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Aarti Industries Ltd
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Ladies and gentlemen, good day, and welcome to Aarti Industries Limited Q2 FY '23 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.
Thank you. Good afternoon, everyone, and thank you for joining us on Aarti Industries Q2 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, update on growth initiatives and outlook on the business. Post this, we shall open the forum for question and answers that the management will be addressing to queries of the participants.Just to share our standard disclaimer here. Some statements that will 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 the stock exchange website.I would now invite Mr. Gogri, to share his perspectives. Thank you, and over to you, sir.
Thank you. Good afternoon, everyone, and welcome to our Q2 FY '23 earnings conference call. We have shared our results document, and I hope you had an opportunity to go through them. We have reported a resilient performance during the period under review, which has come on the backdrop of continued inflation in key input costs, both on raw materials and utilities, some slowdown in end user industry like linked to dyes and pigments, extreme foreign exchange volatility as well as uncertainties prevailing in the global market. Our performance was a culmination of solid expertise attained in managing multiple chemistry processes with superior execution track record. We added to our delivery commitment, thereby winning customers' trust and further deepening our relationship with them. Our knowledge and capabilities demonstrated in several product value chains linked to benzene and toluene is best in class, and we are replicating the same to create strong foundation across other adjacent chemistry value chains.In a significant development, we received honorable NCLT approval to demerge our Pharma business into a separate company named Aarti Pharmalabs Limited. This will extensively enhance value for our stakeholders and also help us achieve operational efficiency. Mainly this will help both the companies to take appropriate strategic decisions in view of the growth opportunities available. We have been expeditiously working to conclude this and expect the listing of Aarti Pharmalabs Limited to take place sometime in December 2022.Let me quickly share some of the key financials for Q2 FY '23. Before that, let me inform you that the financials for Q2 FY '22, [ Q1 ] FY '23 and H1 FY '22, were recasted to consider the effect of scheme of arrangement for the demerger of Pharma segment from the appointed date of 1 July 2021.Our revenue increased by 29% Y-o-Y to INR1,847 crores with exports contributing over 50% of the total revenue. EBITDA improved by 5% to INR267 crores. Normalizing the impact of shortfall fees in Q2 FY '22 of INR52 crores, the EBITDA growth in Q2 FY '23 is over [ 30% ]. Profit after tax stood at INR124 crores. Our revenue momentum was fueled by the stable demand category for key products under the essential end usage further aided by volume gains. As was highlighted in the past, we have seen slower demand for products associated with end user industries of dyes, pigments, et cetera. And to that extent, the performance appear as moderate. However, we expect demand to recoup from Q4 of FY '23.While the raw material utility costs have remained elevated during the quarter, we have a strong passthrough mechanism in place to pass on this cost pressure, thereby protecting absolute profitability. We expect this elevated input cost scenario to soften in Q3. EBITDA was higher supported by product optimization and increased export revenue. Absolute profitability levels were maintained during the period, considering the slowdown in demand due to global sector.We have utilized the time to take up the maintenance work in our Jhagadia location. As a result, the volumes for a few products were lower in Q2 FY '23. Profit after tax appears muted owing to the higher finance costs due to negative ForEx mark-to-market impact of INR20 crores and increase in depreciation in line with new capacity added in recent past. With the current performance for H1 FY '23 and the visibility that we have for H2 FY '23, we expect our FY '23 EBITDA to be around -- about INR1,100 crores.Now let me turn attention to the production details for Q2 FY '23. Production of nitrochlorobenzene stood at 20,276 metric tonnes, while the same for hydrogenated came in 2,558 tonnes per month. For nitrotoluene, the production for Q2 FY '23 stood at 4,954 metric tonnes. Production levels were lower due to the maintenance shutdown that was taken at the Jhagadia facility. This will benefit us to maximize on the operating time when the demand resumes back.Let me now move your attention to some of the expansion initiatives announced and updates around that. Projects into the first long-term contract is scaling up as expected, and we anticipate a high utilization level of about 70% by next financial year. The recently-commissioned facility that houses the second long-term contract is getting utilized in phased manner, and we expect to generate the EBITDA as guided by the contract terms and shared earlier. Construction and other plant-related activity associated with the third long-term contract at Jhagadia is progressing well, and we expect commissioning towards the end of this quarter. Several other projects, including brownfield expansion of NCB facility at Vapi are underway, and will start getting operationalized progressively in next 4 quarters. And