Aether Industries Limited (AETHER) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 and FY '22 Earnings Conference Call of Aether Industries Limited, hosted by HDFC Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nilesh Ghuge from HDFC Securities. Thank you, and over to you, sir.

Thank you, Michelle. Good evening all. On behalf of HDFC Securities, I welcome every one to this Aether Industries conference call to discuss 4Q results and full year ended March '22 results. It is a pleasure of having with us top management team from Aether Industries, represented by Dr. Aman Desai, Promoter and Whole-Time Director; Mr. Rohan Desai, Promoter and Whole-Time Director, Aether Industries; Mr. Faiz Nagariya, CFO; and Mr. Ravi Bhojani, Lead Investor Relations for Aether Industries. And without further ado, I will now hand over the floor to the management for making the opening comments. Over to you, sir.

Good evening, everyone. This is Ravi here, Ravi Bhojani, handling Investor Relations for Aether Industries. Thank you, Nilesh, for the brief introduction. This is our first earnings call for Aether Industries post-listing. So very happy to connect with you all. To begin with, on June 16, 2022, our Board has approved the results for quarter ended and year ended March 31, 2022, and we have released the same on the stock exchanges as well as updated on our website yesterday. Please note that this conference call is being recorded, and the transcript of the same will be made available on the website of Aether. Please also note that the audio of the conference call is the copyright material of Aether Industries Limited and cannot be copied, rebroadcasted, or attributed in press or media without specific and written consent of the company. Let me draw your attention to the fact that on this call, our discussion will include certain forward-looking statements, which are predictions, projections or other estimates about future events. These estimates reflect management's current expectations on future performance of the company. Please note that these estimates involve several risks and uncertainties that could cause our actual results to differ materially from what is expressed or implied. Aether Industries or it official does not undertake any obligation to publicly update any forward-looking statement, whether as a result of future events or otherwise. Now I hand over the call to Mr. Rohan Desai to share the updates. Over to you, Rohan, sir.

Thank you, Ravi. I hope everybody is doing well, and I am happy to connect with all of you to discuss the performance of our company for quarter 4 and financial year ending 2022. This is the first time we are announcing our results post-listing and having direct interaction with all of you. I will begin by sharing the high-level overview of data, and then request our CFO, Faiz Nagariya, to cover the financial highlights for the period under review, and then ask Dr. Aman to talk more on the ongoing expansions and other strategies. First, let me speak a little bit on the business environment. The current global macro environment continues to be challenging, both on a geopolitical front and on persistent inflationary environment. The cost of coal and fuel has spiked utility overheads like electricity, gas and steel in various industries. We have seen the price of commodity chemicals drastically increasing and also have faced huge logistic cost increase heading to supply chain constraints. Nevertheless, we continue to work closely and together with our customers and are having regular discussions with them for navigating through the current environment and increasing business opportunities. Despite the various headwinds, we are happy that we all -- that all of our business segments did grow on in financial year 2022, and we were able to add new customers and increase the wallet share of our existing customers. Let me reiterate again that Aether is focused on core competencies of chemistry technology and systems, with our 3 circles under which Aether operates and the product selected, developed and commercialized falls in the center of 3 circles. In a layman terms, we are not dependent on any segments of chemical industries nor are we dependent on any particular verticals of this segment. We have developed 3 business models in last 5 years of commercialization. 67% of our total top line comes out of large scale manufacturing business model, 8% comes out of contract research and manufacturing services business model, which funnels into the third and interesting business model, which is contract/exclusive manufacturing, which constitutes 24% of our total top line. Our sales mix as on March '22, stands as: Pharma, 60%; Agro, 25%; Material Science, 4%; high-performance Photography, 5%; Coatings, 3%; Oil & Gas, 1%; and Others, 2%. Our export stands at 65%, which includes exports to SEZ and EOU units of India, and domestic sales stands at 35%. Aether being a responsible specialty chemical company has engaged in numerous CSR activities. And in the last 3 financial years, the company has spent approximately INR 20 million towards the CSR activity, with the main focus on education, leading to construction of schools in underprivileged areas in Dang and Tapi regions, which are located in Gujarat state. We have inaugurated 3 schools in the last 3 years and also on last Wednesday, which is June 15, 2022, we have inaugurated one more school in Dang area in Gujarat. With this, I will now request Mr. Faiz Nagariya to share the financial highlights of quarter 4 and financial year 2022.

