Aarti Industries Limited (AARTIIND.NS) Q1 FY2026 Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Aarti Industries Limited Q1 FY '26 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.

Thank you. Good morning, everyone, and thank you for joining us on Aarti Industries Q1 FY '26 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 question-and-answer session, where the 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. And a disclaimer to this effect has been included in the results presentation that has been shared earlier and also uploaded on stock exchange websites. I would now like to invite Mr. Kotecha to share his perspectives. Thank you, and over to you, sir.

Thank you, Nishid. Good morning, everyone. Thank you for joining us today. We appreciate your continued interest in Aarti Industries as we discuss the performance for the first quarter. As you may all know, the quarter commenced with several external headwinds, both geopolitical and market driven. However, our strategy and operational discipline have helped us remain agile and forward focused. Let me start with a brief overview of broader macro environment that shaped the quarter. Q1 was one of more complex quarters that we have navigated in recent times. A steep correction in key input prices, particularly benzene and aniline, which declined by about almost 15% to 20%, led to pricing volatility and inventory adjustments across the value chain. On the other hand, global trade dynamics also lack stability. The initial tariff announcements by the United States created uncertainty among customers. The tariff landscape continues to remain unpredictable, compounding the already challenging global trade dynamics and leading to sustained pressure on product pricing and profitability. The latest new U.S. announcement of a 25% tariff on Indian imports, along with an unspecified penalty has created even more market uncertainty. We are currently assessing the impact of potential of these measures on our products in the U.S. market. Going back in Q1, the Israel-Iran conflict in May, June '25 time frame also had effect on our logistics, temporarily impacting the regional supply chains and shipping schedules, especially affecting the export flows. And consequently, some of our shipments experienced delays and rerouting spilling over into Q2. Domestically, the India, Pakistan tensions in April, May '25 time frame also briefly impacted our operations, especially at our Kutch facility. Blackout periods led to intermittent productions, curtailing our capacity utilization. In parallel, the Kandla port, which is one of our critical export route, faced temporary shutdowns and subsequently significant congestion at Kandla port due to the conflict also further strained our outbound volumes. Despite these challenges, I think underlying demand conditions remain stable. Our business continues to demonstrate strength rooted in product diversification, multi-process expertise and long-term thinking. Our resilient operations enables us to navigate through regional segment-specific disruptions and diversified exposure across energy, agrochemicals, dyes and pigments and polymer additives also provides support and balance to the business. As you may be aware, we had undertaken major capacity enhancements in the last financial year. We scaled up our nitro toluenes from 30 to 45 kTPA, ethylation from 10 to 30 kTPA. These facilities are now in ramp-up phase. They have proved their design capacity and sort of positions us to meet the rising demand in some of the end applications. Further, during the last quarter, we have also scaled up our MMA capacity from 200 kTPA to about 260 kTPA, and we have more room to expand it further with limited CapEx. We have also taken several initiatives linked to inventory and cost optimization in line with the plan shared earlier. Now let me walk you through the financial performance for the quarter. Revenue stood at INR 1,867 crores, a decline of 16% Q-o-Q. While volumes largely remained intact, we faced pricing pressure due to raw material corrections, inventory adjustment and deferred export realizations. EBITDA came in at INR 215 crores, reflecting a decline of 19% on a Q-o-Q basis, impacted by inventory valuation losses to the tune of roughly INR 30-odd crores. Temporary production issues due to domestic conflicts and some of the export deferments due to global geopolitics and margin pressure, of course, continued on some of the value chains arising now sort of account of overcapacity situations globally. As a result, profit after tax was INR 43 crores, while interest and depreciation costs remained largely in line with the expectations. CapEx for the quarter was at about INR 280 crores and is expected to be below INR 1,000 crores for the year '26 as guided earlier. Our Zone IV projects are progressing well, expected to commission in phased manner from the second half of FY '26. These projects will add a host of new products with better margin profile and support the margin improvement over the long term. While the reported numbers reflect a soft quarter, I think the underlying health of the business remains robust. We are confident of a strong recovery in the ensuing quarters driven by ongoing demand revival and our supporting capacity expansions. Coming to key segmental highlights. Energy applications in the Q1 volumes in the energy segment remained flattish on a Q-o-Q basis, a combination of planned disruptions on account of Indo-Pak conflict and also shutdowns taken for the expansion purposes. Continued efforts to increase the customer base and geographic reach will support us the faster ramp-up of these expanded capacities. Demand for MMA remained strong. Pricing was under pressure due to increasing competition and decreasing raw material prices. However, AI's ability to manage large volume shipments and first-mover advantage will support us in continuing to maintain the higher market share. Further improving crack spreads are also expected to support the business in the coming quarters. So summarizing, our focus remains on driving volumes for optimal capacity utilization and increasing our market leadership position. On non-energy application, the agrochemical intermediate segment continue to segment -- continue to sort of experience pricing pressure, while demand recovery was visible. Dyes, pigments, printing and pharmaceutical applications remained steady and stable. The polymer and additive segment showed a mixed picture across different product value chains. DCB had shown certain pressure on the demand versus the other part of the polymer additive segment actually showed a very good demand recovery. With the recent developments on the U.S. tariff fronts, we see potential impact on our U.S. businesses, which accounts for roughly 15% to 20% of our revenue. We are closely monitoring the situation as it evolves to ascertain the impact and then what potential mitigation measures we need to take to minimize the same. On some of the strategic updates on 2 JVs, the first one, Augene, which is a JV with Superform. Project execution is progressing well. We are expected to commission it in H1 of calendar year '26. The market development activities have already been initiated to establish the presence in the domestic market. And the second JV, Re Aarti, which is with ReSL and through our 100% owned subsidiary, Aarti Circularity Limited. I think that project achieved a key milestone in terms of completion of technology selection and awarding the technology contract. I think the preprocessing design, capital expenditure finalization are currently under progress. We expect commercial operations also from this JV in early FY '27. To conclude, Q1 was shaped by external headwinds and temporary disruptions. These issues had bearing on our financial performance, but we view them as a short term in nature. Demand conditions remain intact and capacities are scaling up and our core portfolio continues to expand its reach and relevance. Our future performance will be steered by key strategic pillars. First one being successful foray into high-value and advanced chemistries with commissioning of targeted in phase manner from second half of FY '26 at our zone 4. Our focus on advanced materials and long-term partnership, leveraging our robust manufacturing infrastructure and R&D expertise. And third one is driving the new growth initiatives, particularly in circularity and other emerging sunrise sectors. That concludes my initial remarks. I now invite the moderator to open the floor for the questions.

