AARTIINDNSEQ4 FY23May 15, 2023

Aarti Industries Limited

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Key numbers — 40 extracted

Rs 1,100

d us navigate through sector vagaries. Our EBITDA for the year ended up very close to guidance of Rs 1,100 crs for FY23. we achieved an EBITDA of close to Rs. 1,100 crore in FY23. Our Capex investment were

Rs. 1,100 crore

year ended up very close to guidance of Rs 1,100 crs for FY23. we achieved an EBITDA of close to Rs. 1,100 crore in FY23. Our Capex investment were over Rs 1300 crs. Our exports were close to half of total reve

Rs 1300

r FY23. we achieved an EBITDA of close to Rs. 1,100 crore in FY23. Our Capex investment were over Rs 1300 crs. Our exports were close to half of total revenues, while the share of value added products had

tly even in FY23. If we look at a long term journey, our Chemical Business’ EBITDA has grown over 2x during the past five years i.e from Rs. 534 crore in FY18 to Rs. 1,091 crore in the current year.

Rs. 534 crore

term journey, our Chemical Business’ EBITDA has grown over 2x during the past five years i.e from Rs. 534 crore in FY18 to Rs. 1,091 crore in the current year. This is despite several challenges witnessed duri

Rs. 1,091 crore

l Business’ EBITDA has grown over 2x during the past five years i.e from Rs. 534 crore in FY18 to Rs. 1,091 crore in the current year. This is despite several challenges witnessed during the period like pandemic

17%

financial performance. Initially, let me summarise the annual numbers. Our revenues increased by 17% to Rs. 7,283 crore, while EBITDA came in at Rs. 1,089 crore, higher by 19% over the normalised EB

Rs. 7,283 crore

ial performance. Initially, let me summarise the annual numbers. Our revenues increased by 17% to Rs. 7,283 crore, while EBITDA came in at Rs. 1,089 crore, higher by 19% over the normalised EBIDTA of Rs 919 crs

Rs. 1,089 crore

ise the annual numbers. Our revenues increased by 17% to Rs. 7,283 crore, while EBITDA came in at Rs. 1,089 crore, higher by 19% over the normalised EBIDTA of Rs 919 crs for chemical business in FY22, excluding

19%

revenues increased by 17% to Rs. 7,283 crore, while EBITDA came in at Rs. 1,089 crore, higher by 19% over the normalised EBIDTA of Rs 919 crs for chemical business in FY22, excluding the termination

Rs 919

7,283 crore, while EBITDA came in at Rs. 1,089 crore, higher by 19% over the normalised EBIDTA of Rs 919 crs for chemical business in FY22, excluding the termination and shortfall income. Profit after ta

Rs. 545 crore

mical business in FY22, excluding the termination and shortfall income. Profit after tax stood at Rs. 545 crore. Premised on strong performance reported during the year, the Board has approved a final dividend

Guidance — 20 items

Nishid Solanki

opening

“Post this, we shall open the forum for Q&A where the management will be addressing queries of the participants.”

Rajendra Gogri

opening

“Our EBITDA for the year ended up very close to guidance of Rs 1,100 crs for FY23.”

Rajendra Gogri

opening

“On the project front, we commercialised the facility for 3rd Long Term contract, and two speciality chemical process blocks at Jhagadia in H2FY23.”

Rajendra Gogri

opening

“As guided earlier, we expect the volume growth to be robust in FY24 and beyond.”

Rajendra Gogri

opening

“In FY24, we expect the volume growth to be around 25%, however due to global economic situations, a part of this might be sold into non-regular markets and hence the EBIDTA growth in FY24 would be lower than the volume growth.”

Rajendra Gogri

opening

“Based on current business visibility, our EBITDA growth guidance for FY24 & FY25 remains unchanged at 25% CAGR.”

Rohit R. Nagraj

“So which industry these complexes will be catering to?”

Rajendra Gogri

“This will be also - they intermediates going for various end useses, including both agrochemicals as well as pigments and additives.”

Rajendra Gogri

“Part of that will be internal consumption.”

Lokesh Mallya

“Can you please tell me what will be the total amount of Bank CC lines, non-fund-based lines and how much would be the utilization level as of March 31?”