Thank you, Rohan. Good evening, all of you, and I welcome you all to the first earnings call of Aether Industries after getting listed. I'm glad to inform you all that we have achieved total revenue of INR 597 crores for the final year '22, reflecting a growth of 32% over the corresponding previous year financial year '21. The sales revenue of the company increased by 31% from INR 450 crores in financial year '21 to INR 590 crores in financial year '22. The average selling price of our products during the financial year '22 have been INR 1,479 per kg. The company has been able to generate EBITDA of INR 175 crores in financial year '22 against INR 161 crores in financial year '21, thereby showing an increase of 59% increase year-on-year. The increase in revenues and EBITDA has allowed the company to capitalize on the PAT levels, which have increased by 53% from INR 71 crores in financial year '21 to INR 109 crores in financial year '22. We have capitalized assets worth INR 43 crores during the year, and our CWIP stands at INR 58 crores as on 31 March '22. The ROE was 28.16% and ROCE was 23.96% for financial year '22. I would also like to inform you that after the IPO, our old debts have been paid off and we are a debt-free company today. Now I would like to request Dr. Aman to talk on expansion and strategical plans of the company. Thank you.

Thank you, Faiz. Good afternoon, everybody. I just wanted to touch based on the various expansion and activities going on in the company and the strategy moving forward. All the plans that we had for the growth trajectory of the company and the expansion plans and the growth plans, which we announced at the time of listing are firmly in place and on track. We have already, as we have mentioned before, during the time of listing, we had already initiated the construction of a new greenfield manufacturing facility, which is our third facility. And that is already finished with the civil construction component or almost finished, and we are going to start installing the reactors in this new greenfield production site in this month and the next month. And the idea is to have this greenfield manufacturing site commissioned and completed by the end of this calendar year, '22, so that by January, February, March, we can anticipate revenues and earnings from this new greenfield manufacturing site. The R&D expansion is ongoing significantly and aggressively. As of 2 months ago or last month, we have doubled the R&D infrastructure. And by next month, we will almost triple our R&D infrastructure. At the time of the public listing, we had mentioned the number of 5.4% of our overall annual revenues going towards R&D expenditures. At the end of the last fiscal year, that number has gone up to 6.6% or 6.6% of our earnings -- of our revenues of the last fiscal year was towards R&D expenditure. We have now a total of 164 employees, including the scientists and engineers in R&D, and we are expanding this even further. Pilot plant has been aggressively expanded and now we have one of the largest pilot plants in the world, which function as piloting our own molecules as we launch new molecules in production and also functions as a stand-alone manufacturing facility for our CRAMS business model, which is for the production of high value, low volume products. We are launching 5 new products in this current financial year in the new upcoming greenfield manufacturing site and these 5 products are advanced intermediates for pharmaceuticals being launched by us for the first time in India. There will be no competition for these new products that we are launching in India. Currently, these 5 products that we are launching represent hundreds of crores of imports into India, which we essentially will be the first company in India making these products. We continue to evaluate and refine our core competency buckets of chemistries and technologies and go towards more advanced and niche competencies continuously. And in the business models of contract research and manufacturing services as well as exclusive manufacturing, we are aggressively expanding this business model. And in a post-pandemic era now as the world opens up, we anticipate a tremendous influx of opportunities in the CRAMS business model. And we are already seeing this happening [ lying ] over the last 1 month where a tremendous number of opportunities and inquiries are coming our way. We are an established reliable robust partner with the largest innovator multinational companies across the spectrum in the CRAMS business model, and we are perfectly situated now to capitalize on this new era in a post-pandemic world where these opportunities somewhere start rolling in again. And India is a preferred destination today, as I've mentioned several times in the past. India is a preferred destination today for research and scale-up and manufacturing partnerships for innovators all over the world. We continue to maintain a very high standard of QEHS, quality environment, health and safety. We have been audited 7 times in 3 years, and we have successfully passed all these audits. We have now installed a 100,000 meter per day in-house 0 liquid discharge waste treatment plant. 15.4% of our staff is dedicated to quality, environment, health and safety. Recently we have been awarded the UN Global Compact and silver ranking in EcoVadis. Just last month, I was -- we participated and exhibited in the Chemspec Europe show in Frankfurt, Germany, where I was personally there along with our business development leader, Dr. Norbert Flüggen of Europe. And we had a tremendous exhibition. A lot of meetings happened with our existing clients as well as new clients, which are innovative companies in the agro chemicals, material science, oil & gas space. This Chemspec Europe exhibition is a flagship event globally. And for the first time, actually, in this year, there were no Chinese -- there was no Chinese representation because of the Chinese lockdowns due to COVID, and so it was a perfect opportunity movement for Indian companies to represent themselves without any Chinese representation, and we were right there, and we had a really good exhibition, and really good meetings and they anticipate new opportunities and new business growth as a result of these meetings from the Chemspec Europe Show in Frankfurt last month. Next weekend, we are also traveling to U.S.A. for exhibiting in the Chemicals America Show in Charleston, South Carolina, where we have actually been exhibiting for the last 7 years. And again, this is the first show in the U.S.A., which is happening in the Specialty Chemicals segment after the COVID last 3 years. And so again, we have a whole host of meetings already lined up for this exhibition, and we anticipate great meetings and tremendous opportunities arising as a result of this exhibition in the U.S. as well, which is happening over the 28 to 30th of June next to next week. So with that, I would like to thank the entire Aether family for all the contributions that they have built -- done to build this organization of Aether Industries with all modern infrastructure and systems in the last 9 years only. We have been a manufacturing company for only 5 years. We thank each and everyone who has put their trust in Aether and for having the confidence in Aether in our journey. For all the investors who have onboarded the Aether bus, we thank you all. We truly appreciate your confidence, and we assure you that this is only the start and the beginning of the Aether journey, and we greatly look forward to our interactions with you, with all our investors along in this journey and enjoying their journey together. So thank you again, everybody, for your kind attention and presence today. And Ravi, back to you.

