Aarti Industries Limited (524208) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Aarti Industries Limited Q3 FY '21 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. Thank you, and over to you, sir.

Yes. Thank you, Lizanne. Good evening, everyone. Thank you for joining us on Aarti Industries Q3 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, CFO of the company. Before we begin the call, I would like to point out that some of the statements made today in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentations 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 attending this call. I hope all of you and your families are in good health, and we look forward to the country emerging healthy out of the difficult situation related to the virus pandemic. I trust that all of you would have received the Q3 FY '21 results presentation that has been uploaded on the stock exchange website earlier today. Our financial performance in Q3 show continued improvement, which is in line with our expectation and the outlook [indiscernible] stronger turnaround in the second half of the financial year that was previously shared with all of you. We sustained strong momentum on both operating and financial parameters during the third quarter based on the improving business visibility. During Q3, we reported revenue of INR 1,311 crores, which was higher by 7.6% Y-o-Y. This was driven by turnaround in demand for our regular markets and established relationships. In the first half of the fiscal year, weaknesses in the segment had required us to look for areas and opportunity for discretionary demand and explore new market, resulting in weaker margins. We also recorded our highest ever quarterly EBITDA, PBT and PAT for the company. As indicated earlier, we remain well positioned to meet our guidance of delivering profits in line with last year despite the exceptional disruption seen for the large part of FY '21. The quarter shows a continued recovery phase with gross income from operations of the company on a stand-alone basis at INR 1,261 crore, EBITDA at INR 269 crore and PBT of INR 199 crore and PAT of INR 162 crore. But on the consolidated basis, the gross income was INR 1,311 crore for Q3 FY '21, about 8% higher as compared to the INR 1,218 crore for Q3 FY '20. During the quarter, we witnessed the improvement in margin of 90 basis points and EBITDA expanded to 12% Y-o-Y to INR 285 crore as compared to INR 254 crore a year back. The rebound on this parameter over the last 2 quarters after the weakness in Q1 reflects the resiliency in our business model and the encouraging improvement in the dynamics of our business. Finance charges reduced based on the lower cost of funds and the ForEx linked revaluation gains on the long-term borrowing. Profit before tax increased by 17% to INR 209 crore and profit after tax by 18% to INR 169 crore during Q3 FY '21. CapEx spend for the quarter was INR 365 crore, we took the aggregate the 9 months to INR 891 crore. We are well positioned to meet our indicative CapEx guidance of INR 1,000 crore to INR 1,200 crore for FY '21. Following the commercialization of our new chlorination facility at Jhagadia, we continue to take forward several other CapEx programs. Some of these projects are drawing closer to launch as our expansion momentum remains intact. Next in line are projects related to long-term contracts, NCB expansion, pharma expansion, et cetera, that are slated to be commissioned over the next few quarters, providing the planned growth acceleration next year. Meanwhile, our R&D facility in new Bombay which was operationalized just before the country went into lockdown is now running at near full operating capacity. Here, we are developing new products, new chemistry and new technologies that will contribute to our road map of expanded growth visibility over the next few years. Specialty Chemicals business in Q3 was driven by gaining momentum across various end user market, representing further improvement over Q2. Specialty Chemicals segment reported consolidated segment revenue of INR 1,079 crores, witnessing a growth of about 4% as compared to the revenue of INR 1,042 crores in Q3 FY '20. The consolidated EBIT also grew by 4% Y-o-Y and was INR 224 crore for Q3 FY '21, thereby generating EBIT margin of 20.7% as compared to EBIT of INR 215 crore for Q3 FY '20, which was at a similar margin. With this performance, Q3 FY '21 also recorded the highest ever EBIT for the Specialty Chemicals segment. We are seeing returning demand from established market, driving improved margins after H1. And we have seen higher exploratory sales through discretionary spending market as our objective has been on expanding volumes and rationalizing inventory during a tough operating environment. Contribution to segment revenues from value-added product increased from 72% to 76%. Strategically, our focus remains on increasing the contribution from value-added chemistry within our portfolio, gaining prominence within the development programs of the large number of global [ innovations. ] Now for the Q3 production update, there has been higher scaling production following reduction in lockdown restriction, and volumes have been expanding. Production of nitrochlorobenzene was at 16,830 metric tonne compared to 14,900 metric tonne a year back. Similarly, for hydrogenated products, we have achieved production of 2,740 metric tonne compared to 2,330 metric tonne for our last year. On the nitrotoluene front, production was -- for Q3 was 3,600 metric tonne compared to 1,667 metric tonne in the same quarter last year. We expect to deliver steady performance improvement going forward separate by new facility going online as discussed earlier. Our Pharma business continued to deliver growth in revenue with positive operating leverage on increasing volumes. Segment revenue grew by 32% Y-o-Y on -- during Q3 to INR 232 crore as compared to INR 176 crores for last Q3, which is the highest ever top line achieved historically by the Pharma business. Based on the higher utilization continued from our regulated market and higher contribution from value-added products and a growing pipeline of new introduction, segment [Technical Difficulty] improvement. Q3 EBITDA expanded by 53% to INR 55 crore as compared to INR 36 crore for Q3 FY '20. Pharma revenue growth is expected to sustain as additional capacity for API and intermediates are operationalized. We are also seeing the benefits from India's improving position in global value chain. Going forward, we'll continue to drive deeper penetration in therapy, such as antihypertensive, cardiovascular, oncology, corticosteroid, et cetera. We have strong pipeline of approval and visibility to maintain our growth. Over the years, the Pharma segment has grown to a substantial scale and size having significant further growth opportunity. As a part of the long-term growth opportunity and business strategy, the Board felt a need to evaluate the feasibility for demerger of Pharma and Allied Activity. Hence, a committee has been constituted to evaluate the same. To conclude, we are making a strong operating progress with every component of the business, delivering positive traction. Going forward, our strategic focus will be on creating a sustainable growth framework as we align with India's growing position as a preferred partner of choice to global supply chain with scalable capabilities. We have made commensurate investment to participate in such opportunities backed by our initiatives in R&D, sustainability and other internal competency, in line with the global best practices. 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 Anshuman Atri from PremjiInvest.

