Aarti Industries Limited (524208) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Aarti Industries Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nishid Solanki from CDR India. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and thank you for joining us on Aarti Industries Q1 FY '27 Earnings Conference Call. Today, we are joined by senior members of the management team, including Mr. Suyog Kotecha, Executive Director and Chief Executive Officer; and Mr. Chetan Gandhi, Chief Financial Officer. We will commence the call with opening remarks from Mr. Kotecha, followed by a Q&A session where management will address participants' queries. Just to share our standard disclaimer, certain statements that may be made in today's conference call may be forward-looking in nature. A disclaimer to this effect has been included in the results presentation shared with you earlier and also uploaded on stock exchange website. I would now like to invite Mr. Kotecha to share his perspectives. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone. Welcome to Aarti Industries Limited's earnings call for the first quarter of the financial year 2027. We will walk you through our financial and strategic performance for the quarter, along with the key milestones we've achieved across our growth initiatives. The quarter was characterized by a challenging macro environment with persistent geopolitical tensions in the Middle East disrupting global supply chains, increasing freight costs and driving inflation in crude linked raw material prices. Despite these headwinds, demand across our core products remained broadly stable, supported by our diversified customer base, operational resilience and market development efforts. Our ability to optimize the product mix in such a constrained macro resulted into higher margins despite the elevated prices. The West Asia crisis had a direct impact on our energy business, temporarily halting exports to the region. The region's share in our revenues declined from about 15% to 2% in this quarter. We successfully redirected a significant portion of these volumes to other markets, limiting the overall business impact. We are working on opportunities to open new fronts for the supply in the region, which we expect to regain the volumes in the upcoming quarters. The quarter also witnessed elevated prices of key raw materials, particularly benzene, sulfur, methanol and amylin amongst others. High prices impacted the purchasing power in specific end applications such as dyes, selected agrochemicals and polymer compounds. This impacted our volumes during the quarter. However, our robust supply chain and efficient inventory management resulted into market share gains and inventory gains, which contributed to our overall EBITDA growth. Let me now take you through our financial performance for the quarter. I think overall, the company reported revenue of INR 2,627 crores, representing a growth of 41% Y-o-Y, primarily driven by higher input prices passed on to the customers. EBITDA of INR 385 crores, growing 79% Y-o-Y, driven by a combination of product mix optimization, monetization of low-cost inventories. This was also supported by stable demand, improved realizations for select products and resilient execution despite temporary disruption. Profit after tax of INR 155 crores, registering a growth of 266% Y-o-Y. Working capital requirements expanded during the quarter, driven by higher feedstock prices and increased export volumes. Consequently, debt levels and finance costs rose to support these requirements. Our business continues to be driven by 2 key segments, the energy business and the non-energy business. In the fuel additives/energy business, demand visibility remains robust. West Asia's contribution to revenues has declined primarily due to the ongoing regional conflict, thereby impacting sequential volumes. Meanwhile, the other international markets continue to perform well, while our efforts to develop the other potential markets have strengthened our ability to diversify volumes across geographies. We have completed our key fuel additives capacity expansion to 360 KTPA from 290 KTPA, providing additional flexibility to serve newer markets with new products as demand evolves. Against a volatile backdrop, we maintain an agile strategy, dynamically balancing our volume growth with spread optimization to safeguard the overall profitability despite ongoing fluctuations in feedstock cost, refining margins and gasoline naphtha crack spreads. Within non-energy business, the demand trends remain mixed. Polymers demand