Aarti Industries Ltd
NSE:AARTIIND
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Aarti Industries Ltd
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Ladies and gentlemen, good day, and welcome to Aarti Industries Limited Q3 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 of CDR India. Thank you, and over to you, sir.
Thank you. Good afternoon, everyone, and thank you for joining us on Aarti Industries Q3 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, where the management will be addressing queries of the participants.
Just to share our standard disclaimer here, some statements that may be made in today's call may be forward-looking in nature and the disclaimer to this effect has been included in the results presentation that has been shared earlier and also available on stock exchange website.
I would now invite Mr. Rajendra Gogri, to share his perspectives. Thank you, and over to you, sir.
Yes. Thank you. Good afternoon, everyone, and welcome to our Q3 FY '23 Earnings Conference Call. We have shared our results documents, and I hope that you have had an opportunity to go through them.
We reported resilient performance during the quarter and 9-month period under review as reflected by higher share from value-added products, driving better profitability. This was achieved despite a decrease in demand across some end user categories, which we believe will give us back by next year. Our teams responded promptly to the dynamically changing situation and utilize their expertise to maintain a strong performance by optimizing the product mix and market opportunity. The share of value-added products in Q3 FY '23 was about 81%.
Our expertise and competency in multiple product value chains related to benzene and toluene remains exceptional, and we are leveraging this strength to establish a solid foundation in newer chemical value chains, which will further boost the chem -- company's profitability.
As you all know, during the quarter, we saw two key developments. The first significant event is that we signed a mining 20-year term sheet with Deepak Fertilisers for supply of nitric acid was more than INR 8,000 crores. This is a historic partnership, which will greatly help us in the long term and ensure that we have a steady and adequate supply of the crucial raw material. This comes into effect from 1st April '23, as disclosed earlier and eliminates the need to invest into backward integration for concentrated nitric acid.
The second progress is the demerger of the Pharma entity of Aarti Industries into a separate company, Aarti Pharma Labs Limited. The record date was 20th October 2022 and the new company was listed on the stock exchange, both NSE and BSE on the 30th January 2023.
Now coming to the financial performance for Q3 FY '23. The financials for Q3 FY '22 and 9 months FY '22 have been recasted to consider the effect of scheme of arrangement for the demerger of Pharma segment from the appointed date of 1st July 2021. Further, we had looked to exclude the short fall fee and the termination fee received in FY '22, arising out of cancellation of the first long-term contract to draw an appropriate comparable. As per this during the quarter under review, revenue increased by 12% Y-o-Y to INR 1,854 crores with exports contributed 48% of total revenue. EBITDA improved by 26% Y-o-Y to INR 289 crores. Profit after tax stood at INR 137 crores. Considering this performance, the Board has approved an interim dividend of INR 1 per share. That is 20% of the face value of the INR 5 each.
Demand was steady for key products under the essential end usage, further aided by volume gains. As mentioned, demand for products pertaining to textile end user industry remains impacted and to that extent, the performance appears tapered. We expect demand recovery to come in from the first half of next fiscal year.
Having seen some decline in the raw material prices in the last quarter, and the impact of that might partly be seen in Q4 FY '23. The price of few raw materials are seeing some upside in the last few days. Having said that, we have robust pricing mechanism in place to mitigate the impact of inflationary cost pressure whereby the same is passed on to customers, thereby protecting absolute profitability. Our profitability was further bolstered by the contribution of products with high growth and better margins.
We are happy to report that against the guided EBITDA of about INR 1,100 crores for FY '23, we have already achieved the EBITDA of about INR 837 crores in the 9-month FY '23. We are constantly monitoring the development with reference to the ongoing global recessionary trends and we'll work to optimize our product mix to mitigate the same to be able to meet the guidance given earlier.
As you would have noticed, depreciation for the quarter has increased and is in line with our expectation. This is on account of commissioning of our ongoing projects. With continuing depreciation of Indian rupee against the U.S. dollar, the mark-to-market loss of about INR 11 crores in respect of our ECBs were provided and have resulted in the increase in the borrowing cost.
Now let me turn your attention to the production details for Q3 FY '23. Production of nitrochlorobenzene stood at 18,199 metric tonne, while the same for hydrogenation came in at 2,995 metric tonne. For nitrotoluene, the production for Q3 FY '23 stood at 7,528 metric tonne.
I'll now take you through some of the expansion initiatives announced and updates around that. We are pleased to announce that the plant associated with the third long-term contract has been commercialized by the end of Q3 FY '23 at our Jhagadia facility. We expect that the ramp up as per contract terms will kick in from coming quarters.
Other projects, including brownfield expansion of NCB facility at Vapi and few other specialty chemical blocks are progressing well. This will become operational in over next couple of quarters and start contributing from H2 FY '24. We have started the initial work around expanding the ethylation capacity Dahej SEZ by 3x with an investment of INR 200 crores.
