Aarti Industries Limited (524208) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Aarti Industries Limited Q1 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Ms. Shruti Joshi from CDR India. Thank you, and over to you, ma'am.

Thank you, Janu. Good afternoon, everyone. Thank you for joining us on Aarti Industries Q1 FY '22 Earnings Conference Call. We have with us today on this call, Mr. Rajendra Gogri, Chairman and Managing Director; Mr. Rashesh Gogri, Vice Chairman and Managing Director; and Mr. Chetan Gandhi, CFO of Aarti Industries. Before we begin the call, I would like to point out that some of the statements made in today's call maybe forward looking in nature and a disclaimer to this effect has been included in the results presentation shared with you. I would now like to invite Mr. Rajendra Gogri to talk about the performance of the company and it's 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. We hope to see the government's vaccination drive bring about mass immunity and the country coming out stronger after a very tough phase. I trust that all would have received the Q1 FY '22 results presentation that has been uploaded on the stock exchange website earlier today. First, a review of our financial performance. As you have seen, we have started the year on a strong note. Our revenues crossed INR 1,500 crore during the first quarter, which was up by 45% on a Y-o-Y basis. As there is a significant jump, we are currently monitoring our performance more on a quarterly basis, as the first quarter of the previous financial year had a significant impact of the pandemic on production and operation. In this context, we are happy to report about 12% revenue expansion over the preceding quarter that is compared to Q4 FY '21. During the quarter, there was a sharp increase in raw material prices, steel prices and logistic costs, which also contributed to the increase in top line over the quarter. Q1 EBITDA of INR 314 crore is also higher by 20% compared to Q4 led by increased utilization of capacities and value addition in the product mix. During the quarter, we have witnessed rupee depreciated by about 1.2 versus U.S dollar. This resulted in a mark-to-market loss for ECB, which has been the cost for the rise in the finance cost by over INR 13 crores for the quarter. Our profit after tax came in at INR 165 crores, up 21% over Q4, doubling the level achieved in Q1 FY '21. But the top line and EBITDA in the reported quarter are our highest ever in history. Thus we have successfully extended the growth momentum achieved in the second half of FY '21. Continued volume expansion in the Speciality Chemicals business as reflected in top line and EBITDA growth for the segment, pass-on of the higher input costs and logistics also contributed to the surge in top line for the segment. These factors resulted in the top line growth of about 50% on Y-o-Y basis and about 12% in [ Q2 basis ] for the segment. We have seen return of demand from established market to almost pre-COVID levels. And in some cases, it has surpassed the pre-COVID demand volume. That are clearly driving improved EBIT, segment EBIT of INR 237 crores for Q1 FY '22, [indiscernible] a growth of about 13% on Q-o-Q and about 85% on Y-o-Y basis. As you are aware, we have a pricing model where in the variation in raw materials are passed on to the customers. The better way to look at our performance is a change in absolute EBIT. Income in this business segment includes recognition of about USD 4.5 million in Q1 from the software piece in respect to the first long-term contract. Now for the Q1 production update. Production for nitrochlorobenzene was at 18,155 metric tonnes compared to 13,070 metric tonne a year back. Similarly, for hydrogenated products, we have achieved production of 2,920 metric tonne compared to 2,050 metric tonnes last year. On the nitrotoluene front, the production for Q4 was 3,440 metric tonnes compared to 2,140 metric tonne in the same quarter. We operated about over 80% to 85% capacity utilization across our established location and expect to deliver steady performance improvement going forward as new facilities scale up volume. Our Pharma business grew by 17% Y-o-Y to INR 240 crores during Q1 and by 7% over Q4. The business continues to maintain growth momentum based on higher utilization of facility that are driving volume. EBIT of the Pharma segment for Q1 FY '22 was INR 48 crores, which was fairly similar to the EBITDA for Q4 FY '21. In Q1, there was some impact on margins due to higher inventory of the final product, which could not be shipped due to logistic issues. Further business visibility in Pharma is based on higher volume from regulated market, value-added products and new introduction of intermediate products. As you would know, we are currently implementing additional capacity for APIs and intermediates, they are expected to be operational in the second half of FY '22. We expect volume expansion to be supported by a robust margin in this segment, based on a pipeline of approvals that strengthen our position in the therapies such as antihypertensive, cardiovascular, oncology and corticosteroid. Now an update on capital expenditure. We have incurred CapEx of INR 295 crore in the first quarter. Again, the annual plan CapEx of about INR 1,500 crores. At present, we also have several other capital investment projects in pipeline. This includes expansion of USFDA capacity at the API unit located at Tarapur and at the intermediate unit at Vapi; setup of production unit for the second long-term contract at Dahej SEZ, for the third long-term contract at Jhagadia and the NCB capacity expansion at Vapi; expansion cum asset upgradation for our acid unit at Vapi, amongst various other projects which are underway. As guided last time, we are also undertaking growth project driven by R&D and innovation. This includes new value chains to be introduced for instance the chlorotoluene value chain. Existing value chain expansion by adding new products in chemistry, additional contract manufacturing opportunity being explored, manufacturing outsourcing and strategic alliance opportunities, setting up of UMPP, expansion of existing pharma products and introduction of new pharma API and intermediate. With the addition of new chemistry and value-added products, our objective is to launch 40-plus products for chemical and 50-plus products for pharma driving growth beyond FY '25. This initiative provides a blueprint of growth over the near-term horizon until FY '24 as well as for the longer-term horizon until FY '27. This process entered investment about INR 2,500 to INR 5,000 crores over the next 3 years. To augment various needs, the company has raised a growth capital by way of QIP of INR 1,200 crore in the month of June 2021. The issue was supplied with good quality institutional investors laying their confidence on our growth plan. The issue was close with the participation of long-term investors accounting for over 70% of the issue, of which the FIIs had larger share. Just to summarize, we are in golden era of opportunity for the growth of Indian chemical and pharmaceutical industry and also to enhance its share in the global market. We remain committed to work on this opportunity and drive on the growth journey, which we have guided you during the last con call. In FY '22, we [ retain in entities ] about the prospect of the business supported by increasing utilization of recently commercialized facilities, that is additional chlorination capacity, Jhagadia and Phase 2 unit at Dahej SEZ and other projects to be commissioned this year. Based on this visibility, we reiterate our top line and bottom-line growth of 25% to 35% for FY '22. With that, I conclude my opening comments, and we will open the floor for the Q&A session.

