AARTI Industries (NSE:AARTIIND) Q2 2027 Earnings Call

0:00 Ladies and gentlemen, good day, and welcome to Aarti Industries Limited Q2 FY 'twenty seven Earnings Conference Call. As a reminder, all participant lines will be in a listen only mode, and there'll be an opportunity for you to ask questions after the presentation concludes. Please note that this conference is being recorded. I now hand the conference over to Mr. Nishit Solanki from CDR India. Thank you, and over to Mr. Solanki. Thank you. Good afternoon, everyone, and thank you for joining us on Aarti Industries Q2 FY 'twenty seven Earnings Conference Call. Today, we are joined by senior members of the management team, including Mr. Suyop Kotecha, Managing Director and Chief Executive Officer and Mr. Chetan Gandhi, Chief Financial Officer.

0:53 We will commence the call with opening remarks from Mr. Kotecha, followed by a Q and A session where the management will address participants' queries. Just to share a standard disclaimer, certain statements that may be made in today's call may be forward looking in nature. A disclaimer to this effect has been included in the results presentation shared with you earlier and also uploaded on stock exchange website. I would now invite Mr. Suyopoteca to share his perspectives. Thank you, and over to you, sir. Thank you, Nishat. Good afternoon, everyone, and welcome to Aarti Industries Q2 FY 'twenty seven earnings conference call. We value your continued interest and support. Today, I will walk you through the performance highlights, industry environment and update on strategic initiatives.

1:40 To begin with, I'm happy to share that Aarti Industries has delivered its highest ever quarterly and half yearly revenue and EBITDA, testament to our strong operational performance and sustained business momentum. We achieved robust volume growth driven by resilient export demand and our ability to pass through raw material cost variations. Most notably, our quarterly EBITDA surpassed the INR 400 crore threshold, reaching the record of INR $4.18 crore. Escalating geopolitical tensions in The Middle East triggered significant crude oil volatility, driving raw material cost inflation across key chemical value chains. Almost all of our raw materials saw significant price increase, while raw materials such as sulfur saw prices surge by over five to 6x, combined with sharply elevated freight costs, strained global supply chain economics and brought out challenges of the sort of soaring working capital and debt levels, maintaining supply chain stability to cater to market demands.

2:36 We believe the shifting dynamics in global trade present a compelling tailwind for Indian specialty chemical manufacturers, including Aarti Industries. China's ongoing capacity rationalization paired with India's expanding trade agreements with countries like The U. K. And Europe is set to solidify India's position in global supply chains. With our deeply integrated manufacturing footprint and long standing client relationships, we are well positioned to capitalize on this shift, a trend that is beginning to translate into volume growth and margin expansion across our key value chains. Against this structural backdrop, our quarterly performance across key end use segments reflected varying sector dynamics. Let me take you through segment by segment.

3:21 In dyes and pigments, despite inflationary price pressures from key raw materials like sulfur, we delivered steady growth anchored by resilient domestic demand for the MCB chain. In agrochemicals, while demand across select categories within the ag chem chain remains stable, allowing us to achieve the volume growth, the pricing trend remains mixed. The second half might reflect the impact of weaker monsoon in the domestic market. On pharma and Fluoroproducts, we achieved the pricing and volume gains in PMCB. Key paracetamol building blocks saw robust demand bolstered by capacity rationalizations in China. The Fluoroproduct margins continue to remain under pressure. In Polymers and Additives, the demand dynamics across high end engineering, electric vehicles and defense market remains robust. While the softness in the PDHN created short term drag on our Q2 FY 'twenty seven performance, we expect the traction to resume in Q3 FY 'twenty seven underpinned by accelerating backlog in demand.

4:22 On energy linked portfolio, the blending dynamics remain favorable on the back of elevated crude oil prices and strong gasoline naphtha cracks. The performance was also supported by a price increase undertaken due to higher R and D costs. To build a more steady and sustained business, we are transitioning toward a solutions based approach across the broader energy value chain, leveraging our supply chain capabilities and robust R and D pipeline. We anticipate launching of several new solutions over the next twelve to twenty four months. Now turning to the financial highlights for the quarter and six months ended 09/30/2026 under review. Total revenues increased both quarter on quarter and year on year, driven by strong volume gains as well as pass through of elevated input prices. Revenues for the Q2 FY 'twenty seven were INR 3,887 crores, an increase of 73% over Q2 of last year.

5:14 Q2 FY 'twenty seven EBITDA increased by 44% year on year, reaching INR $4.18 crore. Our H1 FY 'twenty seven EBITDA increased by over 58% to close to at INR $80.02 crore as against INR $50.07 crores in H1 FY 'twenty six. Raw material prices continue to increase during the quarter, resulting in higher input costs. While raw material procurement in Q2 was efficiently managed with limited minimal availability issues, Early indications for Q3 point indicates that for the domestic raw material, we will continue to have good availability and visibility, while for imported raw materials, there could be supply chain gaps that we'll have to mitigate. PAT for the quarter increased to INR 169 crores with growth of about 60% over the same quarter in the previous years.

