Aarti Industries Limited (524208) Earnings Call Transcript & Summary

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

Thanks. Good evening, everyone. Thank you for joining us Aarti Industries Q1 FY '21 Earnings Conference Call. We have with us today on this call are Mr. Rajendra Gogri, Chairman and Managing Director of the Company; 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 you. 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 Q&A. Over to you, sir.

Thank you. Good evening, and very warm welcome to all of you. Firstly, I would like to wish you all to be in good health and to stay safe in the current very difficult situation created by the COVID-19 pandemic. I trust that all of you would have received Q1 FY '21 financial results presentation that has been uploaded in the stock exchange website earlier today. Q1 performance was largely in line with our expectations and the outlook shared with all of you during our previous interaction. As shared last time during the quarter on account of the lockdown-linked restriction, our units for the Specialty Chemicals segment were operating at about 50% capacity in the month of April. The same was subsequently ramped up progressively and thereby helping us to operate our units at about 80% in the months of May and June '20. We also face challenges for the sale of our products with the customers in domestic market as some of our customers' units were also under lockdown during April and May. We started resuming activity on June '20, and hence this had impacted our sales in the domestic markets. Thus, the quarter has the maximum impact of the COVID-19 pandemic and the gross income from operations for the company was lower by 9% at INR 1,035 crore. Our exports remain almost stable at INR 487 crore. Within our business segment, revenue in Specialty Chemicals declined by 11%, while Pharma revenue moved up marginally. Even EBITDA saw a decline of 27% due to higher operating expense in the respect of new facility operationalized in Q4 including our fourth R&D center at New Bombay. The same also resulted in the increase in depreciation cost for the company. On account of lower demand and logistics-related challenges during the quarter resulted into higher inventory at the end of Q1 FY '21. Considering the value of care, we have extended our support to fight against COVID. In this regard, various measures were taken up to support contract workers impacted due to the lockdown restriction and COVID. Additional measures were done to support the NGOs joining to the fight by providing necessary PPE medical equipment as per the need of the hour. We are also supported by making CSR contribution to PM CARES and state relief funds. The company had contributed over INR 10 crores for this cause. During the quarter, the Specialty Chemical business was impacted by weakness in some key end user applications, such as automotive, aerospace, dye intermediates, pigments, et cetera, that are dependent on discretionary spending. Demand from other segments such as pharma, Agro and FMCG, which contribute about 60% of our revenues, has remained firm. I also want to highlight for the quarter, we have recognized revenue of INR 38 crores being the shortfall, be eligible as per the terms of the long-term contract. Now for the Q1 production update. Given the restructuring due to lockdown, the production quantities in Q1 were lower as compared to last year. The production for Nitro Chloro Benzene was about 13,000 metric ton for Q1 as compared 16,100 metric ton a year back. Similarly for the hydrogenated product, we have achieved production of about 2,050 metric ton, it was about 1,880 metric last year. On the nitrotoluene front, the production for Q1 was about 2,140 metric ton, which was about 2,750 metric ton last year. At present, we are operating at around 90% of the capacity across locations and expect a steady improvement in operating and financial performance through the next 3 quarters for the Chemicals segment. During the quarter, our Pharma facility continued to function efficiently. After some initial disruption, they have been able to deliver Y-on-Y growth and substantial expansion in margins, driven by growing supplies of off-patent generics and other value-added products. EBIT by higher operating leverage and product mix segment profit expanded significantly from INR 32 crores to INR 45 crores, which is a new high for the segment, while maintaining flattish top line. Going forward, capacity expansion will drive deeper penetration in therapies, such as NT, hypertensive, cardiovascular, oncology, corticosteroid, et cetera. We also have a strong pipeline of approvals and visibility to maintain growth momentum. The Pharma business continues to see profitable traction and growth will be accompanied by margin sustaining above 20% levels. After the delays as updated by us last time in respect to various projects due to COVID-19 related challenges of lockdown logistic issues and labor migration, the project work has gathered momentum, and the major works are now on track to completion as per the timeline largely stood by us . We'd like to share that chlorination project is in its final stages and is expected to be commissioned in the current quarter. While the other projects such as NCB expansion and expansion of Pharma USFDA unit specialty for the long-term contract are scheduled to be coming onstream at FY '21 and FY '22 in accordance with the plans given earlier. In line with our previously stated guidance, and as I explained above here, we have had the maximum impact of COVID-19 on our Q1 performance. This has resulted in our consolidated EBITDA to be lower at INR 182 crore for Q1 FY '21 as compared to INR 219 crore for Q4 FY '20 and INR 250 crore for Q1 FY '20. And the consolidated PAT for Q1 FY '21 was INR 82 crores as compared to INR 110 crores for Q4 FY '20 and INR 138 crores for Q1 FY '20. As communicated earlier, we see the business delivering EBITDA growth in FY '21, whereas profits are expected to be flat based on the higher cost of the expanded base of operations. We invested INR 222 crore in capital expenditure programs during the first quarter and are on track for our planned CapEx of about INR 1,000 crore to INR 1,200 crore for FY '21. Going forward, our pipeline of new chemistry processes and products remain robust backed by deep customer engagement and substantial investment in world-class manufacturing facility. We remain strongly positioned to benefit as India gains traction as a preferably -- preferred supply location for global corporations that look to establish stable and de-risked long-term strategic supply arrangements. Overall, we see the business bouncing back from this near-term disruption faced due to COVID-19, and we'll be able to maintain long-term profit growth guidance of 15%, 20% over the next 3, 4 years. With that, I conclude my opening comments, and we'll open the floor for the Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Kishan Gupta from CD Research.