Thank you, Dr. Aman. I think we would now move to the question-and-answer round. We would request the moderator to open the line for question-answers.

[Operator Instructions] The first question is from the line of Gagan Thareja from ASK Investment Managers Limited.

Sir, my first question is around your capacity utilization, which I think you indicated in a media interview is at 80% right now. My understanding is that due to change over times, the optimal utilization can address the 85%. Please correct me if I'm wrong there. But if that is the case and your new capacity comes in only towards the last quarter of this year, would growth be constrained by lack of capacity at least for the first 3 quarters of the year.

Yes. So you are right. We are at 80% of capacity utilization. But if you see the documents which we had presented in the form of DRHP and RHP, we have constantly dewaternecking our plants, and we are rearranging our equipments to increase our capacity at every point of time. So we think that we will reach 90%, 92% capacities in this current fiscal year. And we are already rearranging our equipments to achieve better deals and increasing productivity also.

And for the year, if you could break down the sales growth into volume growth and price or sales mix? How much of the top line would have come -- growth would have come purely from volume growth?

So the only thing is volume growth only. If you see the -- there is a very minute increase in the selling prices of various products, if there is a certain raw material which has been increased, you can typically say that the price has increased only by 1.5%, 2% on an average overall vis-a-vis the whole growth as compared to the last year to this current year, this -- the last financial year ending March 2022 is because of the volume growth.

And the 2 new plants that are under construction, what additional capacity do they give you? And when do they get operationalized?