My question is regarding the demerger. We have seen one demerger on the surfactants business and now on the pharmaceuticals. Sir, instead of having one...

Sorry to interrupt Mr. Atri. Sir, we are not able to hear you clearly.

Sir, so my question is regarding the demerger. Sir, we have seen one demerger on the surfactant side and the second under evaluation is the pharmaceutical. So if all these -- suppose, for example, in future, we have these PLI schemes coming up on pharma and specialty, so how will the company try and ensure that the respective demand is catered by specific companies? And is it not better to scale one company rather than have multiple companies listed on the exchange?

Yes, our Pharma business has been growing over the last few years. We are about, I think, INR 112 crore EBIT about 2 years back. Now we are reaching about INR 200 crore EBIT and -- from the scale point of view. And the manufacturing sites and the market is quite different from Specialty Chemical. So that is the reason we are trying to evaluate and take a overall view whether it would be better if we demerge it or whether it should be a consolidated company. I think the point you made also was quite valid in that sense. So we'll take into account that factor also when we take the -- when we evaluate the various points.

And sir, the second question is regarding, we have few sister companies like Aarti Drugs is there. So do we plan to have one single pharma company where all associated companies of the Aarti group sit?

Yes, that is a possibility which can happen in longer term, but not in any immediate term. We are not going to have -- if this demerger is decided, then it will get a separately listed company. And then going forward, the both companies can -- may merge, I don't know. But it is maybe much on a longer-term horizon.

We'll move on to the next question that is from the line of Rohit Nagraj from Sunidhi Securities.

Congrats on good set of numbers. Sir, the first question is in terms of the -- whether we have received -- I mean, whether we have started supplying any material from the canceled long-term contract to any of our customers? So just wanted to know, yes, we have received the 5 million payment, but are we producing any material from there and supplying it to the same customer or other customer?

This plant is being taken up for commissioning in Q4 of this year.

Okay. So it is not yet commissioned, is that what understanding is?

Yes, yes. We are going to start commissioning in February.

Okay. So whether -- have we received any orders for after the commissioning is done to produce any product from this particular facility or do we have any plans for the same?

No, there is some other market for this also. So initially, we'll commission the product and put it into the other market, and we will see how the thing moves as far as [Technical Difficulty]

Right. Sir, second question in terms of the exports market. So recently, we have seen container availability issue as well as the freight rates have gone up. So has it impacted, by any chance, our Q3 revenues? And what do we see in terms of our Q4 revenues from exports?

Yes, the container will be -- is an issue. But till now, our distribution has not been impacted. But definitely, in some of the areas, there are issues in that sense.

All right. And till now in fourth quarter, is there any impact?

Not yet. I don't see it. I think we should be able to manage because we are a very large [indiscernible] and we have a very good relation with shipping lines. So overall, we don't see that there will be any volume impact.

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

In the initial remarks, sir, we mentioned some of the -- in Spec Chem, some of the end user industries are doing well for us. If you can name those end user industries, which area specifically is having more growth for us?

Yes. Basically, this domestic market end use is virtually recovered to pre-COVID levels. And export, now we are seeing [Technical Difficulty] in the textile segment and some traction in engineering polymer side also and automobiles also.

Okay. Secondly, in terms of chemicals margin, if I see our overall spread, it is still in pressure, and we have seen some quarter-on-quarter improvement in our Spec Chem margin. So are there any specific reason for this margin improvement or it's just because of the operating leverage we have seen this?

No. As we had mentioned in our Q2, we had to -- we sold a lot of products in the nonregular market and also made products which have little less margin because of the less demand in our regular discretionary market. So now the margins what we have seen are much more on a normal level as compared to what was there in the previous quarter.

Okay. So if spreads improve from this current level, the margin should go up further from the current reported number or should it be in the similar range?

Well, the overall utilization will increase and the margin will increase because of that. But some of the new plants when they come in [Technical Difficulty] will take little more time. So you can say this is the level it should remain.

Okay. And lastly, on the data point, sir, if you can share PDA volume of this quarter versus last year same quarter?

PDA this quarter was 520 tonnes per month while last year it was at 420 tonnes. So there's a 100 tonne per month increase in PDA.

The next question is from the line of Amar Mourya from AlfAccurate Advisors.

My first question is with reference to both Specialty Chemical and Pharmaceutical segment. If you can broadly give both the segment wise, the capital expenditure for FY '22 and FY '23? And how do you see the growth outlook for both these segments, along with profitability?

You wanted the capital expenditure for the next 2 years? That's what you're saying?

Yes, sir. Capital expenditure for FY '22 and for FY '23 for both Specialty Chemical and for Pharmaceutical segment.