6:06 While on the half yearly basis, our H1 FY 'twenty seven PAT grew by 117% to INR $3.24 crores from INR 149 crores in the last year. Elevated RM prices have also stretched our working capital requirements over the past two quarters, pushing our net debt to INR 4,650 crores and leading to higher finance costs. To strengthen our balance sheet and support long term growth and optimize our capital structure, the Board on 10/01/2026, approved an enabling resolution to raise up to INR 1,000 crores by way of various revenues and or any combination of fund raise. The primary objective of this capital raise is to deleverage our balance sheet, strengthen our financial position and build long term flexibility to support strategic growth initiatives beyond FY 'twenty and FY 'twenty nine.

6:54 The SAID enabling resolution has been approved by the shareholders in the AGM held on 10/31/2026. Moving to our strategic initiatives and growth plans. Our product portfolio continues to expand across energy, agrochemical intermediate, advanced polymer formulations and pharma building blocks, supported by our planned FY twenty twenty seven CapEx of INR700 crores to INR800 crores. In Fuel Additives, the capacity utilization remained strong in Q2 following our expansion from two ninety to three sixty ktpa in the first quarter of twenty twenty six. For our DCB, the capacity debottlenecking to 140 kta remains aligned with downstream PDCB demand. And with our current NCD asset relations remaining elevated, the capacity expansion initiatives are under evaluation by the management teams.

7:44 To drive operational excellence, we are actively leveraging advanced analytics and AI tools to optimize branches, reliability and energy efficiency, while rapidly democratizing in house tech capabilities demonstrated by our successful execution of over 50 Gen AI use cases across our workspace last quarter alone. During the quarter, we achieved several key operational and strategic milestones, starting with Zone 4 expansion in Jagadiyag, Gujarat. The Phase one of Zone 4 was officially commissioned on 09/07/2026. The calcium chloride unit, the PEDA plant and the section of multipurpose plant are now operational and are undergoing stabilization. In many cases, we have achieved the design capacity and quality. Current operational focus is on commercial batch qualification, customer approvals and progressive volume ramp up. PEDRA extends our retaliation platform downstream for agrochemicals, while calcium chloride strengthens our energy and additives portfolio.

8:40 In Zone 4, we plan to introduce five to 10 products in FY 'twenty seven, expanding to 20 to 25 products across five different chemistry blocks by FY 'twenty eight. The remaining four chemistry blocks are expected to come online within this financial year, positioning Zone 4 as a strategic growth driver for the next eighteen to twenty four months. On 10/13/2026, we also entered into a dedicated ten plus years manufacturing and supply agreement with a global specialty chemical measure, representing a revenue potential of INR 1,500 crores. We will build and operate a dedicated facility using a proprietary technology with structured CapEx financing under USD 25,000,000, with the commercial operations targeted for FY 'twenty nine.

9:26 On the Augene Chemicals JV partnership with Superform, the facility is ready and the trial production is also underway, and the order book is gaining traction. Commercial production is expected to commence soon with a steady state revenue projected at INR300 crores to INR400 crores. Project execution for Aarti Fircularity remains on track. Looking ahead, as our major capital expenditure cycle progresses towards completion, our strategic priority shifts towards maximizing asset utilization, expanding value added chemistry and strengthening portfolio resilience through strategic partnerships. By deleveraging our balance sheet and accelerating targeted R and D in the next generation specialty platforms, we are establishing a disciplined capital efficient foundation to drive sustainable growth and long term value creation.

10:15 We remain committed to achieving our financial objectives and delivering long term value for all stakeholders. Thank you. I will now ask moderator to open the line for questions. Thank you very much. We'll now begin the question and answer session. 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. First question is from the line of Rohit Nagaraj from three sixty one Capital. Please go ahead.

11:05 Good afternoon. Thanks for the opportunity and congrats on a strong set of numbers. First question is on the non energy application. In the global market, how are the segments looking like incrementally, given that Q2 has been relatively stronger and the performance is reflective of that. But coming into Q2 and incrementally, how are we seeing the traction in terms of demand for our ex energy applications? Thank you. Thank you, Rohit. I think the demand tailwind both in domestic as well as in the global market in non energy application remains very steady and strong.

11:52 And we can go value chain by value chain. I think in the MCB, which is predominantly a domestic market, I think the demand trends are very strong. We are actually considering capacity expansion pushed by requests from our customers. I think on DCB side, we would say that, in fact, first half is usually a softer second half is very strong as The U. S. Flows kick in. So that is one value chain where also the demand portfolio remains pretty strong. On the entry chain side, we have taken some strategic initiatives to develop downstream markets. And there, we expect the volumes to increase subsequently. PDA is one chain where we are reevaluating how should we utilize those assets in the most efficient manner.

12:40 But there, at this point in time, we are not pursuing strategic growth from a volume standpoint. And for Ethylation, with our multi product strategy, including Mia, Dia and some of the other specialty Ethylationpropilation based chemistries, we expect the volume growth to continue there as well. So overall, I would say in the non energy portfolio, we continue to remain bullish on the volume growth. Sure. Thanks. Second, first of all, congrats on the new long term contract. We I understand that we had three earlier ongoing long term contracts, two for specialty chemicals and one for agrochemicals. Where are we in that journey in terms of how much of useful life is still left?

