Ladies and gentlemen, good day and welcome to Aarti Industries Limited Q2 FY 2023 Earnings Conference Call. As a reminder, all participant lines will be in listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. To assist during the conference call, please signal an operator by pressing star zero on your touchtone phone. Please note today's conference is being recorded.
I now hand the conference over to Mr. Nishid Solanki from CDR India. Thank you, and over to you, sir.
Thank you. Good afternoon, everyone, and thank you for joining us on Aarti Industries Q2 FY 2023 earnings conference call. Today, we are joined by senior members of the management team, including Mr. Rajendra Gogri, Chairman and Managing Director, Mr. Rashesh Gogri, Vice Chairman and Managing Director, and Mr. Chetan Gandhi, Chief Financial Officer. We will commence the call with opening thoughts from Mr. Rajendra Gogri, who will discuss the performance, update on growth initiatives, and outlook on the business. Post this, we shall open the forum for question and answer, where the management will be addressing the queries of the participants. We want to share our standard disclaimer here.
Some statements that will be made in this 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 stock exchange website.
I would now invite Mr. Gogri to share his perspectives. Thank you, and over to you, sir.
Thank you. Good afternoon, everyone, and welcome to our Q2 FY 2023 earnings conference call. We have shared our results document, and I hope you had an opportunity to go through them. We have recorded a resilient performance during the period under review, which has come on the backdrop of continued inflation in key input costs, both on raw materials and utilities, some slowdown in end user industry like paints and dyes and pigments, extreme foreign exchange volatility, as well as uncertainties prevailing in the global market. Our performance was a culmination of solid expertise attained in managing multiple chemistry processes with superior execution strength before. We added to our delivery commitment by winning customers' trust and further deepening our relationships with them.
Our knowledge and capabilities demonstrated in several product value chain linked to benzene and toluene is best in class, and we are replicating the same to create strong foundation across other adjacent chemistry value chains. In a significant development, we received honorable NCLT approval to demerge our pharma business into a separate company named Aarti Pharmalabs Limited. This will extensively enhance value for our stakeholders and also help us achieve certain operational efficiencies. Mainly, this will help both the companies to take appropriate strategic decisions in view of the growth opportunities available. We have been expeditiously working to conclude this and expect the listing of Aarti Pharmalabs Limited to take place sometime in December 2022.
Let me quickly share some of the key financials for Q2 FY 2023. Before that, let me inform you that the financials for Q2 FY 2022 and FY 2023 and FY 2022 were restated to consider the effect of scheme of arrangements for the demerger of pharma segment from the appointed date of July 1, 2021. Our revenue increased by 29% Y-o-Y to INR 1,847 crores, with exports contributing over 60% of our total revenue. EBITDA improved by 5% to INR 67 crores. Normalizing the impact of shortfall fees in Q2 FY 2022 of INR 52 crores, the EBITDA growth in Q2 FY 2023 is over 30%. Profit after tax stood at INR 124 crores. Our revenue momentum was fueled by the stable demand category for key products that were the essential end usage, further aided by volume gains.
As was highlighted in the past, we are seeing lower demand for products associated with end user industries of dyes, pigment, et cetera, and to that extent, the performance of Q2 is moderate. However, we expect demand to recoup from Q4 of FY 2023. While the raw material and utility costs have remained elevated during the quarter, we have a strong pass-through mechanism in place to pass on this cost pressure, thereby protecting absolute profitability. We expect the elevated input cost scenario to soften in Q3. EBITDA was higher supported by product optimization and increased export revenue. Absolute profitability levels were maintained during the period, considering the slowdown in demand due to global factors. We have utilized this time to take up the maintenance work in our Jhagadia location. As a result, the volumes for a few products were lower in Q2 FY 2023.
Profit after tax, however, muted owing to the higher finance cost due to negative forex mark-to-market impact of INR 22, an increase in depreciation in line with new capacity added in recent past. With the current performance for H1 FY 2023 and the visibility that we have for H2 FY 2023, we expect our FY 2023 EBITDA to be around, about, INR 1,100 crores. Let me turn attention to the production details for Q2 FY 2023. Production of nitrophenol ended June at 20,076 metric tons, while the same for hydrogenated HM came in [2,058] tons per month. For nitrotoluene, the production for Q2 FY 2023 stood at 4,954 metric tons. Production levels were lower due to the maintenance shutdown that was taken at the Jhagadia facility. This will benefit us to maximize on the operating time when the demand resumes back.
Let me now move your attention to some of the expansion initiatives announced and updates around that. Our expansion to the first long-term contract is scaling up as expected, and we anticipate a high utilization level of about [audio distortion] 70% by next financial year. A recently commissioned facility that houses the second long-term contract is being utilized in phased manner, and we expect to generate EBITDA as guided by the contract signed earlier. Construction and other plant related activity associated with the third long-term contract at Jhagadia is progressing well, and we expect commissioning towards the end of this quarter. Several other projects, including brownfield expansion of NCB facility at Vapi are underway and will start getting operationalized progressively in next four quarters, and thus will be contributing meaningfully from next financial year.
