Ladies and gentlemen, good day, and welcome to Aarti Industries Limited Q3 FY 2022 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Shiv Muttoo from CDR India. Thank you and over to you.
Yeah, thanks, Stanford. Good evening everyone. Thank you for joining us on the Aarti Industries Q3 FY 2022 earnings conference call. We have with us today on this call Mr. Rajendra Gogri, Chairman and Managing Director of the company, Mr. Rasesh Gogri, Vice Chairman and Managing Director, and Mr. Chetan Gandhi, CFO of the company. Before we begin the call, I would like to point out that some of the statements made in today's call may be forward-looking in nature, and a disclaimer to this effect is included in the results presentation shared with you. I would now like to invite Mr. Rajendra Gogri to take you through the performance of the company and his outlook on the business. We will then open the forum for Q&A. Over to you, sir.
Thank you. Good evening and very welcome to all of you attending this call. I hope all of you and your families are in good health. I trust that all of you would have received, Q3 FY 2022 results presentation and uploaded on the stock exchange website earlier. First, a review of our financial performance. Based on the financial results of the year to date, we have delivered performance that reflects the strong business traction across both our verticals and position us to comfortably exceed our growth guidance as shared earlier this year. Our Q3 revenues were at INR 2,636 crore. This includes the termination fee in respect of the first long-term contract to the tune of INR 631 crore. As you will recollect, in the month of June 2020, we have received a notice of termination of this contract from the customer.
Appropriate disclosure related to the same were given immediately to the stock exchange on June 15th, 2020. This has resulted in increase in EBITDA and PBT by INR 611 crore, net of currency mark-to-market and expense fee. Excluding termination fees, our Q3 revenues were INR 2,005 crore, up 53% year-on-year. Revenue expansion during the quarter also includes the passthrough of the substantial increase in raw material cost prices, as well as fuel and logistic cost to our customer based on the contractual terms. We continue to extend the growth momentum by engaging strong customer traction for our expanded manufacturing capacity across key product lines. As discussed in the past, our reported EBITDA is the key monetizable data point as it neutralizes the input cost variation.
During Q3, our core EBITDA at INR 356 crore, netting off for termination fee, is once again the highest in our operating history, demonstrating the ability of the business to maintain margins by passing on to customers the substantial input cost inflation experienced during the reported period. Q3 EBITDA was also higher by 25% YoY. EBITDA growth was driven by higher capacity utilization, volume growth, favorable product mix and realization. Our profit before tax came in at INR 247 crore after adjusting for the termination fee. This is up 18% YoY over Q3 FY 2021 and is also our highest ever profit historically. In the specialty chemical business, our core revenue without termination income came in at INR 1,657 crores, up 56% YoY.
Segment EBITDA INR 288.4 crore net of termination income for Q3 translates into growth about 27% on YoY basis and about 17% higher on QOQ basis. As you are aware, we have a pricing model where the variation in input costs, such as raw material, fuel, logistics, et cetera, are passed on to the customer. Growth achieved on this parameter during Q3 indicates positive momentum in the business. This in the middle of continuing rise in the price of various key input commodities, fuel prices and significant high cost of logistics. We are watching the situation closely and continue to pass on the impact to the customer to the maximum extent possible. There are instances where we had to absorb some part of these higher costs.
The current inflationary trend has also resulted in increasing working capital, but our well-capitalized balance sheet has enabled us to manage the situation well. We saw a return of demand from established market driving improved margins. During the quarter, shortage in the supply of nitric acid impacted volumes of nitric-based product. Now for the Q3 production update. Production for Nitro Chloro Benzenes was about 18,504 metric tons compared to 16,832 metric tons a year back, and about 20,347 for Q2 FY 2022. Similarly, for hydrogenated products, we have achieved production of 2,878 metric tons compared to 2,739 metric tons last year. On the Nitrotoluene front, the production for Q3 was 3,633 metric tons compared to 3,594 metric tons in the same quarter last year.
During the quarter, the shortage in the supply of nitric acid, which is one of the key raw material, impacted the volume of nitric-based product. We are also witnessing the shortage in the current quarter for FY 2022 and are taking necessary steps to optimize the product mix. Coming to the key projects for the segment, we are currently taking trials of the project related to the second long-term contract and expect to commercialize the unit in this quarter, that is Q4 FY 2022. The projects are related to the third long-term contract at Jagadia, the NCB capacity expansion of Vapi, expansion cum asset upgradation for our acid unit at Vapi, etc., are expected to come on stream in FY 2023.
The commissioning and scale-up of these units and the recently commissioned facilities will drive our growth and enable us to meet the growth guidance for FY 2024 as given earlier. We witnessed the return of demand from established market driving improved margins. With a positive traction for the segment across both Indian and global market, we expect to deliver steady performance improvement going forward as new facilities scale up volume. Our Pharma business grew 40% YoY to INR 348 crore during Q3. Here too, we passed on higher cost to customer, resulting in top line expansion, where part of the fuel cost had to be absorbed by us. Business improvement has been driven by higher volumes, improving efficiency and entry into new APIs. We have established relationship with global generic pharma companies and continue to invest in the expansion of API and intermediate capacity.