that will be contributing meaningfully from next financial year.In respect to our ethylation capacity at Dahej SEZ, which is operating nearly at 90% now, is being tripled with an investment of about -- around INR200 crores and is expected to come onstream in H1 FY '25. We are also planning for further debottlenecking of our nitrotoluene capacity. The products will enable us to cater to few high-growth agrochemical molecules and applications.During the half year ended September 2022, we entailed a CapEx of INR577 crores towards the growth initiative outlined and target the annual CapEx to be about INR1,100 crores to INR1,200 crores. Full benefit of various current ongoing projects will be visible in FY '24 and FY '25, as we anticipate some demand recovery from Q4 of FY '23. While volume ramp-up from new capacity will come in the next 2 years, the fixed cost will not generally rise to that level, thereby resulting in strong gross profit to EBITDA conversion from FY '24 onwards. With this volume ramp up, we anticipate our EBITDA to grow at CAGR of about 25% for FY '24 and FY '25. Collective CapEx for FY '24 and FY '25 is expected to be around INR3,000 crores, and will steer our momentum in the forthcoming periods. Through this, we plan to create a newer chemical value chain and also introduce high-potential products that will expand our addressable market opportunities. And we'll also cater to increased demand from key end user customers.We have built a very strong R&D team with 250-plus engineers and scientists working on several high-potential projects across segments, including some of the sunrise sectors. Our expertise in wide-ranging chemistry with focus on technological expertise is driving gains in a sustained manner. Currently, we have 50-plus products under R&D pipeline of chemicals at various stages, and this will help accelerate our performance trajectory. Our utilization level across plants are being ramped up based on steady demand. We have created a strong foundation through an integrated and well-diversified business model with relentless focus on R&D and chemistry capabilities. Our deep connection with key customer will drive sustained growth and profitability going forward as well. The road map looks encouraging, and we'll continue to capitalize the opportunities created through rapid shifts in global chemical supply chain. Focus on R&D-based product offerings together with incremental gains from existing value chain will propel our value proposition.That concludes my initial thoughts, and we will now request the moderator to open the floor for QA session. Thank you.
[Operator Instructions] The first question is from the line of Aditya Khetan from SMIFS Institutional.
Sir, first question, sir, if you can provide the breakup into the top line. So from our core business and from the custom synthesis business, that is the contract 1, 2. Sir, now we can provide the breakup of revenue into core and into the custom synthesis split?
So I guess the revenue from the contract would be relatively lower. We'll have to -- I don't have the numbers right now [Technical Difficulty] in some single digit number. We'll have to see the numbers and come back to you later on.
We can just add that our value-added product which we generally guide, so 78% sales is coming from value-added products.
Okay. Okay. So what I wanted to know, so this quarter-on-quarter growth of 5% into top line, how much was it on the core business? And how much was it from the contract 1 and contract 2?
The contract 1 is already terminated. So there's no connection of contract 1 as such. And as Chetan mentioned, the contract 2 will not have any significant addition in Q2, I think. That number will not be available [Technical Difficulty].
Okay. Okay. Okay. Sir, we have also taken maintenance account. So what was the one-off impact into this quarter? How much volumes has been impacted because of this?
Yes, nitrotoluene, PDA and chloroaniline, all those volumes were impacted. So that's why the numbers of our nitrotoluene are also low and PDA also are low in this quarter comparatively.
Okay. Okay. Sir, also doing -- so debottlenecking of the nitrotoluene capacity as said by you into your initial remarks, so how much would -- so we are planning to expand on the base capacity, so 15%, 20% additions we can take, and what would be the CapEx figure for that then?
Yes. We are fine-tuning the capacity. Current capacity is about 30,000 tonnes. And we are now fine-tuning the debottlenecking. I think around 45,000 tonnes is what we are targeting to debottleneck.
45,000 tonnes. And what would be the CapEx sir?
No, that is still being worked out, whereas the ethylation is a brownfield plant. So that, already the construction and everything is started. So that CapEx is about INR200 crores. And there, we are increasing the capacity to 3x, from current capacity about 7,000 tonnes to 10,000 tonnes, it will become 3x for ethylation.
Okay. Okay. Got it. And sir, just one last question, sir. Are we witnessing the benefit of the freight cost as of now? In this quarter, we had got the benefit and that should continue or still we are witnessing that freight cost is elevated for us?
The freight cost is coming down in the current quarter. So in the Q3, we will see freight costs coming down.
Okay. So from the current quarter, so we should see improvement into the margins from the freight costs?
Yes, the freight part, but largely, we had done freight passthrough for most of the larger contracts. So overall, we may see some improvement, but it may not be a very meaningful number.
