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Aarti Industries Ltd
Earnings Call Analysis
Q3-2024 Analysis
Aarti Industries Ltd
Aarti Industries has demonstrated a resilient performance in Q3 FY '24, achieving a robust 15% sequential improvement in EBITDA despite external challenges such as inventory destocking, high global interest rates, recessionary pressures in developed markets, and competition from China. The company's diversified portfolio and strong customer partnerships have enabled it to dynamically manage its product mix and cater to changing demands. This agility has led to an 18% increase in consolidated revenue to INR 1,889 crores, and a 36% increase in profit after tax to INR 124 crores, compared to the previous quarter.
The company has secured major long-term supply contracts, including with a global agrochemical major for a niche product with a potential revenue of INR 3,000 crores over nine years. Another contract with a multinational conglomerate could yield over INR 6,000 crores for a specialty chemical. These contracts reinforce Aarti Industries' ability to transition from short-term deals to long-term agreements, highlighting its manufacturing excellence and deep customer engagement despite challenging environments. Demand for these products is expected to grow, with no additional capital expenditure (CapEx) required for the second product as current CapEx plans can accommodate the increased volumes.
Aarti Industries is pushing forward with their expansion, having invested INR 860 crores in CapEx in the first nine months of FY '24, and plans to spend between INR 2,500 crores and INR 3,000 crores between FY '24 and FY '25 on new ventures and manufacturing capabilities. The ongoing projects will commence in a phased manner from FY '25 onwards. With the completion of these expansions and operating leverage, the company expects to end the fiscal year with an EBITDA close to INR 1,000 crores, and project an even more optimistic EBITDA between INR 1,450 crores to INR 1,700 crores for FY '25.
India's cost competitiveness, improved R&D infrastructure, supportive government policies, and strong domestic demand have favorably positioned it in the global chemical industry. Aarti Industries anticipates leveraging these advantages, as geopolitical risks prompt global companies to diversify their manufacturing requirements to India. As an integrated chemical player, Aarti Industries aims to benefit from this shift and maintain its stature as a global partner of choice for specialty chemicals and intermediates.
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Ladies and gentlemen, good day, and welcome to Aarti Industries Limited Q3 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I'll hand the conference over to Mr. Nishid Solanki from CDR India. Thank you, and over to you, Mr. Solanki.
Thank you. Good afternoon, everyone, and thank you for joining us on Aarti Industries Q3 FY '24 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 the opening call thoughts from Mr. Rajendra Gogri, who will take us through the performance overview, progress on growth plans and outlook on the business, post this we shall open the forum for question and answer, where the management will be addressing queries of the participants.
Just to share our standard disclaimer. Certain statements that may be made in today's conference call maybe forward-looking in nature and the disclaimer to this event has been included in the results presentation that has been shared earlier and uploaded on the stock exchange website.
I would now invite Mr. Rajendra Gogri to share his perspective. Thank you, and over to you, sir.
Thank you. Good afternoon, and warm welcome to everyone joining the call today. We are gathered here to delve more into Q3 FY '24 earnings of Aarti Industries, and I'll guide you through the performance, provide updates on growth initiative and outline our strategy.
I'm delighted to share that our concerted efforts have translated into robust results, reflected in about 15% sequential improvement in EBITDA in Q3 FY '24. This was possible despite persistent external challenges, despite going headwinds such as inventory destocking, high interest rates globally, recessionary pressure in developed markets and China dumping.
We effectively navigated to report by our buoyant performance, thanks to the strength of our portfolio, and enduring partnership with our long-standing customers. I would like to compliment our team for promptly applying their market insights, allowing us to dynamically manage the product mix based on evolving demand.
As highlighted in the previous call, we are observing a rebound in demand for various products catering to the discretionary applications such as dyes, pigments, additives, polymers and more. But it is still early times. We remain optimistic about the complete recovery as we progress further.
The nondiscretionary segment, primarily driven by agrochemical and pharmaceutical, is being soft, as major customers are managing lean inventory due to high carrying costs and moderated demand. That being said, we are witnessing steady demand for select products within the nondiscretionary space, and are actively engaged with key customers to offer back value.
Even so we anticipate that we can do more widespread demand normalization in the next 1, 2 quarters. And in alignment with which we continue our dialogue with customers to fulfill their long-term requirements.
Now let me cover the key performance highlights. Our consolidated revenue increased by 18% to INR 1,889 crores in Q3 FY '24 over previous quarter's Q2 FY '24. Consolidated EBITDA, including other income, grew by 15% on a Q-o-Q basis to INR 268 crores in Q3 FY '24.
Management in EBITDA was driven by increased volumes, while maintaining stable pricing for products and also include an element of operating leverage gains, achieved through stabilized fixed costs.
Profit after tax stood at INR 124 crores in Q3 FY '24, higher by 36% over previous quarter Q2 FY '24.
