Aether Industries Ltd

NSE:AETHER

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to the Aether Industries post results conference call hosted by HDFC Securities. [Operator Instructions]. Please note that this conference is being recorded.

I now hand the conference over to Mr. Nilesh Ghuge from HDFC Securities. Thank you, and over to you, sir.

[Nilesh Ghuge, analyst]

Thank you, Sagar. Good afternoon, all. On behalf of HDFC Securities, I welcome everyone to this Aether Industries' conference call to discuss the results for the quarter ended December 2023. From Aether industries, we have with us today, Dr. Aman Desai, Promoter and Whole-Time Director; Dr. Rohan Desai, Promoter and Whole-Time Director; Mr. Faiz Nagariya, Chief Financial Officer; and Ms. Shubhangi Desai, Executive IR.

Without further ado, I will now hand over the floor to Ms. Shubhangi Desai to begin with the earnings call for 3Q FY '24. Over to you, Shubhangi.

[Shubhangi Desai, executive]

Thank you, Nilesh. Good evening, everyone. Today, on February 1, 2024, our Board has approved the financial results for the third quarter ended on December 31, 2023, and we have released the same to the stock exchanges as well as updated the same on our website. Please note that this conference call is being recorded, and the transcript of the same will be made available on the website of Aether Industries Limited and exchanges. Please also note that the audio of the conference call is the copyright material of Aether Industries Limited and cannot be copied, rebroadcasted or attributed in press or media without specific and written consent of the company.

Let me draw your attention to the fact that on this call, our discussion will include certain forward-looking statements, which are predictions, projections or other estimates about future events. These estimates reflect management's current expectations on future performance of the company. Please note that these estimates involve certain risks and uncertainties that could cause our actual results to differ materially from what is expressed or implied. Aether Industries Limited or it's officials do not undertake any obligation to publicly update any forward-looking statements, whether as a result of future events or otherwise.

Mr. Rohan Desai will begin by sharing Aether's business outlook, then Mr. Faiz Nagariya will cover the financial highlights for the period under review, and Dr. Aman Desai will share the ongoing expansions and strategy of the company going forward. Now, I shall hand over the call to Mr. Rohan Desai for his opening remarks. Over to you, Mr. Rohan.

[Rohan Desai, executive]

Good evening, everyone. Before I begin with the business performance, I would like to throw some light on the unfortunate event that affected us during this quarter. On November 29, 2023, a fire broke out in one of the plants of our manufacturing Site 2, which was brought under control. The reason for the accident at Site 2 was a 15,000-liter storage tank, which leaked from the bottom valve, stored solvent started flowing, which had the flash point of minus 17 degrees centigrade led to a vapor cloud formation. There was movement of the vapor cloud formation internally in the intermediate building Plant 2 and nearby tanks in the same plant. Unknown ignition source resulted to vapor cloud, explosion with fire and impacted both plant and the tank farm areas. Total 11 fatalities have been registered and 23 people were injured in the unfortunate accident, who have now been discharged successfully.

While the loss that we have incurred due to the fire is currently being assessed, we want to assert that we are fully covered with the loss of assets, stock as well as loss of profit. The sales and the dispatch of materials has remained unaffected as the orders were catered from our inventory as well as most of our customers have remained upbeat and supportive towards us.

Operations have resumed at our manufacturing unit 2, that is Site 2. We have received GPCB that is Pollution Control Board partial closure revocation order for the unaffected plant and the plants have resumed normalcy with continued efforts to raise our operations to their maximum capacity. We strive to timely restart the affected plant in the highly compliant and safe manner.

With respect to Aether's business model, we have seen 57% contribution of our total top line coming from large-scale manufacturing business segment, 27% from contract/exclusive manufacturing as a result of renewal of the agrochemical contract, that is agrochemical intermediate contract, about which I had mentioned in my remarks in Q2 of FY '24 call, and 14%, which is coming from contract research and manufacturing services business model during the Q3 of financial year 2024. Our exports revenue stood at 40% and our domestic sales stood at 60%.

Demand from our agrochemical customers is coming back on the backdrop of gradual reduction in destocking positions at their end. We are currently seeing an increase in volume from our non-agrochemical products as there is a demand from our customers. However, the intense dumping by the Chinese competition, we have witnessed price erosion. We are currently witnessing price of our products stabilizing at the current levels.

Order pipeline is robust, and all our customers are positive and looking forward towards coming back to normalcy in a short period of time. We are confident of showing a growing trend in the next financial year onwards. With that, I would conclude, and I would request our CFO, Faiz Nagariya, to touch upon the financial highlights for the period under review. Faiz?