[ Bhagat Shah ], this side. Sir, I wanted to ask what sort of integration do you have between the Specialty Chemicals and the pharmaceutical segments?

I don't understand the question.

Sir, I'm asking what sort of integration is there between the pharmaceutical and the Specialty Chemical segments?

No, no. There is no integration. Virtually, we don't supply into Pharma, except maybe limited basic raw materials like sulfuric acid or DMS.

Okay. So virtually no integration as such?

No, no, no.

Okay. And sir, on the administrative side as well, nothing?

Their manufacturing sites are totally differently. There are no overlapping manufacturing in the same site. Pharma sites are totally different. So that administration is separate.

Okay. Okay. And sir, how much revenue can come from new products over the next few years?

In Pharma, we expect 20% top line growth for next few years.

Okay. And Specialty Chemicals, sir?

Yes, that should be an upward of INR 1,000 crores [indiscernible]

Sorry, INR 1,000 crores, you said, sir?

Yes, yes.

So this is over next 3 to 5 years?

Over the next 2 to 3 years?

Okay, INR 1,000 crores next 2 to 3 years in Specialty. And Pharma, you said, sir, 20%, how much of that would be from new products?

So we are combining both. So basically, it will be the expansion of current portfolio as well as the new products. So it will be mix of both. We can say 50%, 50% would be new product and expansion of current range of products. Because in Pharma, normally, the gestation period of any product to go commercial is almost 3 to 5 years. So though we produce this product in smaller quantities, sir, becomes an existing product and that grows also.

Okay. Yes. So the -- all right. And sir, what is the -- what would be the -- you said, planned CapEx of INR 1,000 crores to INR 1,200 crores. Can you give us a bifurcation if that's possible?

Yes, we announced various numbers earlier. Our Nitro Chloro Benzenes expansion is going on, which is about INR 150 crores. And Pharma expansion currently on, which is also about INR 150 crores. And this really is long term, the third long contract is about INR 135 crore. So these are the major expansions which are going on right now.

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

Sir, if you can just give me some clarity, what is the provision of INR 38 crore, which has been created relating to the Specialty Chemicals business in doing which line item that is factored in?

Yes, Chetan.

Yes. So basically, we have long-term contracts, whether a specific provisions of [indiscernible] and other things. This is in relation to the contract for the quarter, they have to buy certain quantity. And if not, the differential is being eligible as the shortfall fee, which has been added to the revenue from operations.

Sir, this is a charge or this is a revenue that is impacted, sir. Understood. See, if this is a shortfall fee, I mean, this is a charge or this is income that we have booked.

So it will be an income. It will be attributable to an income.

Okay. And so that means this is nothing to do with a kind of a deal cancellation or the compensation from the deal cancellation, right?

Yes, that will be coming in the next year. So this year it will be still on a shortfall fee.

Sir, this is -- whether this is relating to the first contract, which has been canceled?

Yes.

Okay. So sir, see, we had guided about something like this around the $120-odd billion kind of total miles meaning compensation that we'll be getting. Out of that $20 million possibly this year and $20 million next year. But this $20 million implication at the EBITDA level that we would be seeing. So whether this INR 38 crores is just a kind of a compensation that we have received and factored in the top line, which should be flowing directly to the EBITDA. Is that correct?

Yes. Yes, that's what I believe it. Out of $20 million expected in this financial year, the first quarter, we have provided $5 million.

Okay. Okay. Understood, sir. So now second question, sir, on the Specialty Chemicals business again. This margin correction, what we are seeing Y-o-Y or even the overall gross margin, that correction that we are seeing or flattish gross margin scenario that we have seen. So not able to really understand. Sure, we are seeing a kind of improved product mix for the Specialty Chemicals and all. And the prices of the products has not corrected as much as that of the correction levels in the input prices. So why is the gross margin is [indiscernible] is low or the Specialty Chemical effective volumes is down?

Yes. That is because the overall the effective volumes are down. And you see the overall inventory also is higher. The gain in inventory also because of the as was the initial production disruption and then because of the demand slowdown, the sales have been down, corresponding, and it depends on what kind of sales which is down, that has impacted operating profit. That operating profit impact on the EBIT level, it impacts more than at a [ cost of goods ] level.

Yes, yes. But on the gross margin level, whether that justifies, sir?

Yes, at EBIT margin, that's what I'm saying. This will impact more you on this EBIT margin reduction.

Okay. Sir, whether for this R&D center that we commissioned or all that. So whether that is also kind of creating a kind of a dent to the overall margin scenario?

That will not be much. That's not as significant.

Okay. And just last question from my side. In the API side, are you really seeing any kind of advantage in terms of supply opportunity because of China may not be catering all people might be thinking of replacing from China, practically? What is the case that is not there with the many other API players? So whether do you see similar kind of trend for in the export market or anything on that front?

Yes. In the API intermediate market, that is what is the trend that you rightly said that generic players don't want to buy intermediates from China, if they are able to get the same intermediate from India. And in API space, we cater to more regulated markets. And these projects, customers can't switch overnight. So these are long-term projects. And had there been COVID or no COVID they would have dropped here, basically, in terms of the numbers and operating efficiency. Of course, our local sales relatively is less in the API category in our Pharma. But local sales has seen some improvement of late, but the base is lower.

The next question is from the line of Chetan Thacker from ASK Investment Financials.

Sir, what will be the number on NCB and PDA? And second question was, is there any currency benefit that you would like to separately call out?

So we -- I'll just give you the numbers for NCB and PDA. For NCB, we had a production of almost 13,000 tonnes in this quarter.

13,000, Yes, 1-3. Okay.

And the PDA number was around 360 tonnes per month for the quarter And on the ForEx, it would not be any significant number. Anyway, that's given as a part of the note in the financials, which have been there, but it's not significant.

