Aarti Industries Limited (524208) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Aarti Industries Limited Q3 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shiv Muttoo from CDR India. Thank you, and over to you.

Yes. Thanks, Stanford. Good evening, everyone. Thank you for joining us on Aarti Industries Q3 FY '22 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 in today's call may be forward-looking in nature and a disclaimer to this effect is included in the results presentation shared with you. I would now like to invite Mr. Rajendra Gogri, who will 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 welcome to all of you attending this call. I hope all of you and your families are in good health. I trust that all of you would have received the Q3 FY '22 results presentation. It's been uploaded on the stock exchange website earlier. Just a review of our financial performance. Based on the financial results of the year to date, we have delivered performance that reflects the strong business traction across both our vertical and position us to comfortably exceed our growth guidance as shared earlier this year. Our Q3 revenues were at the INR 2,636 crores. This includes the termination fee in respect of the first long-term contract to the tune of INR 631 crores. As you would recollect, in the month of June '20, we have received the notice of termination of this contract from the customer. Appropriate disclosure relative to same were given immediately to the stock exchange on June 15, 2020. This has resulted in an increase in EBITDA and PBT by INR 611 crores, net of currency mark-to-market and expenses. Excluding termination fees, our Q3 revenues were INR 2,005 crores, up 53% year-on-year. Revenue expansion during the quarter also includes the pass-through of the substantial increase in raw material prices as well as fuel and logistic costs to our customer based on the contractual terms. We continue to extend the growth momentum by engaging strong customer attraction for our expanded manufacturing capacity across key product lines. As discussed in the past, our reported EBITDA is a key monetizable data point as it neutralizes the input cost variation. During Q3, our core EBITDA at INR 356 crore, netting for termination fee, is once again the highest in our operating history, demonstrating the ability of the business to maintain margins by passing on to customers a substantial input cost inflation experienced during the reported period. Q3 EBITDA was also higher by 25% Y-o-Y. EBITDA growth was driven by higher capacity utilization, volume growth, favorable product mix and realization. Our profit before tax came in at INR 247 crores after adjusting for the termination fee. This is up 18% Y-o-Y over Q3 FY '21. It's also our highest ever profit historically. In the Speciality Chemicals business, our core revenue without termination income, came in at INR 1,657 crores, up 56% Y-o-Y. Segment EBITDA at INR 284 crores net of termination income for Q3 translates for -- into growth about 27% on a Y-o-Y basis and about 17% higher on Q-on-Q basis. As you are aware, we have a pricing model where the variation in input costs such as raw material, fuel, logistics, et cetera, are passed on to the customers and growth achieved on this parameter during Q3 indicates positive momentum in the business. This is in the middle of continuing rise in the price of various key input commodities, fuel prices and significant high cost of logistics. We are working the situation closely and continue to pass on the impact to the customer to the maximum extent possible. There are instances where we had to absorb some part of these higher costs. The current inflationary trend has also resulted in an increase in working capital, but our well-capitalized balance sheet has enabled us to manage the situation well. We saw a return of demand from established market, driving improved margins. During the quarter, shortage in the supply of natural gas has impacted volumes of nitric-based products. Now for the Q3 production update. Production for nitrochlorobenzene was about 18,504 metric tonnes compared to 16,802 metric tonnes a year back and about 20,347 for Q2 FY '22. Similarly, for hydrogenated product, we have achieved production of 2,878 metric tonnes compared to 2,739 metric tonnes last year. On the nitrotoluene front, the production for Q3 were 3,633 metric tonnes compared to 3,594 metric tonnes in the same quarter last year. During the quarter, the shortage in the supply of nitric acid, which is one of the key raw materials, impacted the volume of nitric-based products. We are also witnessing the shortage in the current quarter for FY '22 and are taking necessary steps to optimize the product mix. Coming to the key projects for the segment, we are currently taking track of the project related to the second long-term contract and expect to commercialize the unit in this quarter, that is Q4 FY '22. The project is related for third long-term contract at Jhagadia and the NCB capacity expansion at Vapi. Expansion income asset upgradation for our asset unit at Vapi as they are expected to come on stream in FY '23. The commissioning and scale-up of these units and the recently commissionalized specialty will drive our growth and enable us to meet the growth guidance for FY '24, as given earlier. We witnessed the return of demand from established market, driving improved margins. With a positive direction for the segment across for both Indian and global market, we expect to deliver steady performance improvement going forward as new facilities scale up volume. Our Pharma business grew 40% Y-o-Y to INR 348 crores during Q3. Here do we pass on higher cost to customer, resulting in top line expansion, where part of the fuel cost had to be absorbed by us. Business improvement has been driven by higher volumes, improving efficiency and entry into new APIs. We have established relationships with global generic pharma companies and then continue to invest in the expansion of API and intermediate capacity. We have now attained large scale in this segment and see further increase in volumes based on our new investments. Further business visibility in pharma is based on higher volume from regulated markets, value-added products and new introduction of intermediate products. Currently, trials [ and then surveys ] are being conducted in the new expanded block and the U.S. FDA approved API facility located at Tarapur. We targeted commissioning in the current quarter [ chip ] that is before the end of FY '22. EBIT for the pharma segment for Q3 was higher by 10% year-on-year at INR 60 crores. This was also a sharp increase of about 46% over the preceding quarter and it is over Q2. EBITDA-specific issues witnessed previously are now largely resolved. Going forward, we expect volume expansion to be supported by robust margins in this business based on the pipeline of approvals across anti-hypertensive, cardiovascular, oncologies and corticosteroid. Now an update on capital expenditure. We have incurred CapEx of INR 312 crores in the third quarter. We have now invested about INR 920 crores in the year-to-date and expect the annual CapEx to be around INR 1,200 crores to INR 1,300 crores, which is within the range from -- with our earlier CapEx guidance of INR 1,200 crores to INR 1,500 crores for FY '22. As shared earlier, we are also undertaking various R&D and innovation-driven program, with 40-plus products for chemicals and 50-plus products in pharma in the pipeline. It will out -- drive our growth beyond FY '25 and give us a horizon value visibility until FY '27. Now with reference to the update in the proposed demerger of the pharma business and allied activities. We'd like to share that we have received the necessary principal approvals from stock exchange in the last quarter and the application is now under process at NCLT. We expect the process for getting necessary approvals for the sale scheme to take another 4, 5 months, which is in line with the overall time line that we had shared earlier. Before I conclude, I would like to reiterate that we are focused on building an augmented organizational framework that positions us strongly to capture strategic growth opportunity in our focused verticals. We have an expanded pipeline of projects currently underway, providing clear visibility to the business over the next several years as India emerges as an increasingly significant global chemical supply destination, met by supportive regulatory framework executed by the government, our CapEx commitment driven by a well-capitalized balance sheet. We allow the pursuit of aggressive growth in line with the business blueprint. In addition, our plan to create individually focused business in our 2-core vertical will further enhance value of all our stakeholders. With that, I conclude my opening comments, and we'll open the floor for the Q&A session. Thank you.