[Faiz Nagariya, executive]

Thank you, Rohan, and good evening, everybody. The total revenue of the company stood at INR 1,682 million in the quarter 3 of financial year '24 as against INR 1,705 million in quarter 3 of financial year '23, resulting in EBITDA of INR 378 million in Q3 of financial year '24 as against INR 507 million in Q3 of financial year '23, a reduction of 26% in the comparing periods.

EBITDA margin stood at 22% in Q3 of financial year '24 as against 30% in Q3 of financial year '23. The PAT amounted to INR 191 million in Q3 of financial year '24 as against INR 350 million in Q3 of '23, resulting in reduction of 46% in the comparing period. The PAT margin stood at 11% in Q3 of financial year '24 against 21% in Q3 of financial year '23. The main reason for the reduction in the revenues is attributed to the current fire accident wherein the production at our manufacturing facility 2 was stopped for a month.

The reduced revenue and other exceptional expenses related to the fire accident like compensation to the families of the deceased, penalty to the GPCB, medical treatment expenses of workers who were hopsitalized and increased insurance premium of our IR policy resulted in the reduction in EBITDA and PAT margins eventually. One time cost is approximately INR 70 million for the quarter.

We would be having the impact of approximately INR 30 million on account of increase in insurance premium due to the fire accident in this financial year '24. Due to the fire accident at manufacturing facility 2, new production could not be done in the entire December 2023. Now I would request Dr. Aman Desai to share updates on Aether's ongoing expansion plans and strategies going forward.

[Aman Desai, executive]

Thank you, Faiz for the financial highlights. The well-being of our employees is of foremost importance to us, and I do want to start with expressing my most sincere condolences, solidarity and gratitude towards the employees and the victims of our recent fire accident. We have taken significant actions to ensure the best treatment to the victims and we have extended lifelong support to the families of the injured and the deceased. Also, we have been extending complete and transparent cooperation with all the regulatory bodies.

We have comprehensively undertaken the detailed investigation and root cause analysis of the incident and the accident and identified numerous immediate and ongoing corrective and preventive actions, which will help us to ensure that such an accident will never ever happen again at Aether.

Despite the various headwinds, the planning and execution of the project work of our greenfield CapEx on Site 3+ and 3++ is ramping up with the beginning of civil work, machineries and equipment being procured along with all the regulatory approvals in place. These sites, 3+ and 3++ are expected to commence operations in Q3 or Q4 of fiscal year '25 as per plan.

CapEx on our upcoming Site 4 is also on the verge of completion, which is expected to be commissioned by February 2024, next month. This Site 4 will be initially dedicated entirely to contract/exclusive manufacturing and the initial construction and plant erection is going to align with our strategic agreement recently, previously announced with a leading oilfield services company in the U.S.

As we had guided earlier as well, further structural expansion on Site 4 will be towards the recently announced commercialization agreement with Saudi Aramco Technologies Company on the novel converge polyols platform in the near future.

CapEx planning towards Site 5 at Panoli is at full pace as well with the vision of massive industrial estate with more than 16 production blocks, each production block being ground plus 4 structures with more than 500 reactors combined. As we had guided, this Site 5 will incorporate global best practices towards safety, sustainability, carbon neutrality and renewable energy-based resources.

During the quarter under review, we have announced the execution of a strategic agreement with a major global lithium-ion battery producer, thereby announcing our entry into electrolyte additives and battery space. We have been developing products in this field since a long time now, but we have decided to make it public only once we secured a substantial commercial contract with a global major and this agreement captures that. Thereby, along with this, the commercialization of the sustainable converge polyols and multiple ongoing projects as well as research at Aether, I can ascertain that we have established Aether as a premium India-based provider of sustainable and carbon-neutral chemistry solutions across the industry spectrum.

We continue to make significant investments towards R&D. Our R&D expenses for the 9 months of fiscal year '24 stood at INR 509 million, which is 10% of the total revenues for the 9 months fiscal year '24. The spread of the R&D team at the same period stood at 277. Our major expansion project of the new pilot plant at the land which was procured on long lease is in full fledge, nearing completion with the installation of machineries and the final piping and commissioning going on. Needless to say, such aggressive expansion of R&D and pilot plant footprint, which are the workhorses of our CRAMS business model is, as always, firmly on the backing of numerous inquiries and additional tie-ups with topical learns of global innovators across the industry spectrum, and various contracts are in the pipeline for being executed.

With that, thank you very much for your attention and time today, and back to you, Shubhangi.

[Shubhangi Desai, executive]

Thank you, Dr. Aman. We shall now request the moderator to open the forum for question and answer.

[Operator]

[Operator Instructions] The first question is from the line of Rohit Nagraj from Centrum Broking.

[Rohit Nagraj, analyst]

So my first question is -- what have been the immediate actions that we have taken after the unfortunate event? And any customer audits have happened after the event? And what has been the general feedback from our customers?