The Site 4 get operationalized in this calendar year -- towards the end of this calendar year. And the Site 5 gets at least in the next year -- towards the end of this -- towards the end of next calendar year. Both units give earnings. Both units combined would give us 9,000 metric tons manufacturing capacity.

And by what time frame do you envisage it being optimally utilized once it's commissioned?

2 years.

In 2 years' time. And sir, one of your customers IPCA in their latest results call indicated that they are now finding the intermediate pricing has softened down, which they indicated in the past was up pretty sharply. And it's also being put down to a resumption of intermediate supply from China. And one of your key products, OTBN has also seen a fairly sharp correction in pricing, if I understand it correctly. I'm just trying to understand if that is the case, and on the other hand, input material prices are firm. Do you see some margin pressure in the interim 2, 3 quarters before the input materials, prices also softened down?

So specifically talking on OTBN, a good catch, the price of OTBN has reduced over a period of time. It usually trends at $12, $13 a kilo and which showed a sharp increase in 2019 at $27, which reduced in 2020 at an average of $19, $20, and then further reduced today at $14, $15 pricing range. What we have done is, as the plants are fungible, we were planning to expand on OTBN facility, but we changed the OTBN streams to the Bifenthrin Alcohol stream, which follows the same chemistry. And we could get more top line than bottom lines from that particular product. So we are not increasing our OTBN capacity as of today. We are keeping the OTBN capacity on a watch basis, and we'll see how it goes in this financial year. But overall, the raw material prices are in cycles, a few of the raw materials and a lot of the raw materials, basic building blocks are going up and are still staying up, whereas a few of the raw materials are also coming down on the simultaneous basis. So for the next 2, 3 quarters, we -- or any chemical spectrum company will see a challenge, but a lot of corrections are going to happen on the pricing. However, at Aether, we are looking to maintain our margins, which we have showcased in the March 2022 financials, and we believe that we're building -- we'll build it up from there.

And when you say you'll be aspiring or attempting to maintain margins in a fairly challenging environment, what key levers would help you do that? Is there going to be an improvement in sales mix because the share -- or the salience of contract manufacturing increases or you have new launches, which come in at higher margins to offset the pricing pressure on your existing product project.

So we are doing a lot of activities. We are debottlenecking our plants and processes as we speak also. We are segregating the affluent treatment as sourced with sales of money. Of course, we cannot do anything about the utility costs at this moment because they are driven by international prices. What else we are doing is you're increasing our pie in CRAMS and contract manufacturing space. Contract research and manufacturing services gives us a better margin also. And we are also adding new molecules, which gives us an average -- higher average selling prices and increased margin also. So we are doing all the things combined together as of today to maintain -- maintain to our targeted margins and increase from that.

A final question from my side, sir. When the new plant gets commissioned, what would be the incremental operating costs associated with the new plant? I presume it will take you some time before the new plant gets to its optimal utilization. So to start with -- until the time it's ramping up to its full utilization, that cost will not be efficiently or fully absorbed and that itself could also weigh down on margins. So if you could give us some idea, one on what's the magnitude of the operating cost, and 2, what's your assessment on pressures on margin as you commission a new capacity?

So what we are doing is, we are taking the products which we are launching in the existing plants and commercialize it from the existing plant. This is a fully auditable plant -- audited plant by all of our customers. So we will be starting delivering the new molecules out of the existing plants, which will take away the learning curve costs from the new plant. And we think that we'll be able to build up the production capabilities of the new plant at 50% plus level in the first 2 quarters [ successfully ]. So we'll see some margin pressure overall, but I think that margin pressure will not be reflected in the growth story, and it will not affect our growth story.

And what could be the magnitude of the additional operating costs, if you could give some idea?

Faiz, would you be able to do that?

Yes. For the additional operating cost to reduce them, we have also started -- we also commissioned the solar power plant, which will be operational from 1st July, which will also give us headroom to reduce the electricity cost, which we will get for the next 9 months. Also, the solvent recovery plant, which Rohan just said, we are also doing more recoveries of [indiscernible] by installing new MVR plant in the DTP. So that will also be helpful in bringing down the raw material cost per our -- going forward?