In respect of our hydrogenation capacity at Jhagadia, which is operating nearly at 90% now, is being tripled with an investment of around INR 200 crores and is expected to come on stream in FY 2025. We are also planning for further debottlenecking of our nitration capacity. This product will enable us to cater to few high-growth agrochemical molecules and applications. During the half year until September 2022, we incurred INR 577 crores towards the growth initiative outlined and we target the annual CapEx to be above INR 1,100 crores -INR 1,200 crores. Full benefit of various, our current ongoing projects will be visible in FY 2024 and FY 2025, and we anticipate some demand recovery from Q4 of FY 2023.
While volume ramp of some new capacity will come in the next two years, the CapEx cost will not generally rise to that level. We are resulting in strong gross margin to EBITDA conversion from FY 2024 onwards. With this volume ramp up, we anticipate our EBITDA to grow at CAGR of about 25% for FY 2024 and FY 2025. Our investment for FY 2024 and FY 2025 is expected to be around INR 3,000 crores, and it will steer our momentum in the forthcoming period. Through this, we plan to create a newer chemical value chain and also introduce high potential products that will expand our addressable market opportunities, and we also cater to increased demand from key end user customers.
We have built a very strong R&D team with 250+ engineers and scientists working on several high potential projects across segments, including some of the sunrise sectors. Our expertise in wide-ranging chemistry with focus on technological expertise is driving gains in a sustained manner. Currently, we have 50+ products in the R&D pipeline at chemicals at various stages, which will help accelerate our performance trajectory. Our utilization level across plants are being ramped up based on steady demand. We have created a strong foundation through an integrated and well-diversified business model with relentless focus on R&D and capacity capabilities. Our deep connection with key customers will drive sustained growth and profitability going forward as well.
The roadmap looks encouraging and we'll continue to capitalize the opportunities created through rapid shifts in global chemical supply chain. Focus on R&D and its products offering together with the incremental gain from existing value chain will propel our value proposition.
That concludes my initial thoughts, and I will now request the moderator to open the floor for Q&A session. Thank you.
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 the personal telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use hands-free while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. First question is on the line of Aditya Khetan from Axis Institutional. Please go ahead.
Yeah, thank you, sir, for the opportunity. Sir, first question, sir. If you can provide the breakup into the top line, so from our core business and from the custom synthesis business, that is the contract one, two. Now we can provide the breakup of revenue into core and into the custom synthesis part.
I guess the revenue from the contract would be relatively lower. We'll have to. I don't have the numbers right now. In terms of the numbers, we'll have to see the numbers and come back to you with this one.
We can just say that our value-added product, which we generally guide, 78% sales is coming from value-added product.
Okay. That's all I. What I wanted to know is this quarter-on-quarter growth of 25% in the top line, how much coming from the core business and how much was it from the contract one and contract two?
The contract one is already terminated, so there's no connection of contract one itself. As Chetan mentioned, the contract two will not have any significant addition in future, I think. That number will not be available right now.
Okay. Sir, we have also taken maintenance shutdown. What was the one-off impact into this quarter? How much volumes has been impacted because of this?
Our nitration, phenylenediamine, and chloroaniline, all those volumes, were impacted. That's why the numbers of our nitration are also low and phenylenediamine also are low in this quarter comparatively.
Sir, you have also mentioned the debottlenecking of the nitration volume capacity referred to by you in your initial remarks. We are planning to expand on the base capacity. 15%-20% addition we can do and what would be the CapEx for the project?
We are fine-tuning the capacity. Current capacity is about 50,000 tons, and we are now fine-tuning the debottlenecking. I think around 45,000 tons is what we are targeting to debottleneck.
45,000 tons. What would be the CapEx, sir, similarly?
No, that is still being worked out. Whereas the expansion is a brownfield plant. That already the construction and everything is started. That capacity is about INR 200 crore. There we are increasing the capacity to 3x from current capacity about, you know, 7,000-10,000 tons. It will become a 3x for ethylation.
Okay. Sir, just one last question, sir. Are we witnessing the benefit of the freight cost as of now? In this quarter we have got the benefit and that should continue or still we are witnessing that freight cost is elevated?
No, the freight cost is coming down in the current quarter. In the Q3 we will see freight costs coming down.
Okay. From the current quarter so we should see improvements in the margins from the freight cost, right?
Yeah, the freight cost. Largely, you know, we had done freight pass through for most of the larger, you know, contracts. Overall, you know, we may see some improvement, but it may not be a very meaningful number.