Okay. Okay. Sir, just one last question, sir, on to the raw material side. So how is the trend now? So we have been witnessing that the raw material prices are going down like benzene, toluene and phthalic anhydride. So this should benefit the company and like in case when the raw material prices decline, how confident are we, we can maintain the growth in the coming quarters?
Yes. So basically the raw material prices are definitely coming down and we have a passthrough mechanism there. We have a quarterly or a monthly lag of passthrough. So whatever those lags are, we will get advantage to that effect. But largely, the raw material is also on a 1-month prior procurement basis. So on export side, wherever we have 3-month lag of pass-on, so there we will get benefited.
Okay. And sir, just one last question, sir. So generally, like -- so now we are only focusing into the specialty chemical business. So would it be possible from next quarter, so we can give the revenue breakup of the nitrochlorobenzene, the PDA segment, the dichlorobenzene? So that would help us dwell more deeper into the company's specialty chemical business because now the Pharma business has been excluded. So if possible, sir, if you can provide more breakup on to the numbers, that would be helpful, sir.
I think, anyway, we are providing you the quantity breakup. So I don't know -- further breakup we will have to deliberate and get back to you how we can do.
The next question is from the line of Vivek Rajamani from Morgan Stanley.
Two questions and just 2 small clarifications from me. Firstly, sir, you'd obviously highlighted in the previous quarters regarding some challenges on the raw material sourcing side. If you can just provide an update in terms of how the situation was in this quarter? And how do you see this evolving in the next few quarters? That's the first question. And secondly, if you could just provide an update on some of your own remedial measures that you're doing, which you had indicated in the past quarter?
Yes. nitric acid, there was no significant impact of any nitric acid in Q2. And in second half also, we don't expect much impact of nitric acid because some demands are also overall in the market is subdued. And some more capacity will also come in our nitric acid in the second half. So even the next year, there should not be much issue regarding availability of nitric acid. What we had announced, our plan that will get -- our planning was to commission in Q4 of FY '24 for a concentration plant.
Understood, sir. And just 2 clarifications. On the maintenance side, which you had this quarter, did you specify what was the period of the maintenance shutdown?
About 3 weeks in Jhagadia.
Got it. And I'm not sure if I missed this, you gave the volume breakup, but did you also give the numbers for the PDA volumes?
Yes. The PDA Q2 numbers are around [ 242 ] per month.
The next question is from the line of Abhijit Akella from Kotak Securities.
Just a few data-related request, if it's possible to share these on the call. One was with regard to the restated financials, if it's possible to share with us the base EBITDA and PAT for the years FY '22 and FY '21. That would be helpful.
Come again, what are you looking at?
So under the -- as per the -- following the restatements, following which we have only the specialty chemical financials now, so is it possible to get the base numbers for FY '22 and FY '21, just in terms of EBITDA and PAT for the remaining business?
FY '22 9-month number will be available because this is from July '21 to March '22, I think that number is available.
Okay. Okay. But a full year base won't be available.
Yes, because the effect appointed date was 1st July '21. So post 1st July '21 we have all the quarter numbers for both chemical and pharma separately.
Okay. Fine. I understand. And the second thing was just with regard to the demand softness that you pointed to. So what exactly are the factors that lead us to expect a recovery in demand in 4Q of this year? And what exactly were the reasons for the margin pressure that we saw this quarter? Was it a combination of higher raw material costs as well as the softness in demand? How would you describe that?
Yes, demand, we have been in touch with the customers basically. And generally, there is a feedback as of now some recovery of -- especially on the dyes stuff side to start coming in. Actually, pigment side, the impact had started a little later on. So I think pigment side recovery also might be a little later on. So that is mainly coming from our customer side that's how they see the demand shaping up.
And the margin pressure this quarter was primarily because of falling benzene costs and maybe some inventory-related pressures because of that? Or was it something else?
No, overall margin, I think there's not much difference than in product mix and some raw material prices and everything. Broadly, I think the EBITDA is maybe down by about 5%.
On the benzene side also, just to add on it, the benzene prices are also fairly similar. So the reduction as Mr. Rashesh Gogri shared that the price reductions would start being seen from this quarter onwards.
Okay. Understood. And one last thing from me was just if it's possible to share a volume growth number for this quarter.
This year, the volume growth will be really substantially flat. It won't be anything because we had this shutdown, which was taken up there.
The next question is from the line of Rohit Nagraj from Centrum Broking.
First question is in terms of exports, on a sequential basis, the number looks quite promising. So was there any currency benefit? And allied question to that, Q2 has been pretty strong in terms of exports. And in Q3, we are already 1.5 months done with. So any demand-related challenges from the export side that we have faced in the last 1.5 months?