We have now attained large scale in this segment and see further increase in volumes based on our new investments. Further business visibility in Pharma is based on higher volume from regulated markets, value-added products and new introduction of intermediate products. Currently, trial runs are being conducted in the new expanded block at the U.S. FDA-approved API facility located at Tarapur. We targeted commissioning in the current quarter itself, that is before the end of FY 2022. EBIT for the Pharma segment for Q3 was higher by 10% year-on-year at INR 60 crore. This was also a sharp increase of about 46% over the preceding quarter, that is over Q2. EBIT has specific issues witnessed previously are now largely resolved. Going forward, we expect volume expansion to be supported by robust margins in this business based on the pipeline of approvals across anti-hypertensive, cardiovascular, oncologies and corticosteroids.
Now an update on capital expenditure. We have incurred CapEx of INR 312 crores in the third quarter. We have now invested about INR 920 crores in the year to date and expect the annual CapEx have to be around INR 1,200-INR 1,300 crores, which is within the range from with our earlier CapEx guidance of INR 1,200-INR 1,500 crores for FY 2022. As shared earlier, we are also undertaking various R&D and innovation-driven program with 40+ products for chemicals and 50+ products in pharma in the pipeline. It will drive growth beyond FY 2025 and give us a long-horizon value visibility till FY 2027.
Now with reference to the update in the proposed demerger of the pharma business and allied activities, we like to share that we have received the necessary in-principle approvals from stock exchange in the last quarter, and the application is now under process at NCLT. We expect the process for getting necessary approvals for the said scheme to take around another four to five months, which is in line with the overall timeline that we had shared earlier. Before I conclude, I would like to reiterate that we are focused on building an augmented organizational framework that positions us strongly to capture strategic growth opportunities in our focus verticals. We have an expanded pipeline of projects currently underway, providing clear visibility to the business over the next several years as India emerges as an increasingly significant global chemical supply destination.
Backed by supportive regulatory framework instituted by the government, our CapEx commitment driven by well-capitalized balance sheet will allow the pursuit of aggressive growth in line with the business blueprint. In addition, our plan to create individually focused business in our two core verticals will further enhance value of all our stakeholders. With that, I conclude my opening comments and we'll open the floor for the Q&A session. Thank you.
Anyone who wishes to ask questions, please press star then one. The first question is from the line of Surya Patra from PhillipCapital. Please go ahead.
Yeah, thanks for this opportunity sir and congratulations for the good set of numbers. Sir, the first question is on the termination compensation that we have received. Obviously it was guided and in the similar lines only it has come. It seems that we have got adequately compensated for the deal cancellation by the customer. In this process of deal signing and cancellation and not getting real operational contribution from the transaction, so did we lose anything in the process, either in terms of our effort, time and all that, which possibly we could have created something else? Hello?
Hello. Can you hear me now?
Yeah. Yes, yes.
Now basically, utilizing this facility for other customers as we had guided earlier.
Mm.
Because the facility still remains with us. I think, overall, you know, we have got this compensation and as the facility will be also continue to be utilized, I think, we are fairly okay.
Okay. On the financial terms, obviously it was better than kind of expected compensation. Possibly you could have utilized our effort in a right direction and better direction.
Yeah, but nobody had visualized, you know, this kind of a thing which will happen at that time. The partners also had spent a lot of money. Yeah.
Sure, sir. Okay. My second question is on the margin profile, sir. Since last six, sevem quarters, we have been getting a $5 million kind of compensation amount that was getting built into our numbers. That was to some extent supporting the margin, overall margin, reported margin at a time when there were challenges and all. Adjusted for that, I think the margin profile would be around 17%-18%. That is at one end. Prior to that, S-phase, our margin scenario used to be 20%. We have now guided for a higher margin scenario for 25%-30%. How should one really bridge this equation from the current 18 odd % to 25% plus kind of margin scenario going ahead, beyond FY 2024? In between, from current period to 2024, what would really drive that, and what is the margin scenario should look like?
Yeah. Actually, basically, this quarter itself. You know, this year the raw material prices substantially increased, you know, if you see the last year, so margin profile, you know, becomes very difficult. But in general, the new product which are in pipeline for which we'll start the construction of plant in FY 2023, they are more value-added, so which will have a higher EBITDA margin at constant raw material prices. You are right regarding, you know, this $5 million which we used to get against this contract. That will definitely have a negative impact on margin. But longer term, increase in margin is more based on introducing a newer value-added products.
Okay. This crude price, which is now beyond $90 per barrel, whether that is a kind of a real concern, at this juncture do you think, sir, or it is a kind of temporary one? Even if it is not a temporary one, you can easily pass on the elevated cost. Is that your understanding?
Yeah, yeah. You know, generally crude price even at whether it's 90 or it crosses 100, whatever, but we have inherently a raw material pass-through model, and we are able to pass on the price increases either in the same month or maybe with a quarterly lag in general. We are not much concerned on that.
Just last question, sir, on the first contract, the plant relating to the first contract. We were thinking to commercialize that adequately from third quarter. Whether we have seen any ramp-up there or when do you really expect that to happen?
Yeah. We already started selling the material from that plant and it will be, I think, from FY 2023 we'll see a substantial ramp-up. By FY 2024, we expect to almost reach our targeted original volumes.
Sure. Okay. Thank you, sir. Thanks a lot.
Thank you. The next question is from the line of Rohit Chawla from Edelweiss Securities. Please go ahead.
Thank you for taking my question, sir. Sir, as per the presentation, you have mentioned that we need to alleviate our 25%-30% kind of growth for FY 2022. Just wanted to know how we should see this number now as in the nine months we are already at a much higher top line growth, and also taking into account the rise in product prices in last one year.
