Aarti Industry Earning concall FY23

Key strengths

Key end user Industries

Key Customers

R&D Expertise

Future growth projects

Projects timelines

Conference call Aarti Industry Fy22-23

Q1 Fy23

Our revenue grew by 45% Y‐o‐Y to INR 2,173 crore.
EBITDA stood at INR 369 crore, higher by 18% Y‐o‐Y.
Profit after‐tax came in at INR 189 crore, an increase of 15% over last year.

Q2FY23

Revenue grew by 29% Y-o-Y to INR 1,847 Cr

EBITDA improved by 5% to Rs. 267 crore; EBITDA growth is over 30%

Profit after tax stood at Rs. 124 crore

Q3FY23

Revenues increased by 12% Y-o-Y to Rs. 1854 crore, with exports contributing over 48% of the total revenues.

EBITDA improved by 26% Y-o-Y to Rs 289 crores.

Profit after tax stood at Rs 137 crores

Reason for revenue sharp jump Q1Fy23:

- Revenue trajectory was steered by realization gains as well as the higher volume uptick for certain products. A substantial increase in the revenue was also on account of the robust pricing structure wherein the variation and improved prices are passed on to the consumer.

- Saw revenues coming in from the newer capacity added in the recent past, along with the incremental volume gain from existing capacity. This was further supported by a planned ramp‐up and with respect to units from the first and second long‐term contracts.

- Have been able to pass on the cost pressure linked to the RM prices and utilities costs to customers, thereby protecting our absolute EBITDA.

On EBITDA front :

- During the quarter under review, witnessed mark‐to‐market impact on ECBs on account of steep depreciation of INR versus U.S. dollar, which negatively impacted PBT performance to the tune of INR 30 crore.

Segmental Performance

- Revenue from Specialty Chemicals business stood at INR 1,766 crore, a growth of 44% over INR 1,228 crore that was reported in the same quarter of the last financial year.

- EBIT improved by 8% to INR 250 crore.

Production Details:

Q1 FY'23 - Production of nitrochlorobenzene was at 20,515 metric tons.

Similarly, for hydrogenated products, stood at 3,295 metric tons per month.

For Nitro Toluene, the production for Q1 FY'23 stood at 5,252 metric tons.

Note: This quarter witnessed some impact on business due to short supply of the key raw material nitric acid.

To ease the availabilty as part of long term strategy, company has tied up with the technology partner for setting up a unit for concentrated nitric acid from dilute nitric acid with a capacity close to 225 to 250 TPD.

- Planning to commission it in Q4FY24

Q2 FY'23 - Production of Nitrochlorobenzene stood at 20,276 MT

for hydrogenated came in at 2,558 TPM

For Nitro-Toluene, the production for Q2 FY23 stood at 4,954 MT

PDA Q2 numbers are around 242 tons per month.

Note: Production level were lower due to maintenance shutdown

Q3 FY'23 - Production of Nitro chlorobenzene stood at 18199 MT

for Hydrogenation came in at 2995 TPM

For Nitro-Toluene, the production for Q3 FY23 stood at 7528 MT

Expansion/Capex projects:

Q1Fy'23

- Started seeing volume ramp-up from facility linked to 1st long term contract and except the utilization level to reach 70-80% by Fy24.

- 2nd long term contract, where manufacturing commenced previous quarter, utilization is improving and expected to attain level of 70-80% by Fy24

- 3rd long term contract at Jhagadia, NCB expansion at VAPI expected to commence in forthcoming quarter and will start contributing to revenue from FY24.

- Entailed CAPEX of 200Cr in Q1.

- Will be investing close to 3000Cr in capacity addition and augmentation to support growth.

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Q2Fy'23

- Anticipating high utilization level of 1st contract of abot 70% by next fiscal.

- 3rd long therm plant commissioning towards the end of this quarter

- brownfield expansion of NCB facility at Vapi underway and will be contributing from next FY

- Ethylation capacity at Dahej operating at 90%. Being tripled in capacity with an investment of around 200crs and is expected to come on stream in H1FY25

- Planning further debottlenecking of Nitor Toulene capacity

- Entailed capex of 377cr and target annual capex of 1100-1200crs

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Q3FY'23

-Plant associated with the 3rd long term contract had been commercialised by the end of Q3 FY23 at Jhagadia facility. Expect that the ramp-up as per the contract terms will kick in from coming quarters.

- Other projects, including brownfield expansion of NCB facility at Vapi and few other speciality chemical blocks, are progressing well. These will become operational in over next couple of quarters and start contributing from H2 FY24.

- Have started the initial work around expanding the Ethylation capacity at Dahej SEZ, by 3x with an investment of Rs. 200 crore. Further as shared last time, with NT capacities reaching over 90% utilisations, company have commenced the works related to debottlenecking of Nitro Toulene Capacities. Target the capacity increase by about 50% with an objective to cater to certain high growth applications in agrochemicals. Expect both these units to commercialise in H1 FY25.

