Aarti Industries Limited (524208) Earnings Call Transcript & Summary

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Good evening, everyone. Thank you for joining us on Aarti Industries Q2 FY '21 Earnings Conference Call. We have with us today on this call: Mr. Rajendra Gogri, Chairman and Managing Director of the company; Mr. Rashesh Gogri, Vice Chairman and Managing Director; and Mr. Chetan Gandhi, the 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 the 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'll then open the question -- the forum for Q&A. Over to you, sir.

Thank you. Good evening, and very warm welcome to all of you. Firstly, I hope all of you and your family are in good health as well, and we all collectively deal with a difficult situation over the last several months. I trust that all of you would have received the Q2 FY '21 financial results presentation that has been uploaded on the stock exchange website earlier today. Q2 performance was largely on the lines as discussed by us during the last con call. In Q2, we saw the recovery coming in gradually in the Specialty Chemicals segment, as most units now operating at about 80%, 90% level. Domestic sales, which was majorly impacted in Q1, saw a recovery with customers commencing the resumption of their operation. Our financial performance in Q2 has been significant scale up compared to Q1. During Q2, the consolidated revenue expanded by 23.5% Y-o-Y to INR 1,350 crores, driven by expanding volumes in both domestic and exports as well as we gained traction in new markets for discretionary products. We are also gaining [ traction ] from customer based on the recovery in their annual application, more specifically for the discretionary annual segment. Pharma segment also continues to scale up and grow. The CapEx spend for the quarter was INR 302 crores, while for the first time, the CapEx spend was about INR 526 crores and expect the annual CapEx to be in the range INR 1,000 crores to INR 1,200 crores for FY '21. During the quarter, we partly commercialized a new chlorination unit at Jhagadia. This, along with the projects commissioned in the earlier part of the calendar year, has resulted in the increase in fixed costs, which should normalize as operating leverage kicks in with the increase in volumes going forward. Our other expansion projects are also progressing as per plan to be commissioned progressively in H2 FY '21 and a few are to be commissioned in the next financial year. This will drive stronger growth over the next year and further periods. This quarter shows the recovery phase with gross income from operations for the company on a standalone basis at INR 1,278 crores, EBITDA at INR 241 crores and PBT of INR 167 crores and PAT of INR 136 crores. While, on the consolidated basis, gross income was INR 1,330 crores for Q2 FY '21, about 23.5% higher as compared to INR 1,077 crores for Q2 FY '20. Consolidated EBITDA similarly was at INR 250 (sic) [ 254 ] crores for both the periods and the consolidated PAT for Q2 FY '21 was lower at INR 140 crores as compared to INR 148 crores for Q2 FY '20. Let me walk through the segmental performance and share the insights on the same. With the intent to increase the volumes for the discretionary spend, which has been impacted significantly due to COVID, we had explored non-regular market to grow additional revenue for expanding our presence in [ other ] vertical. This has impacted the overall margin, but helped gain market share, expand presence and liquidate inventories. We have been able to supply significant quantities into China, thereby leading to our exports to China adding 20% of the export revenues as compared to a normal share of about 8%. This is also visible in segment financials. During Q2 FY '20 when the Specialty Chemicals segment reported consolidated segment revenue of INR 1,109 crores as compared to INR 895 crores in Q2 FY '20 and annual revenue of INR 3,865 crores for FY '20. The consolidated EBIT for segment was INR 190 crores for Q2 FY '21, thereby generating EBIT margin of 17% as compared to the EBITDA of INR 214 crores and EBIT margin of 24% for Q2 FY '20, while the annual EBIT for INR 814 crores resulted into an annual EBIT margin of 21% for FY '20. I'd also like to highlight that Y-o-Y comparisons, the margin may not be a right method to see the Q2 performance. As you will recollect, during Q2 last year, we had faced some raw material supply limitations, specifically in nitric acid. That has resulted the volume for some of our products to go -- be lower than plan. As a result of the shortage of these [ full ] stock, the price of downstream products with high demand had temporarily moved up, resulting into higher margins in that quarter. Now for the Q2 production update, there has been a higher scale in product reduction in lockdown and production volumes have been expanding. Production in para Nitro Chloro Benzene was about 17,830 metric tons per [ buru ] as compared to 3,945 metric tons a year back. Similarly, for hydrogenated product, we achieved production of about 3,040 metric tons compared to 2,003 metric tons per month last year. On the nitro [ branding ] plant, the production in Q2 was about 4,120 metric tons, which was about 1,363 metric tons in the same quarter last year. At present, as I said earlier, we are operating at about 80%, 90% capacity utilization across location and expect improvement in operating and financial performance through the second half [ esco ] of the current financial year. Moving to the Pharma segment. During Q2 FY '21, the Pharma segment reported consolidated segment revenue of INR 222 crores as compared to INR 182 crores for Q2 FY '20, an annual revenue of INR 756 crores for FY '20. The consolidated EBIT for the segment was INR 57 crores for Q2 FY '21, and thereby generating an EBIT margin of 26% as compared to the EBIT of INR 34 crores for Q2 FY '20 and EBIT margin of 19%, while the annual EBIT of INR 137 crores is related to EBIT margin of 18% for FY '20. Our Pharma business continues to grow and see operating leverage based on the increasing volumes as demand remains intact, Pharma revenue growth was being driven by increasing contribution from regulated markets and value-added products. We delivered record profit in the segment, and margins continue to expanded to 25%. Continued growth in operating leverage is likely to be maintained in the near term. Further, we are witnessing a structural margin expansion for Indian manufactured API and intermediates, along with a strong long-term demand, which will drive growth for this segment in coming years. Ongoing expansion of API and intermediate facilities expect that we progressively commercialize in the next 2, 3 quarters, which will allow the momentum to sustain. Going forward, capacity expansion will drive deeper penetration in therapies such as antihypertension, cardiovascular, oncology, cardiovascular et cetera. We also have strong pipeline of approvals and visibility [ maintaining growth ]. We have been witnessing various growth opportunities flowing into -- for Indian pharma manufacturing from a global standpoint, which is also well supported by the government's Aatma Nirbhar initiatives. With this kind of opportunity, we are working about the release of new pharma products, which we would like to expand into in the future. With this rationale, we have acquired a large parcel of land in Gujarat. We are at the drawing board stage on these opportunities, and we'll share more details as we move forward. To summarize the Q2 performance, gross income from operation expanded by 23.5%. Profit margins were impacted due to the factors discussed earlier, apart from higher depreciation on new facilities and lower other income. I also want to highlight, for the quarter, we have recognized revenue of around $5 million. During Q2, just as we did in Q1, being a short fall we will be eligible as per the terms of the long-term contract discussed previously. Overall, we are satisfied with Q2 performance and look forward to operational improvements and higher performance during the course of the second half. We continue with our guidance of full year profits to be flattish and expect significant growth momentum from FY '22 onwards. Our focus on expanding value-added product chemistry and value change in the portfolio has allowed us to emerge as a leading global partner to a growing list of innovator companies. Also with a view to enhancing long-term prospects of the business, we have been investing an organizational competency, including R&D initiative, SHE excellence, talent acquisition and greater process orientation, benchmarking ourselves with the best-in-class global practices. Added to these positives is India's rapid emergence as a leading supplier of chemical intermediates are likely to increase the country's share in the global market. Aarti Industries are well positioned to benefit from these trends. With that, I conclude my opening comments. We'll open the floor for the Q&A session. Thank you.

