Ladies and gentlemen, please stay connected. The conference call will begin in a few moments. Thank you. Ladies and gentlemen, good day and welcome to Aarti Industries Limited Q1 FY26 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 the 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. Nishid Solanki from CDR India. Thank you, and over to you.
Thank you. Good morning, everyone, and thank you for joining us Aarti Industries Limited Q1 FY26 Earnings Conference Call. Today, we are joined by senior members of the management team, including Mr. Suyog Kotecha, Executive Director and Chief Executive Officer, and Mr. Chetan Gandhi, Chief Financial Officer. We will commence the call with opening remarks from Mr. Kotecha, followed by a question and answer session where the management will address participants' queries. Just to share a standard disclaimer, certain statements that may be made in today's conference call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation that has been shared earlier and also uploaded on the stock exchange website. I would now like to invite Mr. Kotecha to share his perspective. Thank you, and over to you, sir.
Thank you, Nishid. Good morning, everyone.
Thank you for joining us today. We appreciate your continued interest in Aarti as we discuss the performance for the first quarter. As you may all know, the quarter commenced with several external headwinds, both geopolitical and market-driven. However, our strategy and operational discipline have helped us remain agile and forward-focused. Let me start with a brief overview of the broader macro environment that shaped the quarter. Q1 was one of the more complex quarters that we have navigated in recent times. A steep correction in key input prices, particularly Benzene and Aniline, which declined by about almost 15% - 20%, led to pricing volatility and inventory adjustments across the value chain. On the other hand, global trade dynamics also lacked stability. The initial tariff announcement by the United States. created uncertainty among customers.
The tariff landscape continues to remain unpredictable, compounding the already challenging global trade dynamics and leading to sustained pressure on product pricing and profitability. The latest and new U.S. announcement of a 25% tariff on Indian imports, along with an unspecified penalty, has created even more market uncertainty. We are currently assessing the impact of potential of these measures on our products in the U.S. market. Going back in Q1, the Israel-Iran conflict in the May 2025 timeframe also had effects on our logistics, temporarily impacting the regional supply chains and shipping skills, especially affecting the export flows. Consequently, some of our shipments experienced delays in rerouting, spilling over into Q2. Domestically, the India-Pakistan tensions in the April-May 2025 timeframe also briefly impacted our operations, particularly at our cash facility. Blackout periods led to intermittent production, curtailing our capacity utilization.
In tandem, the Kandla Port, which is one of our critical export routes, faced temporary shutdowns, and subsequently significant congestion at Kandla port due to the conflict also further strained our ongoing volume. Despite these challenges, I think underlying demand conditions remain stable. Our business continues to demonstrate strength rooted in product diversification, multi-process expertise, and long-term thinking. Our resilient operations enable us to navigate through regional segment-specific disruptions. Diversified exposure across energy, agrochemicals, rice and pigments, and polymer additives also provides support and balance to the business. As you may be aware, we had undertaken major capacity announcements in the last financial year. We scaled up our microtolerance from 30 - 45 KTPA, Ethylation from 10 - 30 KTPA. These facilities are now in ramp-up phase. They've proved their design capacity and sort of position us to meet the rising demand in some of these applications.
Further, during the last quarter, we have also scaled up our MMA capacity from 200 KTPA to about 260 KTPA, and we have more room to expand it further with limited CapEx. We have also taken several initiatives linked to inventory and cost optimization in line with the plans for another year. Now, let me walk you through the financial performance for the quarter. Revenue stood at INR 1,867 crore, a decline of 15% QoQ. While volumes largely remained intact, we faced pricing pressure due to raw material corrections, inventory adjustments, and deferred export realizations. EBITDA came in at INR 215 crore, reflecting a decline of 19% on a QoQ basis, impacted by inventory valuation losses to the tune of roughly INR 30 crore.
Our temporary production issues due to domestic conflicts and some of the export deferments due to global geopolitics and the margin sector, of course, continued on some of the value chains that are in our current account of overcapacity situations globally. As a result, profit after tax was INR 43 crore, while interest and depreciation costs remain largely in line with the expectations. CapEx for the quarter was at about INR 280 crores, and it's expected to be below INR 1,000 crores for the year 2026, as guided earlier. Our Zone IV projects are progressing well, expected to commission in a fair manner from the second half of FY2026. These projects will add hosts of new products with better margin profiles and support the margin improvement over the long term. While the reporting numbers reflect this off quarter, I think the underlying health of the business remains robust.
We are confident of a strong recovery in the ensuing quarters driven by ongoing demand revival and our supporting capacity expansion. Coming to key segmental highlights, energy applications in Q1, volumes in the energy segment remain flat on a QoQ basis. A combination of planned disruptions on account of Indo-Pak conflict and also shutdowns taken for the expansion purposes. Continued efforts to increase the customer base and geographic reach will support us to pump the ramp-up of these expanded capacities. Demand for revenue remains strong. Pricing was under pressure due to increasing competition and decreasing raw material prices. However, AIL ability to manage large volume shipments and for more advantage will support us in continuing to maintain the higher market share. Further improving frac space are also expected to support the business in the coming quarters.