[Aman Desai, executive]

Yes. So we have a comprehensive corrective and preventive action plan that has been identified, which includes significant changes in the already strong preventive maintenance program. It was a solvent leakage, which is the root cause, and so we are having -- leak detection was already in place at various sections of the plant, including inside the plant as well as the main tank pump, but unfortunately, not at this particular position in the -- Yes. And so we have [indiscernible] our comprehensive, sweeping leak detection policy and program in place.

We have changed several codes that we are working by. We were quite proud of the safety systems that we had established at Aether and this accident has shown that there's a clear gap and failure in the safety systems because accidents will happen, but the safety systems should prevent loss of life, and this has not happened in the accident. So this has clearly showed a gap in the systems that existed and so we are doing a thorough review.

We have initiated a full scale hazardous operations review of all operations across all sites and operations were restarted in every single site only after the commencement of a thorough HAZOP review. You will see these announcements in the coming days to come. But we have also completed as well as initiated significant hierarchy changes in the technical departments, and so you will see this in the coming days. These are just a few of the numerous corrective and preventative action plans that have been planned out, as I mentioned before this call, in a different meeting, that there is a very detailed investigation analysis presentation and corrective and preventive action plan presentation also already. And so this is just a few of the top things that come off my head. That is the answer to your first part of the question.

The second part is the audits. So the leading oilfield services company that is currently in tie-up exclusively with us for Site 4. They have audited Site 2, which is the affected Site 2, in the recent weeks, which has been partially opened Site 2, the nonaffected blocks. So they have re-audited the Site 2, successfully finished, all the compliance from the audit is successfully finished as of today as well. And this was quite a major audit that has happened.

We have presented detailed investigation reports to almost all of our key customers in all the business models and these are presentations that go on for more than 2 hours on the very topic of the accident. All customers have showcased solidarity and support. Everybody wants to know what happened and why it happened and what we are doing to ensure this never happens again. And I think we have been successful in addressing that concern quite well with the very detailed work and presentation and corrective implementation plan that we have laid out.

In terms of the orders, orders have flowed in as per the regularly expected cadence. We have not seen drop of the orders. And I think the commentary by Rohan and Faiz [indiscernible] to a bit. So I think, yes, that addresses all your questions, Rohit.

[Rohit Nagraj, analyst]

Thanks for answering that comprehensive question and the detailed answers. Second question on the EV battery-related contract front. So how does it complement our chemistry skills. You said that we've been working for a while on this, and is there any possibility of supplies of the similar material to Indian manufacturers whenever their capacities come up? And just a little bit more in terms of when the commercial supplies will be expected, that the overall potential from this particular product, whether it's a single product or multiple product and particular application in the battery?

[Aman Desai, executive]

Yes. Rohit. Whenever anybody asks me about competencies, this is music to my ears and so I can take up the next 1 hour talking about the competencies and the fit in the products that we have. But -- so the electrolyte additives field is a very large field. The battery field is a very large field, and there are many, many, many components that go into a battery. There are many components -- there are more than 12 components that go into an electrolyte formulation, and there are about 67 electrolyte additives that are used commonly and not as commonly -- in that, there are many salts that are also present. And so we have been very clear in our approach. In all the molecules we have chosen, there has to be a competency fit. And so the molecules that we have chosen are small organic molecules. They are electrolyte additives, which have a good fit to our competencies, some of which include ethylene oxide chemistry, the KF -- the fluorination chemistry that we want to get into. And of course, continuous reaction technology is being applied in every one of the electrolyte additives that we're going after, including catalysis, which is also a major competency for us.

So yes, we have been very selective and we have only picked a few of the electrolyte additives, which are small organic molecules and showcase the fit to our competencies, and then there are multiple [indiscernible] we have selected a few of them, and they are small organic molecules. And so we have been clear that we will not go after of the salts, we will not go after the inorganic chemicals because they are not a good competency fit. That's number one.

Number two, Indian manufacturers, of course, yes. This is not an exclusive tie-up that we have. This is a very broad field with a very, very promising future and aggressive market predictions of where these volumes and tonnages of these various molecules will end up. And there are several big Indian players who already announced their plans. There are several global players who announced their plans in the U.S., in Korea, and rest assured, we are reaching out and already talking with many of these global players as well as domestic Indian players.

In terms of commercial supply and the initiation of the commercial supply thereof of these molecules, we expect initial commercial volumes and supplies to start off within this calendar year, 2024, with significant volumes and production and commercial manufacturing starting in calendar year 2025. But we expect the initial commercialization trial orders, validation orders, which should be in itself not a trivial quantity to be done in 2024 itself.

Maybe we can go to somebody else and then come back to you.

[Operator]

[Operator Instructions] The next question is from the line of Sanjesh Jain from ICICI Securities.