Okay. Just one last question, sir. On to the raw material side, so how is the trend now? We have been witnessing that the raw material prices are going down, like benzene, toluene and phthalic anhydride. This should benefit the company and like, in case when the raw material prices decline, how confident are we we can maintain the gross margin, in the coming quarter like?
Yeah. Basically the raw material prices are definitely coming down. You know, we have a pass through mechanism where we have a quarterly or a monthly lag of pass through. Whatever those lags are, you know, we will get advantage to that effect. Largely the raw material is also on a one-month prior procurement basis. On export side, you know, wherever we have three-month lag of pass on, that will be beneficial.
Okay. Sir, just one last question, sir. So generally like, so now we are only focusing into the specialty chemical business. So would it be possible for next quarter so we can give the revenue break up of the nitrochlorobenzene, the Phenylenediamine segment, trichlorobenzene. So that will help us go in more deeper into the company's specialty chemical business. Because now the pharma business has been excluded, so if possible sir, if you can provide more break up onto the numbers, it would be helpful.
I think anyway we are providing you the quantity breakups. Even for the breakup we will have to delegate and get that to you. We can give.
Sure, sir. Thank you, sir. That's it from us.
Thank you. The next question is from the line of Vivek Rajamani from Morgan Stanley. Please go ahead.
Hi, sir. Thank you so much for this. Two questions and just two small clarifications from me. Firstly, sir, you'd obviously highlighted in previous quarters regarding some challenges on the raw material sourcing side. If you can just provide an update in terms of how the situation was in this quarter, and how do you see this evolving in the next few quarters? That's the first question.
Secondly, if you could just provide an update on some of your, some of your own remedial measures that you're doing, that you'd indicated in the past quarter. Thank you very much.
The nitric acid, you know, there was no significant impact of any nitric acid in our Q2. In second half also, we don't expect much impact of nitric acid because overall demand in the market is subdued. Some more capacity will also come online for our nitric acid in second half. Even the next year, there should not be much issue regarding availability of nitric acid. What we had announced, our plan that will get commissioned in Q4 of FY 2024 for a concentration plant.
Understood, sir. Just a few clarifications, sir. On the maintenance side which you had this quarter, can you specify what was the period of the maintenance shutdown?
About three weeks in February.
Got it. I'm not sure if I missed this. You gave the volume break up, but did you also give the numbers for the Phenylenediamine volumes?
Yeah. The Phenylenediamine Q3 numbers are around 240 per month.
Thank you so much, sir. I'll get back to the queue.
Thank you. The next question is from the line of Abhijit Akella from Kotak Securities. Please go ahead.
Yeah. Good afternoon, sir. Thanks for taking my questions. Just a few detail related requests, if it's possible to share these on the call. One was with regard to the restated financials, if it's possible to share with us the base EBITDA and PAT for the years FY 2022 and FY 2021. That would be helpful.
Say again. What are you looking at, sir?
Following the restatements, you know, following which we have only the specialty chemical financials now. Is it possible to get the base numbers for FY 2022 and FY 2021 just in terms of EBITDA and PAT for the you know, remaining two months?
For FY 2022 nine-month number will be available. This is from July 2021 to March 2022. That is, that number is available with us.
Okay, okay. A full year based won't be available.
Yeah. Because in fact the appointment date was July 1, 2021. Post July 1, 2021 we have all the quarter numbers for both chemical and pharma separately.
Okay. I understand. Thank you. The second thing was just with regard to you know, the demand signals which you pointed to. You know, what exactly are the factors that lead us to expect a recovery in demand in next few of this year? What exactly were the reasons for the margin pressure that we saw this quarter? Was it you know, combination of higher raw material costs as well as softness in demand? You know, how would you describe that?
Yeah. Demand, you know, we have been in touch with the customer basically. Generally there is a feedback now some recovery of especially on the dyestuff side start coming in. Actually pigment side the impact has started little later on, so I think pigment side recovery also might be little later on. That is mainly coming from our customer side, like how they see the demand shaping up.
The margin pressure this quarter was primarily because of, you know, falling benzene costs and, you know, maybe some, you know, inventory related pressures because of that, or was it something else?
No. Overall margin, I think there's not much difference in product mix and some raw material price and everything. Broadly, I think the EBITDA is down by about 5%.
Okay. One last thing. Sorry--
On the benzene side also, just to add on it, I think the benzene prices are also fairly similar. The reduction as Mr. Rashesh Gogri said is a price reduction which starts being seen from this quarter onwards.
Okay. Understood. One last thing from me was just, if it's possible to share a volume growth number for this quarter?
This year the volume will be really, substantially flat. It won't be anything because we had this shutdown which was taken up by it.
Okay. Got it. Thank you so much.
Thank you. The next question is from the line of Rohit Nagraj from Centrum Broking. Please go ahead.