13:31 And if you can just broadly tell us what is the current size of revenues from these three contracts and whether these will get further extended once the life is over? Yes. So I think all of our contracts are running actually quite well. I think the three contracts that specifically you talked about, I think on the specialty chemical side, they are they continue to run well, the demand portfolio for the advanced polymer going into EVs and electronics space has actually picked up. So the volumes there have gone up. But given the nature of our commercial arrangement, what is more important is the bottom line because I think the commercials are structured around margins and not necessarily around top line.

14:23 And that continues to perform as per expectations. Even the agrochemical contracts with a global major continues to perform as per expectations. The residual life for each of these contracts differs. I think the first two are long term. They have sort of fifteen year plus contracts. So the residual life still is significant. I think if I'm not wrong, we are expecting this to run-in late 2030s up to 2040, some of them, versus the Aarti Chem contract will sort of will last till 2029, 2030 kind of a time frame. And there is no reason that we expect discontinuation of business performance from any of these contracts.

15:09 They are long term partnerships, and they should continue even beyond the contractual time periods. Perfect. Thanks a lot and all the best, sir. Thank you. Next question is from the line of Arun Prasad from Aventispark. Please go ahead. Yes. Good afternoon, everyone. Thanks for the opportunity. So my first question is, if you see the recent history in our company, second half has been usually much stronger than the first half. Should we expect a similar kind of trend this year onwards, given that unusual strong first half? If that is so, probably we will be reaching our 1,800 crores of EBITDA guidance in this year itself, then should we expect improvement in the guidance for the next year? Or how should we look at the overall growth trajectory over the next twelve, fifteen months?

16:14 That's my first question. Thanks, Arun. I think, yes, historically second half have been stronger than the first half. I think this year the first half have also been a bit unusual. I think we have seen huge pull up from the energy portfolio in the second quarter specifically, which was linked to extremely strong refining margin and gasoline naphtha cracks. As we go into the second half in the winter season, typically we see some of the tracks might soften. At this point in time, what we can say is that the momentum remains very strong and we expect and we hope that the momentum will continue. There might be certain issues around Zone 4 commissioning and the fixed costs associated with that coming into the P and L around Q4.

17:04 And if there is a major correction in the global crude oil pricing scenario and if that has impact potentially on some of the inventory. I think those are the two issues that we have to watch out for. But broadly, we expect the current momentum to continue. And on the basis of that, we will come up with appropriate guidance for the next year closer to the end of the financial year. Just to clarify, original INR1800 crores of guidance didn't anticipate this kind of a higher pricing related upside. So shouldn't it be revised anyway given that current pricing scenario is likely to sustain for probably till the crude remains at this level?

17:50 Yes. So I think I assume you meant margins and pricing because, you know, we we operate in most cases on a pass through basis. If you look at from a spread point of view, by and large, we are running in line with our expectation except in CV chain where we have expanded the spreads compared to what our original assumption was. So there is definitely an upside in the NCB chain that we are seeing compared to our assumption. At the same time, we are running a bit delayed on Zone 4. So this kind of two things are sort of offsetting each other at this stage from our overall planning perspective. If there is a further improvement in margins, right, due to the China's current stand linked to anti evolution and removal of battery base removal, if that sort of gets passed on to multiple other value chains, we could see upside in the margin and that will be reflected in our numbers accordingly.

18:47 Understood. Understood. One more query on the pricing front. If you see our sequential revenue growth across various end use categories, as expected, energy revenue from energy segment has kind of doubled from INR1000 crores to roughly INR1900 crores, largely led by the pricing, something led by the volume growth also. But we don't we are not seeing this kind of a sequential growth in any other segment other than probably pharma. So does it mean that we are still yet to see the benefits of the price growth in the other segments and that should be expected in the second half? Yes. Think in some cases, there will be a price led growth if the current momentum continues. In many of the segments, for example, in hydrochemicals, we may have quarterly contracts, right? So there's a lag of quarter when it comes to pass through of the pricing.

19:47 So there is a delayed impact on revenue for some of the long term contracts and long term arrangements that we have. So in rest of the segments, we might see an impact with a bit of a lag. So there's your assumption is correct on that front. Right. Anything unusual in pharma because you did mention that paracetamol is doing well, but given that it's a matured segment, sequentially, this kind of a growth is largely led by the pricing or something else is also happening there? Both volume as well as price. I think that's one sector where we have also significantly grown in terms of volumes, which is reflected in our MCB chain utilization levels. And we are also considering potential expansion possibilities for that value chain.

20:32 All right, right. Understood, understood. Finally, one last question on the inventory. Our absolute inventory has doubled, obviously, because of the overall uplift in the raw material prices. Given that at some point of time, some of these will also reverse, how are we this time going to manage the risk in the, you know, the potential inventory loss? Anything that, you know, we can mitigate, what kind of an action can take to reduce this inventory loss whenever that pricing corrects in the in the in the probably the near term? Yes, it remains one of the top priority topic for the management team. We are very well aware of the risks that we carry and given current global geopolitics, if there is a reversal of the trend and the impact of that. So we are trying to ensure that to whatever extent possible, forward book some of the product contracts to ensure that wherever we have booked the raw material that pricing is passed on to a customer.

