Aarti Industries Ltd

NSE:AARTIIND

Earnings Call Analysis

Aarti Industries Reports Strong Growth Amid Challenges

In Q1 FY '25, Aarti Industries achieved significant growth despite global challenges. Revenues increased 3% QoQ to INR 2,012 crores, with a 10% rise in EBITDA to INR 311 crores. The company's long-term contracts remained stable, while new applications in pharma and polymers showed promise. An impactful joint venture with UPL is set to bring in substantial revenue by FY '27. Project expansions and strategic transformations position Aarti Industries for continued success, targeting a 20%-25% CAGR EBITDA growth over the next five years.

Aarti Industries: Navigating Through Challenges with Growth

In the latest earnings call, Aarti Industries Limited (AIL) reported a revenue boost, achieving INR 2,012 crores, which reflects a 3% increase quarter-on-quarter and an impressive 28% increase year-on-year. This growth was primarily driven by a 6% uptick in volumes compared to the previous quarter and over 30% year-on-year. EBITDA also showed substantial improvement, rising 10% from the previous quarter to INR 311 crores while marking a striking 55% increase year-on-year.

The Market Landscape and External Pressures

Amid these positive results, AIL acknowledged persistent challenges in the global macroeconomic environment, particularly due to increased competitive pressure from Chinese manufacturers. The company's operational margins have been under pressure because of this, especially within non-discretionary sectors like agrochemicals. However, AIL’s leadership remains optimistic about a volume-led recovery this year despite the pricing headwinds.

Strategic Joint Venture: A Key Development

A significant highlight from the call was AIL's decision to forge a 50-50 joint venture with UPL, aimed at producing key chemical products. Both companies will invest approximately INR 150 crores each into the venture, which is projected to generate peak annual revenues between INR 400 to 500 crores once operational by Q1 FY '27. This move is seen as a crucial step in boosting AIL’s competitiveness within the chemical sector.

Leadership and Organizational Changes

Adding depth to its leadership, AIL welcomed Mr. Suyog Kotecha as the new CEO. His extensive experience in strategy and business transformation in the chemical industry positions him to steer AIL through its ongoing challenges while exploring new growth avenues.

Investment and Capital Expenditure Outlook

For FY '25, AIL is maintaining a capital expenditure guidance of INR 1,500 to 1,800 crores, with approximately INR 270 crores spent in the first quarter alone. The focus remains on completing critical projects like the nitrotoluene and ethylation facilities and enhancing the chlorotoluene product line. AIL plans to ramp up capacity utilization to about 50% in the current fiscal year, potentially reaching 70-80% in the following year.

EBITDA Guidance: Cautious Optimism

Despite promising demand signals, AIL's management expressed caution regarding full-year EBITDA guidance. The initial target range of INR 14.5 to 17 billion has been revised, as uncertainties surrounding pricing volatility and competition remain high. Management aims for a compounded EBITDA growth rate of 20-25% over the next five years, which they see as achievable through effective execution of their expansion plans and strategic partnerships.

Conclusion: A Balancing Act for the Future

Overall, Aarti Industries is navigating through a complex landscape marked by competitive pressures and strategic changes. While the basics of revenue and volume growth are solid, the pressure on margins and the necessity to adapt to market volatility will be pivotal in determining AIL's future trajectory. Investors should monitor these dynamics closely, as the company's ability to deliver on its ambitious growth targets and manage operational challenges will ultimately shape shareholder value.

Earnings Call Transcript 2025-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Aarti Industries Limited Q1 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Nishid Solanki from CDR India. Thank you, and over to you, sir.

[Nishid Solanki]

Thank you. Good afternoon, everyone, and thank you for joining us on Aarti Industries Q1 FY '25 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; Mr. Suyog Kotecha, Executive Director and Chief Executive Officer; Mr. Chetan Gandhi, Chief Financial Officer. We will commence the call with opening thoughts from Mr. Rajendra Gogri followed with highlights of the quarter being shared by Mr. Kotecha, post which, we shall open the forum for Q&A, where the management will be addressing queries of the participants.

Just to share our standard disclaimer. Certain statements that may be made in today's conference call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation, which has been shared with you earlier.

I would now like to invite Mr. Gogri to share his perspectives. Thank you, and over to you, sir.

[Rajendra Gogri, executive]

Thank you. Good afternoon, everyone, and welcome to our earnings call. I hope you all would have gone through the quarterly update presentation, which was uploaded on exchanges earlier today. As you would have noted, we continue to deliver yet another quarter of sequential growth. This performance came despite pricing headwinds as well as supply chain pressures.

Additionally, continuous global challenges from overcapacity in China affected demand-supply dynamics. Nonetheless, we remain focused on execution and anticipate a volume-led recovery this year. Recognizing this evolving market landscape, we have undertaken a strategic transformation. In addition to strengthening our senior leadership team, we have 4 strategic partnerships to offer, customized solution from concept to commissioning stage. Our goal is to deliver sustainable growth while maximizing our potential.

Today, we are a future-ready organization committed to exceptional customer value. Now, let me share a few significant developments from the past quarter, the first one being landmark achievement wherein we took a promising leap by entering a 50-50 joint venture with UPL. This JV is a first of its kind and pathbreaking development that builds on the synergies and competencies of 2 leading Indian chemical companies to support the manufacturing of critical chemical products in India.

We have a very long-standing relationship with UPL, and this JV enables us to combine our individual strengths to create globally competitive businesses. We believe that such unique collaboration between Indian chemical players will contribute to the growth of the Indian chemical ecosystem. The JV, that is Augene Chemical Private Limited, shall engage in supplier downstream derivatives of amines that have a diverse application in agrochemicals and paints.

Both the companies are expected to invest about INR 150 crores each to this JV over the next 2 years. The commercial supplies are expected to begin by Q1 FY '27, targeting peak annual revenue potential of about INR 400 crores to INR 500 crores within the next 2, 3 years.

Further, as our endeavor to bring in quality leadership with high engaging professionals leading the key functions of AIL, I'm delighted to have Mr. Suyog Kotecha joining us as Executive Director and Chief Executive Officer of Aarti Industries Limited. Suyog joined our team on June 17, bringing with him extensive expertise in strategy, innovation and business transformation. His profound understanding of the chemical industry through his past experiences at Reliance Industry and McKinsey, et cetera, and global connection make him the ideal leader to guide AIL towards a successful future.

