, on an organic basis, are we looking at something like a mid-single digits? Or it will be much higher?

For the next year?

Yes, sir.

No, with this contracting hitting in, overall, we see that it will be more towards in the higher double digits.

Got it, sir. And in terms of the Agro contract, we understand the innovator is delaying the technical plant start-up probably to early next year. Would it mean that we will be ramping up only in the second half? Or we can still supply to them, and they'll use it at some other location?

As we mentioned, basically, this ramp-up is going to be slower. And a gradual ramp-up in the next year.

Okay. And if I understood right, if the China current situation continues, the chemical business will be a net beneficiary. Is that the right understanding, sir?

Yes.

The next question is from the line of Rohit Nagraj from Sunidhi Securities.

Yes. Congrats on good set of numbers. Sir, your -- about the 2 contracts. So you said FY '21 would be gradual ramp-up. So do you expect the full potential in FY '22, INR 400 crores of revenues and INR 500 crores of revenues from those 2 contracts?

Yes. FY '22 will be substantially higher. And I think FY '23 will be virtually full. FY '22, maybe more towards 80% plus.

Okay. And FY '21 would be lesser than half? Or I mean somewhere closer to say, 50% plus/minus?

Yes, I would say so.

Okay. Sir, and in terms of, again, a broader strategy. Now these contracts will start kicking in, and they will start adding growth for the next couple of years. Beyond this, how are we placed in terms of any other new such contracts or any other areas of expansion from a chemistry perspective?

Yes, we are saying the third contract, which will be Q4 FY '21, it will get commissioned. In addition to that, we are looking at expanding in chlorotuluene range of products, chlorotuluene as well as downstream, where we'll be adding a new chemistry also, photochlorination and oxidation, et cetera, this will be a new range of chemistry. With our expansion of R&D facility as well as R&D talent ramp up, we'll be adding quite a few chemistry going forward. As I mentioned earlier also, there is a huge appetite for value-added products for supply chain, which is totally independent of China. So people want us to supply product for $70, $80 also, which are maybe 7, 8 step synthesis. So we'll be going on adding newer chemistry in our overall chemical business.

Okay. And right now, what would be the contribution from our top customer and top product in our revenues.

The top 10 products in specialty is around 57% or so this year.

And the top customer?

Top customer would be around 5% -- 4%, 5%.

Okay. And any indication on FY '21 CapEx number. This year, it is 1,000, 1,200, next year?

Yes, we're still working out the budget. So we'll come back on -- in our Q4 results at that time, more clarity on the CapEx.

The next question is from the line of Nav Bhardwaj from Anand Rathi.

Sir, currently, could you shed some light as to what is our raw material procurement as well as our sales or our exports to China currently?

In chemical virtually we don't have much procurement from China.

Pharma, I think out of the raw material, I think we would have at least 40% to 50% coming out of China.

Okay, any disruptions in that currently?

Yes, we -- as mentioned earlier in the call, we have been cautiously carrying a little higher inventory. So that is going to help us mitigate these situations and if these disruptions continues beyond another month or so, then we will have issues. But we are waiting for 2 months.

And on the basis of all these disruptions that are going on currently, have we received -- seen any marked increase in the number of queries? Or has there been any further orders that we've gotten right now? Or is it too early right now to speak about it?

No, we are seeing -- for chemical business, definitely, we are seeing more inquiry from global players also and for within India also. So that impact is being seen.

All right. And Chetan, if I may ask, could you share the current debt number?

So the current debt would be around INR 2,130 crores, INR 2,140 crores.

The next question is from the line of Rahul Jain from Linerock Capital.

Just one quick question. You mentioned 3 factors, which has impacted the profits this year, shortage of raw material, flooding in U.S. and weak order demand. Part of it, the first 2 factors, I mean, had there been no issue, what do you think that it costs you in terms of profits? Any qualitative comment or any sense on that would be very helpful.

So EBITDA could have been higher, maybe 4%, 5% further.

So the total EBITDA would have been higher by about 4% to 5%, if there was no shortage of nitric acid as well as normal weather patterns in the U.S.?

Yes.

Next question is from the line of Rohan Gupta from Edelweiss.

Sir, first question is on the China impact. So you mentioned though pharma can be negatively impacted, and the specialty chemical will be positively. Your raw material, almost 50% in pharma coming from China. So do you see that if the situation continues to remain as it is then our pharma business probably the almost EBIT margins may go down to almost as low as just 0 level, if the situation continues for a shorter period?