I appreciate that. So my question was, what's the additional operating costs associated with the new capacities?

The operational cost, which will be coming up will be majorly this will be only the electricity, gas, steal costs, which will be coming up because those are the normal costs which we have to incur for any manufacturing site. We do not envisage any other out of the box operational expenses, which might come up for this.

You will also need to increase your employee headcount for...

Yes. So that is already envisaged in our business plan, which we have already gone up. So that is observed. But anything apart from this any exceptional expenses like, which is not -- even employee cost is there, then you have other utility costs, you have a staff welfare, you have various other costs which are already embedded. But apart from this, there is nothing which we can come exceptionally apart from these things which are there.

The next question is from the line of Yash Shah.

This is Yash from Investec. Congratulations sir on good listing. My question was right now, as you can see that our portfolio is dominated from pharma and agro products, right? I would like to understand, 5 years down the line, where do we see our product portfolio moving? Are we planning to move away from non-pharma, non-agro products?

We continue to add products in the pharma and the agro but the goal eventually is to balance out all the buckets and make it equitable. And so we anticipate the non-pharma, non-agro sectors to be rising as well more in the future, but we continue to add in all buckets, but the goal is to make it equitable.

Will you be able to provide some broad level of percentage, sir? What will be non-pharma, non-agro versus pharma, agro?

I don't think I would like to speak too much of the future, but the consistent goal is to make the buckets equitable in all the business segments. And currently, even if you check me various figures for the last 2, 3 years, I think it was predominantly pharma in, say, 3 years ago or 2 years ago and its -- the agrochemical has increased quite a bit over the last 2 years. And so now we're trying to do that with the material science, and the oil and gas segments as well.

Sir, another question which I had is, in general, sir, are the raw material prices, have they started correcting? Are you seeing downward trend in the prices right now?

A few of the raw material prices are correcting this week, but few of the prices are still -- I mean, the basic building blocks are still remaining where it is, I mean it's on the higher side. But on the key starting materials, where China is opening up, you are seeing -- already seeing correction happening.

And one last question, which I had was a small bookkeeping question. Sir, can you provide some more clarity on your IPO proceeds? Have you already started using them? And what is the current capital work in progress? And what is the CapEx which we'll be doing for towards the year, including the maintenance CapEx?

So the IPO process, yes, of course, we have started using them. As per the object clause we already paid off our loans, and we are a debt-free company as we speak today. We also draw down the money for payments for the CapEx, which was one of the object clause. And as on date, CWIP stands at around INR 60 crores. And during the year, we are envisaging CapEx -- total CapEx capitalization, which will come out around INR 100 -- sorry, INR 200 crores, which is for the new facility. And so the R&D facility in pilot plant, which we are -- which was in working progress the last year and current year.

The next question is from the line of Nitesh Dhoot from Prabhudas Lilladher.

Team, congratulations for another strong financial year and listing. My first question is, while there was a 51% growth in export revenue in FY '22, the domestic revenue has already been flattish, I think around 5% growth year-on-year. So what is the reason behind the absence of growth in domestic revenues? And what would be the outlook there for FY '23?

So we are not differentiating domestic and -- a wonderful question, Nitesh, first of all. We have not thought why the domestic has not grown. I think I will have to come back to you on this question by doing my own research and we'll let you know for sure.

Sure, sir. So my next question is that in Q4, there has been an 18% decline in employee cost on a sequential basis. So what explains this decline in employee costs. And also, I think the other expenses have come down by 9% sequentially. So if you could just throw some light.

So the employee expenses and the FX which have come down is because of the capitalization which I think the project which is going on. So certain extent we are [indiscernible] costs have been capitalized for the R&D in pilot plant and the new traffic is coming up. So that is the main reason. And other operational costs, which have gone down is majorly because of the solvent recovery plant which has come up, which we commissioned in January 2021, which was a major call for us when we were sending our recoveries to be -- for job works outside our organization. And now that solvent recovery plant is inhouse. So we are having a lot of saving in this costs.