In addition to overseeing Aarti's current operation, he will be instrumental in spearheading new growth opportunities. I warmly welcome him and would request him to share more about the business and the quarterly update to you. Over to you, Suyog.

[Suyog Kotecha, executive]

Thank you, Raju-bhai. Warm welcome to all of you who have joined this call. I feel honored to be part of the AIL family and to be associated with you all. Let me start with our performance for the quarter under review, and then, we'll follow that with evolving macro situation.

As you would have noted, on most performance parameters, we were able to deliver Q-on-Q sequential growth. Our revenues for the quarter were around INR 2,012 crores, 3% higher on Q-o-Q basis, 28% higher on a Y-o-Y basis. Volume growth on Q-o-Q basis was about 6%, while on Y-o-Y basis, it was over 30%. We also witnessed our EBITDA to grow by about 10% on Q-o-Q basis to INR 311 crores, registering over 55% growth in Y-o-Y terms. Higher volumes led operating leverage with favorable product mix was a major contributor to this EBITDA growth. Depreciation/interest cost remains higher on the back of capitalization of projects, and it's in line with the prevailing interest rates. PAT overall was reported at INR 137 crore, higher by almost 4% Q-o-Q basis.

Coming to macros, I think the global macro environment still remains challenging with Middle East tension's linked Red Sea disruptions. They continue to post challenges. We have been witnessing positive demand momentum in key new applications like pharma, polymers, additives, dyes and pigments.

Even agrochemicals, there are small green shoots of demand recovery. However, pressure on margin remains, and it's mostly driven by Chinese competition, which continues to dump products in global markets due to their domestic overcapacity situation. Further, energy as an application has become relatively large application for us, which is bringing additional volatility to the business performance, as it is linked to external factors like crude, gasoline cracks, naphtha cracks, which have their own element of volatility. At the same time, let me also state that our long-term -- all -- most of our long-term contracts continue to deliver both volumes and margins within the expected range.

Coming to key production data, NCB, nitrochlorobenzene production volumes stood at 19,503 metric tonnes versus 17,293 in Q1 FY '24 and 17,646 in Q4 FY '24. Nitrotoluene saw production of 7,637 metric tonnes against 9,320 in Q1 FY '24 and 6,675 metric tonnes in Q4 FY '24. And hydrogenation output stood at 3,428 tonnes per month in the current period compared to 2,868 in Q1 FY '24 and INR 3,389 in Q4 FY '24. So on most of the products, I think we saw a sequential volume growth on a Q-on-Q basis.

Coming to project updates, I think all major CapEx projects remain on track. Our acid unit expansion got commissioned in the last quarter. We are on track to commission our expanded nitrotoluene and ethylation capacity towards the end of current quarter. We will also commission our new pilot plant at Zone 4 within this quarter, which will support in accelerating commercialization of new products developed with in-house R&D and technology.

The larger CapEx program at Zone 4, the new greenfield site, is progressing as per plan. We are expecting to phase-wise commission that from next financial year. From overall capital expenditure point of view, we had projected INR 1,500 crores to INR 1,800 crores in the financial year. And in Q1, we have already spent INR 270 crores. On-time completion of all of these projects will fortify our stance within the global chemical value chain and will also support higher volume requirements from our customers going forward.

Before I conclude and we move into the Q&A, let me say that we remain focused on delivering sustainable growth over mid to long term. Our goal, as stated earlier, is to deliver 20% to 25% CAGR growth in EBITDA, which if you take a 5-year view, then it's almost 2.5x, 3x growth in EBITDA. And to deliver this, broadly, there are 3 things we are focusing on. First one is on time at cost execution of all of our expansion projects. We will be adding a sort of completely new series of products based on our chlorotoluene value chain and also from multipurpose plant and Zone 4. This will also broaden our product portfolio by going more downstream in existing value chains.

Second theme is around leveraging our cutting-edge R&D and technology development capabilities to make investments and build portfolios in new sunrise sectors, which have significant growth potential over the coming decades, likes of circularity, renewable battery chemistries or link technology.

And the third and maybe one of the most important themes around retaining and nurturing the existing culture of founders' mentality and value orientation of care, integrity and excellence. I think this has played a very critical role in AIL delivering significant growth and also shareholder value over last 2 decades. And as a relatively young organization with an average age of 32 years, we not only plan to retain but nurture this and operate with the same ethos, which will deliver growth over mid to long term.

I think that concludes our initial remarks. We'll now request the moderator to open the forum for question-and-answer session.

[Operator]

[Operator Instructions] The first question is from Vivek Rajamani from Morgan Stanley.

[Vivek Rajamani, analyst]

All the very best to you, Mr. Kotecha. 2 questions from my side. Just with respect to the demand trends that you've seen so far and the conversations that you're having with your customers, do you feel that you can deliver the higher end of your EBITDA guidance of INR 17 billion that you have given for fiscal '25? And what factors do you think going forward would be critical for that? That's the first question.

[Suyog Kotecha, executive]

So look, I think when it comes to performance and expectation for this year, as I've been saying, even in some of the morning calls, we have to segregate demand and margin. I think on demand trend, we are pretty confident of delivering growth in the range of 20% to 30%. And this is coming with a combination of commissioning of some of the new projects as well as better capacity utilization in some of the existing product chains. So that story remains very robust.

I think -- but on margins, I think the story is different. I think the pressure from China is actually not sort of going away. And we have seen that across broader product portfolio, not in a specific chain, but across broader product portfolio, the pressure on margin is still very intense. And that, coupled with the volatility that is coming from energy application, which is now forming a decent part of our portfolio, I think, makes it difficult to commit on sort of the EBITDA guidance for the year. I think we would like to watch out, especially the margin trends over the course of the next 2, 3 months before we commit on EBITDA guidance for the full financial year.