Further, I shared last time with our NT capacity reaching over 90% ethylation, we have commenced the work related do debottlenecking above nitrotoluene capacity. We target the capacity increase by about 50% with an opportunity to cater to certain high-growth application in agrochemicals. We expect both these units to commercialize in H1 FY '25.
During the 9-month period, we said CapEx of about INR 840 crores towards various expansion opportunities we shared previously. Our target annual CapEx will be in the range of INR 1,100 crores to INR 1,200 crores for FY '23. Our volume growth from new capacity will occur in the coming 2 years, but the fixed cost will generally tail the micro inflation, thereby heading a robust gross profit to EBITDA conversion starting FY '24 based on solid business visibility, our EBITDA growth guidance for FY '24 and '25 year stands at CAGR of 25%.
The collective capital expenditure target for FY '24 and '25 remains unchanged at about INR 3,000 crores. And will drive strong momentum going forward. This will be aimed towards developing new chemical value chains and introducing high potential products that will broaden the addressable market size and respond to increased demand from customers.
As a company, we have set our sights high for growth and have taken decision action to ensure that we remain at the forefront of our chosen chemical skill set. Additionally, we see great potential to new chemical value chains and are poised to leverage our expertise to capitalize on this opportunity. These are results of our past initiatives will become evident in the next 2 years, and we are confident in our ability to deliver on expectations. This confidence came from our commitment of best-in-class manufacturing processes, continuous process enhancements, strong R&D focus, robust customer relationship management and unwavering commitment to sustainability and innovation. Our objective is to create value for our shareholders by taking advantage of favorable industry trends.
That concludes my initial thoughts, and we'll now request the moderator to open the floor for the Q&A session. Thank you.
[Operator Instructions] The first question is from the line of Rohit Nagraj from Centrum Broking.
Sir, my first question is on a Q-o-Q basis, our gross profit has been more or less flattish, rather marginally declined. However, we have said that the value-added products contribution has been higher during the quarter. So does it mean that the discretionary part of portfolio actually had more impact during the quarter and because of which the gross profit -- absolute gross profit has been flattish on a Q-on-Q basis?
Hello?
Yes. Sir, you are audible.
Yes. I think discretionary is a little bit pressure on the dye side, but other sites didn't see much impact in Q3 overall.
Sure. Sir, second question is, now earlier we were targeting that part of our CapEx will also go for the nitric acid part of the business, either on -- nitric acid or concentrated nitric acid. But now, since we have got this deal with Deepak Fertilisers still, our CapEx remains unchanged for FY '24, '25. So this allocation -- capital allocation, which was probably earlier done for nitric acid, which part of the business will it be allocated now?
This is our current product, more or less all the CapEx is ongoing, except the two nitrotoluene and ethylation block, which will be commissioned in FY '25. Everything else should get commissioned in Q4 FY '23 and FY '24. And the new product line for chlorotoluene and multipurpose plants, which is where the additional CapEx will go.
The next question is from the line of Praneetha from Morgan Stanley.
This is Vivek from Morgan Stanley. Sorry about that. Sir, two questions from my end. Could you provide a bit more color on the kind of demand trends that you're seeing in your key end segments, particularly, if you could just clarify on what is specifically driving the weakness you're seeing on the textiles side? That's the first question.
Textile slowdown has been going on for a couple of quarters. And I think that is because the global demand slowed down because of, I think, the high inflation and all even countries, like Bangladesh, Turkey, everybody was facing problems. But now currently, some global recessionary trends are also visible in other segments also on auto, et cetera.
Sure, sir. And sir, for a second question, could you also maybe touch upon once all of your ongoing projects are completely commissioned over F '24 and possibly F '25. Could you maybe talk about -- touch on how your revenue exposure could change in terms of your end segment exposure?
Yes. End segment exposure more or less, it will be around 50-50 with the current ongoing expansion. So our FY '25 number maybe more towards the similar 50-50. But chlorotoluene and multipurpose plants, I think, will be more on Pharma and Agro. Going forward, I think there will be some increase on Pharma and Agro during FY '25.
Next question is from the line of Niteen from Aurum Capital.
My question is that how much of CapEx is spending now, including the maintenance CapEx? And what is the revenue there that we'll have it from this CapEx?
Yes. No, this year, we have spent around INR 840 crores. And this year, around INR 1,100 crores to INR 1,200 crores. And next 2 years, what we have guided is INR 3,000 crores. So current ongoing expansion, I think except that nitrotoluene and ethylation more or less, everything will get commissioned by first half of FY '24.
Okay. And what is the revenue gear that we are expecting considering the current crisis?
See, we are targeting about INR 1,700 crores EBITDA by FY '25. So generally, revenue guidance depends on the raw material, but should be up for -- if you take 5x INR 8,500 crores plus.