Summarizing, our focus remains on driving volumes for optimal capacity utilization and increasing our market leadership position. On non-energy application, the agrochemical intermediates segment continued to experience pricing pressure, while demand recovery was visible. Types, pigments, printings, and pharmaceutical applications remain steady and stable. The polymer and additive segment showed a mixed picture across different product value chains. DCB had shown certain pressure on the demand versus the other part of the polymer additive segment actually showed a very good demand recovery. With the recent developments on the U.S. tariffs, we see potential impacts on our U.S. businesses, which account for roughly 15% - 20% of our revenue. We are closely monitoring the situation as it evolves to assess the impacts and then what potential mitigation measures we need to take to minimize the same.
On some of the training updates on two JVs, the first one, Augene, which is a JV Superform. Project execution is progressing well. We are expected to commission it in H1 of calendar year 2026. The market development activities have already been initiated to establish the presence in the domestic markets. The second JV, GRC, which is with RESL and through 100% owned subsidiary of the Circularity Limited, has achieved a key milestone in terms of completion of technology selection and awarding the technology consultant in the pre-processing design. Capital expenditure finalizing is currently under progress. We expect commercial operations also from this JV in early FY2027. To conclude, Q1 was shaped by some headwinds and temporary disruptions. These issues had bearing on our financial performance, but we view them as short-term in nature. Demand conditions remain intact.
Capacities are scaling up, and our core portfolio continues to expand with regional revenues. Our future performance will be steered by key strategic pillars. The first one being successful foray into high-value and advanced chemistries with commissioning of targeted in a fair manner from the second half of FY2026 at our Zone IV. Our focus is on advanced materials and long-term partnerships, leveraging our robust manufacturing infrastructure and R&D expertise. The third one is driving the new growth initiatives, particularly in circularity and other emerging sunrise sectors. That concludes my initial remarks. I now invite the moderator to open the floor for the questions.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We'll take our first question from the line of Vivek Rajamani from Morgan Stanley. Please go ahead.
Hi, sir. Thank you so much for the presentation. The first question was, you've given us to understand that the strong turnover gap seen in asset margins would be a good indicator for your own MMA margins. Obviously, for this quarter, the spreads were quite strong compared to the last quarter. Were you hesitant that if it wasn't for these various disruptions that you faced, the performance from the MMA business would have been a lot more better? I just wanted to get a bit more clarification on that. Thank you.
I think the answer is yes. I think to answer it simply, Vivek, maybe we should look at our July export numbers of MMA, which are now, I guess, available in public domain. Roughly, I think it's locked somewhere in the range of 20,000- 22,000 tons of MMA exports in the month of July. This was a combination of deferred equipment from June due to geopolitics issues and then further additional orders during the month of July.
Sure, sir. Just the other question with respect to the expansion that you've mentioned. I think before this, there was another expansion as well, which you had completed in the previous quarter, if I'm not mistaken, and now this one more meaningful expansion. I just wanted to get your thoughts with respect to what is the kind of potential that you're seeing for this product, as well as the competitive landscape, if you're feeling confident to continue this expansionary process on this product. Thank you.
I think we've maintained this stance over the last two quarters. I think it's an important product. We fundamentally feel very confident about the product performance potential, which is now validated by friends and global customers. We have a market leadership position globally in this product, and we would like to continue to maintain that. We have the least cost position as far as our internal benchmarking exercise goes with respect to competition. If you look at a broader strategy point of view, we've obviously started increasing our customer base, diversifying our geographic reach. I remember talking about it almost one year back in my first investor call, and I think we've progressed quite significantly on that dimension. One of the aspects of that was where we built U.S.
as a strategic market for this product, and we really scaled it up very significantly over the course of the last six, nine months. The latest tariff announcement does put some pressure on that strategy, so we have to now figure out a mitigation measure. At the same time, develop additional new markets, which we will continue to do. Given the fundamental performance of the product is still very robust in the downstream and application, we are very confident of finding new markets. From a volume point of view, we remain confident, and that's what leads to our conviction on expanding capacity, which is at now roughly 250 KTPA level. We can further go up with a minor CapEx. That provisioning has already been done as we expanded the latest deep bottlenecking effort that we did in the last quarter.
Coming to margins, I think, yes, we are dependent on aniline, which is one of the key raw materials on imports, and which means that we have to, at any given point in time, have to keep one and a half to two months of inventory given there are so many supply chain disturbances globally that keep happening. From a production security point of view, we do keep one and a half to two months of aniline as an inventory stock, which means we carry pricing risk on that particular stock, but that's a strategic call that we have taken. The last aspect is the competition. There is emergence of some domestic competition. I think China's competition has been around for quite a while.
In that context, we have taken certain strategic calls from a pricing point of view to ensure that we maintain our global leadership positions in all of the global major accounts. That's sort of broadly the sense of the strategy around that product. Overall, I remain pretty confident about the market potential. I think the tariffs and the geopolitics sometimes do create some of the speed bumps, but we have to be agile enough to revise our strategy to go back to achieve the true potential for this product.
Thank you so much for the explanation. I'll resend the queue all the way with us.
Thank you. Next question is from the line of Nitesh Dhoot from Anand Rathi Institutional Equities. Please go ahead.
Hi. Good morning, team, and thank you for the opportunity. My first question is on DCB. DCB volumes have declined both year-on-year and sequentially. Is this purely cyclical, or is there a structural shift in the downstream demand? When do you expect normalization to happen?