Yes, so what we've said is that in pharma we've been strategically placing or keeping inventories with us. So for a quarter or so, we don't see any significant impact. If it continues beyond a month over there, then we have to see the situation how it pans out and what is an alternate available and other stuff, but I would pray that more from the business, even from the humanitarian purposes, we should pray that it doesn't continue beyond a level.

Yes. So basically, in pharma business, is splitted into again, 2 businesses. The caffeine, theophylline and etophylline, and in these business we don't see any disruption. The supply chain is largely independent of China. And the other part is, the speciality APIs or high-value APIs, where we have proactively been keeping higher stocks. So that's how the more caffeine business will stay protected. And it will have very less impact on the disruption because the suppliers are largely independent of China.

Okay. Sir, second question, you mentioned that next year, FY '21, the new product contribution. I mean, utilization level may remain at close to 50% and can ramp up to 18% and 22%. So I believe at 50% utilization, do you see that it will be EBITDA positive and if yes then what kind of EBITDA blended margins can contribute in '21?

No overall it will be EBITDA positive. And in general, the margin as a percentage also will expand.

So even at a 50% utilization, you are saying that margin on the new product will be in line with our current margin of 20%?

Yes.

The next question is from the line of Surya Patra from PhillipCapital.

So just on the NCBs and the nitrotoluene volume, what we have said. So that number is much lower compared to the initial run rate what we used to see prior to the nitric acid issue? So that means whether that issue is still continuing, sir?

No, it has improved. In the month of January, it was virtually normal. But again, February it is showing some supplier had some plant issue. So this quarter also we see that some impact of nitric acid will be there, inbuilt there is enough capacity with the supplier on supply side, but unfortunately they have been having more disruption than what you would assume in a normal circumstance.

Okay. So are we derisking our procurement of nitric acid sir, why because we have seen earlier, also a similar situation?

Well, generally that is something which you cannot stock much, so -- and now inbuilt because they have the capacity and they are in 2 different locations. We don't expect this kind of a situation. Now we'll see whether on a long-term we should have some investment or something to take care of that. We are just evaluating that possibility.

Okay. And just another question on the growth of the pharma, though we have been talking about maintaining our guidance and all that. But the recent performance has been slightly lower than the guidance growth rate. So are we -- any revision of the guidance on that pharma front that we are...

Yes, basically, last quarter, Q3 is normally a slow quarter as compared to the earlier quarter, and we expect Q4 to be better than Q3. But in general, whatever earlier we had been anticipating, there has been a little less top line growth, and seen in the numbers definitely. But next year I think with the newer capacities and everything, we are hopeful that we'll have good growth.

So the new capacity will add what kind of volume growth? Is it possible to talk on that line, sir, because it is difficult, but still?

Our API capacities will go up by 30% to 40% by adding additional blocks. So currently, we have 4 blocks that we are operating in our U.S. FDA plant. [indiscernible] we had 40% additional capacity. And in intermediates, we are adding additional block, which will add another 15% to 20% capacity. But API ramp-up is normally slower as compared to the intermediate ramp-up.

The next question is from the line of Dhiraj Dave from Samvad Financial.

My question is answered.

The next question is from the line of Naushad Chaudhary from Systematix.

Can you share sir, what was the mix of contractual and export revenue last quarter and what run rate we are running in this quarter?

Sir, could you just repeat the question?

Your revenue share between contractual sales and export sales.

No, we have not been bifurcating those numbers. Generally, a very stable business. Some of them may be multiyear, some of them are single year contract, but other businesses are also a quarterly kind of a rollover businesses. So we don't have those kind of separate numbers, which are 1-year plus contracts, and which are more of a regular business.

Okay. Can you share the production number of same quarter last year, sir?

Pardon?

Can you share the production number of the same quarter last year, the NCB hydrogenation, PDA, nitrotoluene?

Yes. This last quarter of last year, it was -- NCB was 15,800 tonnes.

This was the production number, not the sales number, right?

Sorry, sorry, it was yes production number, 17,760 for Q3. Q3 of FY '19 was 17,760, hydrogenation was 1,762, PDA was 354, and NT was 4,000.

4,000 for the whole quarter?

Yes.

Against which we have said 1,666 for this quarter, right?

Yes. Yes.

So there's a sharp decline in NT in terms of production? if you can highlight the reasons for the same?

Yes, as you mentioned, the nitric acid shortages and the various products. So we expect NC will get ramped up in this quarter and then subsequent quarter if the nitric acid remains normal.

If I remember last quarter, we had shared that in the Deepak's Navi Mumbai plant there was a water supply issue. And then we had an alternate source at Dahej plant of the same company, and those things will get resolved in last quarter. So what exactly is happening there, and why Dahej is not able to resolve these issues?