The next question is from the line of Archit Joshi from BNK Securities.
Sir, in this quarter, I think some revenues must have also flown from the second contract. If we were to adjust for that, has our base business seeing some volume growth given that you are still seeing some challenges on the dyes and pigment portfolio? Have you been able to mitigate the effect of those pain points by addition of some other products? If you can guide something on that front.
Yes. If you remove the shortfall fee and the termination fee overall EBITDA growth has been about 26%. So there is a growth because of the second contract as well as increase in the volume of our regular product also in Q3 compared to the Y-o-Y number.
Got it, sir. Sir, in this volume growth that you're talking about in the base business, is that seem to be sustainable maybe in the next few quarters even until -- as we have mentioned in the presentation for 2 to 3 more quarters, we are seeing some challenges again in the dyes and pigment portfolio. So even without that, would we be able to maintain this volume growth?
Yes. Overall, we'll see that volume growth will happen, but sometimes some of the products we may have to put into nonregular markets. So generally, we will try to keep the volumes but nonregular market may tend to have lesser margins.
Understood, sir. Sir, and another thing that I noticed in the presentation was a couple of new technologies that you've spoken about the vapour phase and the continuous flow. I think this is the first time we have mentioned of such a thing in the presentation on the con calls. Sir, any color that you can give on this? Is this going to be embedded in our existing facilities? Or there's going to be a change in some process? Or is this going to be targeting a completely new product set, anything on that end?
No. This will be for the new product line. Basically, the exiting product, we are not changing any processes.
Right, sir. Some more elaboration sir, if possible? What kind of screens are we at in this technology?
Yes. This chlorotoluene will be doing a lot of downstream production also. And a lot of new chemistries will come. And also in our multipurpose plant also, we have identified some products which will be -- have this kind of chemistries.
Next question is from the line of Sagar Sanghavi from JPMorgan.
Am I audible?
Yes.
Okay. I have two questions. One is on the -- a very long term. We had earlier given a guidance for FY '24 and FY '27 where our bottom line kind of increases up to 2x or 3 to 4x. Does that still remain the same and what will drive it? And the second is you had mentioned about a turnaround in discretionary demand in the next 2, 3 quarters. So again, what will drive this turnaround given that there's a recessionary environment booming over?
Yes. Overall guidance, both FY '24 and FY '27, I think we should be able to achieve. General slowdown, what we see from the customer and everything that can last about next 2 to 3 quarters. I think that is a broader feedback, what we are getting from the customer side.
Okay. If I can just slip in one more question. On the tax rate, how do you look at tax rate going ahead because you've been getting some tax breaks. Does that continue with these new plants which are in commission?
So basically, the new plants have a bit of a higher depreciation for IT...
Sorry to interrupt you. Sagar, may I request to mute your line from your side, please a lot of background noise coming from your end. Thank you. Sir, you may continue.
Yes. So the new facilities have -- for the initial period, there is a higher depreciation and this is whether there will be certain tax benefits available. Plus we have a few units operating in SEZ at couple of other tax, which will be there for a few years. So the tax rates will continue to repay this after.
Okay. So it should be ballpark 20% range?
I thought it would be lower than this.
Next question is from the line of Surya Narayan Patra from PhillipCapital.
A couple of questions. First question is about the crude price correction and the significant correction in the freight cost. What we have seen in the recent past, whether the full impact of this has been seen already in the revenues and the product prices? Or that is yet to be seen in the subsequent quarters?
Generally for domestic, it gets passed on, on a month-to-month basis as far as the benzene, toluene prices are concerned. And export it tends to have some where we have contractual, it gets passed on to on a -- with a quarterly lag basis. But benzene, again has started showing some upward trend in month of January, so February pricing again gone up. And freight has further softened in Q4 overall, yes.
So in fact, sir, see, that was a kind of a concern that possibly the growth number -- revenue growth number will be impacted because of the sharp correction in the freight as well as crude. And what we have seen this quarter is that the growth is largely contributed by the stronger almost, like 30% -- 38% kind of growth in exports, whereas the domestic prices, possibly we have seen the impact of this correction already since the growth has got softened. Now considering the kind of slowdown concern, what you are indicating and this quarter's performance and also the likely repricing of the products are driven with the crude and freight. So should we build any kind of concern for the export growth in the subsequent quarter?
Yes. As far as the trade is concerned, generally freight has been also more or less pass-through with the customer, sometimes with a lag because of kind of freight which has increased in the last couple of years, so there is no option but to pass it on to the customers in that sense. And yes, there is some decline in regular export market is there. So we will have to reshape the products there'll be some impact on export demand in the coming quarters.
Okay. Sir, while the export demand could be a kind of a concern, but considering the ramp-up in the multiyear supply contracts, what we have just initiated or the third contract, which is getting initiated now. So considering that the demand concern will be overcome by this new product introductions. Is it fair to believe sir?