[Vivek Rajamani, analyst]

Sure, sir. That's clear. And just as an extension to that. I think a few quarters back, when we were in the midst of the extremely difficult demand conditions, I think, you had mentioned in the calls that you've had to kind of rely on maybe your not -- Tier 2, Tier 3 customers. Basically, the customers, where your pricing power is obviously not as great, and they would not be your regular customers, just wondering, given that you've started to see demand green shoots come through from across the board, just wanted to get a sense if you've been able to go back to your more normal customer profile or do you think you're still having to rely on such a Tier 2, Tier 3 customers to kind of push volumes?

[Suyog Kotecha, executive]

Yes. So look, I think the story is different value chain by value chain. Yes, broadly speaking, as we see demand recovery on many of the end-use markets, we prioritize our sort of Tier 1 customers in those chains. There are some chains where tactically, we may still have to go back to Tier 2, Tier 3 customers, sometimes including that in China.

And that decision, we continue to take on a month-on-month basis to optimize our inventory and production patterns. So overall improvement, and I think the share of Tier 1 customer volumes, increasingly, we will see going up, but I would say the problem has still not completely gone away.

[Vivek Rajamani, analyst]

Sure, sir. And just 1 last clarification. Would it be possible to give any rough sense of how much these Tier 2, Tier 3 customers would be making up of your portfolio? I know it's very dynamic, but any rough sense would be possible?

[Suyog Kotecha, executive]

Frankly, difficult to comment, right? I think from product by product, the percentage will change. Even month-on-month, we see a different volatility. Maybe we can go back and do a detailed analysis, but at off hand, it's difficult to give that number.

[Operator]

The next question is from Abhijit Akella from Kotak Securities.

[Abhijit Akella, analyst]

Welcome to Mr. Kotecha. So from my side, just to understand this commentary about the pricing headwinds and the overcapacity from China, are there specific categories of ours where these pressures are more apparent? Or is it pretty much across the board, across the NCBs, nitrotoluenes? Just sort of hoping to understand that a bit better.

[Suyog Kotecha, executive]

So I think the pressure on pricing from Chinese capacity is across the board. It is much more aggravated in the [indiscernible] from an application standpoint. But the pressure is there even in other segments. I think the intensity of the pressure [indiscernible] being most sort of impacted. But given their overcapacity across broad range of sectors, I think it remains throughout the portfolio. And I think it's got nothing to do with [indiscernible] broader chemical industry is struggling with this issue, and we continue to figure out how to address this challenge. But I hope that gives you a sense in terms of intensity of pricing pressure.

[Abhijit Akella, analyst]

Yes, sure. No, that's helpful. And then on the sort of EBITDA outlook for the subsequent periods, while I understand it's hard to commit on the full year at this point. At this point, given that half of the second quarter is behind us, more or less, should we expect more or less a similar kind of number or are we seeing -- I mean, could we just expect some modest sequential improvement? Is that how we should think about it for 2Q?

[Suyog Kotecha, executive]

Look, we would have loved to give you better clarity, but the situation is actually quite volatile and dynamic. I think the 2 aspects which we would again reemphasize that we need to start appreciating is, one, overall volume on a Y-o-Y basis, we will continue to see a decent amount of growth, right?

Pricing pressure from China sort of will continue to remain. I think the biggest unknown factor for which we need to get a better handle on is energy application, given it's also a new application for us. And there, I said, one is the linkages to the external factor, which is the gasoline/naphtha cracks and the food pricing, which is -- historically hasn't impacted us that significantly, but going forward will impact us.

And there's also a bit of a seasonality expected, right? Gasoline is ultimately a seasonal business across different geographies. So we're just watching out, and we are learning more about this particular application. And with experience, we will be in a better position to give you guidance.

[Abhijit Akella, analyst]

No, that's fair enough. Just if I may, on the energy segment itself, these gasoline/naphtha cracks, do they impact sort of the demand for the products we are selling, which, I presume, are primarily fuel additives, but -- or is it more on the spread side? Where exactly is sort of the volatility creeping in?

[Suyog Kotecha, executive]

Listen, there are 3, 4 different applications of the fuel additives, right, whereas sort of 1 particular application is in sort of cargo blending, which is sort of different grades of gasoline and sort of finishing of those different gasoline grades. There's a particular application around upgrading the overall different cuts that you get from refineries, including that of naphtha and gasoline.

And the third one is on the refinery optimization itself. And this all 3 applications get impacted differently depending on how the upstream markets are moving. So yes, even naphtha/gasoline cracks does impact the demand for this particular product because depending on the incentive available to upgrade certain qualities of naphtha to make them ready for lending into gasoline will be determined by the naphtha/gasoline crack at that particular point in time. So it does impact the demand for this particular product.

[Abhijit Akella, analyst]

Got it, sir. Maybe just 1 last thing if you'll allow me before I get back in the queue. Just in the context of the situation in Bangladesh, from your sort of customer conversations, is there -- what's the situation like in the dyes industry, which is another important release application for us?

[Suyog Kotecha, executive]

So we don't have direct exposure to Bangladesh or any significant exposure to Bangladesh. So right now, we are not seeing any risk from the particular events happening in Bangladesh. And I think the exposure is less than 1% of total business portfolio. So no major risk seen so far.

[Abhijit Akella, analyst]

But on the dyes industry overall, is the environment more uncertain at this point because of this or not really?

[Suyog Kotecha, executive]

At this point in time, we haven't seen any indication from our customers, right? We'll continue to watch out for it, and we are in conversations with our customers. I think the events have also happened very recently. But so far, we haven't got any feedback from customers, but we continue to monitor it and see if there will be impact going forward.

[Operator]

The next question is from Nitesh Dhoot from Dolat Capital.

[Nitesh Dhoot, analyst]

Welcome on board, Mr. Kotecha, and wish you all the best.

[Suyog Kotecha, executive]

Thank you.

[Nitesh Dhoot, analyst]

So my first question is -- if you could just elaborate on the sequential decline in other expenses to around INR 281 crores from INR 319 crores despite the increase in volumes that we've seen, especially on the export side? So in the previous quarter, Q4, that is -- I mean, the reason for higher OpEx given out was the Red Sea-related freight cost increase. And freight cost increase -- freight costs have only increased further in Q1. So what explains the decline in OpEx?

