Aarti Industries Limited (524208) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Aarti Industries Limited Business Update Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over, Mr. Shiv from CDR India. Thank you, and over to you, sir.

Thank you, Raymond. Good evening, everyone, and thank you for joining us on the Aarti Industries update 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 of the statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the communications sent to all of you earlier. I would now like to invite Mr. Rajendra Gogri to take you through the agenda for this call. He will then open the forum for an interactive Q&A session. Over to you, sir.

Good evening, and very warm welcome to all of you. Thank you for joining this call at a short notice. Today, we will discuss with you the implication of -- on Aarti Industries from the notice received by the company for early termination of the 10-year contract previously signed with a global agrochemical major to supply high-value intermediate. The press release for the same was submitted to stock exchange today morning. Let me state that this notice was something which was never envisaged by us to happen under this contract. As many of you would know, the contract was expected to generate revenue of about INR 4,000 crores over a 10-year period. And we have incurred capital expenditure of over 85% of the estimated project cost on the facility to manufacture the agrochemical intermediate, which is a herbicide-related application. We recently commissioned and commercialized the initial phase of the project at Dahej SEZ and had also started exporting initial shipment for the earlier-stage intermediate to other global customer. The end use of the intermediate contracted by us remains among the major growth initiatives of the customer. And in fact, the customer has invested a significant amount of capital for this purpose. We understand that the reason for the customer's decision to terminate the contract at present is based on change in strategy, as they are now focusing on the final formulation and would be sourcing the active ingredient rather than manufacturing it as per their original plan. The customer remains confident and committed to growth initiative as envisaged earlier, and this change in strategy would help them announce [ for solution ] per end users. Aarti Industries strategically placed in this value chain and our manufacturing assets that are completely backward integrated will enable us to continue to participate in these agrochemical markets. Upon the triggering of this termination event, the guiding provision for compensation under the contracts come into effect. As a result, the compensation to AIL is estimated to be in the range of USD 120 million to USD 130 million. Also the change in strategy of the customer doesn't significantly undermine the inherent opportunity in this business, which we shall continue to pursue. We shall be closely working with the customer and various other players to provide solution in this high-growth herbicide business. With that, I conclude my opening comments, and we can now start the Q&A session.

[Operator Instructions] The first question is from the line of Rahul Veera from Abakkus Asset Management Company.

Sir, I just want to understand in terms of the new client, I mean, the active ingredient will be sourced by some other third party or what are the possibilities? Do we know whom our current agrochemical company will be sourcing from? Are we in contact with the active ingredient manufacturer?

No, there are many manufacturers of active ingredient, both in India and China. And obviously, we'll be trying to contact them and try to sell this intermediary to them.

Okay. Okay. And sir, I just wanted to understand, is it a possibility in terms of technical capabilities that we can manufacture AI ourselves and we can propose this to the current client?

Yes, yes, it is not a very difficult molecule. So we should be able to make that product.

Okay. Okay. And sir, this $120 million to $130 million that we're expecting, how -- in what time frame can we expect to get this money from them?

Yes. Basically, it is -- normally long-term contract will have a notice period for this kind of a termination. So for the first 2 years, actually, it will be like a normal business. And the balance will come towards the end of FY '20, it will be for the 8 years upfront. So it will be like 2/3 will be part of that and 1/3 will come in the first 2 years.

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

So we understand there is one of these innovator molecules, which you're talking about is currently under ban in the U.S., and probably that could have triggered this. Two questions, is it that in initial phase they are wanting to terminate the contract and probably come back to you at a later stage once they get regulatory clearances in that country? Is that the broad thinking, as immediately, the innovator wants to take a step back, not really to produce. Any thoughts on this?

No, no, there is no connection with whatever has come in the newspaper regarding some EPA registration cancellation, and these decisions are not connected with each other as such. They are totally committed for this molecule. And we've also got some further registration pending because this -- present registration was valid only until 2020. Yes.

So that means this is not linked. But then from thinking from the standpoint you just mentioned, that making the end AI will not be -- is not a difficult complex process. So why not extend the contract into instead of you supplying intermediary, directly -- supply the end molecule directly and sell it to the customer? What was the thinking in terms of giving it to somebody else why not to us, because anyway, we've committed large capital to help the customer.

Yes. At that time, we are making this intermediary. So we -- up to that point, we were already making that. And then basically, they wanted somebody to invest in the active ingredient, based on substantially huge demand expected. Then they thought a certain quantity should be under their own control for manufacturing. So that's why they decided to -- initially that it may be a good idea to set up a plant themselves. But now they -- when they must have done revised calculation, they've done the overall scenario of the pricing, and determined it would not be required for to have their own plant and they can outsource active ingredient.

Would there be a separate tender from them on putting up active ingredient plant or would we be able to participate anything on that or that task is already completed?

No, no. This active ingredient is already made by so many companies in the world currently. So they would like to source from the current manufacturer or whoever wants to start again. It will be kind of an open market purchase from the manufacturer. It will not be any contractual buying.

On our own supply of the intermediate, really what percentage of, let's say, the global production, any rough number if you could give?

That is what was basically -- this was entirely in a growth phase, it's a very transition phase right now. So that percentage will be difficult to estimate in that sense.

Okay. Just 1 final question, sir. In terms of the current plant that we have, out of the investment that we've done, what element of production that we can do and we can sell in the open market? And how can we extract value of whatever we invested till now?

We'll be commissioning the plant and -- because there are some other end use also of this intermediary. So that, we will cover that market. And for this particular market also, we can tie up with the people who are already making this active ingredient or who might put up active ingredient to supply with intermediary. And we have also an option for us to also forward integrate to active ingredient. So there are different scenarios we are trying to map: either get tolling done and sell active ingredient or set up your own or sell the intermediate to the other manufacturers. We'll work out or try to look at all the 3 different scenarios.