This will be just -- still will be first quarter. So it would take -- a ramp-up will let take a time because of this new contracts.
Okay. Sir, just an extension to this one. So like what is the cumulative CapEx that we would have done for all these three multiyear contracts? So whether -- because the third contract is also now commissioned. So hence, if you can say that what is the cumulative CapEx that we would have done for all the three? And also, we know that these multiyear contracts are the downstream products of our existing line of products. So what is the complementing CapEx that we would have done in our existing products along with the multiyear contract CapEx? So if you can share these two things that will be really helpful.
Actually, second and third is not of a downstream kind. It is more of an independent, second and third contract. And the first contract, which got canceled was more of an integrated. Direct expense of all the three contracts will be maybe around INR 1,000 crores. And if you take indirect, maybe another INR 300 crores, INR 400 crores extra because of that.
Okay. So that means the INR 1,400 crores kind of CapEx, which has not kind of a contributor anything likely to be the growth driver for '24?
Sir, the second contract is already contributing, right.
Yes. Yes. But that is in the initial stage of ramp-up, right, sir?
No. No. Second contract is fully ramped up. The third contract, which we have commissioned now in Q3 of FY '23, which will be going on a ramp-up basis next year.
Okay. Sir, just another one thing regards the margin outlook. So how should we think sir, you had indicated that the newer project, which will be starting from FY '24 are likely to have margin profile in the range of 25% to 30%. So since we are almost now approaching FY '24 and currently, our blended margin, what we are witnessing is in the range of around 15%, 16% level, and the newer projects are likely to have the margin profile of 25% plus. So the blended kind of scenario, what should it be? Could you give some sense on that? Because it is quite clear that the growth on the EBITDA side, it is -- you have already indicated and that is likely to flow in. But on the margins front, how qualitatively that it is going to be changed?
Actually, the value-added product sales will be starting mainly from FY '25. So the impact of high margin will be coming post FY '25. So slowly that -- as a percentage share of this high more value-added product goes up then overall gross margin at the constant raw material will increase beyond FY '25.
Okay. Okay. Just last small question, sir. Is it possible to say what is the cumulative R&D spend, although it is not a line item for us, but what is the R&D spend that we should be doing for a year as a percentage to sales?
It will be about 1%.
Next question is from the line of Abhijit Akella from Kotak Securities.
Just first of all, on the EBITDA for the quarter on a sequential basis, it is up about 7% or 8%. It seems to be driven primarily by lower other expenses, which seems to have fallen quarter-on-quarter. So is this margin expansion largely due to the fall in freight costs and maybe power and fuel costs as well? Or would we have passed this on to customers and instead grow volumes on a sequential basis? What exactly is the reason for this? And in case it is related to a decline in expenses, do we need to pass this on to customers in the subsequent quarter?
The expenses are generally not passed down. If you see the Q2, we had the maintenance shutdown, which has resulted in higher expenses that partly got corrected in Q3. So it is a raw material in the fleet, which gets passed on customers in general. But there are some volume growth and some savings in expenses, which is part of the contribution on the EBITDA side.
Okay. Understood. So this can be retained. And on the second long-term project that has been commissioned, is it possible to just share what revenue run rate it is operating at right now?
That is not an immediate number from that I think.
Or even the first one, has it ramped up compared to the 15%, 20% utilization rate that was quite earlier.
First one is still slower, we had a shutdown in this Q3 for that. But the demand of that downstream product is slow overall.
Okay. Okay. On a Y-o-Y basis, is it possible to share some volume growth number?
Because there are too many different products. So generally, the volume growth numbers, we are not in -- sharing or taking out. Overall value-added percentage was about 81% in this quarter.
Right. And so, one other thing was just that you've spoken about the softness in textiles, which will probably hopefully fadeaway in 2, 3 quarters. And we also spoke about auto showing some signs of softness. There's also a lot of talk in the industry about agrochemicals sort of seeing some demand weakness because of high inventories or worldwide. So are we seeing some signs of softness there as well? And how do you expect these softer in these industries to shape up in coming quarters?
Yes. Agro is more molecule specific. So some molecules, we are seeing that. Other molecules, they are quite strong. So it becomes very molecule-specific inventory impact. And we don't see that impacting more than a quarter on inventory correction. On Agro for some of the products, but not all of them.
Okay. One last thing. Just on the CapEx that's being incurred on chlorotoluene's and then on the asset upgradation initiatives, is it possible to share some figures with us regarding how much is being spent there? And what sort of economics we are expecting from that in terms of maybe revenues and profits?
This chlorotoluene and all spending will start from the next year, actually FY '24. So up until now, the major expenses has been on our existing product line, all these contracts and expansion cum asset restoration on the existing product line and some few specialty chemical blocks.