Thank you, Nitesh, for that question. Yes, DCB, I think it was potentially one of the weakest quarters, and it was driven by significantly lower demand from our U.S. customers where they convert this into advanced polymer, which ultimately gets utilized in automotive applications. This combination of our customers going through inventory liquidation at the same time uncertainty around automotive demand profiles within the U.S. market itself. The combination of the two, our DCB exports to U.S. were significantly lower, even if you take YOY or Q2 comparison. Given we have sort of annual contracts secured with some of the major customers, we are confident of recovering these volumes in the second half. As soon as the demand stabilizes and the inventory correction phase gets over for two of our strategic customers in the U.S., in the second half, we should see significantly better volumes compared to the first quarter.
Right, sir. The next question is on Zone IV and the MPP timeline. We've waited for cash commissioning from the second half. Can you just share some more granular details in terms of customer tiers and expected, you know, a bit of contribution there coming for FY2027?
Yes, sir. I think we, as you rightly mentioned, we are going by the phase-wise commissioning. In the first phase, the multipurpose plant and a calcium chloride unit, we are expected to commission by the end of this year. Around December 2024, around December of this calendar year is when the first phase one will go live from a commissioning point of view. Both of these units, along with associated utility infrastructure, ETP, are at advanced stages of mechanical completion and handover. That is what will go live during this calendar year. The remaining blocks, there are five additional blocks. They will go through phase-wise commissioning from down to May next year, kind of a timeframe. Of course, post-commissioning, there is a sort of ramp-up and stabilization on an ultimately scale-up kind of a phase.
From a profitability point of view, I think we have, given the overall number that we expect from all of this Zone IV investment in our three-year guidance, we continue to stick to that. That is pretty realistic and achievable. The full potential of it, I think, will come one and a half years down the line. The multipurpose plant and calcium chloride unit at least should start contributing from the next calendar year itself.
Right. Just one last question before I get into the queue. Given the sharp drop in EBITDA this quarter and the volatility quarter after quarter, especially, for you to say, but almost every macro event does impact us negatively. Can you also have an annual EBITDA guidance along with our three-year guidance for INR 1,800 crore? If you could just share some outlook for FY2026, sir.
Nitesh, looking as a management, we have taken a call for three-year guidance, and we stick to that. I think we remain committed at the same time confident on that three-year guidance outlook. I think ESG guidance is a practice from which we are moving away. We actually feel it's prudent given there are so many uncertainties going around in the market right now, both from trade barriers as well as from a geopolitics standpoint. We would like to continue to maintain the same practice.
All right, thank you so much. I'll get back in with you.
Thank you.
Thank you. Next question is from the line of Archit Joshi from Nuvama Institutional Equities. Please go ahead.
Hi. Good morning, gentlemen. Thanks for the opportunity. First question on these logistical challenges that we faced. Could you quantify what would be the extent of, let's say, our sales or EBITDA deferment that is following the quarter, which we are expecting to recoup in July and onward?
I think a broad estimate would be roughly anywhere in the range of INR 15 crore -INR 20 crore of EBITDA. I guess you will see that in sort of export volumes for the month of July.
Got it, sir. Second question is a little more nuanced on the MPP and the Zone IV plans. You did mention that you're planning to start up the phase one from December 2025, but any layout that you could share with regards to what kind of products, platforms, chemistries that you are planning to incorporate in both Zone IV and the one that you are starting in December, the MPP? Any broad understanding on that, if you can?
I think overall, if you look at the product portfolio, the original design of Zone IV was done for fluorotoluenes and dichlorotoluenes downstream. Actually, it was done only for fluorotoluene and downstream. We added the entire dichlorotoluene and the downstream product portfolio also to the same design to make it a bit fungible. That's the significant chunk of the product portfolio. At the same time, there are almost 15 - 20 new products, which are downstream of some of our existing product portfolio, which can also be made in the same set of blocks, a combination of Zone IV and the multipurpose plant. At any given point in time, there are roughly 35 - 40 products that we can manufacture as a combination of Zone IV and multipurpose plant.
The logic is to pick and choose the products where we feel we can maximize the contribution, and they are sort of in line with our long-term strategy from a value and integration standpoint. Now, specifically talking about phase I for MPP, at any given point in time, we have kind of a list of 10-odd products from which we prioritize four to five products that we want to take in the first phase of MPP commissioning. That decision is typically driven by the demand pull, the profitability potential of these products. They will keep evolving every three to six months. It's difficult to answer your question in terms of specific products because by nature, it's multipurpose, and we want to use it as a multipurpose to maximize contribution.
Understood, sir. I was actually trying to understand how margin accretive would it be, which is why I asked you and also alluding to a comment that you had made in the annual report. Would this be true for the multipurpose plant or the Zone IV expansion we are doing to anchor newer spaces like defense and electronics and advanced polymers? I think it's a comment that I saw in an annual report. If you can elaborate a bit on the fundraiser sectors that you've spoken of and how margin accretive these products could be, that would be my last question. Thank you.