[Chetan Gandhi, executive]

Yes. So -- Nitesh, this is Chetan here. So some of the annual costs, which were there in Q4 related to employee benefits and other stuff, would not be there in Q1. So that is 1 component. And in some pockets, the freight rates have been lower. So if you would have looked at it, we've got a bit of increased share of business with Middle East Asia, where the incidence of freight on an average is a bit lower as compared to other parts of the world. So that is where you will see some changes which is happening.

[Nitesh Dhoot, analyst]

Okay. All right. And secondly, sir, I mean, what explains the fluctuation on the gross margin from quarter to quarter? Even in the last 3 quarters, that is -- since we started executing the long-term contracts, so 41% going to 46%, coming back to 40% and again 38%. Prior to that, if I look at the entire FY '23 and first half of FY '24, the gross margins were largely stable in the 41%, 42% range.

[Suyog Kotecha, executive]

So I think it's a combination of multiple factors. If you look at it from a key raw material point of view, benzene, aniline being 2 of the largest raw material for us, there has been some volatility. We have seen prices going up for benzene and aniline on a Q-o-Q basis as well as on Y-o-Y basis.

Even in terms of our final product mix and geography mix, as Chetan mentioned, there has been substantial churn, our geographical footprint has changed from an export point of view, and our product mix has also changed quite significantly. So I think overall portfolio has become a bit complex. And given some of the part of the portfolio is linked to volatility in the external market, I think you will see variation. But over the period, as we understand this dynamic much better, there will be clarity whether these are seasonal or fewer Q-on-Q variation. It's a combination of raw material product mix and our geographical footprint.

[Operator]

The next question is from the line of Archit Joshi from B&K Securities.

[Archit Joshi, analyst]

Sir, my first question is on our model of the pass-through mechanism that we used to enjoy. I think we used to maintain our EBITDA per kg or EBITDA per tonne. And currently, given the comments that you have made earlier that we see a good volume growth visibility, the suppression in margin is something which is kind of holding us back to give a premature full-year guidance on EBITDA. So has that construct changed at all that we are unable to maintain that absolute EBITDA on the products we are selling? That would be my first one.

[Suyog Kotecha, executive]

I think there on benzene downstream, we have decent amount of portfolio where we have a pass-through pricing mechanism, and we are able to retain that. On aniline downstream product portfolio, I think some part of it is linked to raw material, some part of it is not linked to directly raw material, where we take market exposure. And that's where I think some of the volatility comes in.

[Archit Joshi, analyst]

Sure. Understood. Sir, secondly, the contracts that we have signed earlier, I think the one that we had with SABIC, and then, there was a third one with an INR 90 crore to INR 100 crore annual sales exposure towards. Has there been any change on those accounts? Are we realizing the full potential of that? If you can comment something on that, please.

[Suyog Kotecha, executive]

So I think both these contracts continue to do very well. In fact, the contract with SABIC has ramped up quite significantly. I think indication of demand from their side start of this calendar year versus now, there has been significant improvement. I think the plant is running at full capacity now.

From an EBITDA point of view, it does not make much difference given the nature of the contract we have with them. But it just shows us confidence in terms of actual pickup in demand as far as polymer end application is concerned. The other contract that you talked about also, I think whatever was expected from a revenue potential and a volume potential point of view, the current trajectory is we are on track in terms of revenue and volume expectation as part of that contract.

[Archit Joshi, analyst]

Sure, sir. Sir, the next few projects that we are commissioning, the nitrotoluene one, the ethylation loop followed by an entire range of new products in chlorotoluenes and the multipurpose plant. Within all this, do we continue to expect -- or rather some margins that we had envisaged earlier, be it percentage or per kg, will that also be subject to the volatility that we are experiencing now with respect to pressure on margins?

[Suyog Kotecha, executive]

So ethylation capacity and nitrotoluene capacity will get commissioned as per sort of original timeline indicated, which is towards the end of this quarter and the volumes will ramp up gradually over the course of quarter 3, quarter 4 and then subsequently in the next financial year. We are expecting somewhere in the range of sort of targeting up to 50% capacity utilization within this financial year and then taking it all the way up to 60% to 80% capacity utilization level in the next financial year.

From a volume point of view, they will continue to deliver as per original plan.

From a margin point of view, yes, if you go by today's pricing, I think there is some compression if I try and see what's the China price trend happening. So profitability might be slightly skewed towards a bit of a downside compared to original business plan. But again, this is something that we will evaluate on a month-on-month basis and see what all we can do. Again, all of these products are targeted towards our Tier 1 customer. And in that context, we are hoping for recovery in the margin in a relatively near-term timeframe.

On chlorotoluene value chains, I would just say that we are sort of a bit further from actually realizing the potential of that CapEx. Today, we are in a sort of construction phase. That capacity is expected to get commissioned in a phase-wise manner only from a next financial year standpoint. So from a timing point of view, we remain on track. I think from volumes and margins point of view, it is still some time away to have a proper commentary on the same.

[Archit Joshi, analyst]

Sure, sir. A very small last one if I can squeeze in. While you are speaking of unable to maintain that per kg margin on the aniline derivative side, is that because, if I just connect the dots to what you commented earlier, we have done some sort of a B2B downtrading there going from Tier 1 customers to Tier 2, Tier 3? So is that exposure hurting the margins as of now? And as we ramp up to go back to the same kind of customers who we were catering to earlier, the lumpiness that you're seeing in margins is expected to wither off. Would that be fair assumption?

[Suyog Kotecha, executive]

Partly. But I would also say, look, it's a new business we are building, right? I think this application, particularly in the energy segment, was not part of our portfolio in a significant way, let's say, 2 years back. So it's a new business we are building, the new customers we are discovering. It's a sector where drivers of our profitability and drivers of our clients' profitability are different, right?

We are linked to aniline, but our customers are linked to "upstream refinery oil and gas market." So we are also figuring out how to right structure these contracts and sort of this transaction. And we're going to go through that learning journey. And hopefully, in a span of next couple of quarters, we land at an arrangement, which is a win-win for both sides. But I would say it's more of a learning and a development journey for the new product that we are trying to scale up.

[Operator]

The next question is from Aditya Khetan from SMIFS Institution Equities.

[Aditya Khetan, analyst]

Sir, my first question is that in this quarter, we had witnessed a good volume growth in NCB and into the nitrotoluene business. So this improvement in volumes is largely -- is because of the better availability of nitric acid or there is a structural improvement in demand?