Okay. And the way to sort of look at the Specialty Chemical EBIT number would be, we'll be booking this $5 million for 4 quarters now this year and a similar number for 4 quarters in the next year as well and then the final compensation that comes in will come in? That would be the right way to see it?

Yes, yes. Yes, broadly.

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

My question would be, you gave a revenue guidance of around INR 1,000 crores in Specialty Chemical top line. This is equal to around 8% percentage growth. Am I right in the understanding, sir? 8% per annum on the current base?

Yes. That will have to be checked the number wise.

Rather, what I'm getting at is that the INR 1,000 crores that you told is for the next 2, 3 years combined, right? Not...

Yes, yes, yes.

So on the current base of around...

Yes, INR 1,000 crores -- INR 1,000 crores plus, you should get it.

So will there be any non-linear expansion in the margin -- in the margins as compared to the top line.

The top line is something which generally because of -- as we have been mentioning, and all, we are a raw material pass-through model. So exact top line, it will be INR 1,000 crores plus. The exact number, I think, will not have readily available. But as we were going forward, we instated value-added products, our EBITDA margin to the turnover will increase that margin. It will be both. There will be increase in EBITDA margin.

So EBITDA growth should be much more than 8%? Is it?

Yes. Could you just repeat the question?

I was saying that EBITDA -- the absolute EBITDA from the Specialty Chemical projects, though you don't disclose, that should be much higher than the revenue growth. That is what you're implying?

Yes. So going forward, the EBITDA growth will be higher than top line.

All right, sir. Sir, one more. You mentioned that the chlorination capacity is about to be commissioned in this quarter. So given that current slowdown -- lower volume uptake, how will you be filling this capacity? Will it be just a depreciation charging or there will be any incremental revenue from this project? Can you just throw some light on this?

Yes, [indiscernible] So this -- we'll be able to sell part of this volumes coming out of it.

Will it be right mostly like a [indiscernible] kind of product or more value-added product, sir, out of this capacity also?

Yes, it will be both, value-added also as well as the .

Right from the first quarter?

Yes.

Okay. Okay, sir. And can you just throw some light on the NCB expansion? Where is the current stage? Is it still on track? Or is it delayed? Or there will be -- the utilization will be full? Some light on that front?

Yes, first phase will be in the second half of this year. And the second phase will be more happening in maybe towards the second half of next year.

All right, sir. Okay. My final question is, can we get some -- give a little bit explanation on how the product mix has changed, say, before COVID and after COVID, during the COVID during -- in the Specialty Chemicals segment. Is it back on track? Or is it a permanent change? Some explanation on that front would be great.

Yes, basically, demand on our products, which are going into textiles and construction and aerospace and auto, that demand is down during this year. This quarter, and it will be down for this entire year. Subsequently, I think next year as the global economy starts recovering, in FY '22, we expect volume to be more than FY '21. Especially on this small economy gains. So the product mix, as a percentage basis, we are more skewed now on agro and pharma for this quarter.

All right. So the EBIT margin that for -- whatever is there for current quarter, so that would be the fair estimation of what would be there unless and until things improve. Is that right?

No, the volumes will improve. Overall volumes itself will improve because this quarter was bad because of the lockdown and customers were also not -- so that's why this was the worst quarter. But going forward, we feel that volumes will start increasing in this sector also.

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

Just to clarify whether this INR 38 crore amount we've booked, is there any cash that we have received against this? Or this is on an accrual basis?

So it's on an accrual basis.

Okay. And the cash, when do we expect to get on this account?

It a year-ending provision. Basically, at the year-end. Okay.

So that means the entire 2 years out then the full lump sum payment come, that's when the cash will be booked?

No, no. This is part of the annual setup. So after the end of the year, the cash would come in as regards to this account.

Understood. So every year, they need to settle the balance for the year.

Yes, yes.

Understood. Chetan, just on the expense items, there has been an increase in employee cost on a sequential basis by about INR 10 crores. Is this largely because of the new R&D center? Or is it any other onetime provisions, et cetera? And also in the segment reporting, the other unallocated expenses have increased on a sequential basis. So again, just wondering if there are any one-off items within this?

So on the segment, on the other segment, there is -- out of the total amount of INR 10-plus crores, INR [ 7.5 ] crores relates to the -- paying for the COVID CSR activities for COVID, which is like contribution to the PM CARES Fund, the state relief refund and any other activity. The staff will cost because there's gone up, there have been a couple of factors. One, the new facilities, like in Q4, we commissioned some of the first phase of the Dahej unit. So there's been a -- and power costs coming in over there plus we have been extending support to the contractors and other people who have been operating during the lockdown situation and to various entities who have been doing that. So there has been additional staffing cost related to that as well and a standard level of increment there. Even that has been in a normal manner. So it's combination of that.

Got it. That's helpful. And also just on the Pharma side, if I may just ask. The margin expansion, is it in any way also because of an increase in prices or realizations of some of our key products, like say, caffeine, for example? And what are the key raw materials in Pharma? And how -- have they registered some correction?

Yes. So in Pharma, we had basically advantage of the currency in this quarter because the rupee got depreciated over last quarter. And also, overall, we were able to produce budgeted volumes because we could sustain the production even during the COVID period. And as far as the caffeine and raw materials are concerned, yes, the caffeine because during the last quarter, there were issues in China. We had orders in the current quarter -- we had large quantity orders in current quarter, which we could cater because our production was continued. And the raw material prices slightly have started falling from mid of last quarter. And correspondingly, I think caffeine prices also has started dropping a little bit. So that raw material and caffeine prices are going to move in tandem. So there may not be a heavy impact on the margin.