[Sanjesh Jain, analyst]

First I will ask the bookkeeping question probably then go on more broader questions. This quarter, our gross profit margin is at 41%. Was there any loss of material also, which has led to a drop in the margin in this quarter? That's number one. Number two, on the bookkeeping is that, there has been a restatement in the cost line item for the last quarter, both employee cost and other expenses. Can you explain us what has led to the restatement of the historical number, which is the Q1 number. These are two bookkeeping questions and then probably I will take the rest of this.

[Faiz Nagariya, executive]

Yes. So I'll take the second question first. The regrouping what happened is, in the last quarter, the Director's remuneration was erroneously shown in the employee cost, and so we had to change it to the other expenses. That is the thing which we have done. So we have brought it down in the other expenses to group it with -- and make it more compatible with the other quarters.

And for the first question, we have still not provided for any loss of stock, because the assessment of loss is still going on. If you see the financials, you can see the changes in inventories has dropped significantly, because in the commentary also Rohan said that we have sold the goods from our finished goods inventories and there was no production in the Site 2, which was contributing around 60%, 65% to our revenues and production also was taking place more there. So the changes in inventory has gone down, which has resulted into the gross margin going down.

Going forward as the production will increase, we will have the finished goods and semifinished goods inventories coming back, this will be again back to square.

[Sanjesh Jain, analyst]

Now I got it. That's why the other expense is also down, because it is largely captured before the finished goods, right Faiz?

[Faiz Nagariya, executive]

Yes. Yes.

[Sanjesh Jain, analyst]

Got it. That's very clear now. Rohan, on the competitive intensity, you did touch upon in your opening remarks that there is an increased competitive intensity from the Chinese. Can you allude more? How is the competitive intensity in the product that we manufacture? Have we faced any rising competitive intensity from Chinese, particularly in our pharma side of the business?

[Rohan Desai, executive]

On majority of our products, we are the only source in India. Most of the competition comes out of China, 80% will be coming out of China, 10% from Japan, 10% from Europe. We are not seeing any increased sources coming from China or being added from China at this moment. However, because of the currency devaluation and the government incentives and the export benefits which the Chinese competition is getting, they had become more [indiscernible] approximately 20% to 30% from the start of the correction, and that is what we are facing right now. So we are at the bottom out position at the moment. I don't see a further decline happening on the prices of our products.

[Sanjesh Jain, analyst]

Got it. Got it. Second, on the agrochemical side of the business. This quarter, we saw a sharp decline. This was more like pushing the inventory from the Q4 and hence, the recovery for next quarter will be higher or we generally had a lower inventory, so lower sales in agrochemicals?

[Rohan Desai, executive]

There are 2 parts of it. One was stock correction price. So you're comparing Q3 to Q3 or you are comparing Q2 to Q3.

[Sanjesh Jain, analyst]

No, last year Q3 to this year Q3.

[Rohan Desai, executive]

Yes. That is because of the price correction. We are manufacturing 3 intermediates. Out of which, 2 intermediates have seen a drastic price correction because of the Chinese competition entering into that space. And hence, the volumes are robust on that basis, but the prices have been corrected significantly.

[Sanjesh Jain, analyst]

Okay. Okay. So the drop in the revenue is largely because of pricing. We have held the volume market share, right?

[Rohan Desai, executive]

Yes, volume market share, we have. We have not changed in that position. The change is significantly because of the price correction.

[Sanjesh Jain, analyst]

Got it. Got it. One last question from my side before I join back in the queue. We were in the process of commercializing Site 3++, Site 4 and Site 5 we are now planning. So what is the capacity we anticipate to add from all these 3 sites when they are fully commissioned, say, 3 years down the line?

[Aman Desai, executive]

So 4 to 5 years down the line, there would be tremendous capacity, right? And so we are talking about thousands of tonnes of capacity.

[Sanjesh Jain, analyst]

Just from the gross block perspective, if you can help us understand what is the gross block for each of these factories sites?

[Aman Desai, executive]

We share the excitement -- depending on the product that you choose and depending on -- so for example, if electrolyte additives pans out the way the people all over the world claim it would pan out, you're talking individual electrolyte additive would be literally thousands of tonnes of requirements. And so if you could go on to converge polyols, if these pan out the way we think it would, it would also be a very significant volume and tonnage. And so it depends on these products, it depends on the number of steps within the product and it depends on the complexity of the products.

In terms of the gross block, I think Faiz can answer that.

[Faiz Nagariya, executive]

Yes. So the gross block for Site 3++ would be around INR 200 crores. Currently Site 5(sic) [ Site 4 ] first phase, which we are doing, the gross block would be around INR 75 crores to INR 85 crores. And Site 5, the first phase is around INR 500 crores, and fully operational after 5 to 6 years down the line, it should be around INR 2,000 crores to INR 2,200 crores approximately on Panoli site.