remained soft during Q1, primarily due to weak demand for downstream products in U.S. and China with recovery expected in Q2. Dyes and Pigments continues to face demand headwinds driven by subdued demand amid high raw material pricing environment and seasonal factors. Pharma demand continued to remain stable and the agrochemical volumes were marginally lower, primarily owing to customer resistance to source at elevated RM prices. Volume recovery here also is expected in Q2, supported by underlying stable demand. The suspension of export tax rebates in China has created favorable opportunities for NCB value chain for us. While short-term export headwinds may persist due to West Asia conflict, we expect sustained volume growth supported by capacity expansion and deeper market penetration. Overall, our business continues to demonstrate underlying strength anchored by steady volume growth, enhanced operational efficiencies and disciplined execution of our strategic road map. Barring the 3, 6 months delay due to labor constraints and war-related issues, our Zone 4 project expansion continues to progress. The project is being commissioned in phased manner this year, FY '27 with ramp-up expected over FY '28 and FY '29. Our Peda project is progressing through market-seeding activities and is expected to commercialize very soon. We are also looking to debottleneck our DCB capacity to 140 KTPA backed by volume increase supported by PDCB and downstream demand. In line with our earlier guidance, the FY '27 CapEx remains on track to be within range of INR 700 crores to INR 800 crores with about INR 180 crores already deployed in Q1 FY '27. With our major expansion programs nearing completion, the CapEx intensity is expected to reduce significantly starting next year. Going forward, our capital deployment will pivot towards high-growth, high-return niche projects. Aarti Industries is also accelerating its long-term strategy through high-impact collaborative partnerships and ESG-led growth initiatives. Our JV with Superform for downstream amine derivatives exemplifies this approach, leveraging complementary commercial and manufacturing strengths to unlock significant market potential, reflecting a strategic model we intend to build upon. Strengthening this collaborative approach, our partnership with Superform chemistries through virgin chemicals, combines our deep chemistry expertise and raw material backward integration with their market application insights to build a differentiated specialty chemical platform. This joint venture remains firmly on track for commissioning in Q2 FY '27. We are seeing demand tailwinds in primary end-use application, which provides opportunity for faster ramp-up. Parallelly, our commitment to sustainability and circularity is anchored by our plastic recycling initiative with sustainability through Aarti circularity that is slated for commissioning in second half of FY '27, which utilizes advanced recycling technologies for hard-to-recycle waste streams. Reinforcing this ESG-led direction, we were pleased to achieve the EcoVadis Platinum rating 2026 during the quarter with a score of 87 out of 100, placing Aarti Industries among the top 1% of the companies globally for the sustainability performance. Our business expansion through our subsidiaries globally, that is in UAE, U.K. and U.S.A. is progressing well and supporting better growth trajectories in various markets. With an endeavor to expand our global footprint and be a step closer to the potential markets, we have planned to set up a subsidiary in China. This entity shall facilitate our plans to expand our base in one of the large global chemical markets accounting for more than 45% of the global market. Our presence there will also enhance our sourcing capabilities for some of our key raw materials and support a cost and time-efficient supply chain arrangement. Execution across all long-term contracts remains stable, continuing to underpin baseline volume growth and safeguard revenue visibility. Despite near-term uncertainties, we remain confident in our long-term growth prospects, supported by our diversified portfolio, expanded capacities and strong customer relationships. Backed by disciplined capital allocation, continuous process optimization and deeper integration with global key accounts, our focus on execution ensures we maintain operational resilience in the near term while building long-term sustainable shareholder value. Thank you for your continued trust and support. With that, I would now request the moderator to open the floor for the Q&A session.

