Aether Industries Limited (AETHER) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Aether Industries Post Results Call 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, Ryan. Good afternoon, all. On behalf of HDFC Securities, I welcome everyone to this Aether Industries conference call to discuss the results for the quarter ended December 2024. From the Aether Industries, we have with us today, Dr. Aman Desai, Promoter and Whole-Time Director; Mr. Rohan Desai, Promoter and Whole-Time Director; Mr. Faiz Nagariya, Chief Financial Officer; Mr. Kushal Doshi, Lead Investor Relations; and Ms. Shubhangi Desai, Executive IR. Without further ado, I will now hand over the floor to Mr. Kushal Doshi to begin with the earnings call for Q3 FY '25. Over to you, Kushal.

Thank you, Nilesh. Thank you, and a warm welcome to everyone. Today, our Board has approved the financial results for the third quarter and the 9 months ended FY '25 and the same has been filed with the exchanges as well as updated over our website. Please note that this conference call is being recorded and the transcript of the same will be made available on the website of Aether Industries Limited and the stock exchanges. Please also note that the audio of the conference call is a 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 discussions 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 Limited or its officials do not undertake any obligation to publicly update any forward-looking statements, whether as a result of future events or otherwise. Now Mr. Rohan Desai will begin by sharing Aether's business outlook, then Mr. Faiz Nagariya will cover the financial highlights of the period under review and Dr. Aman Desai will share the ongoing expansion and strategy of the company going forward. I hand over the call to Mr. Rohan Desai for his opening remarks.

Good evening, everyone. I'm happy to connect this to you today to dwell into the details of our company's performance during the third quarter of financial year 2025. First of all, let's talk about the market dynamics. We have witnessed an increase in total volumes, while at the same time, maintaining stable prices across our product range. This stability reflects a resilient demand for our products, leading us to expand our client base by adding 8 new clients. While we have observed that the prices are likely bottomed out, we are expecting a potential uptrend to emerge post Chinese New Year, which could positively impact our future quarters. Operationally, we have some noteworthy developments. Site 2, which was previously affected by the accident, is now back to full capacity following the revocation of restriction by Gujarat Pollution Control Board in January 2025. This is a testament to our commitment to safety and regulatory compliance. Meanwhile, our expansion efforts on Site 3 and 3++ are on track, promising future capacity increases. Our greenfield project at Site 5 in Panoli is also progressing as planned with first phase to expect fully to be operational by quarter 3 of financial year 2026. This expansion will increase our production capacity significantly. Site 4 has been particularly busy, experiencing a surge in production, primarily due to new validation and trial quantities from Baker Hughes. Following our strategic supply agreement with them signed and announced in June 2024, we have finalized orders on the first 2 products in January 2025, which will be supplied from our site. We are gearing up for a ramp-up in Q4, which should further solidify our position in this market segment. Turning to our business model. We have observed a shift in our revenue streams. This quarter, large-scale manufacturing contributed 49% of our sales with Contract/Exclusive Manufacturing increasing up to 38% and Contract Research & Manufacturing Services making up to 11% of our sales. As we pivot our strategy towards enhancing our capacities in Contract Research & Manufacturing Services and Contract/Exclusive Manufacturing, we anticipate these areas to become even more pivotal. Volume growth across all 3 models has been encouraging with our export and domestic split at 54% and 46%, respectively, in quarter 3 of financial year 2025. Sustainability has been a core focus for Aether. We have now fully commissioned a 15-megawatt solar power plant, which not only powers our manufacturing facilities but also marks a significant step towards reducing our carbon footprint. This initiative is expected to save us over INR 115 million annually in energy costs. With 31-megawatt of solar power plant now under our belt, we stand as the only company in the spec chem space to source approximately more than 80% of our electricity from renewable sources, setting a new benchmark for environmental responsibility. I would now conclude and invite our CFO, Faiz Nagariya, to elaborate on financial highlights of the period under review. Over to you, Faiz.