The first question is from the line of Surya Patra from Philip Capital.

Congratulations for the good set of numbers. Sir, the first question is on the terminal compensation that we have received. So obviously, it was guided and in the similar lines on it has come. So it seems that we have got adequately compensated for the deal cancellation by the customer. But in this process of deal signing and the cancellation and the not getting real operational contribution from the transaction, so did we lose anything in the process, either in terms of our effort, time and all that which possibly we could have created something else? Can you hear me?

Yes, yes.

Basically, now will be utilized -- this utilizing the specialty for other customers as we had guided earlier. Because the facility still remains with us. And I think overall, we have got to this compensation and as the facility will be also continue to be utilized?

I think we are fairly okay.

Okay. On the financial terms, obviously, it was better than kind of compensation -- expected compensation. But possibly, you could have utilized our effort in the right direction and better direction. Is that...

Nobody had visualized, no, this kind of a thing which will happen at that time. So -- the partner also had spent a lot of money, yes.

Sure, sir. Okay. My second question is on the margin profile. So since last 6, 7 quarters that we have been getting a $5 million kind of compensation amount that was getting built into our numbers. So that was, to some extent, supporting the margin -- overall margin -- reported margin at a time when there were challenges and all. So adjusted for that, I think the margin profile would be around 17%, 18%. That is at one end. And prior to that phase, our margin scenario used to be 20%. And we have now guided for a higher margin scenario for 25% to 30%. So how should one really bridge this equation from the current 18-odd percentage to 25%-plus kind of margin now going ahead beyond FY '24? And in between from current period to '24, what would really drive that? And what does the margin scenario should look like?

Yes. Actually, basically, this quarter itself -- this year, the raw material prices substantially increased, if you see the -- last year. So margin profile becomes very difficult. But in general, the new products which are in pipeline, which are -- for which we'll start the construction of plant in FY '23, they are more value-added, so which will have a higher EBITDA margin at a constant raw material prices. You are right regarding this $5 million which we are -- which we used to get against this contract. That will definitely have a negative impact on margins. But longer term, increase in margin is more on -- based on introducing a newer value-added products.

Okay. And this crude price, which is now beyond $90 per barrel, so sir, that is a kind of a real concern, at this junction, do you think, sir? Or it is a kind of a temporary one? But even if it is not a temporary one, you can easily pass on the elevated cost. Is that your understanding?

Yes, generally, crude price even at whether it's $90 or across $100, whatever, but -- we have, inherently, a raw material pass-through model. And we are able to pass on the price increases, either in the same month or maybe in a -- or the quarterly lag in general. So we are not much concerned on that.

Just last question, sir, on this -- the first contract, the plant relating to the first contract. So we were thinking to commercialize that adequately from third quarter, whether we have seen any ramp up there? Or when do you really expect that to happen?

Yes. We already started selling the material from that plant. And it will be, I think, from FY -- in FY '23, we will see a substantial ramp-up. And by FY '24, we expect to almost reach our targeted original volumes.

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

Sir, as per the presentation, you have mentioned that we did a 25%, 30% kind of growth for FY '22. So I just wanted to know how we should see this number. Now as in the 9 months, we are already at a much higher top line growth and also taking into account the rise in product prices in the last 1 year.