I'll now cover some of the major business developments. In December '23, we entered into a long-term supply contract with the Global Agrochemical major for a niche agrochemical intermediate with a revenue potential of over INR 3,000 crores over a period of 9 years. This agrochemical intermediate serves as a crucial input component for a widely used herbicide. And the global market for this herbicide remains large and growing steadily.
More important, it is an integral component of AIL's existing integrated product portfolio, and our current CapEx plans are well aligned to meet these order requirements. This order will start contributing our performance from the current fiscal, and we anticipate an EBITDA margin about 20% based on the stable raw material prices.
Our application with this the prominent customer has been robust and we aim to foster this relationship further to expand within the high-value agrochemical sector.
In another major development, we secured a 4-year supply contract worth over INR 6,000 crores with a multinational conglomerate for a niche specialty chemical. This product is also included in our diversified product portfolio, and we have been supplying this product to the paid customer for the past few years with consistent annual increase in volumes. No additional CapEx is anticipated for this product as our existing CapEx is structured to manage these incremental requirements. Demand for this product has been growing continuously. We anticipate doubling volumes in calendar year '24 versus that of calendar year '23 with this customer.
The strong demand is based on the newer applications, which has been evolving over the last few years. We expect that the margin in this case would be about 15% to 17% at constant prices.
In short, both these contracts are best among our ability to convert short-term or spot business into a medium- to long-term contract, with substantial increase in volume. It also speak volumes about our manufacturing excellence, strong and deep customer engagement, and a robust track record of handling multiple complex chemistries. We are more than happy that this has come through such a challenging macro environment, which underscores our commitment to transforming relationship into sustainable long-term opportunities.
Let me now turn your attention to the production details for Q3 FY '24. Production of Nitro Chloro Benzene stood at 19,580 metric tonnes as compared to 18,199 metric tonne in Q3 of last year and 19,014 metric tonne in Q2 FY '21. For hydrogenation, this came at 3,644 tonnes per month, over 2,995 tonnes per month in same period last year and 3,136 tonnes month in Q2 FY '214. For nitro toluene the production of Q3 FY '24 stood at 6,951 metric tonnes as against 7,528 metric tonne in Q3 of FY '23, and 7,560 metric tonnes in Q2 FY '24.
Moving your focus towards update on key projects. All the other projects, including capacity increases in ethylation and nitro toluene and introduction of chloro toluene value chains, among others, are progressing well and will start commencing in a phased manner from FY '25 onwards. We entered a CapEx of about INR 860 crores in 9 months FY '24 to fund our expansion projects, and remain on track to collectively deploy INR 2,500 crores to INR 3,000 crores between FY '24 and FY '25 to expand our manufacturing expertise and venture into newer high potential chemistry to accelerate our performance trajectory.
We had earlier guided for our EBITDA to be about INR 950 crores to INR 1,000 crores for FY '24. While we are witnessing revival of business across various discretionary applications, there's still some more pain and time for recovery to be visible in the agro and pharma sector. Further current macro challenges across the Red Sea have resulted in a sharp increase in freight costs and the container availability. Our arrangement with customer enable us to pass on most of these impacts to the customer with a time line.
In line with this current performance and visibility available, we expect to close this year with an annual EBITDA closer to INR 1,000 crores. We further expect our FY '25 EBITDA to be in the range of INR 1,450 crores to INR 1,700 crores.
Let me now conclude by saying that India is favorably positioned within the global chemical industry given it's cost competency, improving manufacturing and R&D infrastructure, supportive policies and strong domestic demand.
In addition, evolving geopolitical risk prompt global company to shift a portion of their manufacturing requirement to India. As an integrated player, we'll continue to reap the benefits and remain a global partner of choice for speciality chemicals and intermediates.
With this, I now close -- with this, I now request the moderator to open the forum for a Q&A session. Thank you.
[Operator Instructions]
The first question is from the line of Vivek Rajamani from Morgan Stanley.
Two questions from my side. The first question was, given the demand recovery that you're witnessing, can you talk about your sales mix in terms of whether your reliance on nonregular markets is reducing? If you could give us a sense of where the share of your nonregular markets were, say, last year to where it is today?
Yes. As demand is recovering in our regular market, quarter-on-quarter our share of nonregular market is decreasing. We will not have absolute percentage here. But in general, as the regular market is improving, the nonregular market share is decreasing.
Sure, sir. And second question I had was, in the presentation, you've mentioned that you've seen an improvement in pricing trends. Would it be possible to give a sense of how much pricing improvement you've seen relative to the trough, which I guess was in the first half of this year? And which segments are driving this pricing improvement?
Basically, as some of the products where the demand are revising, we are also seeing potential of some increase in pricing. So it will be across all the segments, whether it's agro or on discretionary side also, but it become more of a product-specific, but in general, we see that as the demand recovers some pricing improvements are also taking place.
Sure, sir. Just one clarification. Would it be possible to give any kind of percentage number just for a sense in terms of this improvement?
Not really on a percentage basis, we do that.