Yes. So Deepak had outage in their Dahej plant where they are producing dilute nitric acid as well as CNA, so they had a boiler outage there. And 2 of their dilute nitric acid plants in Taloja also have an outage. So basically, the -- out of the 5 plants in Dahej and Taloja 3 of dilute are not operating, so which has resulted in operation of only 1 line or 1.5 line now as on today. So there has been some issue there.

We were expecting there the Dahej plant would help us to resolve this issue.

So basically, the Dahej plant did start. And -- but the overall stabilization of Dahej plant is taking some longer period. They had a boiler outage basically, which was not anticipated earlier. So in between, their supplies were okay, but they had some boiler outage, which was extended almost 1 month, 15, 20 days more.

Okay. Last question, on the asset part of our chemical business. So if I subtract the total asset of our chemical business, consolidated number versus standalone number, so the difference number would be the capital, which is for subsidiaries, right, subsidiary companies?

Yes.

So if I do the math, I see there is around INR 70 crores to INR 80 crores of reduction in the total assets of subsidiaries, which used to be around INR 290 crores same quarter last year, which is now INR 210 crores.

So you will have to just look at it from a perspective that in last financial year one of the manufacturing division of our subsidiary called Alchemie Limited. So that would be there. Plus, when you look at reducing the asset, you will have to consider that between stand-alone and consolidated there will be elimination of transactions within the company. So even that gets eliminated, which should not be there as a part of stand-alone. So it will not be entirely right to just do the simple subtraction because the elimination adjustment within the group as a part of consolidation doesn't come at the time of stand-alone.

The next question is from the line of Kishan Gupta from CD Equisearch.

My first question is, how much is automotive and agrochemicals a percentage of your total volumes?

Agrochemical is around 25% to 30%; and automobile is an overall volume polymer and additive business. So automotive will be more towards 8% to 10%.

Okay. And sir, since we do not have the volume growth, then how would you assess your business growth?

It is more of as a value-added of the total percentage.

So ma'am, we've got products which are right from a few rupees a kilo to a few thousand rupees a kilo in chemical segments. So volume growth cannot be just a simple arithmetic calculation, we look at detailed for more than 200 odd products on a regular basis to drive the businesses.

The next question is from the line of Arun Prasath Spark Capital.

I have 2 questions, sir. First is, if I see the purchase of stock [indiscernible] in this quarter, it is substantially high. Is there any specific reason for this or is it normal fluctuations in some prices or something like that?

So there were certain transactions. So this is related to the segment got demerged, which is Home and Personal care. So the orders were placed earlier in the name of Aarti Industries, and which was sold to that entity. So roughly around INR 50 crores was only on account of that.

This will not get -- this will not get recurred in the next year?

No. No. Next year, we don't see it recurring in next year.

Okay. Sir, my second question is, can you throw some light on the ethylation project, how it stands versus what was our initial projection versus where it is right now?

So in ethylation project, we have been trying to ramp up the overall ethylation by offering this product to various customers. And we are also looking at changing the product mix there. So currently, we have added a new product in the last quarter and the current quarter also. So overall, we see ethylation getting improved for next year.

So currently, ethylation should be upwards of 60 percentage?

No, this quarter it was less because this is also an agro intermediate. So this quarter, the total ethylation was only about 300 tonnes per month. But going forward by adding other products, we expect in FY '21 the volumes to increase.

The next question is from the line of Rohan Gupta from Edelweiss.

Can you just provide the breakup of the money spent from that [Indiscernible] as of now?

So we've raised INR 750 crores. We have utilized close to INR 600 crores. We would have INR 100 crores with us -- INR 150 crores with us.

This INR 600 crores, if you can provide any money has gone deployed in working capital and Capex, if you can just give the breakup for that?

I won't have the breakup, but I believe it could be somewhere around 25%, 30% would have gone for -- close to 35% would have gone for working capital and balance would be for CapEx.

And this year we had a total of roughly INR 900 crores of CapEx planned for FY '20, right?

Sorry, the CapEx plan for this year was INR 1,200 crores.

Sorry. So as of now, how much total we have spent, sir?

We've spent -- we invested roughly INR 830 crores.

Okay. So another INR 400 crores is going to capitalize in -- I mean, is going to come in next quarter, Q4.

Yes, approximately around that.

The INR 1,200 crore numbers remain intact, right?

Broadly, yes.

The next question is from the line of Ankit Gor from Systematix.