Yeah. They would definitely be margin accretive. I think we're talking about, you know, historical five years back. If you look at what was AIL 's margin profile, I think we're targeting to go back to those kinds of margin levels with these new products coming in. 20%+ EBITDA kind of margin profile for most of these products. In terms of end segments, there is a wide variety, including, you know, advanced polymers, including agrochemicals, including pharmaceuticals. These three remain right now the largest end-market target and market applications for Zone IV and MPP. Some of the defense and electronics might require very specific investments because the quality specifications and the nature of the assets that you require to serve these end markets look, you know, slightly different and will require specific tailor-made assets. For that, we have a separate effort ongoing.
From an existing MPP point of view, if you start plotting end-market profile based on the current products which are shortlisted, it is more towards the advanced polymers, advanced materials, pharmaceuticals, and agrochemicals.
Sure, sir. Thank you. All the best.
Thank you. We'll take our next question from the line of Surya Patra from Phillip Capital India. Please go ahead.
Thank you for this opportunity. First, the clarification I wanted. You just mentioned about an impact of around INR 50 crore. Is that at the EBITDA level, or is it the kind of revenue impact that you anticipate?
EBITDA level.
If you...
Five, five zero. This was INR 15 crore -INR 20 crore from a delayed shipment point of view and INR 30-odd crore from an inventory point of view.
Sure. My second point was about the capacity expansion that we are on. In recent times, what we have observed is that capacity additions without any customer backing was not really helpful. Since we have been there in the CapEx mode for some time, and we have also recently added the capacities like NEL and all that, it has not been really helpful given the demand situation. The upcoming CapEx, let's say the multipurpose plant or Zone IV or the other capacities, are any of those backed by any contract or anything?
Of course, we continue to do this evaluation in terms of which product we want to manufacture. In that context, the capital allocation decision is made wherever there is a demand pull. Maybe a bit longer answer to your question. Overall, from a capital allocation point of view, we have become quite stringent in the last one-year timeframe. Many of the CapEx that you see, which are completed or which are getting completed right now, construction of these assets started practically two and a half years back. These are committed CapEx. To some extent, they were kind of half done in the last one year where we changed our capital allocation strategy in terms of stringent criteria to decide on the investment profiles. That is why we are on a taper-down mode when it comes to overall CapEx. Last year, we had somewhere around INR 1,300-INR 1,400 of CapEx.
This year, INR 1,000 crore. Next year, the number will drop dramatically. We are mindful of global demand-supply balances, and therefore, we allocate incremental capital going forward. At the same time, the projects which we have taken on, we are going through them while optimizing the design and the portfolio of those CapEx to ensure we get best returns out of it. That is the sort of sum and summary of the overall CapEx strategy. The latest CapEx expansions that we are announcing, for example, MMA 200 - 250, right? These are done very thoughtfully with very, very limited CapExes to ensure that the return on that investment is significantly better. Wherever there is a significantly higher CapEx involved, they will go through a very rigorous evaluation from both demand-supply dynamic point of view as well as from a return calculation standpoint.
Sure, sir. The second point was about the quarter-specific impact of what we are seeing. Most of those are an external factor, I believe. Let's say, you know, a war is war. It is the kind of a raw material price press impacting the inventory or those kind of trade deferrals because of the tariff-related aspects. If you can add your thought process about the pricing angle to it, how could we see a pricing aspect for the raw materials going ahead and its impact to the overall profitability and also the pricing scenario for the product basket? Ultimately, what changes that we are anticipating in the product mix going ahead in the second half? These three things are likely to have some implication on the profitability. If you can address that, sir.
Yeah, a bit of a long-listed question, but three aspects. One, raw material, we have been in a falling price environment not only in the last quarter, but I would say in fact the last five or six quarters, right? If you plot raw material trends for the last five, six quarters, aniline has practically come down from $1,000 per ton to $600 per ton, right? Benzene, which used to be as high as INR 85- INR 86, has come down to INR 59, INR 58 kind of level. We have been in a falling price environment for a very long time. At least current judgment of the management is we've practically bottomed out in terms of key raw material pricing. We are not seeing further room for raw material to go down. It's stabilized at that level, at least for the last one and a half to two months.
There is some minor uptick as well in some of the raw materials. In that context, I think the only thing we can do is to ensure that we are most optimized on inventory and we are able to tack on the pricing volatilities as soon as possible to the market. It's not always possible because there's always some lag. That's the best thing we are doing at this point in time. I think when it comes to product mix, there are two types of assets we have, right? We have certain dedicated chemistry plants, and then we have certain assets where we can do multiple products of similar chemistries in the same asset, like fluoro-anilines, for example, or different nitrogen-based products. We are optimizing our product. For the second category, I think we continue to optimize our product portfolio depending on the demand pull and the margin profile available.
That exercise is continuous. If you look at our ammonolysis product footprint, what it was one quarter back versus what it will be in the next two quarters, or if you look at fluoro-anilines, what it was two, three quarters back versus what it will be for the next two to three quarters, they will look different in terms of exact products produced and sold both in domestic and export markets, again linked to demand and margin profiles. However, there is a distinct chunk of our asset which is dedicated chemistry, right? If you look at our assets portfolio, if you look at our NCB portfolio, DCB portfolio, PDA portfolio, the focus remains to ensure that we have the leadership position, we have the lowest possible cost, and we retain the global market share or in some cases even gain market share.
Different strategies for different assets, but that's how we are playing it right now.