Yeah. Thanks for the opportunity. First question is, in terms of exports, on a sequential basis the number looks quite promising. Was there any currency benefit? A light question to that, Q2 has been pretty strong in terms of exports and, in Q3 we are already 1.5 months, you know, done with. Any demand related challenges, from the export side that we have faced in the last, 1.5 months? Thank you.
Yeah. Some of the pigment intermediates, as I mentioned earlier, we are seeing some challenges. The other sectors, we don't see much challenges as far as exports are concerned.
Right. Any currency benefit on a sequential basis?
I think Chetan will be able to answer. Currency--
Structurally rupee depreciation benefits us. To some extent, there will be a benefit of that which would have been making in Q2 as well. The numbers would be in the range of around INR 8 crore or something, INR 8 crore-INR 10 crore. The fact is that we do have covers for partial hedging the exports over next three years. There's also a limitation in terms of not everything which is there as a part of our export is completely open. The benefit is limited to those covers and there is already accounted for by way of the mark-to-market change.
Right. Got it. The second question is just a bookkeeping question. We have refigured the numbers for FY 2022. Can you give the gross block by end FY 2022? We have given the net block.
Yeah. The gross block of FY 2022 should be around INR 5,000 crore.
This is only pertaining to specialty chemicals, the business which is now remaining.
It's roughly INR 25,000 crore, yes.
Okay. Just one last clarification. I missed the number on NCB volumes.
NCB volumes was 20,276 for the quarter.
Right. Got it. Thanks a lot, and best of luck.
Thank you.
Thank you. The next question is from the line of Rohan Gupta from Nuvama. Please go ahead.
Hi. Good evening, and thanks for the opportunity. Sir, couple of small clarifications. First is, on our Dicamba intermediate sales. If you can just give some sense that how has been the utilization for the current quarter on Dicamba intermediate?
Yeah. Overall, you know, I think seven quarters not significant about 10% level we are on that. Progressively I think will go on increasing.
10% is only utilization. While I think that by FY 2024 next year we are looking some 70% utilization level to go, right?
No, no, it's actually my mistake. Around 25%. Sorry. The number was around 720. That will be around, I guess 2,400. It will be around 25%.
Okay. 25% utilization. Is this entire block related to this intermediate? That will be being given or it will be dragging the rest of the block.
No. We'll expect progress slowly from second half onwards, capacity utilization to increase.
Okay. I'm asking at 25% in the current quarter.
Yeah. Current year quarter, you know, it will not be good.
Okay. There'll be some losses there.
Yeah, yeah.
Secondly, in terms of guidance for firstly, INR 1,100 crores for this year you're looking at EBITDA, and almost half of that we have already done in the first half. It is clearly indicating that in second half there won't be any growth while we have a large fixed commission already and current quarter is already weak. Just wanted to understand the thoughts on this second half, how can we get relatively first half, more volume to participate in this.
Yeah, I think the dyes and pigments segments are weak. I think that will continue in the second half also. I think that is the main reason there is lower guidance. Hopefully the things start recovering in the Q4 and next year now we don't have any impact of this slowdown in this segment.
Couple of capacities that are coming on stream in the second half. There will be some point of fixed cost like the Bangkok numbers that which you also participating in.
Right. Sir, in the segment-wise, you mentioned the dyes and pigments is drag right now. It's primarily coming from the European market because of the inflation scenario, or what is the particular reason for it? Also in which segment, I mean, like agrochemicals and all, you must be seeing a good growth. If you can just give some segment, which are the segment are a drag and which segment you are seeing a good growth.
The pigment impact is global. Basically, whereas dyes generally impact is more on within India, most of the dyes is just consumed in India. It's an export also. Whereas now some of the agrochemical and additive business are quite strong.
Okay, cool. That is all my questions.
Thank you. The next question is from the line of Meet Vora from Axis Capital. Please go ahead.
Yeah, hi. Thanks for the opportunity. My first question was toward our earlier guidance that we are seeing that we are facing shortage of nitric acid and as a result our volumes might be impacted. Few questions regarding that. Q2 is generally a seasonally weak quarter for nitric as monsoons are going on and nitric is basically used in fertilizers. Is it that we are facing some demand was down because of the seasonal quarter and how do we look at it from a Q3 or Q4 perspective?
Secondly, we say that while new capacities are coming on stream in Q4, what kind of visibility do we have that volumes will be shared with us? Thirdly, more clarity on our, you know, other CapEx plan, whether we set up a concentration plan or a backward integrated plan, that would be helpful.
Yeah. I think, you know, basically, earlier this year we don't anticipate much impact from nitric in the second half because overall also there is a demand slowdown and some capacity will come up. As of now, you know, we have a concentration plant order has been placed. Our comprehensive nitric strategy actually we are planning to share in this call, but it may take some more time and we'll come up with a comprehensive strategy.
Sure, sir. Secondly, our volume growth guidance for FY 2023.
FY 2023?
Yeah.
