AARTIINDNSEQ2 FY24November 10, 2023

Aarti Industries Limited

7,854words

147turns

15analyst exchanges

1executives

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Management on call

Solanki. Nishid Solanki

Thank you. Good afternoon, everyone and thank you for joining us on Aarti

Key numbers — 40 extracted

16%

e on a sequential basis, which came on the backdrop of continued external pressures, reflected by 16% gains in absolute EBITDA compared to the previous quarter. While the challenges with respect to gl

he key performance highlights. Financials are on a consolidated basis. Our revenues increased by 2% to Rs. 1,597 crore in Q2 FY24 over previous quarter Q1 FY24. EBITDA grew by 16% on Q-o-Q basis to

Rs. 1,597 crore

performance highlights. Financials are on a consolidated basis. Our revenues increased by 2% to Rs. 1,597 crore in Q2 FY24 over previous quarter Q1 FY24. EBITDA grew by 16% on Q-o-Q basis to Rs. 233 crore in Q2

Rs. 233 crore

to Rs. 1,597 crore in Q2 FY24 over previous quarter Q1 FY24. EBITDA grew by 16% on Q-o-Q basis to Rs. 233 crore in Q2 FY24, the better EBITDA performance was a result of volume expansion with near stabilising

Rs. 12 crore

of realisation for some products. Interest cost was higher on account of revaluation loss of about Rs. 12 crore with respect to unhedged long-term loans. Profit after tax stood at Rs. 91 crore in Q2 FY24, high

Rs. 91 crore

on loss of about Rs. 12 crore with respect to unhedged long-term loans. Profit after tax stood at Rs. 91 crore in Q2 FY24, higher by 30% over previous quarter Q1 FY24. This was in-line with better operational

30%

respect to unhedged long-term loans. Profit after tax stood at Rs. 91 crore in Q2 FY24, higher by 30% over previous quarter Q1 FY24. This was in-line with better operational performance, further aide

19014 MT

the production details I will now share for Q2 FY24. Production of Nitrochlorobenzene stood at 19014 MT as compared to 20276 MT in Q2 of last year and 17293 MT in Q1 FY24. For Hydrogenation, this came a

20276 MT

I will now share for Q2 FY24. Production of Nitrochlorobenzene stood at 19014 MT as compared to 20276 MT in Q2 of last year and 17293 MT in Q1 FY24. For Hydrogenation, this came at 3136 TPM over 2558 TP

17293 MT

Production of Nitrochlorobenzene stood at 19014 MT as compared to 20276 MT in Q2 of last year and 17293 MT in Q1 FY24. For Hydrogenation, this came at 3136 TPM over 2558 TPM in the same period last year, a

7560 MT

period last year, and 2868 TPM in Q1 FY24. For Nitro- Toluene, the production for Q2 FY24 stood at 7560 MT as against 4954 MT in Q2 of FY23, and 9320 MT in Q1 FY24. Moving your attention to updates on ke

4954 MT

and 2868 TPM in Q1 FY24. For Nitro- Toluene, the production for Q2 FY24 stood at 7560 MT as against 4954 MT in Q2 of FY23, and 9320 MT in Q1 FY24. Moving your attention to updates on key projects. Our rev

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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

“While I anticipate these headwinds to persist over the next few months, we are witnessing gradual recovery quarter-on-quarter for various products.”

Rajendra Gogri

opening

“We expect the worst to be over in H1 FY24 and anticipate that it will take a few more quarters for normalised demand across various end segments/product lines.”

Rajendra Gogri

opening

“Thus we expect consequentially better performance in H2FY24 and foresee FY25 to be a normalising year considering the current pace of recovery.”

Rajendra Gogri

opening

“All the other projects including capacity increase of Ethylation & NT and introduction of Chlorotoluenes value-chain among others are progressing well and will start commissioning in a phased manner, from next year.”

Rajendra Gogri

opening

“Our target annual capex will be in the range of Rs.”

Rajendra Gogri

opening

“2,500 to 3,000 crore for the outlined growth initiatives over a two-year period, as we anticipate rapid growth for the Indian Chemical industry in the foreseeable future.”

Rajendra Gogri

opening

“However, FY25 onwards, we will see healthy accretion to earnings in a phased manner as the macro challenges eases out, on-ground demand improves and also with newer projects begin to contribute.”

Rajendra Gogri

opening

“We continue to believe that this will be a golden decade for India given its cost competitiveness, huge talent pool, growing domestic market and favourable manufacturing shift from other Asian/ western countries.”

Rajendra Gogri

opening

“With this promise, we will be able to enhance value for all our stakeholders.”