[Operator Instructions] First question comes from the line of Rohit Nagraj with 360 ONE Capital.

Just one question in terms of the Zone 4 CapEx. Given that it's got delayed, however, our FY '28 guidance remain intact. So how confident are we to reach the lower end of guidance given that at least 6 months delay in this project, and we were probably considering a decent amount of scale up happening in FY '28, which will give additional EBITDA. That's all from my side.

Rohit, that's one area where we continue to work upon. We -- in our guidance, we had given the numbers that will come from the CapEx-led programs. And in CapEx-led, Zone 4 was a significant contributor. In that overall CapEx section, the JVs are expected to remain on track. I think Augene and RESL will commission. Even the MPP, the multipurpose plan and the calcium chloride unit in Zone 4 is also expected to commission now. So it should get ramped up. The other blocks, there are 5 different chemistry blocks in Zone 4 is where we are seeing the delay and which might lead to a bit slower ramp-up compared to our original anticipation that we had given in our target aspirations for FY '27, '28. We continue to remain watchful while being fully transparent in terms of where we stand against our strategy. As and when we commission these blocks and we see the ramp-up phase of these units, we will come back and clarify once we have better understanding of what is the speed of ramp-up of these 5 different chemistry blocks.

And just one question on the numbers. What was the inventory gain during this quarter, although we have specified the ForEx gain in the press release?

I think the FX and inventory gains are difficult to estimate correctly, but I think the impact could be anywhere in the range of INR 50 crores to INR 60 crores. But it is difficult to quantify that precisely because a lot of it is also -- within the quarter, we saw significant volatility, right? We had April and May where the raw material prices were elevated. We saw towards the end of the May, some part of June where the prices corrected dramatically. And then again, sort of restarting of conflict in Asia led to price increase towards June and July, right? So I think -- this quarter, specifically, it would be a bit unfair to sort of quantify the exact amount of inventory -- same thing happened also with currency. I think the April currency versus June currency look phenomenally different during the quarter. There was tremendous amount of volatility. But by and large, given the timing of the raw material purchase and the timing of the product placement, there was a support in the overall EBITDA performance for this quarter.

Our next question comes from the line of Arun Prasath with Avendus Spark.

Sir, my first question is on the energy segment. We successfully diverted from Middle East to the new geographies, as you mentioned. How are the new geographies earlier fulfilling their fuel demand? Is it some other fuel or is it product? And is this sustainable? Can we continue to service these new markets and as well as Middle East markets once the crisis is over? Will it mean that our current additional capacity that we have added will we go back to, say, [indiscernible] near term? These are the first set of questions on the energy markets from my side.

So I think our overall -- as I have sort of repeatedly said in the previous quarters, this business is still in this market development phase. We haven't reached the true potential of this business, and it will remain in market development phase for some time to come. And that's how the ability to divert the product from one region to another region as and when the new market opens up gives you a lot of flexibility. In general, our portfolio has become not well balanced in terms of percentage of volume going to U.S., Africa, Europe, Middle East and India. There is still a Southeast Asia region, which we haven't cracked. But apart from that, in the rest of the global markets, we are pretty well diversified. And in that context, it is giving us ability to move volumes around. To your question on capacity utilization, I think from a customer and a market development point of view, significant efforts have happened. They are also supported fundamentally by the fact that the demand has been good, right? The gasoline naphtha cracks were strong, and they continue to remain strong, which is where we are sort of the continued strong demand is also visible in the quarter 2. And that's what is giving us confidence that irrespective of the Middle East situation, we should be able to ramp up our pipeline.

And given our success in this segment, are you worried that at some point of time, competition will also try to -- right now, I believe competitive intensity is less in this product, not as a fuel additives but in this product. But how are going to know -- when the time comes, what would be our strategy to retain market share? Can we become more cost competitive? Can we increase our distribution? How are we going to retain this once competition decides to us?

Yes. So I would say there is already significant competition in this product. I think there are more than 2 or 3 players in India, which have entered this market and there are more than 2 or 3 players in China which are currently playing in this market. I think we continue to maintain our market leadership position and we will continue to do so. The strategy involves multiple aspects. I would not go into the details, but it does -- it includes all aspects, including new products in the portfolio, differentiated products built for specific markets, specific customers. It also includes global supply chain planning and footprint optimization, and it also includes unique distribution strategy linked to specific customers, right? So I think -- and cost remains sort of in our DNA. We can very confidently say that we will be top decile in terms of cost structure for the entire product portfolio that we are trying to develop as part of this segment. So it's a combination of multiple aspects. Competition already exists, and we try to do our best to retain the market leadership position.

Now that we are close to commission -- any kind of numbers would you like to quantify what is our steady state expectations on this? How soon we can see it reflecting in our quarterly numbers and how long it will take to ramp up to the steady state?

So I think from an operations point of view, it will definitely commission, I think this or next month. I think the commissioning activities are ongoing as we speak. The first sale of the raw material to the joint venture has already happened. We also see traction in terms of order book of the product that we plan to produce in this joint venture. So within this quarter, we should start seeing operations and ramping up happening. Within the first sort of 1 to 2 years, we should be able to reach to a decent utilization level for the entire capacity that we have built. From a financial standpoint, being 50-50, it will consolidate at PAT level. So the numbers at PAT level will start becoming visible. The meaningful difference may come, we would say, around a few quarters down the line, 2 to 4 quarters down the line, but it should start becoming visible from this quarter onwards.