I think overall we have given an EBITDA growth specifically because as you may mentioned earlier, now the value-added products are increasing which they were part of the [audio distortion]
Okay. Sir, stable number on the working capital since it has gone up in FY 2020-- through FY 2020.
I guess there could be a potential of that to reduce because, the way it's working, I mean, the freight rates and raw material prices, there's some stock here which is getting visible. Working capital cycle in number of days should remain on similar, but on a value basis, I expect some reduction to happen.
Okay. Last question from my side. Sir, has there been any change on presentation of the numbers from, you know, gross sales and net sales perspective? Because last quarter our Specialty Chemicals revenue was around INR 1,750 crores and right now it's somewhere around INR 1,580 crores . So should we look at the net numbers or the gross numbers? Because last quarter our breakup of Specialty Chemicals and pharma in that the Specialty Chemicals revenue is INR 175 crores, and now it's around INR 161 crores . So INR 161 crores. What is the right thing to look at? And am I missing something or the presentation has changed or it has remained the same?
I guess the numbers. I don't think so, the numbers are different. It probably has to be connected. We will clarify. Yeah, we'll see the numbers and try to get similar.
Sure. Thanks, sir. That's all from my side.
ESP, in fact, there is basically in whatever number comparison that you are doing.
Okay.
Sometimes there is a growth and also in next number also there is a growth. One number that we have introduced with GST, one is without GST.
Sure. The presentation has not changed in any format?
Yeah. No, no, no.
Okay.
I'll connect separately with you.
Sure. Okay. Thank you so much. Thanks so much. That's all from my side.
Thank you. The next question is from the line of Ketan Thakur from ASK Investment Managers. Please go ahead.
Good evening, sir. Sir, just a question on the gross blocks that has been transferred to the pharma business and working capital that has moved there.
We are going to pull out some numbers because the transfer is effective July 1, 2021, and those numbers will not be. Our numbers keep on changing. I guess the gross blocks which were being transferred would be upwards of INR 1,200 crore.
Working capital, I'll have to pull out some numbers and check on that.
Sure, sir. I'll connect with you separately then for that. Thank you so much. All the best.
Thank you. Next question is from the line of Mihir Damania from Ambit Asset Management. Please go ahead.
I hope I'm audible. You mentioned in your earlier commentary that you are expecting a 25% growth for both FY 2024 and FY 2025. Do you have a range of numbers you are targeting either on the EBITDA or profitability for those two years?
Currently, our target is around INR 1,100 crore. For a 25% CAGR, within two years, targeting around INR 1,700 crore.
Okay. I just have another clarification. What will the potential impact on profitability for the maintenance shutdown which you did in one of your plants?
That will be around INR 15 crore.
Okay. I just have a question. Do you expect the EBITDA margin, the EBITDA number to be very in line with what we have done in Q1 and Q2 for the next half a year? Is it what we are looking at?
Yeah, I think something happens because where there is a demand pressure, there it may go a little bit down and where there are some opportunity also because of some shortages of European shutdowns. On a product to product, there may be some variation because of little bit unusual situation, one is on the demand side of certain products and secondly is on supply side because of European natural gas scenario, some shortages are there.
Got it. What I wanted to value was sort of majority benefit of any further CapEx will only be visible from the FY 2024 onwards, not the material impact we are seeing in either Q3 or Q4 of this year.
Yes. The main reason because next two years, we expect a direct transfer of gross profit to EBITDA because we don't expect much fixed cost or employee cost increase in next couple of years other than the normal increment. That's why, you know, we are targeting a 25% CAGR.
Got it. Thank you and all the best.
Thank you. The next question is from the line of Vishnu Kumar from Spark Capital. Please go ahead.
Thanks for the time. We have a CWIP of about INR 1,400 crores. Just help us understand what are the major projects that will be getting capitalized in the next 18 months and the CapEx for the current year.
Just through the contract three will get capitalized and some other specialty chemical blocks and nitrochlorobenzene, which will get capitalized. In the second half we expect capitalization about INR 1,000 crores for this year.
INR 1,000 crores in this year. Okay.
Approximately INR 1,000 crore CapEx on this third contract and few other specialty chemical blocks also will get commissioned.
Okay. How was it fixed for the current year and how much you will spend in total?
Current year we have spent INR 557 crore in first six months. Overall annually, you know, around INR 1,000 crore-INR 1,200 crore will be the CapEx for this.
Got it. Next year, what are the projects will be capitalized? Major projects, if you can.
Next year, now, whatever some of the specialty chemical and nitrochlorobenzene expansion may go towards the first quarter of the next year. Most of the capital WIP except this NCB nitration loop we expect that capital WIP get capitalized by the Q2 of FY 2024. Except this nitration loop which will be commissioned in first quarter of FY 2025. Subsequent to that will be all the new product line at a new location, Vadodara, where the construction is expected to start from Q4 of this year onwards.