[Operator Instructions] We have our first question from the line of Rohit Nagraj from Sunidhi Securities.

Congrats on a good set of numbers on a sequential basis. Sir, the first question is the land that we have purchased. So how much have we paid? What is the GDR? And most importantly, given that we are having the CapEx plan of almost INR 1,000 crores per year, so how much land is available from future expansion perspective? So how many years would this land be sufficient?

Yes. Chetan, you can brief about the new land?

Yes, I can take it up. So we have procured a land parcel in Gujarat, and the total parcel size is close to 105 acres of land. And it is in the Dahej belt. So -- and it will be utilized for Pharma and Chemical. So we plan to utilize a larger parcel for Pharma and a parcel for Chemical as well.

[ Did you mention ] that we have a 75-acre parcel in Jhagadia also.

So given the current expansion spree, how many years would this land be available? I mean, let's say it gets exhausted, and we have to look for a new land parcel?

Yes, with the 75-acre in Jhagadia and some more in new location, at least for next 3 to 4 years, I think should be sufficient for the project. And for Pharma, maybe even longer period. But for chemical, about 3 to 4 years, I think.

Okay. The second question is, could you just give us the time lines for the commissioning of long-term projects? Has there been a delay? Or they are on track, both the INR 10,000 crores and the $135 million project?

Yes. The first one will be commissioned in Q4. And the second one, INR 10,000 crores one, is expected to be in the first half of next financial year.

So earlier, I think it was in the second half of this financial year. So it has been delayed by another maybe 3 to 6 months, is that correct?

Yes. There is some delay in that second project because of [ some other equipment-related ] issues.

We have next question from the line of Sudarshan Padmanabhan from Sundaram Mutual Fund.

Sir, my question is specifically on Specialty Chemicals and margins, which you had given a brief description on, specifically doing work on the discovery thing for the COVID part. My -- what I would like to understand is on the Specialty side, when you talk about recovery happening on the nonessential part, how much of the recovery has basically happened versus pre-COVID? And second is, should the margins trend back to normal? Or is this something that we would continue to pursue?

Domestic demand for discretionary is almost now in Q3 reaching to pre-COVID level. Whereas export is going to [ take ] the next 2, 3 quarters. So going forward now, we will see the improvement in margins in [ this very ] segment.

Sure. So the product mix would basically go back to where it was probably from the second quarter, is what you're alluding to?

Yes. Then also the market, if you go to more towards more of a regular market, which will have a higher-margin also. So progressively, the margins will increase.

Sure, sir. And sir, from a longer-term perspective, I mean, with the long-term contracts that are available. And second is, even if I go through the annual report over the years, we have basically been working on more complex chemistry moving up the value chain. So from where we are today, I mean, when we are talking about, say, in FY '23, 2 to 3 years where we'll be utilizing the land fully, what is the kind of margins and ROCEs, which one can expect, given that we are definitely moving up the value chain and investing in more complex chemistry?

So progressively, we'll see that the margin as well as ROCE will be improving. But ROCE generally will also depend on capacity utilization at that particular time.

Sir. And specifically, with respect to this Aatma Nirbhar I mean, given that this has basically been announced earlier this year, when do we start seeing the benefits as far as our business is concerned from our clients?

Yes. Some of the Pharma API products, which are announced in Aatma Nirbhar we want to make raw material for that. So that will come in. And we expect some similar scheme for Chemical also. So that will also directly and indirectly will benefit us. So in general, I think overall, we'll see our intermediate demand increasing in India.

We have next question from the line of Naushad Chaudhary from Systematix Group.

I hope I'm audible?

Yes, you are, sir. Please go ahead.