Yes, I know. So there were -- we already crossed 9-month EBITDA. Because top line sometimes becomes difficult as a percentage. So more guidance will be on EBITDA and PBT and PAT levels. So we already crossed 9 months. So on that basis, I think we are maintaining around 25%, 35% growth rate.

So it would be any reason on that? Or it still remains there?

No, basically, 9 months, we already reached our previous year's 12-month numbers on EBITDA and PBT. And the top line growth is substantially more, but it's -- critical guidance is more on EBITDA and the EBIT levels.

Okay. Okay. And sir, on this compensation side, I mean, as we have received our money, so just wanted to know what kind of cost was included in this as at the EBIT level, we are taking some INR 611 crores number. And as you have guided that this facility would be used to secure orders for other customers. So just wanted to know how much revenue we are generating from that particular project or how many customers we have secured post this deal penetration.

We have ForEx and related hedging costs to be deducted out of that and certain commissions. And regarding -- we already started the product -- export of these products from this site. And we'll be doing both domestic as well as export sales going forward from this site. We already identified customers and qualification of the product also has been done with new customers.

Okay. So just wanted to -- I mean, the kind of investment we have made in this new number in terms of revenue from what we are invested in this project.

Yes. No, we are looking at in a couple of years, reaching targeted volumes. We should generate maybe about INR 400 crore-plus revenue.

Okay. Okay. And one last question. As you were saying that in pharma, we see growth driven by regulated market growth. So just wanted to know how would be the margin in this business, as it would be less likely to have higher margin in a regulated business.

Yes. Basically, in the pharma, we are at -- as we have expanded our capacity in this quarter, which will be coming online, there are several products where we are unable to meet the customers' demand. So those demands will be picked up. And also, as you know, we are operating in steroid as well as anticancer chemistry APIs. So there, overall, the number of players -- other players who are offering this kind of products are limited. So there, we anticipate reasonable margins to sustain for future. So we are getting newer approvals every year for these products also.

Okay. So I mean the overall margin profile would be better from this level, what we are currently?

Yes, yes. So we would like to maintain this 18%, 20% percentage EBIT number for us.

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

Sir, two questions. Sir, first is on this, because of this nitric acid shortage, what could have been the revenue loss? If you can just quantify. Am I audible?

Yes, yes, yes. I think the absolute quantification, we have not done like that, but still maybe around INR 50 crores can be the kind of number, yes.

Okay. And you mentioned that the availability, the shortage still remains there. So probably that may continue to have impact on our current quarter number as well and -- because of this nitric acid asset shortage?

Yes, yes, yes. It will -- some impact in Q4 also will be there.

And sir, you also mentioned that there is a definitely lag of close to months to quarter, and we have seen a very sharp increase in crude prices even in the current quarter. So do we expect that though we are passing it on, but that may have some delays? Or is there any cap you see that there will be acceptance up to a level of only from the customers, and after a level that it can start affecting your demand, because the end user industry may not be in a position to absorb that price increase. Did we hit that kind of level because close to a $90 to $100 may have put a lot of pressure on end product pricing? So how do you see that -- the acceptance of the customer? And can it have a margin pressure for us?

Yes, most of the products which are made from our product downstream, similar. Some of them are agrochemicals and polymers and paints and all that. I mean, in fact of this, by the time the finished product is made and put it to the customer, all the marketing costs and also everything got loaded. So right at the end of the customer, this increase in crude oil and our intermediate price is virtually not significant to really impact the demand. Some commodity plastics, like polypropylene, polyethylene, PVC, where the immediate lead goes to the end user, and that user sometimes, you'll see that they have a pushback on the demand if these polymer prices increases. But in our range of products, generally, crude at $120 or crude at $60 is not going to impact the demand.

Okay. So there are absolutely no problem from the customer and as far as the demand is concerned?

No, no, no. It's not -- because there, the ultimate products are $5, $10, $15 kind of products. Maybe at the customer end, it may be still higher prices. So these variations, generally the -- except from the demand, [ whole that's in. ]

And so there, on the product which got terminated from the customer and this is a dicamba derivative intermediate, if we can zoom in. You mentioned roughly INR 400 crores kind of sales you are expecting to achieve. Didn't mention any time line. So by when do you think that we'll be able to...

By FY '24, yes.

And sir, any idea that -- any guidance that how -- what is the percentage utilization of the plant right now and what it can be in '23, next year?

Yes. This year, in a way, we have just started giving a trial with qualification, quantity and all that are getting started. And FY '23, I think it's still difficult to give. I think in our Q4 call, we should be able to guide more on FY '23 volume target for that product.

Okay. Sir, can you also give us some financial figures like what is our current debt number for the year-end? And what is our cash position? And because -- and also in terms of cash accounting from the fees which we have got, I mean, from the customer that how much fees -- how much cash we have got in the current year?

Yes. Chetan, you can take that.

Yes. So as regards to the accounting for the fees, we had an advance of INR 25 million and the balance would be coming up in the current quarter. So that would be fully settled in the current year itself. And Rohan, could you just repeat the question once again? Hello?

Yes. He wanted to know the overall debt level.