Next question is from the line of Rohit Nagraj from Centrum Broking.
Congrats on good sort of numbers and asking to see that the guidance remains intact for FY '25. Sir, first question again on the demand front. So if you could just give us an understanding of which geography the discretionary demand has been good and which geography the nondiscretionary demand has been good or languishing. Just to get a perspective how individual geographies are doing domestic as well as the other -- U.S. or Europe or rest of the world?
Actually in geography, the way our product mix are there in our end products. So the product which we export to say U.S., Europe or Japan, the finished goods products, what they make, whether it's a agrochemical or engineering polymers. They are exported worldwide in that sense. So even the consumption that comes in a particular continent, the finished products are sold all over. But in general, U.S. is seeing a better -- if you just want to specify, the U.S. is seeing a better recovery in volumes.
Right. And any sense on the domestic market, India, for both the segments?
Yes, domestic -- because we have a lot of indirect export also when we sell to domestic. So purely a domestic market, I think, is a very steady -- as such.
Sure. That's helpful. Sir, second question is on the 2 contracts. So given that it's a 9-year contract and 4-year contracts, how do we see the revenue? Will it be linear? And even from the EBITDA perspective, whether from first year of operation, I mean, right from FY '25, we'll get the EBITDA of 20% and 50%, respectively, for both the contracts?
Yes. Now, the second contract is a very linear basically. So it will be INR 1,500 crore coming in the calendar year '24 itself. And whereas the first contract, which was INR 3,000 crore over a 9-year period, we expect -- ramp up in FY '24 and FY '25. And FY '26 would become more of a normal year because as we are expanding our plant, which should be basically getting ready in the first half of FY '25. So around INR 300 crore will come in FY '25 for the first contract, but then it should become INR 350 crores plus from FY '26 onwards.
Sure. Just one last clarification from Chetan Bhai. In terms of the tax...
Rohit, sorry. Cloud you just speak a little louder, please?
Yes. Is it better?
Yes.
One last clarification from Chetan Bhai. In terms of the tax, which has been negative for the first 9 months, how do we see it for FY '24 and FY '25 average tax rate.
In FY '24 the tax would be negative. We got this -- some of these assets, which are getting commercialized and that IT depreciation is higher than the book depreciation, which is where the tax rates are going to be -- I mean they don't -- will be a tax liability -- the deferred tax asset could come in. FY '25, I expect this to be in the range of around 15% to 17%.
Next question is from the line of Aditya Khetan from SMIFS Institutional Equities.
Sir, just a couple of questions. Sir, first question is on the gross margins. Sir, this quarter, we had witnessed that on sequential basis, our top line has been robust. But sir, despite this jump in -- raw materials has also gone up very high. So this has led to compression in our growth [Technical Difficulty] I believe it is the lowest of the last 8 quarters. So when we look at the prices of benzene, toluene, phthalic anhydride, aniline, on sequential basis, there hasn't been any jump. So what is the reason for this huge dip in margins?
Actually, generally, we have been always telling that gross margin or EBITDA margin is a number which is not a very appropriate number for comparing. And as far as the volume of raw material price, the benzene has seen an increase of about INR 10 from INR 70 to INR 80. But in general, this gross margin to -- as a percentage will depend also on the product mix. So as the product mix changes, the gross margin also will have some variability.
So important thing for us always will be basically the gross profit, then the expenses and EBITDA on an absolute number-wise, how it is moving. So on an absolute basis, there was a growth both in gross profit as well as on EBITDA.
Is the growth [ is dipping ] -- so that means the product mix is changing towards the lower side or towards the lower -- product [Technical Difficulty] so towards the value chain?
Basically, the -- that -- it may not be that simple. Basically, the product mix of where it is changing and how the raw material price of those products are there, that will determine. So I think as a gross margin, we never even evaluate in our business model. Basically, it is always gross profit per kg for a particular product. So that is the major criteria.
Got it sir. Sir, on to the 2 large contracts which we have signed recently. So sir, my understanding is that so these 2 projects will not add any revenue or EBITDA. It just increases the visibility over the longer term. Is this understanding correct, sir?
Yes, because this was already part of our existing CapEx program and whatever we had guided. If you remember, in the first half, we had guided for FY '25, INR 1,450 crore to INR 1,600 crores. But now we are guiding INR 1,450 crores to INR 1,700 crores. So that -- because it shows a more stronger visibility with signing of the contract. So in a way, you are right, it gives more solidity on the visibility.
Got it. Got it. Sir, my last question, sir, in our presentation, we have mentioned that we have started to see demand recovery into dyes, pigments and polymers. And the Agrochemicals and Pharma segment that continue to underperform. So any outlook, sir, into the agrochemical side because most of the agrochem companies have reported very weak numbers for this quarter.
Also like -- so supplying to some of them. So any outlook from them which are witnessing any change in outlook from the coming quarter that demand is improving or any sort of any guidance?