Thank you, Rohan, and good evening, everybody. I am glad to present the financial results of Aether Industries Limited for Q3 and 9 months of financial year '25. The total consolidated revenue of company stood at INR 2,333 million in the quarter 3 of financial year '25 as against INR 2,098 million in quarter 2 of financial year '25. There is an increase of 11% quarter-on-quarter. This has resulted in EBITDA of INR 757 million in Q3 of financial year '25 as against INR 613 million in quarter 2 of financial year '25, which is an increase of 23% in the comparing quarters. EBITDA margin stood at 32% in Q3 of financial year '25 as against 29% in Q2 of financial year '25. The PAT has reached INR 434 million in Q3 of financial year '25 as against INR 348 million in Q2, which is an increase by 25% quarter-on-quarter. The PAT margin stood at 19% in the Q3, which was 17% in Q2 of financial year '25. The consolidated revenue in the 9 months of financial year '25 increased by 25% from INR 5,083 million in 9 months financial year '24 to INR 6,351 million in 9 months financial year '25. EBITDA has increased to INR 1,891 million in 9 months of financial year '25 against INR 1,433 million in 9 months of financial year '24, resulting in an increase of 32%. PAT stands at INR 1,081 million in 9 months of FY '25 as against INR 839 million in 9 months of FY '24, which is an increase of 29% in comparing periods. During the quarter, we have submitted the stock loss claim resulting from the fire accident on November 29, 2024, to the incident surveyor and the same will be processed and claim settled by the insurance company in Q4 of financial year '25. The revamping of the affected site is completed. 100% operations at the fire affected site has been started in January of 2025 post approvals from the regulators. The remaining claim for the fixed assets for the loss will be put up to the insurance company in the month of February '25 along with loss of profit claim, and we are confident to get the claim settled by the insurance company by or before the end of financial year '25 or maximum by Q1 of FY '26. We have been able to reduce our inventory cycle to 171 days as on December 31, 2024, as against 179 days as on September 30, 2024. The debtor cycle has also been reduced to 129 days as on December 31, 2024, as against 136 days as on September 30, 2024, encompassing a payment flow from the customers. With more of contract manufacturing businesses unfolding in the near future, we anticipate to have better debtor and inventory cycles in the future, resulting in better working flow cycles. Now I would request Dr. Aman Desai to share updates on Aether's ongoing expansion plans and strategies going forward.

Thank you, Faiz, for the financial highlights. Good evening, everybody. I'm very pleased to connect with you all again. To begin with, as always, we've been working diligently in augmenting our capabilities with our ongoing CapEx across R&D, pilot and production. We integrate this with incremental additions in our chemical reaction capabilities and competencies of chemistry and technology beginning from R&D all the way to commercial scale. And this aids us in enabling and developing newer chemistries and technologies and addressing newer customers. The CRAMS business model has continued to grow with our 9 months CRAMS revenue being equivalent to 95% of the entire fiscal year '24 already. We are currently working on over 50 research projects in our CRAMS business model across all the sectors with the majority of the projects being in the non-pharma and non-agro sectors. As the new year has started the world over, we have been witnessing a significant influx of business inquiries in our CRAMS business model. These increased inquiries are primarily on non-agro and non-pharma and in the oil and gas and sustainability business segments of our company. And what is very interesting about these new inquiries is that they are more towards the late stages of the commercialization journey for new chemical entities for various innovators in these business segments. These means that the translation to contract manufacturing and exclusive manufacturing business model from the CRAMS business model for these molecules will be relatively much faster. Each such transmission will represent a step change in the growth trajectory of the company. One exciting development in the recent few weeks has been the finalization of the first 2 product launches in our site for our strategic customer, Baker Hughes, which we have recently announced to the stock exchanges. This will, now with immediate effect, initiate significant manufacturing activities in Site 4, which will represent the first commercialization at Site 4, which has been long awaited. We anticipate multiple significant product launches in Site 4 for Baker Hughes and other companies to sequentially kick in now in the very near future. Our R&D expenses for the quarter 3 of fiscal year '25, which is the current quarter, stood at INR 161 million, which is about 7% of our total revenues. We had 10 customer audits in this quarter. We successfully passed all these audits, and we have reinvigorated our collaborations with these customers and the innovators. CapEx at our Site 3+, 3++ and Site 5 is all well underway and as per schedule and on track, which represents very significant potential and possibilities for increased manufacturing assets for both the large-scale manufacturing business model as well as the contract and exclusive manufacturing business model. So with that, I'll end here. Thank you, everybody, for your time and attention this evening, and I look forward to the questions. And Kushal, back to you.

We shall now request the moderator to open the forum for question and answers.

[Operator Instructions] The first question comes from the line of Priyank Chheda from Vallum Capital.

First, on the Site 4, Baker Hughes. In this, you said that we have finalized now 2 products. Can you tell me what would be the volumes for these 2 products? And just to again reconfirm this total oil project of Baker Hughes was somewhere around 16,000 metric tons, is that right? And at an ASP of around $2.5?