[Operator]

[Operator Instructions] The next question is from the line of Prolin who is an Individual Investor.

[Unknown Analyst]

Hi team. Thank you for taking my question and sincere solidarity on the loss of life and people at your company. I have two questions -- the first one is that in contract manufacturing, in the past, you have alluded to the fact that the margins in those businesses or in that segment is similar to our large scale manufacturing. So I just wanted to understand from the working capital side of it, how is the working capital in the contract manufacturing business different from our large-scale manufacturing? And a related question would be, will this margin profile be any different in case we are able to get a pharma contract there right,? Because right now, if I'm not wrong, we don't have a pharma contract on the contract manufacturing. So will the margin profile be different? And just to understand how should one look at the working capital intensity of contract manufacturing business?

[Rohan Desai, executive]

So let me just differentiate ourselves in a way where we are saying that we are only making generic intermediates right now. We are not making a patentable product's intermediate at this moment in contract/exclusive manufacturing. When we do enter into that, which will be there in the short period of time, the margins will improve drastically in contract/exclusive manufacturing. However, at this moment, contract/exclusive manufacturing and our large scale manufacturing margins are almost in the similar line, and only differentiated by a 100-basis-point range.

[Unknown Analyst]

Sure. And on the working capital side of it?

[Faiz Nagariya, executive]

So the working capital cycle for the contract manufacturing and LSMO is currently just similar because [indiscernible] these products are generic products. And we are supplying to current customers, and we are giving them the same credit terms which are [indiscernible] the customers. So working capital cycle currently is similar for them. And as we move ahead and have more patent specific or better products in these things, we will be able to reduce the working capital cycle in this contract manufacturing.

[Unknown Analyst]

Okay. So what I understand it correctly, both margins and working capital cycle will improve as we move from generic to slightly more specialized intermediary. Is that a fair summarization of the answer?

[Faiz Nagariya, executive]

Yes.

[Unknown Attendee]

Okay. The second question would be on this polyol contract, right? Can you help us understand where does this contract lie in your 8 x 8 matrix, right? In terms of chemistry and technology. And now that we have been successful in getting that contract, how did it benefit in terms of expanding our 8 x 8 matrix or fortifying or strengthening some of the components of our 8 x 8 matrix, if you can talk about competencies, especially for this polyol contract, that would be very helpful.

[Aman Desai, executive]

Yes. A great question again. So originally, the project started off with Saudi Aramco Technologies company several years ago on proving a key piece of operation in the overall process to make this converge polyols and that was based upon continuous reaction technology, which is #1 in the 8 x 8 matrix on the technology side of our competency. And so continuous reaction technology is featured in the manufacturing of the converge polyols and in the chemistry side, it is catalysis and high-pressure chemistry. And so these are the original fits which are still present in the manufacturing of these converge polyols and they are a very good fit to our existing and very first 8 x 8 matrix that we have build 10 years ago.

What it will add to in terms of additional competencies in the future will be a solid comprehensive understanding and expertise in the manufacturing of polyols, i.e., [indiscernible], so that gives us entry into the field of polymers, which is very exciting if you think about all the potential that exists in the specialty polymers world, it is very exciting. And this kind of gives us a handholding segue into understanding this world and getting experience in the manufacturing of polymers. And so polymerization will be a new competency that we can add as a result of these polyols.

[Unknown Analyst]

Great. Just one last question, if I may. Can you give us some revenue visibility of this contract because in the press release, which we had released back in June of 2023, we had mentioned that each product has a potential of around 1,300-odd metric tonnes per month. So what should be the starting revenue and when should it start hitting? And what could be the peak revenue from this contract?

[Aman Desai, executive]

So there was some confusion there. I think the 1,300 tonnes per month that we mentioned was the LOI done with the oilfield services company. And that is a different contract and an agreement and announcement as compared to the one with Saudi Aramco Technologies company. I don't believe we have ever publicly speculated on the tonnage for the Saudi Aramco Technologies Company converge polyols platform. And so there are these two different things.

To address the visibility on the revenue, I'm afraid that this is not a platform and we will not be able to provide any visibility towards the revenues or the tonnage in the future.

[Unknown Analyst]

And not also on time line in terms of when should this revenue start hitting us in terms of P&L?

[Aman Desai, executive]

So if you think about the oilfield services, 1,300 tonnes per month that you mentioned, we fully expect a full or almost full contribution of that in the fiscal year '25, i.e., the quarter starting from April '24. In 3 months from now, we expect to be getting contributions from Site 4, which is being designed for the commercialization of the contract with the oilfield services company, which is the LOI mentioning the 1,300 tonnes per month. And so with that, the visibility is for sure, the next fiscal year, the next quarter.