[Operator Instructions] The first question is from the line of Naushad Chaudhary from Systematix Shares.

A couple of questions. Firstly, just wanted to understand on our long term -- second long-term contract. I believe it was expected in 1Q FY '21, and we are almost 1 year of delay in this project. And so just wanted to understand, is it because from delays because of -- from our side or because the client is expecting us to get it delay? And will there be any cost overrun in terms of overall CapEx, which was required for this project? I think earlier it was INR 300 crore. So will there be any addition because the recent commodity inflation?

Yes. I think this project was mainly impacted by the first wave of COVID last year and also the second wave in this year. But that is the main reason. And obviously, the demand was also impacted globally. And now we are targeting to commission this plant in the second half of this year. And there is no significant cost escalation for this project.

Okay. And secondly, on the chlorination plant, this 65,000-capacity addition, I believe it was primarily for our -- for the requirement of our first long-term contract project, which already got canceled. So if you can help us understand how are we planning to ramp up this capacity? And we have already experienced 2 quarters for this capacity. So where are we now? And how are we planning to ramp up this?

Yes. No, this will be because you rightly mentioned the cancellation of the first contract has impacted production for this products. But we see progressively volumes growing in this plant in the second half of this year also and going forward in the next year for this. As you know, we had mentioned earlier also that we will be making the same product and major sales will be started from FY '23.

Okay. So the strategy would be to use it captively and the left out would be sold in open market? Will that be...

Yes, yes.

Okay. And lastly, then I'll come back in queue. In terms of our overall gross block which has -- in the last 2 years, we have added around INR 1,800 crores of -- in a gross block plus as of March '21, we had around INR 12,100 crore of working capital. So total around INR 3,100 crore of investment we have made in last 2 years. Just if you can how quickly give us a breakup of this INR 3,100 crore of amount which we have invested. So broadly, we have some projects in mind, but there is I think INR 600 crore, INR 700 crore of CapEx, which I was not able to find out. So if you can broadly give us a breakup of this INR 3,100 crore.

So you're looking at the previous 2 years CapEx number?

Yes. Yes, yes. So I think chlorination NCB, PDA and some INR 75 crore in R&D. Then we had INR 150 crore of Jhagadia land. And then in all your 3...

Pharma CapEx, which will be around INR 150-odd crore, where we are adding the capacity for both the U.S. FDA plant as well. So that is also there.

Yes. So let's calculate it this with INR 1,000 crore we invested in chlorination. INR 150 crore in NCB. There were some INR 70 crore, INR 80 crore in PDA. INR 75 crore in R&D.

You're mixing a lot of numbers. Can you take it up separately because...

Yes, we'll take it off-line.

We'll take it up separately.

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

Congratulations on this set of numbers. So I have a few queries and questions, sir. First is on, if you can give a breakup for the volume and the price lag growth in the current quarter on Y-on-Y basis, sir?

Especially for the volume growth on Q-o-Q basis is about 9% to 10%.

It's on Q-on-Q basis?

Yes, yes, yes.

Okay. But sir, we had seen that benzene has seen a sharp increase in prices almost more than 50% to 70% prices have gone up. Even there is a significant amount of increases happen in Q-on-Q basis as well. So is that not reflective in terms of revenue growth in terms of pricing, sir, if you can just that reflect on that?