Okay. Okay. What is the key raw material we use in this sir?

No, there are several raw materials, which are used in manufacturing of caffeine. So it could be a nitride or nitric acid or sodium nitrite, right? Actually, there are more than 10 raw materials, which are used.

Got it. That's really helpful. Just one last quick one, and I'll get back in the queue. Just with regard to this INR 1,000 crore top line outlook that you provided for Specialty Chemicals, am I right sort of in estimating that, say, about INR 500 crores comes from the second long-term project, another INR 100 crores from third long-term project? And then if you could also just help us fill in the gap, I mean, the remainder is coming from which projects, specifically over the next 2, 3 years?

Yes, Nitro Chloro Benzenes expansion also will come. This chlorobenzenes expansion and nitrotoluene will get ramped up, PDA ramped up. Actually, INR 1,000 crore, it will be more than INR 1,000 crores, I've put it at INR 1,200 crore. So we expect that to be still further more than that. So across the value chain, Nitro Chloro Benzenes, nitrotoluene, PDA and chlorobenzene. Other than those 2 contracts, we'll have volume growth across various lines.

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

Sir, just -- sir, I wanted to understand a bit more on the INR 1,000 crore revenue guidance that you're giving. So you are talking about INR 1,000 crore incremental revenues on Specialty or overall? And is it...

Specialty.

Okay. Just for specialty. And this is for...

It's upward of INR 1,000 crores. So it's not an absolute number. As I mentioned earlier, the top line is not a major thing we generally track. It is more on the volume and how much operating profit and gross profit we are going to generate. So that is a bigger number, which we track. So exact top line estimate growth, I think, we'll have to -- but it will be upward of INR 1,000 crore.

In that context, would you like to give any EBITDA guidance because revenue guidance, I mean, if it doesn't reflect breakeven, there is no point.

No, so overall, we are seeing that the [indiscernible] range of 12% to 18% growth rate at a company level. We are looking at those kind of numbers.

Okay, okay. And sir, on the CapEx side, I mean, when you were mentioning CapEx to one of the earlier participants, you said CapEx of about INR 1,000, crores, INR 1,200 crores, out of which you said Nitro Chloro Benzenes is INR 150 crores and Pharma is another INR 150 crores and then the third long-term price is INR 130 crores. So any other heads because it still leaves a gap of about INR 500 crores?

There would be the normal maintenance CapEx, which is generally mirroring depreciation of around INR 250-odd crores. And then there are a lot of other projects works and other products that may make a substantial impact that are going on. So it will be combination of those as well.

Okay. And from a recovery perspective, I mean, what is your take on like is it going to be like -- you're already seeing some green shoots as the economy is reopening? Plus, I would understand that there would be some benefits you would have already started to get from some of your previous year's CapEx from a growth perspective, I mean, that you have done in the last 2, 3 years. So to that extent, what is your like -- you had earlier given us guidance of flat EPS, flat profit, I think, in the previous call. Would you maintain that for effect or would it change?

We are maintaining the same value. Main reason is the global slowdown, basically. As you are aware, U.S., Europe, India, everything is slowdown economy. So all the products, which are going in that, that sector, the volumes are impacted. So that's why now whatever the capacity growth we will have and against that, the demand slowdown. Because of that, the combined impact, we are seeing flattish in short term growth.

Okay. Okay. So you're not changing your '21 guidance?

No. No.

No, no, no. So what we are saying is that we will be recouping the gaps what we have in the Q1 and in the subsequent quarters.

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

So I missed your initial remark of 2, 3 minutes, so apologies if I ask any repetitive questions, sir. You shared your NCV and PDA volume, can you also share your hydrogenation and nitrotoluene production of this quarter?

Yes. So the nitrotoluene volume for the quarter is around 2,140 tonnes and the hydrogenation is 2,050 tonnes. So nitrotoluene for quarter end, hydrogenation is 2,050 per month.

Okay. Secondly, as of March FY -- March 2020, we had an inventory of around 95 days, if you can talk about what is the current status of our inventory? And has there been any improvement versus the last quarter?

The inventory days would have gone up, because if you see on the numbers, there's a higher inventory position as well, which is there. Some of it was impacted because of the restrictions or in terms of the port movement are not operating and subsequently the logistic side affected. And some of the facilities started to operate from June gradually. So there is -- the inventory levels have gone up a bit. We don't have the correct correlating data but the days have gone up.

Yes. Would it be fair to assume it should be more than 100 or 110 days versus 95 days earlier?

Yes.

Okay. Can you also share the revenue mix of your spectrum in terms of value-added products versus traditional products?

Sorry, the inventory level, I don't think would have reached 100 days. I mean last quarter, it was not beyond 90 days, it was less than 90 days. There's some correction in the numbers needs to be in that line.

Okay. So which side of inventory is piling up for us? Is it for finished goods? Or is it for the raw materials, which we have accumulated?

It is more on the side of finished goods.

Okay.

I guess you are referring to the higher inventory, probably for Q4 was related to some of the products, which we were importing from China for the Pharma side of the business, where we used to maintain higher inventory cycles beyond 100 days as a normal practice to un-complicate issues related to the solution and other problems in China. So that was on the Pharma side, but at the company level, that was still a smaller number.

Okay. And how much revenue -- what was the percentage of the revenue share from the value-added products in our spectrum?

The value-added product would be close to around 76% kind of stuff -- 74%.

7-4?

Yes.

Okay. And last one on the inventory loss. As we mentioned in the last quarter, there was a steep fall in the benzene prices, and we were expecting some inventory loss in this quarter because of this. If you can quantify how much inventory loss was there in this quarter?