[Suyog Kotecha, executive]

I think it's a combination of both, but I would rather give credit to a better structural demand in the end market because that's what we are seeing in our customer conversation. As I said, we see genuine volume uptick across end markets. Even [indiscernible], which was stressed for quite some time, we have started to see some green shoots, the volumes have started moving. So while both elements are right, we would give more credit to actual genuine demand growth in the end-use markets.

[Aditya Khetan, analyst]

Okay. And sir, the nondiscretionary segments, which were not performing like agrochemicals and pharma, you mentioned that you are starting to witness an uptick, so into the recovery cycle, so we are at the bottom and how much improvement can we expect from here on? In terms of margins also, can you highlight how much improvement will be witnessed?

[Suyog Kotecha, executive]

So look, on margin front, we still have a long way to go when it comes to nondiscretionary segment. As I mentioned earlier, the pressure on pricing, and hence, on margins is significantly high, especially on the agrochemical side, from the Chinese competition. We are nowhere close to our cycle average margins. If you ask us at this point in time, we don't see within 1 or 2 quarters the margins going back to normal. We see this is a sort of long road ahead. We continue to watch out for it and build our strategies to optimize cost and figure out how within the existing product portfolio we can optimize margins better. But there is still significant scope for margin recovery, whether it's visible immediately in the next quarter or next 2 quarters, we don't think so. I think we think it's going to be a long haul.

[Aditya Khetan, analyst]

Okay. Sir, although the aniline downstream, you mentioned there has been some moderation in spreads, so as a percentage of EBITDA, how much this segment can -- so this segment will contribute?

[Suyog Kotecha, executive]

At this point in time, frankly, a bit difficult to comment. We have multiple products downstream of aniline, right? It's not one product. It's a complicated product portfolio with also a lot of linkages as we go more and more downstream. So at this stage, difficult for me to give an exact percentage of EBITDA coming from aniline downstream derivatives.

[Aditya Khetan, analyst]

Okay. Sir, onto the CapEx part, sir, now we are close to completion of the nitrotoluene and the ethylation facilities, sir, is it possible to share the breakup of the INR 1,500 crores CapEx, which we'll be incurring in FY '25?

[Suyog Kotecha, executive]

So I think at -- I can give you at a higher level, I don't have exact project by project CapEx number at this stage. But out of INR 1,500 crores to INR 1,800 crores, whatever we have spent in Q1 has practically gone into blocks which are getting commissioned, likes of ethylation, NT, and then, a pilot plant in Zone 4.

I think the remaining part of INR 1,200-odd crores, slightly more than that will bulkily go into Zone 4, that's the significant chunk of our CapEx now, which is going into chlorotoluene value chain. Exact project by project CapEx, at this point in time, not in a position to share, but broad split is that. Bulk of the CapEx in the remaining financial year will be spent on Zone 4 chlorotoluene project.

[Aditya Khetan, analyst]

Okay. Okay. Sir, just 1 last question. Sir, because of this moderation in spreads which we are witnessing in aniline, is this one of the reasons why we have dropped the EBITDA guidance? Like last quarter, so we were maintaining this for the guidance of INR 14.5 billion to INR 17 billion EBITDA. Any particular reason, sir, we have dropped this guidance?

[Suyog Kotecha, executive]

I think it's volatility that we are observing in the business. And I think -- as I said, it's a new business application for us. So we are learning. And because of the volatility, we just think we need to get a better handle and better understanding of this market before committing on our guidance.

[Operator]

The next question is from Niteen Dharmawat from Aurum Capital.

[Niteen Dharmawat, analyst]

Okay. Sir, regarding this UPL joint venture. Sir, is there any overlap with our existing business with the joint venture, revenue that we will be having?

[Rajendra Gogri, executive]

Yes, the products what will be manufactured from that joint venture, there is no overlap, it is not. Actually, our current aniline will be consumed in that joint venture.

[Niteen Dharmawat, analyst]

I understand. And what is the debt level we'll be having now with the new CapEx that we are planning?

[Chetan Gandhi, executive]

The debt level will be roughly around INR 3,300 crores at this point of time.

[Niteen Dharmawat, analyst]

Okay. And it is likely to increase, right?

[Suyog Kotecha, executive]

Yes, yes, it is because we have substantial CapEx coming up in this year also, it will be -- it will increase in this year.

[Niteen Dharmawat, analyst]

So what is the peak debt level that we are targeting currently?

[Chetan Gandhi, executive]

As regards this year, I expect it to be anywhere between INR 3,500 crores to INR 3,800 crores. It depends on how the raw material prices and the working capital play around that.

[Niteen Dharmawat, analyst]

I understand. And what is the trend in the raw material prices? That also I had a question.

[Suyog Kotecha, executive]

So if you look at last 3, 4 quarters, at least the 2 key raw materials, benzene and aniline, I'm sure you guys also track this information, but on benzene, we have seen sort of sequential increase in prices going up to Q1 FY '25 level. But in this quarter, in the current quarter, we have started to see some softening in the benzene prices. I think aniline has remained quite volatile. If you compare on a Q-on-Q basis, then there is an increase in the prices. But again, we see some softening on the raw material pricing within this quarter.

[Operator]

The next question is from Ankur Periwal from Axis Capital.

[Ankur Periwal, analyst]

Congratulations, Mr. Kotecha, for your new role and responsibility. First question on the margin outlook here. You did allude towards the volatility expected given the macro that we are in. Just trying to break this up into 2 parts. One is the end-use mix wherein energy is a bigger contributor now. Going ahead, do you expect energy to be as high a contributor or probably this -- given maybe dye segments, agro, other segments pick up, this segment's share will come down a bit?

[Suyog Kotecha, executive]

So I think let me answer that question in 2 parts. In the near term, I think energy will remain a significant part of our application mix. But even within that, you will see volatility, right? As I said, given the nature of the business and also some aspect of seasonality involved in that market, I think you will see this number going up and down for the next few quarters, but it will remain one of the largest, if not the largest end application for us, at least for the next few quarters.