The revenue growth is higher. Revenue growth in Speciality Chemical is almost 20% Q-o-Q.

Yes, that only sir, leads to 10% price increase, price net growth, correct?

Yes. And rest is by volume growth.

But sir, raw material price increase has been much sharper and much faster so in the current quarter. So -- and the prices of benzene continue to remain well. So I just wanted to understand that, do you see that the price led growth was muted in the current quarter and more so will be happening in a subsequent quarter?

Basically, there is a lot of value addition also, and benzene is one of the raw materials. So there are other raw materials also. And a lot of value addition comes in.

Okay. Sir, second question is on our long-term contracts. So are we -- sir, now we have already got the [ QIP ]money and we have already strong balance sheet. I just wanted to understand, sir, you have been looking at long-term contracts from almost last 3 to 4 years since our first [ trial period ]. But so far, we have only been able to seal 2 large contracts and one small contract. Unfortunately, one of them has been -- deal canceled. So just wanted to understand and no more, are we looking for such more long-term contract? And are the negotiations with the customer with any closed deals which we can expect over the next 1 year? Now we already have a sufficient -- I mean, a strong balance sheet to fill this kind of contract. So I just wanted to know in terms of long-term contract perspective, how the business marriage is ramping up, sir?

We had given this detail of these 3 contracts on public domain based on the SEBI regulation. But we have been having this contract some 3-year contract rolled over 5 times on 4-, 5-, 6-year-old contracts also in past also and also been happening in last 2, 3 years also, which have not been gone in public domain. But we continue to engage with the customers, and we see that is more such large contracts also happening. And some of them may come in public domain also.

So you want to say sir, that there is a change in the communication strategy from the company like earlier, you have mentioned this contract -- long-term contract in a public domain, but right now, probably the company wants to continue with the focus on growth. I mean, and discussing on a quarterly numbers rather than publicizing any such long-term contracts which we win, is that so?

No, basically, the smaller tenure or the value, we have not been putting in public domain. Whereas when a significant larger domain -- tenure and value comps, we'll be putting those in public domains. So we'll have a mix of both, actually, which is a continuous phenomenon.

Sir, my question was more on that line only, sir. Sir, it's been almost 3 years back that we have got -- we have won these kind of long-term contract and since then, though the industry scenario has been improving a lot but we haven't heard anything in terms of a large size contract won by the company. However, there are some other -- other industry players have got some long-term contracts and large contracts. I just wanted to understand more on the EBIT. Why so -- when the industry scenario is so favorable, we have a solid balance sheet. But in last 3 year, we haven't heard much about these long-term contracts. And while 3 years back, we were very positive about winning many such contracts in the future. So I just wanted to understand is the industry scenario is changing? Or we are not too much interested in winning this long-term contract or the customers have many other opportunities or probably many options to give this large -- large contract to someone else?

No, no. Basically, as I mentioned, the already ongoing discussions are there. And same way because of the COVID, I think virtually you have to forget at least 1 year from the calendar. Because globally, the demands were significantly impacted for a lot of items. So that has also resulted in delay in investment because of COVID, everybody was more trying to manage the existing business rather than going for further investments and demand. So I think that is also one of the reasons that we have not announced any significantly large contracts. But definitely going forward, I think it will happen.

So sir, should we hope that over the next 1, 1.5 years the pandemic scenarios that is subsided now, we can expect and we can hear some large contracts won by the company over the next 1.5 years to 2 years. Are you in advanced stages of any such discussion?

Yes, that is our [ endeavor ]. We have -- usually, these things, we cannot announce till we -- it is actually happens, right?

Yes, exactly, yes. So we are not preempting, sir. I'm just saying that are you in advanced stages of any discussion which we may expect over the next 1.5 years to 2 years and such large contracts, can we expect any sort of that thing?

Such forward-looking definitive statement we cannot make, but I think that process is on.

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

Congratulations for the good set of numbers. Sir, my first question is on the -- the first -- relating to the first contract. And -- because of which we are every quarter building kind of a $5 million is additional income. So I'm just trying to understand, is this to just cover the kind of underutilized cost of the new plant, which has been created at around INR 400-odd crore. Is it just sufficient to cover all those overheads of that new plant? Or it is much below the potential fixed cost, a plant of this size could be having?

No, no, it is definitely actually more than the fixed cost.

Exactly.

But EBITDA also...

So you are saying there is some impact in the margins because of the uncovered overheads in the first contract for the -- means, the plant for the first contract that has been created you are seeing that is, is that right, sir?

Yes, yes. it is more than the fixed expenses. This contribute -- these are larger than fixed.