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

A couple of questions. Sir, you just mentioned that these products would be -- there are some other end uses as well. Could you establish the quantum or the size of the other products that you just mentioned?

So that is relatively small. It's not significant. But still, it can occupy -- our 15%, 20% capacity can be utilized for this.

Okay, great, sir. Sir, then, if at all, we decide to go ahead with the forward integration of the AI, what kind of cost will we have to incur to reach that capability?

No, this is just -- the news has come to us only on the weekend. No cost estimate or anything has come. We will [ not scale these options. We can do them to evaluate buy I told ] from existing players, supply intermediate to them and also look at investments. All those things will take time. We'll evaluate the cost and overall demand-supply situation and then whether we should go for our own investments.

All right. Sir, about -- you had already mentioned about the payout, but I just didn't catch that properly. So that's 2/3 of it is coming in later, 1/3 is coming in the first 2 years. Did I hear that correctly?

Yes, 2/3 will be coming towards the end of the second year.

End of the second year. All right. And 1/3 will be coming in the first year itself?

Yes. 1/3 will be in the first 2 years, and that is a terminal compensation.

Okay. And this is not disputable under any tribunal or any arbitration. This is an absolute, this number?

Absolute, yes.

So any reason why you gave a range of $120 million to $130 million, and not an absolute number?

We had to give within 24 hours once we get the notice, one at that time and plans over the exact number might be trickier.

The next question is from the line of Abhijit Akella from IIFL.

Sir, this -- so buyer -- sorry, I mean, the customer has agreed to sort of make this payment in compensation for this thing? Is this already decided with them? Or is there some process of negotiation that needs to happen?

No, no, this is part of the contract itself. So there is no negotiation.

Okay. Got it, sir. And also, is this going to be adjusted against the advanced payments you have received for the plant?

Yes, part of that will get adjusted against the advance, yes.

Could you just quantify how much was received, sir, in advance?

That absolute number, I cannot disclose, but substantially is going to be further as a cash flow for us.

Okay. Understood. And last thing is, in the context of this development, is there any revision to our FY '21 guidance or the 3, 4-year road map you have talked about, of about, say, 15%, 20% CAGR over the next 3, 4 years. So is there any revision to that, that we should expect?

No as far as FY '21 and FY '22, virtually nothing changes. And FY '23 and '24, actually, we'll have 1 big lump sum compensation, which will be coming. And for FY '23 and '24, we'll have to now see how much this intermediary we are able to sell to other players and based on that, that last 2 years, there can be some impact. But the overall, still, this is not a very huge component of our overall business. It is not going to be a big difference, I think. More or less, we should be able to maintain, maybe a little bit down on post -- but there'll be in between a big lump sum payment.

The next question is from the line of Anandha Padmanabhan from PGIM.

Sir, with regard to the plant, you said that you will -- you have an option of either selling the intermediate to any of the existing manufacturers or giving that intermediate for some other alternate uses. Do you also have an option of repurposing the plant for manufacturing some other intermediate or doing some other chemistries that you might already be doing in some of your other plant? Is that an option? How difficult it would be for you to repurpose the plant?

We'll evaluate whether a part of this plant will be utilized, we'll be definitely making this intermediate for sure. But from -- in R&D and all, we'll check whether any other product also can be simultaneously manufactured in this. So that if there is any capacity, spare capacity is available, then we can utilize. So that we will evaluate whether it is possible. But this particular product will be definitely made.

Okay. And in the current scheme of things, by how many years do you expect that you'll be able to fully utilize this plant?

Overall, I see, basically, the demand of the product is not impacted, obviously. Instead of the customer who was going to make, somebody else will make either in India or China. And then how do we participate in that entire chain will depend. So it may happen that we may be at the full capacity in the third year itself. We don't know how the things will, but we are sure that we will be able to reach full capacity, but it will be which year we have to see.

Okay. And in the current scheme of things, by FY '23, you will be receiving the entire payment, by end of FY '23, you would have received all the entire $120 million to $130 million that you have spoken about in total?

FY '22, not '23.

FY '22 you would be receiving the entire pay. Great. And sir, 1 final question from my side. The exchange data, you said over the past couple of months, promoter book has been consistently selling some portion, some small portion of their stake in open market. If you could throw some light into what's the end use or what's the thought process of selling or any other [ related ] reason why the promoter is selling stake in the open market? That could be the final question from my side.

As you've maybe heard about 5 years back, we had announced that a certain part of our equity we are transferring for charity purpose and other words of our Chairman Emeritus, Chandrakant Gogri, and we will also like to use this money also for charity purpose. So that's a broad idea that we have.

The next question is from the line of Bharat Shah from ASK Investment Managers.

Just for the abundant clarity sake, while I understood in different parts when you explained, this entire $130 million or $120 million would be recovered by March '22. Am I right in understanding?

Yes. Yes.

And in the meanwhile, this particular plant you will be completing the balance portion. And if there is any opportunity to begin supply, that need not wait till March '22 for any new customer. It may -- you -- are you in a position to be able to supply to any new customer in this interim period itself?

Yes, yes, that restriction was never there actually, we could always supply. So we'll be supplying to the other customers.

That means some output will begin actually occurring in the current or next year itself?

Yes, yes, yes. If they're able to sell more, then overall FY '22 may be better for someone and -- chances of that are there, quite [ sorry for that ] confused.

And which includes some other work also you may do for the same customer from this plant?