First question on the inventory liquidation part, sir. Can you help us understand how much inventory have you liquidated in this quarter and which all products were there in that inventory? And how much it had impacted on our margin, if you can quantify?

So -- this is Chetan here. There is -- I mean, it's not a single product inventory. There are multiple products on the discretionary side, which have been there. So as you would have noted that we've been operating initially in the start of the year at 50% and gradually ramping up to 80%, on the discretionary side, the demand has been significantly lower from the regular market and there's an inventory, which has been piled up. If you note the Q1 numbers, the inventories to the extent of INR 46 crores was there higher as compared to the Q4 numbers. So those are the kind of number -- I mean, inventories which we have look to clear out and look at applying to the nonregular markets.

Okay. So it was just INR 46 crores of inventory, which...

No, no. So it's not just INR 46 crores. There is much more -- so that's the impact on a quarter-on-quarter basis, but there were other inventories as well. So the value, specifically, if you want to look at it, I don't have that specific number right now, but I'm just giving a perspective that there was an entire inventory pileup which was happening, and we look to -- look at deploying that inventory and converting that to cash by way of supplying that to the nonregular market. It also helps us in terms of adding an additional market and some more diversification on overall which probably could help on a long run basis.

Okay. Would you be able to quantify in terms of margin, how much it impacted on EBITDA?

It will be difficult for me to put a specific number to that at this stage.

No problem, sir. Secondly, is this a part of our regular business? Or was this just something one-off, which we have witnessed in...

Generally, if there's additional capacity or material available, you can drive it into a nonregular market. So it will be as per a need basis, generally.

So it's a part of our business, and we can see these kind of things in coming years as well if there is not much demand...

Yes, yes, yes. We can divert that to the nonregular market.

Okay. Secondly, sir, we have mentioned we have started we have partly commissioned as a chlorination business, which initially had 65,000 tonne per annum capacity. So how much capacity we have started? And what is the rationale of starting partially of this plant?

Partly is basically first phase. There are -- in the chlorination, the first segment is commission. And second part is under commissioning. So it will get fully commissioned by end of this quarter. So it is basically -- it is a sequential commissioning. The entire thing will get commissioned.

Okay. And how do you see the ramp-up of this capacity?

Yes, that will take at least 2, 3 years, with a steady step jump in the capacities.

Okay. And last, very quick one, sir, if you can share the PDA volume number of this quarter?

Yes, I'll share the number for PDA in this quarter. So the PDA volumes for the quarter was we had a monthly production of around 470 tonnes, of which in Q1 was around 360 tonnes.

Okay. And correction on nitro toluene number, it was 4,120 of -- in this quarter, right?

Yes, yes, yes.

We have next question from the line of Surya Patra from PhillipCapital.

Sir, just on the margin again. See, we have, obviously, because of the product mix issue, we have seen some impact on the gross margin front. And hence, the overall margin was impacted. And in the previous quarter, we had been on the other expenses front some issue because of the higher spend relating to the COVID-related aspects. And although the gross margin was better in the previous quarter, but because of the higher COVID-related spend, it was slightly lower. My question is that, sir, see, although we have seen all the entire industry has witnessed a kind of marked improvement in the overall margins because of the improving spread because of the lower or the correction in the crude prices. So contrary to that, we have not been seeing or rather we got impacted in terms of margins over the last 3 quarters since when the crude price corrected. Can you just clarify that? And what is the outlook that one should have in the second half or going ahead?

Yes. Basically, I think we have told many times that it's [ always ] for us we are crude-neutral. So it's a raw material pass-through model. Actually, crude prices going down impact our business into inventory losses for us. So that mean -- lower crude or higher crude doesn't impact us as far as the margins are concerned. It is just the discretionary side, the demand is under pressure. So that is leading to a lower margins, [ despite ].

But do you think that is going to sustain for some more time, sir, at least for this current financial year?

So progressively, it will reduce. That's what I mentioned. The domestic demand is virtually reaching to pre-COVID level. And export also, we are seeing that progressively, it is increasing. So margin should, quarter-on-quarter, should go on increasing.

And generally, sir, even the -- since we have seen improvement, sequential [ sharp ] improvement in the domestic side. So ideally that should have added to the margin expansion only, but not meaningful margin expansion sequentially that also that we are witnessing.

Yes. The other expenses also increased. That also we had mentioned. So that has affected the margin at EBIT level, the depreciation and fixed overheads for the new plants, which has been commissioned.

Okay. Sir, second question was on this dicamba supply contract. In fact, obviously, it is now -- the contract has been canceled, subject to the following further development that what U.S. Court has ordered about dicamba. But now having the ready facility with us and now they are extending that usage for another 5 years, so should not we be excited about it because we have got adequate compensation in one hand, and we have ready facility. And there is a global business opportunity that is also visible?

Yes, yes, correct. Recently, only the U.S. government gave 5-year extension for all dicamba-related formulations, which is a very positive sign for that industry. And we see this will increase the dicamba demand going forward. And as we have mentioned earlier also that we'll be participating in that demand because customer ultimately is going to buy dicamba, so by making dicamba we will be tied up with dicamba manufacturer. And also, we can look at putting up some part facility for ourself also. So that also we'll be deciding on whether to do that also or we only supply to the other manufacturers. So there's a couple of options we have, and we may have both of them or only one of them. But obviously, this development is a good sign. It will increase the dicamba demand. And correspondingly, we'll be able to supply our intermediate.

But this compensation is all set and decided, right, sir?

Yes, yes.