Yes, some of the pigment intermediates, as I mentioned earlier, we are seeing some challenges. But the other sectors, we don't see much challenges as far as exports are concerned.
Right. And any currency benefit on a sequential basis?
I think Chetan will be able to answer. Currency benefit, there was...
Structurally, rupee depreciation benefits us. So to some extent, there will be a benefit of that, which would have been there in Q2 as well. The numbers would be in the range of around INR8 crores or something -- INR8 crores to INR10 crores. But the effect is that we do have forwards for part hedging the export over the next 3 years. So there's also a limitation in terms of not everything which is there as a part of our export is completely open. So then the benefit is limited to those forwards and there is anyway accounted by way of the market to market accounting.
Right, right. Got it. The second question is just a bookkeeping question. So we have restated the numbers for FY '22. Can you give the gross block by end FY '22? We have given the net block.
Yes, so the gross block of FY '22 should be around INR5,000 crores.
This is only pertaining to specialty chemicals, the business which is now remaining?
Roughly to INR5,000 crores, yes.
Okay. And just one last clarification, I missed the number on NCB volumes.
NCB volumes was 20,276 for the quarter.
The next question is from the line of Rohan Gupta from Nuvama.
Sir, a couple of clarifications. First is on our dicamba intermediate sales. So if you can just give some sense that how has been the utilization level for the current quarter on dicamba intermediate?
Yes. Overall, I think current quarter's not significant, about 10% level, we are on that. But progressively, I think will go on increasing.
Okay. So 10% is the only utilization while I think that by FY '24, next year, we are looking some 70% utilization level to go up, right?
No, no, actually, my mistake, around 25%, sorry. The numbers were around 720 tonnes per quarter. And that will be against quarter capacity of 2,400 tonnes. So it will be around 25%.
So sir, like 25% utilization level, if this entire block related to this intermediate, will it be breakeven or it will be dragging the profitability?
No. So we will expect progressively, from second half onwards, capacity utilization to increase.
I'm asking at 25% in the current quarter.
Yes, currently [Technical Difficulty] it will not break even, no.
Okay. It'll be some losses there.
Yes.
Okay. Sir, second is in terms of guidance of roughly INR1,100 crores for this year, you're looking at EBITDA, while almost half of that we have already done in the first half. So you're clearly indicating that in second half, there won't be any growth, while we have a large CapEx commissioned already and current quarter is already weak. So just wanted to understand the thought process that second half will be just exactly first half [Technical Difficulty]. Any particular reason for that?
Yes. I think the dyes and pigments segments are weak. So I think that will continue in the second half also. So I think that is the main reason there is for lower guidance. Hopefully, the things start recovering in the Q4 and so next year and all, we don't have any impact of this slowdown in these segments.
Couple of capacities are coming o stream in the second half so there will be a component of fixed cost by way of manpower and other stuff which will also start kicking in.
Right. And sir, in the segment wise, you mentioned that dyes and pigments is a drag right now. It's primarily coming from the European market because of the inflationary scenario or what is the particular reason for it? And also in which segment, I mean, like agrochemicals and all, we must be seeing a good growth. So if you can just give some segment, which are the segments are a drag and which segments you are seeing the good growth?
The pigment impact is global basically, whereas dyes, generally, impact is more within India, most of the dyes gets consumed in India and some export also. Some of the agrochemical and additive business are quite strong.
The next question is from the line of Meet Vora from Axis Capital.
So my first question was towards our earlier guidance that we're saying that we are facing shortage of nitric acid. And as a result, our volumes might be impacted. So 2, 3 questions regarding that. So Q2 is generally a seasonally weak quarter for nitric as monsoons are going on and nitric is basically used in fertilizers. So is it that we are facing -- so demand was down because of the seasonal quarter? And how do we look at it from a Q3 or Q4 perspective? Secondly, we say that, while new capacities are coming onstream in Q4, what kind of visibility do we have that volumes will be shared with us? And thirdly, more clarity on our -- the CapEx plan, whether we will set up a concentration plant or a backward integrated plant, that would be helpful.
As we mentioned basically earlier that this year we don't anticipate much impact of nitric in the second half because overall also there is a demand slowdown and some capacity will come up. And as of now, we have -- concentration plant order has been placed. And our comprehensive nitric strategy, actually, we are planning to share by -- in this call, but I think it may take some more time, and we'll come out with the comprehensive strategy.
Sure, sir. And secondly, our volume growth guidance for FY '23.
FY '23?
Yes.
I think overall we had given an EBITDA growth, specifically because, as we mentioned earlier, now the value-added products are increasing this year [indiscernible] 78%.