Thank you for the question. But unfortunately, we will not be able to comment on the exact specific volumes and pricing for these 2 products as these are confidential in nature with Baker Hughes. But in the second half of your question, the volumes and pricing that we have conveyed are what have been conveyed by us in the original letter of intent that we had published to the stock exchanges 1.5 years ago, and those remain.

So nothing has changed since whatever the original volumes and the numbers that you had conveyed for Baker Hughes, is that right?

We have only increased our partnership with Baker Hughes, and we have only increased our collaboration across even more projects and products since then. And it's become only more interesting in the last 1.5 years.

So just to understand, when we had thought of the original communication -- again, referring back, we had thought to get this full revenue in FY '25, but now because of all the dealers that we know, should we think that this full revenue potential gets shifted to FY '26 or there would be certain more validations that are required yet to establish that FY '26, we'll see the full revenue?

The field trials and evaluations are all finished, and we anticipate that the full brunt of our work that we are doing across all products in the Site 4 will be implemented in the very near future. You should shift to the next question.

Sir, can I continue?

Maybe perhaps you can come back in the queue.

The next question comes from the line of Bhumika from Neumerc Research Lab.

First of all, I'd like to congrats the company on the great set of numbers. My primary question is, how are we planning to push the agrochem and the pharma verticals? And do we see any massive scope happening in material sciences or any other vertical for that matter?

I can take that. Thank you for the question. The pharma and the agro continue to be interesting, especially with the work that we are doing with the CRAMS players, especially in the agro business for the new chemical entities and the innovators. In the pharma world, in the generics, advanced intermediates world for our large-scale manufacturing, the demand is solidly in place. And as Rohan mentioned in his script that as the Chinese New Year ends and the industry starts over again, we anticipate an increased pricing trends to happen as well, which will be beneficial for us. And especially in the non-pharma and non-ag world of material sciences in oil and gas, which is very interesting. And as I've mentioned, we have numerous projects, including new projects that have kicked in in the CRAMS' model, which we anticipate translating into the contract and exclusive manufacturing business model in the very near future. And so I think we are very upbeat much more so on the material science, the oil and gas and the sustainability business segments that we have in terms of manufacturing potential and possibilities for new projects.

I have one more question. This was regarding Site 5 expansion, so the expansion that we've incurred, the CapEx that we've incurred. This expansion pertains to the agrochemicals segment or the pharma segment or the material sciences segment? What are we planning to -- are we planning to increase the production capacity? And which products will be increased there? Any clarity on that?

It will be a mix of large-scale manufacturing business model as well as exclusive manufacturing business model, which are the 2 primary business models that we have in production, and it will be a mix of pharmaceutical, agrochemical, material sciences and oil and gas. And so broadly speaking, the vision of the company ultimately is to have a mix of -- product mix of 25% pharma, 25% ag, 25% material sciences and 25% oil and gas majorly, and Site 5 is really our largest production site will reflect this proportion in ratio.

[Operator Instructions] The next question comes from the line of Priyank Chheda from Vallum Capital.

On the Site 4, again, project of Saudi Aramco that we had, we had targeted to do around 500 metric tons volume in FY '25 and then eventually scale it up to 2,000 tonnes over the next 2 years. Any project update on this would be helpful.

Yes. I'll take this question. We did a top line until 9 months of INR 11 crores for Saudi Aramco project, currency converted. We are looking at anticipating net financial year to close -- to reach a revenue of INR 40 crores. That's the plan and that is what we are looking at. We have one contract which we had done and commercialized that contract, which was with H.B. Fuller, and we are anticipating 2 new contracts to come in in the next financial year.

Sure. So, if I list out the number for FY '25, you said we're looking out for around INR 40 crores. Is that right?

Yes.

Okay. Okay. Okay.

FY '25-'26.

'25-'26. So the full potential for this project was around 200 tonnes at $10, somewhere around INR 200 crores. So is that something which we are looking out to reach in FY '27 later on?

Yes, INR 180 crores is the potential of revenue which we can generate out of 2 KTA plant.

Sure. Okay, okay. And coming to...

So this is a 5-year contract, right, which was signed in FY '24 until FY '29 and maturity having a 2 KTA plant. So this is a step-up buildup towards that 2 KTA, which we are targeting in FY '28-'29.