Okay. But is it possible to quantify the -- means, to what extent there is a kind of a pressure on the margin because of the plant, which is not getting utilized currently? That is one. And secondly, relating to that only, I'm just trying to understand, see, despite we being one of the most integrated player there, still we would not have seen much progress on that plant front. So is it because the plant is currently with the validation -- customer -- means, validation phase or it is the validation by the customers. Is that kind of phase currently going on? And possibly we could see a ramp-up in that facility?

Yes. Basically currently is on validation and the ramp-up will happen in that from the second half of this year and also in FY '23 and FY '24.

Okay. Sir, you mentioned about a kind of a peak potential out of this plant by FY '23. So do you think that, okay, we will capture almost like optimal utilization of this plant?

Not in FY '23, it will be more in FY '24.

Sure. Okay. Okay. So that is my first point. Second is that did you see any kind of impact because of the COVID wave 2 in your -- in implementing your -- this multiyear projects? So I think the CapEx for the second contract and CapEx for the third and both are currently under various phases of implementation. So did you see any impact because of the COVID 2? And hence, whether the time line of commercializing those projects are getting impacted?

This second wave, as you know, it was a very, very ferocious. So our effort was mainly to keep our operations running. And then we were very -- fairly good success we had. But the projects across the board at various locations were impacted. And there were -- project time line is extended virtually for all the projects.

Okay. So what would be the revised time line sir, for commercializing these 2 second and third project at this juncture that we are thinking about?

The second contract, it will be mostly -- will be -- we are targeting Q3. And the third contract is we are currently targeting Q4.

Okay. Okay. So not much difference in terms of time line that what we had earlier mentioned then?

Yes, it is a similar, but maybe 1 quarter push off. We are targeting to do it in Q3 and Q4. But maybe some stabilization may take longer time.

Sure, sir. Okay. Sir, one more thing about the cost elevation situation that we are seeing generally for the industry. So do you need to worry about the kind of a higher logistic cost and higher input cost? And possibly, the extended underutilized assets that we'll be having for our new projects. So how should we really see in terms of those impacting the margin in next 1 year period or so or till the time the impact of COVID would be there?

So the raw material cost we have pass-through model, which we have been highlighting. And as far as the ocean freight cost is concerned also because it's a very, very known global phenomenon. A substantive portion of ocean freight increase, we have been able to pass on to the customers. Somewhere in some places, we also have to bear that ocean freight cost. Other impact which is there is also -- coal price also has significantly increased. So that is where some impact will come on us also. But overall, similarly, we have been able to pass on the raw material and the freight to the customers.

Okay. Okay. Just last one clarification, sir. In this quarter, was there any inventory gain is there this quarter, either because of the speciality side or because of pharma side? And any specific reason that you are witnessing a kind of larger inventory situation for pharma?

No. As we have mentioned that this container availability has become a big issue. So logistics, there are 2 impacts. One is also on actual exports and also the price increase. So there is a lot of accumulation of finished goods inventory for both speciality chemical as well as pharma. And so that's why the inventory gain against the inventory gain because of the raw price increase. Part of that is offset by increased finished goods inventory. And also, some of the raw material cost increase happens over the quarterly lag. So overall, inventory impact is not significant.

We take the next question from the line of [ Aditya Khetan from Stewart & Mackertich ].

My first question is that in the opening remarks also and continuing with the earlier participant's question, it was highlighted that -- so in Pharmaceutical business, some of the high-cost product inventory, which could not be shipped that has led to decline in margin. So has that been issue -- has been solved? Or are you still facing shortage of container and higher freight cost?

No, no, no, that issue has been solved. So basically, there has been a lag in dispatches of products, particularly going to U.S. and Latin America. As you know, the container availability have really become an issue. But -- and also -- but I think in July, we were able to do significant [Technical Difficulty] inventory.

Okay. Sir, also, we are -- so we were already guiding for additional capacity for expansion in the API and the intermediates which we are expecting to be operational in the second half of this fiscal year. So if you can highlight just a brief as to how much capacity are we increasing, just a ballpark number of capacity increase?

Yes. Basically, in terms of intermediates, we have started one manufacturing block, where we have added around [ 150,000 ] of capacity already has started in last quarter. In API, we are adding one additional block. So that will get started in the second half of this year. So that will add significant capacity and also various other model making expenses are also underway in API facility [Technical Difficulty] API facility, which will [Technical Difficulty] operationalize in the second half of this year. So overall, I think our capacity [Technical Difficulty] manufacturing will almost be 50% to 75% more depending on the product mix that we offer it.

Okay. So 150,000 you mentioned in the intermediate, right?

Yes, yes, yes. [Technical Difficulty] other volumes, yes.

Other second contract of INR 10,000 crore, right, will there be -- we have -- already have a tie-up with customer. So ramping to peak utilization should [Technical Difficulty].

Yes. That ramp up [Technical difficulty].

Hello?

[Technical Difficulty] couple of years to ramp-up.