Sure, sure. Just one simple question now, sir. What is the export number for this quarter? This is for still taking care. Also, if you can give some clarity, how has been the domestic performance in the difficult times of this quarter?
The exports for the quarter were roughly around INR 950 crore.
Okay. If you can just comment how it's been, sir, the domestic performance.
I think, you know, frankly, Surya, the overall trend is not that different when it comes to domestic and export. I think the raw material price, falling raw material price environment does impact both domestic as well as export markets. Of course, the supply chain disruptions that were caused in the month of June mostly impacted sort of export portfolio quite significantly. While there, I think the domestic market continued to do well during the month. We also had certain operational challenges in the month of June, especially in our NCB assets, for example, or in our, you know, some of the fluoro-aniline-related assets. That has some impact on the domestic market. Broadly, you know, at an overall level, I think from a falling price, falling raw material price environment point of view, both got impacted to somewhat similar levels.
Yeah, thank you for the question.
Thank you. Next question is from the line of Abhijit Akella from Kotak Institutional Equities. Please go ahead.
Good morning, and thank you so much. Should the thesis help us understand a little bit more about the possible impacts of these new tariffs from the U.S. on the business? I know you mentioned 15% - 20% of the business comes from there. Which specific products are we using primarily? MMA and PDA, or are there any others also? How do you see the sort of tips and tricks playing out here?
Look, I think it is early, but I will give anyway the perspective because we have been evaluating this now for the last quite a few months. Different products have different sort of nature of impact. Let me start with the positive first, right? I think on the emailing diamine chain, if we continue to see differential tariffs between India and China, then that helps us. That is visible in significant volume recovery in Q1. We don't know where the tariffs are going to settle with India versus China. If there is a differential tariff, then it will support that particular value chain from a demand recovery point of view. There are a decent number of products where we have good exports to the U.S., which are part of "annexed to exemption list." There are key agrochemical intermediates that we export to the U.S.
or even some of the different volume products like DMS, ONA, and all of these are part of exemption lists. In that context, there is no asset visible impact, either positive or negative, from a U.S. tariff perspective. Two more value chains. DCB is where we typically end up competing with the European competition. In that context, it looks like right now there would be a preferential tariff towards Europe compared to India based on the current announcement. In that context, we will face increased competition on the DCB portfolio that we've exported to the U.S. Given our cost competitiveness, we are targeting to retain the market share, maybe at the slight expense of margins. That is where we expect some headwind given the differential tariffs between Europe and India. The last one is MMA. MMA, of course, is a very large market that we developed in the U.S.
in the last six to nine months. Frankly, there it's less about competition. It's more about affordability to the end customer. The 25% tariff on that will impact the affordability for the end customer. We are in the process to understand what actions we can take to mitigate the same. We will have better clarity on it in the coming two to three weeks. In addition to that, we also continue to focus on expanding the global markets for that product, including the European region where we are putting significant efforts against speed. That's broadly our current understanding of the potential impact of U.S. tariffs on our product portfolio. I do want to caveat it is it's very early.
We are still studying the new regulations which just got published late at night in terms of exemption lists, in terms of relatively geographic comparison of different tariff lines and different exemptions. We frankly also don't know where it will settle, right? We are expecting this is just a start, but there could be further rounds in terms of where it actually settles.
Thank you. I appreciate the callout. Just one other thing on the financials. There is a significant stormy change in the game this quarter of about INR 16 crore. Why exactly did that come about? Also, just a couple of, yeah, sorry, three quotes.
No, go ahead, sir. I appreciate your call. Go ahead.
I can ask. I can come back for more.
Okay. This is more of a review piece. It was earlier part of export revenue, but this is the clarification and other stuff which is coming. This is just regrouped the purpose. In all the historic numbers, it was part of revenue only. It is more of the current fluctuation on the export revenue which is there.
Okay. This is the reason why there's some deviation in the expense line items compared to what were reported in previous quarters, right?
Previously, it was part of revenue. This is a new requirement of the disclosure and the service .
Okay. Just one last thing from me. The working capital seems to have increased a little bit if I look at the ratio and the bias. The debt has also increased, and the finance cost is down sequentially. Is it a case that helps us understand that?
The working capital has gone for two reasons. One is, as you know, there are a couple of shipments which are going to go in June. That corresponds to July. The inventory got locked up at port and the plus. That was one component. Also, some customer issues got deviated by a week or two days, which is where you could see that temporarily we're keeping working capital. On the debt level, the finance cost reduction is structurally we've been witnessing a bit of a softer rate regime, and we expect the softer rates to continue, which is a result of that.
Great. Just one last quick thing. The tax rate, do you still maintain your expectations for mid-single digits this year, or could it be lower?
It could be anywhere between, yeah, it could be a bit lower than mid-single digits.
Okay, thank you so much, and all the best.
Thank you. We'll take our next question from the line of Aditya Khetan from SMIFS Institutional Equities. Please go ahead.
Thank you, sir, for the opportunity. My first question is, sir, when we add that this sort of one-off item like the inventory loss of INR 30 crore and INR 20 crore of the deferment volume, still, sir, the number looks muted in the list when we compare on quarter on quarter. We think it has been relatively flat. It looks like there is a good pressure on the demand side. You alluded to the fact that the volumes have been lower in DCB and in NCB. How do you see, sir, the coming quarters will optically look higher compared to this? Are we on track to achieve a 20%-25% EBITDA growth, like to achieve that guidance of INR 1,800 crore? 20%-25%. CAGR growth should be in sight. How that looks, sir?