Is it possible to just break that up sir for us, the asset upgradation and the specialty chemical lines, how much have you spent exactly?
That bifurcation will not have an handy on that.
Next question is from the line of Keyur Pandya from ICICI Prudential.
I think it doesn't partially answered, just wanted to understand, probably if you can give some idea on contract 1 and 2, what we had earlier guided versus what run rate right now we are running at as far as contracts 1 and 2 are concerned?
Yes, contract 2 as such is more of a -- we are as per our original guidance, whereas contract 1 in the demand are slow. So in general, what we had guided was about maybe 30%, 40% this year may not materialize as far as contract 1 is concerned.
And contract 2 would be INR 200 crores when stabilizes, is that INR 200 crores per annum?
No, that were more about INR 500 crores, but it is not purely directly related to top line we destructured, the EBITDA.
Sorry, I couldn't understand.
So it is more not directly to the top line as far as when we consider the EBITDA coming out of a second contract.
Okay. And sir, on contract 1 you mentioned probably the end product is also facing some slowdown. So in absolute terms, what kind of revenue should we expect either say, FY '23 or say FY '24 after considering that slowdown?
FY '24 it will be -- I'll have to get some number that maybe around INR 200 crores. But the margins and all are still under pressure on those lines.
Next question is from the line of Rohan Gupta from Nuvama.
Sir, first question is on our start up Q1 before Pharma demerger -- I mean after Pharma demerger in Q2. We mentioned that INR 1,100 crores kind of guidance for EBITDA for FY '23. Looking at the current number and you've mentioned that there's some pickup in demand environment. What kind of numbers one can expect now? Or is there any upward reason for that given the 9-month number?
No, overall, I think as we mentioned, there's some global slowdown. So we are not revising guidelines. Overall now, we'll try to reshuffle the products and everything to meet the guidelines about INR 1,100 crores.
Sir, second question is in terms of our Aarti Pharma. What kind of sales we do from there? I mean, we are supplying to intermediates to them because earlier there were some intersegmental sales was there. So what kind of business is coming right now from Aarti Pharma? Do we hear anything on that?
No, we don't have any significant sales to Aarti Pharma.
So there is not any significant revenues coming from outgoing to Aarti Pharma.
No, no, no.
Just an observation on the current quarter numbers and trend like the purchase of the stocks in trade -- intake. So that has gone up significantly with roughly INR 126 crores, while we always had adjusted INR 50 crores to INR 60 crores kind of trading business. So what is this? Why all of a sudden sharp increase in purchases of stock intake any particular product commissioning? Or lack of any existing intermediate, which we are manufacturing and we have to buy from outside?
No, no. I guess. One of the reason for this increase in that was the transitionary period because the demerger was effective on 20th of October, and there were certain orders which would have been issued by us in the name of Aarti Industries for the Pharma business. So those orders, we still have to continue servicing from Aarti Industries. So it's more of a transitionary period activity, nothing beyond that.
Okay. So just last on my side, on the contract 1. You mentioned that the product 1 that after the termination, we are still running on yet 40% kind of -- 30% to 40% kind of utilization. You mentioned that there's a global weakness in the demand environment for the dicamba intermediate. Do you see that this environment or the sluggishness in the dicamba intermediate will continue? Or you see that there is some pickup happening. Or are we evaluating any further possibility of further forward integration in complete dicamba, which we had one plant for that? Or can you break it in part and use partially these capacities also facility also for making some other chemicals as well?
Yes. Currently, basically, we are looking at a slowdown in that. So even in FY '24, we don't expect that -- what we had guided 70% may not happen. So what are -- we are evaluating and our strategy on that, whether we can go downstream or we can try to convert the other line into some other products. So as we have two different lines in that. So that detailing we are trying to work out how to optimize those assets.
So if I understand rightly, sir, I think that including the peripheral investment in excess -- along with this contract, we had some INR 800 crores to INR 850 crores investment made in this and that at the current level, 30%, 40% utilization or maybe even not looking at 70% utilization next level, next year. So it means that it will not contribute anything to the bottom line with this run rate and INR 800 crores to INR 900 crores investment will not sketch anything. Is that understanding correct, sir?
No, no, this is the downstream component, which will not be utilized. But the upstream, we'll be starting to give in to the other products. This particular molecule doesn't have much use. But the precursors that we are now going into the other markets.
Okay. So the ancillary investment, which we have made around with this project that is being utilized now? That is only that we have INR 800 crores investment will be made?
Yes. Yes. Correct, correct. That will get ramped up in the next 2 years to almost fully utilized levels.
Okay. This is only related to this plant, which was I think the investment was INR 600 crores, if I am not wrong?
Around INR 500 crores was coming from this plant. Yes.
Okay. So that investment will still stretch lower utilization of just only 70% and where we are evaluating further possibility of getting into other products?
Yes, yes, yes.