Overall, Specialty Chemical, we are looking around INR 1,000 crores and -- INR 800 crores to INR 1,000 crores and Pharmaceutical around INR 150 crores to INR 200 crores. But we are not yet totally frozen. This is generally broadly around INR 1,000 crore to INR 1,200 crore, which is around 20%, 25% going in Pharma and around 80% in Chemical. That's a broad situation.

And can you give this -- basically, this CapEx is for what kind of products backward integration? How do you see the breakup of this expenditure?

Yes. We've got some of our regular current benzene chain also. We are adding new downstream products. And entire chlorotoluene chain, that will be the new product. So those 2 will be the -- for Specialty Chemical CapEx for next 2 to 3 years. The chlorotoluene chain and furthermore downstream products and some debottlenecking of our existing benzene and toluene line.

For pharmaceutical?

No, we are basically going to install a new intermediate facility in Dahej for which we have already acquired the land. So that will be taken up in next couple of years. And we have ongoing expansion of our API side also, for which we have received the EC in this current quarter.

Right. Sir, why I'm asking this question is that as you are planning to demerge both businesses separately, just trying to understand that pharma business, which is currently roughly about 17% of the revenue, how do you see the Pharma business over next 3, 4, 5 years?

Yes. Pharma business in general will -- it has been growing. Last 5 years, it has given a CAGR of 18%. And I think we are hopeful that it will grow at 18% to 20% top line going forward. And in terms of bottom line, last 5 years, it has -- EBIT has grown 37%. Of course, that can't -- we can't sustain 37%. But overall, I think we are looking at 25% kind of a growth, plus or minus 2%.

Okay. Just last question on my side. Sir, whether these both businesses have any, what I would say, transfer pricing division wise or synergies which probably, once you do demerge, that will basically will reduce? Or how do you see that? What is the rational for demerge?

There's no integration or interlinkages, to answer your question. There are no integration or interlinkages between the Chemical and Pharma. So -- I mean, substantial integration or linkages. We can't disconnect it from that perspective.

I see. Sir, what is the major rational for demerger?

I think Mr. Gogri had answered that question sometime back.

Okay.

Yes, basically, now there is a good scale for Pharma, good growth opportunity. So we are just looking at that possibility whether there can be a [indiscernible] growing company.

The next question is from the line of Sangeeta Purushottam from Cogito Advisors.

Yes. I'm her husband and partner, Andrey Purushottam, here. First of all, congratulations for a good set of numbers. My question was a bit of a long-term strategic one. Given the background that you've been fairly intensely indulging in CapEx as an investment for growth, in a 3- to 5-year horizon how do you see your CapEx strategy panning out? Is there some period of time in the future when you see these amounts in CapEx tapering off? Or do you see a sustained pace of CapEx over a 3- to 5-year horizon that we're talking about?

Yes, basically [Technical Difficulty]

Sorry to interrupt, sir. Sir, there's an echo from your line.

Hello? Now it's there?

Yes, sir. There's still an echo, Mr. Gogri.

Can you connect again?

Certainly. Ladies and gentlemen, we'll be reconnecting the speakers. Requesting you to stay connected. Ladies and gentlemen, thank you for patiently holding. We now have the line for the speaker reconnected. Over to you, sir.

Yes. In general, there is a huge appetite from India and also because of government Atmanirbhar scheme, we expect that overall chemical manufacturing in India for both intermediate and downstream chemicals will increase. So we see that at least the next 4 to 6 years, we should be able to maintain this kind of a CapEx. That kind of opportunity should be available. And especially because we have a very wide end-use exposure from agro to pharma to dyes, pigments, engineering polymers and also very -- we have an opportunity to expand in various end-use segment. So for the next 5, 6 years, I see that we will be still in an investment mode. Hello?

Hello, Mr. Purushottam?

Hello? Can you hear me?

Yes, sir. We're able to hear you.

So roughly what, about INR 200 crores to INR 300 crores a year, roughly?

Hello?

Sir, would the CapEx be of what order of magnitude every year? Would it be about INR 300 crores, INR 400 crores, INR 500 crores, roughly?

No, this INR 1,000 crore level, we expect to be there for next at least 4, 5 years for sure.

INR 1,000 crores per year?

Yes.

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

Sir, my first question is that the discretionary sector pickup has been quite slow, and that is visible from your sequential revenue numbers which grew only marginally. I believe you were expecting a good pickup in the second half, but still the growth from the discretionary seems to be laggard. So what could be the major reason for the same? And how are you expecting on a sequential number for Q4?

Basically, this last quarter, it was more and we had to go on for transferring some discretionary to nondiscretionary and some nonregular markets, so we could get it back to our regular market. So the top line increase is not much, but the margins have expanded. And going forward, I think, by end of fourth quarter, I think discretionary spending would reach to almost pre-COVID level for export market also.

Okay. Okay. And then, sir, second question, you have mentioned that now we are exploring a new segment that is chlorotoluene. So I just want to know what is the opportunity size and -- I mean, how big is the market and what is the potential Aarti indiscernible] 40:05 can take in that?

Yes. Overall, we see more than INR 1,000 crore plus definite revenue, maybe more than that. So -- it is because nobody is making those range of products in India yet, and we see a sizable possibility there, INR 1,000 crore plus top line.

Okay. So this chlorotoluene is completely an import substitute product or like -- so there are domestic manufacturers for the same?

No, it's a total import substitute. So we'll be making chlorotoluene as well as some of the downstream which are also imported into India.