Yeah, I know. We already crossed nine month EBITDA. Because top line sometimes becomes difficult, you know, as a percentage. More guidance will be on EBITDA and PBT and PAT levels. We already crossed nine months. On that basis, I think we are maintaining around, you know, 25%-35% growth rate.
It would be any region on that or still remain there?
No. Basically nine months we already reached previous year's 12-month number on EBITDA and PBT. Top line growth is substantially more, but it's critical guidance is more on our EBITDA and PBT levels.
Okay. Sir, on this compensation side, I mean, as we have received all money, just wanted to know what kind of cost was included in this as, at the Ind AS level we are taking INR 611 crore number. As you have earlier guided that this facility would be used to execute orders for other customers, just wanted to know how much revenue we are generating from that particular project or how many customers we have secured post this deal completion?
Yeah. We have Forex and related hedging costs to be deducted out of that and certain commissions. Regarding, you know, we already started the product export of these products from this site. We'll be doing both domestic as well as export sales going forward from this site. We already identified customers and qualification of the product also has been done with new customers.
Okay. Just wanted to know the kind of investment we have made in this thing. Any number in terms of revenue from what we are invested in this project?
Yeah, you know, we are looking at, you know, in couple of years, reaching our targeted volumes. We should generate maybe about INR 400 crore plus revenue.
Okay. One last question. As you were saying that in pharma we see growth driven by regulated market growth. Just wanted to know how would be the margin in these business as like it would be. It is less likely to have higher margin in a regulated business.
Yeah. Basically, in the Pharma we are. As we have expanded our capacity, you know, in this quarter, which will be coming online, you know, there are several products where we are unable to meet the customers' demand, so those demands will be picked up. Also, you know, as you know, we are operating in steroid as well as anti-cancer chemistry, APIs. There, you know, overall the number of players, other players who are offering these kind of products are limited, so there we anticipate reasonable margins to sustain for future.
Okay. Okay.
We are getting newer approvals every year for these products also.
I mean, the overall margin profile would be better from these level what we are currently?
We would like to maintain this 18%-20% margin, you know, EBIT number for us.
Okay. Okay. That's it from my side. Thank you.
Thank you. The next question is from the line of Rohan Gupta from Edelweiss. Please go ahead.
Yeah, hi sir, good evening. Sir, two questions. First is on this, because of this methacrylic acid shortage, what could have been the revenue loss, if you can just quantify? Hi sir, am I audible?
Yes. I think the absolute quantification we have not done like that, but still maybe around INR 50 crore can be the kind of number.
Okay.
Yeah.
Okay. You mentioned that the availability, the shortage still remains there, so probably that may continue to have impact on our even current quarter number as well and because of this methacrylic acid shortage.
Yes. It will be by some impact in Q4 also will be there.
You also mentioned that there is a definite lag of close to a month to a quarter, and we have seen a very sharp increase in crude prices even in the current quarter. Do we expect that, though we are passing it on, that may have some delays or is there any cap you see that there will be acceptance up to a level of only from the customers and after a level that it can start affecting your demand because the end user industry may not be in a position to absorb that price increase? Did we hit that kind of level because crude close to $90-$100 may have put a lot of pressure on the end product pricing.
How do you see that the acceptance from the customer and can it have a margin pressure for us?
Yeah. Most of the products which are made from, you know, our product downstream, you know, some of them are agrochemicals and polymers and paints and all that, you know. Impact of this, you know, by the time the finished product is made and put to the customer, you know, all the marketing costs and also everything gets loaded. Price to the end customer is increasing crude oil and our intermediate price is virtually not significant to really impact the demand. Some commodity plastics like, you know, Polypropylene, Polyethylene, PVC, where the immediate feed goes to the end user, and there you can sometimes see that, you know, the pushback on the demand with these polymer price increases. In our range of product, generally, crude at $120 or crude at $60 is not going to impact the demand.
Okay. There is absolutely no problem from the customer end as far as the demand is concerned.
No, no. It's not because their ultimate products are, you know, $5, $10, $15 kind of a product maybe. At the customer end it may be still higher prices. These variations generally it's absorbed from the demand point I think.
On the product which got terminated from the customer and this dicamba derivative intermediates which you're making. You mentioned roughly INR 400 crore kind of sales you are expecting to achieve. Didn't mention any timeline. By when you think that you'll be able to then come up?
By FY 2024. Yeah.
Sir, any guidance on what is the percentage utilization of this plant right now and what it can be in 2023 next year?
Yeah, this year, you know, we have just started giving a trial qualification quantity and all has been started. FY 2023 I think it's still difficult to give. I think in our Q4 call, you know, we should be able to guide more on FY 2023 volume target for that product.
Okay. Can you also give us some financial figures like, you know, what is our current debt number for the year end and what is our cash position? Because also in terms of cash accounting from the fees which we have got, I mean from the customer, that how much fees, how much cash we have got in the current year?
Yeah, Chetan, you can take that.
As regards the accounting for the fees, we had an advance of INR 25 million, and the balance would be coming up in the current quarter, so that will be fully settled in the current year itself. Rohan, could you just repeat the question once again? Hello?
Yeah, he wanted to know the overall debt level.
Yeah, the debt levels are almost at INR 2,700 crore as of the quarter end.
Thank you. The next question is from the line of Abhijit Akella from IIFL Securities. Please go ahead.
Good evening. Yeah, thank you so much, sir, for taking my questions. First, just wanted to clarify on the adjustment pack excluding the termination fee, is it INR 242 crore? Was that the right number I got?