This particular plant, we are doing only that -- this particular product with that customer. We have relation with them for many other products from our different plants.

And that continues. There is nothing change on that?

No, no, no, absolutely not.

So this entire thing is, some strategic changes the customer made for this particular product only. There is nothing in terms of the relationship with Aarti or some other matter, which has brought this situation?

No, no, absolutely not. We have a very good relation. And actually, we are expanding our relation in other products.

With the same customer?

Yes, yes, yes. We have just expanded for some other products for their growing demand. That is not at all the reason. It is when they realize there is some manufacturing there and focusing and doing manufacturing in Western country with a high OpEx and all. So that's the overall assessment when the active ingredient is available in the market. The capacities have already come up in India and China and may come up in the future. So they took an overall call.

But generally, multinationals of this kind plan their affairs, strategic affairs in a pretty mature way and sensible way. Usually, they take into account long-term picture, they would make their own assessment before committing to such a contract and all that. So it sounds very surprising that how they are willing to lose $120 million, $130 million kind of a sum, which is not a small sum. And that strategic kind of a flip-flop is very surprising for the large multinational.

Yes, no, original idea when it was put up, they were worried that whether that kind of active ingredient will be available in the market. And that is what forced them to go for putting up a manufacturing plant. It was more for availability point of view. Because this molecule was expected to grow substantially. That availability was a worry which they had. When they realized that, by the time their plant is getting ready, there is a lot of capacity already.

I see. So in some sense, some kind of -- they didn't read the strategic long-term picture fully correctly, that means.

Yes, yes, yes. They never wanted to put the plant. They were virtually forced to put the plant for -- they were worried that it may not be available when the agri market needs that.

And 1 final thing. If they've initiated the contract to be terminated, why not make the payment immediately? Why is credit over a 2-year period?

No, that is as per the terms itself, in the contract itself, because you cannot have a very fast termination. This idea was -- it's not like before starting itself we terminated. The contract may be on and in some time if they want to do termination by convenience, then certain notice period has to be given. So that period has to be given like that. This is something which is totally different when the contract is getting terminated before the start of the supply.

And this is watertight, I mean there is nothing they can change it or make a different [ mark ] or subject to some extra condition or anything of this kind?

No.

The next question is from Chirag Dagli from HDFC Mutual Fund.

Sir, how much of this capacity for this intermediate would Aarti have versus global? So let's say, if demand -- if earlier the capacity was 100 and if the demand was expected to go to, let's say, go to some number, you added some number, if you can give us some sense, without getting into specific, for just the magnitude of capacity that Aarti would have had for this intermediate?

This additional capacity will be adding to maybe around on an existing capacity about 30%, 40%.

Okay. And are there any other players in the global market who can -- who have added capacity over this period, sir?

No, the active ingredient capacities have been added.

No, sir, not for the active. For the intermediate that we have -- we were to supply.

Yes, I don't know. We don't know, but they might have a secondary contract also, which they have not told to us, which we are not privy to that information.

But outside of that, in the open market, you have not heard of many people putting up plants?

No, no.

Which means that if the demand does come through, then even the active ingredient manufacturer has to come to Aarti for the intermediate?

Yes. If you look at the macro sense, it is just the in-between manufacturing of active ingredient, which is going on. The finished molecule, nothing changes, whichever the trajectory, finished molecule gives us -- always in an agrochemical, they always have 3 scenario, which is middle scenario, optimistic, pessimistic and all. So ultimately, how the active ingredient in the market end use will turn out, that is totally different, not connected to this decision as such. So obviously, if that happens, then we may have to expand our plants after a few years.

Understood. Effectively, what this termination has done is that versus we depending on a contract earlier, now we are far more dependent on how the molecule -- the end molecule behaves in the market?

Yes. Yes. Then 1 point is that the entire manufacturing capacity of active ingredients, which would have come up has gone off. So if the market really grows, then there is an opportunity for somebody to participate in putting up that capacity for making the active ingredient.

Understood, sir. And sir, would you be aware of what has happened to the customers' formulation capacity? How has that behaved? Because for the -- we understand on active ingredients, we may supply or we may buy from outside. But what has happened to the formulation capacities at the customer end?

No, no. Formulation capacity was already expanded, the requirement was there. All the investment in formulation side has been done.

There is no change in that?

Yes, yes.

Right. And you said that there is no change in your early guided numbers, but you are including the compensation numbers in profits.

Yes, first 2 years, these are not actually a termination compensation. It is a normal business.

For FY '21 and '22, normal business?

Yes, the termination happens post notice period, so that is more for the subsequent 8 years.

Okay. Okay. Yes. And you said that you will get all $120 million before March '21?

March '22.

March '22, right, okay.

The next question is from the line of Vinay Jaising from ENAM Asset Management.

Sir, just dwelling a little bit more on the calculation. The cost of the plant which you would have put up for this project is about INR 400 crores, right? If I'm not mistaken, it's less than $80-odd million or $85 million. So what you're getting back in return is probably more than what you would have done had you given them the product? That's my first question. Is that fair to understand?

Basically, from an asset point of view, we've got more than what we have invested and we have kept the assets. That is as far as the assets are concerned. But if you take the earning, then over a period of future earning, then just some number credit was done, we might be getting 70% to 80% of the NAV...

That should be upfront, right? They give upfront, it will be more NPV accretive? Or would that be 70% to 80% NPV accretive, means there would be a loss of 20%, 30%?

Yes, there will be a loss of 20%, 30%, yes.