[Operator Instructions] We'll take our first question from the line of Vivek Rajamani from Morgan Stanley.

The first question was, you had given us to understand that the strength in the gasoline and naphtha margins would be a good indicator for your own MMA margins. And obviously, for this quarter, the spreads were quite strong compared to the last quarter. So would it be fair to say that if it wasn't for these various disruptions that you faced, the performance from the MMA business would have been a lot more better? Just wanted to get a bit more clarification on that.

I think the answer is yes. And I think to answer it simply, Vivek, maybe we should look at our July export numbers of MMA, which are now, I guess, available in public domain. Roughly, I think we've clocked somewhere in the range of 20,000, 22,000 tonnes of MMA exports in the month of July, which was a combination of deferred shipments from June due to geopolitics issues and then further additional orders during the month of July.

Sure, sir. And just the other question with respect to the expansion that you've mentioned. I think before this, there was another expansion as well, which you had completed in the previous quarter, if I'm not mistaken, and now there's one more meaningful expansion. Just wanted to get your thoughts with respect to what is the kind of potential that you're seeing for this product as well as the competitive landscape, if you're feeling confident to continue this expansionary process on this product?

Look, I think we've maintained the stance over the last few quarters. I think it's an important product. We fundamentally feel very confident about the product performance potential, which is now validated by several global customers. We have a market leadership position globally in this product, and we would like to continue to maintain that. And we have the least cost position as far as our internal benchmarking exercise goes with respect to competition. Now if you look at broader strategy point of view, we've obviously started increasing our customer base, diversifying our geographic reach. I remember talking about it almost 1 year back in my first investor call. And I think we have progressed quite significantly on that dimension. One of the aspect of that was where we built U.S. as a strategic market for this product, and we really scaled it up very significantly over the course of last 6, 9 months. The latest tariff announcement do put some pressure on that strategy. So we have to now obviously figure out a mitigation measure at the same time, develop additional new markets, which we will continue to do. So given the fundamental performance of the product is still very robust in the downstream end application, we are very confident of finding new markets. So from a volume point of view, we remain confident, and that's what leads to our conviction on expanding capacity, which is at now roughly 260 kTPA level. We can further go up with a minor CapEx that provisioning has already been done as we expanded the latest debottlenecking effort that we did in the last quarter. Coming to margins, I think, yes, we are dependent on aniline, which is one of the key raw material on imports and which means that we have to, at any given point in time, have to keep 1.5 to 2 months of inventory, given there are so many supply chain disturbances globally that keep happening. From a production security point of view, we do keep 1.5 to 2 months of aniline as an inventory stock, which means we carry pricing risk on that particular stock, but that's a strategic call that we have taken. And the last aspect is competition. There is emergence of some domestic competition. I think Chinese competition has been around for quite a while. And in that context, we have taken certain strategic calls from a pricing point of view to ensure that we maintain our global leadership positions in all of the global major accounts. But that's sort of broadly the sum and substance of the strategy around that product. Overall, we remain pretty confident about the market potential. Yes, I think the tariffs and the geopolitics sometimes do create some of the speed bumps, but we have to be agile enough to sort of revise our strategy to go back to achieve the true potential for this product.

Next question is from the line of Nitesh Dhoot from Anand Rathi Institutional Equity.

My first question is on DCB. So DCB volumes have declined both year-on-year and sequentially. Is this purely cyclical? Or is there a structural shift in the downstream demand? And when do you expect normalization to happen?