Any revision to the steady-state revenue for our JV at the current prices?

I think we had projected INR 300 crores to INR 400 crores. I think we will maintain that range for the joint venture to start with. As and when we complete the ramp-up in this quarter and we stabilize the plant operations, we will come back with a firmer estimate.

Finally, on Zone 4, you said that of the chemistries is delayed. Is it linked to the agri markets and hence the recoveries also will track the agri market turning around?

I don't think the delay is anything to do with market or linked to a particular agri segment. It's a pure product execution challenge, which we faced, primarily started around March, April time frame, where there was a huge labor shortage driven by LPG issue and then consequent elections in the monsoon triggered a few delays. But at the same time, I think multipurpose plant is undergoing commissioning again as we speak. The product out is expected within the month of August, and we will announce commissioning post first product is out from the plant. The other blocks of different chemistries will get gradually commissioned as we had indicated earlier. The product mix that we are currently starting with is very well diversified. It has a mix of agro, it has a mix of pharma, it has mix of coating, it has mixed of polymers. And we remain to have a different sort of segregated differential end market exposure for the overall Zone 4 capabilities. It will not be heavy towards one particular end market. That's the current strategy. So the ramp-up is linked to project execution is not necessarily linked to end market at this stage.

Our next question comes from the line of Aditya Khetan with SMIFS Institutional Equities.

Just a couple of questions. Sir, the price hikes when we look in this quarter, across segments, we would have taken price hikes. But when I look at the dye pigments and the Pharma segment, then the price hike number look much higher compared to Energy segment or the polymer additive business. Are we expecting like the price hikes to roll back going ahead, suppose if the base commodities prices reverse? And what would be the sustainable number we can work with this going ahead? And secondly, sir, when we look at the overall volume performance, exports during the quarter have taken a sharp dip. How do you see the domestic volumes picking up in the coming quarters? And how we see -- for FY '27 and '28.

I think the first thing, the increase that you see in pharma and in dyes and pigments, it is a combination of 2 factors. One is, of course, the raw material inflation and passing on that to customers. The second is the NCB chain forms a significant part of these 2 end segments. And in NCB chain, the China's VAT removal led to changing of the pricing regime for the products in the entire value chain. So you will definitely see volatility linked to raw materials as the raw material softens in future, pricing, of course, will get corrected to some extent. But there's some element which is also linked to some of the actions Chinese government took, which might sustain. So the answer on pharma and dyes and pigments, I hope you got it. There are 2 factors, one of which is linked to raw materials. The second is not linked to raw materials. I think on the exports, the exports for the quarter actually were very robust. 59% of revenue actually came from exports. And we are seeing good traction in exports. The volumes are expected to go up in Q2 in exports. It's just that now our footprint, our supply chain in terms of export is changing quite dramatically and towards longer destinations, especially places like U.S. and America. In that context, the recognition of revenue is linked to the import terms, right? And many of the sales which are on DAP basis, especially in U.S. I think you will see quarter-on-quarter volatility in terms of production numbers and the exports from India versus when the revenues are recognized. But over the quarters, it should smoothen out.

Sir, my second question, so during the quarter, like a INR 380 crores EBITDA and stripping off the INR 47 crore ForEx benefit and some inventory gains, whatever the number could be. So we are still at around like INR 300 crores to around INR 310 crores EBITDA that could be a guess. How do you see like to reach INR 280 crores EBITDA by FY '28? Ideally, this number should have been on base business and not taking the inventory benefits, it should have been at around INR 350 crores. But we are still lower by sir, some around 20% on that. How you see this trajectory moving? And what would be that particular quarter which can change that trajectory going ahead?

So I think the -- FX gain to some extent is a combination of accounting and the combination of volatility during the quarter, right? And that's sort of part of a routine business. I think in the coming quarters, as the volume recovery happens and potentially, if there is a regime where the pricing is maintained throughout the quarter without significant change, everyone should be able to see the underlying business performance in terms of what's the true potential of the existing asset. And that itself should sort of be in terms of what's the EBITDA trajectory that we are on.