Okay. Okay. And sir, my third question, sir, on the PDA utilization, if we look for the last 2 years, so the utilization has been almost constant at around 45% to 50%. In this quarter, we have seen around 100 tonnes per month improvement in the PDA volume. So what has changed now? And for the last 2 years what was not changing? I just want to understand that.

Now we see that in some of the other markets also, we should be able to penetrate and volumes going forward should expand in PDA.

Okay. So what are the end user segment for the PDA?

PDA is mainly on [indiscernible] and engineering polymers. These are the 2 major segments.

Okay. Okay. And sir, my last question, sir, what is the CapEx outlined for particularly NCD expansion? And are we on track to complete by FY '22?

Yes, that is about INR 150 crores.

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

Sir, could you please share your volume this quarter for nitrochlorobenzene and shed some light on the pricing as well?

So the nitrochlorobenzene volumes in this quarter was 16,830 tonnes.

So similar to last quarter. And anything on the pricing?

Pricing wouldn't be possible. It won't be possible for us to share.

No worries, sir. Sir, also on the CapEx front, if I rightly understand, the cumulative with the CWIP and the CapEx that's going on, we have roughly INR 2,400 crores of new capacity been coming out. How much of that can be attributed to the pharmaceutical business? And how much is for the Specialty Chemical business?

So close to -- I mean, more than 200 -- or close to INR 200 crores to INR 250 crores would be related to the pharmaceutical aspect.

That's just 10% of the whole kitty right now?

Because there are some things which has already been done from that aspect. Yes.

The next question is from the line of Karan Rathod from AUM Advisors.

Sir, just wanted to check your current gross block is about INR 2,750 crore, on which -- this is the Spec Chem -- I'm guessing most of it is Specialty Chemicals, and you're on a INR 4,000 crore revenue run rate. And if I look at your capital work in progress, as of September, it was INR 1,500 crores, INR 1,600 crores. You'll add another INR 600 crores by the end of March for your INR 1,200 crore guidance and another INR 1,200 crores next year. So then you will become almost INR 3,500 crores of capital work in progress. What sort of -- I mean, should we look at asset turnover from a INR 3,400 crore fresh capitalization or increase in EBIT margins beyond the current 20% margins? How are you looking at it? This question is more sort of what sort of sales growth are you seeing or margin expansion are you seeing as a result of this massive CapEx over the last 1 year and possibly over the next few years?

Yes. We see it's around INR 2,000 crores to INR 2,500 crores top line coming out of this CapEx, current WIP and some more which will be going on. And I think INR 400 crore to INR 600 crore level of EBITDA, it should be able to generate out of that incremental.

So sir, that will be then little lower margin than what you're currently doing. Currently, you're doing INR 4,000 crore revenue and you're doing 20% EBIT -- about INR 750 crores of EBIT. And with the incremental CapEx of INR 3,400 crores, you'll have a lower turnover from that will sort of -- will you not compromise your return on capital, the incremental return on capital?

No, obviously then still something will go in capital WIP also. So it will be -- there'll be always some capital WIP in that sense.

The next question is from the line of Kunal Mehta from Vallum Capital.

Sir, my questions have been answered.

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

Sir, my first question with regards to the overall ROC numbers. For example, if you look at -- for Chemical business, we have a...

Sorry to interrupt Ankit. Can you speak a bit louder? We are not able to hear you. Ankit? Mr. Ankit Gor? Ladies and gentlemen, we seem to have lost the audio from the line of the current participant. We'll move onto the next question that is from the line of Rohan Gupta from Edelweiss.

Sir, couple of questions from my side. Sir, first is just an extension of the previous question. You mentioned that roughly -- with the cumulative CapEx of roughly INR 2,400 crores, we are expecting revenues of INR 2,200 crores to INR 2,500 crores, generating an EBITDA of INR 600 crores. Sir, probably, this is first time in the history of the company that we are going to see such increase in gross block, almost INR 2,400 crores CapEx in FY '20 and FY '21 is going to converted in a capacity or real revenues in FY '22 and probably in FY '23. Sir, do you see that generally, with -- we have a time lag of almost 18 months. So do you see that there are any hindrances in converting this CapEx into revenues in FY '22 and '23 or it is going to take a longer -- with a lag of more revenues flowing in '24 or something?

Yes, this will be more on FY '23 and -- FY '22-'23 and '23-'24. So FY '23 and FY '24, that is the range by this time to get this kind of top line.

So you see that there are, sir, enough demand and enough projects in hand to consume all these CapEx? And can we see that the utilization level for this incremental CapEx is going to be, I mean, significantly consumed over next 2 to 3 years? Because we are still seeing that our top line growth from last 1 year, 1.5 years has been significantly impacted despite we are continuously doing CapEx. So are we getting into a time frame where most of this CapEx of last 2 years is going to get converted into revenue? So that's what I just wanted to reconfirm, sir. We have enough projects in our hand. And there is enough growth visibility that this CapEx won't be compromised with this lower utilization?

Yes, yes. Now there is enough visibility on the top line growth next 2 to 3 years for sure.