- Enatialed CAPEX of 277 cr in Q3

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Future guidance

- Do not expect major fix cost in FY24 as substantial part of fixed cost will be built in Fy23

- The volume ramp up in FY24 will significantly lead to an increase in EBITDA

- Expect EBITDA to grow at CAGR of about 25% for FY24 & FY25

- Capex remains unchanged at 3000cr for FY23 & Fy24 aimed towards developing new chemical value-chains and introducing highpotential products that will broaden the addressable market size and respond to increased demand from key customers.

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Pharma business Highlights:

Q1 FY'23 - Reported revenue of INR 407 crore, higher by 48% as compared to INR 276 crore in Q1 FY'22. EBIT stood at INR 76 crore, an increase of 46% Y‐o‐Y.

- Performance was driven by continued high demand for key products, leading to better volume trajectory from generic pharma companies and Xanthine business.

- While a major part of the elevated input and utility costs were passed on to the customers, in some cases, the same had to be absorbed.

USFDA audit conducted at Dombivli plant and rasied 2 points under 483, which company is confident of addressing.

- with the observation addressed, Company will have 3 USFDA approved facility

- Company has also commenced new API block at USFDA approved facility at Tarapur in early Q2.

- Taken new land near Dahej, in Atali to set up greenfield site in pharma

Going forward, performance will be anchored by incremental gains from newly introduced products, higher capacity for existing products and exciting pipeline of upcoming approvals in cardi, anti-diabetic, anti-hypertensinve, onco and corticoteroid segments.

- After demerger there is no significant revenue coming or going to Aarti pharma

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New product pipeline

- New chemical value chain -Chlorotoulene

- 40 plus products in speciality chemicals

- 50 plus products for pharma in R&D

Q&A Q1FY23

- Raw material prices have gone high ( benzene from 77 to 94, Slphur from 27 to 37), therby impacting margins.

- Export mix will be in range of 40-50%

- Expect substantial jump in EBITDA in Fy24 & FY25, and maintaing the margin after the demerger of the pharma business.

- No impact of slowdown in EU in the order intake

- Operating leverage to kick in from Fy24

On Debt-to equity ratio

Q2 FY23

- Received Hon'ble NCLT approval to demerge our Pharma business into a separate Company named Aarti Pharmalabs Limited.

- seeing slower demand for products associated with the end-user industry of Dyes, Pigments, etc and to that extent the performance appears moderate.

- Expect elevated input cost scenario to soften in Q3.

- EBITDA was higher, supported by product optimiztion and increased export revenues.

- Profit after tax appears muted owing to higher finance costs due to negative FOREX mark-to-market impact of Rs. 20 crore and increase in depreciation in-line with new capacities added in the recent past.

Future guidance

- With the current performance for H1 FY23 and the visibility for H2 FY23, expect FY23 EBIDTA to be about Rs. 1,100 crs.

- Expecting EBITDA to generate CAGR of 25% for FY24 &25 to reach 1700 Cr.

Strong R&D team strength

- Contract 1 got terminated and from contract 2 there is not a very significant addition in Q2, so major revenue is from core chemistry

on Maintenance shutdown

- Debottlenecking nitro toulene capacity from 30000 tons to 45000 tons and for Ethylation which is a brownfield expansion increasing the capacity from 7,000 tons to 10,000 tons with 200cr capex

- Freight cost start coming down thereby imporvement in margin can be visible form Q3

On benfit with material prices coming down

on Slowdown across the segments

- H2 will more or less remain flat due to drag from dye and pigment segment. Also, capacities are coming up in H2 which will entail fixed cost.

- Some reduction to working capital may happen going forward.

- Upcoming MPP will be partly used for the custom manufacturing.

Revenue cntribution from the upcoming facilities

What exactly is materially changing , going from H2FY23 to FY24 that management is assuming a lot of fixed cost will get subdued and operating leverage will start peaking and there will be vertical growth?

As 70-75% products are value added product, which are the industries where it has this kind of exposure?

Will this be benefiting for margin expansion?

On other expenses going up sharply on Q-o-Q

Q3FY23

Key Developments

1. signed a binding 20-year term-sheet with Deepak Fertilisers for supply of Nitric Acid, worth more than Rs. 8,000 crore. This is a historic partnership which will greatly help us in the long term and ensure that we have a steady and adequate supply of this crucial raw material. This comes into effect from 1st April, 2023 as disclosed earlier, and eliminates the need to invest into backward integration for concentrated Nitric Acid.

2. The second progress is the demerger of the Pharma entity of Aarti Industries into a separate Company – Aarti PharmaLabs Ltd. The record date was 20th of October, 2022 and the new company was listed on the stock exchanges, both NSE and BSE on the 30th of January, 2023.

- Demands for products pertaining to textiles end use industry remained impacted and expect recovery to come in from H1Fy24

- Saw decline in raw material prices and impact can be visible in Q4FY23

- Achieved EBITDA of 837Cr vs estimated 1100 Cr for year in 9MFY23

- Depreciation has increaseed on account of commissioning of ongoing projects

- Due to depreciation in INR, the unhedged ECBs has M2M loss of 11Cr resulted in increase in the borrowing costs.

Q&A

- gross profit remains flattish although value added pproduct contribution has been higher during the quarter?

- As the CAPEX alloted for NC raw material is no more required and capex guidance remains unchanged where is this additional capex going to be utilized?