It's a very -- actually agrochemical becomes very, very molecule-specific, like some products virtually we didn't see any clear impact at all. And some products, there was a impact and now it is on a recovery. And some products the sudden impact has come because something is there, by on annually in the 3 months. Last year, they were bought in, say, January to April. And when it comes to January to April calendar year '24, the demand goes down sharply.
So this agrochemical demand impact is becoming a very molecule-specific and some of them, where there was no pain in the last year, suddenly because they're buying only for a few months in a year, it suddenly also crops up. But in general, I think most of the agrochemical company itself have been saying that I think calendar year FY '24, at least a couple of quarters for them as a basket will have an impact and some impact of that will be on us also.
So we'll see this sector to underperform. And can this have a bearing impact on our margins like -- so it can remain into the similar range for a longer period of time?
So part of that -- because we have a wide range of end use and all. So part of that is covered in our guidance also, some softness in agro.
Next question is from the line of Abhijit Akella from Kotak Securities.
The 2 new contracts you've announced, would it be possible to just help us with the revenues we are making from those in FY '24. Just so that we know how much is incremental coming in from next year onwards?
So second contract, which is about INR 1,500 crores, the revenue in this FY '23 will be more around, I think, INR 900 crores or something on a financial year basis. Calendar year, it was doubling. But financial year basis, FY '24 to FY '25, it will be kind of a jump from around INR 900 crores to INR 1,500 crores.
And the second contract, the FY '24 sales will be below INR 200 crores. The first contract, sorry, that -- INR 3,000 crores over a 9-year period.
Understood. And you said that the agrochemical contracts will ramp up gradually, right? So FY '25, we expect -- if you could please just share that number again? How much do we expect in FY '25 and then '26?
FY '25, near INR 300 crores. And FY '26 onward will be INR 350 crores, the full rampup phase.
Got it, sir. The other one was just on -- so of this EBITDA guidance that we have now, INR 1,450 crores to INR 1,700 crores for next year, how much has already been tied up after all these based on the contracts we have in hand and how much is still left to be tied up over the remainder of the year?
So basically, overall, if you say, the -- our contractor business will be -- with these 2 contracts will be more about maybe 30% to 40%. And rest will be also like a semi contractual where the customers have been buying for years and there is a good visibility in general for those also. So there are -- some of them they're buying for on quarter-on-quarter basis quarterly pricing and all that. So we are in touch with those also and the kind of visibility on volumes, the range what we are getting from them, that will -- helping us -- looking what are the kind of volumes we will see in FY '25.
Okay, sir. Just 2 last things for me. One is for the ethylation and nitro toluene capacities that are coming up. Would the primary end-use industry be agrochemicals itself? Or does it go into other end users as well?
Ethylation is basically an agrochemical driven mostly, whereas the nitro toluene part of that will go into the ethylation. And other component nitro toluene the para nitro toluene, which has a more wider end use profile.
Right. And the final thing is just on the chloro toluene project. Any sense of the time line for commissioning following which how long it will take to get customer approvals, especially depending on how much we are targeting to sell in the export markets. And therefore, how much revenue can we expect from chloro toluenes in FY '26, once the capacity is [ unlocked ].
So basically, commissioning will happen in FY '26. So that will be a commissioning year. And most of this product we -- lot of this product will be in for substitutes within India. And also for export, they are not very near to the end where we'll take a lot of time for qualification. So we don't see much. Overall, on a product mix basis, not much delay on qualification.
So FY '26, I think the contribution because it being a commissioning year, will be difficult to really quantify. But FY '27 onwards, we'll see a sizable EBITDA coming from this chloro toluene range.
Next question is from the line of Rohan Gupta from Nuvama.
Sir, first question is on the clarification on our contract 2. So you mentioned that definitely, we don't need to incur further CapEx and the revenue we can expect is roughly INR 1,500 crores. So that should directly add to the bottom line with the incremental EBITDA.
The question is, sir, that the 15% to 17%, 16% kind of margin we are guiding in this product, with your EBITDA guidance of roughly even at the higher end of INR 1,700 crores for full year FY '25. So if you do just do some back of envelope calculations on x of this product, we are looking in EBITDA margin of close to 20%, significant improvement from the current year. So is that something we are looking for that kind of margins in FY '25 to achieve the guidance which we are talking about at the higher end of INR 1,700 crores.
Yes. That's what we have been highlighting for a year or so because the operating leverage will kick in. And conversion of gross profit to EBITDA will be high. And that will have the constant raw material prices, our EBITDA as a percentage also progressively should go up. So it will move towards 18%, 20% range, even if you hit INR 1,700 crores.
Okay. So you are assuming that even the constant price of raw material we can hit to 19% to 20% kind of EBITDA margins. However, the current quarter, for itself, your EBITDA margins were quite muted at 15%, sir?
Yes. I think basically, whatever the gross profit which we expect to be added next year, it will be virtually translating into EBITDA.