Risks & concerns — 15 flagged

While the challenges with respect to global inventory destocking, high interest rates, recessionary trends across various end-markets, slowdown in export markets and geopolitical tension persists, we witnessed some recovery on Q-o-Q basis.

— Rajendra Gogri

— Chetan Gandhi

Rajendra Gogri mentioned, so we are doing better there where the demand is coming back, I think we are seeing some margin improvements, whereas some drag in agro, pharma and markets I think we are seeing.

— Chetan Gandhi

And FY25, it will be difficult to give guidance now, but I think our general guidance earlier was Rs.1,700 crore.

— Rajendra Gogri

So, we see that at least 5% to 15% is the maximum decline over that number.

— Rajendra Gogri

If you can share your thoughts on the overall competitive intensity, the demand slowdown as well as intensity especially from China and are there any new capacities coming in or shutting down, your thoughts please?

— Rajendra Gogri

Because what we believe is that US and Europe for these markets, continue to remain weak.

— Aditya Khetan

I will not get into details, but some of the products what we see, some pressure is there in the demand, but overall, as a company as a whole, that's not a very big output.

— Rajendra Gogri

At this point of time, it will be a bit difficult to work on the net debt basis because we still have a lot of areas to look into such as the raw material prices, have started moving up, the impact of that you will have to be evaluated and seen.

— Rohan Gupta

Putting a number at this point of time would be a bit difficult.

— Rohan Gupta

No, basically the impact of this Chinese competition increase is already there.

— Rajendra Gogri

So sometimes this decrease in local sales maybe is also because of the downstream pressure especially in the agrochemicals side, where our customers buy the product locally and then make the product and export.

— Rajendra Gogri

It becomes difficult with too many products at two different prices, but overall in general, the volumes across the board we will see growth.

— Rajendra Gogri

If you could just explain on the sequential decline of 17% that you're seeing on the domestic side, which end users would have been the key contributors there?

— Nitesh Dhoot

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Q&A — 15 exchanges

First, if you could just touch upon the demand trends that you're seeing in October or this quarter for your end markets, I just want to get a sense which sectors are actually seeing the biggest recovery, and which are the sectors which are being the biggest drag? And secondly, sir, I think you mentioned in your opening remarks that you're starting to see some ASP stabilization in some products. So, just from either an ASP or a margin perspective, if you can just talk about how it has moved on a QoQ basis between your regular and your non-regular markets, that will be very helpful? Yes, overal

Vivek Rajamani

Just one small clarification. This margin improvement that you're seeing in discretionary segments, is that coming both from your regular markets and your non-regular markets? I would say on both.

Just on the margin point, a little bit longer, so the sequential increase in margins, what exactly would that be attributable to -- is it that there's been some favorable shift in product mix or is it expansion spreads in some of our base products itself or is it inventory gains on benzene for example, what exactly might it be, and can we

Rashesh Gogri

expect this to sustain into 3Q and 4Q as well the same level of margins going forward? Yes, product mix also is a factor where more, on a higher margin, product sales are there. Specific product-to-product where some demand increase, stabilization is taking place, there is some sort of a margin increase, is also what we have observed. So, in general as the demand also starts recovering, we see that some margin benefit is also starting to accrue. We are seeing recovery in our traditional markets and so this is not a dumping market that non-traditional market where we are seeing improvement, we

The first question is on the first contract. So, we were planning to change the structure of the plant so that we can manufacture something else from the dedicated plant. So, are there any more new things that we have worked on? Is there a possibility that next year we will be able to at least use part of that plant for manufacturing any new products, so, any thought process on that?

Rajendra Gogri

We have not taken any firm decision on that yet. We are still evaluating the possibility of using it for the same product. As I mentioned earlier also, maybe it's couple of more quarters that we will need for us to know whether we should partly use it for some other products or something, that call has not been taken yet. Second question is in terms of our guidance, so this year we are planning to reach about Rs.1,000 crore, next year, Rs.1,700 crore minus something. So, from 1,000 to 1,700, what could be the increase from the base set of capacities that we are currently having? What could be

First question is on the global demand as well as supply scenario. If you can share your thoughts on the overall competitive intensity, the demand slowdown as well as intensity especially from China and are there any new capacities coming in or shutting down, your thoughts please? As we mentioned that global demand is gradually recovering and we see the next two, three, quarters, there will be demand revival and obviously because of the Chinese economy also going slow down, in general the Chinese competitive intensity has increased in last few quarters. But as the global demand improves, we se

Ankur Periwal

Any change in the global supplies’ capacities there? No significant new changes. Secondly, on the pricing bit, there has been volatility across the pricing for our products. Do you believe, more or less, that there is stability now or probably looking at maybe October or the recent trends, that price volatility still remains? Generally, in prices, we have a raw material pass-through. Raw material volatility is not impacting much. Generally, a little bit margin improvement, as already mentioned in earlier question, for some of the products we have seen. Lastly on the CAPEX, so around Rs. 1,200-