Yes. And just one more thing on this. As regards to that investment, just to refresh that is partly -- I mean, there's a significant component of termination and shortfall compensation. So the investment is substantially funded out of cash down. So typically, there's no cash flow, which has gone into that it is completely...
Yes, that we understand because we already got the termination fees along with the 2 years EBITDA number, that we understand. That is already money sitting in the balance sheet, right?
Yes, yes, yes.
Just last from my side, sir. Sir, last time, you guided for the further reduction in debt, and you mentioned that roughly last quarter, debt was at peak level. So do we see that -- and the working capital, which has gone up in between what kind of debt level we are looking at year-end?
So I guess, the debt level should be virtually be a bit lower than what we have seen on the fee but maybe around INR 2,600 crores, INR 2,700 crores debt level could be seen. So some part of it is because of reduction in the commodity prices or the freight cost and other things which is resulting in the reduction in working capital.
So still it will be INR 2,700 crores, you're a going to cross debt. What kind of the net debt number?
No, I'm looking at more or less gross and net will be similar.
Okay. This, I'm asking because we looked at when in Q2 con call, you mentioned that will be -- this is a peak yet, and we'll see some reduction in that level in net debt level and which can come down by year-end.
It is already been by reduction.
Next question is from the line of Ankur Periwal from Axis Capital.
Sorry. Am I audible now?
Yes, you are.
Yes. Okay. First question on Slide #9, wherein we are saying that 50-plus products are in the pipeline from R&D perspective. Are these products largely for the existing value chain? Or these are the new value chain that we have talked about?
Yes. These are mainly from the new value chain but some from the existing value chain also. But more than 3/4 will be of new value chain.
Okay. Sure. And so from a time line perspective, these will be FY '24 onwards getting commissioned, right?
Yes, FY '25 onwards.
'25 onwards. Okay. And sir, second question on the volumes front. While I understand near-term slowness in terms of macro, et cetera. But from a medium term, let's say, from a 3, 5-year perspective, what should be our volume growth on a like-to-like basis?
Yes, basically, what we are seeing that in around 40%, 50% volume growth, that's what we are guiding in EBITDA, more or less that volume growth will transfer on our existing product line, about 40%, 50% growth and then the new products will come in.
If I got you right, 25% CAGR, which is 50% almost growth is largely volume driven largely from the existing product segments.
Yes.
So any top-up there from chlorotoluene or the other initiatives will be inching up the growth further?
Correct. Correct. So that will be more of FY '25 onwards. So it will be commissioned in FY '25. So we don't see much coming in from both -- in FY '25. We are commissioning a year. So the new product real contribution to EBITDA will come from FY '26.
Fair enough. And here, we are largely gaining market share because the reason I checked on this was historically, looking at the chemical business EBIT, the growth has not been as sharp versus what we are guiding now. So is it any specific area wherein we are gaining market share globally? If you can help us understand that.
Yes. Some of the product is, the post contract downstream upstream capacity, which we'll try to fulfill that and then nitrochlorobenzene in new capacity, which are coming. And at ethylation plant, we are -- that is a totally additional volumes, which we had tripling. And nitrotoluene also we are expanding. So across the board, somewhere the new will get started in FY '24 and '25. And the rest, which is already commissioned. So there'll be some ramp-up on this first contract-related upstream capacities.
Okay. That's helpful. And sir, lastly, if I may, on a 9-month basis, if you can define how could be the -- how should one look at the volume growth here? I understand it's a mix of multiple products, but broadly, directionally, what should be the range?
That -- it had become difficult. And again, contractual -- new contract is a different kind of volumes and also. Overall, the value-added percentage has increased to 81%. The specific number will not have a volume growth.
Next question is from the line of Ranjit from IIFL Securities.
Firstly, on the second long-term contract. If I understand it right, there was an advance that we have got for setting at this particular contract. So to that extent, this should be a largely noncash flow, at least for this particular year. Is that understanding right?
Correct. Correct.
Okay. So how long would that be, whether we will be exhausting that this year or this...
Sorry, sorry to correct that it only be a noncash flow thing -- the cash flow coming in from the contract. So the advance doesn't get adjusted against the supply, gets partly adjusted, and it will be there over a period of -- fairly, a longer period of timing.
Okay. So how long would that continue over the next 2 to 3 years?
It will be more than that, but we can't give the exact details on kind of confidentiality purpose but it will be there for more than 3 years, for sure. That will be gradually phased out over time.
Sir, can you put a number to that gradually is a 20%, 25% each year or even less than that?
A little bit lower than that.
Okay. And the rest will be kind of a cash flow?
Yes.
Okay. Second, we have said that most of our projects would be kind of a commission in the first half of FY '24, and it will continue to have the guided impact of 25% CAGR. Would it safe to assume that probably the bulk of this growth would largely accrue in FY '25, even that we will have this overheads in FY '24?