We are yet to work out the full number, but there always has been some inventory loss, but there has been also some offset because in a few of our export commitments, the contract has a quarterly lag on the pricing count. So the earlier contract pricing prevailed in Q1 as well. So it would have -- help us map some of the loss which we will see. I still have to look at the numbers, and we'll probably come back to you with that subsequently.

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

A couple of questions. First about, $20 million which you have received -- likely to receive from shortfall fees. I just want to understand is implication on your EBITDA margin for the segment. Ideally, your operating margin for that segment should benefit from it, right? If that is true, your margins should be much higher than what you earlier used to report because you don't have any expenses related to that revenue, which generally flows through. So you should have actually a significant benefit because of the way you accounted business. If you can help me understand or rephrase this.

So Dipesh, there would be certain costs related to the people, the overhead to the facility and other stuff. So there would be some benefit, but I would think that significant cost also which is coming in. So you have to...

Depreciation of the first phase also will come in. So overall just about 3.5%...

But, sir, raw material is roughly half of the revenue, broadly.

Expense maybe around 10% will be the only expense.

Yes. So now, let's say, if I look at your Specialty Chemical, you used to operate 20% plus margin in normal time. Now with this benefit your -- whether we can see similar improvement in your Specialty Chemical margin? Even the Q1 was one-off because of COVID-19-related implication. But going into next 3 quarters, whether that performance would be 20% plus this benefit?

Yes, that's what we are saying is going forward, Q2 onwards, we expect further -- the plants are operating at higher capacities. And in general, the volumes -- demand overall volumes are also better than what were in the Q1, but in Q1, there was a substantial lockdown in some of our customer facilities in India and local sales were down. So we'll have a higher production as well as sales going forward in Q2 and second half also.

Let me rephrase. Let's say, earlier, we used to operate at 20% plus with this $20 million benefit, whether we will reach to 25% kind of volume?

As a percentage, and I think it will again boil down to raw material price and everything. But the number -- the absolute number will grow.

Yes. Okay. Okay. So broadly, that flow will be reflected from Q2 onwards?

Yes, yes, sure. That would reflect.

Understood. Sir, second question is about end user industries. Now we have seen roughly 40% of industries where demand we have witnessed weakness and 60% is fairly stable. How do you see industries in August, those 40% of industries, whether some recovery or it will still remain weak?

So, it is going to remain weak. It is not going to go up in 1 quarter. The entire year will be weaker, but the progress you will see in the weakness is expected to become less and less. Still, I don't think Q4 will be reaching the full. It is next year only all the discretionary sectors, demand will be to the original level.

Understand. And sir, last question is about the government announced some products and link incentives. Do you know whether we have any plan to play on it, kind of thing with a new product introduction or some CapEx. If you can provide your thought process around it?

We are studying the list. And the segment in which -- in the Pharma segment, we are operating generally in the newer products and the products, which have been mentioned in the PLI are more older products in terms of innovation. And though there are some like -- we are studying it, and we'll take a call on this.

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

Sir, on -- with this -- all these lockdowns and the travel restrictions, which are going on, has there been any meaningful impact on our business development activities and to the extent, does it have any implications for our growth over the next few quarters?

No. I think this is still making more efficient, I think, working from home. We have been able to connect to our overseas customer also on a conference call and all that. So I think and what -- everybody is used to getting now working from home and working on remotely. So as far as the business development work with the customers and all, we don't see any significant impact at all.

In that continuation of that -- with all of this over the last few months, there has been increased backlash against China. Have you begun to see any impact of that in the kind of inquiries that you are getting? Any color on that?

Can you repeat the question, please? Sorry.

I'm saying over the last 3, 4 months, there has been this incremental focus on companies looking to give us derisk out of China, supplying sources and all. In the conversation that we have with clients, so what kind of changes are you seeing in the inquiries that you are getting on business development, sir?

Yes. That is what is happening as far as -- I think in past also we have seen. And there we are at more advantage because we don't import anything from China. We start from benzene and all. So now the buzzword is the supply chain independent of China. If they want to buy anything from India, they want that we don't -- the Indian players should not buy intermediate from China. So we are getting inquiries where the product value might be even $30, $40, $50, $60. So that traction is there and a lot of those products are under development, then will come into production in coming years. They are going to plan to set up a multipurpose kind of a block also, where in future, we can commercialize those kind of products faster.

Okay. Sir, when do you see impact of some of these initiatives playing out for you? I mean is it going to be more like a '22, '23, where some of these are...

Yes, yes. It will be post -- it will be more starting in FY '23, not in these 2 years. Actual financial impact on the production front will only happen in FY '23.

Okay. And so I'll just link to that. On the CapEx front, you highlighted the CapEx for this year. Next year, I guess, you will not have these large 2 or 3 blocks, which you outlined earlier. So how should we look at CapEx from FY '22 and say, and beyond, sir? How are you looking at it right now?

Yes, we are going to present our chlorotoluene range CapEx coming in, we have identified at some chloro intermediates which are more of a downstream of our current range of products, so that -- chloro intermediate blocks and chlorotoluene and downstreams are the products which we are -- which are on a design table right now. So construction of those plants will start in the next financial year, FY '22 and we'll start commercializing in FY '23. That's a broad -- newer range of -- totally new range of products will happen.

Okay. And sir, lastly, on the Pharma side. I mean what is it -- what is -- I mean, from our perspective, there has obviously been a lot of a gain, or possibility on the API space in China. Sir, our business mix, how much is intermediate and how much is APIs? And incrementally, bulk of the growth for us is going to be new in your filings? Or this is going to be in your scope for growth in the current portfolio itself?