INR 1,300 crores for CWIP and current year CapEx of about INR 1,200 crores , so INR 2,500 crores will be capitalized in first half of next financial year. After that, the new CapEx is only going to come after 2025, 2026. Is that right to understand?
No, that's a utilization loop and all also will come in the next year. That also they're going to spend. Certainly around INR 2,000 crore will get capitalized. In 2021, 2022 that will be more of a normal CapEx and some debottlenecking and all. There'll not be any significant capitalization other than this loop which is about INR 200 crore and some normal CapEx for about 12 months period.
Currently, I mean, if you could give us a broad mix of revenues from end user segments, say agro, pharma, dyestuffs. If you could give us maybe a broad number, like, say, last 12 months or how has been the revenue share. Once you execute your new projects, say, in 2024, 2025, et cetera, how should this look like in terms of end user segment?
This is basically agro, pharma and FMCG which are not that much economy linked. We are around 50%. 50% will be more on dyes, pigments, polymers and additives. That's broadly, you know. 50% will basically 40%-60%, you know, year quarter to quarter in that range. That should be more around that number. As we go forward also, this may not change much, because across the board, you know, some pharma also will increase. I mean, we'll be increasing the numbers across the board in all the segments. Even after two years, I would not say that, you know, it will be a significant change.
Okay. I mean, just to conclude what you're saying, you're saying it'll be more or less similar, but, slightly towards agro, pharma. Is that the assumption?
No, currently it's 50/50 agro, pharma and FMCG and others is 50/50. You know, that kind of number will remain. It's not like something will become 70 and other will become 30.
Understood.
The same order of magnitude.
Understood, sir. Given the global slowdown people are at least talking about and maybe there is a slowdown, our export division, which probably the second segment, which is the dyes segment, would this be a larger chunk of exports? Or which segment is currently contributing to majority of our exports? I'm trying to understand if there is a slowdown next year, I mean, which segment will probably see an impact.
Currently, exports are more on polymer and additives and then agro and pigments.
Okay. Any considerations done, sir, if you're seeing some slowdown for the next 12, 18 months, if you're not seeing much growth, then will our CapEx intensity slow down or we'll continue to, I mean, the plans are going to continue?
We have a long-term visibility of the products. As such, you know, we are not looking at any slowdown in the CapEx.
Understood, sir. One final question, sir. The closing net block as of March was INR 4,400 crores, which is, as of September only INR 4,000 crores. Is it right to understand that INR 400 crores is the net block transferred to the pharma division as per the statements given?
No, since you are comparing March versus September, so the net block transfer to pharma will be more than that.
How much would that number be, sir?
I believe the net block transfer to pharma should be in the range of around INR 700 crores -INR 800 crores, if I'm broadly looking at it.
Because we have to re-verify some numbers, but it should be in this kind of range.
Got it. Just one comparable number. I know a couple of guys have asked earlier also. If you could just give annualized EBITDA for the company, I mean, only for this division, or how has the company exists for the previous year at a comparable of the [level into] we are talking about now. If you could just give that number, if you have.
We have to work on it because after the scheme, the pharma business continued to be part of the continuing, I mean, RTE listings for the quarter of April to July 2021. April to June 2021 from positive went off. If we have to look at dissecting that number, we have to spend some time and work on that. We're not available right now with that.
Okay, sir. All the best. Thank you.
Thank you. The next question is from the line of Abhijit from Falcon Investments. Please go ahead.
Hi. Regarding dyes and pigments, what is the end user industry that's been affected? Is it textiles?
It is textile, printing ink and also coating for the automotive. All these segments had been affected during last quarter.
The auto industry, at least in India, is supposed to be picking up. How has it affected?
It's basically global auto industry and also I think in the pigment sector, there's destocking which is happening and there has been lot of consolidation amongst the players. All that has also come into the impact of, you know, overall slowdown in the pigment.
I see. This is in India or globally?
Yeah, it is globally.
Okay. You actually produce the pigment intermediates, right? And supply it to the pigment formulation companies like Sudarshan, et cetera. Is that correct?
Yes, yes. We supply to the pigment manufacturers and they in turn supply to the painting guys and the plastic master batches guys as well as the coating polymer material paint manufacturers.
Okay, understood. Thank you.
Thank you. The next question is from the line of Tejas Sheth from Nippon India AMC. Please go ahead.
Yeah. Hi, sir. I have two questions. One, the INR 3,000 crore of CapEx which you are doing for next three years, that is FY 2024 and FY 2025, what would be that cost? Secondly, INR 3,000 crore of CapEx for three years and INR 3,000 crore odd of debt for three years. We see our borrowing increasing on FY 2023 levels as well as something that will be having a cash outflow and a dividend outflow, on that level. Would that be okay?