Okay. So this is obviously assuming that you do nothing else with the asset. So even in the first year, in FY '21, I mean, in the next couple of months and a year down and fully ready, if you get any contract, it's not that you're going to use the plant, you're getting a take-or-pay from them, and you can use the plant to get any additional money for any new customer on the same plant. It's not that you cannot utilize the plant since we're getting the money from your previous customer? Is that a fair assessment?

Yes, yes. We can make the product and sell [ those ].

Right. So 1 last question. That means in FY '21 and '22 in the immediate 24 months, how do you account for this? Would you be accounting for this amount, which you're getting as business as usual? Or would you be showing these as one-off payments below the line?

No, it will be business as usual, the contracts will be still in subsistence.

The next question is from the line of Jignesh Kamani from GMO.

With respect to the question on compensation, would you say USD 130 million, USD 120 million compensation from the client. Sir, is this something that at the time of termination, this client reiterated willingness to pay $120 million, $130 million or that we are referring to as part of the earlier agreement? And since you have already renewed with the client with other [ material ] product also, if you decided not to go for the legal route, is this cause for the client might pressurize and negotiate this price down or increase the payment time?

No, no, I don't think.

But client has communicated the willingness to pay at the time of termination the required amount?

Yes. And this threshold is approved by them.

The next question is from the line of Pratik Rangnekar from Crédit Suisse.

Just wanted to understand, since you are part of [ this usual ] supply chain even outside the contract as well, so are you noticing any change in the supply chain in terms of pricing or cost pressures, which could have forced the customer to change their make-or-buy decision? Maybe some capacity addition by a competitor or somewhere downstream for the AI manufacturer or anything of that sort?

Yes. Actually what happens, basically, everybody expects that this will grow. So on that basis, the capacity has come up. And the last 2, 3 years, if you see because of various problems, the ramp-up of the usage is not as per what we might have envisaged. So surely going to have surplus capacity in the market and which tends to, it was the -- it's like demand and supply, it will [ have then the ] capacity [ then cut ]. So I think [ who knows what is the ] figure.

Right. So then in that case, would it be right to assume that if we go outside the contract, I think which we would have to right now, when we sell outside the contract, the estimated margin or the profitability will not be as high as we were expecting during the contract?

Yes. Initially, it will have some -- that -- in future, we will see how it accounts.

Got it. Got it. And just lastly from my side. If I understand it correctly, for the next 2 years, it will be -- the contract will be in force and you will be supplying as normal. But because there is a termination notice, it will get terminated in the second year. So is that the right understanding, that there's like a 2-year termination of [ the force in this ]...

Yes.

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

Sir, first I'd like some clarification on the accounting part. So if I just break it like it's a $120 million compensation, roughly, so you said 1/3, $40 million will come in next 2 years, that is roughly $20 million every year. So I think that this project was supposed to give INR 160 crores EBITDA every year. The $20 million mean roughly INR 150 crores, INR 160 crores EBITDA that you are looking at $20 million, which is coming first year, you will book it as EBITDA without even supplying any product to the company? Or how will be the accounting treatment [ and so I'm ] not clear on that part, if you can just give clarification?

Yes, it is part of the contract itself. So it will come as a normal business because they can still have the product if they want. They can have the product and sell it for tolling also.

So we are under arrangement to supply them product, and then they will do whatever they want, right?

Yes. They can, because as long as the contract is in subsistence, they can take the product and give it to somebody for tolling. So that is also possible. So it's -- at the time it gets terminated, our obligation to supply is [ still remains indacs ].

Okay. So as far as the near 2 years are concerned, we will produce, we will give them, and then they can do whatever they want that. But our obligation is definitely to supply them, right?

Yes, yes, yes.

Okay. And it did -- I just also want to understand is what -- because they have also done that -- they have also invested on their own AI plant after buying this material from us. What has happened to their AI plant investment? I mean they are still going ahead with the -- I'm sure that they will now not go ahead with the AI plant, but they must have made investment already, like how we are already invested in that?

They altered that project. They are not going ahead with [ implementation ] on that front.

What kind of level of the investments have they already reached and then they stopped making that? Because if we were ready with the plant -- my whole question, sir, we were ready with the plant in just 1 quarter. So as they also must have been ready with the AI. Our investment was hardly INR 400 crores. In a complete AI, their investment would have been much larger. I just want to understand what has happened to their investment on the plant.

That I am not sure. I am not have any -- how much they invested now in that sense. But they can always buy intermediate and keep in stock or whatever way the initial quantity or they could have always asked us to delay. So absolutely no idea how much investment they have made in plant. But obviously, they must be making some savings there also and it will [ be base ].

Okay. And, sir, second question, the almost $80 million, which you will receive at the end of 2 years as the termination payment, that is roughly INR 500 crores plus some. I just want to understand that what are the plans ahead with this money to be utilized? Because I see that this contract termination has a windfall gain for the company rather than any other losses. So what your plans are to utilize that money for?

For more projects. To get more business. There is...

For CapEx or...

Yes, if you go for CapEx, there is lot of opportunities there. As I've been always saying, India is a sweet spot in chemical industry, this is now the company. So now we'll have to gear up our business development more and our R&D. Our R&D center also is, unfortunately, because of COVID right now is not running in Mumbai, but it will start running in a new R&D center. So we'll ramp up our all efforts to get more projects lined up to use that money.

Okay. And sir, as far as this current product is concerned, so after 2 years, so your [ headache ] starts to find the customers after 2 years to sell this product, right, if you still want to keep on running your plant at 100% utilization?

Yes, we'll start finding other customers from immediately, not wait for 2 years.

Yes, but I'm saying that till 2 years, we are covered that ultimately, the payment will come, and I think there we'll lift the produce, which we are going to produce, right? So after...