No, that would be the PBT, if I'm not mistaken, INR 247.
Yeah, it's the PBT.
The tax will be at a company level. Something we'd have to look at it on a consolidated basis only.
Okay, got it. About the same 18%-20% tax rate on this. Understood. Besides the INR 631 crore termination fee, would we have booked another, you know, $5-$7 million this quarter as well as part of the reserve accrual? If you could just give us that number as well.
It's a $6.5 million, right?
Yeah, that's around 6.5. That's the last component for the quarter because the contract gets over.
Okay, understood. On the project you mentioned that, you know, INR 400 crore is what we are expecting to generate from it in the next couple of years. If I remember correctly, the, you know, original project's revenue projection was also INR 400 crore a year. Essentially in terms of realizations and margins, it seems to be in the same ballpark as the original contract. Is that how we should interpret that?
Yeah. I think it'll be about a similar order. It'll not be exactly same. I think the margin may be little lesser. Top line, because the prices have increased in general over a period of time. Raw material prices have increased. At the constant top line, some margin will be little less than originally forecasted.
Okay. Fair enough. One last thing, and I'll come back in the queue. Regarding the demerger, how much of that debt will be transferred to Aarti Pharmalabs? Would you have a sense of, you know, how much that might be?
We'll have to actually look at the component when the actual order comes in. As on the appointed date, which was like July 1st, the debt to the bank was around INR 600-INR 650 crore. I don't remember the exact number, but around that number of debt would have gone in. Plus there were some cash balances also. Component of cash balance would have also go over there. Anyway, these numbers will have to be seen as on the effective date when the NCLT approvals comes in and what are the actual numbers at that point of time.
Okay. This is for the Pharma business, you're saying?
Yeah. Yeah.
Okay. Got it. Understood. Thank you so much. Wish you all the best.
Yeah.
Thank you. The next question is from the line of Amar Maurya from Alfa Advisors. Please go ahead.
Yeah. Hello. Hi, sir. Thanks a lot for the opportunity. Sir, firstly on these volumes which you had highlighted, you said NCB volume was 18,500, correct?
Yeah.
What was the p-Phenylenediamine volume?
The p-Phenylenediamine volume was around 495, close to 500.
Close to 500. Okay. And then hydrogenation, 2785, correct?
No. That was 2878.
2878. Nitration, Nitrotoluene?
It was 33,630.
3,630. Okay. Sir, if you can also help me broadly, what would be our DCB, MCB and TCB volume? Chlorination, the whole volume.
I don't have that number right now. Probably we'll have to check on that and get back to you.
Okay. Just to understand, I think p-Phenylenediamine and NCB, we both this capacity got expanded in the second quarter, correct?
No, no. There was no expansion of p-Phenylenediamine, recently.
Yeah. Okay.
Recent expansion was a chlorobenzene plant.
Yeah. Nitro Chloro Benzene plant got expanded, right?
No, no. Not yet.
Still that because last time when I discussed, I think around INR 1,200 crores kind of a working capital, we were looking at NCB INR 150 crore, U.S. FDA plant of around INR 400 crores and two dedicated projects something around INR 300 crores. I just wanted to understand that NCB plant got commissioned or it is still in the working capital?
It is yet to be commissioned. Yeah.
Okay. That same is the case with that U.S. FDA plant also?
Yeah, yeah. That number wasn't INR 400 crore. It could be INR 100+ crore or something.
Because I think you said that something we had bought the land of around INR 200 crore and INR 200 crore we are implementing for the expansion, something like that.
No, no, it was not INR 200 crore. Land is not possible, I think.
Okay.
I guess, Amar, you got a bit confused. In the Pharma we've got the land in Gujarat, and over there, the project which is gonna come up would be of the magnitude of INR 350 crore-INR 500 crore.
INR 350-INR 500 crores. Okay.
Yeah. That is something which is gonna come up. It's not currently part of the WIP component.
Sir, now, as you said that out of INR 1,300 crore CapEx, 922 crore got capitalized or crore got invested, and it could be sitting in the WIP. You also guided that something around INR 1,500 crore would be invested in 2022, 2023. What would be that CapEx now?
Now all the new projects what we are saying, new product lines, that construction will start in FY 2022, 2023. Means FY 2023.
Okay.
From April onwards, we'll have construction of the UMTP plants, what we have guided. As well as from dedicated chemistry, construction will start in FY 2023.
Okay. On top of this, sir, we had also guided for something around 2024-2027, INR 350 crore CapEx, right? 3,500 crore CapEx.
Overall we had guided INR 4,500 crore-INR 5,000 crore in our three-year period. Out of that, around INR 1,500 crore were for the existing ongoing projects.
Okay.
Around INR 3,000-INR 3,500 for the new more or less the greenfield kind of a project. That's how the guidance was there. Yeah.
Sir, these greenfield projects which are going to come, I believe the chemistry would be either toluene or benzene, right? Would this be when you say high value, what kind of products which will be this and, you know, what kind of profitability we can see from these products? And if you can specify, like, you know, what kind of product this will be, like this INR 3,500 crores of CapEx which we talk about.
Yeah. This lot of chemistry will be added. Starting will be with toluene and benzene. It may be two, three , four, five, six steps will be added. That's how sales to asset turnover will be less and EBITDA margin will be higher. Then most of these products then will be both on it will be multi-end use level for pharma as well as on a dyes and pigment side. As well as these are import substitution as well as export driven. Where customer want to, you know, diversify the source.