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Risks & concerns — 11 flagged

Since the demerger was effective 1st July 2021, the financials for the historic period prior to the scheme being adopted (ie in October 2022) had been re-casted the requisite financials to consider the impact of demerger.

— Rajendra Gogri

As highlighted in the past, we have robust pricing mechanisms in place to mitigate the impact of such volatility, and the same is being passed on to the customers thereby protecting absolute profitability.

— Rajendra Gogri

PAT also factors in one-time impact of write back of previous periods tax provision as few matters under appeals were awarded in favour of the Company.

— Rajendra Gogri

Yes, Globally, there is a slowdown and because of the higher interest cost also, there is inventory correction.

— Rajendra Gogri

Are you also witnessing this kind of pressure in your agrochemical basket?

— Rohan Gupta

As I mentioned even in the last call, the agrochemical demand slowdown has been mainly because of inventory correction because of high finance costs, more product specific and also in some of the products we are seeing that kind of demand slowdown, but it is not across the board for all the products.

— Rajendra Gogri

So, sir, if we impose this challenge in FY '24, we are still struggling from the recovery in the consumption-led sectors like textiles, dyes and pigments, etc.

— Rajendra Gogri

But sir, end user industry demand across our end user segment still remains weak, so...?

— Rohan Gupta

I think because of the general slowdown that impact was there, but we are not seeing any increase in that currently.

— Rajendra Gogri

Currently, at least Q1, definitely, there is pressure because of the inventories.

— Rajendra Gogri

So that is where you are able to see the decline on working capital as well.

— Chetan Gandhi

Q&A — 18 exchanges

Sir, first question is, you mentioned in the presentation and in your remarks that you have commercialized two specialty chemical complexes at Jhagadia. So which industry these complexes will be catering to? Is it discretionary or nondiscretionary? And what kind of potential revenues and margins that we are expecting from this? Thank you.

Rajendra Gogri

This will be also - they intermediates going for various end useses, including both agrochemicals as well as pigments and additives. They are mostly intermediates. So directly, we will not be able to connect to top line. So, will these be for our internal consumption? Yes. Part of that will be internal consumption. Sure. The second question is in terms of the discretionary product portfolio. So, is there any change which is witnessed from Q3 to Q4? We are one month in Q1, so how has been the progress over the last few months on the discretionary product portfolio? Yes, Globally, there is a slo

My question is pertaining to the working capital and its funding. Can you please tell me what will be the total amount of Bank CC lines, non-fund-based lines and how much would be the utilization level as of March 31? That’s part A. B, what would be the total amount of debt that is maturing in each of the quarters of FY '24, both long term and short term?

Chetan Gandhi

Yes. So, the bank line, including the non-fund-based lines would be upwards of INR2,000 crore or INR2,100 crore. How much of that would be CC and how much of that would be nonfund-based and what would be the utilization? So, In certain cases, the lines are also fully fungible. It would not have a specific number because at certain banks, it's a fully fungible line between fund-based and non-fund-based. So, we'll have to assume that from an overall basis, it would be upwards, somewhere between, INR1,800 crore to INR2,000 crore of the CC based on the fungibility which is there; and the utilizati

Okay. Now my question is related to other expenses and your employee benefits. While I understand your pricing mechanism kind of protects you from a gross profit or a pass-through mechanism. But over the last few quarters, you've been mentioning that you'll have kind of built up your employee costs, both technical and nontechnical from a next league or annex growth phase perspective. And as the top line starts growing and output starts increasing, we should start seeing these numbers, both other expenses and employee costs as a percentage of sales to come down quite a bit, but we haven't seen

Rajendra Gogri

Chetan, your view on the employee costs. Yes. So, on the employee cost and other expenses, so there's a bit of an increase because of the new capacities which just came in the second half. So that's one component on that. And secondly, on the employee cost, there has been an annual provision which happens because of the employee benefits such as gratuity, leaving encashment, superannuation and the like. And there are some expenses that have increased on the other expenses i.e, certain costs related to the inland logistics on account of the volume increase, which has been there in the quarter.