I think the growth levers are very clear, and those growth levers are getting implemented, which is the ultimate aim of achieving the taking of the road. As we deploy that, typically, we feel confident of executing on all of these assets. There are, of course, certain detours that you have to take depending on how the market evolves, right? For example, we did scale up the U.S. business of MMA quite significantly, and it was expected to contribute quite significantly over the course of the next, for the full year or for the course of the next nine months. Now we are altering that plan, investing in our alternate way of scaling up that volume in case there is some impact from a U.S. tariffs point of view.
Overall, if you look at the strategy, fundamentally the product portfolio, the strategy around cost optimization, ensuring sort of operating leverage from the existing assets to maximize the volumes, that is not changing. The entire Zone IV commercialization along with the multipurpose plant and some of the JVs, that's not changing. From an activity we are doing on the ground, there is practically no change. Yes, the strategy around product placement and market mix needs to evolve. The fact is the frequency with which geopolitical events have been happening and the supply chain disruptions that have been coming has definitely been higher in the last five, six months timeframe, which puts additional onus on the management team to remain agile so that we reflect and respond to those disruptions. That is what we are doing right now.
Got it. Sir, on this lower volume in DCB and NCB, you mentioned it is because of the lower volume to lower export into the U.S. market. Also, with the tariff uncertainty coming ahead, do you expect that this number will materially not improve from the current level?
Different answer for these two things. I think DCB is export-dependent. NCB is mostly, you know, 99% domestic market. DCB, yes, I think there are large customers in the U.S. As I said, we end up competing with European competition for that share. Ideally, at least till 24 - 48 hours back, I think the clients were pretty confident of recovering and improving the volumes of the second half. We will have the conversations with them to ensure how to mitigate the tariff impact. In general, expectation was the second half to be better than the first half. On NCB, which is purely a domestic market, I think it was a combination of, you know, some of our physics customers going through, you know, certain challenges. We also had operational challenges in the nitrochlorobenzene unit in June, certain maintenance and takedowns because of which the volumes slowed down.
Those volumes ideally should come back going forward.
Got it. Sir, you were stating the fact that competitive intensity has increased. In our product basket on a base of 100, I believe, sir, you remember, I remember in one of the forms we have stated that out of 100, 70% - 75% products have still competition with China. Has that gone up materially from that level?
No, I don't think it has gone up. I think it remains somewhat at a similar level. As we continue to optimize our product portfolio with sort of unique chemistries in the value chain, potentially, we are now creating a product portfolio which should be less dependent on that pricing pressure. At the same time, even the Chinese players continue to evolve. It's not a status quo kind of situation. It's a dynamic strategy which keeps evolving. I don't think it has materially gone up. As I had mentioned in the previous call, we fundamentally feel that everyone has reached the kind of pricing levels where it is difficult to go down from here, at least on the core product portfolio. Now it's a matter of being efficient that market share gains when the cycle turns around.
Got it. Sir, just one last question onto agrochemicals and dyes and pigment side. Sir, we were stating this fact that volumes have picked up, but pricing pressure remains. When we look at the cycle for the last one year, global inventories have come down. Inflation also, in select economies, has come down. Rainfall has been also good. What is the reason why the pricing is not getting improved in these select end-user segments?
I think it will take some time. I think in some of the value chains, we are seeing improvements also in geolization. At a broader generic level, we can still quantify it as pricing pressure continues. That's also because of the reason that there are two steps in the value chain, right? There's an intermediate, and then there's a finished product. As the downstream demand improves at a farmer level, I think the first segment to see uptake is the people who are closer to downstream consumer, you know, the guys who are doing the technicals and the formulations. I think the intermediate guys will see impacts of that a bit later in the timeframe.
Any particular quarter you believe, like by second half it can improve or by FY2027 only DCB?
I would not hazard a guess, but my personal belief is it's not about one or two quarters. I think it's about a bit longer timeframe because it's a combination of demand uptake and capacity absorption, right? It's not only one of the two. Both have to happen for realizations to improve materially. We feel it will take a bit longer time.
Got it. Thank you.
Thank you. Next question is from the line of Jignesh Kamani from Nippon Mutual Fund. Please go ahead.
Yeah. Just on the profitability part, if you think about it, if I added close to INR 50 crore of profitability because of the inventory breakdown and the delay, we are close to INR 250 crore on the R&D. This was much lower YoY. If you take about the last second half, it was similar R&D on the profitability. If you take about volume, like 3% - 4% kind of energy volume, if I include the deferment of 20,000, 22,000 in July, we are close to double digits kind of volume growth in energy. While on the non-energy YoY, we are already close to 10% kind of volume growth.
Despite our 10% plus volume growth YoY and have around 5%- 6% to fuel 5HS, our profitability has materially come down. Is it fair to assume that profitability proceeds so severe and more particular in the MMA vertical, and we have to live with this situation in the end?