Okay. Just last question, sir, from my side. On the -- this polymer project, although we are maintaining our guidance that is likely to start from the fourth quarter. But [ sure house ] target and in terms of the utilization that one could really see for the project or any sense it is given the kind of current scenario, COVID uncertainties and all. So whether it will look like -- or it is likely to be a kind of much staggered compared to the earlier stance? Or what is your expectation in terms of starting the supplies and ramping up there because we have seen some supply issue in one post-COVID. So that's why if you can give some clarity on it, that will provide more confidence.

As I mentioned in an earlier question that commissioning will now go not into Q4, it will go more in Q1 of next year. Some equipment delays are there. And overall, I think the demand impact is also there, so customer side also pool is less. So -- but we'll be commissioning in the next year to that project.

And the utilization in the first year would be how much of that once you see, sir?

First year, maybe around 50% or so.

We have next question from the line of Sneha Talreja from Edelweiss.

So my question was related to Speciality Chemicals segment. So what is the utilization right now versus last year?

Last year Q2 was impacted. That's why you have seen the numbers also. Y-o-Y, all the numbers this quarter were higher than the last year number. And currently, about 80% to 90%, most of the plants are running.

Which is same as what we ended the Q1 with?

Yes. Q1 was more -- first month was only 50%, and we have reached around 80% in by May, June.

Okay. Okay. Sir, my second question was more pertaining to the Pharma margin. So likewise, you mentioned that Speciality margins will see inch up once your discretionary spends, product sales start again. Pharma margins have almost touched the peak of what you've ever achieved. So is there any temporary element or any one-off element, or you see this margin sustaining because of the product mentioned rupee depreciation [ hold ]?

Yes. I think Pharma margin overall have moved to a reasonable healthy level. And we have been fully utilizing our brand capacity. And of course, the new expansion is going to come in. So in terms of EBIT percentage, as you know, this is a good number, to be anything about 25% is a good number. And overall, there will be growth in terms of Q-o-Q and Y-o-Y because of the new capacity additions that will come in the years.

We have next question from the line of Chetan Thacker from ASK Investment Managers.

Just had 2 questions. One was what is the capacity that has been commissioned for chlorination already in this space and the PDA volume, if you could share that?

No. We have just started the monochlorination step. The dichlorination step has not yet started. So that step is a part commissioning in that sense.

Yes. So just to add on that PDA volumes for the quarter is 470 tonnes per month.

We have next question from the line of Keshav Lahoti from Angel Broking.

I just want to understand, as you know, there is a China story that's playing out for the entire chemical industry, so Aarti been one of the beneficiary of it. How should we look at export share as a percentage of revenue to go, going forward?

Yes. Actually, because now India, the overall manufacturing in India is increasing. So we are seeing a lot of good traction of materials are being sold within India itself. So I think this export in the range of about 40% to 50% level might remain for us. And we might have more sales in India, which will be then indirectly exported by our customers. Like some of the products which we sell it in India, 100%, it is used for exports.

Okay. Okay. Understood. So in a way, we are seeing traction like our export price increasing, that is what your sense is?

Yes. As a country, export price will increase. And then part of that, we will be supplying to the people who will be ultimately making some [ biochemical ] molecules, some -- or advanced intermediate or pharmaceutical, which will get exported. So some of the agro intermittent, which we sell it in India, the finished molecules is not at all consumed in India. They get 100% exported out of India.

Okay. Understood. Okay. I just need an update on contract one, which got canceled. So possibly, we might not be supplying to the concerned party. So for that product, are we manufacturing product and supplying in the domestic or international market?

No, actually, we'll be commissioning that second phase of that project only in this Q4 of this year.

We have next question from the line of Archit Joshi from Dolat Capital.

Sir, I just remembering from the last call, we had sort of divided by $20 million bullet payment from the cancellation of the contract in the 4 quarters, and I think we had approved approximately $5-odd-million in the first quarter. So just want a clarification if they are buying the same this time around this quarter?

Yes, yes.

Right, sir. Just an extension to that. I think you were expecting this stream of cash in our balance sheet by the end of this year. Are we still on track in terms of receiving that amount of money, or are there any delays in getting that?

No, no, it's as per the contract term. So there's no change [ that will pass ] on that.

Right, sir. And so $5 million is approximately INR 35.7 odd crores, this should directly flow into our EBITDA or PBT. So considering that also, sir, I mean, a lot of questions have been asked early on the margin side earlier. So if I just remove that from our sales and EBITDA margin comes even lower, so just wanted to understand if there's been any -- other than the discretionary items that we have been selling in the exports market, has there been any -- is there any new normal that we are seeing in terms of the Tier A and Tier B buckets that we have in terms of the commodity products that we sell? Have we seen any correction, which could be a new normal sort of a premium in terms of realization?

No. Other than the discretionary product, there is no impact on margin side on whether products which are going in agro, pharma or specialty.

And other than that, you also need to just consider that there will be -- there are certain expenses and costs, which are being charged on a fixed base related to that contract. So it's not that the entire $5 million directly goes to the bottom line. There is an expense charge, which is also coming in towards that.

Sure, sir. One last question, sir. I just got a little confused when you were speaking of the first contract, you said that the second phase will be commissioned in the fourth quarter. What is this case exactly? Have you found any alternative route of applications from that plant that we had partly capitalized, I think, in FY '20 or the first quarter?

So that product has other uses also, and we can sell to others also. And as we discussed earlier, that product is going to be manufactured by various companies, and we'll be selling those intermediates to them.

We have next question from the line of Rohit Sinha from Emkay Global.

Am I audible?

Yes.