For us, the business is split between 3 segments in Pharma. One is API, one is intermediaries and third is the xanthine based where the caffeine and the derivatives come into the play and more or less it will be equal between all the 3 segments. And growth, we are seeing in API and API intermediates. Of course, no one wants to take [indiscernible] in the current situation of COVID. So that is where we are seeing a little bit of pushback on the demand.

But are we looking to significantly up our investments in these 2 categories based upon what we see in the market or...

Yes, yes. So basically, we have announced expansion of our API facility, which is USFDA-approved by acquiring adjacent land. And basically, we will be doubling our capacity in our API facility. And also in the intermediates, one block will get started in this current quarter. And then we are also looking at possibly a new site, where we can expand the intermediates in the next couple of years.

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

Sir, first question is on your guidance, which you're talking about in EBITDA level also over next 2 to 3 years. So we have seen that current year, we have, in FY '20 end, you had a significant CWIP of almost of INR 1,400 crores, which you have yet to get converted into growth and start producing revenues from that. Also looking at INR 1,000 crore further CapEx in the current year, though out of that INR 400 crores to INR 500 crores can be maintenance and another small CapEx, but INR 500 crores is still a larger CapEx leading to the revenue. So almost close to INR 2,000 crore CapEx, which we are going to spend, and I believe that given an 18-month gestation period also, so by '22, everything should be, I mean, start coming into revenue. So with the INR 2,000 crore investment, sir, if I look at your early track record of close to 1.5x as a turnover. So isn't it that we are missing something or even close to INR 3,000 crore is incremental revenue should flow into Specialty Chemicals, though I understand that you are seeing that raw material price volatility is there. But despite that, either it INR 3,000 crore revenue should get added by '23 in our Specialty Chemicals. How you look at that?

No. As we mentioned earlier, now the more value-added products are going to come in [Audio Gap]

Sir, I missed your voice.

Definitely, the turnout will be more than INR 1,000 crores. That was upward of INR 1,000 crores what we had mentioned. But it will not be in our asset to turn ratio, it will be relatively less in that sense, but -- and EBITDA percentage will be higher. So that's how it is.

Right, sir. But even if it is a value addition, I hope that the incremental CapEx, which we have done in last year and doing this current year, it's not ROC dilutive, right? So ultimately, at that EBITDA level or ROC level, we must see that the cash flows and the profitability should justify this kind of CapEx. And we have been having almost 20% plus ROC in our Specialty Chemical business. So I hope that this CapEx justifies that? Or is in line with those ROC, which have been done?

Yes, yes, that is what will happen. Basically, you have to see entire world 2021 is a washout because of this pandemic. The 2021 loss will be recovered in '21, '22 and then '22, '23 -- by FY '23, the ROC numbers have to recover. That's what is going to happen.

Okay. Sir, second, just clarity on this contract that got terminated. We mentioned that INR 38 crores, so it's directly added at EBIT level and in revenues because the incremental cost on that is hardly anything. And we are not producing this product, right, because we had earlier price of produce if the customer got that, right?

Yes.

So we continue not to produce, but they continue to provide us almost $5 million every quarter.

Yes, that's how the contract is.

Right. And sir, you have also mentioned that we will start looking for some other markets for this product. So are we working on those lines? Or first, we want to wait for 2 years till the time the contract is with this customer and then only we can start looking for the customers for this contract -- for this product?

No, no, we never had a restriction on that way. So that we are looking at other markets. We're also evaluating whether to go for further downstream in this and that is still on a drawing board. We have not crystallized our philosophy on that. We can always apply to the other entities and people who are manufacturing the same active ingredient. So these are the various options, which we are looking at, but nothing has been crystallized yet.

This is just last, and I will come back in the queue . Also in Pharma business, current year, you are doing roughly INR 150 crores CapEx, but you seem quite optimistic with the current scenario in both APIs and intermediates. So over the next 2 to 3 years, what kind of investment do you envisage that can be absorbed in the Pharma business both, in a new facility as well as a brownfield expansion?

So in Pharma, we are looking at INR 100 crore to INR 150 crores investment further in the next couple of years, INR 150 crores.

INR 150 crores every year for next 2 years?

No, we would be looking at INR 75 crore to INR 100 crore every year.

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

Just one confirmation on the contract that was canceled -- that got terminated. You had mentioned that the $120 million to $130 million was your initial assessment. Have you got any confirmation from the client for this yet? Or it still stays as an assessment?

Yes. Basically, that is more or less in that range as of now, I would say.

Okay. Fair enough.

Basically, on the timing of payment and all, we can do some pre itemize. So that's how it can go up and down. In that sense, if we want early payment, then it will go. So it all depends. But it will be in this range.

Okay. Fine. My next question is on your other expenses. Sir, if you could just quantify how much would be the variable component in your, say, staff costs and other expenses? The reason I'm asking is because we do not see much of debt even if we cared, just for the INR 10 crore extra donations, PM CARES donation and all of that, which ideally maybe there should have been some savings this quarter is what we would have expected. So if you could just quantify how much would be the variable component in your other expenses?

Pratik, we'll have to work on that, probably some other time, we'll have answer to this.

Okay, fair. And just maybe lastly, you mentioned some of your newer CapEx initiatives, which are still on the drawing board. If you could maybe quantify what kind of an opportunity do you expect or what kind of -- is that like an import substitution theme? Or is there some numbers -- opportunity number that you can put to that, the chlorotoluene and the fluoro intermediate site you mentioned?