They may or may not, the customer may or may not lift and we are free to sell.

And if in the case, if they don't lift then definitely by producing that product, we will be getting some additional revenues and profitability, isn't it? So...

Yes.

Is there a possibility that in next 2 years, we can make extra money by selling the produce even the customer doesn't -- I mean, if they don't -- if they choose not to lift the product from us?

Yes, yes. It is possible.

Okay. And as far as, sir, their investment is concerned, so definitely they had given this plant after a lot of work on their own end. Probably, they may be expecting that there is a demand slowdown in this dicamba product. Do you see that globally there is still an opportunity in this product that after 2 years, you still see that there is enough demand so that your intermediate product will be sold? And if it's not will be able to use this intermediate only in this plant you may not be able to manufacture this intermediate only? What are the other probability of this plant getting converted into other product manufacturing and how we can utilize this plant as an asset turnover and all what kind of expectation we can have from this plant?

Yes. Basically, you see here, these are the teething problems. There's a totally new use for this molecule and once this teething problem goes off, then it will become a very big blockbuster in 2030. So it is a teething problem we now have to resolve. And overall, all the people who are there in this line that they are confident that they will be able to resolve, and the market will ultimately pick up for this product.

[Operator Instructions] The next question is from the line of Ritesh Gupta from AMBIT Capital.

So just on this contract itself. So I think in the last con call, you had said that the take-or-pays for the contract would be somewhere close to INR 80 crores a year. And actually now my understanding is that you're getting $20 million a year, which is almost close to INR 160-odd crores, which is what the EBITDA you would have made in this. So is it my understanding correct? Or there is some difference in that -- or that situation, I think...

This is -- this working is -- current working is basically because they are not working to make active ingredient and they might have [ by ] ...

Okay, okay. So then the way to look at, as I understood correctly from the previous ones, that $20 million this year, $20 million next year and then $100 million -- $80 million bullet towards the end of March '22. That's correct, right? I'm just...

Yes.

And sir, in the past, what we have seen is that, let's say, some other contract manufacturers. Typically, these MNC guys ultimately while take-or-pays are there, but given that the kind of growth opportunities that different suppliers are looking at to sign a parallel contract, which, in a way, compensates -- which in a way takes away the cash liabilities from the buyers and the contract -- I mean the supplier also benefits in terms of the long term arrangement. So do you think that this -- I mean, how clear you are or how confident you are to get that cash bullet right away or that $80 million payout to come in versus, let's say, are you being compensated through other long-term projects from the same customer?

I don't know, of large commitments that are bigger than this, any other offer which will be giving bigger than this. This is a very, very sizable project. So I don't see any of those trend happening.

Okay. Got it. I just, I know this is not part of this call, but could you just give us a sense in terms of the other growth projects that the company is pursuing? I mean you have toluene expansion as well and some other projects in benzene, plus there is a Middle East contract that you have. So if you could just highlight on the -- for the benefit of all, I think if you could highlight the other growth levers that the company has from a next 2 year point of view, apart from this particular contract?

So basically we are adding -- planning to add new line of entire chlorotoluene lines, which is in design phase and some other further molecule for -- it helps that we have this contract going on and also a lot of discussion going on for future possibilities and all. Because we are -- the advantage with us is that we have got a very wide customer base across the end-use industry, and we are kind of a B2B, and we can partner with an entire spectrum of customers, that's an advantage that we have. And looking at overall, each and every macro disruption is making things more towards India plus the environmental, then U.S., China and now COVID. Everybody wants a supply chain independent of China. So now we are going to make products under development, maybe $50, $60, $100 product, starting with benzene which is less than $1. So opportunities for Indian chemical industry are [ just too nice ].

And these will not be just contract manufacturing or exclusive contract manufacturing opportunities, but these could be your existing benzene and toluene, or maybe downstream of that benzene and toluene and you probably kind of supplying it then as catalog products. Is that a correct understanding?

Yes, there'll be all kinds. There'll be totally in our own line further extension, which can be as a contract manufacturing or it will be -- can be totally -- need not be in our own line with our expansion of R&D unrelated line, and we can have multistep synthesis with customer collaboration, using their technology or jointly developing the technology. All those possibilities are there. And so we see in our company now as a multiple factor as a growth driver. Our existing business chain, which is continuing and depending on the overall global growth, we'll go on adding that also more and more on a downstream of that and some individual one-to-one product developing with the customer for that. And also, like another contract, which we have a 20-year contract, which is kind of a manufacturing outsourcing partnerships. There also, we will be pursuing. So now we have a multiple growth drivers.

The next question is from the line of Dipesh Mehta from SBICAP securities.

I just want to get a clarification on the first 2 years. Now I'm not very clear whether we have to supply that product or not. If we supply, obviously, we have to incur production cost. When you suggest about $20-odd million, it is revenue or it is after production cost, so that is what money we will make? So if you can provide some clarity, whether it is revenue and supply for 2 years or it is hard cash which we will get without any production kind of thing. That is question one.

It will be -- it is after production cost.

So this $20 million is what EBITDA or EBIT we will make from the...

Yes.

Okay. So revenue might be higher than $20 million?

Yes, yes, yes.

Okay. So for next 2 year, our revenue will be higher than this $20 million, and this is what we will make from operational profit perspective for next 2 years?

Yes.

In case they are not opting for the products and then this $20 million will be directly cash flow, which will happen for us without any risk of corresponding revenue, right?

Yes, yes. You are absolutely right.