Okay. Sir, second question is on some volume clarification on -- we have seen a sequential strong recovery in the current quarter. How were the volume numbers which you shared that except that probably in hydrogenation, NCB and nitro toluene volume doesn't seem to show such any sharp improvement on sequential basis Q-on-Q. So it is that the recovery is more -- the sequential growth is more driven by the pricing scenario?
We have got a lot of other specialty products also. So the volumes have been growing in other products. which are more on a value-added and kind of -- yes.
Sir, just one more question I will come back in queue. Sir, once again, coming back on the contract 2. Sir, particularly the reason for compromising on margins at EBITDA at 15% to 17% when we converted this contract in the long term. Is there any pressure from the customers to get in this kind of margins and compromise on the profitability to have the continuous supply or it was our decision only that we wanted to have some long-term visibility, and that's why we have compromised on margins?
No, I don't know. There is no compromise on margins. I think there is some confusion on that.
Sir 15% to 17% versus the rest of the business, you are looking at 19% to 20%, it means that on this product, we are making -- we have making a lower margin than the other part of the business or other product...
That is -- when we move to INR 1,700 crores at that time, and as a composite, it will reach that basically, if you're reaping around say, INR 9,000 crore turnover. You'll be in...
But sir, I'm sure that 15% to 17% is not the range on which we want to do the business, right? You have always been highlighting that long-term margins will be 20% upward. So definitely on this such a large product with INR 1,500 crores, contributing roughly 15% to 18% top of our revenues, we must have -- we have compromised on the margin, isn't it?
No. This margin can become 22% also and can become 12% also, if the raw material prices increase. So generally, if this margin emphasis is not in our criteria, in general. So it is basically per kg. And for kg -- current raw material levels, so these are the numbers basically we have. So if the raw material goes down, this is -- so 20-plus the same product.
Okay. Sir, with the INR 1,500 crores turnover, the asset which we will be using for this plant, a very ballpark number so we can get some assets turnover idea on this product?
That I will not have -- any data available on that.
Next question is from the line of Chetan Thacker from ASK Investment Managers.
Sir, just one question is on how do you see debt playing out over the next year in terms of how -- where do you see gross debt ending at the end of FY '25?
Assuming that the raw material prices remain at the current level. I believe the FY '25 debt to be in the range of INR 3,500 crores to INR 3,700 crores to INR 3,800 crores.
So you're expecting some relief from working capital there?
That should be happening, but let's wait and see what happen on the raw material prices.
And sir, just to get the CapEx guidance right, FY '25, we are talking about INR 2,500 crores to INR 3,000 crores?
No. No. It is for '24 and '25, 2 years put together. So this year, we will be somewhere between INR 1,200 crores to INR 1,300 crores. And the balance of that will be for FY '25.
Next question is from the line of Priyank Chheda from Vallum Capital Advisors.
Sir, my question is on assets. What are the asset turnover at the current prices for chlorotoluene project that you are putting. And the total capacity of 42,000 is equally divided among nitro and para toluene. Or are there any other products within chlorotoluene basket that we are going to manufacture?
The 40,000 is based chemical Ortho and para chlorotoluene. And overall, as I said, chlorotoluene combined, we -- our asset turn is around 1 to 1.2 -- around 1.2 will be the asset turn for chlorotoluene range of product.
Okay. Okay. And how much of that would be getting imported within the -- product value-added products that you are making as it is -- its import substitution, what would be the size that are getting imported in India, which we are looking to replace?
Import of those products around INR 1,500 crores range is the import, which is taking place.
You mean that INR 1,500 crores worth of chlorotoluene -- base chlorotoluenes are getting imported?
Yes. And not chlorotoluene-based the entire value-added products. There are a lot of intermediate for statins and all -- there's a lot of new products.
And what would be the ASP, would be around INR 200, INR 250 per kilo.
No. That will be difficult to just get that number.
What would be the -- what would be the realization that we would be looking towards the whole basket?
No specific -- for overall, per kg, we have not done any on a weighted basis, any specific number.
Okay. Okay. And it's INR 1,500 crores of CapEx that we are dedicating towards this 42,000 tonnes?
The entire range, yes.
Next question is from the line of Surya Narayan Patra from PhillipCapital.
My first question is on the sequential improvement on the revenues that what we have seen and simultaneously, the kind of sequential pressure that we have witnessed in the gross margin front. So is it fair to believe, sir, is it indicating that the pricing -- the pricing pressure scenario is very active at this new juncture. And that's why even though we would have seen some kind of volume growth sequentially, consistently over the last couple of quarters, but the pricing pressure is playing a role, and that's why the kind of impact on the gross margin front that we are seeing?
No, I already answered in a earlier question. The gross margin will also, depending on -- what is the product mix in the overall sales. So that determines -- and the raw material prices like benzene had increased from INR 70 to INR 80 in this quarter. So overall, we are not seeing any significant increase in pricing pressure.