21:34 That's the simplest way to manage this. And at the same time, we are trying to really live with minimum possible inventory. Though in numbers, see higher numbers on overall working capital, but in terms of days, we have practically optimized to fifty five to sixty days of working capital, which is the optimum level at which we could operate. So from a volume standpoint, we are really running tight. Wherever possible, we are trying to do forward booking of the contracts to ensure that our exposure gets minimized to the best extent possible. But irrespective of everything that we do, I think that risk cannot be fully eliminated. So we will always carry... Given we operate a significantly import and export heavy nature of a business, some risk on inventory loss will always remain. Understood. Just one bookkeeping question, probably Chetan Bhai can share thing. What is the for the entire first half, what is the inventory related gain in the P and So I don't think so we have got anything significant in second in the second quarter.

22:35 In first quarter, we said that the inventory and FX was roughly around INR50, INR60 combined number. Okay. That remains in the okay, Understood. Thank you very much for answering all the questions. All the best, everyone. Thank you. Thank you very much. Next question is from the line of Abhijit Rakela from Kodak Institutional Equities. Please go ahead. Good afternoon. Yes, thank you so much for taking my questions. First one, just on Zone 4, would it be possible to share what sort of peak revenue potential we see from the Zone upon full utilization in, say, eighteen, twenty four months as you've been calling out? And just a related question was out of this INR 2,200 crores CWIP that we see on the balance sheet at September, how much of it pertains to Zone 4? And by when will it be capitalized?

23:27 Yes. So, Abhijit, I think on Zone 4, I will answer the second part of your question first. I think we hope to capitalize significant chunk of that CWIP, which is mostly Zone 4, roughly around INR800 crores to INR900 crores by the end of this financial year. So by 03/31/2027, most of it should get capitalized. I think on the Zone 4 potential, we would hesitate to again give revenue number as you have seen in last 0.5, revenue numbers can go completely AY depending on the crude price environment. From margin standpoint, in the first eighteen months, our target is to achieve AAR $2.50 to AAR $3.50 odd crores of bottom line from Zone 4, and I think we continue to push for that aspiration.

24:19 Thank you. That's helpful. And the other question I just had was on MMA, on the expanded capacity. Are we now running at 100% utilization already or a bit south of that? I think in the second quarter, ran almost at full capacity. Okay, understood. Got it. Yes, that's it for me. Thank you so much and all the best. Thank you. Next question is from the line of Surya Naranapatra from PhillipCapital. Congrats for the great set of numbers, sir. My first question is on the MMA. See, we know that generally this quarter, within the year, it is a cyclical product area.

25:08 But given the kind of ramp up that we have seen so far and the capacity expansion and all that, how should one think about FY 'twenty eight? On an annualized basis, should we think progressively or we should be kind of a flattish performance that we should anticipate? So, Surya, I think the way we are thinking about it is we have established certain level of capacity in the market and our idea would be to now sort of stabilize the business at a higher utilization level on an annual average basis for this level of capacity. Our subsequent actions will be more driven by how to improve the stability and the profitability of the entire value chain, which could involve multiple things. It could involve certain preferential arrangement on the raw materials, certain downstream integration to get better share or better value of the customer service and also expanding the product portfolio within the energy value chain, right. So I think going forward, we will focus more on stability in the earnings profile of that energy value chain. From a capacity point of view, we will remain focused on achieving the higher level for existing capacity.

26:25 Sure, sir. Just next point about the profitability of this revenue stream. See, generally, have seen 100% kind of volume growth means volume growth and revenue growth. Within that, 57% kind of the volume growth. If I even adjust that kind of a rupee depreciation factor, so then it is more than 30% kind of price time. So still, this is the stream which is kind of for driving significant revenue growth for this quarter. And on the margin front, if I see gross margin wise, so there is a drag. So is it fair to believe this way that we could not have passed on the full impact of the rise in the raw material in aniline?

27:15 So hence, it is a kind of impact of the gross margin that we are seeing. Yes. So I think two ways to look at it. Right? One way is sort of absolute margins, and the second is a percentage margins. I think typically our pass throughs are on absolute basis, not on a percentage basis. And that's where in an inflationary scenario of a significantly higher RM prices, sometimes the percentage might get impacted while the absolute EBITDA or absolute contribution on the product remains relatively concrete. Energy, given the volume that we operate in that particular segment, also sometimes the contribution can be a bit different compared to rest of the portfolio. And the third one is also impacts of inventory, which is in the waters, right? Given the size of the business that we are running at any given point in time, we roughly have anywhere between INR 8,000 to 2,000 crores worth of inventory on the waters for which we have to account for margins as they get accrued to the P and L only when the material is delivered to the customer.

28:20 So combination of all of this is what you see in the gross margin performance. On an absolute basis, more than two third of our portfolio kind of operational pass through, right, where the absolute INR crore is protected, but in terms of percentage, it has different impact depending on the RM price environment. Sir, my next question is about the Zone 4. See, two things here. You obviously mentioned that a couple of new chemistry blocks that you are likely to introduce from this block. So if you can elaborate a bit the areas, that is one. And secondly, is it fair to believe that the Zone 4 would be a kind of EBITDA neutral at least for FY 'twenty eight?