Over a longer term, we expect as the remaining part of the product portfolio sort of comes back, especially from a margin standpoint, and as we are seeing demand recovery -- broader demand recovery across end segments, including the nondiscretionary segments of agrochemicals and pharma, this share on an average sort of might get a bit moderated. The Energy segment share might get a bit moderated, but that is sort of 1, 2-year down the line kind of story.

[Ankur Periwal, analyst]

Sure. So the volatility probably can continue for, let's say, 1, 2 years, let's say, '25 and '26, and beyond that, maybe things will pick up?

Sure, sure. So just moving to the next one. So on the CapEx guidance that we had, this INR 15 billion to INR 18 billion CapEx is for FY '25 only or is it an annual run rate that we should presume now?

[Suyog Kotecha, executive]

No, I think it's only for this FY '25. And in fact, I think from an annual CapEx point of view, we will peak in this financial year. I think our CapEx for next financial year is expected to be significantly lower compared to current levels.

[Ankur Periwal, analyst]

Sure. That's helpful. And lastly, on the volumetric growth that you mentioned, around 20%, 25% for this quarter, this number, I presume is year-on-year. Am I right on that?

[Suyog Kotecha, executive]

Yes. On a quarter-on-quarter, it's a 6% volume growth. On a year-on-year basis, it's in high [ 20s ] as we mentioned.

[Ankur Periwal, analyst]

Sure. So from a demand uptake perspective, if I look at absolute revenue, domestic is still weak. Or is it just because of the realization that the reported numbers look weak and maybe this 20%, 25% growth is across both domestic and exports?

[Suyog Kotecha, executive]

I think, again, it's a combination of a product mix. I think energy application, which has now become a significant part, their larger share comes from export. And that's why we will see compared to last year average where I think our overall share of export was, I think, roughly 52-odd percent, has gone up to 60% now in the Q1 FY '25. So -- and as I said, this will keep varying depending on our sort of application mix and product mix.

[Ankur Periwal, analyst]

Sure. Great. And just lastly, given that the China-led capacity expansion and lower realizations are here to stay probably for a while, what is your thought on the overall ROCE profile for the CapEx that we are putting in? Any change in thought there versus the numbers that we were thinking of earlier or broadly, we are in that same range? And what will that be?

[Suyog Kotecha, executive]

No, look, I think it's our endeavor to improve our ROCE performance, and we remain very focused on that. All of our CapEx decisions, it becomes one of the important factors as we consider putting together sort of new projects for expansion point of view. I think a large chunk of CapEx expansion that has happened over last 3, 4 years had also gone into operation of existing assets, improving reliability and not necessarily purely growth-oriented CapEx versus the CapEx that you see in -- towards the end of last year, current year and the next year going forward. It's a predominantly growth-led CapEx programs, right?

So with all of that, we expect improvement in our ROCE performance. And as I said, we will peak in terms of CapEx in the current financial year. Next year onwards, our CapEx numbers will go down significantly, and that's where we should also start seeing a decent uptick on our ROCE numbers.

[Operator]

The next question is from Surya Patra from PhillipCapital.

[Surya Patra, analyst]

Sir, first question is about the numbers that -- the production numbers for NCB, I missed it, and if you can also share the PDA number?

[Suyog Kotecha, executive]

Surya, could you just repeat your question because your voice is not coming out clearly?

[Surya Patra, analyst]

So I was saying, can you repeat the NCB number and also share the PDA production number for the quarter?

[Suyog Kotecha, executive]

So NCB number for the Q1 FY '25 was 19,503 tonnes against last year same quarter number of 17,293 tonnes. And the PDA number is roughly around 206 tonnes per month for the current quarter against last year same quarter, this number was 135 tonnes per month.

[Surya Patra, analyst]

My first question about the trends and the performance is that excluding MMA, what is the kind of volume growth that you would have seen for this quarter, sir?

[Suyog Kotecha, executive]

So if you're talking about Q-on-Q volume growth, then actually the volume growth is quite consistent, even in non-MMA portfolio. It still remains in the range of 5% to 6%. So volume growth has actually been broader across the portfolio, not specifically linked to one particular product.

[Surya Patra, analyst]

Okay. Even on a Y-o-Y basis, the base business excluding the MMA, would have seen the similar 30% kind of growth, is that fair to...

[Suyog Kotecha, executive]

We talked about Q-o-Q numbers. I think on a Y-o-Y basis, there will be significant difference because on Y-o-Y basis, our energy application has scaled up quite significantly. There, MMA would take a significant chunk of the Y-o-Y growth.

[Surya Patra, analyst]

Okay. Sir, my second point was this -- in fact, we have seen, obviously, the volume recovery that is clearly visible from the NCB and all those hydrogenation numbers, PDA numbers and all the nitro volume over the last couple of quarters or few quarters, do you really see the -- or when do you see the scope of price recovery happening for the -- generally for our portfolio? Or you did see a really significant challenge given the kind of aggression of the Chinese? Because long back, if I remember, we, because of our cost, leadership and all that in our product basket or because of the end-to-end integration model that we have been having, we still bring a kind of an exporter of our products to China despite the kind of pricing situation there and the competition and all that. But now what is the difference? And what is the change that we are finding in that? Any scope of price recovery that you think that can come up given the kind of a backward integration and forward integration that you are talking about?

[Suyog Kotecha, executive]

Look, see, frankly, difficult to comment, right? As I said, our expectation was we should start seeing the recovery in margins and prices in this financial year. So far, it has not been visible, and it looks difficult for the next few quarters. But I also want to answer sort of broader question you're raising, right? I think the backward integration and the -- so the through-and-through valuation integration that we have is actually genuinely giving us a competitive advantage. And that is one of the reasons despite so much pressure from China, we are still able to deliver volume growth and we are still able to maintain sort of our current level of EBITDA margins, right?

That shows that we are able to compete. But at the same time, no doubt that we get pulled down on prices and margins because of Chinese competition. So the margins that we enjoyed, let's say, 2, 3 years back or even before that, today, we are not able to enjoy those margins because of this competitive intensity and the pressure.

And whether it takes 2 quarters, 3 quarters or 5, 6 quarters, difficult to judge and difficult to comment at this point in time. We are closely watching Chinese capacity utilization on many of these products and see sort of how it is ramping up, ramping down versus sort of what is the outlook on that front. And that's the only indication that we continue to monitor to see potentially a leading indication in terms of where the pricing recovery will happen.