Just want to understand this Chinese thing little clearly, due to ongoing situation in China do we really see any supply chain changes adopted by those innovators, global formulators. Apart from selecting the chain, which is independent of China, any stark differences in -- just on going on as of now, in your experience?

This is going to be now a long-term phenomenon. And as you know, in chemical business, the product will -- chemistry will have to be developed and the plant will have to be put. So -- but in general, basically evaluated intermediates and finished products will increase from India.

Right. So irrespective of what is happening in China, probably we would have seen the same trend? Is that the right to understand? Or this will aggravate the trend?

No. This is aggravated because last year's disruption has aggregated because what was happening a lot of time customers were thinking that they are buying from India, China and Europe, and they are well set but then they realize that the intermediate is coming from China. So now there's a new buzzword that they try to get supply chain, which is totally independent of China. Previously, they were just trying to source more and more from outside China. But now they are trying to ensure that the entire supply chain also. If it is better if it can be independent of China. Even Indian pharmaceutical players are also in the same soup right now because they also want more and more things coming from within India.

Also, pharma side also, there is -- customers are not wanting to import APIs from China, they want to divert because of this virus situation buying pharmaceutical from China, they want to avoid. So overall, I think API demand will switch to India temporarily.

Right. But in your view, is the world ready to adopt that China independency chain? Because are these enough capabilities with all countries including India to replace even part of it?

No. That is where the Indian companies, that's a challenge to them, but it's a good challenge to have, the demand. A lot of places in the Indian economy is issues of demand. In addition, chemical industry, sees or not demand. It is more of your own capability to put up the -- develop the product and put up the plant. So that way, chemical industry is in a big sweet spot. As far as the demand is concerned, now it is up to the industry players to take up the challenge.

Right, I agree. So this will probably propel the prices. But have you really seen the -- any price growth as we are moving to a month like January, February? Have you seen any spark of any particular price movements or probably because more or less price remained just in the range of 5% to 10% increase only, but has the situation really moved up the prices to a different level?

The prices change only if there are short-term disruption. So this coronavirus thing is happening now. So that might cause for some particular products, some price disruption. So those kind of thing, sometimes there's a spec. If you see some companies like Sadhana Nitro, you can see last few years profits. In one year, they might have made profit of 15 years. So those kind of spikes also happen, but they are more related to the sharp shortages, but in general, the margins are improved, stable margins.

Okay. But have you -- can you -- have you seen any -- this sharp increase in any product prices, which is -- which we manufacture? Or you expect that to happen?

Things will crystallize, as I mentioned earlier also by end of February. So for which product, what kind of prices impact, but we -- the current filler is that there will be price increases.

Okay. And just lastly, on the domestic business guidance, 60% is domestic business for us. What sort of guidance you would like to give us?

The price will increase in the domestic market also.

Okay. And what sort of growth we can assume for FY '21 on domestic side?

In general, export as a percentage will increase.

Okay. So domestic may remain muted or probably a Single-digit sort of stuff for us?

Yes, domestic growth will be relating to that next year.

Our next question is from the line of Raj Kumar from Green Portfolio.

Question is related to, when will we expect the listing of Aarti Surfactant.

So it will happen now end of this month or maybe in March, we should get that done.

Sir, could you explain the revenue and profit target for FY 20.

What?

Sir, can you explain the revenue and profit target for FY '20?

FY, in this current year?

Yes, sir.

Yes, that we have mentioned. We are maintaining the guidance of 10% to 15% increase in bottom line.

Just one question related to, as you know that this is the coronavirus. Sir, do we have proper vendor substitute or input substitute available? So that anything happens, we can have the opportunity?

Basically, for our chemical business, we have a plant, which is in -- in which certain type of products can be made. It is not kind of made-to-order kind of facility we don't have. Within our own product mix if the opportunity comes, we'll be able to get the benefit, not something which is new products because new product you have to develop the product and then get the environment permission and all.

Sir, so may I say that the coronavirus is an opportunity for the Aarti Industries?

Yes.

Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.

Yes. Overall, we remain confident that our diversified exposure to chemistry products, plants and geographies as well as low cost, sustainable and regulatory compliance operations provide the platform for long-term partner-of-choice relationships and market share gains in global supply chains and subsidiary import and domestic manufacturing ecosystem. It has been a pleasure interacting with you over the call. We thank you for taking time out and engaging with us today. We value your continued interest and support. And we value it. If you have any further question or would like to know more about the company, kindly reach our Investor Relations desk. Thank you.

Thank you very much, sir. Ladies and gentlemen, on behalf of Aarti Industries Limited that concludes this conference. Thank you for joining us, and you may now disconnect your lines.