And sir, second question is on our strategy of demerging our Pharma business. Sir, I know and I recall our con call with -- almost 2 years back when you have given this suggestion of demerging your Pharma and surfactant business separately. At that time, I think investors was only behind you of demerging these businesses which was generating lower capital -- lower ROC. Sir, but now that the business and Pharma business is doing pretty well and there is enough growth opportunity, we already have a separate company under Aarti Drugs of Pharma business, almost in similar line what you're doing right now. Sir, if we see that some of the companies who are in agrochemicals, they are struggling to get into Pharma businesses because only being in agrochemicals probably may not give us enough growth opportunity. So you are probably -- your Aarti Industries is right now in the current scenario fortunate enough to already have its presence in Pharma. Sir, would it not be prudent now that you keep this business under this company only and take the benefit of integrated business model between agrochemicals and pharma APIs and pharma other Specialty Chemicals, keeping in the same business under the same roof under Aarti Industries?

Yes. I think these are some of the factors which we will take into account as we do this evaluation. But yes, this definitely reduces our diversified end use which currently we have. That diversification reduces if we remove the pharma out of it. So that is -- from that point of view, it is in a disadvantage.

No, sir, I was talking about the synergies and the similarities which have -- which are there in agrochemicals and Pharma APIs and Pharma Specialty. So why not take the advantage of that of the same integrated business model because some of that chem companies are trying to get into pharma, but they are struggling. And when we already have that business and then we are trying to demerge that. So I just wanted to have more clarity that why that we don't have a similarity between the both of the businesses? You said that both pharma and agrochemicals are completely separate. I just want you to elaborate a little bit more than how these 2 businesses are separate.

Yes, [indiscernible] totally end use customer base is totally different and at least the manufacturing -- our manufacturing sites and scale, the prices of the product, volumes are quite low and high-priced products in pharma. So that way the manufacturing activity is quite different compared to our intermediate and then even agrochemical, which are more on a higher volume and relative lesser price compared to Pharma.

Okay. And sir, just to reconfirm, and I'll get back into queue again. Sir, just to reconfirm, you mentioned that Pharma business offered 18% to 20% revenue CAGR over the next 4 to 5 years while PAT can grow at 25% despite we already have very solid EBIT margins in the current year in Pharma business, which is roughly 23% to 24%. Despite that, you see that PAT growth in Pharma business over the next 4 to 5 years can be at 25%?

Yes, yes. Yes.

The next question comes from the line of Ashutosh Garud from Ocean Dial.

Yes. Hello? Can you hear me?

Yes, sir. We are able to hear you.

Yes. Sir, the CapEx plan which you just mentioned about around INR 1,000 crores kind of a CapEx for next -- on a per annum basis for next 4, 5 years, so do you mean to say you would be like more than doubling your gross block in next 4-odd years? And if that is so, then what kind of a 5, 6 years of revenue CAGR do you see? Because we have already incurred CapEx earlier also. And I mean as a company what kind of a growth you are expecting from FY '22 onwards? Not -- let's say, not from FY '23, but even in FY '22 onwards, what kind of a run rate are we expecting because last 3-odd years have been flattish from a top line perspective?

Yes. Basically, this current CapEx should be for the.... [Technical Difficulty]

Hello?

Hello?

Yes. I guess there is some...

Ladies and gentlemen, we've lost the audio from the management's line. Please stay connected.

Yes. So while Mr. Gogri gets connected, the current CapEx which is there should be good enough for us to -- I mean, we've already given a guidance that we should be able to maintain our growth of around 15% to 20% over the next 3 to 4 years. So that -- with the current CapEx trend and other stuff, we should be fairly -- be able to justify -- I mean, stick with that growth guidances. As regards the future CapEx, which is going to come in 2 years, 3 years down the line, we still have to do some number, working and evaluate in terms of what is the kind of growth numbers which will come out from that. It will be a bit early for us to take a view beyond 4 years at this point of time. But having said this, generally, all the CapEx initiatives, which we broadly take up, would have an ROC of 20%, 25% or upwards of that. So with that rationale, I believe we will continue to maintain a healthy growth profile.

The next question is from the line of Harsh Bhatia from Emkay Global.

Sir, given that large nitrochlorobenzene capacity has been shut down in China, let's say, almost 40%, which could consequently restrict PNCB output as well within China itself, is there any sort of directional impact are we seeing in our pricing for nitrochlorobenzene, PNCB, ONCB? That's my first question.

Rashesh, do you want to...

Yes. There is an impact on the nitrochlorobenzene pricing, as you rightly said, and we are getting advantages in overall pricing and margins in this product line.

Okay. What would be the proportion of the China's revenue in this quarter, given that last quarter it was 20%, which was kind of high as compared to normal single digit? Anything on that front?

Yes. Overall, I think the China export is -- I think, Chetan, you have the number of China export?

The China export in Q2 we've seen it going to a level of 20% more in terms of sending the material to the nonregulated markets. In this quarter, it has normalized to around 11%, 12%.

Yes. It has come down, and we have not exported marginal products to China this quarter because the demand in India has come back, basically.

All right. That makes sense. One final question from my end would be, if there is a possibility you could provide a split of PNCB/ONCB? I think it's not captively consumed. Are we providing it to domestic players or are we exporting it directly?

No, PNCB, we are not exporting significantly and neither -- ONCB export is also very marginal. So it is largely consumed in India. 95% -- 90% to 95% is consumed in India.

We'll move on to the next question. That is from the line of Naushad Chaudhary from Systematix.

One quick question, sir. What is the gross debt we have as of this quarter? And how much of that would be for Pharma business?

So there won't be any -- we don't have a separate bifurcation on debt between Pharma and Chemicals. The gross debt what we have is roughly around -- marginally less than INR 2,500 crores.

We'll move on to the next question. That is from the line of [ Pawan from Renaissance ].