Thank you, Nitesh, for that question. Yes, DCB, I think it was potentially one of the weakest quarters, and it was driven by significantly lower demand from our U.S. customers where they convert this into advanced polymer, which ultimately gets utilized in automotive application. So it's a combination of our customers going through inventory liquidation at the same time, uncertainty around automotive demand profiles within the U.S. market itself. So combination of the 2, our DCB exports to U.S. were significantly lower, even if you take Y-o-Y or Q-o-Q comparison. But given we have sort of annual contracts secured with some of the major customers, we are confident of recovering these volumes in the second half. So as soon as the demand stabilizes and the inventory correction phase gets over for 2 of our strategic customers in the U.S., in the second half, we should see significantly better volumes compared to the first quarter.

Right, sir. So next question is on the Zone IV and the MTBE time line. So basically, you've guided for phased commissioning from the second half. So can you just share some more granular details in terms of customer tie-ups and expected EBITDA contributions there, I mean, for FY '27, say?

Yes. So I think as you rightly mentioned, we are going by sort of phase-wise commissioning. In the first phase, the multipurpose plant and a calcium chloride unit, we are expected to commission by the end of this year. So around December 2020 -- around December of this calendar year is when the first phase 1 will go live. From a commissioning point of view, both of these units, along with associated utility infrastructure, ETP are at advanced stages of mechanical completion and handover. So that is what will go live within this calendar year. The remaining blocks, there are 5 additional blocks. They will go through phase-wise commissioning from Jan to May next year kind of a time frame. And then, of course, post commissioning, there is a sort of ramp-up and stabilization and then ultimately scale up kind of a phase. From a profitability point of view, I think we have given the overall number that we expect from all of the Zone IV investment in our 3-year guidance. We continue to stick to that. That is pretty realistic and achievable. The full potential of it, I think, will come 1.5 years down the line. But the multipurpose plant and calcium chloride unit at least should start contributing from the next calendar year itself.

Right, sir. Just one last question before I get into the queue. So given the sharp drop in EBITDA this quarter and the volatility quarter after quarter, especially -- sorry to say, but almost every macro event does impact us negatively. Can we also have an annual EBITDA guidance along with our 3-year guidance of INR 1,800 crores? I mean if you could just share some outlook for FY '26 there.

So Nitesh, I think as a management, we have taken a call to 3-year guidance, and we stick to that. And I think we remain committed at the same time, confident on that 3-year guidance outlook. I think yearly guidance is a practice from which we are moving away. We actually feel it's prudent given there is -- there are so many uncertainties going around in the market right now, both from a trade barriers as well as from a geopolitical standpoint, we would like to continue to maintain the same practice.

Next question is from the line of Archit Joshi from Nuwama Institutional Equities.

First question on these logistical challenges that we faced. Could you quantify what would be the extent of, let's say, sales or an EBITDA deferment that we saw during the quarter, which we are expecting to recoup in July and onwards?

So Archit, I think a broad estimate would be roughly anywhere in the range of INR 15 crores to INR 20 crores of EBITDA. And I guess you will see that in sort of export volumes for the month of July.

Got it, sir. Sir, second question, a little more nuanced on the MPP and the Zone IV plans. You did mention that you're planning to start up the phase 1 from December '25. But any layout that you could share with regards to what kind of products, platforms, chemistries that we are planning to incorporate in both Zone IV and the one that you are starting in December, the MPP. Any broad understanding on that, if you can?

So look, I think overall, if you look at the product portfolio, the original design of the Zone IV was done for chlorotoluene and dichlorotoluene downstream. Actually, it was done only for chlorotoluene and downstream. We added the entire dichlorotoluene and the downstream product portfolio also to the same design to make it a bit fungible. So that's the significant chunk of the product portfolio. But at the same time, there are almost 15 to 20 new products, which are downstream of some of our existing product portfolio, which can also be made in the same set of blocks, combination of Zone IV and the multipurpose plants. So at any given point in time, there is roughly 35 to 40 products that we can manufacture as a combination of Zone IV and multipurpose plant. And the logic is to pick and choose the products where we feel we can maximize the contribution and they are sort of in line with our long-term strategy from a value chain integration standpoint. Specifically talking about phase 1 for MPP, I think we -- at any given point in time, sort of we have kind of list of 10-odd products from which we prioritize 4 to 5 products that we want to take in the first phase of MPP commissioning. And that decision is typically driven by the demand pull, the profitability potential of these products, and they will keep evolving every 3 to 6 months. So it's difficult to answer your question in terms of specific products because by nature, it's multipurpose, and we want to use it as a multipurpose to maximize contribution.

Understood, sir. Sir, I was actually trying to understand how margin accretive would it be, which is why I asked you and also alluding to a comment that you had made in the annual report, would this be true for the multipurpose plant or the Zone IV expansion we are doing to enter newer spaces like defense and electronics and advanced polymers, I think it's a comment that I catched from your annual report. So if you can elaborate a bit on the sunrise sectors that you've spoken of and how margin accretive these products could be? That would be my last question.

Yes. So they would definitely be margin accretive. I think we are talking about sort of historical 5 years back, if you look at what was AIL's margin profile. I think we are targeting to go back to those kind of margin levels with these new products coming in. So 20%-plus EBITDA kind of margin profile for most of these products. In terms of end segments, there is a wide variety, including advanced polymers, including agrochemicals, including pharmaceuticals. I think these 3 remain right now the largest target end market applications for Zone IV and MPP. I think some of the defense and electronics might require very specific investments because the quality specifications and the nature of the assets that you require to serve these end markets look slightly different and will require sort of specific tailored-made assets. For that, we have a separate effort ongoing. But from an existing MPP point of view, if you start plotting end market profile based on the current products, which are shortlisted, I think it is more towards advanced polymers, advanced materials, pharmaceuticals and agrochemicals.