And for the Saudi Aramco Technologies Company, the commercialization has already started and this quarter, it is smaller, so not a significant mover of the needle yet, but commercialization and manufacturing has already started, and we hope it will pick up soon.

[Operator]

The next question is from the line of Priyank Chheda from Vallum Capital.

[Priyank Chheda, analyst]

Sir, my question is on the Site 3. So if you can help me, what is the utilization that we are running today? I reckon that we had spent around INR 200 crores, and we had reached around 30% in the first half. So what is the utilization over there? That's the question number one.

And follow up on that, Site 3+, we did plan to start the commercialization. So if you can help me, by when is that project coming up?

[Rohan Desai, executive]

Yes. So we are currently at 42% capacity utilization of Site 3 and Site 3++ and 3+ both combined together, I mean, the remaining part of the site will be commercialized by September 2024.

[Priyank Chheda, analyst]

By September 2024 and over there also...

[Rohan Desai, executive]

September 2024, we will start commercialization and it will take 3 months to stabilize the plant.

[Priyank Chheda, analyst]

Got it. And the capacity is roughly around 3,500 tonnes, for which we have spent INR 200 crores. Am I correct?

[Rohan Desai, executive]

Yes.

[Priyank Chheda, analyst]

Got it. Sir, so the second question is on the Site 2, while we did have a very unfortunate incident, can you help me, which product got impacted in this Site? I reckon that we had 2 products that we were manufacturing for Otsuka, Japan? Has that been shifted to some other sites -- the Site 1 or somewhere, because that's not reflecting on the loss of sales quarter-on-quarter where you've been maintaining the quarter-on-quarter trajectory of sales. So has there been any loss of sales from Site 2, which product got impacted and amongst the 2 products that we were manufacturing for Otsuka?

[Rohan Desai, executive]

So I would not bifurcate the products over here because these transcripts are publicly available and our Chinese competition can get this information very easily, Priyank, so I'm sorry to not give you that information on the particular products. But talking about Otsuka, there are 2 products which we were existingly manufacturing it in our large-scale manufacturing platform. And so we have joined and have an association with Otsuka on the existing products, which are manufactured in Site 2. And as we had good amount of stock lying with us, this was not affected.

And secondly, we have got a partial revocation of Site 2 already. So this product, which we are talking about, which is with regards to Otsuka, is already back online.

[Priyank Chheda, analyst]

Got it. So the key takeaway is that there was no loss of sales per se, from the Site 2, right? That's the key message that we should take it?

[Rohan Desai, executive]

No, no. Obviously, there was a loss of sales because 2 products were almost at very nominal stock level, which we could not produce for approximately 2 months. So there was a loss of sales which was there. And second was that we were not producing for a period of the closure which we had received. And hence, we were selling out of the stock, basically, that material.

So if you see the stock position, you will see that our stock positions have reduced drastically. And hence, it is not affecting much on the top line, however, it has impacted us on gross margins.

[Priyank Chheda, analyst]

No, I understand. So would it be possible to quantify what our quantum of sales did we lose, which would get recompensated because we have got the partial revocation in the current quarter, the production should start as and when the rectifications are done. So anything that you would like to quantify on loss of sales for the 2?

[Rohan Desai, executive]

We have the internal targets, but we would not like to lead you at what was the projected sales of Q3. We had internal targets, which we cannot lead you to, but we lost a considerable amount of sales, let me tell you that.

[Priyank Chheda, analyst]

Got it. If you can help me with the realization per kilo for Q3 or for 9 months, it would be great.

[Rohan Desai, executive]

1,514 in the Q3 average realization per kilo.

[Priyank Chheda, analyst]

And for 9 months, this translates into?

[Rohan Desai, executive]

1,570.

[Priyank Chheda, analyst]

Got it. Just a last question on Site 4, where the oilfield contract lies, the commencement of the construction has started in July 2023. By when would this get commissioned?

[Aman Desai, executive]

We will start commissioning next month, in February. And so we are going quite aggressive on that Site, and we are going to start commissioning in February with expectations of full contributions in the next fiscal year.

[Priyank Chheda, analyst]

And sir, just to verify the realizations for this product were at around $3 to $4 per kilo, and that has remained stable, right, even in the current market scenario?

[Aman Desai, executive]

Yes, yes. That has remained stable. The current market scenario going to not affect this contract.

[Operator]

The next question is from the line of Siddharth Gadekar from Equirus.

[Siddharth Gadekar, analyst]

I just wanted to understand that fundamentally anything has changed in the overall chemical or the specialty chemicals business, like where we were sitting in 2022 when you are evaluating projects and where we are today, has anything changed or it is just the destocking [indiscernible] segment?