Okay. And sir, a stable number on the working capital since it has gone up in H2 FY '23?
I guess there could be a potential of that to renew because the way working -- I mean, the freight rates and raw material prices, there is some softness, which is getting visible. So on capital cycle in number of days should remain similar, but on a value basis, I expect some reductions to happen.
Okay. And -- okay. And last question from my side. Sir, has there been any change on presentation of our numbers from gross sales and net sales perspective because last quarter, our spec chem revenue was around INR1,750 crores. And right now, it's somewhere around INR1,680 crores. So should we look at once the net numbers or the gross numbers? Because last quarter, our breakup of spec chem and pharma, in that, the spec chem revenue was INR1,750 crores and now it's around INR1,610 crores. What is the right number to look at? And am I missing something or the presentation has changed or it has remained the same?
I guess the numbers -- I don't think so the numbers are different. We can probably separately connect and give you clarity and you see the numbers to be fairly similar.
GST impact, there is a -- basically in whatever number comparison that you are doing, so gross number there is a growth and also in net number also, there is a growth. So one number that you have said is with GST and one is without GST.
Sure. So our presentation has not changed in any form, right?
Yes.
No, no, no. So I'll -- we'll connect separately to just give you...
The next question is from the line of Chetan Thacker from ASK Investment Managers.
Sir, just a question on the gross block that has been transferred to the Pharma business and working capital that has moved there.
Okay. So we'll have to pull out some numbers because the transfer is effective 1st July '21 and those numbers would not be -- that number keeps on changing. I guess the gross block which would have been transferred would be upwards of INR1,200 crores. And working capital, I'll have to pull out some numbers and check on that.
The next question is from the line of [ Mir Dhawania ] from Ambit Asset Management.
I hope I'm audible. So you mentioned in your earlier commentary that you are expecting a 25% growth for both FY '24 and FY '25. Do you have a potential range of numbers you are targeting either on the EBITDA or profitability for both those years?
Yes. Current year, our target is around INR1,100 crores. So correspondingly, 25% CAGR, it'll take within 2 years targeting around INR1,700 crores.
Got it. Got it. And I just have another clarification. What will be the potential impact on profitability for maintenance shutdown which we did in one of our plants?
That would be around INR15 crores.
Okay. Okay. And just another question, do we expect the EBITDA margin -- sorry, the absolute EBITDA number to be ranged on what we have done in Q1 and Q2 for the next half of the year? Is it what we are looking at?
Yes. I think some change may happen because where there is a demand pressure, there it may go a little bit down and where there are some opportunity also because of some shortages by European shutdowns. So on a product to product, there may be some variation because of little bit unusual situation, one is on the demand side of certain products and second is on supply side because of European natural gas scenario, some shortages are taking place.
Got it. So what I wanted to allude was, so the majority benefit of any further CapEx will only be visible from FY '24 onwards, not any material impact we are seeing in either Q3 or Q4 of this year.
Yes, yes. So mainly because next 2 years, we expect the direct transfer of gross profit to EBITDA because we don't expect much fixed costs or employee costs increase in the next couple of years other than the normal increment. That's why we are targeting at a 25% CAGR.
The next question is from the line of Vishnu Kumar from Spark Capital.
We have a CWIP of about INR1,400 crores. So just help us understand what are the major projects that will be getting capitalized in the next 18 months and the CapEx for the current year.
Yes, this Q the contract 3 will get capitalized and some other specialty chemical blocks and nitrochlorobenzene, which will get capitalized. So actually second half, we expect capitalization of about INR1,000 crores in this year.
INR1,000 crores this year. Okay.
Approximately INR1,000 crore capitalization and this third contract and few other specialty chemical blocks also will get commissioned.
Okay. How much is the CapEx for the current year? And how much have we spent till now, sir?
Current year, we have spent INR557 crores in these first 6 months. And overall, annually, around INR1,000 cores to INR1,200 crores will be the CapEx.
Got it. Next year, what are the projects we'll be capitalizing, major projects, if you can?
Whatever -- some of the specialty chemicals and nitrochlorobenzene expansion may go towards the first quarter of next year. So most of the capital WIP except this [indiscernible] utilization loop, we expect that capital WIP will get capitalized by the Q2 of FY '24, except this utilization loop, which will be commissioned in first half of FY '25. And subsequent to that will be all the new product line at the new location in Jhagadia where the construction is expected to start from Q4 of this year onwards.
So INR1,300 crores of CWIP and current year CapEx of about INR1,200 crores, so INR2,500 crores will get capitalized by first half of next financial year. After that, the new CapEx is only going to come after '25, '26. Is that right to understand?