We'll take our next question from the line of Surya Patra from PhillipCapital India.

Sir, first, the clarification I wanted. You just mentioned about an impact of around INR 50-odd crores, that is the EBITDA level or it is the kind of revenue impact that you have witnessed in this quarter?

EBITDA level.

5-0, so it was INR 15 crores to INR 20 crores from a delayed shipments point of view and INR 30-odd crores from inventory point of view.

Sure. My second point was that about the capacity expansion that we are on. See, in the recent times, what we have observed that capacity additions without any customer backing was not really helpful. So since we have been there in the CapEx mode for some time, and we have also recently added capacities like MEA all that, so it's has not been really helpful given the demand situation. So the upcoming CapEx, let's say, the multipurpose plant or the Zone IV or other capacities, any of those are backed by any contract or anything?

So of course, Surya, we continue to do this evaluation in terms of which product we want to manufacture, and in that context, the capital allocation decision is made wherever there is a demand pull. I think maybe a bit longer answer to your question. I think overall, from a capital allocation point of view, we have become quite stringent in last 1 year time frame. Many of the CapExs that you see, which are completed or which are getting completed right now, I think construction of these assets started practically 2, 2.5 years back. So these were committed CapExs. And to some extent, they were kind of half done in the last 1 year where we changed our capital allocation strategy in terms of stringent criteria to decide on the investment profiles. And that's why we are on a taper down mode when it comes to overall CapEx. I think last year, we -- I think some around INR 1,300 crores, INR 1,400 crores of CapEx, this year, INR 1,000 crores and next year, the number will drop dramatically. So we are mindful of global demand-supply balances and where should we allocate incremental capital going forward. At the same time, the projects which we have taken on, I think we are going through them while optimizing the design and the portfolio of those CapExs to ensure we get best returns out of it. That's the sort of sum and summary of the overall CapEx strategy. The latest CapEx expansions that we are announcing, for example, MMA 200 to 260, right, these are done very thoughtfully with very, very limited CapExs to ensure that return on that investment is significantly better. And wherever there is a significantly higher CapEx involved, I think they will go through a very rigorous evaluation from both demand-supply dynamic point of view as well as from a return calculation standpoint.

Sure, sir. Sir, second point was about the quarter-specific impact what we have seen. See most of those are external factor, I believe, let's say, war issue or it is the kind of raw material price crash impacting the inventory or those -- or trade deferrals because of the tariff-related aspect. But if you can add your thought process about the pricing angle to it, how should we see a pricing aspect for the raw materials going ahead and hence, impact to the overall profitability and also the pricing scenario for the product basket? And ultimately, what changes that we are anticipating in the product mix going ahead in the second half? So hence, these 3 things are likely to have some implication on the profitability. So if you can address that, sir?

So a bit of a long-ish question, but 3 aspects, right? One, raw material, we have been in falling price environment, not only in last quarter, but I would say, in fact, the last 5 or 6 quarters, right? So if you plot raw material trends for last 5, 6 quarters, aniline has practically come down from $600 per tonne to $1,000 per tonne, right? Benzene, which used to be as high as INR 85, INR 86, it's come down to INR 59, INR 58 kind of level. So we have been in a falling price environment for a very long time. But at least current judgment of the management is we've practically bottomed out in terms of key raw material pricing. We are not seeing further room for raw material to go down. So it's stabilized at that level, at least for the last 1.5 to 2 months. There is some minor uptick as well in some of the raw materials. And in that context, I think the only thing we can do is to ensure that we are most optimized on inventory, and we are able to pass on the pricing volatilities as soon as possible to the market. It's not always possible because there's always some lag, but that's the best thing we are doing at this point in time. I think when it comes to product mix, right, I think we have -- there are 2 types of assets we have, right? We have certain dedicated chemistry plants, and then we have sort of certain assets where we can do multiple products of similar chemistries in the same asset, likes of chloroanilines, for example, or different hydrogenation-based product, different nitrogen-based products. So we are optimizing our -- for the second category, I think we continue to optimize our product portfolio depending on the demand pull and the margin profile available, and that exercise is continuous. So if you look at our ammonolysis product footprint, what it was one quarter back versus what it will be in the next 2 quarters or if you look at chloroanilines, what it was 2, 3 quarters back versus what it will be for the next 2, 3 quarters, they will look different in terms of exact products produced and sold both in domestic and export market, again, linked to demand and margin profile. However, there is a decent chunk of our asset, which is dedicated chemistry, right? So if you look at our assets portfolio, if you look at our NCB portfolio, DCB portfolio, PDA portfolio, where the focus remains to ensure that we have the leadership position, we have the lowest possible cost, and we retain the global market shares or in some cases, even gain market share. So I think different strategies for different assets, but that's how we are playing it right now.

Sure, sir. Just one simple question now, sir. What is the export number for this quarter? This is for Chetan sir? And also, if you can give some clarity, how has been the domestic performance in the difficult time of this quarter?