29:13 The aspiration is to get Zone 4 additive to EBITDA in FY 'twenty eight itself, and that's the current plan. At this point in time, the good news is that whatever we have commissioned in Zone 4, it has achieved the ramp up, the scale both in terms of efficiency norms and the capacity norms in a relatively short span of time. So we have been able to do first time right across many of these capacities. The calcium chloride plant that we commissioned has achieved more than design capacity within first three months of operation. The PETA plant that we commissioned is able to achieve design capacity and design norms within the first two months of its operation. So that is giving us confidence that as and when we launch the product from Zone 4, the ability to ramp up these products provided there is a good demand traction for these products will be superior.

30:08 And with that, in FY 'twenty eight, we expect Zone 4 to be value accretive. Okay. Just one clarification, sir, on the energy portfolio, what we have seen in the last two quarters, there is a robust ramp up in the domestic sales. What is driving that? No, sir, it's a combination of multiple things. I think in the energy portfolio, first of all, have two products there, which are contributing now significantly, even calcium chloride, both the volume and revenue contribution has increased quite significantly after zone four commissioning of calcium chloride as well. And there the price uptick in calcium chloride is quite significant. That's one. Second, I think we have domestic demand picking up for the fuel additives portfolio in the market. I mean in some cases some of the exported volume has also been bought in the domestic market. So it's a combination of three, four things, but that's what you see reflected in the domestic performance of energy portfolio.

31:09 Okay. Sure, sir. Thank you. Wish you all the best. Thank you. Next question is from the line of Aartiia Khetan from SMFS Limited. Please go ahead. Thank you, sir, for the opportunity. Sir, my question is on to the Energy segment. So the jump, what we see almost 2x of revenue jump in, partly contributed by volumes and partly by the realizations also, as you mentioned. On to the pricing side, sir, have you also noticed a similar jump in spreads also? And also if you can highlight like what is the number like for last quarter you mentioned some $15.16 dollars a barrel. So similarly on that lines only, what would be the number for Q2? So I think the spreads we have been able to maintain, I would not say there was an expansion of spread for us in the energy portfolio in the second quarter.

32:05 I think on the gasoline naphtha crack, it was very robust. It was $20 plus per barrel, if I look at last quarter. So overall demand remained quite robust. From a spread point of view, we were able to maintain our spread despite inflationary raw material environment. So, Rajeev, on this margin pressure, like you mentioned, we have not been able to pass on the higher raw material, particularly in this segment like we are witnessing that pain because when I look at your commentary, so pharma was good dyes and pigment demand was also stable. Even other segments also had witnessed a jump in demand. So which segment particularly faces raw material pricing pressure? So there are select areas.

32:51 There is asset value chain, for example, where the inflationary sulfur price, we were not able to pass on fully where margins actually got compressed quite significantly. So that's one value chain where the pass through was very difficult and there was a compromise on the spread. Even in some of the ag intermediate product, as I said, the pass through happens with a lag. It takes time for market to absorb and in that context for that particular time period, sometimes the spread can get compressed. But you know in AARTIFICALLY with the lag price pass through does happen, you might see a pressure for the last three to four months kind of time. So there are select value chains in which price pass through was a bit difficult. Got it. Sir, my next question is on to the PDA. Like you mentioned, PDA that remains a pain point.

33:38 And we are also looking for other areas to utilize that asset. So is the product market not fit properly or demand in the global market that is coming down because this is particularly an export product. Is the customer not accepting or there is a substitute which has come up for this product, which is why it is not picking up? No, we see huge overcapacity and dumping by some of the Chinese players for this particular product in the global market. Now that behavior can correct and the margins can again become attractive for us to operate the plant at full capacity. But right now, we are kind of trying to protect the minimum margin levels that we desire from this valuation. At the same time, as I mentioned earlier, we are also evaluating if we could utilize part of this capacity to produce other products where we have favorable margins and demand trends.

34:34 It. Sir, just one last question. Sir, suppose in this quarter, we would have passed on the complete impact of RM prices, what would have been the sustainable margins? So as I said, we don't want to talk about percentage margins because frankly, it is a factor of a top line, which can swing significantly linked to where crude and downstream derivatives are operating. From an absolute EBITDA number is so we focus on three things, right? We focus on underlying volume growth. We focus on absolute INR in terms of contribution margins and EBITDA. And third is our sort of balance sheet health, right, especially debt to EBITDA. And I think I can say with confidence that in all these three fronts, we are making progress in a positive direction and we expect that momentum to continue.

35:21 So per kg wise, so we are flat, like you mentioned, so per kg wise we are better, but in terms of percentage margin, it is looking lower. Per kg wise, I would say in almost two third of our portfolio, we have been able to maintain our spreads. Okay. Got it. Got it. Thank you, sir. That's it. Thank you. I request all the participants kindly limit yourself to two questions per participant Next question is from the line of Darshita from DSP Asset Managers. Good afternoon. So I just had one question regarding the PDA value chain. You mentioned that there's a lot of overcapacity.

36:11 I suppose that was the scenario with the NCP value chain as well, and somehow we have seen some changes happening on that front. Maybe if you could just, throw some light on what's the difference between the competitive, intensity between the NCB value chain, I mean, back then versus now, and if something like that can also, translate into... You know, something like that could happen with the PDE value chain as well where, you know, we we may see spread expansions coming through in the near term. Yes. I think the biggest lever for there was, you know, China's anti evolution strategy, which impacted NCP Chain, right, where they removed the bad subsidy rebates that Chinese players used to get, which was as high as 13% of the product price. And if something similar happens like that in video chain, of course, you know, the turnaround will be pretty dramatic.