Got it. Now that is clear. Perfect. On Site 3++, so I'm sure we are ready to start the plant with the construction fully commencing by end of this financial year. And we had planned somewhere around 2 molecules in agro, one in material science as a pipeline, so that when we start, we start ramping up the production also. So any update on that, right, 3+ and 3++ would be helpful. Somewhere the production capacity was around 3,500 tonnes. Is that what remains intact or not? And then plans to reach a full potential of INR 350 crores, while should we think of reaching that potential from that plant?

So on Site 3++, there has been an interesting development also on CEM business model, so we are looking at it. Also on these 3 products, we have already completed the qualification with our customers. So either we go on the large-scale manufacturing business model or CEM is just what we are looking at. We will come to know by February end as on this direction where it is going, and we will announce that decision publicly once we make that decision.

But in terms of extension, Priyank, yes, you are correct, we will look to complete the construction of the plant by the end of this financial year. We look to stabilize this plant over the next 3 to 4 months, and then we see the full commercial production happening.

And the full revenue potential somewhere remains with the mix of the product that we plan to manufacture. The full potential remains at around INR 350 crores, INR 400 crores. Is that right understanding?

For Site 3+ and 3++?

Yes. Both combined at 6,500 tonnes, yes.

INR 300 crores.

INR 300 crores. Got it. And now coming to Site 2, which is our core manufacturing site, which is now ready to again scale up fully. What would have been the revenue contribution, say -- because we were running at suboptimal level, what would have been the revenue contribution from that plant in this 9 months, so that we get to know when we are ready for full commercial production, say, FY '25, at full utilization, what can be the revenue from this?

That is approximately INR 265 crores in 9 months.

Okay. INR 265 crores in 9 months. And this would have been running at what around 60% utilization, is that right?

Yes, it is around 60% to 65% utilization and now when 100% revocation is received, in this quarter, we will be reaching around 70% to 72% utilization levels.

The next question comes from the line of Abhijit Akella from Kotak Securities.

Just a couple. One was regarding the comment you've made regarding the expectation of some improvement in prices in China following the Chinese New Year. So if it's possible for you to please share some color about what intel exactly you're picking up from your contacts there. What's the thought process? And has anything changed in China with regard to how they're looking at their strategy in the chemical industry going forward?

So the prices have already bottomed out. We do not see further reduction in the pricing. Usually, the Chinese -- post-Chinese New Year, the Chinese strategies evolve and the companies restart afresh. And that is when the strategies and the pricing trends are decided for the whole year. So we are projecting that some changes and some corrections will happen. That's our understanding. Our teams, as we speak, are also in China, evaluating this in terms of the procurement in terms of the sales. So I think that's our understanding and that's our assumption.

Okay. Okay. And does the proposed tariffs to be imposed by the U.S. on China, does that have a bearing on any of this? Or this is independent of that in your view?

It's independent.

Okay. All right. And just the other thing I had was on the Baker Hughes contract. Since we expect that it will more or less run at close to full utilization during the upcoming financial year, so just sort of wanted to check what level of visibility we have or how far along the progress of the launches of those products has actually come along. So how much confidence can we sort of have in that projection?

We have a lot of confidence on the partnership in general. We are launching the first 2 products now, as we speak, and we anticipate the remaining products to kick in in the very near future. It is usually the [ SSA ] that is the most difficult. And now as of today, we are starting. And so with a lot of confidence and very high -- it's a very strategic partnership for us, and we have the ability at the highest level. And these are very fast-moving products, and we have confidence and a high degree of attention in this partnership and in general, and Site 4 is expected to reach full utilization very fast.

The next question comes from the line of Krishan Parwani from JM Financial.

Congratulations on a good set of numbers. Just a couple from my side. First on the gross margin improvement in this quarter. So just wanted to know, is it linked to product mix improvement? Or is there some benefit from price revival as mentioned by Rohan earlier?

I would say some, very less 5%, 7% could be contribution of the price improvement, but remaining is change in the product mix.

Okay. That's great. And so with commercialization of the Baker Hughes contract and then some volume uptick of Aramco projects, so are we expecting a similar EBITDA margin or an upward trajectory in your margin going forward?

Yes.

I mean should we assume like a 29%, 30% margin? What should we assume for the future?

Currently, for a couple of months or a year or 2, you can expect around 30% margins. And then when we have new contracts coming up, and then we will see that the margins also increase beyond that.