Yes, the debt levels are almost at INR 2,700 crores as of the quarter end.

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

First, I just wanted to clarify, on the adjusted tax excluding the termination fee. Is it INR 242 crores also the right number, I recon?

So that would be the PBT, if I'm not mistaken, INR 247 crores.

Yes, it's the PBT. Right.

The tax will be at a company level. So something we'll have to look at it on a consolidated base only.

Okay. Got it. So about the same, 18%, 20% tax rate on this. Understood. Besides the INR 631 crore termination fee, would we have booked another $5 million, $7 million this quarter as well as part of the usual accrual? So if you could just give us that number as well.

It's a $6.5 million, right?

Yes, that's around $6.5 million. That's the last component for the quarter because the contract gets over.

Okay. Understood. And on the project, you mentioned that INR 400 crores is what we are expecting to generate from it in the next couple of years. If I remember correctly, the regional projects revenue projection was also INR 400 crores a year. So essentially, in terms of realizations and margins, it seems to be in the same ballpark as the original contract. Is that how we should interpret that?

Yes. I think it will be both a similar order. It will not be exactly same, but I think the margin will be a little lesser. But top line, because the prices have increased in general, over a period of time. So raw material prices have increased. At the constant top line, some margin will be a little less than originally forecast.

Okay. Fair. One last thing and I'll come back in the queue. Regarding the demerger, how much of the debt will be transferred to Aarti Pharma Labs? Would you have a sense of how -- - what that might be?

So we'll have to actually look at the component when the actual order comes in. So as on the appointed date, which was like 1st of July, the debt was, to the bank continued off around INR 600 crores to INR 650-odd crores. I don't have the exact number, but around that number of debt would have gone in. Plus there were some cash balances also. So a component of cash balance would have also go over there. But anyway, these numbers will have to be seen as on the effective date when the NCLT approvals come in and what other actual numbers at that point of time.

Okay. This is for the pharma business, you're saying?

Yes. Yes.

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

Sir, firstly, on these volumes which you had highlighted, you said NCB volume was 18,500, correct?

Yes.

And what was the PDA volume?

The PDA volume was around 495, close to 500.

Close to 500. Okay. So -- and then hydrogenation, 2,785, correct?

No, that was 2,878.

2,878. And nitration, nitrotoluene?

Plus 30 -- 3,630 tons.

3,630. Okay. And sir, if you can also help me, broadly what would be our DCB, NCB and TCB volume, chlorination, the whole volume.

I don't have that number right now. Probably we'll have to check on that...

Okay. And just to understand, I think PDA and NCB, we both -- both this capacity got expanded in the second quarter, correct?

No, no.

There's no expansion of PDA recently.

The expansion was the chlorobenzene plant.

Yes. So nitrochlorobenzene plant got expanded, right?

No, no, no. The chlorinated facility.

No, not yet.

Okay. So still that -- because last time, when I discussed, I think, around INR 1,200 crores kind of a working capital, we were looking at NCB, INR 150 crore, U.S. FDA plant of around INR 400 crores and 2 project -- dedicated projects, something around INR 300 crores. So I just wanted to understand that NCB plant got commissioned, or it is still in the working capital?

It is yet to be commissioned, yes.

Okay. Okay. And that same is the case with that U.S. FDA plant also?

Yes, yes. But that number wasn't INR 400 crores, it would be INR 100-plus crores something.

Because I think you said that something we had bought the land of around INR 200 crores and INR 200 crores we are implementing for the expansion, something like that.

No, no. It was not -- INR 200 crores land is not possible, I think.

I guess, Amar, you got a bit confused. So in the pharma, we've got the land in Gujarat. And over there, the project which is going to come up would be of the magnitude of INR 350 crores to INR 500 crores.

INR 350 crores to INR 500 crores, okay.

But that is something which is going to come up. It's not currently part of the WIP component.

Okay. Okay. And sir, now as you said that out of INR 1,300 crores CapEx, INR 922 crores Mota [ Multi ] Capitalized, Mota [ Multi ] got invested and it could be sitting in the WIP. And you also guided that something around INR 1,500 crores would be invested in '22, '23. So what would be that CapEx, sir, now?

So now all the new projects, what we are, say, new product lines, that construction will start in FY '22, '23, this FY '23 at a newer location. So there, from April onwards, we'll have a construction of the UMPP plants, as what we have guided as well as from dedicated chemistry, construction will start in FY '23.

Okay. And on top of this, we had also guided for something around '24 to '27, INR 350 crores CapEx, right -- INR 3,500 crore CapEx?

So overall, we had guided INR 4,500 crores to INR 5,000 crores in over a 3-year period. And out of that, -- around INR 1,500 crores were for the existing ongoing projects and around INR 3,000 crores to INR 3,500 crores for the new more or less a greenfield kind of a project. So that's how the guidance was then, yes.

Yes. So sir, the greenfield projects which are going to come, I believe the chemistry would be either toluene or benzene, right? So would this be like a kind of when you say high value, what kind of products which will be this ? And what kind of profitability we can see from these products? And if you can specify, like, what kind of products this will be, like this INR 3,500 crores for CapEx which we talk about.