My first question is, sir, when we were listening to all the global and domestic agrochemicals and the pigment companies, most of the companies have given out a very weak guidance on to the demand side and most of them have also shifted the improvement in demand outlook towards the first half of the next calendar year. So still sir, we have witnessed an improvement in volumes and margins. So just want to know the disconnect between the global commentaries and our improvement in volumes. Yes, basically, we have a very wide spread of products and wide end use market that kind of helps us to put

Aditya Khetan

And then on the volume improvement on quarter-on-quarter basis into the NCB and into the hydrogenation business, which are the major geographies wherein we have increased our exports? Because what we believe is that US and Europe for these markets, continue to remain weak. So which are the markets that have shown an uptick in terms of your volume growth? Yes, we have been exporting to various markets including China, other Asian and European countries also. We are a very, very well spread geographical baskets. Any specific geographies which have witnessed an improvement, that's what I wanted t

First question is on our end user industry wise growth, which we have seen on a QoQ basis, in volumes. I understand that global agrochemicals are still challenging. Can you give some sense that which were the end user industries which have given a sharp growth and how has been the agrochemicals industry growth for us?

Rajendra Gogri

Yes, agrochemicals are continuing to be challenging, but on polymers and additives and dye stuff side and all, we have seen growth. Sir, any ballpark number, end user like how much was agrochemicals’ degrowth and what kind of volume growth would have seen in polymers and additives, a very ballpark number? industry wise, That number we will not have readily available. Sir, we have seen that the crude oil started going up and that may have some follow up impact on benzene prices as well. Have you seen any kind of improvement so far in our margins because of low raw material cost benefit or do yo

Over this first half a reasonable control has been there on the staff cost and other expenses. So, on the other expenses, barring the reduction in power cost, any other factor which is contributing?

Rajendra Gogri

Freight is the major component of the other cost. Sir, are there more opportunities to optimize staff costs and other expenses for us going forward? Yes, as we had mentioned earlier also, the operating leverages and everything will kick in and will be more or less stabilizing on our employees’ level. Some more optimization may happen. Sir, is there a volume growth number that you have in mind for next year that the business can overall deliver? It becomes difficult with too many products at two different prices, but overall in general, the volumes across the board we will see growth.

in polymer and dyes and pigments ahead of First is on the volume growth on the industries where we are seeing the recovery. It is that they are now getting the favorable days because I think the destocking phenomena started the agrochemicals. Rising crude price is also driving the restocking because this year, the prices may remain high. Is that what we are seeing or do you see there is a strong underlying demand recovery because if you look at the pigment rise in sales or the textiles that doesn't show the optimism we are sharing on the volume side of it? Yes, I think once the inventory kind

Sanjesh Jain

But my whole question was on our confidence of CY25 having the strong volume recovery, if it is a restocking-based volume recovery without underlying completely recovering, are we still very confident of the volume delivery? Yes, the volume degrowth this year also is also substantially driven by inventory correction, if you see FY24, the amount of volume degrowth has taken place and some demand increase underlying also, but it will be still mainly that inventory correction related degrowth which will be coming back. My last question is on the margins. Are we sitting on any of the inventory gai

So, just trying a bit on the margin front. Earlier sir, we used to sort of give a split of our five blocks wherein we used to operate wherein we used to classify chlorination and nitration, more of commoditized products and the hydrogenation, ammonolysis and halex chemistries, i.e., more of specialized kind. And the split used to be somewhere close to 80:20, 80 favor of specialty of course. Would it be safe to assume that maybe in the first half, we have experienced more of specialty products in the mix and the inferior margin products are not a part of the current sales, which is why we have

Rajendra Gogri

So that were not specialty, what we call a value added. In general, the value- added’s percentage is increasing overall. So that value-added percentage increase in EBITDA margin to sales in general. So, that is where the impact comes. So, we have seen that impact, got it. Sir, just another confusion that I had on the CAPEX front, we have mentioned that Rs. 1,200-1,300 crore of CAPEX for this financial year and Rs. 2,500-3,000 crore of CAPEX, would that be on the top of this, would this be FY25 and FY26 or the current Rs. 1,200-1,300 crore part of this Rs. 2,500-3,000 crore CAPEX? Yes, current

So, my question is with reference to one of your products which goes in for Octane boosters. So, if you could explain the demand for this particular product and is it part of any contract, long or short term or how sustainable is the ongoing demand that we are witnessing there.

