Release Date: August 12, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Aarti Industries Ltd (BOM:524208, Financial) reported a 3% QoQ and 28% YoY increase in revenues, reaching INR2,012 crores.
- Volume growth was strong, with a 6% QoQ increase and over 30% YoY increase.
- EBITDA grew by 10% QoQ to INR311 crores, marking a 55% YoY growth.
- The company entered a 50-50 joint venture with UPL, expected to generate INR400-500 crores in annual revenue within the next 2-3 years.
- Major CapEx projects, including the expansion of the nitrotoluene and ethylation capacities, are on track and expected to be commissioned soon.
Negative Points
- Pricing headwinds and supply chain pressures continue to impact the company.
- Overcapacity in China is affecting demand-supply dynamics and putting pressure on margins.
- Energy application, now a significant part of the portfolio, brings additional volatility due to external factors like crude and gasoline prices.
- Depreciation and interest costs remain high due to the capitalization of projects.
- The company has not committed to its full-year EBITDA guidance due to ongoing margin pressures and market volatility.
Q & A Highlights
Q: With respect to the demand trends and conversations with customers, do you feel that you can deliver the higher end of your EBITDA guidance of INR17 billion for fiscal '25? What factors would be critical for that?
A: We are confident of delivering growth in the range of 20% to 30% in demand, driven by new projects and better capacity utilization. However, margin pressure from Chinese competition remains intense, making it difficult to commit to the EBITDA guidance for the year. We need to observe margin trends over the next two to three months before providing a full-year guidance. - Suyog Kotecha, CEO
Q: Given the demand recovery, have you been able to go back to your normal customer profile, or are you still relying on Tier 2 and Tier 3 customers?
A: The situation varies by value chain. While we prioritize Tier 1 customers as demand recovers, we still tactically engage with Tier 2 and Tier 3 customers in some chains. The share of Tier 1 customer volumes is increasing, but the problem has not completely gone away. - Suyog Kotecha, CEO
Q: Can you elaborate on the pricing headwinds and overcapacity from China? Are there specific categories where these pressures are more apparent?
A: The pricing pressure from Chinese overcapacity is across the board, with the most significant impact in the agrochemical segment. However, the pressure is present in other segments as well. The broader chemical industry is struggling with this issue. - Suyog Kotecha, CEO
Q: On the energy segment, do gasoline-naphtha cracks impact the demand for the products we are selling?
A: Yes, the gasoline-naphtha cracks impact the demand for our fuel additives. The demand is influenced by the incentive to upgrade certain qualities of naphtha for blending into gasoline, which is determined by the naphtha-gasoline crack at that time. - Suyog Kotecha, CEO
Q: What explains the sequential decline in other expenses despite the increase in volumes, especially on the export side?
A: The decline is due to annual costs related to employee benefits and other expenses in Q4 that were not present in Q1. Additionally, freight rates have been lower in some pockets, and we have increased our share of business with the Middle East and Asia, where freight costs are lower. - Chetan Gandhi, CFO
Q: Can you provide an update on the nitrotoluene and ethylation projects, including CapEx, capacity, and revenue potential?
A: The nitrotoluene capacity is being expanded from 30,000 tonnes to 45,000 tonnes, and ethylation capacity from 8,000-10,000 tonnes to around 25,000 tonnes. The CapEx for these projects is around INR400 crores to INR500 crores. We aim to reach 50% capacity utilization this year and 70%-80% next year. - Chetan Gandhi, CFO
Q: How do you see the long-term demand outlook for the fuel additives business in the context of global electrification of vehicle fleets?
A: We are optimistic about the demand for fuel additives. Despite the trend towards EVs, ICE engines will remain significant. Our fuel additives are more sustainable compared to other options, fitting into the trend of replacing metal-based additives with greener alternatives. - Suyog Kotecha, CEO
Q: What is the current debt level, and what is the peak debt level expected with the new CapEx?
A: The current debt level is around INR3,300 crores, and it is expected to increase due to substantial CapEx this year. The peak debt level is projected to be between INR3,500 crores to INR3,800 crores, depending on raw material prices and working capital. - Chetan Gandhi, CFO
Q: How much of our product basket has direct competition from China?
A: Approximately 70% to 80% of our product basket faces direct competition from China. - Suyog Kotecha, CEO
Q: Given the new capacities in China, has the EBITDA per kg structurally moderated compared to pre-COVID levels?
A: Yes, for many products, the EBITDA per kg has come down compared to pre-COVID levels due to increased competition from China. We continuously work on developing new applications and products to maintain a competitive edge. - Suyog Kotecha, CEO
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