Sir, just 1 question. Sir, given our plans to do INR 1,000 crore, INR 1,200 crore CapEx on an annual basis, unlikely we'll be generating free cash, at least for next 2, 3 years. And so what are -- so one thought on this free cash in the sense. Secondly, what is the peak debt/equity or debt/EBITDA level that you're comfortable with?

Debt/equity around 0.7 to 0.9 is what is our internal view on that.

Okay. And on the free cash flow side, it's fair to assume that we won't be generating free cash at least for the next say, 3, 4 years?

I think in the chemical industry, we are really in a sweet spot as far as the demand is concerned. And I think this is the right time for investment for next few years, for sure.

Okay. And sir, one more thing. I missed your comment that you had mentioned about INR 600-odd crores of additional EBITDA. So that you were referring to the CapEx that you've undergone in the current year. Is that the case?

Current year and part of next year also will come into that.

Okay. Okay. And it was also mentioned that we're looking at 20%, 25% of ROCs for our CapEx. So simple math behind that would be, like what are the asset turns we're expecting generally then?

Asset turnover is always dependent on the value addition. So depending on the -- but typical asset turnover will be between I think 1 to 1.5.

The next question is from the line of Amar Mourya from AlfAccurate Advisors.

Just a few clarifications I was looking for. You mentioned that our current capital work in progress is roughly INR 1,400 crores. My first question is, when this capital work in progress will convert into gross block? That's my first question. My second question is you mentioned INR 1,000 crores CapEx in Chemical and roughly INR 200 crores in Pharma. I assume that is over and above the current capital work in progress to be spent over FY '22 and FY '23. Kindly clarify on the same.

Yes. That is more over and above capital WIP. And substantial of this capital WIP will get commissioned before of -- yes.

Sorry. I'm not able to hear you, sir.

Q4 we'll see substantial capitalization of this capital WIP. So additional CapEx is in addition to this capital WIP.

I see. And of this INR 1,400 crores, how much is for Chemical and how much is for Pharma?

Would be 90-10 or something, I think.

90% Specialty Chemical, 10% Pharma?

Yes, approx.

Hello? Yes, sir? Hello? Hello?

It will be less than 10% for Pharma and rest is for Specialty Chemical.

Okay. Okay. Okay. So now basically, sir, given that almost around out of the INR 1,400 crores, we are going to spend 90% in the Specialty Chemical and in the INR 1,200 crore, 80% in the Specialty Chemical. So basically, I wanted to understand, if I see your current gross block, which is around INR 3,800 crores out of -- and another INR 2,400 crores, INR 2,500 crores will be added. So in that context, like when we say 25% ROC on 1.2x or 1.5x asset ratio, so are we saying that these all products will be a high margin business than the current business margin? Because currently, we are not making 25% ROC?

Yes. Our idea will be to get more and more on a value-added product. So we expect that margins to be higher.

Got that. Got that. And sir, this INR 1,400 crore of capital work in progress, when it will be commissioned? When it will come -- added to the gross block?

I think 50% should be in Q4 more or less.

50% will be in Q4. Okay. This is basically in Q4, largely, that dedicated capacity CapEx, right?

Yes. So that is -- a major chunk will be that.

A major chunk would be that. So sir, because my question is to understand that dedicated CapEx, still, I mean, we did not got any customer. I mean, no visibility from the scale perspective. So should we assume that, that scale will take more time to come on the -- to percolate into the revenue?

Yes. That's why we are seeing a little more -- FY '24 will be the more by that time that turnover materializing will happen. It's not going to happen in next year. It will be more in FY '23 and FY '24. Because '22 next year, we don't expect too much sales out of that CapEx.

Correct. Correct. And that remaining CapEx out of that INR 1,400 crore, approximately INR 700 crore, that will come in which year?

No. That will be capitalized next year.

So FY '22, first quarter, second quarter?

Yes. It will be over that time. Substantial will happen in first half.

First half. Okay. Substantial will happen in first half. And that would be largely -- I'm assuming that, that would be the market facing kind of a CapEx where we have a higher visibility of the revenue?

Sure. Yes.

And that would be like what you're saying is 20% kind of ROC business?

Yes.

Right. And sir, remaining this INR 1,000 crore CapEx, that will be commissioned in '23 and '24, correct?

Yes. Then it will be going in subsequently.

Subsequently. And how much would be the maintenance CapEx, sir, out of this INR 1,000 crore?

Current maintenance CapEx is around INR 300 crore.

INR 300 crores, correct?

Yes.

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

Sir, just on the CapEx part. So the polymer additives a 20-year contract. That particular commissioning will happen in second half FY '22. Is that correct?

First half of '22.

First half of FY '22?

Yes.

Okay. And the $125 million 10-year contract, it was supposed to be commissioned in Q4 FY '21. So are we on track for commissioning that?

No. That we had already mentioned that, that is also delayed because of the COVID side here also and in customer end also. So that will be second half of FY '22.

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

So my question is on the extent of opportunity available in the import substitution side, which is kind of a low-hanging fruit for you. So if I take your current top line, which is about INR 5,000 crores, roughly INR 2,500 crores would be in the domestic, INR 2,500 crores to INR 2,600 crores. So how much of this -- how this number would be looking like, say, in coming months? Is there a large import substitution opportunity still available or most of it is already exhausted? That is my question number one. I will subsequently ask my second question, if you can answer this.

In India, currently, $45 billion chemicals are imported.