This will be mainly for the new range of product, chlorotoluene, and its downstream, and also some other specialty chemical, which we have identified. Some of this already ongoing expansion also will take place. The CapEx plan will take place across the second nitration loop and also will take place in the next two years. It'll be a mix of both the chlorotoluene related products and multipurpose plants at the new location. This nitration loop depolymerization. The ongoing, which will get commissioning by start of FY 2024.
Okay. On the cash flow side, as I said, INR 3,000 crore of EBITDA we would be doing. If we subtract the cash outflow and dividend outflow, and also when we incur INR 3,000 crore of CapEx, there would be debt increase.
Yeah. There will be debt increase. Yes.
Okay. Just lastly, what will be the tax rate for this year and the next for FY 2024?
I guess the tax rate should be in the range of around 18%-21%. Next year it should be around 18%-20% or 21% roughly.
Okay. Thank you.
Thank you. The next question is from the line of Archit Joshi from B&K Securities. Please go ahead.
Thanks for the opportunity. Sir, we have laid out a five-prong strategy in our presentation. Just wanted to understand if you can share some rough timelines. Also, a question linked to the same. Is it that they are interdependent? I mean, the setting up a multipurpose plant, would that translate into more custom manufacturing opportunities or the fact that they mentioned that they're looking for more strategic alliances? Or is it that we are already in touch with some customers, look at these opportunities in the base business? If you can elaborate a little bit.
You are right. On the multipurpose plants, simultaneously there will be contract manufacturing. Actually the multipurpose plant will be used for contract manufacturing. For a strategic alliance and all that, they are more of a different kind where maybe dedicated plants with several customers and all that. They are generally at individual level business.
Opportunities. The contract manufacturing may be a variety of products. It's the number of the products may be more, but individual product sales may be less. That kind of a thing will happen in multipurpose.
Understood, sir. Just an interpretation of the previous participant's question, we are looking at commissioning most of these projects, let's say, before the end of FY 2024. Just wanted to see what kind of timelines we are looking at, be it the new chemistry that we are adding, chlorotoluene plant. When would we have a multipurpose plant set up? This is other than the part which you are doing in the base business, which is the bottlenecking of the nitroarenes or adding more utilization capacity. The newer initiatives, when will those start contributing with respect to revenue growth from--
Yeah. It will be coming mainly starting from second half of FY 2025.
Right.
Second half of FY 2025 and FY 2026 will be where all the new initiatives will start getting commissioned. Whereas the nitration loop is expected to be in first half.
First half FY 2024, right?
FY 2025.
FY 2025. Got it. Just one last question. I think we are looking at FY 2024 as a transition year, looking at a significant volume growth with a lot of CapEx that has already gone by. What I was trying to understand is the major projects which have got commissioned in the last maybe two-three years, most of them have been in the same part of the chemistry that we were into, except for the two contracts that we might have a few stretched utilization on. Barring these two, what exactly is materially changing going from the second half of FY 2023 to FY 2024?
That we are, you know, kind of, assuming that a lot of fixed cost will get subsumed and operating leverage will start kicking in with the volume growth. Because currently, as you have been pointing out, that where we are supplying products to, be it dyes or pigments, those will continue to be under pressure. Is it that we do expect a meaningful recovery happening in FY 2024 or is there something else to it that some new customers have been added or some new products are coming to the into the portfolio?
Some new products are also coming in and nitrophenol will be an additional thing, you know, where substantial goes also into pharma and polymers, also. All this slowdown in dyes and pigment also, you know, we don't expect that to be continuing for very long time. Definitely by FY 2025, I think it has become a normal year. Whatever is the slowdown which we are witnessing in current year, we expect that to be, you know, by FY 2025, at least where next year also should become normal and contribute to the volume.
Thanks. Thanks a lot for the clarification, sir. Have a good day. Thank you.
Thank you. The next question is from the line of Pujan Shah from Confluence Advisors. Please go ahead.
Hi, sir. My first question would be, let's suppose, if we didn't do this maintenance thing, so what would be the volume growth in H1?
Sorry, could you just repeat the question?
If we haven't gone for the three-week maintenance shutdown, so what would the volumes be like? Volume growth would be around 5% or so or like it would be less than that.
We are talking about the current, I mean, Q2?
Yeah. I am talking for H1, which we are saying that the volume has been flat. Due to one of the reason is because there was a maintenance shutdown in our plant. I am talking about if let's hypothetically think that the plant hasn't gone for the maintenance cadence, would the volume be flat or it would be something more marginally improvement we have seen in the volumes?
One of the reason for maintenance shutdown was also there was a pressure in demand. Overall it won't be much different, maybe 2%-3%.
Sir, I just wanted to know your outlook on dye and pigment for the next, like let's suppose FY 2023. Would it be like the sluggish demand as we have witnessed in Q2 or it would see some improvement or we have seen the weakness of the year-to-date, and now there is only an improvement going forward for the dyes and pigment.