No, this utilization loop and all also will come in the next year because that also we're going to spend. So at least around INR2,000 crores will get capitalized. And subsequent to that will be more of a normal CapEx and some debottlenecking and all. So there will not be any significant capitalization other than this loop which is about INR200 crores and some normal CapEx for about a 12-month period.
Okay. Sir, currently, I mean, if you could just give us a broad mix of revenues from end user segments, say, agro, pharma, dye stuff, if you could give us what is the broad number, let's say, [ last 12 months? ] how has been the revenue share? And once you execute your new projects as in '24, '25, the CapEx, how should this look like in terms of end user segments?
This is basically agro, pharma and FMCG, which are not that much economy-linked, so we are around 50%. And 50% will be more on dyes, pigments, polymers and additives. So that's broadly -- so basically 40 to 60, quarter-to-quarter in that range. It'll be more around that number. And as we go forward also, this may not change much because across the board, some pharma also will increase -- means we'll be increasing the numbers across the board in all the segments. So even after 2 years, I would not say that it's going to be a significant change.
Okay. So I mean just to conclude what you're saying, you're saying it will be more or less similar, but slightly towards agro, pharma? Is that the right understanding?
I mean currently, there is a 50-50 agro, pharma and FMCG and others 50-50. So those kind of numbers will remain. It's not like something will become 70 and other will become 30.
Understood, sir. So given the global slowdown people are at least talking about and maybe if there is a slowdown, our export division, which probably -- the second segment, which is the dyes pigment, would this be a larger chunk of exports? Or which segment is currently contributing to majority of our exports? I'm trying to understand if there is a slowdown next year, I mean which segment would probably see an impact.
Actually, exports are more on polymer and additives and then agro and pigments.
Okay. Would any concentration be done, sir, if you're seeing some slowdown for the next 12, 18 months, if you're not seeing much growth, then would our CapEx intensity slow down or we'll continue today -- I mean, the plants are going to continue?
So we have a long-term visibility of the products. So as such we are not looking at any slowdown in the CapEx.
Understood, sir. And one final question, sir. The closing net block as of March was INR4,400 crores, which is as of 30th September, only INR4,000 crores. So is it right to understand that INR400 crores is the net block transferred to the Pharma division as per the statements given?
No. So you are comparing March versus September, but the net block transfer to Pharma would be more than that.
How much would that number be, sir?
I believe the net block transfer to Pharma should be in the range of around INR700 crores to INR800 crores, if I'm broadly looking at it because we have to reverify some numbers, but it should be in this kind of range.
Got it. Sir, just one comparable number, I know a couple of guys have asked earlier also. If you could just give annualized EBITDA for the company, I mean, only for this division or now as the company exists for the previous year, the comparable of the INR1,100 crores we are talking last year? If you could just give that number, if you have.
We have to work on it because as per the scheme, the Pharma business continue to be part of the continuing -- I mean, Aarti Industries for the quarter of April to July '21 -- April to June '21 [indiscernible]. So if we have to look at dissecting that number, we'll have to spend some time and work on that. It'll not be available right now.
The next question is from the line of Bobby Jay from Falcon Investments.
Regarding dyes and pigments, what is the end user industry that's being affected? Is it textiles?
Yes, it is textile, printing ink and also coating for the automotive. So all these segments had been affected during last quarter.
But the auto industry, at least in India is supposed to be picking up. So how is it affected?
Yes. So it's basically global auto industry. And also, I think in the pigment sector, there's destocking, which is happening, and there has been a lot of consolidation amongst the players. So all that has also come into the effect of overall slowdown in the pigment.
I see. This is in India or globally?
Yes, it is global.
Okay. So you actually produce the pigment intermediates right and supply it to the segment -- formulation companies like Sudarshan, et cetera. Is that correct?
Yes, yes. We supply to the pigment manufacturers and who in turn, they supply to the printing guys and the plastic [indiscernible] guys as well as the coating for the automotive paint manufacturers.
The next question is from the line of Tejas Sheth from Nippon India AMC.
I had 2 questions. One, on the INR3,000 crores of CapEx which we are doing over the next 2 years, that is FY '24 and FY '25. What would be that for? And secondly, INR3,000 crores of CapEx for 2 years and INR3,000 crores odd of EBITDA for 2 years. So we see our borrowing increasing on FY '23 level as well, considering that we'll be having a slight outflow and a dividend outflow on that EBITDA level. Would that be a fair...