No, I think there's a bit more nuanced understanding of that market. As I said, there are certain strategic calls that have also been taken to maintain the market leadership position in some of the segments. This sometimes gets reflected in the pricing on the profitability. In the long term, as I said, from an overall margin point of view, it's kind of bottomed out. I think it should improve going forward. It's not going to happen immediately in a quarter's timeframe. On a steady-state basis, as you move along, the margin profile should actually improve from here on.
In the near term, the profitability will be materially like the volume growth situation because of the market share initiative we are taking in the current market environment.
I think I would slightly characterize it that the profitability growth on an absolute basis should track the volume growth going forward, not lag.
Understood. Is there any margin improvement in the cost structure on the Q2 basis? We are taking a series of cost structure measures also. Has anything contributed in the 1 Q which was not there earlier?
I think that remains sort of an ongoing exercise. I think we are well on track, in fact, slightly ahead of track when it comes to implementation of some of the cost-saving initiatives. Multiple initiatives there include, for example, the new back pressure turbines that were installed in Wafi Units, or some of the initiatives around yield improvements and steam consumption improvement. All of those have also got implemented, and they will start reflecting as they become relatively steady in the operations. That is one aspect of the business where the focus remains very strong, and all of it is currently on track as per the plan.
Had we not taken our cost-saving initiative, probably profitability could have deteriorated much starker.
Yeah, it could have definitely been lower than where we are today.
Thanks, sir.
Jignesh, does that answer your question?
Yeah, I'm done. Thank you all.
Thank you. Next question is from the line of Arun Prasath from Avendus Spark. Please go ahead.
Good morning, everyone. Thanks for the opportunity. Sir, my first question is on the DCB utilization. We are talking about 60%, 63%. That is all the downstream, most of the downstream to the DCBs are at a higher utilization, even during this quarter. That would mean that our auto is overall globally also auto. We haven't seen this kind of decrease. How should we look at this DCB utilization? What factors or what sectors, apart from auto, should we track to see whether there will be an improvement in the volume ramp-up?
Yes. I think DCB, especially PDCB, that mostly goes into PPS manufacturing, which is one of the very large end applications. For PPS, auto is one of the major end markets. I think there we have two or three large customers in the U.S. who have gone through their own balance sheet corrections at the same time, inventory corrections for this particular product, as well as the downstream PPS product. That is what I think is leading to impact on the DCB volume in the first half. The kind of contracts that we have with some of these customers ensure that, as soon as their demand comes back from a production point of view, our consumption will go up. That is what we are hoping for in the second half. Tariff does create a certain amount of uncertainty because 25% is not a small number.
However, we are in conversation to figure that out.
Can we switch between the other auto customers outside the U.S. for the PPS demand? Is it not an option for us?
I think the multiple initiatives that we have on the plate, including this other application of that particular product, which goes into a different form of a product, which we have scaled up actually quite significantly, both in domestic as well as export market. Globally, we do have a leading market share in that product. Frankly, we are actually quite deeply penetrated. We, of course, found gain market share into each of these clients. Typically, these guys do yearly contracts, and hence the share of the volume gets locked in upfront at the start of the year. Depending on those contracts and how your customers are performing during the year, switching of volumes is difficult. When you go through a next contracting cycle, you have another opportunity.
Understood. On the sessions related to the competitive intensity, you spoke that things are kind of finally looking to be turning for good. We are also hearing that in China, in a lot of sectors where there is overcapacity, there is a government initiative to actually reduce it. In our product or value chain, do you see that happening or sometimes already occurring?
I think, sir, as we talked, it's established as a firm trend. We see our first three incidences where realizations have been taken up in the last few months. I would still hesitate to characterize it as a generic trend. I think we are a bit further away from staying with confidence that the margin profiles or the realization levels from a Chinese competition intensity are turning around. Yes, we have started to see a few incidences where the margin profile and realizations have started to change.
Okay. Just so our understanding in our product space, say DCB and NCB, what is the extent of overcapacity in China? Can you quantify this?
I would not go in that direction. The fact is there is a significant overcapacity. I think depending on what is the real operating capacity and also what is the real capacity available to compete in the global markets, the answer will look significantly different. It's fair to say, you know, we are talking about a significant overcapacity. The demand-supply balancing, you know, did not happen with one year of demand growth, I think, if that helps you get a perspective.
Oh, okay. Understood. Finally, the question on cost optimization. We have three buckets for our EBITDA to reach our key agendas. One is cost optimization. We are talking about INR 150 crore -INR 200 crore. We have already done this cost optimization initiative. Can you quantify what % of this INR 150 crore -INR 200 crore is already in the paying bill and what is to be realized over the coming months?
From an implementation point of view, it's relatively at advanced stages. I think it's just that many of these initiatives will accrue at a different point in time. For example, the two initiatives that we announced on renewable energy power purchase agreements, which are supposed to add significantly to this cost saving, I think one of that, the solar component of that, is expected to get commissioned from November to December this year, versus the hybrid component of that is expected to get commissioned around April or May next year, right? I think the actual accruals to the bottom line will start from both timeframes, versus all the action implementation sort of has contracts, has already been done and completed.
At a very advanced stage of completion of this cost-saving initiative, this is just that the timing of the accrual will get triggered whenever the sort of the overall implementation of the activity takes place.
Right. I understand it's implemented. I'm just trying to understand what is already reflected in the P&L. What percentage of this INR 150 crore -INR 200 crore is already reflecting in P&L, I suppose, today?