Just an extension of one of the questions that were asked earlier. Could you give a little bit more colour in terms of the demand trends that you've been seeing in April and May with respect to some of your key end markets and also with respect to your domestic and export segments? The second question was you mentioned that you made sales to nonregular markets, given the demand condition and you also expect to do this in the next year as well. Could you just elaborate what exactly you mean by these nonregular markets? What could be the share of this in the overall mix? What is the margin diffe

Rashesh Gogri

Yes. The demand in domestic and export market is dependent on the segments. So, the discretionary market demand is a little bit slow still, but we have demand in the agro and the polymer market which is sustaining. As far as the nonregular markets go, they are traditionally lower margin markets, where we can put the product. So that's the market that we are capturing largely, like China or this kind of market where we are trying to push the product. In case the demand is less from our regular market, which can be Western market. Just two clarifications. So, when you say nonregular markets, you

Sir, my question is on basically on our agrochemical portfolio. If you can quantify that how much of our portfolio is catering to the products where the final products are generics? How much would be under the patented products? This question has also come in many generic agrochemical players globally have given a warning about the huge inventory-led losses and increasing competition from China that is impacting the global market. So, are we catering to any customers who are in the patented products or in generics; and what is the portfolio split? Are you also witnessing this kind of pressure

Rajendra Gogri

Yes. We'll not have exact bifurcation between the patented and generics as we have both, but still, I think overall, generic will be a majority in the value from an overall agrochemical basket. As I mentioned even in the last call, the agrochemical demand slowdown has been mainly because of inventory correction because of high finance costs, more product specific and also in some of the products we are seeing that kind of demand slowdown, but it is not across the board for all the products. So even in our portfolio, also some of the agrochemical intermediates, the demand we see that is getting

First question was on the capex side, sir, we have given a guidance of INR1,500 crore. During the last quarter and even in the plant visit, we were given a guidance of around INR1,200 crore capex. So, there's an upward revision of cost capex, which we have done now?

Rajendra Gogri

No, we will be also doing this in our zone, so combined guidance we have been having for FY '24 and FY '25, about INR3,000 crore. Okay. Because earlier, we were giving a guidance of around INR2,500 crore capex for the next two years. Now we have given a guidance of INR3,000 crore? No, even last concall also we had given INR3,000 crore. Okay. Sir, any of the basket of Aarti industries on the portfolio side, are we witnessing any sort of increased competition from China; because there has been huge dumping which is happening from China right now in many baskets of commodity and specialty chemica

Just a few clarifications. One is with regard to the specialty chemical blocks, the two of them that have been commissioned. So is this part of the INR607 crore of capex in the downstream and specialty chemicals that we had disclosed in our presentation at the plant visit. I was under the impression that these will be revenue generating. So, is that not the case? And if you could please just help us with how much capex has been invested in these two blocks? And how will those contribute in terms of either revenues or margin expansion for us.

Rajendra Gogri

Yes. That will be around INR300 crore out of that. So partly, it will be for captive and partly, it will be for outside sales. The exact number on the sales, I will not have, on that. But, I mean, in terms of, say, EBITDA or EBIT or rather the payback period on this capex, would that be a rough number you could share with us? Yes. This has been around 25% to 30% EBITDA range. Abhijit R. Akella And these are backward integration for our existing intermediates, is it? Because I don't believe we make active ingredients at this point, right? Actually, this will be one of the products on this our c

One thing, just wanted to know your thoughts on how the inventory situation right now is shaping up? What you are hearing from your customers and overall, what the outlook would be for Q1 and Q2 as we are hearing two different views from other companies that for some situation getting normalized, they are still saying that it will take another maybe one quarter. So how you are seeing this situation?

Rajendra Gogri

Yes. Currently, at least Q1, definitely, there is pressure because of the inventories. And as we mentioned, it will be progressively that I think the situation will improve, i.e., quarter-on-quarter. Okay. And it is across your agro and polymer sides? are there any scenes there? Yes, both sides basically. Okay. Secondly, on the raw material side, as we are talking about that crude has corrected in the recent time, but if we look at building prices, it has been slightly on the higher side as compared to crude. And I believe the increased demand and a bit of a demand supply shortage, would likel

Sir, first, just a clarification to Abhijit's question, you mentioned that the quarterly OP run rate will be similar to what we witnessed in Q4. But before that, you highlighted that there will still be 15% OP growth. How do both of these tie up?