[Surya Patra, analyst]

Okay. My next point was about the business mix. Sir, what is the current and -- let's say, what is the current non-benzene, non-toulene value chain in terms of sales mix? And what is that likely to be, let's say, over the next 2-year period or 3-year period?

[Suyog Kotecha, executive]

No, I don't -- we don't have these numbers off hand right now, Surya, so I'm afraid we may not be able to give you those exact sort of numbers.

[Surya Patra, analyst]

Sure. My basic point here I was trying to understand, sir, since we are now obviously talking about the new product development, the collaborative development with partners, new downstream value chains, Zone 4 now getting commissioned and potentially this should be contributing incrementally beyond the existing product chain, so hence, I was trying to understand that, let's say, the base -- excluding the base business or the beyond the base business, what is the new business segment that is likely to contribute? And how significant it would be in the business mix over the next 3-year period?

[Suyog Kotecha, executive]

Yes. So I think maybe in the next conference call, we'll have better information regarding the same. But broadly speaking, look, we remain benzene, aniline and toluene downstream value chain-focused companies. And there, we have multiple chemistries downstream of those 3 basic building materials. But given the different nature of the chemistries we operated, even within these 3 value chains, there's a lot of interplay of products, right?

So sometimes, it becomes difficult to segregate impact of 1 particular value chain over the other. And as we are getting into some of these partnerships that we are doing with global majors or some specific capacity expansions that we are doing for a few specialty chemicals, I think the share of these value chains will decrease, as you had indicated. But still today, these 3 value chains, and maybe not that much toluene today, but today is dominated by benzene and aniline downstream. Once our Zone 4 commissions, I think toluene downstream will also become a significant part of the business.

[Surya Patra, analyst]

Okay. Just last 1 small point, sir. In fact, do you find any challenge to your -- or the challenge to the ramp-up of this new project ethylation one and nitrotoluene one, given the market situation or demand situation? Because my understanding was that for ethylation project, there has already been kind of a contract available for offtake and all. So hence, I'm asking that, okay, do you find any challenge to the ramp up or scale up of these 2 units, which is going to become ethylation?

[Suyog Kotecha, executive]

So look, it's the same story as the broader business. I think from a volume point of view, we will still meet our targets. I think our target of reaching 40% to 50% capacity utilization within this financial year itself, I think we feel confident that we'll be able to achieve that.

We may not achieve our targeted margin in terms of rupees per kg that we have targeted for this particular product, and it will take some time to reach that level, but our focus remains on full utilization of that capacity as soon as possible. We do have contracts with 2 large customers, and then, we continue to engage the other customers for this product to ensure that we start getting good market share from at least all the major Tier 1 customers.

[Operator]

The next question is from Siddharth Gadekar from Equirus.

[Siddharth Gadekar, analyst]

I just wanted a clarity on your previous comments. Sir, you mentioned that the energy as part of the revenue is very dynamic in nature. So our understanding was that the long-term contract that we signed in December was mainly pertaining to the energy contract, so how should we look at that volumes and the ramp-up in that contract?

[Suyog Kotecha, executive]

So there's just one contract in that end application. It doesn't mean that we are relying only on 1 customer for that particular application. I think we are developing a broader footprint of customers for application in the energy segment. And that's where you see variability. So one customer as per contract might be going a bit smoothly and maintaining their commitment in terms of volumes. But given we are trying to develop a wider basket of customers, that's where we see volatility.

[Siddharth Gadekar, analyst]

Okay, sir. So broadly, the contract that we announced in December and Jan, they should be on track to deliver the announcements that we had made, right, like INR 1,500 crores for the December contract?

[Suyog Kotecha, executive]

Yes.

[Operator]

Next question is from Rohit Nagraj from Centrum Broking.

[Rohit Nagraj, analyst]

Congrats on your new role, Kotecha, sir. Sir, first question is how much of our product basket has a direct competition from China?

[Suyog Kotecha, executive]

Well, I would say anywhere in the range of 70% to 80% is where we would expect that all of these products will also have competition from China.

[Rohit Nagraj, analyst]

And just a live question. Given that there have been new capacities which have come up in China, so structurally, the EBITDA per kg, which was there pre-COVID and now has come down? And -- I mean, what is your understanding of the same given that the demand-supply side is now more tilted to supply, so probably the EBITDA per kg or EBITDA per tonne will slightly moderate than the previous period? Your thoughts on that?

[Suyog Kotecha, executive]

So look, I think, again, the story will change product by product, but there are many products in which our EBITDA in terms of rupees per kg has come down compared to, let's say, pre-COVID levels. But I think our endeavor has always been to find new applications, new products, a new set of customers where we have certain differentiating advantage over China. And that's a continuous exercise, right?

Something where we had this advantage 2 years back, if the capacity gets built in China, at some point in time, they get closer to commoditization. So that situation also evolves every 2 years. So we have to be continuously on the front foot in terms of building differentiated offerings for our customers where we enjoy that premium at least for a certain point in time before it gets copied.

On a broader level, yes, EBITDA at a rupees per kg level for many of the products is not equivalent to where it was 3, 4 years back and that's also reflected in our EBITDA margin percentage.

[Rohit Nagraj, analyst]

Right. Sir, second question, again on the similar lines. In terms of the newer products and technology, so ethylation, chlorotoluene, whether we have seen new capacities coming up in China? And will, again, that have some bearing at least in the initial period until we get to a reasonable operating level?

[Suyog Kotecha, executive]

No, not at this stage. We haven't seen any new capacity coming in China in the sort of recent times. But what we need to understand is, ultimately, it's a value chain, right? I think we are a supplier to an agrochemical formulator. And they have to also understand the dynamic of their products in different global markets where there is a substitutability in terms of what final formulations they are making.

So I wish it was that simple, but even if there is no ethylation capacity that has come up in China, if there are a few products which are ultimately going into downstream [indiscernible] formulation. And if there's a competition from different substitutes for those products, it does impact our ethylation capacity. I'm not saying that's the case, but I'm just sort of making a point that a point-to-point comparison in terms of ethylation capacity is fair, and we don't see any recent capacity on that front. But we also have to look at the broader valuation angle to understand where there might be competitive intensity, and accordingly, pressure on pricing and margins.