Okay. Generally, there is a kind of understanding sir, this whether it would be China-related oversupply situation or it is the subdued demand situation, which is ultimately have created a kind of a suppressed pricing situation, and is expected to remain so far relatively in the mid- to short-term to medium-term kind of situation -- or period. So do you believe in this.
Yes. Basically, as the overall demand improvement takes place globally, I think this pricing pressure should ease out. So I think as product -- specific product to product demand starts recovery, then we expect the pricing also -- margin improvement also taking place.
Okay. And simultaneously, sir. Just an extended view on this only. See this quarter, we have seen sequential as well as Y-o-Y. The export growth is really robust. And if I just relate that with the margin performance, the gross margin. So even in the export market, the pricing is really soft.
No, that's the same answer. It's a product to product. So margin as a percentage will not be a good indicator to maintain -- overall -- even or to any specific market.
Okay. Fine, sir. Sir, just one number for clarity. Sir, this PDA volume number, whether you have shared, sir? No, right?
Yes. We are just -- hit all the numbers.
Yes. Okay. In the meanwhile, I'll just ask a couple more things. So this freight cost scenario, what we have discussed because of the Red Sea situation, is it delaying? And is it creating a kind of -- extend their working capital situation also along with the kind of cost inflation? Is it impacting in any manner to our gross margin or either in terms of cost or in terms of revenue realization?
Yes. Basically, the Red Sea scenario is creating some issue with the supplies to Europe and U.S. Basically, the pricing of the containers have definitely moved up, and we will have a quarter lag or, in some cases, a month lag to push these prices up with the customers. But I think customers are considerate and they understand the situation, they have cooperated with us. But one thing that you asked about this overall, I think the shipping time is improving definitely, and it will have some impact. But I think our overall revenue mix 30% would be what it is going to these markets where we will -- 25%, 30% of the export. So it may not have too much impact on the working capital as such.
And generally, the credits are from the BL dates. So anyway, we will get BL date in time. So yes, it may not have as much impact.
Okay. And just one more question on the -- this first contract. Sir, this 4-year contract, sir, you have indicated that it is -- in the FY '23, it was kind of a INR 750 crores kind of supply that we have been doing. And potentially reach INR 900-odd crores. So is it fair to believe sir, this is the largest customer in terms of concentration?
Yes, it will become the largest customer.
Okay. And is it relating to any downstream of [ MMA ] or something like that?
That we will not be able to specify as of now.
Okay, sir. And...
You just wanted the PDA volume, right?
Yes.
The Q3 PDA volume was 481 tonnes per month.
Okay. Just last, on this point, on this thing on the first contract. You see, we possibly would be -- although you have been advocating that the margin is not a criteria. But just my view is that, if current situation would be such, where possibly our margin is somewhere in the range of 15% to 17% for the company as a whole. But if situation improves and subsequently, the pricing scenario improves costing situation kind of stabilizes, then, generally, the margin profile of the business is as a whole for the company itself is likely to see an improvement. So is it not safe to believe that it's the same situation that we will see even for this contract?
Yes. Basically, this contract, we already structured. So that kind of gets fixed. But in general, I think, as the pricing improves -- both gross margin and EBITDA margin both will have positive impact.
Next question is from the line of Archit Joshi from BNK Securities.
Sir, I was just going through the volume numbers that you have shared for this quarter and maybe for the last maybe 8 to 12 quarters. especially in NCB, I can see that if I've got the numbers right, our volumes have ranged between close to 18,000 to 19,000 tonnes in a ballpark range for a meaningfully higher amount of time, even after adding the chlorination complex of late. So does that mean that our base business, which is predominantly the chloro benzene and the NCB chain that has been grossly underutilized till now? And does that also mean that the base business has a far better potential to grow even beyond FY '25 or FY '26?
This 70 -- we have increased the capacity from 75,000 to 108,000. So that is getting ramped up. So currently, we are nearly 80,000 and some of the volume pressures are also coming on these products also. So as the volume -- pressure eases then we are also going to add some more downstream products also in this range. We will see a better utilization coming in this. So in a way, you are right, there is no -- some of the volume growth will come in these products.
Got it, sir. Sir, just delving on to the same nitro chloro benzene capacity. I think a large part of our chlorination complex was also dedicated towards 2,5-DCP, which was dicamba intermediate. And now that it is not being used to the best of its capacity, would that mean that there will be a divergence of this capacity towards the existing product portfolio that we have, which can potentially trigger growth. Maybe in FY '25, FY '26?
Yes, dichloro benzene portfolio, this dicamba-related outlet -- it was not a very huge outlet because it goes in a lot of other [ PP ] -- polymers and air fresheners and some other products also. So we should be able to utilize that, that should not be issue as far as dichloro benzene itself is concerned.
Understood, sir. Sir, would my assumption be right towards for chlorobenzene and the nitrochlorobenzene having more salience towards dyes, pigments as application area, which has not been doing well as evident as it is in the last maybe 2 or 3 years and which is the reason why our utilization and production numbers have been quite stagnated. And once we see a pickup on that front, we will see volume growth coming in from the base business as well?