Rajendra Gogri

15%? For FY '24, you mentioned volume growth can be 25%, while would be lower, but still a 15% OP growth number for '24. What is roughly. No, I think you mentioned the expense is not the profit, right? The profit, sir. So, our exit operating profit is lower. Okay. No, no. What Abhijit asked was more on the expenses side as a run rate. Okay. Got it. Sir, second is more on the cash flow side. So, if you look at the capex that you're doing and the cash that can be generated, so is it fair to assume you'll still be adding on to debt over the next 2 years? Yes. I think there will be additional debt

Sir, we have mentioned that we are looking at 15% EBITDA growth for FY '24, which broadly relays that we are looking at roughly 40% kind of EBITDA growth for FY '25. So, can you just give a brief colour on what will drive this EBITDA growth in FY '25 and what kind of volume growth are we looking in FY '25 for this kind of EBITDA growth?

Rajendra Gogri

We expect some volume, which will go to a nonregular market in FY '24, so that should get corrected by FY '25. So that will be one driver, which will be for additional EBITDA coming out of that. Over and above this, another 15%, 20% volume growth, is what we'll be looking at an in FY '25. Okay. Sir, secondly, in terms of now given that we are speaking in terms of volumes, can you give it a broad colour on how has been the volume growth for FY '23? FY '23 number, Chetan, you have? Yes. So, FY '23, the volume growth is upwards of 15%. Siddharth Gadekar So even this year, we have switched somethi

My question was in respect to the volume growth that we spoke about in FY '24 and '25. So, if you could please be kind enough to highlight the capacity, which would be adding to the growth in volumes, which we have recently commissioned over '23 and perhaps commissioning about '24. So, if you can just enlist those capacities, which will be coming up or have already come and would be contributing to the volume growth.

Rajendra Gogri

Yes. The FY ‘24, we have our Nitro chlorobenzene plant expansion that will be completed and some other specialty chemical blocks. In end of FY '24 and early FY '25, our Acid division capacity will be expanded by around 22%. ,ethylation plant tripling of capacity will happen in FY '25 and Nitro Toluene debottlenecking also will happen in FY '25. So, these are the expansions, which will come up in FY '24 and FY '25. What has been commissioned in this FY '22 and FY '23, that further ramp up in those facilities, which will drive the growth for FY '24 and '25. Understood. Lastly, just confirming th

This is Ritesh from Morgan Stanley Investment Management. Sir, I was just looking at the numbers that you guided for and then was trying to back calculate. So, when you say 25% volume growth and you say that let's say, the incremental volumes all go into a business, which probably is at a 10% lower gross margin, and let's say 40% is your blended gross margin, let's say INR25 for volume effectively goes at 30%, so it implies INR8 fall through to EBITDA and your EBITDA margins are hardly, let's say, 18%, 19%. So, the extra on INR18 EBITDA margin play, which still implies assuming your employee c

Rajendra Gogri

I think on opex, I would not have a direct Q4 number on exactly how much it was. But overall, we are not looking much of an increase in opex in FY '24 and '25 on an annualized basis. Another thing is the entire 25% is not going to go in a nonregular market. No, sir, I'm saying even if I assume your exported to nonregular market, it still implies, let's say, it's still INR100 of volume you're doing, if you're doing INR125 of volume next year and with a 30% gross margin business, you still make INR8 extra gross margin. You had about INR18 of EBITDA. It's a INR8 completely fall into an EBITDA of

I missed the opening portion of the call, so there could be a repetition. I wanted to know, let's say, considering the multiyear supply pact. So, what is the cumulative revenue that we would have booked in FY '23?

Chetan Gandhi

For the multiyear contract or the long-term contract? Yes, yes. All three long-term contracts put together. So, you are not seeing individually, but it is all three put together. I would not have that number readily with me. I will separately share it out. Okay. So the basic reason for that question was that I was trying to understand, when you are saying, sir, 25% kind of a volume growth for FY '24, then what portion of that growth is coming from the ramp-up in these three contracts? And excluding this, what is the kind of volume growth that we are building for our base business? Yes. So, the

You commented earlier that you see excess inventory in the system. So, I'm just trying to clarify, is it the products that you manufacture or the final products where your products go; where do you see excess inventory or is it there at both ends?