[Audio Gap] from China, just like we have Nitro Chloro Benzenes and chlorobenzene and nitrotoluene chain will get ramped up in next 3 to 5 years. And some other various specialty intermediates and also customer-related products will come into that. So it will be -- so basically, it's an import substitute. Second thing, it is a diversification also that a lot of European and American companies want to diversify their source from India -- to India from China. And certain products are growing globally. So generally, we see 3 factors. Either it has to be an import substitute or it has to be a global growth or where the customer wants to derisk. That is the primary criteria for selecting any -- for the clients.

Okay. Just one second. So what related products, did you mention, I didn't catch that word?

Either it has to be growing globally that those product, downstream products demand has to grow or it has to be an import substitution or third is where the customer want to derisk. Our customer may not be -- demand must be growing, but they want to derisk their supply chain. So these 3 factors are the major factors, not much selecting the products. So we'll not select somebody else who is making in India, and we tend to capture their market share.

Okay. Fair. So just one more, if I can squeeze in. In the Pharma segment, also, is there -- are we independent from China? Or is there some dependence on China? That's it.

Yes. In Pharma, we have steroid range of products, where our dependency is there on China because steroids are manufactured only in China and U.S. largely. And apart from these products, there are certain intermediates that we buy, but we also have our own intermediate manufacturing block, which supports our API manufacturing. So advanced intermediates of most of our products are manufactured by us only.

Okay. Would like to put a number to that? How much would that be? China dependent in the Pharma segment, such...

We will have to work out that number. But if you see the global chemical industry, anything which is not made in India and it comes from China. So largely -- a lot of small intermediates would come from China.

The next question is from the line of Sidharth Mota from Principal India.

I just wanted to reconfirm that out of INR 38 crores, which is forming a part of revenue, so how much will flow at PBT level?

It's 90% plus.

Okay. So which is around 35%. Okay. So Thank you and best wishes for coming questions.

Thank you.

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

First question is related to the long-term contract, which is terminated. Now the facility is ready. So are we using the facility for any other purposes? And if not, what will be the maintenance cost to just keep up the facility in workable condition for -- on a yearly basis?

We already started utilizing that facility and exporting.

Okay. And I suppose this was a dichlorobenzene plant, and we also have another of CapEx on the chlorination project, which is currently ongoing. So are these 2 different products? Or they are the same products?

No, it's the entire value chain is also chlorination plant value addition. Totally different chemicals, but sequential.

Okay, okay. And sir, the second question is in terms of the -- this year's guidance that we are providing. So 40% of our Specialty Chemical business is going through a rough patch, which accounts for almost INR 400 crores of quarterly run rate. And that is yet to -- I mean as you're expecting that it will be a gradual recovery. So how are we so confident that we'll be able to maintain the profitability at FY '20 levels? I mean is it because there are firm orders, which are supposed to be executed and on which we will have some kind of a take-or-pay agreement or if there is any other factor which we are missing?

Yes, this is a deemed direct. We are getting the $20 million as compensation. It's like a deemed sales. So that is actually a newer business that is value-add. That is compensating volume loss in the factory.

Sorry, sorry, probably I was not clear.

Yes, what you are saying is, because the demand is down, we are still why we are maintaining the similar guidelines. Because this $20 million isn't totally additional thing [indiscernible] agrochemicals. So that is a new additional profit in this year coming that line. So basically that is what expense, I think, the volume loss seen and other factors.

Okay. Okay. And the INR 1,000 crore revenue -- incremental revenue guidance for Specialty, that is for FY '22, if I'm right?

More of a 2 to 3 years kind of numbers, yes.

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

Sir, my first question would be on the bullet payment that we are supposed to receive at the end, the INR 500 crores to INR 600-odd crores. My understanding is that, that would be a capital receipt. Is that correct?

No, it is -- from the tax and accounting perspective, it's revenue received.

It's revenue received. All right. Sir, in terms of the last CWIP that we had mentioned, that was at somewhere around INR 1,400-odd crores. Do we expect to capitalize the entire amount this year?

We would have a substantial, I mean, capitalization of that in this year.

Got it. And so the second utilization in the next year should be seen from the same, right?

Yes. So typically, we have like 3 to 4 years of ramp up pay. So we should start seeing the utilization happening.

And sir, in the spec revenue that we got this quarter of roughly INR 840-odd crores, how much of it would be in non-agro, non-pharma entailed in that revenue basket?

So I guess non-agro, non-pharma would be in the range of around 30% or 35%

The next question is from the line of Vivek Kumar from Safe Investments.

This question is with respect to the people's entity of RP [indiscernible] So what is the current capacity in and the expansion plans for the next 3 years of the CapEx amount, which we need?

No. This is a question regarding what?

[indiscernible]

So that is running as a separate company. So we'll not have any idea on that.

Okay. Any reason, like we can give, like it was emerged from this company.

So yes. It's a separate Board of Directors. So the listing got delayed because of the regulatory issue, but the company is [indiscernible] almost independently for almost a year now.

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

Chetan, this take-or-pay shortfall, now a contract like this, normal business should be running on a month-to-month, quarter-to-quarter. So if there is a shortfall in there to compensate, why should you wait for a whole year before they pay?

So when we had entered the contract, we didn't anticipate that we will have a second instance coming in. You would have regular going on and [indiscernible] at the end of the year rather than doing it every month because there's too much of activity.

So that basically was supposed to be the -- there will be annual targets and then based on the annual lift-up, what is the shortfall?

It's not a quarterly with this shortfall is calculated. So that's why now we have to calculate at the end of the year and then get the money for that, that side of stuff.

But now that identified shortfall is a reality that it is going to remain in a perpetual state of shortfall, shouldn't they be paying you on a more shorter period basis rather than making you wait all year for that payment?

It will be purely as per the contract. Contract you're very clear, what is the shortfall of the entire year, you get accordingly.

Okay. And I suppose based on the provision of the accrual of the income, you will be required to pay tax on that.