Hello?

Hello?

Yes sir, your voice is gone, sir.

There was a slight disturbance. You may please go ahead now.

Yes. That in a couple of years, there will be a full ramp-up of that plan.

Okay. So by FY '24, you mean to say, or by FY '23 because we already have a tie-up with the customer. So I don't think it should take more than a year. So you are -- so you're guiding by FY '24?

By FY '23. By FY '23 itself, we will have a structure in place. By FY '23, itself we'll have approval.

Okay. So for the first contract, which was terminated, so there it would take around by FY '24?

Yes, yes.

Okay. Okay. Sir, just one last question. Sir, again, this was asked earlier. So the gross margin contraction, if you look on a sequential basis, it is quite small, that is only 14 basis points despite we have seen some sharp increase in the major raw material prices like benzene. So we definitely understand that. So there has been some -- so the finished product price increase has been significant. That has led to offset to some of the major raw material price increase or exactly like what has happened that has led to not sharp decline in the gross margin in this quarter.

We have this raw material pass-through. So a lot of raw material prices increase gets passed on to the same quarter to the customer. And also because of the higher volume, which has also benefited in order to give a little more margins. So one is the raw material pass-through, another is the volume growth also. So that's why the impact on margin is less.

Okay. So similar quarter only we can pass on because earlier we used to guide that we had to take a lag of 3 to 6 months, then we should have pass on. But now we can pass it on a -- on 1 to 2 months only, like you mentioned?

No, no, the local pass-throughs is onto the same month itself, virtually. But export some of the passing on happens with a quarterly lag and that continues to be there also now.

Okay. Okay. Sir, just one last question, sir, if you can again repeat the volume numbers for the quarter. I actually missed because the commentary was quite sharp, it was quite fast by the management. So I was not able to write the volume numbers, please, if you can repeat it again.

About 9% to 10% volume growth Q-o-Q in Speciality Chemicals.

Individually, if you can highlight for nitrotoluene for NCB?

Yes, yes, that number, Chetan, can give the numbers.

So nitrochlorobenzene, the volume was 18,150 plus metric tonnes. For nitrotoluene, it was 3,440.

Okay. And sir, hydrogenation?

Hydrogenation, we would be...

I'm so sorry to interrupt, but your audio is not very audible sir. Requesting you to please speak a bit louder.

Yes. So I'll just repeat the nitrochlorobenzene, the volumes was 18,155. Nitrotoluene was 3,440 and hydrogenation was 2,920.

And PDA, sir?

PDA, we would have got a run rate of 570 tonnes per month, over 570 tonnes per month.

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

I just wanted to clarify one thing. Our long-term contract will start contributing in FY '23 now, and there won't be any meaningful contribution in '22. That understanding is correct?

No. This second contract will be commissioned in the second half of this year. So some benefits will come in this year also, but it will not be significant.

Okay. The large part will happen in '23. That will be a fair understanding for both the contracts?

Yes, yes, yes.

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

It was mainly on this contract 1 and contract 2 only. So first, some clarity on this contract 1 on this by combined intermediate last quarter call plus con call, you mentioned that you are looking for some open opportunities or customer -- open market customers to sell these intermediate because otherwise we were supposed to supply to there. Any breakthrough on that, sir, you were expecting to start producing this plant at almost 15% to 20% capacity utilization for FY '22. Any breakthrough on getting the customer for that, sir?

Basically, that major volumes we -- hope we start from FY '23 onwards.

But I was saying that are we starting -- getting customer for that? I mean I understand...

Yes. We are already in touch with the customer. And some volume will start in this year, the major volume will come in FY '22.

And for these customers, I believe, will be open market or global players or with them also, we will be having some kind of annual arrangement in terms of uptake?

No. We definitely have some arrangements, which will be of a longer-term kind of a nature.

And will there be many customers for these products? Or will be only 1 or 2 such customers taking a large quantity?

No, there are -- there will be a more than one definitely.

Sorry sir, I didn't get you. Sir, please repeat?

No, there are not many players but there will be few players in this.

3 to 4 such customers, right?

Yes.

I was [ speaking most likely ]. Sir, I'm saying that we have 3 to 4 customers for that project?

No. Basically, there are a few players in that. So we'll see for how many customers we are able to -- we'll be tying up.

And sir, with them the pricing arrangement will be on the market, spot market and what kind of margins sir, you think that we will be able to enjoy in the longer term on that product, sir?

Basically, some sort of a structure prices will come into play that we are looking so maybe some question of market active prices.

Sir, sorry, sir, but your voice is not coming clear. There is a lot of disturbance on your line, sir.

Hello, Is it better?

Yes. So we will have a structured pricing, Rohan. And still these contracts are under discussion. We will have more once we are able to finalize the ones in the next few con calls.

Okay. Okay. But, we are confident that in '23 for this...