Rajendra Gogri

No, Actually, it goes from the ultimate customer and that back-end entire supply chain because of this high interest cost and all, and people are trying to reduce the inventory in the supply chain. That is coming more from the customer’s side’s back end. Okay. So, the products are facing excess inventory, which is causing an impact for your products demand? Correct. So, it's not -- so I'm just trying to understand, it's not at both ends. I mean not -- it's not -- that your products are also facing excess inventory and the final products are also facing excess inventory? Both are actually conne

As we have presented, we are showing a growth strategy and we are saying that we are seeing something developing in battery chemicals, electronics, chemicals and new edge. So, can you just give a broad guidance, what are the types of products, how the market share is evolving and when we will been ramping up all this capacity and revenue stream - in which year specific?

Rajendra Gogri

Yes, our existing product line, all this expansion will get over in FY '24, except the ethylation and those volumes will come up. But the new one at our zone 4 for chloro toluene and multipurpose plants, that commissioning will start from FY '25 and the major volume growth from that will come from FY '26 onwards. How is the market evolving and what are you seeing on that part? How will the demand be favourable for our company as compared to global competitors like China and XYZ? Yes, the product line, what we are putting up there. Basically, they are, in general, growing globally between 3% to

My question is what would be the asset turnover that you are expecting in FY '25 and beyond, post ramping up of the capacities.

Rajendra Gogri

Asset turnover then will depend on the benzene and toluene prices. Direct asset turnover will be more towards still, I would say, around 1.5% kind of thing, on a gross block level.

Sir, first was on to the PDA volume - we have not shared that in our opening remarks and secondly, what would be the breakup of exports and domestic for FY '23?

Chetan Gandhi

The PDA volume for the quarter is 348 TPM and FY '23 exports was roughly around 48% and domestic is 52% Just a question on your working capital. So, in this FY '23, we had witnessed that the cash conversion cycle has been almost 110 days. I think this number is close to 2016, '17 level. So, working capital has drastically gone down in FY. Is there any particular reason like there has been sharp dip in the receivables and also in inventory days also. Any particular reason you foresee and what would be the rate which we can take for the next few years? So, on the receivables, certain product pro

Thank you everyone for taking out the time to join us on our Q4 & FY23 earnings conference call. Hope we have addressed all your queries. If you have any further questions, please feel free to contact our Investor Relations team, and we will address them. Stay safe and we look forward to connecting with all of you again in the next quarter. Thank you once again.

Management

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Speaking time

Rajendra Gogri

Moderator

Chetan Gandhi

Aditya Khetan

Surya Patra

Abhijit Akella

Lokesh Mallya

Chetan Thacker

Rohan Gupta

Dhruv Muchhal

Opening remarks

Nishid Solanki

Thank you. Good evening, everyone and thank you for joining us on Aarti Industries Q4 and FY '23 Earnings Conference Call. Today, we are joined by senior members of the management team, including Mr. Rajendra Gogri, Chairman and Managing Director; Mr. Rashesh Gogri, Vice Chairman and Managing Director and Mr. Chetan Gandhi, Chief Financial Officer. We will commence the call with opening thoughts from Mr. Rajendra Gogri, who will take us through the performance overview, insights on growth plans and outlook on the business. Post this, we shall open the forum for Q&A where the management will be addressing queries of the participants. Just to share our standard disclaimer, some statements that may be made in today's 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 invite Mr. Rajendra Gogri to share his perspective. Thank you, and over t

Rajendra Gogri

Thank you, a very good evening to everyone. I welcome you all to our Q4 and FY23 earnings conference call. Hope everyone is keeping safe and healthy. We have shared our results documents and I hope that you have had an opportunity to glance through them. As all of you are aware, the financial year 2023 has been challenging from various aspects. What started with Russia-Ukraine conflict that disrupted the global supply chains transpired into an inflationary surge in input prices and energy costs. This was in addition to slowing demand in select developed markets due to deteriorating economic scenario and very recently the banking crisis in the US that sent shock waves across the globe. Amidst all this, we displayed resilience thereby demonstrating strong financial performance in a challenging external environment. This was possible due to our dynamic approach of building a superior business enterprise by meticulously leveraging our strengths in complex chemistries, products, and process

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