So whatever is the tax incidence, we will have to consider that.

Yes. So it is attract tax. So you'll have an outflow before you get the income.

It will be still in SEZ. The entire unit has been put up in SEZ, special economic zone.

I see. So that particular part, there isn't a much tax?

Yes.

The next question is from the line of Sagar Jethwani from Phillip Capital.

Sir, how many commercial APIs do we have now? And how many are in development stage?

Currently, we are producing more than 40 APIs. And we have an R&D program where we are going to have 5 products, which will get commercialized in this year and another 10 are under development.

Okay. Yes. And sir, any guidance on debt number in next 2 years since we are not doing CapEx this year? And post that we are looking at chlorotoluene range of products. So any plans to become debt free, maybe in 3, 4, 5 years? Any guidance over there?

No, as a company, we don't believe in debt-free philosophy because then we have 30% working capital. If you don't borrow any working capital, then I think shareholder value is eroded. Fundamentally, that free concept results doesn't sound...

It should be around this range?

Yes. Yes. Because working capital will always be funded by debt. Any CapEx -- depending on the CapEx cycle, we'll have net for the CapEx. That's not generally, previously, we used to 0.8:1 .2 as the debt equity. And now we have met guidelines of 0.7:1. There is a broader debt equity parameters we have.

The next question is from the line of Resham Jain from DSP Mutual Fund.

Sir, just one question on CapEx, which I'm still not able to get that. So INR 1,000 crores to INR 1,200 crores of Capex. And if we just add up all the CapExs which you have mentioned, there is still almost INR 500 crores, which is -- I'm not able to reconcile. So if you can help with the remaining part of the CapEx, like you mentioned NCB INR 150 crores, pharma INR 150 crores, long-term 3-year contracts INR 135 crores, and INR 250 crore of maintenance. So still almost INR 500 crores of CapEx is -- what -- is into which all lines is what I wanted to understand.

Yes. So other parts also some of the expansion and some new products are also being added. So what we have mentioned are the big bucket items. In addition to that, some existing product debottlenecking as well as some new products are being added.

Okay. It's like mostly debottlenecking. Does it include modernization as well, where it's not going to lead us to incremental capacity, but it's like on the environmental side, on the modernization front?

No, no. That is a normal CapEx. This is to be more on expansion or new products. We are adding some new products and dedicated plant for the newer product also.

Okay. Understood. And this is across all the products you're saying?

Yes. Yes. Different products will get a different debottlenecking as the volumes reach certain level, and we try to see the debottleneck income expansions.

The next question is from the line of [ Akshat Ashok Naik ] from Alexandrite Capital.

I just wanted to know what's your 5-year target for revenue and profit after taxes?

Sir, revenue, we typically don't look at revenue from an overall basis because the revenues link with various [indiscernible]. That's correct. On the bottom line, we are targeting growth of around 15% to 20% on a year-on-year basis for 3 to 4 years. So probably, you can look at similar kind of a number.

Okay. And just another question. I've been seeing that the promoter holdings decreased. Is this in normal with the charity that you all were planning to do? Or is there -- would you all be looking at increasing your promoter holding in the future?

I think earlier also, we had mentioned for whatever charity need we have in house for that, we have been doing other than that, not much.

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

Please help me understand this. If I...

Ankit, you're not audible enough.

Am I audible now?

Yes, please go ahead.

Yes. Sir, if I remove INR 38 crore from revenue, my operating EBITDA is about 144 , roughly 16% margin. If this is the way -- correct way to understand, my subsequent quarters, when things normalize, at that time, for example, my base business gives me 20% margin. On top of it, this INR 38 crores in every year, if we did include. And my overall EBITDA margins should look much, much better compared to pre-COVID level. How do we see this? Can you please answer my question.

So basically, as the margin, we are not looking at it. Absolute EBITDA level, as the volume expansion, we will see that the EBITDA will grow.

Because of the increase in the volumes in this Q2 and subsequent quarters. Yes. So if you see Q3 number, for example, Q4, #pre-COVID, EBITDA was INR 220 crore. If you consider Q3, again, we've come through those INR 220 crores sort of run rate. On top of it, we can assume this INR 35 crores to INR 38 crores in this compensation of the -- you can say the way you accounted for revenue. This is a way to understand, right? Then in COVID - in that case, my EBITDA margin should be in the range of 24% to 26%.

That's what I'm saying. This year, EBITDA margin will shoot up. It's INR 150 crores without any direct top line [indiscernible] directly at EBITDA levels. So this year, our EBIT margin will -- if you look at margin, the margin as a percentage, it will definitely will be higher this year.

The next question is from the line of Aditya Khetan from East India Securities.

So my question is on the canceled long-term contracts. So will we continue to use the facility for the client for a few years or the capacity would be used for other customers?

No, we will be using that for that product.

So the clients would be using the facility for a few years, because that was...

No, the client will not be using. They are not going to consume.

Okay. But we will say that the clients will be using the facility for 2 years because we are in the notice period kind of a thing. So the client would not be using the facility?

No, because they are not putting up the plans. So they will -- we will be -- we can give it to the other customers.

Okay. Sure. And sir, the second question, the compensation amount of $120 million to $130 million has this been vetted by the clients?

Yes, yes.

So customer has given the confirmation means that this amount has been vetted?

Yes. Yes. The entire first press release was vetted by them.

Ladies and gentlemen, that will be the last question for today. I now hand the conference over to the management for their closing comments. Thank you, and over to you.

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.

Thank you very much. Ladies and gentlemen, on behalf of Aarti Industries Limited, that concludes today's call. Thank you all for joining us, and you may now disconnect your lines.