Yes. A lot of chemistry will be added, starting with toluene and benzene. It may be 2, 3, 4, 5, 6 steps will be added. That's how sales to asset [ tunnel ] will be less and EBITDA margin will be higher. And then most of the products will be both on a -- it will be multi-end use, .It will have, like, core pharma as well as on the dyes and pigment side as well as in the import substitution as well as export-driven, where customers want to diversify the results firstly.

Okay, sir. Okay. Okay. Sir, if I can squeeze one more. Like, broadly -- I believe, as you said, you are looking for export as well as for the import substitution for this INR 3,500 crores CapEx which we are doing. So let's say, how big this market would be in terms of the value today? And what much of the market you can address? Let's say, in India, what will be the import of this value? And what will be the export side. If you can give some color on that.

Yes. The chloro-toluene race, I think, already about INR 1,500 crore import is taking place in India. In generally, we count -- the product, what will be made. Normally, 60% to 70% of the market share of imports can be taken up in general. So that is broadly -- we look at market share target for import substitution.

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

Just wanted to understand the projects that will get commissioned in '23 and '24. So if I'm not too wrong, one is a second long-term project, which you're saying we will commission on FY '23. Third long-term contract, when we get commissioned?

Yes -- sorry, sir. Go ahead, sir.

Yes. Second one, we have started commencing trials and we expect the product to come out in Q4 for the second one. And the third contract, we'll be targeting to commission maybe towards the end of Q1 or Q2 of FY' 23 as far as long-term contracts are concerned.

Just a clarification, the second one, you are targeting Q '23. It is not FY '23, it is FY '22.

The second one, yes.

Could you repeat that.

Yes. The second one, you said that you are looking at Q3 -- sorry, FY '23, it is not FY '23 as mentioned ago. We said that it is under commissioning. So we are targeting to commission it in FY '22.

Understood. Sir, the second contract, what is the utilization level that you are expecting? Because I understand it's INR 1.5 billion for 20 years. So should we take it a INR 75 million run rate? And when is this likely to be achieved?

So basically, we will see a sharp ramp-up from the first year itself. Then suddenly, a couple of years, I think we should be able to reach full capacities.

Okay. And second point is that, please don't get me wrong, sir. This CapEx is completely funded by the supplier. So I believe the margins in this should be -- if I go back to the conversation, it would be much lower than the company level. Is that the right understanding?

Yes.

Okay. Got it. And when we look at the third contract, again, 125 million, could that be the run rate? And what is the margin expectation on this particular contract?

Yes, that was around -- I don't recollect, maybe 35%, 25%, 35%.

The margin was in the range of around 30%, 35% kind of stuff.

The EBITDA, sir?

Yes. At EBITDA level, yes.

Okay. Okay. Got it. So sir, this -- again, this ramp-up you will see pretty quickly? Or what should be the ideal number that we should consider if I'm -- I mean, this contract, if I'm not wrong, again, it's about INR 125 million for 10 years.

Yes. That ramp-up also, by FY '24, we expect both of that to be running fully.

Okay. Got it, sir. Sir, any other projects that will get commissioned in -- I mean, or rather, you will see a ramp-up in '23, '24? Or something that gets commissioned in '23, '24, like NCB expansion which you spoke about or the asset unit? Indicatively, what revenue run rate should we expect in some of these projects that is coming up?

Yes, that's what we are guiding. By FY '24, we virtually expect a substantial ramp-up of this contract as well as nitrochlorobenzene, chlorobenzene and all. And that our guidance was around 1.7 to 2x the top line as well as EBITDA and PAT, our FY '21 numbers. So those kind of -- by FY '24, we should be able to achieve.

Okay. And just to understand, sir, on the volume growth front, I know we see revenue growth partly because of commodity, how would have been volume growth this time this quarter, be it exports or domestic? Any rough indication that you could help us with.

Yes, Y-o-Y maybe around 25%. These values are 50% plus as per speciality coming with [ great ] concern. Volume growth may be around 25%, we'll have to see the change number.

Okay. So was there any disruption or rather a benefit to us because the export market, because Chinese companies are not supplying, given we understand many of them are coming back post the Winter Olympics, which is currently on, do you see some element of supplies that are in the export market, they are going to come back again? Any comments on this?

No, we are not seeing that kind of a thing. No.

The next question is from the line of Kumar Saumya from AMBIT Capital.

My first question is regarding the repeat of the contamination fees. So apart from this INR 630 crores that we received in the current quarter, was there raised demand that we'll see in the first half of the year?

Question was not very clear.

We received around INR 630 crores in this quarter. So in the first half, what we received from these fees, like any penalty fee that we received in the first half?

Yes. First quarter was INR 4.5 million. And second quarter was about INR 7 million. And third quarter roughly is about INR 6.5 million in addition to this termination fee. That was the number.

Chetan, you will have the number in crores also, right? .

Yes, yes.

It's 1 million dollars.

The next question is from the line of Aditya Khetan from Stewart & Mackertich.