I think we will come back to you on that one later. Roughly, I think from an implementation point of view, we should be done up to 60%-70% of it should get implemented within this year. I think the remaining balance, 30% odd, can get spilled over to the next year. From an accrual point of view, it will take time. From an implementation point of view, I think 65%-70% of it should get done this year.
Got it. Got it. All the best, sir.
Thank you. We'll take the next question from the line of Hussein Bharuchwala from Carnelian Capital. Please go ahead.
Yes. I already spoke about the U.S. exposure that we have an exposure around a 15% - 20% odd. I wanted to understand, has this exposure that you have said is combined of both the direct exposure as well as the indirect exposure that you said?
No, because you're really talking about direct exposure. I think indirect exposure could be even higher. What the numbers that we mentioned is our direct exports to the U.S.
Got it. How do you see the impact of the indirect exposure, and what could be your ballpark point of the indirect exposure? I think you sell a lot of products in the domestic market, which eventually gets exported to the U.S. What is the end result, and how do you see that getting impacted?
As I said, the story is yet to play out. I think apart from a direct exposure, from an indirect exposure point of view, the largest segment where we have indirect exposure is actually agrochemical intermediates, where we sell intermediates to our local partners who ultimately convert that into either a technical or a formulation for final exports to the U.S. How will that story pan out? Frankly, we are yet to assess the full impact. I think we remain in conversation, but everyone is in kind of evaluation mode right now to give the conclusive perspective on the same.
Okay. Okay. I think that's it from my side for the timing. Thank you. Thanks, sir. Enjoy the rest of your day.
Thank you.
Thank you. We'll take the next question from the line of Pratik Oza from Systematix. Please go ahead.
Yeah, I saw it in your opportunity. Just one question from my side. If you can please join the call for some updates for 1 Q?
We don't have a number right now. We will definitely share it with you.
Finally, on serious calls, let's just check our page that usually has around 300.
I'm sorry to interrupt, Pratik. Can you use your handset mode, please? Your audio is not very clear.
Yeah, one second. Is it clear now?
Yeah.
Yeah. In previous calls, Aarti Industries Limited had a net debt at around INR 2,500 crore, and we would be reducing it by INR 200 crore -INR 300 crore in the next 2026. Does that guidance, your signature that guidance, or you will see?
Yeah, we'll be sticking to that guidance. I think we will remain roughly at around that level, right? I think, of course, from a working capital optimization point of view, we will see INR 100 crore, INR 200 crore upside downside. We don't expect a material increase to that number. Broadly, we should remain around that level.
Got it. Thank you.
Thank you. Next question is from the line of Tushar R from Omega Portfolio Advisors. Please go ahead.
Yeah, thank you for the opportunity. Prasad, wanted to know, earlier in the call you mentioned that 70%-75% of our product basket is competing with China. I'm coming from the calendar year 2027. After your Zone IV started contributing, in quantitative terms, how much do you see that reducing to an extent, with some numbers given?
I think there are different ways to look at it. The fact of the matter is if you today in today's chemical industry, coming up with a product which China is not manufacturing would be kind of an exception. I think it's also about intensity of capacity and intensity of players in that particular domain. At the same time, domestic demand pull versus export demand pull, right? That is what will lead to potentially less competition intensity as we broaden the product portfolio with commissioning of Zone IV. It would be unfair to say that there would not be any Chinese competition because the fact of the matter is they're practically present in sort of the broad sector of the chemical industry as on date.
Thank you much, sir. In the M&A business of yours, to. Agreed.
To 30 years, spread, 15 years spread on that. It comes out to be $13 per child. Just wanted to note in order to get a double-digit, higher double-digit type of margin. What sort of spread, you know, Aarti would need? Because energy has been a major contributor to our revenue, you know, certificating the parks and will be going forward, to the in regeneration level.
Yes, I think current spread levels are leading to a good demand growth. I think we see demand coming from different regions, from different customers. It is relatively healthy at this stage of the current space. They're good enough to have the pull for our products. As I said, geography by geography, sometimes the spreads are different and hence the demand pull does look different depending on the specific market. I think the US, which was very attractive, with the tariffs, it's a kind of a speed bump there, but we'll figure that out. The current spread levels, to answer your short question, are good enough to generate pull for demand of this product.
I'll ask a last question. In the Florida election tendency, do you see any contracts coming in going forward post your Zone IV commercialization? Any JVs are you expecting for technicals, you know, using the intended provider going forward?
Nothing at this stage which we can provide you on that one.
Oh, fair enough. In the elimination, as a percentage of your sales, as you mentioned, so many, valuation in annual report, if a plural component would be what percentage of your total sales in that, housing change?
Fluoro.
Fluoro would be in single digits, I think. Oh, part of everybody's giving out a single digit. Single digit.
Fair enough. That was really helpful. Thank you.
Thank you. Ladies and gentlemen, that was the last question for today. I'll hand the conference over to management for closing comments. Over to you, sir.
Thank you. Thank you, everyone, for joining us today. We appreciate your continued support. We hope we have been able to address all your questions. Please reach out to us if you have any further queries, and we would be glad to address the same. Thank you. Thank you once again.
Thank you, members of the management. On behalf of Aarti Industries , that concludes this conference. Thank you for joining us, and you may now disconnect.