This will be mainly for these new range of product, chlorotoluenes and its downstreams and also it's on the other specialty chemical, which we have identified. And some of this already ongoing expansion also will take place, the CapEx spend will take place for this second utilization loop and also will take place in the next 2 years. So it'll be a mix of both the chlorotoluene-related blocks, multipurpose plants at the new location and this utilization loop, nitrotoluene [indiscernible] making and several other ongoing, which will get commissioned in first half of FY '24.
Okay. And on the cash flow side, as I said, INR3,000 crores of EBITDA we would be doing. And if we separate the cash outflow and dividend outflow and also then we incur INR3,000 crores of CapEx, there would be debt increase...
Yes, yes. There will be debt increase for sure, yes.
Okay. Okay. And just lastly, what will be the tax rate for this year and even for FY '24?
I guess the tax rate should be in the range of around 18% to 20%, 21%. Next year, it should become -- it should be around this 18% to 20% or 21% broadly.
The next question is from the line of Archit Joshi from B&K Securities.
Sir, we have listed out a 5-pronged strategy in our presentation. So just wanted to understand if you can share some rough time lines and also a question linked to the same. Is it that they are interdependent? I mean setting up a multipurpose plant, would that translate into more custom manufacturing opportunities or the fact that you've listed that we are looking for more strategic alliances? Or is it that we are already in touch with some customers to look at these opportunities in the base business? So if you can elaborate [ on this, it'll be helpful ].
You're right, the multipurpose plants, simultaneously, there will be contract manufacturing. Partly the multipurpose plant will be used for contract manufacturing, whereas strategic alliance and all are there more of a different plant or may be dedicated plant for certain customers and all that. So there is generally at individual level bigger opportunities. The contract manufacturing may be for a variety of products. And number of the products may be more, but individual product sales may be less. That kind of a thing will happen in multipurpose.
Understood, sir. Sir, and just in continuation with the previous participant's question, we are looking at commissioning most of these projects, say, before the end of FY '24. So I just wanted to just see what kind of time lines we are looking at, be it the new chemistry that we are adding with chlorotoluenes and when would we have a multipurpose plant set up. And this is other than the parts which you are doing in the base business, which is debottlenecking of, say, nitrotoluenes or adding more ethylation capacities. So the newer initiatives, when will those start contributing with respect to revenue growth? Just trying to look at that.
Yes, it will be coming mainly starting from second half of FY '25. Second half of FY '25 and FY '26 will be where all the new initiatives will start getting commissioned whereas the ethylation loop is expected to be in first half.
First half FY '24, right?
FY '25.
FY '25? Got it. Sure, sir. Sir, just one last question. So I think we are looking at FY '24 as a transitionary or looking at a significant volume growth with a lot of CapEx that has already gone by. What I was trying to understand is the time -- the major projects which have got commissioned in the last maybe 2 to 3 years, most of them have been in the same part of the chemistry that we were into, except for the 2 contracts that you might have a full-fledged utilization on. So barring these 2, what exactly is materially changing going from the second half FY '23 to FY '24 that we are kind of assuming that a lot of fixed costs will get subdued and operating leverage will start kicking in and there'll be volume growth because currently, as you have been pointing out that the certain pockets where we are supplying products to, be it dyes or pigments, those still continue to be under pressure. So is it that we do expect a meaningful recovery happening in FY '24? Or is there something else to it that some new customers have been added or some new products have come into the portfolio?
Some new products are also coming in. And nitrochlorobenzene will be additional thing where substantial goes also into pharma and polymer also. And all this slowdown in dyes and pigment also, we don't expect that to be continuing for a very long time. So definitely, by FY '25, so I think it has to become a normal year. So whatever is the slowdown which we are witnessing in current year, we expect that to be, by FY '25, at least dyes pigment also should become normal and contribute to the volume.
The next question is from the line of Pujan Shah from Congruence Advisers.
My first question would be, let's suppose, if we didn't do this maintenance thing, so what would be the volume growth in H1?
Sorry, could you just repeat the question?
Yes. If we haven't gone for the 3-week maintenance closedown, so what are the volumes would be like -- volume growth would be? It would be around 5% or so or like it would be less than that?
I mean you're talking about the current -- I mean Q2?
Yes, yes. I'm talking for H1. I'm talking for H1, which we are saying that the volume has been flat. So due to one of the reason is because there was a maintenance shutdown in our plant. So I am talking about, see, let's hypothetically think that the plants haven't gone for the maintenance CapEx, would the volume would be flat or it would be something more marginally improvement we have seen in the volumes?
There's -- one of the reason for maintenance shutdown was also there was a pressure in demand. So overall, it will not be much different, maybe 2%, 3%.