Sir, just one last question. I missed your opening remarks on the volumes front, volume numbers during the quarter.

So volumes on energy business were down 17% on a quarter-on-quarter basis. And on non-energy business, they were down by 7% on a quarter-on-quarter basis. On an overall organization level, they were roughly 12% down on quarter-on-quarter basis.

We have stopped giving the actual numbers like we were actually mentioning it earlier in our presentation, sir.

So we are giving numbers at 2 broad application levels, which is energy and nonenergy. And we are also showing utilization numbers specific to value chain in a relatively narrow range, which we feel gives good enough indication of where the assets are. The actual sales numbers is something that we have removed from the slides because I think they were getting utilized in a situation which was not favorable for the company. But we feel this gives good enough indication. I think at an overall company level, you have a volume trajectory within energy and non-energy, you have an exact volume growth numbers, and you also have a utilization ranges for all the major value chains.

Our next question comes from the line of Viraj from Kotak AMCP.

So first on the chlorotoluene -- of the chemistry, I think in Zone 4. So what is exactly the execution issues why is the chlorotoluene we had mentioned about in 2024, 2025. I just wanted to get some sense on what is happening in the chlorotoluene space.

So as I said, I think we changed our strategy for Zone 4 around 1.5 years back, where we made the entire chain capable of producing different chemistries. So we have 5 different chemistry blocks. And yes, chlorotoluene was the original intention and the asset still retains the capability to manufacture the entire chlorotoluene chain if we want to. But now the assets are designed in a way where they can produce multiple other chemistries as long as the fundamentals of asset capability sort of deliver the performance that is expected for the finished products. So that's one. Second, I think the exact nature of the is right now, where we are is practically all of the equipments are elected, 97% of the equipments are elected for those blocks. In terms of piping, 85% of piping is complete. I think this is one area where it requires huge amount of manpower, both piping and the final insulation. And that is where we faced a bit of challenges, as I mentioned in the March, April, May kind of a time frame. But we are back to full manpower in Zone 4. And hence, hopefully, no further delays, and we should be able to commission it as we had indicated during this financial year itself.

And in terms of the JV, so basically, I think that is more for the chemistry. So which segments within the end customer sectors, what are you targeting? And roughly would this chemistry have a little bit of a higher margin versus the benzene chemistries, which right now probably would be overall at the group level.

I think there are 2 dominant end markets, coatings and dyes. Coatings is expected to be a much larger market and mostly India-focused market for the chemistry, which is targeted as part of that unit. So it also gives us exposure to a very different end market, which is helpful. And yes, the profitability expectation is it will typically deliver higher margin profile compared to our existing product portfolio.

And one last question in terms of M&A. So how has been the markets, especially -- I mean, the base market of maters as well as the replacement markets? How has been the market's ability to uptake your products, especially in terms of price hikes have to be taken. And the slightly longer-term plans in terms of going back I mean how fungible are the markets in terms of taking up -- would you shift back to Middle East when things settle? So what are your thoughts there?

Yes. I think we remain very active in the market. Overall, the market has been pretty strong, as I said, linked to the end market profile, given decent strength in gasoline naphtha crack, the pull for this fuel additives business remains very strong. I'm purposefully saying not only MMA because we are trying to broaden the basket of the products that we supply as part of this application. And going forward, you will see more and more we're talking about fuel additives than specifically MMA. So the global market demand linked to the end market characteristics remains very strong. As and when the market opens up, we will definitely sort of -- the idea is not to then necessarily shift volume, but increase capacity utilization, which is what should be visible in the quarter.

Our next question comes from the line of Sanjesh Jain with ICICI Securities.

First on the energy side of it, how are we seeing the gasoline naphtha side across the market? I know Middle East hasn't been great, but what's been spread in, say, Europe, U.S. and Africa, the other 3 key regions for us?

Overall, at the gasoline naphtha level, the cracks have averaged in the range of $15 to $18 per barrel, which are pretty healthy. And this is a global market. And at these levels of cracks, the demand for the product is pretty robust.