37:02 But that is one of the biggest difference between the two value chains. Okay. But is there any any difference between the number of players who are there operating in the NCP value chain versus the TD value chain? And, thus, it's, you know, it's relatively better to kind of implement those price hikes because we have seen, like, going on for a load of other products as well across the chemical category, but we have not seen something like that happening across all the other categories. So just your thoughts on that. Is there any difference in the competitive intensity in China specifically? We don't feel there is a diff... I think that in terms of number of players, in terms of concentration, it's not majorly different. I think it's a matter of how much subsidy region exists and also industry conduct to some extent, right, how a leading player in that particular value chain wants to behave. So it's a combination of the two.

37:54 Got it. Okay. That's all from my side. You. Next question is from the line of Ranjit from IFL Capital Services. Please go ahead. Yes. Hi. Thanks for this opportunity. I have a couple of questions. Firstly, on the isomer management, on the benzene chain, we did have some challenges last year. But incrementally, what we have seen, there has been healthy improvement in at least managing the isomer management. So if you can give some color on whether this is more sustainable, largely backed by the Chinese innovation or how should one see that? By and large, I think across all of our value chains, we have very strong downstream integration in both isomers, right? If you look at NCB, DCB or NT, all three value chains where isomer balancing comes into play.

38:47 We have been able to develop either customers or our own downstream integration in each of the isomers to ensure we are very well balanced when it comes to our production capacity and the market footprint. I think we've made significant progress on this dimension over the last eighteen, twenty four months, and we will continue to make investments to ensure that we retain that as one of our competitive advantage. Right. I also heard in your opening commentary planning to kind of increase capacities in some of these products as well. And just connecting these two, the earlier roadmap of limiting the CapEx intensity and probably focusing more towards the free cash flow generation, who should one see that roadmap given the new wizard in expanding capacities?

39:44 So I think this is a bit of a different CapEx. I think we are not looking at sort of big CapEx programs at this stage. The capacity expansions that we did either in fuel additives or in the CV chains were done with limited incremental CapEx and whatever was achievable through a debottlenecking is what we decided to go through. Even in NCD, I think we are looking at a debottlenecking CapEx and not necessarily a greenfield CapEx. So from that point of view, capital intensity would not be significantly higher. And that's our approach in the current market, right? Whatever best we can get in brownfield and debottlenecking versions is what we are trying to get done quickly and accrue to the bottom line. All right. And one last bit on the MMA front, we were also focusing more on the nonfuel additive segment.

40:37 How has been the progress on that front? I don't think so. We've talked about non fuel additive as an application. That application remains relatively small. We talked about other products going into different types of fuels. There the journey continues. I think we continue to invest resources to develop new products, get them commercialized, so that we are able to target a broader energy value chain and not sort of depend on one specific product or one specific fuel. Next question is from Manav Nitesh Tooth from Aarti.

41:27 So my question is on the feedstock constraints. I mean, your Q2 you know, PPT flagged difficulty in securing enough feedstock for elevated demand. Basically, PPT page 13 mentions about some strategic initiatives to strengthen and build integrated value chain and energy products. So could you give some color here? I mean, what are we really looking at in terms of integration? Yes. Maybe it's a bit early to comment at this stage. I think we are in an exploratory phase. The type of initiatives on the table vary all the way from strategic partnership to manufacturing some of these on our own, And all of those initiatives are currently under considerations.

42:21 And we will implement some of these in a span of next three to four months, which will help us strengthen our value chain and the margin profile in that particular part of the business. Okay. Okay. And on the MMA business again, I mean, so how sensitive would this business be to a crack reversal? And how much volume is under term contracts versus spot? Also, if you look at Q1, you had mentioned some competitors scaling up. And in Q2's presentation, there is no such mention. So has something changed there as well? No, I think so the business is, of course, subject to significant sensitivity with respect to end market affordability.

43:14 All the commentary that I mentioned in Q1 remains valid. There is no fundamental change in the industry conduct. The competition is there and some of them have ramped up the capacity. We have also ramped up our capacity. But we have also been able to place our capacity despite increasing competition. In general, as I have mentioned in my previous call, I think the business the product is still going through its business development phase. There is a lot additional market that is yet to be discovered compared to what currently is getting served. I think the more important element to track there is how the end market is performing and the affordability of octane boosters linked to end market cracks is the biggest driver of that particular business segment.

44:06 Okay. All right. And so just one last on the dyes and pigments part. So what drove the domestic rebound in one quarter? I mean, the last time you were mentioning about soft demand and seasonality. So what really transpired on the domestic side? I think two, three things. One, there was a decent amount of reluctance to accept the higher levels of pricing linked to iron inflation, and that's what was reflected in the Q1 softness. But at some point in time, I guess, when most of the market realized that the elevated pricing are here to stay, we saw a demand coming back and demand actually came back more aggressively because people had delayed the decision making significantly when there was a significant uptick around the Q1 timeframe from a purchasing point of view.