Sir, first question is regarding on the INR 4,500 crores CapEx which you are targeting. Out of that, the newer segment CapEx is around INR 3,000 crores to around INR 3,500 crores. You had said to an earlier participant that you are targeting more towards the benzene and toluene chain only. So if you can just break up into segments, like so for segment as we [ closed ]. Apart from that, which are the segments which we are -- which we are particularly targeting? If you can break up this number into some of the segments.

Yes. Can be further value-added downstream product from that chlorobenzene chain as well as nitrochlorobenzene chain also in addition to the entire chlorotoluene chain. And some nitrotoluene, downstream also will be added. So we have -- currently, we have got 3 benzene and 1 toluene chain where we make the base product also. So all value-added downstream from all those 4 will be added. And the chlorotoluene will be adding the base chemistry of toluene and chlorine as such, as well as the downstream.

Okay. Okay. Sir, on the crude oil prices and now definitely with this level of crude prices, as you have said earlier also that are these comfortable to pass on at any crude oil level, but considering like we are into an upward surge of crude oil prices only now. So out of [ answer], so just to get a hypothetical idea, out of 100 customers definitely, so 70%, 80% could absorb, but there would be some amount of 10%, 20% of customers which might resist. So are you witnessing some sort of -- so that kind of a scenario right now?

No, no. As I mentioned earlier, the ultimate product which are made, which is consumed by the end customer, which will be when going into the agrochemical or some pharmaceutical and all, those values are very high. So this intermediate, I would say $130, $140 crude will not impact demand at all.

The next question is from the line of Nitin Tiwari from Yes Securities.

My questions are just a couple of [ clarificatory ] questions. So the compensation payment that you have mentioned in this quarter's result, is that -- that is something we have received? Or does that accrue to us and we are yet to receive?

Yes. So we've got something like around close to INR 180-plus crores already with us as an advance. And balance will come in the current quarter.

Right. So you mentioned about, like, the receives in the previous quarters as well. I missed out on that number. So it was about $7 million and $6.5 million, something around that. So would you please repeat those numbers, one, for the first quarter's, actually.

So basically in the first quarter, we had provided for around $4.5 million. In the second quarter, it was $7% million. And the third quarter of $6.5 million.

All right. So basically, we are looking at, out of this 18 million, we have received about INR 180 crores of payment and this would be pending. That's what you're saying?

Yes.

Okay. Okay. Got it. And sir, also regarding the second and the third long-term contract. So if I heard you right, basically, the commissioning of second long-term contract is at the end of fourth quarter FY '22.

Yes.

And the third one is at the end of quarter 1 or quarter 2 of FY '23, right?

That should start in Q1, Q2 FY '23 kind of stuff.

Correct. So you also mentioned about an EBITDA range for the third contract. So could you please also give a sort of an EBITDA range for the second contract as well? And what would be the annual run rate of revenue in that contract? If you can help me with that.

So in the second contract, the annual run rate, which was -- which we had disclosed earlier when the contract was executed was in the range of around INR 500 crores. As Mr. Gogri shared in the call, it might take -- it will have a faster ramp-up and might take just a couple of years for us to reach to that level. The EBITDA, because there's no interest component or other stuff which is charged, so the EBITDA should be relatively lower. We'll have to see the exact number, but it should in be the magnitude of around 14%, 15% also. We'll still have to rework it because a lot of numbers, including the raw material prices and a couple of other input costs have gone through or gone changed. So we'll have to rework it, what it should be in that 12%, 15% range kind of stuff.

[ The thing ] is about 30% to 35% in the third contract. That's what we are looking at in terms of EBITDA, right?

Yes, around that kind of stuff. So these are basis -- pricing which was available at that point of time when the contracts are signed. So some of those basis, the input cost, which has gone up, there could be some change on it, but I don't see a substantial. On an absolute basis, the EBITDA guidances would continue to be there, what was guided earlier.

Got it. And also, if you can just help us making aware which segments these 2 contracts are targeted at? I mean are they catering to agrochemicals or to dyes or, like, to which end market segment? If you can help us with that.

Basically, speciality chemicals. We will not be able to guide anything further on that.

Right. So -- and I was just, like, wondering because as in the case of first contract, it become, I think, was meant for agrochemical production, right?

Yes.

But over here, we got certain restrictions. So we can't guide beyond what it is there in speciality chemicals.

The next question is from the line of Rohit Nagraj from Emkay Global.

I guess, again, then on the total income from the long-term contract. What was the amount in rupees crores for FY '21 and for 9 months FY '22? And obviously, the termination fee was INR 631 crores.

So this is in respect of the first long-term contract?

Right, right, right.

So if -- you're talking in terms of the revenue which is being generated or...

No. So I understand during FY '21, we were getting close to about $5 million each quarter.

That was around INR 140-odd crores roughly for FY '21.

Right. And if I add this $18 million for 9 months, it's close to about INR 135 crores?

Yes, that kind of stuff another INR 630 crores kind of stuff.

So total about INR 900 crores is what we have received?

Broadly plus/minus some INR 10 crores, INR 20 crores here and there.

Correct. Okay. The second question is in terms of the long-term contracts. So we have given a range of revenue growth for FY '24 as well as FY '27. So by FY '24, how much percentage of our revenues might be coming from the long-term contract? And similarly, on FY '27, given the visibility that currently we have?