Yes. Can you repeat the question?
Yes. So our EBITDA CAGR for the next 2 years is 25%. And we have also said that most of our CapEx is likely to come on stream in the first half of FY '24. So I assume that there would also be a higher overage on account of capitalization. So to that extent, the EBITDA growth should be a bit lower. So would it safe to assume that the 25% CAGR that we are guiding would be skewed towards FY '25?
Yes, it will be more towards FY '25, yes.
Yes. And lastly, the way I understand the business is we are -- we generate a lot of isomers, we carry we out to one reaction and there are multiple products that we generate, the fluorination hydrogenation or nitration process. And when we say that we were exposed to the discretionary is around 50%. So the question is that would that 50% eventually also impact the other 50% of the business, where there is a demand, but there could be a situation that we might not be able to cater that because we are contained by our ability because beyond the point we might not be able to produce because of the slowdown in a larger part of the portfolio?
No. Generally, we are able to place it on a nonregular market. So generally, we are able to manage in a particular segment has a lower demand. In a regular market, we try to place it in a nonregular market.
That's what we did during COVID as well, maybe as part of the COVID.
Correct. Correct.
Next question is from the line of Nitin Agarwal from DAM Capital.
Sir, two things. One is, a, you talked about this 25% EBITDA CAGR over the next 2 years. Now you also talked about certain softness being there in some of the segments, like textiles and autos. So what is the risk in your assessment on this guidance? What should be mindful of?
So we expect there is a normal demand situation should resume. At least FY '25 should see a totally normal demand. It is mainly based on that.
And sir, what could drive upside to this? I mean what could be the primary -- is there any source of upside to this guidance, which elements can surprise us on the positive side to this guidance?
Yes. I mean, overall, if certain product there and some shortages we have created and then higher profits can come up because of that.
Have you been seeing any instances of these in recent times where supply in certain products where because of various reasons, the issues in China or Europe, there have been shortages and price improvements or some mass supplies have been largely normal across most of your products?
Yes, most of the products are in a normal situation.
And sir, lastly, this whole talk which has been there about China Plus One. Later, Europe Plus One also. In your assessment, how much of that has played out and in which shape and form are you seeing it playing out?
China Plus One is a very long-term structural thing, which is going on for last maybe 5, 7 years, and I think we will continue to happen for the next 5, 10 years. So there is a Europe Plus One is long term. Some of the energy intensive products, you see that the investment in Europe might become less because the energy will become costlier. So that may open up opportunity for India. So then that Europe Plus One also may take 2, 3 years that you have to identify the products where they will open other long-term opportunities.
Sir, have you had any conversations with your clients around this, the potential fallout from this Europe Plus One? Or this is right now largely a concept, and it's not much really translating into numbers of industry -- Indian industry just yet?
No, it's just discussions are going on of these possibilities in that but that impact will come only up for 2, 3 -- after 2, 3 years. So except some people have surplus capacity and you temporarily put up. But in general, I think for the newer capacity, it will take 2, 3 years.
And sir, just last one on FY '24, you said bulk of the growth will be driven by our current products. And FY '25 is where some of the newer products will start to contribute in a more meaningful way. That understanding is correct, sir?
No, even up to FY '25 will be more of the current product line because FY '25 by the new product line, it will be the first year. So we don't see any significant EBITDA coming from new products in FY '25, but some volumes will start coming in FY '25 from the new products.
And sir, on that, the fact is we have the same product lines if you're saying which you've been driving growth for '24, '25. I mean, what has been the reason that our growth has been relatively little contribution for some of these existing products have been little on the muted side over the last few quarters. I mean what is going to change in your assessment over the next 2 years on this current portfolio, which can drive up such a reasonably strong growth versus what we've done in the recent past?
Yes, basically, this enter the first contract backward change, which we had expanded that we expect that to get a fueled in. And this new ethylation and nitrotoluene that is a new capacity, which we are adding based on more visibility. And nitrochlorobenzene expansion will happen. So those are the things which will lead to this volume growth and some other specialty chemical also we have added. So that will also drive growth.
And sir, last one, sir, on Pharma business, so how are you planning to share more details on the business? Anything which is planned, if you can share it on this call?
Basically, 9-month results are already in public domain in Pharma. So -- and EPS for 9 months was about 16.6. So annualized EPS about 22 for Pharma. On an absolute number, PAT is about INR 151 crores and EBITDA is INR 264 crores for 9 months in Pharma. And then after Q4, obviously, there will be a regular interaction for Pharma also.
Next question is from the line of Ritesh from Morgan Stanley.
Sir, just one quick question. Did you say that your FY '23 to '25 growth, 25% CAGR is more FY '25 driven rather than FY '24 driven? I got confused when you answered to your previous participant.