Okay. And secondly, on this tax rate, is there any abnormal payment in this quarter because I think it's 28%. So I think with the new facilities coming in, I remember you had mentioned that it should come down. So this 23%, 24% going for a tax rate this time?

Krishan, good question. And the major reason is that the Site 4 started in third quarter. The same stated in actually March '25, and the assets were capitalized. So this is basically deferred tax, which has increased on account of that. And the tax also, there was the assessment completed of our previous year, which is also around INR 1.25 crores, which is also added to this tax, so there is an increase. Otherwise, the tax rate is 25.168% for Aether Industries and 17.16% for Aether Specialty. This is one update this time.

Okay. So with contribution from Aether Specialty increasing, that mix would be -- tax rate could be lower than 25%, correct?

Yes, correct.

Okay. And just a last bit, in terms of your working capital, so where do you aspire it to take it to, let's say, in the next 2 to 3 years, maybe FY '27, FY '28? What's your targeted working capital there?

As a finance person and a CFO, I would like to see the working cycle of the company after 2 years to around 150, 160 days, at least.

The next question comes from the line of Ashok Shah from Eklavya Invesco Family Office.

Sir, we have increased our R&D budget. So can you elaborate so how many scientists we have recruited and what's your future plan because we have increased by almost 100%?

The company is based on R&D foundation. And so we continuously expand the R&D assets and the talent management assets that we have. We today have more than 125, 130 R&D scientists, more than 100 chemical engineers in the R&D and pilot plant and the idea is to continuously expand that and increase that. And these are on the backdrop of continuously increasing inquiries that we see from existing customers as well as new customers in the CRAMS business models. In fact, minus your -- in 2025, we do plan to take a 2x expansion of the R&D infrastructure and create an entirely new R&D wing, which will be a 2x expansion of the R&D assets and that we will start digging the hole and doing excavation for that in the very near future and the designs are also made up and that we will work in the continuous expansion. And so this trend of increased R&D expenses and expenditure, this is a continuous feature for us and the continuation.

Ashok, I would like to add something here. Last year, we spent around INR 98 crores in financial year '24 on R&D expenses. And this year, in 9 months, we are at around INR 47 crores. Where do you see double R&D expenses? Can you please explain?

No, no. 15%, I think it was percentage-wise in comparison to the revenue.

Yes, last year, it was a one-off because the revenue was down because of the fire accident, and as said, it was 15.4%. If you see current year at 9 months, it is INR 47 crores, which is 7.4% of total revenue. So we are on track which we will sustain.

Yes, yes. And sir, what's the amount of claims we have submitted for the fire accident?

INR 100 crores.

The next question comes from the line of Yash from Stallion Asset.

What is the capacity utilization right now? And how do you see that going forward overall?

The capacity utilization at Site 2 is approximately 62%, which I told before some time also. And we expect that by end of March '25 -- when the entire facility is now operational, we expect it to be around 72%. And maybe next year when everything is going okay, we do not expect it to go more than 80%, 85% because we will give 15% always in end for some kind of overhauls or maintenance. Site 3 is operating at around 50% currently, and that is not because of the production but because of the pricing pressure, which is there. And we expect it to rise up to around 65% next year.

The next question comes from the line of Bhumika from Neumerc Research Lab.

My question is regarding the exports. Now since this quarter, we were heavy on exports, there is a lot of wildfires going globally and there's global temperature uncertainties. Do we see our agrochemical exports being hampered because of that?

Bhumika, I'll take this question. No, we do not see. We are operating out of very few agrochemical products, and we have annual contracts on them or long-term contract on them. And we do not see this because they are not seasonal products. They are ongoing for approximately 8 to 10 months in a year. So we do not see any change in demand because of this event.

Okay. The other question that I had was, now we will see a decrease in our large-scale manufacturing segment and a massive increase in our contract exclusive manufacturing. So at the company level, would you say the vision for the company is to venture more into the contract exclusive manufacturing for the pharma, agro and the material sciences space?

Yes, Bhumika, that's the thought and that's the strategy of the company that we want to do more CEM business and also focus on the large-scale manufacturing business model. The large-scale in fact has not decreased. In fact, the CEM has increased. And hence, there is a pivot from large-scale manufacturing to CEM business model.

Ladies and gentlemen, Bhumika has left the question queue. And as there are no further questions, I now hand the conference over to the management for their closing comments.

Thank you, everyone. Thanks for connecting, and we look forward to connecting you post our Q4 results. Thank you.

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