Yes. Overall, long-term contract percentage will increase with 2 new contracts also and some more contracts are also being discussed. But our noncontract [ chill ] sales will also increase. So overall, we have not done any specific bifurcation between this long-term. But in general, in most of our products, we have very good visibility with the customer over their next few years' demand and how they're going to grow and how much they will be buying from us in that sense. But this long-term contract percentage is increasing, yes.

Right. Sir, got it. Just a small clarification on long-term contracts. So whenever we are discussing new long-term contracts, the project execution period is, say, 2 to 3 years? Or it is now lesser than that, given that we already have a particular asset size and the projects which are currently on hand?

Yes, it depends. If there is a greenfield, more time. If it's brownfield, then obviously, it is faster because we've got a lot of infrastructure in place. So it depends on that and also the complexity of the project and the total CapEx involved. So it'll be anything between 1.5 to 3 years kind of a number, depending on the size of the project and whether it's a greenfield or no.

Right. And sir, just one clarification on R&D front. Currently, what is the strength? What is the number of PSDs and technology people who are into R&D?

I guess the headcount, we have to do the recent headcount, but it will be upwards of 400.

The next question is from the line of Naushad Chaudhary from Aditya Birla Capital.

Just one clarification in orders. So typically in long-term contracts, like there is a commitment from our side in terms of our project commissioning and supply on time. And at the same time, there's a commitment on the client side on the volume of it, right? If I'm understanding it correctly.

Yes.

But if I see the commissioning time line of both of our contracts, the second and third long-term contracts, there has been a substantial delay of the second long-term contract. Initially, it was expected to come by 1Q '21. There has been about 2 years delay in this contract. And similarly, around 1, 1.5 year delay, long-term contract. So just wanted to understand who is delaying. What is the -- and even in -- for this deal and the client is not pushing us to get it on time or get it quickly? Or is this an indication that the ramp-up of these 2 contracts could be slower than expectation and there's not much demand of the product from the clients' side as of now?

Yes. Basically, this delay was mainly because of COVID. There were 2 waves and that was a global event. So actually, this -- the second contract was already reset by 1 year because of the entire COVID-related thing happening in that. So we are in constant in touch with our customers regarding the delay which was happening on that front. And on the ramp-up side, we don't see any issues. I think on their side, the demand, they don't see any challenges going forward.

Okay. So the annual revenue run rate, which is expected, can we expect it to come within a year or 2 of the full utilization of both the contracts once it gets commissioned?

Yes, yes. By FY '24, I think both of them will reach almost full run rate.

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

Sorry, got dropped out in the previous question. Sir, another few questions on -- especially on the capital implied in the chemical business and even in pharma. Gross block has gone up. I mean, investment has gone up significantly, which I believe is a combination of both CapEx as well as -- sir, it seems looking at the numbers, like there has been close to INR 1,800 crores in asset increase from Q4 to Q3, while liabilities has gone up only from INR 200 crores. So just wanted to understand that because of the high input prices, the data has gone up significantly in inventories also, but -- are we not getting enough lineup from the [ payroll ] stand? And is there any significant increase in working capital that is going to affect our interest cost in the current scenario?

Rohan, just to address the question, probably against, like, increase of INR 1,800 crores, INR 900 is on the capital spend which is there. There would be INR 600 crores related to the termination, which is also shown as receivable and part of capital employed. So -- and the result then would be on the working capital side. So I guess that kind of explain -- summarizes a major part of your thing.

So even the INR 600 crores is also included in that...

Yes, because we still have to receive a substantial part, so there will be a good part of that also as a part of capital employed, right?

Okay. Sir, as a part of the -- this termination contract arrangement, the balance money was supposed to come by end of FY '22. So this balance INR 600 crores, the entire money, you think that will come in the current quarter?

Yes, yes, yes.

Okay. And that will lead to total money received from this contract termination is INR 980 crores because that actually was $140 million, right?

No, no. So we had given a guidance that it could be in the range of $120 million to $130 million. So I guess, the numbers are within the guidance which we had given in June 2020.

Okay. Okay. Okay. Fine, sir. Sir, second question is on this -- the product, which, like, derivative only. You mentioned that we can achieve a revenue potential of almost INR 400 crores, which was actually full revenue potential from this contract when we did it with the Monsanto and was supposed to have a 40% kind of margins. Do you see that at the full potential, when you are selling this product to outside, will you still have a 40% kind of margins in that segment -- or it will be -- or in that product or it will be much lower than that?

It will be lower. Very much lower, I would...

Okay. So even we may achieve revenues, but definitely in terms of margin profile, it will be much lower?

No, not much lower. It will be a little bit lower, I would say, but not at 40%. It will be more towards between 30% to 40% range. Within that range it will come.

Okay. sir, we are almost end of the year and having invested close to INR 950 crores in CapEx by Q3. Though there -- still -- range for the current year still looks pretty large in terms of from INR 1,200 crores to INR 1,500 crores total CapEx for the current year. I believe only a couple of months left for this year also. So you may have a fair amount of visibility that how much will be CapEx for the current year. And are there spillover you are expecting that are any delays in the CapEx for the current year?