Okay. Sir, if I can squeeze one more, like, you know, broadly, I believe, as you said, you are looking for export as well as for the import substitution for this INR 3,500 crore CapEx which we are doing.
Yeah.
Let's say, how big this market would be in terms of the value today and how much of the market you can address, you know, let's say in India, what will be the import value and what will be the export size? If you can give some color on that.
Yeah. The chlorotoluene range, I think already about INR 1,500 crore import is taking place.
Okay.
In India. In general, you know, we count, you know, the product what will we make. Normally 60%-70% of the market share of imports can be taken up, in general. That is broadly, you know, we look at a market share target, for import substitution.
Okay. Yeah. Okay. Fine, sir, I'll take offline. Probably, you know, it will take too much of time. I'll take offline, sir. Sure.
Thank you. The next question is from the line of Vishnu Kumar from Spark Capital. Please go ahead.
Good evening, sir, and thanks for your time. I just wanted to understand the projects that will get commissioned in 2023 and 2024. If I'm not too wrong, one is a second long-term project which you're saying will get commissioned in FY 2023. Third long-term contract, when will you get commissioned, sir?
I guess the second one would get.
Yeah.
Second one we have started with commissioning trials, and we expect the product to come out in Q4 for the second one. The third contract, we'll be targeting to commission maybe in, towards the end of Q1 or Q2 of FY 2023. As far as those long-term contracts are concerned.
Okay. Just a clarification.
What are the projects?
Just a clarification. The second one you are targeting Q23. It is not FY 2023, it is FY 2022.
Sorry, the second one. Yeah.
Could you repeat that?
Yeah. The second one you said that you are looking at Q3 or, sorry, FY 2023. It is not FY 2023.
Okay.
Like Mr. Gogri said that it is under commissioning, so we are targeting to commission it in Q4 FY 2022. Understood. This second contract, what is the utilization levels that we are expecting? Because I understand it's INR 1.5 billion for 20 years, so should we take it as INR 75 million run rate? And when is this likely to be achieved?
Basically, you know, we will see a sharp ramp-up from the first year itself. In that certain couple of years, I think we should be able to reach full capacities.
Okay. Second point is that if I'm not wrong, sir, this CapEx is completely funded by the supplier. I believe the margins in this should be, if I go back to our conversation, it would, could be much lower than the company level. Is that a right understanding?
Yeah.
Okay. Got it. When we look at the third contract, again, INR 125 million, could that be the run rate and what is the margin expectation on this particular contract?
Yeah, I think that was around. I don't recollect, maybe 35%, 25%, 35%.
The margin was in the range of around 30% or 35% kind of stuff.
This is on EBITDA, sir. Yeah, at EBITDA level, yeah.
Okay. Got it. This, again, this ramp-up you will see pretty quickly or what should be the ideal number that we should consider? I mean, this contract, if I'm not wrong again, is about INR 125 million for 10 years.
Yeah, that ramp up also. By FY 2024 we expect both of that to be running fully.
Okay. Got it, sir. Sir, any other projects that will get commissioned in, I mean, or rather you'll see ramp up in 2023, 2024 or something that gets commissioned in 2023, 2024, like NCB expansion which you spoke about or the acid unit. Indicatively, what revenue run rate should we expect in some of these projects that is coming up?
Yeah, that's what we are guided. By FY 2024 we virtually expect substantial ramp up of this contract as well as Nitro Chloro Benzenes, chlorobenzene and all. That our guidance was around, you know, 1.7-2x the top line as well as EBITDA and PAT over FY 2021 numbers. Those kind of thing by FY 2024 we should be able to achieve.
Okay. Just to understand, sir, on the volume growth front, I know we have steep revenue growth partly because of commodity. How would have been volume growth this time this quarter? Be it exports or domestically. Any rough indication that you could help us with?
Yeah. YoY may be around 25%, because this value is around 50%+ as per specialty chemicals concerned. Volume growth may be around 25%. We'll have to see the exact number.
Okay. Sir, was there any disruption, or rather a benefit to us because at the export market, because Chinese companies were not supplying, given we understand many of them are coming back, post the Winter Olympics, which is currently on. Do you see some element of suppliers are in the export market, they are going to come back again? Any comments on this?
No, we are not seeing that kind of a thing. No.
Okay. Got it, sir. All the best. Thank you.
Thank you. The next question is from the line of Kumar Saumya from Ambit Capital. Please go ahead.
Good afternoon. My first question is regarding the receipt of the termination fees. Apart from this, INR 630 crore that you received in the current quarter, was there a remaining amount that you received in the first half of the year?
My question was not very clear. Yeah.
Sir, we received around INR 630 crores in this quarter. In the H1 , what we received from this, fees, like any penalty fee that we received in the H1 ?
First quarter was INR 4.5 million, and second quarter was about INR 7 million. Third quarter the provision is about INR 6.5 million in addition to this termination fee. That was the number. Chetan, you will have the number in crores also, right?
Yeah. Yeah, yeah.
This is million dollars.
Yeah.
Okay. Thank you. Bye. That's okay, sir.
Thank you.
Thank you. The next question is from the line of Aditya Khare from Stewart & Mackertich. Please go ahead.
Hello, sir, and thanks for the opportunity. Sir, first question is again on the INR 4,500 crore CapEx which you are targeting. Out of that, the newer segment CapEx is around INR 3,000-3,500 crores. You had said to an earlier participant that you are targeting more towards the benzene and toluene chain only. If you can just break up into segment like, so first segment is the chlorotoluene. Apart from that, which are the segments which we are particularly so targeting? If you can break up this number into some of the segments.