No. Right, sir. But if you again slice and dice into the segments in which you operate, what would be that number, actually? So it won't be $45 billion is entirely available to you, right?

No, no. So what I'm trying to say that overall pie is very large, $45 billion. So even $1 billion from that is definitely a possibility which you can look at. And then, again, the Indian economy is going to grow. So left to itself is $45 billion. If nobody puts the plant, $45 billion is going to become $65 billion, $70 billion by the time -- in 2030. So overall, the import substitution itself is like a $1 billion opportunity can be there in next 10 years, for sure. We are very end-use agnostic product line. So we can expand into various end-use -- as a feeder to various subsegments.

Sir, what I was asking is $1 billion could be the future number, but currently, what is that which is still untapped by the company? Is it still $1 billion or it would be a different number?

So overall, we have identified up to $1 billion, I can say. Those kind of possibilities are there. It is -- the only thing that it will take time. You cannot put that much shot. So those are the possibilities.

Sir, usually, what are the challenges? You have a significant opportunity in import substitution. You have existing customers who are currently importing. So you know the customer. So where is the challenge? Is it the quality? Or is it the pricing? Or is it the distance between your plant and the customer plant? So what are the challenges in exploring this opportunity aggressively?

So basically, R&D and focusing of the plant. Basically it's -- you have to do the research and put up the plant. So that is the entire activity will take -- if you want to put up a dedicated site, from research to plant commissioning will take 2 to 2.5 years. And if you're in the existing site, it will take maybe a year or so. So [ challenges ] is bound to be there on that site.

My second question is on that we have been talking about the product -- projects like photochlorination, oxidation and chlorotoluene. So have you completed the basic engineering and the initial environmental clearance? All those is done or still is it in progress?

We have already applied for environmental clearances for the chlorotoluene.

And your basic engineering and design all is completed, is this waiting for execution? Or is there anything waiting for the market to evolve or is there something that you are waiting for? Any color on that.

No. They are in different stages. Certain are on basic engineering level. Certain are on pilot scale. And -- but the demand wise, there's not an issue. Once we get there -- so we expect to start construction in post monsoon next year -- next 6 months. All the constructions will start for various plants.

The next question is from the line of Archit from Dolat Capital.

Congrats for a good set of numbers. I just had 1 question on the bookkeeping side. So just the way you're accruing up about $25 million per quarter from the first long-term contract, how will be the accounting treatment spread across all 4 quarters in FY '22? Will it be like $15 million to $20 million per quarter or it will be like a [indiscernible] treatment at the end of the year?

There will be a similar treatment for the quarter.

Okay. And in quantum, sir, if you can have that number, probably a ballpark number?

It will be difficult for me to comment on the number at this point of number. But it will be broadly in this range only.

Okay. $15 million to $20 million, somewhere between that.

The next question is from the line of Avishek Datta from Prabhudas Lilladher.

Sir I just wanted to check -- you mentioned that the discretionary demand in the domestic market is largely back to pre-COVID levels and the export market you're expecting it to recover by Q4 levels. So can we expect that the pain which was there in the first half is largely over? And what kind of growth rate can we expect in this 40% which is a discretionary demand share in our portfolio?

Yes. So next year, we'll see a substantial growth in that segment in both margin as well as top line next year.

Okay. And sir, secondly, sir, you mentioned that you are expanding capacity on the toluene side. Isn't it that Deepak Nitrite is also expanding capacity there, sir?

No. We are -- I'm talking chlorotoluene.

So in that space, there is no one else who is entering the market?

Yes. No, it's not made in India currently.

Okay. And sir, I just wanted to recheck once again. Like next year, you are suggesting that Specialty Chemical revenue should be in what range, largely?

That we are still budgeting. So that, I think, we will give in -- after our Q4 more definitive guidelines -- guidance for the next year.

Because this year, largely, the run rate should be around INR 3,800 crore, INR 3,900 crore. So next year, what kind of number which we should work with?

Yes. There will be definitely 15% to 20% minimum jump, but the more definitive number we'll be able to give post Q4, but again 15% to 20% jump, for sure.

And sir, just wanted to recheck, like this quarter, you also benefited from low-cost inventory or when you don't work on -- you work on cost plus business, but will you have benefited from low-cost inventory in this quarter?

Not much. I think this quarter also the price of second and third quarter raw material were very similar. The price increase is happening in this Q4 this year -- this quarter.

And that you will pass it on to the customers with a quarter lag?

Yes. Somewhere we have monthly lag. Somewhere we have a quarterly lag. So that's how it equalizes.

The next question is from the line of Kamlesh Kotak from Asian Markets Securities.

Sir, just I wanted to understand the revenue breakup in terms of the domestic and export. You are saying that backward integration and import substitute also is an opportunity and exports also. So 2 to 3 years down the line, what will be the pie look like in terms of the domestic and exports, if you can help us understand, or the growth rate at which they both will be shaping up?

Actually, we are currently at 60-40 level, so the similar level. I think it will be local between 50% to 65%, that range, and export 40% to 50%. Those range should happen. Export, I don't think will cross 50%.

Okay. So you see both of them are growing at a reasonable space, right?

Yes.

Okay. And secondly, sir, within this Specialty Chemical, we are catering to multiple industries. So any particular industry or the segments which you believe from next 2 years horizon will grow faster or which of them would have slightly moderate growth?