In terms of other volume to other customers. Yes.

Okay. And can we expect 55% to 60% of the capacity utilization can happen for this intermediate in [ '22 ], sir?

Yes, we would like to place 100% also. We will know once we reach there, and has been currently answered today.

Sir, fine sir. Sir, second, on this contract 2, sir, you mentioned that a large part of revenue definitely will come in '23 except that maybe some small revenues may come in the current quarter. Sir, just wanted to understand will it have any major impact? Because I think that we were expecting some INR 200 crore to INR 250 crore revenues to come in '22 from this second contract. Is there any -- going to be significant change in overall financial outlook for the current year and it can be compensated by other product the loss which we had in a contract 2, sir?

Yes. So basically, if we are able to operate only for second half, the revenue expectation for the full year, whatever we were expecting, we will not be able to get that. So there will be some lower revenue from the second contract for this financial year.

We take the next question from the line of Naushad Chaudhary from Systematix Shares.

Sir, on a toluene chain, I wanted some clarification that if you can help us understand how much money we have spent so far on our toluene chain? And how much revenue we would have generated in FY '21 from this chain? And what is the potential, which we can generate from this chain now whatever we have spent so far?

Yes, so the spend on this projects would be around -- I mean toluene chain is -- it's in derivatives both put together. So the spend would be around INR 200-odd crores, which would have been invested from an overall basis on the project.

Yes. And last year, we, in total, we produced 13,000 tonnes of nitrotoluene and derivatives were close to 500 tonnes per month.

Okay. Okay. So since the beginning, we have spent only INR 200 crore in this chain. Okay. Secondly, on our [indiscernible] shortfall fee, I think we have accounted around INR 170 crore as of now cumulatively in last 4, 5 quarters. So how much cash we would have received for this? And by now? And is there any development or negotiation which clients want us to have on this part? Or are we okay with receiving all the amounts which we had disclosed earlier?

Yes. So we've got roughly -- I mean, from last -- from the time we got the termination notice, there was a revenue which was getting accrued. So in last fiscal, [ $20 million ] was accrued in that we have received entirely. In this fiscal, the accrual will happen as per the contract structured method. The settlement for that will happen once -- towards the end of the year in the last quarter itself. So till that time, we will not have any cash which would be coming in on that basis. And there are various -- hello?

Yes. Yes.

Yes, yes, yes. So we are looking at things in terms of what more opportunities can be developed. But it's all -- [indiscernible] is a very large customer, and there could be various opportunities but none of that is correlated with this.

Understood. Lastly, on our pharma margin, sir, if I see -- in last quarter, we had mentioned that there was some maintenance CapEx cost, which had impacted our margin plus in this quarter, if I see there is a favorable improvement in terms of caffeine prices. So given that the cost which you would have had last quarter because of maintenance was not there in this quarter, plus there was an improvement in caffeine prices. So apart from the raw material prices or the order which you couldn't dispatch in this quarter, was there something else which had taken the pharma margin down? Or?

No, I don't think. It depends on the product mix quarter-to-quarter. Depending on the product orders, we keep on changing the product mix and every product may not be manufactured in our API plant every quarter. So that can also have some impact on the overall contribution that we generate from these products because certain drugs are highly profitable. And if we make the product in particular quarter so that quarter can go up a little bit. So it is just that aberration in the numbers. But overall, I think we are fairly confident about what we are doing there, then we will have the growth there also.

Yes, because you are not -- the reason of not able to -- being able to deliver the higher-margin product. If we are not able to deliver, it would have not come to our P&L. So there won't be any impact on margins, right? If it is stuck at port side, then it's okay. But otherwise, it was at our factory, and we were not able to dispatch it. You won't account it in your P&L. So it won't have...

Yes, it is impact of both, basically, the product mix impact as well as this.

The next question is from the line of Yogesh Patil from Reliance Securities.

I have a follow-up question. Sir, you have maintained the gross margin at the same level on a sequential basis. Is that correct understanding you have passed on the increase in raw material costs like benzene to customer fully or some part of it is -- still remain?

Domestic customers and export customers have different tenure by which the cost pass on happens. And in the domestic customer, it is plus 1 month and whereas in export it is plus 1 quarter depending on the contracts that we have. So there is some impact, which always there is a lag of price pass-through.

Okay. And my second question is on the same line. In which segment you were more confident to pass on the cost. Is it the Speciality Chemical or pharma? So why we are asking this question...

Speciality Chemicals -- yes, Speciality Chemicals, we more confident about the pass-on of the cost, whereas in pharma, there could be certain contracts which are annual in nature also.

So why we are asking this question is that -- is related to mostly operating profit margins. Is there any possibility to cross 24% line in the coming quarter? So already you have reported [indiscernible] kind of operating from margin. So we just wanted to check on that side. Any view color from your side on?