Just give me a moment. The exports for the quarter was roughly around INR 950-odd crores.

Okay. And the domestic performance, if you can just comment how is it doing, sir?

I think frankly, Surya, the overall trend is not that different when it comes to domestic and export. I think the raw material -- falling raw material price environment does impact both domestic as well as export market. Of course, the supply chain disruptions that were caused in the month of June, those mostly impacted sort of export portfolio quite significantly. While there, I think the domestic market continued to do well during the month. We also had certain operational challenges in the month of June, especially in our NCB asset, for example, or in our -- some of the chloroaniline-related assets. So that had some impact on the domestic market. But broadly, at an overall level, I think from a falling price -- falling raw material price environment point of view, both got impacted to somewhat similar level.

Next question is from the line of Abhijit Akella from Kotak Institutional Equities.

Suyog, if you could please just help us understand a little bit more about the possible impacts of these new tariffs from the U.S. on your business. I know you mentioned 15%, 20% of the business comes from there. So which specific products, are we using primarily MMA and PDA or are there any others also? And so how you see the sort of puts and takes playing out here?

Look, I think it is early, but I will give anyways a perspective because we have been evaluating this now for the last quite a few months. So different products have different sort of nature of impact. Let me start with the positives first, right? I think on the phenylenediamine chain, if we continue to see differential tariffs between India and China, then that helps us. That is visible in sort of significant volume recovery in Q1. We don't know where the tariffs are going to settle with India versus China. But if there is a differential tariff, then it will support that particular value chain from a demand recovery point of view. Second, there are a decent number of products where we have good exports to U.S., which are part of "annexure 2 exemption list." So there are key agrochemical intermediates that we export to U.S. or even some of the decent volume products like DMS, ONA, all of these are part of exemption list. And in that context, there is no as such visible impact, either positive or negative from a U.S. tariffs perspective. I think 2 more value chains. DCB is where we typically end up competing with European competition. And in that context, it looks like right now, there would be a preferential tariff towards Europe compared to India based on the current announcements. In that context, we will face increased competition on the DCB portfolio that is exported to U.S. But still, given our cost competitiveness, we are targeting to retain the market share maybe at the slight expense of margins. But that is where we expect some headwind given the differential tariffs between Europe and India. And the last one is MMA. MMA, of course, is sort of a very large market that we developed in the U.S. in the last 6 to 9 months. And frankly, there it's less about competition. It's more about affordability to the end customer. And the 25% tariff on that will impact the affordability for the end customer. We are in process to understand what actions we can take to mitigate the same. We will have better clarity on it in the coming 2 to 3 weeks. But as I said, in addition to that, we also continue to focus on expanding the global markets for that product, including the European region where we are putting significant efforts as we speak. But that's broadly our current understanding of potential impact of U.S. tariffs on our product portfolio. I do want to caveat it. It's very early. We are still studying the new regulations, which just got published yesterday, late night in terms of exemption list, in terms of relatively geographic comparison of different tariff lines and different exemptions. And also, we frankly also don't know where it will settle, right? We are expecting this is just to start, but there could be further rounds in terms of where it actually settles.

I appreciate the color. And just one other thing on the financials. So one is there's a significant foreign exchange gain this quarter of about INR 16 crores. So why exactly did that come about? Also just a couple of -- yes, sorry, please go ahead, Chetan.

No, go ahead, sir. Abhijit, go ahead.

I can ask -- I can come back for more.

Okay. So this is more of a regrouping. It was earlier part of export revenue, but basis the clarifications and other stuff, which is coming, we just regrouped it separately. So in all the historic numbers, it was part of revenue only. It is more of the currency fluctuation on the export revenue, which is there.

Okay. So this is the reason why there is some deviation in the expense line items compared to what you reported in previous quarters, right?

Correct, correct. So earlier, it was part of revenue. So -- but yes, this is a new requirement on the disclosure and all the stuff, we've started showing it separately.

Okay. And just one last thing from me. The working capital seems to have increased a little bit if I look at the ratios at the back. And the debt has also increased, but the finance cost is down sequentially. So if you could please just help us understand that?

So the working capital has gone for 2 reasons. One is, as you know, there are a couple of shipments, which has to go in June that got postponed to July. So the inventory got locked up at port and the plant. So that was one component. And also some customer receivables got delayed by a week or 10 days, which is where you've seen a temporary uptick in working capital and so on the debt level. The finance cost reduction is structurally, we've been witnessing a bit of softer rate regime, and we expect that the softer rates to continue. So it is a result of that.

Great. Sorry, just one last quick thing. The tax rate, do you still maintain your expectation for mid-single digits this year? Or could it be lower?

It could be anywhere between -- yes, it could be a bit lower than mid-single digit kind of stuff.

We'll take our next question from the line of Aditya Khetan from SMIFS Institutional Equities.

Sir, first question is, sir, when we add back this, what is, one-off items like the inventory loss of INR 30 crore and INR 20 crore of the deferment volumes. Sir, the number looks muted like when we compare on quarter-on-quarter basis, it has been relatively flat. So it looks like -- so there is a good pressure on the demand side. And also you alluded to the fact that the volumes have been lower in DCB and in NCB. How you see, sir, like so coming quarters will optically look higher compared to this? And are we on track to achieve a 20%, 25% EBITDA growth, like to achieve that guidance of INR 1,800 crore, 20%, 25%, so CAGR growth should be in sight. How that looks, sir?