One is that engineering polymers are globally growing at 7%, 8%. That was a pre-COVID. So 2 years, we have to knock out. But then I think it will go back to the same because it's replacing metal in so many areas. And agrochemical growth is always going to be molecule specific. So we are in some of the innovator pipeline, somewhere which are on a growth pace. We'll be participating in that supply chain for agrochemical. In addition to that, construction and all whatever, which are paints and all. And I think post COVID because of the change in working style overall I think going forward, the construction could increase across the world because people want bigger houses than what they used to have. So I think that should be an additional jump for construction-related like paints and all.

Okay. Okay. And sir, just wanted to have a flavor of this CapEx which we are doing. Any of that are already falling under the government's PLI scheme or how much investment of our plant as of now which we are incurred or we are going to incur will fall under the PLI scheme? Anything which we have formed up on that side?

No, nothing is in PLI scheme because there's no -- PLI scheme has been announced for chemical. It's for Pharma and some very few specific Pharma intermediates. So none of our products go into that specific molecule. But we make raw material which go into those intermediates and APIs. So our demand will increase, but that will be superior to this PLI product.

Okay. Okay. Okay. And then lastly, sir, in terms of the export, do you see any geography doing better or any pockets which are still not recovered fully? How the overall recovery on the export front is looking?

Actually [ we see different ] products. Generally, the customer will make the end product and then they supply all over the world. So sometimes which we -- product we export to Europe, it is not for European consumption. They make the product and then they sell it world over or we send to U.S. in the same way. So in that sense, there is no geographical impact.

The next question is from the line of Harsh Bhatia from Emkay Global.

Just 2 quick questions. Let's say, the demerger goes ahead and if I'm not wrong, Specialty Chemicals would still have some exposure to Pharmaceuticals, right? And if yes, what would be the proportion of that exposure?

Yes. That we'll have to calculate. But we make a very big intermediate PNCB which is going in paracetamol. So there's -- in our Chemical business, that is one of our big molecule, which goes into Pharmaceuticals. And then there are some other ones also. So we'll have to calculate that number.

That's helpful, sir. And just lastly, on the dicamba side, have you started any negotiations or discussions with -- for the intermediate that we already have in place? And how is the market looking in the international markets such as China, Western Europe?

I think things will get clearer post this summer.

Yes, for the dicamba, sir?

Yes, dicamba, and how does the growing happens in the U.S. this year, that will give more clarity, I think, in the second half of the calendar year, that how the growth will happen. And some growth will happen in Brazil also in coming years. We expect the demand to grow from at least next year onwards, in '22 onwards in dicamba side.

Right. And we'll still be evaluating of our integration aspect as well, along with other opportunities?

Yes, yes.

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

I'm just trying to understand in detail our ambition to each 20%, 25% ROC. In light of our existing business, if you break that up, Chemical gives us 17% ROC, Pharma gives us 22% ROC. If we demerge Pharma, then obviously, with the existing business, our blended ROC is about 14%, 15%. And if we demerge Pharma, then our ROC will further come down probably. So in -- used like -- on top of it, we are doing CapEx of about INR 400 crores in Spec Chem over the next 5 years. How do we see ROC pans out to reach to those 20%, 25% ROC? Ex of Pharma, we should be doing 30% plus EBITDA margin, then only we can reach to those 20%, 25%. So what is your sense -- overall sense, if you can guide me, please.

Yes. Generally, what happens when you are in a CapEx mode, the ROC takes time to catch up. One, because of the capital WIP and second is you are on a ramp-up mode. Once the thing gets mature, then you can see those kind of ROC. So on a year-on-year, sometime the numbers might be less. But then I think more and more capacity utilization happens, the ROC will go on improving.

So this 25% target is in that case for which year?

That is a stress target. Typically, it will be a 20%. But what we see there with more and more value-added product, typically you will get more ROC. Basically, in a commodity it will be more 12% -- 10%, 12%. And if you go in a highly value added, you may go to a 30%. So as we have more and more advanced chemistry, we see that the ROC on those will improve.

In that case, it will take more than 5 years to reach that 25% ROC...

One more thing which I can add over here is that when you're looking at the actual current ROC, I would request you to kind of do a calculation with the -- excluding the capital WIP. Because as you know, the projects which are underway will not contribute to the EBIT. And that's how -- considering that as a part of capital employed for the calculation purposes -- it always give some distorted view. So if you want to do a proper comparison, probably removing capital WIP would be a better way.

Sure, Chetan. It will not help much, but on other data points, if you really see, the gross block addition in last 5 -- 10 years was 19% CAGR and the EBITDA CAGR was also 19%. In that case, I'm not comparing revenue because there is a pass-through element as well.

Yes. Yes.

So gross block addition 19%, EBITDA is also 18%, 19% CAGR, 10 years. So how do we see this changing in that case? Even if you have to take that number up, EBITDA CAGR should be in that case -- now this time around should be 25%, 30% in between and gross block CAGR should be probably 15% in that case, if we see really this way.

Going forward on value-added products, this ROC that -- when we say 25%, some products, we can have 30% and some 20%. So the incremental product as is go more and more towards value added, we see that ROC will go on increasing. That is the thought. Currently, we are at -- if you were to net off this CapEx, capital WIP will be 20-plus, I think. But going forward, with more value-added products, it should go up.

Okay. I'll take it off-line, sir.

Okay.

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

Yes. It has been a pleasure interacting with you over the call. We thank you for taking time out and engaging with us today. We value your continued interest and support. If you have any further questions and would like to know more about the company, kindly reach our Investor Relations desk. Thank you.

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