Understand. Clear. And the second question is about this active ingredient forward integration side. What would be, let's say, if we decide to go for it, considering that we are already getting around 30% to 40% capacity of global capacity through this project and we plan to do it. Whether we have any cost advantage considering our backward integration and overall, if you take all of the factors put together. So what kind of advantage we have and whether that forward integration we have fit into overall scheme of things for Aarti?

Yes. Obviously, we'll have a cost advantage and also supply chain advantage when we are totally backward integrated, the customer also -- they don't have to worry. Because if you're totally backward integrated, the customer also gives you a preference in that sense, that advantage you get on that. So -- but now we'll have to see. Suddenly it has happened. So now we'll have to see when to go further downstream, at what time and all that. But that possibility definitely remains and we will definitely have advantage if we go in that line.

And sir, overall, now how you look overall in whether the management then was occupied through this contract and now because of it is likely to get terminated, you can start something new. So overall, you think it is likely to be a positive indication for the company considering some termination amount also we are receiving? Or are you seeing some short-term setback? And maybe we can recover over next 2 years?

So, basically, if you see the financial years of our next 2 years are not getting impacted, then we are getting a lump sum thing. And over the next 2 years, we will make a lot of effort that we are able to utilize this plant more and more down the line, and we'll have that extra cash for expansion. So I think overall, I see this should be in a positive situation. And if we said overall assessment. We never -- still we don't like termination of contracts in the sense because this is a very steady state income for the 10 years. But the way -- yes, which will be still quite okay.

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

Can you hear me?

Yes.

I have a couple of questions. One is when you think about -- you've talked about that there are a lot -- there is a lot of active ingredient capacity, which has come up, and that's probably 1 of the reasons why the customer has decided not to pursue with their own plant and source the active ingredient in some other player. And you mentioned there is a lot of them are in India and China. So when you look at those players, I mean, are they backward integrated? Where are they sourcing this intermediate from? So that's the first one. I mean, would there be a first easy opportunity for us to supply this active -- to supply this intermediary and -- intermediate and get going? That's one. And the second is, I mean if you think about going into forward integration, I mean, I just want to get a sense of like how we should think about the cost implication or CapEx implication if you can provide any color? And third is, as and when you supply to the -- this intermediate to the current active ingredient players, should we expect the margins to be significantly lower than what we were supposed to earn as part of the long term contract? That's it.

Yes. Some of the players, nobody in India is backward integrated. One Chinese player is backward integrated. Others are not, as far as the backward integration is concerned. And obviously, the margins will be lower when we give to somebody who maybe already has got some capacity to make this product in the sense. And as far as putting up an active ingredient plant we will have to evaluate it what is the cost and all that or whether to align with active ingredient players and do that. Something like that and you also -- and all those possibilities are there.

Just a follow-up, a quick follow-up. So when you said that most of the Indian players are -- almost all of Indian players are not backward integrated and one -- very few in China. So where were they sourcing the intermediate from? I mean, I'm sure that they might have -- are there lot of other intermediate players out there or should we...

No, they're not making this one, they're making only a precursor to this product what we were going to supply. This is a long-chain of chemistry. So generally, they were buying -- precursor to this product.

The next question is from the line of Pavas Pethia from Enam Asset Management.

Just want to understand, sir, this is a currently existing product for us. So what is the margin currently on this intermediate for us? Secondly, if somehow you are able to supply the entire quantity to some other player in 2, 3 years down the line, does that mean also of INR 400 crores sales, $150 crores, $160 odd crores of EBITDA? This is not a sacrosanct number, it changes considerably?

Yes, it will change basically depending on whom we are supplying and how it happens. So generally, it will be still a lower number in general than what we [ are doing ].

And what are the overall margins currently because this is a existing product?

So that was -- currently, it was -- we were looking at about 40% margin. So margin of this...

Particular contract and you will also supply to some other players? Is it also possible...

So that is there. Yes, yes. That also is same kind of margins, but now we don't want to push lot of material where some people might have some capacity and some additional capacity who want to add. That's where the margin might come under pressure. For any other use to whom we supply for other market and all the same kind of margin will continue.

Secondly, it's [ considerably concerning ] that 70% to 80% of [ one of these ] you're already getting back. So what -- I am trying to understand what's your [ hesitancy ] to not go further with this contract. And in fact, they really paid all the costs.

It is mainly in that overall assessment of what they are going to invest in their own country for manufacturing, I think that may be more bigger figure.

The next question is from the line of Roshan Nair from Equentis Portfolio Management.

So I have just 1 question. So if you calculate $120 million by the current dollar so it comes to INR 900 crores of payment, which implies 20% net profit margin on INR 4,000 crores. So is this 20% margin what was company expecting over a 10 year period?

Yes, with high value-added now 40% EBITDA value.

Yes, okay. And so the similar other 2 contracts are all covered by this kind of clause? And what are the chances like that getting canceled, are there any chances like how do you see it right now?

No, basically, each contract will have its own set of circumstances and their own set of [ terms ]. But in general when you put a lot of efforts, certain protection has to be in place for termination for convenience. Otherwise, putting lot of efforts on assets -- certain safeguarding has to be there in any multiyear long-term contracts where there are [ solely ] dedicated assets.

Okay. So if my understanding is right, the other 2 contracts are protected by similar clause.

Yes, it will have its own clause. I won't say it is a similar clause, but it will have its -- that is very important that certain kind of protections are kept in all.

Next question is from the line of Vihang Subramanian from Samsung Asset Management.