So sir, most of my questions are already answered. Just wanted your thoughts on, as we have recently know that [ Moda ] is also looking to come into this benzene derivative side. So are they going to compete in some of our products line? Or how we are seeing that into our competition?

No, we'll have to see, I think we are -- some press note has come, we were just not in, but because of this increase in [ parameters ] the benzene demand is substantially expected to increase, maybe that can be the trigger. I don't know what is the trigger for that.

We have next question from the line of Naushad Chaudhary from Systematics Group.

Again, a more clarification on the inventory and margin part, sir. If I look at the balance sheet, there is hardly any change in terms of inventory if I compare it with March '20. So just wanted to understand, is there still inventory pending which is expected to be liquidated in this or coming quarter? Or is there any new product inventory we are building up?

This inventory is in a routine course. Actually, the more building was happening in the first quarter when we realized that the regular market is not picking up the material. So that's why we sold that into a nonregular market. So now we are not building the inventory. We will see whatever we are producing, we'll sell it to a regular market or nonregular market.

So why I'm looking sir, if I connect it with the margins, sir, so we have only 2 reasons for the margin drop in this quarter. First one is inventory. Second one is the chlorination plant, which we have started, which is also up 50%. So if I look at the positive side, we had a substantial volume growth, around 30%, 35% in our key product volume growth. We had a very good utilization, plus INR 35 crores to INR 40 crores we have recognized from long-term contracts, plus nitro toluene have recovered, which had an issue last year because of the raw material. And still, we have a drop of 700 bps in the Chemical margin. So I was not able to understand this. Exactly what has dragged this margin?

So there's some new projects what has been commissioned that have a fixed cost. Because of that, there is a higher increase in depreciation, then some COVID-related expenses are also there. So those things have combined and the discretionary side because there is a pressure on the margins, so this nonregular market, the margins are still lower. So there is a broader price pressure is there in discretionary segment. And if you're putting into nonregular market, the impact is still more. So that is the reason that margins are impacted. And going forward, quarter-on-quarter, I think that margins [ still want ] improving.

Okay. From the next quarter on, what can we see it is going towards 20 or 22, which we used to guide earlier?

It will be progressively increasing, both utilization will increase as well as market spread also will get better.

Another point just to add is that if you look at the inventory days in the overall basis, inventory days have fallen off by more than 10%. So that probably you could just do some calculations on that. It might just give you some [ indication ].

We have next question from the line of Harsh Bhatia from Emkay Global.

Just a clarification on this dicamba extension, I see if you're already expanding the capacity for the users. Even if we go ahead for the dicamba to supply the intermediate as a dicamba usage, it would be more export-oriented or it would be more related to the domestic market, like in what scenario could we see more export offtake? And if yes, would this be more towards the U.S. market or the Europe market?

Basically, now, we will be supplying to the manufacturer of dicamba wherever, either in India or China. So then they will make the product and sell either in U.S., Latin America or wherever.

Okay. Okay. So the supply would be towards domestic market or Chinese market? Okay.

Yes. We will be making intermediates here. So major market for dicamba is more on U.S. and Latin America.

Okay. As opposed to Europe.

Yes.

And in your opening remarks, sir, just a clarification, you had mentioned that significant quantities were -- in Q2 were taken to China, almost 20% as opposed to 8%, that is in normal case. Am I right? Or this is -- any clarification on that?

Yes, that percentage of export had increased from China from normally about 8% to 20% of our export has gone to China.

Right, sir. Any more color on this, like as to what reason? Any specific product or could this be the new normal going forward?

Yes, that's what the point was the discretionary spend of our regular market, the demand was impacted. So then after accumulation of inventory in the first quarter, then we decided to go for newer market and identified customers in China, and we have supplied to them. So this will be good for us on a longer-term basis also. So time to time, we'll be able to tap that market as and when required. We have some regular markets -- for some of our products, we have a regular market in China. And some of the products which would be a little less margin might become more of a kind of market.

Okay. So going forward, we can expect 15% to 20% range for the Chinese market.

Correct.

We have next question from the line of Nitin Agarwal from IDFC Securities.

Sir, on the Pharma business, you talked about a lot of newer opportunities coming into play, and you're sort of going in for a much larger CapEx expansion. Sir, what is the nature of some of these opportunities that you are seeing, which is different than the business that you were doing earlier? Or is [Technical Difficulty]

Yes. We are going to concentrate on the intermediate and the CDMO part of the intermediate business going forward so -- apart from the API business. So that is what is the area where, based on our chemistry [ spend sag ] and the customer base that we are approaching, we will be able to gain significant growth in this area.

And when you say CDMO, this pertains to what? This is pertaining to some innovative -- some global innovators you will be working with for the intermediates?

Yes, yes, yes. We will be working with global innovators. And also we are also specialist in onco products. So there are a lot of other generic companies also who don't have their onco capabilities. They also like and they are -- we are doing a lot of vertical integrated work for them as well. Because any onco product, which needs to be commercialized, you need to be vertical because -- and they are trying to create a virtual vertical platform for them.

So sorry, on the onco bit, you mentioned -- it's again the intermediate sort of onco products or the full APIs for the oncology products?

Both. Both.

Sir, now with all of this as sort of put together, in terms of these initiatives that you're taking on the Pharma business, do we see Pharma's proportion in business sort of meaningfully increasing over the next 3 to 4 years?

I think overall, Chemical is also going to grow significantly and Pharma will also grow. I think Pharma, next couple of years, we anticipate again 15% to 20% top line growth because of the new facilities coming up. And then the large facility that we plan to build will be commissioning after that. So -- after the couple of years.