Yes, nitrochloro is more -- again, it's a mix, nitrochloro like one of the big products is paracetamol, which is a classical big pharma also. So nitrochloro is a less agro exposure but the pharmaceutical in paracetamol is an exposure. Other than dyes, pigments. Same way in dichlorobenzene, we have a discretionary like air fresheners and polymers. And then agro on dichloropropionyl or those kind of products. So it's a mix on dichlorobenzene. So most of this -- these are base products. So we'll have a end use profile in all the sectors.
I said discretionary somewhere and some place, it may be [ 30-40 ] other places it may be [ 50-60 ]. But it will be always a spread, all the 3 nitrochloro, dichloro, nitro toluene is more of a widespread. Whereas chlorotoluene is more on agro and pharma with new products which will be coming.
Got it, sir. Nothing to do with dyes and pigments doing underperforming, which has resulted in a lower volume, right? It's just widespread effect?
It is also -- we have dyes and pigment component also in nitrochlorobenzene as well as also in some in small portion dichlorobenzene also. So that impact obviously comes in.
Next question is from the line of Sabyasachi Mukerji from Bajaj Finserv.
Sir, my question is on the gross margins or rather the gross profit per kg that you mentioned that better to not look at the margins, per se, but the absolute gross profit number and the gross profit per kg. Now if I look at the volume numbers that you have told us and do a small map that gross profit per kg, quarter-on-quarter, sequentially, it has remained flat. So essentially, what it boils down to is that our volumes have increased by 5% quarter-on-quarter from Q2 to Q3, while the absolute gross profit has also grown by 5%, which means the gross profit per kg has remained flat. Is my understanding correct, sir?
Yes, typically, that's what we have been saying that gross profit per kg is a much better indicator, and that tends to show more stability.
No. So a follow-up to this is that if I look at historical levels, our gross profit per kg has been whatever we are doing right now, it is almost 20%, 25% lower than what we used to do, historically. So going ahead, we should see improvement in this number as well?
Per kg, on a composite basis, I don't know from where the number is coming in, because we have so many products, products which -- like sulphuric acid, which is less than INR 5, if I'm -- agro...
Sir, I am doing basic math of what the volume numbers you have said across nitrochlorobenzene hydrogenation and dividing that number, metric ton number with the gross profit that we have done.
Yes, Yes. I understand that, but I think that it's not a best simplistic scenario because we have a lot of value-added products. Lot of this nitrochlorobenzene are captively consumed or nitro toluene are captively consumed into value-added products. So that simple math, I think, will not work to really gain some -- any insights.
Then I mean -- so a better way to understand probably the realization is going up. So my question is basically, if I look at the revenue numbers, it has grown 19% quarter-on-quarter. But some of the product mix is such that the -- probably the gross profit has not grown at a similar pace. My question is that if -- going ahead, do we see improvement in the gross profit number as well so that, that flows down to the EBITDA number as the other OpEx remains very similar in the next year?
Yes. Yes. That's what I've been telling, basically the absolute gross profit will increase and -- substantial translation to EBITDA, which will happen. And if it has been happening in this quarter then also it will happen in FY '25.
And sir, last clarification here. So absolute gross profit will increase because of volumes increasing or also at kg level also, it will improve? I mean how do you look at it?
I think both. There'll be -- we expect substantial volume increase also in lot of products, and also, as mentioned earlier in some of the question, as the volume pressure eases, the pricing pressure also will ease. So some of the products will -- we are expecting that per kg also improvement will take place. This is a mix of both.
Somewhere, where this Chinese issues and all the volume pressure, which is eating the margin, this gross profit per kg, we'll see some improvement there also. And -- but substantial improvement growth for our absolute gross profit will be more driven by volumes.
Sir, what kind of volume growth are we targeting for FY '25 or FY '24?
Yes. On a composite basis, around 20%, 25% range, we can say.
20%, 25%. Okay. Okay.
Next question is from the line of Ankur Periwal from Axis Capital.
Congratulation for the sequential improvement here. My first question on the volume side, I'm looking more on a 9 monthly basis rather than the specific quarter. On a composite basis, what sort of a growth we would have seen across the portfolio?
I do not understand. The entire 9 months compared to what? Last year or...
Yes, Yes. 9 months. So I'm not looking at Q3 versus last Q3. So let's say, YTD, this year, financial year '24, 9 months versus 9 months last year.
Overall, I think there's a volume growth is there. But again, that's -- some of the product has grown and some of the product has seen some volume pressures. So...
Okay. So -- but on an overall basis?
Composite -- there is a growth, I would say, on the volumes still.
Fair enough. And from a product mix perspective, any feedback or any traction that you can share on, let's say, nitro toluene as a product chain or other value-added products or the rebound is largely more on the lower margin products, what we are seeing?