Rajendra Gogri

It's a growing product. We see the kind of demand what we have seen, we should be able to sustain and maybe grow also, and this product is also for other end use also. So, ex of this product, has there been significant growth in the other exported products also or this has been one of the drivers if I may ask? Yes, there is a growth in the other also and this one also is a substantial part of it. Lastly, on the sunset review on MPDA, just trying to understand if MPDA's contribution in the overall revenue is anything significant or even non-acceptance of this review by CBDT would impact us in a

Sir, following on the previous caller's question on one of the key products that our export growth has been good, any key reason why we are gaining market share on this particular product - is the competition slow, if you could just give us help us understand reasons why we are having a good traction on this particular product?

Rajendra Gogri

We're trying to spread our market base and develop newer markets for these products. But primarily any particular end-market segment this product that goes into? It is a specialty product going into different end uses. Sir, if I see your domestic and export run rate, our exports are more or less holding around Rs.800 crore run rate mark, whereas our domestic realizations have come from Rs. 950-odd crore to 750 crore. Now, we understand that let's say pricing is actually coming down and exports is the only one that is holding. If agrochem is not doing well globally, is it that dyes and other ma

Sir, two clarifications. One, our fixed contract revenue that from unit-II and unit-III, so what was the total contribution of the two units?

Rajendra Gogri

This contract-III as mentioned is more stabilizing and contract-II the way it is structured that the EBITDA is not directly connected to the sales. I understand this is a fixed EBITDA, but what portion of it is currently contributing to our total either in revenue or EBITDA that I wanted to understand? That number we will not have readily available right now. Secondly, when we say that FY25 we'll see the normalization of business, so exactly what kind of growth normally we consider, I understand this would be a gradual improvement there, but is there any number in our mind that we are expectin

Sir, on the Nitro Toluene side, volumes have fallen on our QoQ basis. So, is it because of our ONT, OT chain not doing well and that's why we have restricted production and sales of NT or it's because of the PNT and the other products which come along with the production of NT and those products not doing well, that's why we have restricted the production of NT in this quarter?

Rajendra Gogri

It's more related to agrochemicals side demand. We have taken some shutdowns also, so production was impacted. Sir, was there any restrictions on the sale of Metalochlorine in Europe, predominantly in France and because of which probably the demand restriction or demand fallen would have happened on the OT chain, is this a right understanding on the fall in the volumes for NT? No, I'm not aware of any restriction in those geographies. On the Nitric Acid side, the prices have fallen, so last year the prices were very high So does the raw material benefit of the fall of those nitric acid prices

It's more or less substantially on a regular market. Non-regular will be more about 10%. Siddharth Gadekar: Because we had highlighted that in the non-regular markets, our margins would be 10 percentage points lower, but despite some higher exports, our margins have improved substantially. So, is there any particular reason behind that?

Rajendra Gogri

So, the non-regular market margins are generally lower, so that impact is there. That is what we will see that once we move towards more regular markets that benefit is going to accrue in future.

Thank you everyone for taking out the time to join us on our Q2 FY24 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. We look forward to connecting with all of you again in the next quarter. Thank you once again.

Management

Speaking time

Rajendra Gogri

Moderator

Surya Patra

Chetan Gandhi

Nitesh Dhoot

Krishna Kumar

Nirav Jimudia

Abhijit Akella

Ankur Periwal

Aditya Khetan

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Opening remarks

Nishid Solanki

Thank you. Good afternoon, everyone and thank you for joining us on Aarti Industries Q2 FY24 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. Call with opening thoughts from Mr. Rajendra Gogri, who will take us through the Performance Overview, Progress on the 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 a standard disclaimer: Certain statements that may be made in today's call may be forward-looking in nature and the disclaimer to this effect has been included in the “Results Presentation” that has been shared earlier and also uploaded on stock exchange website. I would now invite Mr. Rajendra Gogri to share his perspectives. Thank you and over

Rajendra Gogri

Thank you. Good afternoon and a warm welcome to everyone present on the call today. We are here to discuss Aarti Industries’ Q2 FY24 earnings. Firstly, festive greetings to each one of you. I would like to take you through the performance, update on growth initiatives and strategy. We have exhibited strong resilience and delivered robust performance on a sequential basis, which came on the backdrop of continued external pressures, reflected by 16% gains in absolute EBITDA compared to the previous quarter. While the challenges with respect to global inventory destocking, high interest rates, recessionary trends across various end-markets, slowdown in export markets and geopolitical tension persists, we witnessed some recovery on Q-o-Q basis. In light of this situation, I believe our teams have displayed remarkable agility to swiftly navigate to products that are experiencing a more favourable demand scenario. This was possible due to our comprehensive understanding of the market conditi

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