As the raw material prices go up and the top line increases further and further, the operating margin in terms of percentage goes down. So in terms of absolute, we can have some number. But in terms of the percentage in core related to the top line, it is a little bit difficult to have higher numbers with the higher raw material prices.

Okay, sir. And my second question, during the quarter, company's finance cost increased by 51% Y-o-Y and [indiscernible] Q-o-Q. Is this only due to or accelerated loss [indiscernible] or some other cost is also involved?

No, this is -- yes, this is purely because of the ForEx related mark-to-market impact coming out of hedge accounting. So if you look at last financial year, when rupee was appreciating, there was the gain which has also been provided in a similar manner.

Okay. And sir, last, what are the net debt levels at the end of FY '22 considering that [Technical Difficulty].

I guess the net debt level, I mean, it will be difficult for us to take a guess because the raw material prices seems to be moving upwards. But at constant prices, I believe the debt should be in the range of around INR 1,600 crore to INR 1,700 crores kind of stuff.

So this is just in [Technical Difficulty].

Hello?

Hello, Mr. Patil?

Yes.

Sir, there's a lot of disturbance from your audio. We are unable to hear you well.

Okay. Is it clear now?

Yes, sir, it's clear.

So sir, that was my last question. So you mentioned that INR 1,600 crores is the net debt, right? Am I right?

So as of March '22, that's what we're targeting, right?

The next question is from the line of Bobby Jayaraman from Falcon Investment Advisors.

Over the past few quarters and years, you have certainly been growing, but you're constantly in need of capital. So what is your prognosis for the next few years? When will you be internally self-sufficient to fund your growth?

Yes. So basically, these 3 years, we are lined up to INR 2,500 crores to INR 5,000 crores. So partly, it will be funded by internal accruals, partly QIP and party debt. So basically, it will be based on the amount of investments, it will depend where we will the need additional debt to our -- but this next 3 years has still a substantial CapEx mode. So we'll be having an additional debt also.

Right. So in terms of becoming free cash flow, is that one of your goals? Or at this point, do you see a lot of opportunity and you're not thinking about that?

I think the chemical industry is showing significant growth opportunity because we are also totally backward integrated. And also, you have a very wide end-use exposure from micro chemical to engineering polymer, pigment pharmaceutical. So mode of opportunity we see for us is a tremendous and at least will be continuing to be in a CapEx mode. And we are not looking at any free cash flow situation for the next 5, 7 years at least.

We take the next question from the line of [ Dhruv ] from HDFC AMC.

Sir, just one clarification. You gave the volume numbers. If I add up the individual volume numbers or even look at the NCB key product chain, I don't see a Q-o-Q 9% to 10% volume growth, which -- what you commented in one of the earlier questions. So sir, what could I be missing here?

So what we are giving is just a base -- some numbers on the key capacities, but there are a lot of value-added product and a lot of downstream, which comes in. So you'll have to compare all of that to get to the right number. These are only a few of the entire basket of products what we have.

But this would be the upstream of it, right? So if the upstream comes, the downstream will come. So isn't it fair to compare this from the upstream level? Or that -- I mean, is that not the right comparison?

No, generally, in company what we do at the [ constant prices ] is if there is any change in the top line that we can do at a complex that is weighted volume increase. So these are specific product volume. But when we want to at the entire segment level is kind of arrive at a number which is on a weighted basis.

Okay. So the 9% to 10% is on a weighted basis?

Yes, Yes.

Yes, yes. So like, for instance, like in case of nitrotoluene or hydrogenation, the volume growth on a quarter-on-quarter is like 20%, 50% kind of scale value. So -- I mean you'll have to look at the -- even the downstream for those and then see on the weighted basis how it adds up.

Okay. So you do a value to volume weighted based on that and then you give a volume?

Yes.

Okay. This is helpful. Sir, if you can provide this number on a consistent basis, it would be very helpful just to understand how the trend is moving? Because otherwise, these volume numbers just give us as a sense, give us some sense, but not the complete sense because otherwise, it looks like on a Q-on-Q basis, your volumes have not grown much.

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

So the first question is on the -- recently, we have seen there is a very high price of glyphosate, which is in many places, which is kind of a -- which could be taken as a substitute for dicamba. So because of this glyphosate price, high prices, are you seeing any strong demand for dicamba?

Yes. Some -- we are seeing some revival with the increase in dicamba demand compared to what was forecasted by the customer.

If you can quantify what was earlier and what is now, that would be great?

In general, they have indicated that the demands have become stronger.

Okay. So besides this replacement coming because of the high prices of the other replaceable products, what is the scenario right now there on the regulatory side of the dicamba where we had earlier some challenges, especially in the U.S. market. So now how it looks like now? Is there any change...

I think that customer, they always -- yes, they got the approvals. So I think there is no regulatory challenge.