Sir, just 1 thing I wanted to ask was, given the fact that you mentioned that the intermediate capacity of set up, I think you mentioned that it's almost 30%, 40% of the total global capacity. So and given the fact that your customer is giving you a $120 million payout, did we have an option where he could just probably -- so now he would be taking the AI. And you know that AI, whoever is giving it to them would be also like requiring the intermediate, right? So couldn't the customer just probably like put you in touch with that AI manufacturer and tell you to like supply the intermediate there and then kind of give you a reduced payment, right? So how did that work? Did the economics not work? Or did the customer not think of this? Like what do you think, sir, on this aspect?

Yes. Basically, they can still do as per the contract in [ where they in ] substance, can buy and give it tolling -- to some other active manufacturer. That option is open to them. But long run when they decided not to invest in their own -- of their own assets, then whether it is worth doing this exercise for long and get some toller and supply and negotiate with them and all that exercise. Whether it will have any -- add value or not, I think that call they have to take.

No, but basically, they could have reduced the payment that they have to give to you by just putting you in touch, for instance, with the person whom they are going to take the AI from now, right? And that would have been like one of the most easiest things for them. So basically, the very fact that they're giving you a $120 million payment essentially means that they are going to take basically the intermediate that you're making will not probably go in the molecule. That's what I was thinking there. Because giving them the molecule...

Molecules are all the same. Only that intermediate only goes into that. That they don't have -- there are no other intermediate as such. That option, basically, but this idea was that they themselves they can manufacture that. So otherwise there are 2 options. They buy within our contractual term pricing, and then they do the tolling [ its own ] manufacturers. So then they have to enter into another manufacturer for tolling contracts. So whether to do those kind of a double contract or not, or do a onetime compensation and be totally open in the market when they have an option from where to buy, where not to buy, that option as I mentioned come for them. So that they have to take -- call they have taken.

The AI manufacturer, basically, do you think that they would be having very like multiple options to source this intermediate from? Hello?

[Technical Difficulty] [ Mr. Subramanian, we cannot -- can you still unmute. Mr. Subramanian, we are reconnecting. Yes, you can repeat the question, please. ]

Yes, I was just asking, does the AI manufacturer have many other options to like source this intermediate from?

We have Subramanian.

Yes, yes. No, they are not going to make the AI themselves. So they don't need now any intermediate options.

No, no. I mean, the person -- the customer is taking the AI from someone, right? Someone, do they have like options, many options to source their intermediate from? Or there are limited options? Is it like a fragmented market? Or what is the market like for the intermediate?

No intermediate, generally, everybody -- that will be integrated. Nobody will have surplus intermediate. So that's why the entire contract had to be done. So...

But there is a high chance that basically the AI supplier to your customer would also be integrated, right?

Yes, yes.

The next question is from the line of Ranjit Cirumalla from B&K Securities.

Again, coming back to the compensation. You said you had a very limited time and you had to respond within 24 hours and that's in kind of principal $120 million to $130 million. So if you say that this is a part of the agreement, then the payer should also have this particular figure handy? Or it was only left to us to come back to them for this particular figure?

No, that actual figure will -- this is just a notice and the actual figure we'll calculate with them on that. But this is the range it was coming. So that's how we have to...

But, sir, you said this limit has been vetted by them. So they are not going to do any dispute on this range.

Yes. The customer has vetted.

Okay, sir. Second question, you also indicated that we would have received some advance for this particular facility. So would it be fair to assume that we would have already got 50%, 60% of this [ opportunity ] of investment as advance or it will be less.

We have got some, but it will not be [Technical Difficulty]

Sir, I was not able to hear you.

Yes, we have received some advance, but it will not have those high percentage numbers what you have mentioned.

Okay. And sir, finally, the way I understand that this was also an NCB facility. So we are also expanding capacities in the NCB value chain. So at least till that time we don't get the visibility on this particular product, is there a way or possibility that we can use the NCB value chain on this facility?

No, it's not an NCB value chain product.

So it was a benzene derivative.

Yes, yes.

The next question is from Surya Patra from PhillipCapital.

Just 1 clarification. Since we are in the -- we have just commissioned or capitalized, this initial portion of this project. As we discussed in the previous call, I think somewhere around INR 300-odd crores is there in the capital working progress. So that means whether there is a need to capitalize the entire of the project that is 1 because anyway we are now saying that in the first 2 years, the revenue supply -- revenue from the supplier, the material would be to the tune of around $20 million. And we are anyway targeting 1x kind of a CapEx requirement for the project. So then in that case, we may not be requiring to capitalize the entire project cost in the first year also.

No, once you commission the project, you will capitalize that.

So whether there is a need to capitalize the entire project or, since it is in the between, or we are in the process of capitalizing or completing the project. So based on the need, we can do whatever that is required and balance can be tweaked to accommodate some other product or project or something like that. Is there scope to do that, that is there, sir?

No, no. We'll be completing the project and starting the production of the intermediate. As I mentioned, there are other markets also for these products. So that we'll capture. And for this particular chain, we can have options with a variety of options. We can do the tooling or delay the existing customer, AI manufacturer or we can go for our own AI manufacturing. So all those options are open. So we are going ahead with the completion of the project and starting the production.

Okay. So this entire capitalization would happen this year sir?

Yes.

Okay. And whether any -- I mean, is there any risk to any other kind of [ totally ] long-term supply project, given this situation that we are replacing for the first supply program? And when we are thinking about a multiyear kind of many more kind of supply opportunities for being a kind of a leading player out of India. So given that outlook or background, [ do ] these developments, whether it is generating any kind of a risk for future such programs or projects or alliances?

This is a very one-off event. They are very, very rare, which has occurred in that sense. So I don't see this kind of a thing happening, fortunately.