So look, I think the growth levers are very clear, and those growth levers are getting implemented, which is ultimate aim of achieving that INR 1,800-odd crores. And as we deploy that typically what we feel confident of executing on all of these actions. There are, of course, certain [ details ] that you have to take depending on how the market evolves, right? I think, for example, we did scale up U.S. business of MMA quite significantly, and it was expected to contribute quite significantly over the course of next -- for the full year or for the course of next 9 months. Now we are altering that plan, right? And we're figuring out alternate way of scaling up that volume in case there is some impact from a U.S. tariff point of view. So overall, if you look at the strategy, I think fundamentally, the product portfolio, the strategy around cost optimization, ensuring sort of operating leverage from the existing assets to maximize the volumes, I think that is not changing. I think the entire Zone IV commercialization along with MPP and some of the JVs, I think that's not changing. So from an activity we are doing on the ground, there is practically no change. But yes, the strategy around product placement and market mix needs to evolve. I think the fact is the frequency with which geopolitical events have been happening and the supply chain disruptions that have been coming has definitely been higher in the last 5, 6 months' time frame, which puts additional onus on the management team to remain agile so that we reflect and respond to those disruptions. And that is what we are doing right now.

Got it. Sir, on this lower volumes in DCB and NCB, you mentioned like it is because of the lower volumes to -- lower export into the U.S. market. And also with the tariff uncertainty coming ahead, do you expect like these numbers will materially not improve from the current level?

So different answer for these 2 chains. I think DCB is export dependent. NCB is mostly 99% domestic market. So DCB, yes, I think there are large customers in U.S. And as I said, we end up competing with European competition for that share. Ideally, at least till 24, 48 hours back, I think the clients were pretty confident of recovering and increasing the volumes in the second half, and we will have the conversations with them to ensure the -- how to mitigate the tariff impact. But in general, expectation was the second half to be better than the first half. On NCB, which is purely domestic market, I think it was a combination of some of our strategic customers going through certain challenges. We also had operational challenges in the nitrochlorobenzene unit in June, certain maintenance and breakdowns because of which the volumes were down. Those volumes ideally should come back going forward.

Got it. Sir, you are stating the fact that competitive intensity has increased. Sir, in our product market on a base of 100, I believe, sir, I remember in one of the calls, you have stated that out of 100, 70% to 75% products have still competition with China. Has that gone up materially from that level?

No, I don't think it has gone up. I think it remains somewhat at a similar level. And as we continue to optimize our product portfolio with sort of unique chemistries in value chain, potentially, we are now creating a product portfolio, which should be less dependent on that pricing pressure. But at the same time, look, even the Chinese players continue to evolve. So it's not a status quo kind of situation. It's a dynamic strategy which keeps evolving. I don't think it has materially gone up. I think, as I had mentioned in the previous call, we fundamentally feel that everyone has reached the kind of pricing levels where it is difficult to go down from here, at least on the core product portfolio. And now it's a matter of being efficient to survive at this level and then use that market share gains when the cycle turns around.

Got it. Sir, just one last question on 2 agrochemicals and dyes and pigment side. Sir, we were stating this fact that so volumes have picked up, but pricing pressure remains. So sir, like when we look at the cycle for the last 1 year, so global inventories have come down, inflation also in select economies have come down and rainfall has been also good. So what is the reason why the pricing is not getting improved in this select end user segments?

So I think it will take some time. I think in some of the value chains, we are seeing improvement also in realizations. But at a broader generic level, we can still quantify it as pricing pressure continues. And that's also because of the reason that there are 2 steps in the value chain, right? There's an intermediate and then there's a finished products. As the downstream demand improves at a farmer level, I think the first segment to see uptick is the people who are closer to downstream consumer, the guys who are doing the technicals and the formulations. I think the intermediate guys will see impact of that a bit later in the time frame.

Any particular quarter like you believe like by second half, it can improve or by FY '27 only we see?

I would not hazard a guess, but my personal belief is it's not about 1 or 2 quarters. I think it's about a bit longer time frame because it's a combination of demand uptick and capacity absorption, right? So it's not only 1 of the 2. Both has to happen for realizations to improve materially. And we feel it will take a bit longer time.

Next question is from the line of Jignesh Kamani from Nippon Mutual Fund.

Just on the profitability part, if you take about -- if I -- even I add close to INR 50-odd crore of profitability because of the inventory write-down and the delay. So we are close to around INR 250-odd crore kind of run rate. And this was much lower Y-o-Y. And if you take about the last second half, it was similar run rate on the profitability. If you take about volume, like 3 to 4 percentage kind of energy volume, if I include the deferment of [ 22,000 ] in July, we are close to double-digit kind of volume growth in energy. While on the non-energy Y-o-Y, we are already close to 10% kind of volume growth. So despite a 10% plus volume growth Y-o-Y and maybe around 5%, 6% Q-o-Q, if I adjust, our profitability has materially come down. So fair to assume that profitability pressure is so severe and more particularly in the MMA vertical, and we have to live with the situation in near term?