Sir, another question is on the working capital. So you've seen that working capital has got further stretched both on inventory days and I think on the receivable days. So despite, I mean, the leadership positions globally in some of our major revenue generating products, I mean is it still difficult to keep the working capital more balanced or, I mean what is exactly the reason behind the working capital requirements?

So the working capital requirement, you correctly said that is because of the high levels of inventory, first reason. For the inventories, I would like to emphasize that in the last quarter, that is December quarter and just ended March quarter, we have introduced 4 new products and to capitalize and for the manufacturing products and the demand from the customers we have -- we have procured raw materials in proper quantities, taking into consideration the delivery time of the suppliers and all sort of bottleneck situation which is there. So there is no materials coming from Ukraine or Russia. But still the logistics is also disturbed, so we have procured raw materials for this new product and also for our old products. We are holding new raw material inventory for at least 5 months for all our products and for major opportunities, more than 5 months also. And receivable days which have gone up is because -- so the receivable days which has gone up is a normal trend because some of the debtors, very marquee customers have not paid in time, that's the only reason. Otherwise, there is no other issue. We are having good relations with all the customers, and there is a continuous business going on with them.

So one last question, if I can. What was the revenue and volume of your contract manufacturing products, NMDC, MCT and Bifenthrin Alcohol, if you can share? And any other products which we are manufacturing as part of the contract manufacturing business. So that will be all from my side.

Nitesh, I would not like to bifurcate this product and give you the volume and the value because this is a transcript, which will be publicly available and the Chinese can refer to this transcript and understand what we are doing. So we can connect separately on this, and I can share this information with you [indiscernible] if required.

[Operator Instructions] The next question is from the line of Nityanand Parab, an individual investor.

So from the presentation, I can see that there are -- the products which are mentioned like 4MEP and others. So for these, we have become #1 or #2 in last few years, right? So I would like to know any specific strategy which we have used that you have become #1 in these products? Like are you the lowest cost producer for these? Or what is the exact strategy?

Basically, it's a combination of strategies, thank you for the question -- that we use. It's -- we are not the lowest cost by means. We keep cost parity with the Chinese supplies in most cases and worldwide supplies in other cases. But it's a combination of factors of our approach towards core competencies, the automation, inherent process innovations, [ enhanced ] operations, continues reaction technology and so on and so forth. So -- and also the scale at which we enter into these molecules, which is with the goal of establishing our globally leading position in all of these products. So it's a combination of capacities.

So you are planning to have this -- so you use this strategy for other products as well, right, which are going to coming near future. So can you just give a vision on this, how many products you are planning to have? Or I don't want a detailed one, but you can give some guidelines on what is your vision for next 3 years or 5 years, how many products you are planning to have? And what is the potential those products can have to become the #1 -- in globally?

Yes. Year-on-year, we have launched 3 to 5 products if you look at our history of the last 5 years of manufacturing. This year, we are going to launch 5 new products which are all advanced intermediates and just a common strategy will apply to all of these products. And moving forward in the future, we'd like to maintain the same rate -- so similar rate and introduce new products to the market every year.

So the new capacity which are coming up, is it also going to be a fungible capacity? Or it is going to be a dedicated facility for some products.

All our manufacturing facilities are fungible and multipurpose across the core competencies that they are designed for. And we have this so-called 8x8 metrics that we have, and the plants are designed for these core competencies, and they are fungible across these core competencies, and that is the strategy of the company.

As there are no further questions, I would now like to hand the conference over to the management for closing comments.

Yes. So thank you all for your time and attention and presence today. We very much appreciate the questions and the time that you have spent with us. Again, already heartfelt gratitude and thank you to all the investors who have participated in our listing and have shown the confidence in us, and we assure all the investors and all the stakeholders that we will continue this journey with -- in earnest and with diligence and try and achieve sustainable growth for the company and for our stakeholders and for our investors. Thank you all very much. Greatly appreciate the time, and we look forward to additional interactions in the future.

Thank you. On behalf of HDFC Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.