[Aman Desai, executive]

Nothing has changed in the macro part of the world. If you take a step back, when we were in the midst of COVID, we thought the world would end. But then if we took a step back and we realized that life goes on [indiscernible]. Jokes apart, nothing has really changed if you step back and look at the global perspective. I've always maintained that this is a golden decade for the Indian spec-chem industry. I believe this is a golden decade for the Indian spec-chem industry and will remain so, but if you go into the micro, in this current day and month, China is extremely aggressive in their pricing strategy. Destocking is happening, inventory levels look very high because of the COVID time closures and the inflation that took place subsequently and the stocking that happened all over the world as a result of which inventories built up even further, that is currently being aggressively destocked by China, and they are truly dumping in a very aggressive fashion. So that's the current state of affairs, but if you take a step back and look at them from a yearly perspective, I don't see any problems in all the tailwinds that were there in 2022, which will come back, I believe, in 2024 to an extent fully in 2025.

[Siddharth Gadekar, analyst]

So initially, like if we were estimating an ROC of 20% or 25% for the project, even beyond the destocking, we should get there. That is a fair understanding or it could end up somewhere lower now in this cycle?

[Faiz Nagariya, executive]

Currently, for the ROC level in the mode where we are doing lots of CapEx, which is coming up and things happening...

[Siddharth Gadekar, analyst]

I was asking on a project basis, like when you are evaluating the project on a certain ROC, and even beyond the destocking, should we get to those levels or might be lower than what we were thinking?

[Faiz Nagariya, executive]

No, no, we should get to those levels. Then only the projects will [indiscernible].

[Siddharth Gadekar, analyst]

Yes. Okay. Sir, secondly, in terms of China, we are hearing that even now China has been aggressively investing in the downstream and in the specialty or complex products. How true is that? And how should we look at them as a competition even in the complex chemistries and products?

[Rohan Desai, executive]

They are a formidable force, and they are the best in what they do in the spec-chem space or the commodity space or the API or AI space. So we shouldn't discount China in any way possible, and we should consider this threat very seriously and take proper care that when we select the products, which falls into our core competency, we should do our techno-commercial studies very, very properly and seriously,and that is what we do.

[Siddharth Gadekar, analyst]

So in our product basket, if we want to understand like across the products that we are manufacturing, is it fair to assume that we would be one of the lowest cost producers in the world, that is why we are competitive even at these prices?

[Rohan Desai, executive]

We might be lowest cost producers in the world, but in most of the products, we are the only manufacturers of this particular product in India. And that gives us a good advantage as compared to our competition in China, where you have an Indian source which is reliable, auditable, and holds up to the values of the business basically.

[Siddharth Gadekar, analyst]

Okay sir, got it. So basically, I think the key takeaway that beyond the destocking, maybe like 1, 2 quarters down the line, we should see some gradual normalization and CY '25 is where we should be back to the normal levels, is that a fair assumption?

[Rohan Desai, executive]

Yes.

[Operator]

[Operator Instructions] The next question is from the line of Rohit Ohri from Progressive Shares.

[Rohit Ohri, analyst]

One or two questions, which is related to Novoloop and the circular plastics. If you can take us to what is the role that Aether will play over here? And what sort of an arrangement is done over there?

[Aman Desai, executive]

Yes. It's a very interesting project that we have started in exclusive relationship with Novoloop in California. They have a very interesting and novel technology of degrading polymers waste into the crude basic monomers and then upcycling them to useful polymers. So it's kind of a circular economy, but even an upcycling economy.

So the current arrangement is that Aether is the -- they have a process in place, which is basic and rudimentary in their labs and Aether is the exclusive partner with which they are validating the process; one, scaling up the process. Two, the pilot plant is in the current phase and the current press release was about. And three, then in the future, potentially partnering towards further scaling up and commercialization as well. The partnership is sound. We are aligned on the interest in the competencies. And it is a very interesting field.

It's again a new field for Aether. It is adding significantly to the basket of sustainable processes and products and areas that we're getting into, diversifying away from the ag and the pharma core of our business, which is a strong focus for us. And so that way it's very interesting. So the current press release was more on the side of Novoloop, and so we kind of made a press release backing up on that, but in fact, they were presenting in the World Economic Forum in Davos, this particular case study, and their technology, and they wanted to give out a press release before that. And so we kind of helped them out in that. And it's very interesting where this will end up, but potentially go all the way towards commercialization.

[Rohit Ohri, analyst]

And this pilot plant is at which site, from Aether's end?

[Aman Desai, executive]

Site 1, the new pilot plant that we're building. We're building an entire state-of-the-art, fully automated manufacturing skill. Again, going back to the various questions on this call, core competencies and so it's continuous reaction technology with the CFTR depolymerization, which is very unique and very interesting technology that they have kind of innovated on and we are going to bring to commercial realization.