No, I think there's a bit more nuanced understanding of that market. I think, as I said, there are certain strategic calls that have also been taken to maintain the market leadership position in some of the segments, which sometimes get reflected in the pricing and the profitability. I think in the long term, as I said, from an overall margin point of view, we've kind of bottomed out. I think it should improve going forward. It's not going to happen immediately in a quarter's time frame. But on a steady-state basis, as we move along, the margin profile should actually improve from here on.

But in near term, the profitability materially lagged the volume growth, safe to assume because of the market share initiative we are taking in the current market environment?

Yes. But I think I would slightly characterize it that the profitability growth on an absolute basis should track the volume growth going forward, not lag.

Understood. And is there any material improvement in the cost structure on the Q-o-Q basis, because we are taking the series of our cost structure measure also. So has anything contributed in 1Q, which was not there earlier?

There are. I think that remains sort of ongoing exercise. I think we are well on track, in fact, slightly ahead of track when it comes to implementation of some of the cost-saving initiatives. So multiple initiatives there, including, for example, the new back pressure turbines that were installed in Vapi unit or some of the initiatives around yield improvement, steam consumption improvement, all of those have also got implemented, and they will start reflecting as they become relatively steady in the operations. So that is one aspect of the business where the focus remains very strong, and all of it is currently on track as per the plan.

So had we not taken a cost-saving initiative, probably profitability could have deteriorated much sharper?

Yes, it could have definitely been lower than where we are today.

Jignesh, does that answer your question?

Yes, I'm done.

Next question is from the line of Arun Prasath from Avendus Spark.

Sir, my first question is on the DCB utilization. We are talking about 60%, 65%, whereas all the downstream -- most of the downstream to the DCBs are at a higher utilization even during this quarter. So does it mean that our auto is -- overall globally also auto, we haven't seen this kind of a degrowth. So how should we look at this DCB utilization? And what factors or what sectors apart from auto, we should track to see whether there will be an improvement in the volume ramp-up?

So look, I think DCB, especially PDCB that mostly goes into PPS manufacturing, which is one of the very large end application. And for PPS, auto is one of the major end markets. I think there we have sort of 2 or 3 large customers in U.S. who have gone through their own sort of, I would say, balance sheet corrections at the same time, inventory corrections for this particular product as well as the downstream PPS product. And that is what I think is leading to impact on the DCB volume in the first half. I think the kind of contracts that we have with some of these customers ensure that as soon as their demand comes back from a production point of view, our consumption will go up. And that's what sort of we are hoping for in the second half. Tariff does create a certain amount of uncertainty because 25% is not a small number. But however, we are in conversation to figure that out.

So can you use the -- I mean, can you switch between the other auto customers outside U.S. for the PPS demand? Is it not an option for us?

We can. I think there are multiple initiatives that we have on the plate, including this other application of that particular product, which goes into a different form of a product, which we have scaled up actually quite significantly, both in domestic as well as exports market. Globally, we do have a leading market share in that product. So frankly, we are actually quite deeply penetrated. And we, of course, try and gain market share into each of these clients. Typically, these guys do yearly contracts, and hence, the share of the volume gets locked in upfront at the start of the year. So depending on those contracts and how your customers are performing, during the year, switching of volumes is difficult, but when you go through a next contracting cycle, you have another opportunity.

Understood. Understood. On the question related to the competitive intensity, you spoke that things are finally looking to be turning for good. And we are also hearing that in China, in a lot of sectors where there are overcapacity, there is a government initiative to actually reduce it. So in our product or a value chain, do you see that happening or some signs already appearing?

I think I would not say it establishes as a firm trend. We see, of course, stray incidences where realizations have been taken up in the last few months. But I would still hesitate to characterize it as a generic trend. I think we are a bit further away from sort of saying with confidence that the margin profiles or the realization levels from a Chinese competition intensity are turning around. But yes, we have started to see a few incidences where the margin profile and realizations are starting to change.

Okay. Just to -- our understanding in our products, say, DCB, NCB, what is the extent of overcapacity in China, can you quantify, please?

No, I would not go in that direction. The fact is there is a significant overcapacity. But I think depending on what is the real operating capacity and also what is the real capacity available to compete in the global markets, the answer will look significantly different. But it's fair to say we are talking about a significant overcapacity and the demand supply balancing did not happen with 1 year of demand growth, I think if that helps you get a perspective.

Okay. Understood. Finally, the question on cost optimization. We have 3 buckets for our EBITDA to reach our 3-year guidance. One is cost optimization. We are talking about INR 150 crores to INR 200 crores and where we have already done this cogeneration initiative done. So can you quantify what percentage of this INR 150 crores to INR 200 crores is already in the P&L and what is it to be realized over the coming months?

So from an implementation point of view, it's relatively at advanced stages. I think it's just that many of these initiatives will accrue at a different point in time. For example, the 2 initiatives that we announced on renewable power purchase, which are supposed to add significantly to this cost saving. I think one of that -- the solar component of that is expected to get -- one component of that is expected to get commissioned from November, December this year versus the hybrid component of that is expected to get commissioned around April, May next year, right? So I think the actual accruals to the bottom line will start from those time frames versus all the actions, implementation sort of as contracts has already been done and completed. So at a very advanced stages of completion of this the cost-saving initiative, it's just that the timing of the accrual will get triggered whenever the sort of the overall implementation of the activity takes place.