Okay. Then, sir, on the Chemical business, sir, after -- during this COVID phase, have you seen any changes in your -- in the demand patterns, any -- which sort of gives you a little more positivity on your business outlook going forward? Anything -- any [ pattern ] you've seen both from innovator demand -- from a global demand as well as domestic demand perspective?

No basically [ decreased ] demand has been impacted, whether it's a textile or construction or automobile and all that. That is expected. There is a global demand impact. But the domestic demand has now picked up back to pre-COVID level.

And sir, on the new chemistries that we've been looking to work on, have you identified which new platforms are we looking to work on or to create to sort of build capabilities on going forward?

Yes, we are planning to enter into [ coridoran ] range. So that has a lot of different chemistries coming in, in that range.

Okay. And then just squeeze in the last one, sir, on -- earlier, you gave your guidance that we should be able to compound our profits by about 20%, 25% on a long 3- to 5-year basis, we see essentially the flip year, how should we look at this guidance over the next 3 years beyond that?

No. Actually, our guidance is 15% to 20%, not 20%, 25%. We will look if those guidance should not be issued.

We have next question from the line of Abhijit Akella from IIFL.

I joined the call a bit late, so apologies in case you've already had some on this. On the dicamba intermediate project, have we firmed up our plans, sir? Are we going ahead with some specific manufacturing capacity by end of this year?

Yes, the plant will get commissioned this year, by end of the year, yes.

No, no. So I guess, Abhijit, just clarify, the question is in relation to setting of the dicamba facility.

No, no dicamba. Our intermediate plan.

Yes. I guess, the question was related to that.

No. I mean -- I understand that you have plans to do both or maybe a combination of both. So just the query was regarding any finalization of plans in this regard, whether the intermediate or the finished product?

No, intermediates are definitely, we will make. Regarding finished products, we have not yet -- I think it will take some more time to understand how the demand is actually going to grow in dicamba. So that we are evaluating. We have taken up in R&D and all that, so -- that product. So that decision for finished product has not yet been taken.

Okay. And on the intermediate, do we have customer visibility now, sir, in terms of market opportunity?

Yes, yes. Yes. There are possibilities of selling.

Okay. Fine. Second thing was on the discretionary portfolio that you mentioned. So can we interpret that roughly 40% to 50% of our spectrum sales, which is auto and construction and all these, these are the products that were impacted in the quarter. And should we expect that this will improve now from 3Q onwards in terms of margins and price?

Yes. Yes, yes. I think that's what was discussed earlier also. But going forward, the margins should improve quarter-on-quarter.

Okay. And the plants are still running at about 90%, you mentioned. So which segment in a drag, sir, on the overall utilization? Which end-use industry that...

No, some of the products, we can -- we are able to sell, but that products still remain -- the capacity remains underutilized in some products.

Okay. And last thing from me, on the chlorination project, is it possible to quantify the amount of the project? And how much was the fixed cost increase in this quarter because of that?

So the project CapEx was upwards of INR 200 crores. The specific number on the fixed cost, we don't have it right now. We have to circle back and share it with you later on.

No problem. So just to clarify, you said INR 400 crores, is it Chetan?

INR 200 crores.

We have next question from the line of Ranjit Cirumalla from B&K Securities.

The one question, in one of the answers you alluded that you were also looking to benefit from the PLI schemes in the Pharma and probably the Chemicals. Just wanted to get a sense whether you're looking at benefiting directly or it is like benefiting indirectly?

There will be indirect benefit. And some of the APIs, we are looking at whether we can develop...

So we would be taking 105 acres of land in Dahej, so is there any plans of taking a direct benefit, at least in the Pharma side?

I think, our Pharma, basically, the products which are there in PLI scheme are older products, and they are more commoditized products. And we are more in higher-value chemistry and higher-tech chemistry, where we do [ endemic ] reactions and we do [ antigan sort of ] stuff. So I think at -- looking at the current list, we're not going to be in that space currently.

Okay, sir. Second one, we have been incurring upwards of INR 1,000-odd crores of CapEx, and we [ and you ] guided that it would continue to remain a bit elevated for at least next couple of years. So is there a thinking within the company now we have these tax benefits so we can easily set up a subsidiary and take the tax benefits? And if that [ thing seems ] or we will continue to do it in the stand-alone?

There are a lot of hidden clauses impact tax benefit and other stuff. It's not an easy thing. So it is we [ stick with what ] we are doing as of now. That would continue in the current tax structure.

And then lastly, on the interest part up, we have seen some INR 6 crores of gains, and that's why the export is a bit lower this quarter. But if one were to assume a normal run rate, so if we add back INR 6 crores, INR 20 crores should be a normal run rate of the interest for the next couple of quarters?

Yes, it should largely be around that plus or minus 5%, 10% kind of [ stuff ]. I mean, it will provided we look at the interest rate hovering around the current rate.

We have next question from the line of Rohit Nagraj from Sunidhi Securities.

So how much have you invested in the land, 1-0-5 -- 105 acres?

We have just not invested anything. We just acquired the land. So the -- from a land cost perspective, I think we have invested close to INR 45 crores.

INR 45 crores, 4-5, right?

Upwards of 45, 45 to 50.

So that number would be around 50-plus -- INR 50 crores.

Around INR 50 crores, right? Yes, yes.

INR 50 crores.

Okay. The second question is in terms of the canceled long-term contract. So we are getting the compensation at $5 million per quarter. Now if the company decides to get the material from us, then will that revenue be over and above this $5 million? Or will it initially form part of the 5-year?