So we are back to that pre-war kind of a spread in gasoline, naphtha. We were at around 15 to 20. We are back to that range.

Yes, it remains very volatile. Look, I think we are living in a world where the daily price movement is plus/minus 5%, right? So I think for me, generalizing, it would be unfair. But yes, at an overall average level, the cracks have remained at around $15 to $20 per barrel, which is healthy.

When we talk about the fuel additive, what other -- apart from MMA are we looking at, because we are now talking like a portfolio approach. So what are the other products we have identified or working on R&D within the fuel additive space?

Yes. I think we've talked about it in the past in previous investor calls. I think the expansion of the product portfolio in this segment started some time back. We have just initiated some of the development efforts and the sales efforts for the new products that are getting added, which will sort of help us expand the fuel additives business going forward. Of course, they are not at a very significant volume levels right now. But the idea is to scale up these new products as well and then broaden from sort of one product dependency to a multiproduct fuel additives portfolio over the course of next 12 months.

Can you name the products?

At this stage, we won't name the products.

And how many will be there in terms of count?

I mean, at any point in time in our pipeline, there are 3 to 5 products.

Three to 5 products. Got it. But they will be all in the octane booster itself or you're looking at the other end-use application as well?

It will broadly fall into category of fuel additives.

Not necessarily an octane booster. Got it. On the overall, with the crude coming down and we are facing the situation where raw material prices eventually will come down. Are we looking at behavior from the customer side where they are looking to destocking in a falling scenario and there could be a period where some of the gains may also go off or we may have an inventory loss like we had an inventory gain this time. Are we looking at such scenario in the immediate term because crude has sharply reversed, but I know it's super volatile.

So look, I think that risk always remains in a business when you're operating in crude-linked raw material and the product environment, I think that risk will always remain. What we can do as a company is to be very agile. So especially most of our domestic raw material procurement, the pricing pass-through is relatively quick, right? We typically won't have more than 7 to 15 days inventory wherever we are purchasing raw material in the domestic market. I think in the imported raw material, which is where we tend to have 1 to 1.5 months of inventory ideally in stock or over waters, that's where this price fluctuation sometimes could impact us. We have put in strategies in place, including a combination of forward booking of customer orders, including some hedging strategies to minimize that loss. But that risk will always remain and we actively manage it.

One interesting comment you made that if margin remain at this level, we will see an actual potential of the business. Are we seeing these margins improving across the isomers of the benzene and that's where the true profitability of Aarti will come out? Is that the way to read that statement?

I think the different value chains will have a different story. I think NCB value chain, which has suppressed margins for a very long time, has recovered in the margin in the last quarter. DCB chain has always had sort of decent -- DCB hydrogenation has always had decent margins. I think NT remains suppressed for a while, and it is linked to an isomer imbalance that we have faced over the course of last 2, 3 years. We have put in some innovative strategies to rebalance that portfolio. And in that context, we hope to achieve better margin profile in that chain going forward. The overall fuel additives segment also the broadening of market, customer and now product footprint, we hope to gain a little bit on the margin profile on that front. PDHN is one where we structurally remain weak because of our technological disadvantage. And there, we are trying to work on cost efficiency to figure out how to improve our margin profile. So the nature of improvement or strategic initiatives across the value chain and the characteristics differ, but the objective is to expand both the volume and the margin profile across all of these chains.

One last on the Zone 4, particularly on the chlorotoluene and MPP side. On the -- where are we in the product approval cycle from the customers now that the projects are slightly delayed, but from an approval perspective, product development perspective, we have a line of sight what product we will produce first and whom are we selling?

Yes. So I think in most cases, we do have sort of already a target customers identified and the qualification of the product from our pilot facility is also done with most of the customers. However, these customers will also ask for a commercial batch qualification. So whenever the unit gets commissioned, there will be a commercial batch taken and there will be requalification done based on that commercial batch, and that will happen only when the assets are commissioned. But relatively speaking, for most of these cases, the initial demonstration of technology in pilot and getting the product qualified through our pilot plants, that has already been achieved in most cases.