44:58 And the second is also some of the Chinese exports got impacted, combination of multiple things happening in China. But basically, availability of some of these products from China, coupled with people coming to terms with elevated RM pricing is what led to change in the stance in Q2 versus Q1. All right. So that helps. Thank you so much for answering my questions and wish you all the best for this coming quarter. Thank you. Participants kindly limit yourself to two questions per participant and region for a follow-up. Next question is from the line of Aarti from Omega. Please go ahead.

45:44 Yes. Thank you for the opportunity. So I just wanted to know the... You mentioned that we're entering to adjacent market and new platform. So can you let us know that in which segment will that be, and do we have the anchor customer or planning to have anchor customer in that kind of application? And you mentioned that you are seeing a good growth in terms of the open market. Any qualitative understanding in that in terms of some large, like a big size contract or a large contract for quite any years? Thank you for asking that question. I think it's important to do a step back. As I mentioned briefly in my commentary, we are fundamentally seeing the nature of the industry trends evolving a little bit.

46:40 China started its own anti evolution strategy, which was also pushed to some extent by global pushback on their deflationary exports. The U. S. Already started erecting trade barriers against many countries in the world, but China was also one of the focus area. And what we have seen interestingly is Europeans becoming very sensitive with respect to Chinese imports coming into the region. And that coupled with FTA trends of Indian sort of market with some of those Western markets is creating very interesting opportunity for us. We have seen very good traction when it comes to inbound inquiries to do long term partnerships for specialty chemical manufacturing in India to serve markets in Europe, in Japan, in U. S. That inquiry flow has gone up and we are in active conversation with some of these customers. We hope to we concluded one as we announced a few weeks back, but we hope to conclude many more such partnership agreements, which gives opening into new areas, which we haven't served before.

47:55 Right now, as we speak, we are looking at strategic projects backed up by customers' demand in areas like the personal care, for example, flavors and fragrances, batteries, the defense. So very interesting new areas opening up. And many of these are backed up by a long term contract in terms of offtake and assurance on the capital recovery as well as on the margin profile. So this tailwind will definitely augur well from a long term growth point of view. And that's what is giving us a lot of confidence to double down our reach out to some of the Western markets to secure these partnerships. Fair enough, sir. And then in terms of the R and D, where are we and are focused on... In terms of the bandwidth increment in the r and d front on this platform that you mentioned?

48:45 So I think a lot of our r and d efforts was focused on chemistry that we intend to manufacture in Zone 4 till the recent past. As you know that the entire Zone 4 is actually built based on in house technology. We haven't actually bought any technology from outside. So it's a fully in house developed technology. So a lot of our efforts in last three, four years were spent on developing those products, those technologies in house. As we are going through a commercialization phase for Zone 4, now the R and D efforts have shifted towards the new generation platform. I think we are making interesting progress and we would and this time we are also doing lot of R and D in partnership with our strategic customers. So we expect to launch, you know, such projects in the near future.

49:38 Fair enough, sir. Just a last question in terms of the long contract, right, what are the expiration in terms of the volume percentage? Where do we see RPI as, you know, in terms of long term contract, like, it's 30, 40%? I don't know. Like, what are the expiration on that front in order to keep the check on the fixed cost for the for the facility? Yes, we I don't think we have any number or a target as such in mind. Usually, it's around 25% to 30% of our business that comes through some of these long term partnerships. We hope the share of that will go up going forward as we do more and more such partnerships. In terms of the way these contracts are typically structured, the fixed costs are very well covered, right, including inflationary causes in many such contracts.

50:30 So the protection of convergent margins in those long term contracts is relatively well assured. Yeah, that was really helpful. Thank you. You. Our participants kindly limit yourself to two questions and rejoin for a follow-up. Next question is from the line of Siddharth Gadekar from Equator Securities. Please go ahead. Hi, Aarti. So first on the in the presentation, we have mentioned that we have taken a 40 crores provision between concern and stand alone. So is that mainly for the goods in transit? Yes, it is for goods in transit. So any any quantum advice we have taken this kind of a provision? So the way that typically sale happens is there's a sale from...

51:18 Jason, why don't you take that question? This is a typical accounting treatment in specifically when you have global operations and under consolidation. If your materials have not been supplied to the customer, the element of profit which is accounted in either of the books kind of gets parked as a reserve or parked all the time, material is actually supplied to the customer. So got it. So secondly, on this new long term contract that we have announced, so is it fair to assume this is more like a service kind of a contract where we'll be getting the conversion charge just to manage the site in respect of the words? That's the minimum in terms of conversion margins to support, but I think the nature of the partnership actually is much broader, including supporting them on improvement in process technology as we expand the relationship. I think this is just a start up relationship with a new client.

52:17 We hope to do many more projects, including expanding capacity under the existing contracts, where there will be lot more value addition through both CapEx and OpEx improvements. Sir, and any new technology that we are getting access to because of this partnership or something that even Aarti could benefit in the longer run because of this? Yes. I think the technology on which we are working as part of this is something first time we are doing, and we hope that know how will benefit us significantly in long term. So just lastly, is this product manufactured by anyone else in India or this is the first time this technology is coming to India? For this, we we can't comment on it at this point in time. For this customer, this is the first time we are doing this in India.