It will be further value-added downstream products from dichlorobenzene chain as well as, Nitro Chloro Benzene chain. Also in addition to the entire chlorotoluene chain. Some nitrotoluene downstream also will be added. We have, you know, currently we have got, three benzene and one toluene chain, where we make the base product also. All value-added downstream from all those four will be added. The chlorotoluene will be adding the base chemistry of toluene chlorination as well as the downstream.
Okay. Sir, on the crude oil prices front now, definitely with this level of crude prices, as you had said earlier also that RP is comfortable to pass on at any crude oil level. Considering like, we are into an upward surge of crude oil prices only now, just to get a hypothetical idea, out of 100 customers, definitely 70, 80 could absorb, but there would be some amount of 10, 20% of customers which you might reject. Are you witnessing some sort of that kind of a scenario right now?
No, no. As I mentioned earlier, the ultimate product which are made, which is consumed by the end customer. Which will be, you know, in the going into the agrochemical or some pharmaceutical and all. Those values are very high. These intermediates, no, I would say even $130-$140 dollar crude will not impact demand at all.
Okay, sir. Thank you, sir. That's it.
Thank you. The next question is from the line of Nitin Tiwari from Yes Securities. Please go ahead.
Good evening, sir. Thank you for the opportunity. My questions are, just, couple of clarificatory questions. The compensation payment that you mentioned, in this quarter's result, is that something we have received or that has accrued to us and we are yet to receive?
Hello?
Hello.
We've got something like around close to INR 180+ crore already with us as an advance and balance will come in the current quarter.
Right. You mentioned about like, you know, the receipts in the previous quarters as well. I missed out on that number. It was what? $7 million and $6.5 million, something around that.
Yeah.
Could you please repeat those numbers once for the first quarter, second.
Yeah. Basically in the first quarter we had provided for around INR 4. 5 Million. In the second quarter it was INR 7 million, and the third quarter was INR 6.5 Million.
All right. Thank you. Basically we are looking at out of this 18 million we have received about INR 180 crores of payment and rest would be pending. That's what you are saying?
Yes.
Okay. Okay. Got it. Sir also, regarding the second and the third long-term contract, so if I heard you right, basically the commissioning of second long-term contract is at the end of fourth quarter FY 2022.
Yeah.
The third one is at the end of quarter one or quarter two of FY 2023. Right?
Yeah, it should start in Q1, Q2 FY 2023 kind of stuff.
Correct. You also mentioned about an EBITDA range for the third contract. Could you please also give a sort of a EBITDA range for the second contract as well, and what would be the annual run rate of revenue in that contract if you can help me with that?
In the second contract, the annual run rate which we had disclosed earlier when the contract was executed was in the range of around INR 500 crore. As Mr. Gogri shared in the call, it will have a faster ramp up and might take just a couple of years for us to reach to that level. The EBITDA, because there's no interest component or other stuff which is charged, so the EBITDA should be relatively lower. We'll have to see the exact number, but it should be in the magnitude of around 14%-15% or so. We'll still have to rework it because a lot of numbers including the raw material prices and couple of other input costs have gone through or gone changed, so we'll have to rework it but it should be in that 12%-15% range kind of stuff.
Okay. That means about 30%-35% in the third quarter, that's what we are looking at in terms of EBITDA, right?
Yeah, around that kind of stuff.
Okay.
These are based on pricing which was available at that point of time when the contracts were signed. Some of those, based on the input cost which has gone up there could be some change on it, but I would see a substantial hit. On an absolute basis the EBITDA guidances would continue to be there, what was guided earlier.
Got it. Also, like, you know, if you can just help us let him know which segments these two contracts are targeted at. I mean, are they catering to agrochemicals or to dyes or, like, you know, which end market segment if you can help us with that.
Yeah. Basically, specialty chemicals, you know. We will not be able to guide anything further on that.
Right. I was just like, you know, wondering because as in the case of first contract, Dicamba I think was meant for agrochemical production, right?
Yeah, over here we've got certain restrictions we can't guide beyond what it is there in specialty chemicals.
Understood. Great. That is all from my end. Thank you so much for answering the questions.
Thank you. The next question is from the line of Rohit Nagraj from Emkay Global. Please go ahead.
Yeah. Thanks for the opportunity. Just to again delve on the total, you know, incomes from the long-term contract. What was the amount in INR crores for FY 2021 and for nine months FY 2022 and obviously the termination fees is INR 631 crore.
This is in respect of the first long-term contract?
Right.
You're talking in terms of the revenue which is being generated or what?
No. I understand during the FY 2021 we were getting close to about $5 million each quarter.
That was around INR 140-odd crores roughly for the FY 2021.
All right. If I add this $18 million for nine months it's close to about INR 135 crores.
Yeah.
And, uh.
That kind of stuff and another 630 kind of stuff.
Total about INR 900 crore is what we have received.
Broadly, ± some INR 10-20 crore here or there.
Correct. Okay. The second question is in terms of the long-term contracts. We have given a range of revenue, you know, growth for FY 2024 as well as FY 2027. By FY 2024, how much percentage of our revenues might be coming from the long-term contract? And similarly on FY 2027, given the visibility that currently we have.