[Rohit Ohri, analyst]

Dr. Aman, if you can just take us through that, what sort of revenue potential do you see or what sort of investments do you feel, because it's a promising business and promising chemistry going forward. What sort of competition is there or something on the market size or the margins profile if you all can share that?

[Aman Desai, executive]

The market size, you could imagine the PET waste that happens in the world is hundreds of thousands of tonnes and there are a select few companies. In fact, we are working with -- I cannot name them, but we are working with some other company as well in the U.S. based on very similar field of upcycling and circular economy of polymers. And so it's a newly developing field, and we are firmly in partnership with the front runners of this field. And the market potential is tremendous.

Every single plastic that you touch currently is going to waste and you throw in plastic polymers in the recycle bin at the airport, but it's actually only about 10% to 15% of that what is thrown into the recycle bin is actually recycled or upcycled. The rest of it actually goes to waste. And so I'm just looking at some Google number here and how Google search [indiscernible] plastic waste management market in the world and it's claiming to be $35 billion in 2021 and so $45 billion in 2029.

And so it's too early to say anything, but it's a very interesting field. We are working with all the major players right now. Novoloop is one of them that we've publicly announced. And I think we are going to focus on this field as well in the coming future and the potential is tremendous. We're talking about thousands of tonnes. And as far as we know, we are the only people in India doing this in partnerships with such companies.

[Rohit Ohri, analyst]

Dr. Aman, do you think that these kind of businesses will kind of put a little bit of a dent on the margin profile, which was earlier 28% or we were scaling up to 32%, 33%? Do you think that it...

[Aman Desai, executive]

The realization will be small, but the margins and the EBITDAs will be gradual and going up. And so we will not compromise as a business policy and as a fundamental philosophy of the company and the family, we will not compromise on the margin levels and the EBITDA levels as much as possible in the products going forward. The realizations might be small, for example, the oilfield services, we had a speaker that mentioned previously of $3 to $4 of realization as compared to INR 1,500 or almost $18 of the current average realization that we have today. So we'll compromise on the realization, because that depends on the field that we get in, but we will, as much as possible, try not compromise on the margins and the EBITDAs.

[Operator]

The next question is from the line of Inderjeet Bhatia from HDFC Securities.

[Inderjeet Bhatia, analyst]

Is all okay at the site now? Just a couple of questions. One is on this, if you could just explain this margin. I think there was a comment by you -- by Rohan, I think that gross margins got impacted. If you could just explain the mechanics as to how exactly this played out? And second is, do we expect to kind of go back to our usual 20% net profit margins back, say, from quarter 4 or next year onwards?

[Faiz Nagariya, executive]

Yes. So Inderjeet, Faiz here. As Rohan said in his commentary that we were able to achieve the sales in the third quarter, mainly because of the finished good inventory, which we had for the materials which were required by the customers. And so finished goods inventories are all sold out. And if you see the change in inventories due to the finished goods has gone down drastically. And that has impacted the margins because there's no production which has happened. Only the sales has happened. The changes in inventories, which was INR 25 crores in the last quarter has come down to INR 3 crores, which has impacted the [indiscernible] which could have been a better number if the site was working properly in December month also. So that would have changed the numbers drastically.

The main reason is that it is because of the finished goods, which have been sold off and the change in inventory has gone down a lot and the reduced numbers in the sales.

And regarding the profit margins, we definitely were banking on the -- 20% was our benchmark and that still remains the benchmark to grow from there gradually. We would definitely be willing to bring this back in quarter 4, but from next year of course, we should. That is the target again for us.

[Inderjeet Bhatia, analyst]

Okay. Among the other costs, is there any kind of inventory related cost or damages to inventory, damages to finished goods? Is any of that kind of cost also booked into the P&L this time around?

[Faiz Nagariya, executive]

No, no. Currently, if you see the footnote, I have mentioned clearly that the loss assessment is going on and currently, we have not taken any impact of assets or stocks or profit loss in this current quarter. Once the assessment is over and we are submitting the final claim to the insurance company, will take you through that numbers, then only we'll be taking the impact in the books of accounts.

[Inderjeet Bhatia, analyst]

Sure. And typically, the turnaround time by insurance company to kind of pay as damages would be, 6 months?

[Faiz Nagariya, executive]

Yes, it is 6 months, but we have been providing the required information and data to them. So we should try that we are able to close it within 3 to 4 months.

[Operator]

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments.

[Shubhangi Desai, executive]

Thank you, everyone, for participating in the call. We hope that we have addressed majority of your questions. If you still have any further unanswered questions, then please feel free to reach out to us. Have a great day ahead. Thank you very much.

[Operator]

Thank you. On behalf of HDFC Securities, that concludes this conference. Thank you for joining us. You may now disconnect your lines.