No, rebound, wherever there is impact, those products will go on -- like nitro toluene has been slower in last couple of quarters because that's more dominated on agro. So that's where we have seen some pressure on the nitro toluene volumes. So it's all specific end use wise recovery on the volumes and corresponding margin will happen.
Yes, sir, I appreciate because, as you rightly mentioned, this twist we have seen some rebound versus agro and pharma has not. I was just curious whether the value-added portions over there have got some sales to do? Or it is the basic or the relatively lower margin products, which have seen been more, a sharper rebound, within those user applications?
No, it will become same, where the end uses is -- where we are selling value-added, then there will be value-added impact will come. So that -- because the people are not changing the product. They are buying value-added products and they -- selling it to buy the value-added product. They are buying base products, they continue to buy base products. When there is a slowdown, it impacts both.
Sure, sir. Fair enough. Secondly, from a new product approval or, let's say, new client addition or a geography addition. Any comments there, what we would have seen this quarter or slightly even earlier quarters as well?
So overall -- because the product -- new product additions are not that many in that sense so this is not like new geography or new customer edition in general to the existing customers and geography. And lot of new products actually which we are adding are also mainly for those customers in that sense.
Okay. Sir, we do have the earlier portion of the long-term contract there. Your comments, anything, whether they are also seeing a similar pressure that we saw in the other businesses? Or there the pressure is relatively better and the revenue ramp-up is better?
The 4-year contract basis?
Yes, yes.
So there, I think that particular product end use we are not seeing any such volume pressures.
Okay. And you did alluded towards the discretionary growing and non-discretionary slower. How will be that mix right now among the key let's say, end user applications, if you can share?
This is more towards discretionary currently primarily around 60% and non-discretionary another 40%.
And how will this number be, let's say, last quarter or last year?
More towards 50-50.
Okay. Fair enough. And sir, lastly, you did mention that the CapEx plan remains intact, INR 2,500 crores to INR 3,000 crores over the next 2-year window, and you said also, we are doing around INR 1,200 crores, INR 1,300. How much of this will be revenue generating? Or there is some bit of backward integration because your comments are also there in terms of site development of Jhagadia. So just trying to see how much of this is going into backward integration or let's say infra development versus a pure revenue-generating one?
No, Jhagadia, you visited the entire new greenfield site is going to come up. And other sites of our major -- current Jhagadia site and Dahej site and all will be virtually completing our expansion in virtually in calendar year '24, most of the projects. Yes.
So if I -- sorry, if I got you right, the expansion across all the projects will be completed in CY '24 itself?
The calendar year '24, all over this existing site Zone 1, 2 and 3, what we have been saying like Vapi, current Jhagadia site, Dahej and all, then we expect to be completed. And then from calendar year '25 onwards or FY '26 onwards, the commissioning will be mainly coming in on the new Jhagadia site.
Okay. Fair enough. Sir, last question, if I may. From an overall -- given the 2 projects, as you mentioned, we do not need to spend incremental capacity addition or a CapEx for these. How much more can the current existing capacity absorb and excluding the newer site? Or let's say, in other terms, what is the current capacity utilization at the existing site?
As we mentioned, around 25% volume growth next year, we are expecting FY '25. And then further I think around -- there'll be still headroom for another 10%, 15% volume growth in the Zone 1, 2, 3 assets.
Next question is from the line of Meet Vora from Emkay Global.
So we have guided for INR 1,000 crores EBITDA for FY '24. That means, again, we see sequential improvement in EBITDA to the tune of around INR 280 crores, INR 300 crores in Q4. So this will, again, be a result of recovering discretionary spends that we have been highlighting. So my question was, do we further see improvement in Q1, Q2 of FY '25 as well in discretionary spend before we start seeing improvement in agro and pharma demand?
Yes, basically, discretionary will further improve. And I think the agro also should start improving quarter-on-quarter. So even in FY '25 also progressively from Q4 FY '24, Q1 FY '25 should be better and then Q2 should be better.
Understood. Understood, sir. And secondly, on chlorotoluene while we have been -- we have highlighted that we are seeing a INR 1,500 crores of import substitution opportunity. Can we just guide on our revenue target that at least we are targeting and EBITDA margin expectations and total CapEx spend on this chain?
This will be more value-added -- EBITDA will more towards 25% to 30%, in that product range.
And any rough target of revenue that we have decided internally or we are targeted for CapEX spend that you add?
So about INR 2,000 crores plus, I think, would be the revenue.
Okay. So we are also looking at export opportunity in this chain, broadly?
Yes.
As there are no further questions, I will now hand the conference over to the management for closing comments.
Sir, would you like to make any closing comments?
Yes. yes. Thank you, everyone, for taking out the time to join us on our Q3 FY '24 earning conference call. Hope we have addressed your queries. If you have any further queries, please feel free to contact our Investor Relations team and we will address them. We look forward to connecting with all of you again in the next quarter. Thank you, once again.
Thank you very much. On behalf of Aarti Industries Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.