No. As of now, because they are not going to consume -- they are not -- they have stopped their construction. So as of now, that issue is not there.

So at any point in time, if they again come back to us for material, it will be over and above the compensation amount, it might be a different revenue stream altogether?

No, that is separate this -- if it is outside this contract, then it will become a totally separate. There can be a totally new contract also where the material may not be going to their own plant [ but only ]. So that is a totally separate idea.

We have next question from the line of Pavas Pethia from ENAM Asset Management.

Firstly, congrats on good recovery from 1Q. So when we talk about the return to long-term trajectory of 15% to 20% PAT CAGR, so how does FY '22 looks? Is it the base we take is FY '20 and then grow 15% and 15-odd percent to 35%? Or from a base of FY '21, which is kind of flattish, if we grow 15%, 20% every year?

This is overall a 3, 4-year period. So next year, obviously, we'll have a strong double-digit growth. The exact number, I think, in Q4, we'll be able to give better guidance to the FY '22. And subsequently, there will be further growth in FY '23.

Okay. Sir, over, say, the next 4 years, the base we take is FY '20 or FY '21? Just because...

Yes, FY '20 or FY '20 will be the base value.

Okay, sir. Secondly, sir, in last few years, we have seen that we are in a CapEx mode. But the flip side is that our sales growth is kind of lagging whatever the Capex we are incurring, and that's also kind of weighing on the return ratio, which used to be upwards of 20%, now it's down to 15%, 16 odd percent. So when this kind of reverses and we have as [ return ] of more than 1 or next and then again, we are back to that high 20s return ratios?

Yes, the turnover will -- we will see increase. Unfortunately, this COVID had given an impact here. And again, this contract also has an impact. But going forward, the top line will increase.

So the other way to ask is, what is the potential sales or EBITDA at constant prices for all the project CapEx we have incurred?

Yes. I mean INR 2,000 crores plus top line is what we are looking at additional from FY '20.

Ex the 2 long-term projects you're talking? But that's included in this guidance?

No, that is included.

Your next question from the line of Sameer Dosani from Carnelian AMC.

Just one clarification. What is the current mix of discretionary and other nondiscretionary kind of things because FY '20 was 60-40, right? Am I correct?

Yes. FY '20 was 60-40.

And what is the number for H1, sir?

The discretionary will be a little lower than that.

And the margins for discretionary are higher? I mean -- or is it similar? Or what is the margin trajectory for that, sir?

It will vary product to product. So we don't have -- as a basket, we don't have any specific [ trajectory ].

We have next question from the line of Pratik Rangnekar from Crédit Suisse.

Sir, just a clarification on the -- on the Speciality Chemicals margins. So from my understanding is that for the new business that you had to take in the nonregular markets, you had to match your prices with whatever was going in that market, because of which the spread on that contract is a little lower. But on the regular market discretionary products, your spread is still intact compared to what it was earlier, is that understanding correct?

No even regular market also, there is a pressure. Obviously, I think, because the demand is less. But nonregular market, the impact is going to be much higher than the regular market.

Okay. Okay. Fair enough. The next question is on the Pharma margin, sir. In the context of your comment that there is a structural improvement in the margin, sir. Can you just throw some more color on that as to what is driving that structural improvement? And if you could also highlight what is the ASP increase in dollar per tonne or dollar per unit basis on -- in the pharma segment?

Yes. Basically, as we are approaching towards fully utilizing our current capacity, we are concentrating more on the regulated and higher-margin markets. So due to which the overall margins have shown improvement. And once the additional capacity gets onboarded, then there will be top line growth which will be faster. And would eventually result in overall percentage growth in net EBIT number growth going forward. So we have API additional block coming in, and then also we have intermediate additional block, which will get commissioned in this year and next year.

%Okay. Is there a realization increase component here as well, which is contributing? Or..

Yes, yes, yes. Realization increase component is there. Yes.

%Can you -- is it possible to quantify that?

We have more than 40, 50 products are being made, 40 products of the API we are making. And in the intermediate space, also, we are making 50, 60 products. So we can't [ commit to a price ] but overall there is an increase, yes.

Okay. Okay. Okay. So sir, just one more question on the dicamba plant. So you mentioned that you have visibility in terms of, that there's a possibility in terms of clients that you can sell to, potential clients. So what would be your strategy, maybe similar to the strategy that you adopted in 1Q where in order to increase your volumes, you were willing to accept a lower margin there. So would you be willing to do a similar strategy in the dicamba plant as well? And in that sense, how fast do you think or how soon do you think that you can fill up that capacity once it's commissioned?

Yes. I think now that the entire dynamics will change, so accordingly, we'll have to do the pricing for the product. And more volume for that will come in FY '23. For FY '22, still, there's a pipeline like [ in the ] system. So some volume will come in FY '22. And a significant volume, I think, will -- more will come in FY '23.

We have next question from the line of Prasenjit Bhuiya from AMBIT Capital.

This is Ritesh on [ again ]. So I just wanted to check on one thing. When you say that, like, if I remember correctly, FY '20 also, there was some pressure because of nitric acid and an [ inability and chem all those were ] weak. Global autos and chem were weak in FY '20. And then FY '21, we have seen a COVID impact. And in between what I see is that in '19, '20 and '21, you would have actually done the CapEx of anywhere around INR 3,000-odd crores. And you are pretty much from '19 to '21, EBITDA would largely be flat. Even gross profit, for example, would have hardly seen a 3%, 4% sort of growth in between. So I just wanted to check with you. I mean, is it that the base business has also been under pressure over the last 2 years, given where we were in '19 realizations? [ COVID } have those realizations corrected and have also kind of put pressure on the P&L. And when you say that 15%, 20% growth guidance, I mean, I know you answered somebody in FY '20 to be the baseline. But why not take it as '19 because you would have also done a INR 3,000-odd crores CapEx since then?