Actually, we have already corrected in our statement. Now, we had said INR 1,200 crores to INR 1,300 crores. Right, Chetan?

Yes, yes. Rohan, probably you missed out when you have dropped out. So it would -- for the current year, it would be in the range of INR 1,200 crores to INR 1,300 crores.

Okay. Because I was just referring the presentation where it mentioned INR 1,200 crores to INR 1,500 crores.

That was the annual guidance. And now the 9 months are over, so we are now looking at around INR 1,200 crores to INR 1,300 crores.

So in that context, sir, can we be concrete about the next year CapEx plan of -- amount-wise?

No, next year, we have to still work out in detail regarding the cash flow. Overall, the 3 year, which was guidance was the INR 4,500 crores to INR 5,000, that is for sure. I think that will be the same.

Okay, I understand. Sir, when you say that 85% utilization in speciality chemicals for the current quarter, can you say that -- can you give, what was the gross block number was considered in that?

Rohan, I have to check that number. I don't have it right now handy with me so.

Okay. But definitely, entire INR 950 crores invested in the current year would not have been part of this 85% utilization.

A substantial part of this is in capital deployed. Those projects are yet to commission.

The next question is from the line of Bob from Falcon.

I wanted to ask whether you see any new competition coming up given the growth in this sector, in India, especially?

We have a very wide product range, and we have some competitors in India as well as in other countries. But overall, we don't see any significant increase in competition.

So you haven't had other chemical manufacturers getting into benzene derivatives recently?

Yes. No, no. Not yet, no.

Thank you. Ladies and gentlemen, we take the last question from the line of Surya Patra from PhillipCapital.

Yes. Just one clarification, sir. You mentioned that under your R&D projects, some around 40-odd products are there in the chemical pipeline and 25-odd in pharma. Can you elaborate on that and EBIT?

50-plus in pharma, yes.

So that number would be -- I'm saying on the pipeline, sir, if you can give some clarity on that.

Yes. So that's what we said, the chlorotoluene nitro downstream as well as the downstream of nitro chloro, dichloro benzene, nitro toluene value-added downstream, they have the product range.

You had earlier mentioned about when -- while setting up the new R&D plant in [ New Bombay ], you had mentioned about few new areas.

No, the chemistry wise. There are a lot of new chemistries. These are products downstream. But the chemistry will be -- we will be having a photochlorination, ammoxidation, [ eHF ] fluorination, Grignard reaction, [ Maleimide ] reactions. So a lot of new chemistry will come in.

Okay. So in terms of application, majorly how will that be distributed.

It will be both agro as well as the pharma product going into starting some going in dyes and pigment side also. So we are in a very wide range of applications. But these 3 sectors will be major: agro, pharmas, some dyes pigment and some other sector.

Okay. In regards to the pharma manufacturing side, how integrated that we would be post this pipeline?

Yes. So basically, in Pharma, we are largely up to N-5 stage on most of the APIs that we manufacture. We are doing more or less in our in-house manufacturing, except the steroid range of products. And whereas in certain products like sitagliptin, et cetera, they will be vertical from benzene straight away until the final sitagliptin. So that is one example. There could be similar few examples of few APIs. What that value in terms of turnover may not be significant. But as a practice, generally, we try to do at least 5 to 7 stages in-house in pharma non-steroidal products.

Okay. So then how would the business model the past few drugs will be different from this, sir? So -- because that is also API and looking for kind of...

Yes. So basically, what we are doing in Aarti Industries largely is specialized chemistry of steroids, anticancer as well as the antihypertensive lifestyle medicine, which are higher value and lower volume products that we are targeting. And we don't do generally the products which are below $100 a kg. Whereas in Aarti Industries, largely, we are into ciprofloxacin and anti-infective, pain management...

But not volume on old product.

Yes, yes. So these are all older products where the values of certain products are above $100, but largely under $100. But there are some products which go up to $300, $400 also, but largely under in that space. So that is largely Aarti is focused on the ROW market. Whereas here in Aarti Industries, we are focused more on the regulated markets as well as we are also selling intermediates of these APIs to all the generic manufacturers who are like companies like Dr. Reddy's or Mylan, Zydus or Alembic and they buy intermediate for their regulatory requirement. Apart from that, we are also having CDMO business also in pharma, so which is a different business, which Aarti doesn't...

Then in terms of the facilities also in terms of manufacturing facility, so it is entirely batch-processed [ BFS ] kind of model.

We have fully flexible manufacturing where we can do a multipurpose production, multipurpose plants. There we can do any product which fits that manufacture location. So it's a facility which is -- we can change the product and go to different products. If the particular product supposed market has gone down due to life cycle, et cetera, so then we can always substitute a new product. Whereas in case of Aarti Drugs, that is a little bit less possible, but of course, doable.

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over 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 iterate that with the execution of our planned growth objective, we look forward to driving strong value for all stakeholders associated with Aarti Industries. We thank you for taking time out and engaging with us today. We value your continued interest and support. If you have any further questions and would like to know more about the company, kindly reach our Investor Relations desk. Thank you.

Thank you very much, sir. Ladies and gentlemen, on behalf of Aarti Industries, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.