So the question is, so the cancellation that happened because of the earlier regulatory challenges, it could also get reversed. So why do we need to find other open -- why do we need to supply in the open market basis? Can we not go back to the same customer and ask them to take our product?

And the cancellation didn't happen because of the regulatory reason, actually. They were supposed to put up the plant to manufacture in the U.S. and then they decided to -- not to -- stop the construction of the new plant. So it was not -- nothing to do with regulatory. It was an overall assessment what they have done, that is instead of manufacturing themselves the finished agro chemical, they would like to buy that molecule from India and China. That was a strategy difference and not connected to regulatory issues.

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

Sorry, I joined the call a bit late. So please excuse me if this has been asked already, but just trying to understand the reason for the decline in other unallocable expenditure this quarter. It's down from INR 59 crores, INR 60 crores in 4Q to about INR 39 crores this quarter. So just wondering is there any one-off item there? Or how should we think about that going forward?

No, no. So there are some reduction in the operating costs, which were there in the earlier phases for managing the logistics and other stuff. So those -- some of those costs has gone down, and we found a bit of a benchmarking of allocating couple of costs to specific segment. So that's why the changes happen.

So on a quarterly run rate basis, this is the right number to trend off of now going forward?

Going forward, we can start using these kind of numbers.

Okay. Got it. And on the -- some of the volume numbers that were shared for nitrotoluene, we said 3,440 tonnes. Does that exclude the downstream products that are made also...

Yes, these are only the nitrotoluene volumes. It is nitrotoluene volumes on the downstream.

Okay. Okay. Last one thing is with regard to the new projects that are getting commissioned, any sense of the turnover we expect from the major projects out of these? And like you mentioned, for example, in chlorination or the Dahej Phase 2, et cetera, [ ACV2 ], et cetera. If you could just give us some ballpark and some of the turnover we can expect from each of these major projects?

Yes, actually, we have guided this from FY '21 to FY '24 about 1.7 to 2x turnover. So from the INR 5,000 crore turnover what we had in FY '21, we are more looking around INR 9 crores -- INR 9,000 crores turnover by FY '22.

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

Sir, one question on the guidance that we have given of 25% to 35% growth in FY '22. Now if we are talking about some delays in the long-term contracts, then that essentially means that the base business will actually have to grow much faster. And even on an adjusted basis, we have kind of hit a run rate which is similar to 1Q '20 in the spectrum business in the core, if you exclude the compensation and all of that. So my question was more on -- is there anything in particular which you are seeing, which is driving an acceleration in growth in the core business? Or how should we think about this?

This second and third contract, the contribution was not significant in this -- our guidance of 25% to 35%. So some delay in that [ commissioning ] is not going to impact much.

But maybe if I can frame my question a bit better. Is there anything in the underlying business, any particular segment or any particular geography or any particular customer product that you're seeing, which is ramping up to drive this 25%, 30% growth? Because even after we covered for the low base, it is a much stronger growth compared to FY '20 compared to what we've seen is delivered?

Yes, last year was impacted. Because of last year, the volumes EBITDA and PAT, both were all were impacted because of the COVID in the first half. The second half was much stronger, and we will be building on that and we'll be seeing -- we are looking at -- most of the demand of pre-COVID has reached and some of the segment, even the demand has grown more than the pre-COVID levels. So based on that, we are seeing a good volume growth possibility.

Sir, in terms of volume trend, what is the number that you could look at this quarter, like in terms of a sustainable volume growth over FY '20, if one was to look at that, not '21.

Yes. FY '21, basically, that's what we have said, 25% to 35%. So that is the overall guidance we see.

Okay. Okay, fine. Maybe Ill take that off-line. Sir, then the next question that I had was on the -- there's been a lot of discussion on the long term -- on the canceled long-term contract. Maybe if you could maybe throw some light on what are the challenges that we are facing in ramping that up? Because it would have been -- one would have assumed that would have been faster than what we are currently guiding for say FY' 24 because we are a large part of the intermediate capacity on that product, right? So...

No, no, overall, the demand of the product was impacted. So this year, it will be more of a qualification and significant demand is expected only from the next year for this product.

Got it. So this is more like a regulatory hurdle that you guys face in terms of qualifying with the customer. And once that is done, then the ramp-up will be faster. Is that the right understanding?

Yes. And the demand itself was impacted and because there are a lot of inventory in pipeline, accumulated inventory. That's why these FY '22 demand is relatively less. Most demand -- more demand will come from next year.

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for closing comments.

Yes. It has been a pleasure interacting with you over the call. Before we close the call, let me reiterate that with the execution of our planned growth objective, we look forward to driving strong value for all stakeholders associated with our industry. 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 out to our Investor Relations desk. Thank you.

Thank you. On behalf of Aarti Industries Limited, this concludes this conference. Thank you all for joining. You may now disconnect your lines.