[Operator]

The next question is from Rohan Gupta from Nuvama.

[Rohan Gupta, analyst]

Sir, first question is that your guidance, you mentioned that even in -- apart from the other discretionary industries and all, you have also started seeing pickup in agrochemical, which was seeing weakness so far. So with this pickup, do you see that our volume growth can ramp up higher than what we were looking earlier because we are sitting with idle capacities? Even after ramp-up in plant 3, you see that there is an opportunity to ramp up that plant as well. Just wanted to -- your clarification and your guidance on that.

[Suyog Kotecha, executive]

Look, our current target to deliver anywhere between 20% to 30% volume growth on a year-on-year basis for the full financial year, I think, is aspirational and is challenging. But I think we are taking that as a target. I think beyond that, frankly, it's difficult to sort of judge at this point in time. But 20% to 30% is what is seeming sort of possible and achievable at this point in time.

[Rohan Gupta, analyst]

Sir, that plant 1 like dicamba project, are there any chances of that plant seeing any ramp-up because it was still going through the weakness because of the global agrochemical weakness going on? So how we plan to ramp up that plant? And in the current environment, can we see the faster ramp-up of that?

[Suyog Kotecha, executive]

So we are evaluating multiple options to ramp up utilization of that particular asset. I think that asset has different capabilities and -- even in that value chain, it can be broken down into 2 or 3 intermediates. So we have also started ramping up our sales for 1 or 2 intermediate which ensures utilization of part of the assets. And hence, from a total plan point of view, there are parts of the plants which are now utilized to a very good extent. There are still some parts of the plants which are not utilized to the full extent, but we continue to look out for options which will allow us to utilize that asset fully.

[Rohan Gupta, analyst]

Sir, since we are getting into chlorotoluene also, I think that there is some other players also. In Gujarat, there is like -- they are also getting into chlorotoluene space, which earlier this space was not touched by many Indian players, so do we see that the competitive intensity in that segment, chlorotoluene, also is increasing and more players can enter into that? Can that have an impact on our growth plan because after '25, a lot of our growth was expected to come from the chlorotoluene project?

[Suyog Kotecha, executive]

Yes. Look, there is competition, but I think the way we have structured our growth project is fundamentally slightly differently. I think we are building the integrated chain. We are not stopping at the first 2 steps in the chain. We have a portfolio of 40 different products as part of that investment, and we will go significantly downstream into specialty derivatives, right? We will not stop at sort of first 2 levels of derivatives. In that context, we feel confident about our investment and ability to generate returns as well as sort of volumes in margins out of that investment. So competitive intensity, yes, for sure. But I think we have a unique strategy, which will allow us to fight in the market.

[Rohan Gupta, analyst]

Sir, just lastly from my side that we also have any significant exposure to textile, dyes, paints, pigments, which is seeing some impact from the Bangladesh going on right now, the issues. So do you see that -- maybe early, but do you see that there is some possibility of some business in the textile can be impacted in near term?

[Suyog Kotecha, executive]

No. As I said, I think we continue to monitor that trend. So far, we haven't seen any red flags. And based on our conversations with customers so far also there are no major risks highlighted. As I said, our direct exposure to Bangladesh is relatively limited. In fact, it's close to negligible. And even indirect exposure wise, so far we haven't seen any risks.

[Operator]

The next question is from Abhijit Akella from Kotak Securities.

[Abhijit Akella, analyst]

Just 2 here. One on the nitrotoluenes and ethylation project. If you could please just help us with the final CapEx numbers, the capacity and the revenue potential from the project?

[Chetan Gandhi, executive]

So the capacities which we're targeting on nitrotoluene, currently, the capacity is around 30,000 tonnes, and we're looking to ramp it up to around 45,000 tonnes. And for ethylation, we have a capacity of around 8,000 to 10,000 tonnes, and it is expected to go up to around -- go by around 3x, maybe around 25,000 tonnes, roughly around that magnitude.

[Abhijit Akella, analyst]

Okay. So 50% expansion in nitrotoluenes and about 3x in ethylation.

[Chetan Gandhi, executive]

Yes, in ethylation capacity.

[Abhijit Akella, analyst]

Got it. And what would the CapEx on this have been, Chetan bhai?

[Chetan Gandhi, executive]

It would be in the magnitude of around INR 400 crores to INR 500 crores...

[Abhijit Akella, analyst]

Okay. And so utilization you think would take like 2, 3 years or could it be...

[Suyog Kotecha, executive]

Yes. As I said, this year, the target is to ramp them up to 50% capacity utilization, and next year, we will take it up to 70% to 80%, which is a good level of utilization for this kind of asset.

[Abhijit Akella, analyst]

Sure, sure. Understand. And just the other one was on the energy derivatives, the products business over there, just wondering from a really long-term perspective, if we think about, say, the next decade-or-so, in the context of this global move towards electrification of vehicle fleets across the globe, sort of how do you see the long-term demand outlook for the fuel additives business in that context?

[Suyog Kotecha, executive]

I think we're actually very optimistic on that front. I think I understand you're hinting towards sort of overall trend towards EV versus sort of ICE engine. But I think we think from an absolute volume point of view, still ICE engine led capacity remains in the market. This fuel additive is actually much more sustainable compared to other options available today in the market, right?

There's been general trend to replace metal-based fuel additives with more greener, more sustainable fuel additives, and this product fits into that bucket. So we remain pretty confident and optimistic about demand potential for this particular product.

[Operator]

That was the last question. I would now like to hand the conference back to the management team for closing comments.

[Rajendra Gogri, executive]

Thank you, everyone, for taking out time to join us on our Q1 FY '25 earnings conference call. As we embark on our 40th year in specialty chemicals, Aarti Industries is stronger than ever with renewed vigor on excellence, innovation, passion and determination. As a global partner of choice, we will continue to serve and expand our robust client base while ensuring sustained value creation for our shareholders by optimizing our assets and venturing into newer business opportunities.

I 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 you again in the next quarter. Thank you once again.

[Operator]

Thank you very much. On behalf of Aarti Industries Limited, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.