Right. And I understand it's implemented. I'm just trying to understand what is already reflected in the P&L. What percentage of this INR 150 crores, INR 200 crores is already reflecting in P&L as of today?

I think we will come back to you on that one later. But roughly with -- I think from an implementation point of view, we should be done up to -- 60%, 70% of it should get implemented within this year. I think remaining balance, 30-odd percentage can get spilled over to the next year. From an accrual point of view, it will take time. But from an implementation point of view, I think 65% to 70% of it should get done this year.

We'll take our next question from the line of Huseain Bharuchwala from Carnelian Capital.

Yes. I think you already said about the U.S. exposure that you have an exposure of around 15%, 20-odd percent. Sir, I wanted to understand this exposure that you have said is combined of both the direct exposure as well as the indirect exposure that you said?

No, 15% to 20% is direct exposure. I think indirect exposure could be even higher. What the numbers that we mentioned is our direct exports to U.S.

Got it. So how do you see the impact of the indirect exposure? And what could be your ballpark sense of the indirect exposure? Because I think you sell a lot of products in the domestic market, which eventually gets exported to the U.S. So what is the end result? And how do you see that getting impacted?

So as I said, the story is yet to play out. I think apart from a direct exposure, from an indirect exposure point of view, the largest segment where we have indirect exposure is actually agrochemicals, where we sell intermediates to our local partners who ultimately convert that into either a technical or formulation for final exports to U.S. And how will that story pan out? Frankly, we are yet to ascertain the full impact. I think we remain in conversation, but everyone is in kind of evaluation mode right now to give sort of conclusive perspective on the same.

We'll take our next question from the line of Pratik Oza from Systematix.

Just one question from my side. If you can please provide the cash flow from operations for 1Q?

We don't have the number right now. We'll just separately share it with you.

Secondly on, I guess in previous call you had stated that our peak debt will be at around INR 3,500 crores...

I'm sorry to interrupt, Pratik. Can you use your handset mode, please? Your audio is not very clear.

Yes, one second. Is it clear now?

Yes.

So I guess in previous call, you had stated that net debt had peaked at around INR 3,500 crores and we will be reducing it by INR 200 crores to INR 300 crores in FY '26. So does that guidance -- you are sticking to that guidance or...

Yes, we'll be sticking to that guidance.

I think we will remain roughly at around that level, right? I think, of course, from a working capital optimization point of view, you will see INR 100 crore, INR 200 crore upside, downside, but we don't expect a material increase to that number. But broadly, we should remain around that level.

Next question is from the line of [ Tushar R from Omega Portfolio Advisors ].

I just wanted to know earlier in the call, you mentioned that 70%, 75% of our product basket is competing with China. So I'm coming from calendar year 2027. So after your Zone IV started contributing, like in quantitative terms, how much -- do you see that reducing to an extent with some numbers given?

So I think -- look, I think there are different ways to look at it. The fact of the matter is if you -- in today's chemical industry, coming up with a product which China is not manufacturing, would be kind of an exception. I think it's also about intensity of -- capacity and intensity of players in that particular domain and at the same time, domestic demand pool versus export demand pool, right? So that is what will lead to potentially less competition intensity as we broaden the product portfolio with commissioning of Zone IV. It would be unfair to say that there would not be any Chinese competition because the fact of the matter is practically -- they're practically present in sort of broad sector of chemical industry as on date.

Fair enough, sir. And sir, in MMA business of yours, so considering the 30 years spread -- 13-year spread, my bad, it's coming out to be $13 per barrel. Just wanted to note in order to get a double-digit -- high double-digit kind of margin, what sort of spread Aarti would need because energy has been a major contributor to our revenue considering the past and will be going forward to the EBITDA in weighted average terms as well.

Yes. So I think current spread level sort of are leading to a good demand growth. I think we see demand coming from different regions, from different customers, which is relatively healthy at this stage at the current spread. So they're good enough to have the pull for our products. As I said, geography by geography, sometimes the spreads are different and hence, the demand pull looks -- do look different depending on the specific market. I think U.S. which was very attractive, I think with the tariff, it's a kind of a speed bump there, but we will figure that out. But the current spread levels, to answer your short question, are good enough to generate pull for demand of this product.

So sir, my last question, in the fluorination chemistry, do you see any contract coming in going forward post your Zone IV commercialization? And any JVs are you expecting for technicals you being the intermediate provider going forward?

Nothing at this stage which we can provide you on that one.

Fair enough, sir. And sir, fluorination as a percentage of your sales, as you shown the valuation in your annual report. So the fluoro compound would be what percentage of your total sales in that healthy chain?

Fluoro will be in single digit, right?

Pardon, I didn't get your answer, sir.

Single digits.

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

Thank you, everyone, for joining us today. We appreciate your continued support. We hope we have been able to address all your questions. Please reach out to us if you have any further queries, and we would be glad to address the same. Thank you. Thank you once again.

Thank you, members of the management. On behalf of Aarti Industries, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.