Dye side should recover faster. The pigment side has had the impact also has come later on and, as, [Rashesh] sir mentioned, some destocking and everything taking place. Some recovery on the dye side maybe in Q3 and pigment might take to Q4 and all that. Slowly it will happen.
Yeah, we are like the demand is being strong. We are witnessing this due to destocking. We are expecting improvement in demand coming forward after this destocking gets concluded over the distribution side. That's what our idea is?
Yes. Yes.
Yeah. Okay. Thank you. Thank you so much.
Thank you. The next question is from the line of Rohit Sinha from Sunidhi Securities . Please go ahead.
Yeah. Thank you for taking my question, sir. Some of my questions are already answered. Just wanted to understand as we are mentioning that almost 70%, 75% kind of products are value-added products for us. Which industries where we are having this kind of exposure, or is it across the industry where we are supplying? Going forward, which industry would be focused to for us to add more value-added products in that particular industry?
Our end users are quite varied across the board. Our chlorotoluene base will be more dominated by pharma and agro intermediates. We don't see much polymer intermediates and all coming in that new range of products. That will be more on pharma and agro from dyes and pigments.
That would be benefiting, obviously, to our margin expansion.
There are going to be more value-added products also. Recovery also expected to be high in that range. That will have substantial impact only starting from FY 2026 onwards.
Okay. Okay. That's it from my side. Thank you.
Thank you. The next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Hi, sir. Thank you for taking the question. Just going on the other expenses which are there, you know, they're going up pretty sharply on a Q2 and a Y-o-Y basis. Are there any specific drivers for that, sir?
One of the components would be the, if you look at the exports, which generally was in the range of around 40%-45%, this quarter is around 50%. The higher trade cost on the exports kind of moved the other expenses up. I don't see any major fix apart from the export and so. Okay. Something related to some of the maintenance and other stuff. Other than that, it is fairly in line.
Okay. You know, typically in the past, you've given for the combined business, you know, previous guidances of 34% and 37%. Now, in the context of where the chemical business is, how should we think about the numbers for FY 2024, 2025 or 2027 as you've guided in the past for the chemical business?
Yeah. FY 2025 already we have guided, that's 2023 on the next two years. Because FY 2027 guidance I think will come up in the, I think, next couple of quarters. We'll have a confidence in guidance for FY 2027 also.
We should assume FY 2024 EBITDA for that segment was INR 800 crores. INR 800 crores compounded 28% for the next two years.
No, that is for the next two years.
Okay. Thanks.
Thank you. The next question is a follow-up from the line of Rohan Gupta from Nuvama. Please go ahead.
Hi, sir, and thanks for the follow-up opportunity. Sir, in terms of, our nitric acid problems which we faced in, first half, so you mentioned that definitely in Q2 we have not faced any challenges. Did you see that the raw material and the nitric acid prices were still volatile and that has some impact on our gross margins? Or do you see that the availability and the pricing both are better?
Yeah. Generally, the nitric acid prices are dependent on the ammonia prices. Globally, due to the Ukraine war, overall the ammonia prices have increased significantly, and they are around $1,000 level. Due to that, overall the nitric acid prices for the first half have remained significantly higher due to the ammonia prices. Once the war, you know, and other external pressures ease out, then the prices will come down.
Sir, in the current scenario, when we see that the blending prices to this plant have started moderating and nitric acid also, do you see that the raw material prices broadly have started coming down? How do you see that in terms of our synthetic margins? We should go back to an EBITDA margin of almost 24% kind of range with the moderation in the raw material prices? Or with the value addition, we see that the margins remain margin profile can remain which is under.
No. Generally speaking, it's an EBITDA margin, sir. Generally more on EBITDA. Depending on from production and raw material and mix, then obviously margin as a percentage will increase. Giving specific numbers will be difficult.
Okay. Last bit to follow up on this, nitric acid chain product development which you are working on and expecting to commission by 2025, how has been the customer acceptance? Have you started demonstrating the products and started doing the sampling for these chain products? Or is there still some time from the customer acceptance perspective?
No. The existing product only we are expanding the capacity. The customer qualification is ongoing. We are already making those products. It's more of a volume expansion for the same range of products.
Hello. Mr. Gupta, your voice was not clear. Can I take it up? Thank you very much.
Thank you. Ladies and gentlemen, there are no further questions. I now hand the conference back to the management for their closing remarks.
Thank you everyone for taking out the time to join us on our Q2 FY 2023 earnings conference call. Hope we have addressed all your questions. If you have any further questions, please feel free to contact our investor relations team and we will address them. Stay safe, and we look forward to connecting with all of you again in the next quarter. Thank you once again.
Thank you. Ladies and gentlemen, on behalf of Aarti Industries, I conclude this conference. We thank you all for joining us, and you may now disconnect your lines.