Okay. Just 1 more thing, sir. Since the capacity, what we are building, it will be free from any obligation from the partner side, starting third year. How efficient we could be for whatever that we would be doing subsequently? Why because, we are at this juncture may not be clear about what project, which product and what could be done post [ the ] 2 years. So whether that could be a kind of a situation where the return ratios of these assets would be relatively compromised since it is not preplanned then?

Yes. Basically, some compromise may happen. But we'll definitely like to utilize this plant. If we are not able to sell the intermediate, we'll do forward integration and make active ingredients. Active ingredient definitely we can market because all the big agrochemical players who are buying this active ingredient that they are already our customers. We can definitely sell this active ingredient. So our idea will be we'll definitely utilizing this plant for sure in 3, 4 years. And that actually gives an additional opportunity of some profit in active ingredient also in a way. So one thing is for sure that we will be running this plant only after 4, 5 years, for sure.

Okay. So in that case, whether this will lead to our entry into a kind of active agrochemical intermediate manufacture in place. See, we have a vertical already in the pharma side, which is a dedicated pharma vertical, which is contributing, let's say, 25% of the -- or 15% of the total revenue. So whether because of this development, we will be entering into such dedicated agro vertical, which is contributing something kind of decent chunk.

This might become a trigger. What you are saying is correct, this can become a trigger that we'll enter, end up into -- entering into making technical products.

The next question is from the line of Nitin Agarwal from IDFC Securities.

Just 1 thing on this intermediate, how relevant -- how -- what proportion of the value of this intermediate is the final API of this product, sir?

It is almost 50%.

50%?

Yes.

Okay. And sir, did we make any process changes or something in our R&D program when you're developing this product, which probably makes us more competitive than other players who are making this product within a period, any sense on that?

No, we have mentioned improvements in this and that will give some advantage, yes.

So is it fair -- would it be fair to say that we probably would be probably more comparative producer of this intermediate in the industry?

Yes.

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

Two clarifications, sir. In the mid of the call, you said you're facing some teething issue in the existing product line. If you can elaborate more, sir, what exactly are we facing? And what is the cost you might incur because of this issue?

No, I never mentioned there is any teething problems. It is teething problem of the finished molecule, what is the [ media ] that is used, there are teething problems there.

Okay. And second thing, in terms of the breakeven of this plant, at what level of utilization we may see EBITDA level of this plant?

That we'll have to work out the number. If you take out the compensation, and then when you take on a stand-alone basis, it will also depend on the margins now, how much margins we are able to get. So the breakeven volumes will vary depending on the pricing.

Right. So earlier, you have talked about the margins as well. So if you can highlight more on this, earlier the plant was expected to be at around 40% of margin with 1x sort of asset turnover. What could be the economics now considering we will be serving some other end user industry? What you can...

For other end users, it remains similar, but the size of the other end use is limited. So for when we go into the same end-use sector, we don't expect the similar pricing what we had in this contract. So there will be definitely a margin contraction in that sense.

Any number you would like to say sir?

No, that we cannot get right now what will happen in that.

The next question is from the line of Keshav Lahoti from Angel Broking.

As when you signed the contract, you thought you will be making 40% margin, but as now the scenario has changed, now in the changed scenario, if you sell the product to other players, what would be the normalized margin in this scenario?

Basically, for any other end use, it will be similar. But for this particular end use, depending on whom we are selling or whether we do forward integration and all, because everything is opened up now, so that becomes a plus.

Okay. Okay. Okay. Understood. And last question from my side. As the dicamba a banned herbicide few weeks ago in U.S., so what would be the impact on your bottom line because of this?

The dicamba banning was only for specific formulation what was announced by EPA. It is not the chemical itself, it was that particular registration, and that also ultimately EPA has allowed that to be sprayed for the farmers, who [ have then stopped ] for this summer. And there are a lot of other registrations which are there for dicamba, which are valid basically, even the registration which was issued in 2019 also is valid. So the active ingredient is not banned, some specific registration for some specific formulation -- in which the state registration was canceled.

So no impact on us because of that order, right?

No.

The next question is from the line of [ Mulan Mushara from Venustere ].

I just had 2 questions. Sir, one is that you mentioned that we could also look at getting into API manufacturing. So we have the capabilities, but where would our preference lie? So do we want to be more of the intermediate supplier, that is our preference or if intermediate does not work, then we don't mind getting into APIs?

No, if we are not able to sell the intermediate, we'll not have a choice. When we are putting up such a large plant, then we'll have to go for active. So that's how we'll have to see how the entire industry players function currently. So if you have a tie up, which is an active ingredient, we can supply the intermediate and they may get the ingredient, that is one way of doing it. Second thing otherwise we forward integrates. So we will have to -- this is a very sudden development. But one thing is for sure that our plant we'll see that it is fully utilized, either by supplying intermediate to other manufacturers or go forward.

Sure. So this call on API could be taken maybe some period down the line, at least a couple of years down the line once we get more clarity?

Yes, a couple of years, maybe. We will continuously evaluate on a quarterly basis the situation how the things are panning out. We can standardize the environmental clearance and everything on one hand [ because ] that time doesn't get wasted. As soon as we decide, we can have a plan, design and everything ready and then advance whenever we decide. So those kind of things can happen.

Sure. Great. And just 1 more thing. So considering the relationship that we have with the customer, which has been a pretty ongoing relationship. So do you think there could be any sort of preference that we might get, in the sense they would be looking at sourcing from some other API player and they could kind of push for you as a preferred intermediate supplier to that API player. Is that -- is there any sort of possibility over there?

All those possibilities are there. Definitely, we'll try for that actually.

We'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.

Yes. 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. If you have any further questions and would like to know more about the company, kindly reach our investor relations desk. Thank you.

With that we conclude today's conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.