Yeah. Overall, you know, long-term contract percentage will increase with these two new contracts also, and some more contracts are also being discussed. Our non-contractual sales will also increase. Overall, we have not done any specific bifurcation between this long-term. In general, you know, most of our products, we have very good visibility with the customer about their next two years' demand and how they are going to grow and how much they'll be buying from us in that sense. This long-term contract percentage is increasing. Yeah.
Right. Got it. Just a small clarification on long-term contracts. Whenever we are discussing your long-term contracts, the project execution period is, say, two to three years, or it is now lesser than that, given that we already have a particular asset size and the projects which are currently ongoing.
It depends. You know, if there is a greenfield, more time. If it is a brownfield, then obviously it is faster because we've got a lot of infrastructure in place. It depends on that. Also the complexity of the project and the total CapEx involved. It'll be anything between, you know, one and half to three years kind of a number, depending on the size of the project and whether it's a greenfield or brownfield.
Right. Sir, just one clarification on R&D front. Currently, what is the strength? What is the number of PhDs and, you know, technology people who are into R&D?
I guess the headcount. We'll have to do the recent headcount, but it'll be upwards of 400.
Okay. Got it. Thank you so much, and best of luck.
Thank you. The next question is from the line of Naushad Chaudhary from Aditya Birla Capital. Please go ahead.
Yeah, hi. Thanks for the opportunity. Just one clarification I wanted. So, sir, typically in long-term contracts, that means there is a commitment from our side in terms of our project commissioning and supply on time. At the same time, there's a commitment from the client side on the volume of it, right? If I am understanding this correctly.
Yeah.
If I see the commissioning timeline of both of our contracts, second and third long-term contract, there has been a substantial delay of the second long-term contract. Initially, it was expected to come by 1Q 2021. It's been around two years delay in this contract. Similarly, around one and half year delay in third long-term contract. Just wanted to understand who is dealing, what is the reason and for this delay. The client is not pushing us to, you know, to get it on time or get it quickly, or is this an indication that the ramp up of these two contracts could be slower than expected and there's not much demand of the product from the client side as of now?
Yeah. Basically, this delay was mainly because of COVID. You know, two waves and that was a global event. Actually this, well, the second contract was already reset by one year, because of the entire COVID related thing happening in that. We are in constant touch with our customers regarding, you know, the delay which was happening on that front. On the ramp-up side, we don't see any issues. I think from their side, you know, the demand, they don't see any challenges going forward.
The annual revenue run rate which is expected, can we expect it to come within a year or two, the full utilization of both the contracts once you get commission?
Yeah, yeah. By FY 2024, I think both of them will reach almost full run rate.
Okay. Thank you so much.
Thank you. The next question is from the line of Rohan Gupta from Edelweiss. Please go ahead.
Yeah. Hi, sir. Sir, thanks for the follow-up, and sorry, got dropped out in the previous question. Sir, another few question on, especially on the capital employed in chemical business and even in the Pharma. Gross block has gone up, I mean, investment has gone up significantly, which I believe is a combination of both CapEx as well as. Sir, it seems looking at the numbers like there has been close to INR 1,800 crore in asset increase from Q4- Q3, while liabilities has gone up only from INR 200 crore. Just wanted to understand that, because of the high input prices, the debtors has gone up significantly in inventories also, but are we not getting enough lineup from the payables? Is there any significant increase in working capital that is going to affect our interest cost in the current scenario?
Rohan, just to address the question probably, against the increase of INR 1,800 crores, 900 is on the capital spend which is there. There'd be INR 600 crore related to the termination, which is also shown as receivable and part of capital employed. The resultant would be on the working capital side. I guess that kind of explains or summarizes a major part of your team.
Even the INR 600 crore is also included there.
Yeah, because we still have to receive a substantial part, so there'll be a good part of that also as a part of capital employed, right?
Sir, as a part of this termination contract arrangement, the balance money was supposed to come by end of FY 2022. This balance INR 600 crore rupees entire money, you think that will come in the current quarter?
Yeah. Yes.
Okay. That will lead to total money received from this contract termination is INR 980 crore because that actually was $140 million, right?
No, no. We had given a guidance that it would be in the range of $120 million-$130 million. I guess the numbers are within the guidance which we had given in June 2020.
Okay. Fine, sir. Sir, second question is on this, though, the product which like Dicamba, derivative only. You mentioned that we can achieve a revenue potential of almost INR 400 crore, which was actually, a full revenue potential from this contract when we did it with the Monsanto. And was supposed to have a 40% kind of margins. Do you see that at a full potential when you are selling this product to outside, will you still have a 40% kind of margins in that segment, or it will be, or in that product, or it will be much lower than that?
No, it will be lower. Very much lower, I would say.
We may achieve revenues, but definitely in terms of margin profile it will be much lower.
No, not much lower. It will be little bit lower, I would say. Not a 40%. It will be more towards, you know, between 30%-40% range. Between that range it will fall.
Okay, sir, we are almost at the end of the year and having invested close to INR 950 crore in CapEx by Q3. Though the range for the current year still looks pretty large in terms of INR 1,200-INR 1,500 crore total CapEx for the current year. I believe only a couple of months left for this year also. You may have a fair amount of visibility on how much CapEx will be for the current year. Are there spillovers you are expecting or any delays in the CapEx for the current year?
Actually, we have recorrected in our statement. Now we have said INR 1,200 crores-INR 1,300 crores. Right, Chetan?
Yeah, yeah.
Mm-hmm.