Okay. Okay. And sir, I just wanted to know your outlook on dye and pigment for the next, let's suppose, as to FY '23. So would it be like this sluggish demand as we have witnessed in Q2 or it would see some improvements? Or we have seen the weakness of the base -- we have built the base and now there is only an improvement going forward for the dyes and pigment?
Dyes side should recover faster. The pigment side, the impact also has come later on. And as Rashesh bhai mentioned, some destocking and everything taking place. So some recovery on the dyes side maybe in Q3 and pigment might take to Q4 and all that slowly should happen.
So yes. So we had -- like the demand has been strong. We are witnessing this due to destocking. So we [ are been ] expected improvement in demand coming forward after this destocking gets concluded over the distribution side. So that's what our idea is?
Yes, yes.
The next question is from the line of Rohit Sinha from Sunidhi Securities.
Some of my questions are already answered. Just wanted to understand, as we are mentioning that almost 70%, 75% kind of products are value-added products for us. So which industries where we are having this kind of exposure? Or is it across the industry where we are supplying? And going forward, which, again, industry would be focused for us to add more value-added products in that particular industry?
Yes, our end user are quite varied across the board. And our -- this chlorotoluene will be more dominated by pharma and agro intermediate. So we don't see much polymer intermediation all coming in that new range of products. So that will be more on pharma and agro, some dyes and pigments.
Okay. And that would be benefiting obviously to our margin expansion.
Yes, there is going to be more value-added products also, so our EBITDA per [ kg ] also is expected to be higher in that range, but that will start impact only over from FY '26 onwards.
The next question is from the line of Nitin Agarwal from DAM Capital.
Mr. Gogri, on the other expenses which are there, they're going up pretty sharply on a Q-o-Q and a Y-o-Y basis. So are there any specific drivers for that, sir?
So one of the component would be the -- if you look at the exports, which generally was in the range of around 40%, 45%, this quarter is around 50%, and the higher freight cost on the exports, kind of, [indiscernible] other expense was up. So I don't see any major uptick apart from the export and so. [Technical Difficulty] something related because of some maintenance spend and others. But other than that, it is fairly in line.
Okay. And sir, typically, in the past, you've given for the combined business, 3-year guidances for '24 and '27. Now in the context of where the chemical business is, how should we look at maybe numbers for FY '24, '25 or '27 as you've guided in the past for the chemical business?
Yes, FY '25, already, we have guided. FY '23 and the next 2 years. FY '27 guidance I think will come up in the -- I think, next couple of quarters, we'll have a comprehensive guidance for FY '27 also.
So we should assume that FY '22, our EBITDA for the spec chem was INR1,100 crores, so INR1,100 crores compounded at 25% for the next 2 years.
Yes, that is for the next 2 years, yes.
The next question is a follow-up from the line of Rohan Gupta from Nuvama.
Sir, in terms of our nitric acid problems, which we faced in the first half, you mentioned that definitely in Q2, we had not faced any such challenges, but did you see that the raw material, I mean, nitric acid prices were still volatile and that had some impact on our gross margins? Or you see that the availability and the pricing both are corrected?
Yes. Basically, the nitric acid prices are dependent on the ammonia prices and globally due to the Ukraine war, overall, the ammonia prices have increased significantly, and they are at around $1,000 level. So due to that, overall, the nitric acid prices for the first half have remained significantly higher due to the ammonia prices. And once the war and other external pressures ease out, then the prices will come down.
Sir, in the current scenario, when we see that the benzene prices should start -- have started moderating and nitric acid also, so you see that the raw material prices broadly have started coming down. How do you see that in terms of our percentage margins? Should we go back to EBITDA margins of almost 24% kind of range and with the moderation in the raw material prices? Or with the value picture you see that the margin profiles can even be better than earlier?
No. definitely [Technical Difficulty] EBITDA margin, it's generally more on absolute EBITDA. So depending on some correction in raw material takes place, then obviously, margin as a percentage will increase. But any specific numbers will be difficult.
Okay. Lastly from my side. On this, nitrotoluene chain, the product development, which you're working on and expecting to commission by '25, how has been the customer acceptance? And have we started demonstrating the product and started doing the sampling for these chain product? Or it's still some time from the customer acceptance towards it?
[Technical Difficulty]
We are already making the product. It's more of a volume expansion for the same range of products.
Ladies and gentlemen, as there are no further questions, I now hand the conference back to the management for their closing remarks.
Thank you, everyone, for taking out the time to join us on our Q2 FY '23 earnings conference call. Hope we have addressed all your questions. 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.
Thank you, ladies and gentlemen, on behalf of Aarti Industries, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.