Yes, yes. Because FY '24, even some slowdown might go on in maybe 1 or 2 quarters. And so, FY '24, is I think will be more of a turbulent year in that sense. So that clarity will be viewing in Q4. But FY -- yes.
Next question is from the line of Vishnu Kumar from Spark Capital.
If you see the 9-month sales number versus '22 and '23, roughly about INR 860 crores is the increase, which is completely driven by exports, which means domestic seems to be flat for 9 months. Now considering that commodity prices have generally gone up and also some new plants have kicked in for you, it appears that your volume growth overall seems to be negative. Is this only -- I mean is the number quite large in textile, so we are not seeing any growth in domestic? Or other segments are also not doing great? Any thoughts or color on this?
No, textile is generally domestic. Textile has a very less export component. But overall, I don't think it will be negative. We have not looked at that way actually bifurcation of export and local.
So if you just look at the 9-month number, '22 to '23 is practically flat. So I mean, obviously, the commodities prices have gone up. So it appears that at least the volume could have been negative.
Yes. That is, in general, we always tried to reshuffle depending on the market, the remote potential in export market will push it there. So it hasn't been analyzed that there will be a decrease.
But how much would be textile out of our overall domestic sales? Any rough idea if you could give us?
So overall, we are more around 15%, 20% range. So textile market and domestic may be around 20%, 25%.
Next question is from the line of Meet Vora from Axis Capital.
Just trying to understand the thought process behind...
Sorry to interrupt you. Sir, your voice is breaking terribly. May I request you to come in a better reception area please?
Hello. Am I audible now?
Yes.
Sir, just wanted to understand our thought process behind tying up volumes of nitric acid with Deepak Fertilisers. So earlier, we were contemplating a INR 200 crores of CapEx for setting up a concentration plant. And in last call, you mentioned that this plant has been ordered. Now given that as we grow our business, nitric acid is our key RM and even Deepak Fertiliser is not expanding their capacities. So how do we see this? I mean, will we be able to suffice our volumes from this agreement?
Yes. Basically, they'll be expanding capacity Deepak Fertiliser also plans to expand that capacity. And overall, because Deepak Fertiliser is multi-location, multi-plant for both weak nitric acid and concentration nitric acids. So it's kind of daily stress rather than having a one single stream plan for us. So that is an advantage of sourcing from Deepak Fertilisers compared to our own single plant dependency. And second thing it frees up the cash flow for more on a value-added specialized chemistries. So they're the two main reasons, which are driving this.
Sure, sir. And secondly, we have highlighted that this quarter performance has been aided by newer capacity additions. So is there any other capacity addition except for first long-term contract and the second and third long-term contract?
Other than that, not be any significant capacity addition in this quarter now.
Sure. So this 9-month performance has been headed by second and third long-term contract addition?
Yes.
Next question is from the line of Rohit Nagraj from Centrum Broking.
Yes. Sir, in our presentation, we have mentioned that in FY '22, 5% revenues came in from China. And given that recently, the restrictions have been over, have you seen any demand pickup, particularly for the exports in China?
Yes, I think demand from China is now normalized overall, I think.
Next question is from the line of Surya Patra from PhillipCapital.
Sir, just wanted to check about the cost component relating to the energy and the date. So in fact, FY '24 put -- just two components put together was about 8%. So for FY '23, the cost share would be, what should be the percentage to sales, sir?
I think that detail have to be taken out especially because...
We have to pull that numbers out for that. Yes.
Yes, yes, yes. Okay. So that is the one. Secondly, some clarifications. Just what we are trying to say is that this third contract what we have commissioned. So this year, we may not find any meaningful contribution in the -- even in the fourth quarter. Practically, that will be contributing from the first quarter. Is that right, sir?
Yes, yes, yes.
Okay. And even the new projects, so you have said in the -- for FY '24, the chlorotoluene project, the NTC project and the expansion of the NCD, these are the three key kind of commissioning that we should be seeing along with the specialty chemical project. Is that the kind of right understanding, sir?
No, no, no. Multipurpose plant will get commissioned in FY '25. And chlorotoluene will be FY '25 and FY '26. There will be multiple blocks for chlorotoluene. So over that 2-year period, we'll have a commission of various chlorotoluene blocks.
So then what are the projects that you are indicating for FY '24, sir?
So nitrochlorobenzene and some other specialty chemical blocks, which are currently under the construction.
Okay. Okay. Okay. So -- and just last one question. So this year, the first agrochemicals dicamba project, utilization should be in the range of around 20% or so, that is the kind of fair number we should consider?
Yes.
I now hand the conference over to the management for closing comments.
Thank you, everyone, for taking out time to join us on our Q3 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'll address them. Stay safe and we look forward to connecting with you all of you again in the next quarter. Thank you once again.
Thank you very much. On behalf of Aarti Industries Limited, that concludes this conference. Thank you for joining us. You may now disconnect your needs. Thank you.