Yes, but part of that CapEx will be also for your replacement CapEx as well as on related CapEx also. And now because of this order cancellation, the visibility will have some what margins we are able to sell this product. As you know in the previous question, that point was asked. So that also kind of puts a little bit of uncertainty on that part.

Understood, sir. And any comment on the Specialty Chemicals? I mean, like, for example, you had about INR 820 crores of EBIT in FY '19. And probably will end the year at actually even much lower than what your FY '19 number is. So I just want to get a sense on, a, what is the CapEx that you [ commissioned ] and that are [ causing ] some bit of challenges to the profitability. The other part is, of course, the base business or the base business that was listed there in FY '19, it hasn't seen margin erosion over the last few years and which I believe you would expect to recover in the next 2 years?

It's actually more volumes getting [ cleared ] up also will give us additional benefit into that.

And any volume growth that you would have seen in your base business, let's say, over the last 2 years in '19, and let's say, whatever your [ '20 ] looks like?

Yes, this year -- this second quarter itself, we had gone substantially higher volumes. You've seen that. Unfortunately, margins were lower because of the COVID situation. So once the situation normalizes then that margin benefit will come in from that.

We have next question from the line of [ Falguni Sanghvi ] from JPMorgan.

This is [ Falguni Sangheva ]. My question was again on the guidance for PAT. You mentioned that -- we have a flattish guidance for FY '21. So I'm just doing a quick calculation. So this would mean that in the second half, we will do about 30% more business than the second half last year. So what will drive this business because you -- as I gather, there will still be margin pressure, it will sequentially improve, but not yet be at pre-COVID levels. So what will guide this growth in the second half compared to the second half last year?

Yes, in last year Q4, that's about 10 days impact was there of the lockdown in the last year. And so overall, we expect the volume to grow and also the market spread also to get better. Pharma is also showing a good traction compared to the last year.

But all this will still have to give a 25%, 30% year-on-year growth. Is that -- so in your mind, do you think the [ cited ] guidance is still achievable? Or it looks optimistic?

I think that is achievable. That's what in our internal budgeting, we feel that this is possible.

Okay. All right. And lastly, for the canceled long-term contract, so I understand that we have a second phase of commissioning, which will happen by the end of this year. But in the first phase, are we keeping the capacity idle currently, currently? Or are we using it for something?

No, we are utilizing it for other markets already, yes.

And what would be the utilization rate right now for that plant?

That is relatively less, but it should get ramped up from this quarter.

Okay. And it's related to developing the same intermediate, which was going to happen?

We can -- there, we have some flexibility also in the products, too. We can make some other products also.

All right. And just one last question. Do we give any breakup of how much is that toluene a part of our business in the overall Specialty Chemical pie? Has it already reached, say, anywhere between 5% to 8% of the EBIT? Any color on that would be really helpful.

Can you repeat?

The toluene part of our business, how much would that be of the overall Specialty Chemical pie right now?

Yes. That actually -- this quarter, the volumes were better. And going forward, we expect the toluene volumes to go further up in the second half as well as the next year.

But that business would -- the business would be somewhere around 7% to 8% of our Specialty Chemical business already, or much lower? Like just a ballpark figure on that front?

I don't know, Chetan might have a number.

I would start taking that kind of number.

We have the last question from the line of Arun Prasath from Spark Capital.

My question is on -- on the land parcel that you acquired. So if I recall correctly on your [ QAP ] document, you said that you will be buying some land parcels in Gujarat. Is [ done that ] same? Or is it something incremental to that?

It's a different parcel.

So basically, we have parcel in -- land in Jhagadia and we have this [ land in Dahej ] and then over on top of that, we have this land parcel?

No, that will add this contract is still [ unlee ].

Okay. Okay, sir. And can you also throw some light on the breakup of the [ CV ] that is capital work in progress, INR 1,500 crores in your balance sheet? Some rough breakup of what kind of project is part of this?

I think it's the second phase of chlorination and second phase of first contract, the second contract, NCB expansion also is going on. And Pharma expansion as [ Adi ] has mentioned, it is going to get commissioned in these next 2 to 3 quarters. So across the board, we'll see substantial commissioning in this second half and the first half of the next year. Substantial capitalization will take place.

All right. And can you give some status on the NCB expansion also, sir?

Yes, NCB expansion first phase towards the end of this year, and the second phase will happen in next year, FY '22.

And utilization will also be -- right from the beginning, it will be higher? Or how it is? Some guidance on that will be very helpful.

Yes, I think utilization, we don't see much increase there.

No. I'm saying now that you have around current capacity there on that you are doing 90 percentage. So when the new NCB expansion comes it, it will be maintained in 90 percentage? Or it will see some dip initially?

No. I think there is enough demand there. So we don't see any -- once the plant stabilizes, we should be able to run it [ to capacity ].

Sir, do you have any further questions?

Sorry, actually, I couldn't hear. Some disturbance in the line. Can you please repeat, sir, on the utilization part?

No. Yes, there is enough demand on that side. There are a lot of material is currently imported. So we'll be able to utilize immediately the increased capacity.

Thank you, sir. Ladies and gentlemen, that was the last question. I'd now like to hand the conference over to the management for closing comments. Over to you, sir.

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 or would like to know more about the company, kindly reach our Investor [Audio Gap]

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