Rohan, probably we have missed out when you had dropped out. For the current year it should be in the range of INR 1,200 crore-INR 1,300 crore.
Oh, okay. Because I was just referring the presentation where you mentioned INR 1,200 crore-INR 1,500 crore.
Yeah, that was the annual guidance. Now we know that the nine months are over.
Right.
We are now looking at around 1,200-1,300.
In that context, sir, can we be concrete about next year CapEx plan of amount-wise?
No, next year we have to still, you know, work out in detail regarding the cash flow. Overall, you know, the three-year which was guidance was there, INR 4,500-INR 5,000. That is for sure. I think that will stand.
Fair enough, sir. Sir, when you say that 85% utilization is specialty chemical for the current quarter, can you just say that, or can you give that what was the gross block number was considered in that?
Rohan, I'll have to check that number. I don't have it right now handy with me, so.
Okay. Definitely entire INR 950 crore invested in the current year would not have been part of this 85% utilization.
Substantial part of this is in capital WIP. Those projects are yet to commission.
Correct. Okay. Fine then, sir. Thank you very much.
Thank you. The next question is from the line of Bob from Falcon. Please go ahead.
Yeah. Hello. I wanted to ask whether you see any new competition coming up given the growth in this sector, in India especially?
Yeah. We have very wide product range, and we have some competitors in India as well as in other countries. Overall, we don't see any significant increase in competition.
You haven't had other chemical manufacturers getting into benzene derivatives recently?
Yeah. No, no. Not yet. No.
Okay. All right. Thank you.
Mm-hmm.
Thank you. Ladies and gentlemen, we take the last question from the line of Surya Patra from PhillipCapital. Please go ahead.
Yeah. Just one clarification, sir. You mentioned that, under your R&D projects, some around 40 odd products are there in the chemical pipeline and 25 odd in Pharma. Can you elaborate on that a bit?
Yes. 50+ in pharma. Yeah.
I'm saying on the pipeline product, you can just give some clarity on that.
Yeah. That's what we say. You know, the chlorotoluene and its downstream as well as downstream of Nitro Chloro Benzenes, dichlorobenzene, nitrotoluenes, very varied downstreams. They are the product range.
You had earlier mentioned about while setting up the new R&D plant in Navi Mumbai, few new areas.
No, the chemistry wise. There are a lot of new chemistries. These are the products you have downstream, but the chemistry will be having a photochlorination, ammoxidation, then, AHF chlorination, Grignard reaction, Stille reaction. A lot of new chemistry will come in.
In terms of application, majorly, how would that be distributed, sir?
It will be both, you know, agro as well as the pharma product going into starters and all, and some going in the dyes and pigment side also. Again, a very wide, range of application. These three sectors will be major, agro, pharma, some dyes, pigment and some other sectors.
Okay. In regards to the Pharma manufacturing side, how integrated that we would be post this pipeline?
Yeah. Basically in pharma we are largely up to N-5 stage on most of the APIs that we manufacture. We are doing more or less in our in-house manufacturing, except the steroid range of products. Whereas in certain products like sitagliptin, et cetera, we will be vertical from benzene straight away till the final sitagliptin. That is one example. There could be similar few examples of few APIs, but that value may, in terms of turnover may not be significant. As a practice, generally we try to do at least five to sevem stages in-house in pharma, non-steroidal products.
How the business model of Aarti Drugs will be different from this, sir? Because that is also API and looking for, kind of,
Yeah. I will explain to you.
for integrated. Yeah.
Basically what we are doing in Aarti Industries is largely specialized chemistry of steroids, anticancer, as well as the antihypertensive and lifestyle medicines, which are higher value and lower volume products that we are targeting.
Okay.
We don't do generally the products which are below $100/kg. Whereas in Aarti Drugs largely we are into ciprofloxacin and anti-infective, pain management.
Large volume, old products.
Yeah, yeah. These are all older products where the values of certain products are above $100 but largely under $100. There are some products which go up to $300, $400 also, but largely in that space. That is largely Aarti Drugs is focused on ROW market, whereas here in Aarti Industries we are focused more on the regulated markets as well as, we are also selling intermediates of these APIs to all the generic manufacturers, who are, like companies like Dr. Reddy's or Mylan or Zydus or Alembic, and they buy intermediates for their regulatory requirement.
Okay.
Yeah.
Thank you, sir.
Apart from that, we are also having CDMO business, also in pharma. Which is a different business, which Aarti Drugs doesn't.
In terms of the facilities also in terms of manufacturing facility, it is entirely batch processed based kind of model?
Yeah. We are fully flexible manufacturing where, you know, we can do a multipurpose production, multipurpose plants, where we can do any product, which fits that, manufacturing location. It's a facility which is, you know, we can change the product and go to, different product. If the particular product, suppose market has, gone down due to life cycle, et cetera. We can always substitute a new product. Whereas in case of Aarti Drugs that is little bit less possible. Of course doable.
Mm-hmm. Sure.
Yeah.
Okay. Yeah. Thank you, sir. That is very useful.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.
Yeah. It has been a pleasure interacting with you over the call. Before we close the call, let me reiterate that with the execution of our planned growth objective, we look forward to driving strong value for all stakeholders associated with Aarti Industries. We thank you for taking time out and engaging with us today. We value your continued interest and support. If you have any further questions and would like to know more about the company, kindly reach our investor relations desk. Thank you.
Thank you very much, sir. Ladies and gentlemen, that concludes this conference. We thank you all for joining us and you may now disconnect your lines.