53:06 Okay. Thank you so much. Thank you. Next question is from the line of Rohit Sanna from Sunibi Securities and Finance. Please go ahead. Yeah. Thank you for taking my questions, sir. Some of my questions are already answered, but some clarification. On the top line side, as we are seeing almost 75% jump on a y o y basis, And still, we are seeing that some of the price pass through is yet to be done. I just wanted to know, is there any trading volume also involved in this top line growth? There is a trading volume. I think for the full first half it was roughly around INR500 crores and that was done in anticipation to build the market for our expanded capacities.

53:56 So there is a portion of trading volume involved in the top line. Got it. Got it. Probably that is also reason for the lower margin in this quarter? Partially. Yes. And secondly, on the raw material availability side, as the participant also said that we are looking for some strategic things. So how has been the availability mainly for, I would say, and then with and all for us on the outside India? And is there any domestic arrangement available for us in terms of... If there is any issue within the export side? So India as a country is a huge importer of both these commodities, right, methanol and iron. We unfortunately don't have much of a domestic production for any of these two products.

54:52 So we have to rely on imports. And when we talk about raw material availability, it's in two aspects. One is the quantum, the volume itself and the second is also desired level of pricing. I think methanol hasn't been a challenge from an availability point of view. Typically, we have been able to source whatever volume we need. Pricing, of course, remains quite volatile linked to Middle East situation given that's one of the largest supplying regions for this particular commodity. I think on aniline, where we depend quite a lot on China and now some supply from Europe has also started to come in. There, we have seen some challenges in terms of securing the volumes that we wanted to run our asset at full capacity. But we have developed enough markets to supply this particular commodity to India. Today, are one of the largest merchant buyer of aniline for non MDI usage.

55:44 And in that context, we have initiated conversations with multiple global majors. So that will get increasingly streamlined as we stabilize our volumes. Roy, do you have any follow-up question? Yes. Just just on the tax rate side, is there any... I mean, what should be the tax rate for FY '27 or twenty eighth? I guess we'll be somewhere between 15 to 20%. As the new assets get commercialized, there will be the element of deferred tax liabilities will start kicking in. Okay. Okay. That's it from my side. Thank you and that's all.

56:31 Thank you. Next question is from Manav Gagan Deshit from MK Global. Please go ahead. Yes. Thanks for taking my question, sir. I have a question about the MMA. So now given that this is the largest product in your portfolio, so do you have any plans for backward integrating the aniline? And also, do you see any risk that although it's a ban in the China for MMA use, Vexa. But at least you see that Helium find a larger application in China that can be supply side? Yes, I think it is one of the larger product in our overall fuel additive portfolio. And what you mentioned is something that we proactively manage.

57:19 I think from an AARTIIND point of view, as I said, we have very well diversified supplier network and some of the relationships are now getting elevated to a strategic level of partnerships. So that will give us increasing confidence in our ability to manage the value chain very well. I think on a backward integration side, too early to comment. It's a relatively large commodity. So we will evaluate all possible options to manage the handling procurement in the best possible way. And whenever we have something concrete, we will come back and update you there. And sir, my second question is about the five new platforms that you indicated in the presentation. So I mean, this advanced materials, semiconductors, battery, defense.

58:07 So for how many of these you have any customers or any qualifications is there? And this any CapEx committed to them? That's my second question. So I think, rather than platform, what we meant was these are the applications where we see traction from the end customers to do long term partnerships, and that's where it is today. I think we are in conversation with the global majors if we could do something together where the product ultimately goes into this end application. As and when those contractual conversation gets converted into something concrete, we will come back and update you. As of now, whatever has got confirmed and signed is what we have communicated to the market. I think rest of them remains in in the conversation stage.

59:00 Yeah. That's that's from my end, sir. Happy evaluation. Yeah. Thank you. Next question is from line of Sachem Jaghi from Desolado Advisory. Please go ahead. Hello. Am I audible? Yes. Yes. Okay. So sir, my first question is, since we are targeting an EBITDA of around INR 1,800 crores to INR 2,200 crores in FY 'twenty eight, which is roughly around 150% higher than the EBITDA of H1 FY seven. So I just wanted to understand like how are we moving towards it? Like how are we planning to achieve this target within an upcoming time?

59:52 So I think we have talked about the three focus areas that are important for us to achieve that trajectory in our previous calls. And we remain on track on execution of all of those initiatives under these three areas. I think cost and efficiency levers are mostly implemented. The impact has also started to become visible in the bottom line and will become increasingly visible going forward. Operating leverage and sort of volume and margin ramp up also many of the initiatives have got completed and many of them have started reflecting in our quarterly run rate and they will become they will get increasingly effective going forward as well. And on the CapEx laid ramp up, few projects have got commissioned, but I think the big chunk of Zone 4 is sort of yet to get fully commissioned and ramped up.

1:00:45 So across the three levers is what gives us line of sight to achieve the range that we had mentioned in our guidance. Okay, sir. And sir, how are we working on the cost optimization side? There are several initiatives as we speak at any given point in time. We have a pipeline of 50 to 60 different initiatives typically focused on yield energy, throughput quality, all four levers and including fixed cost optimization. So I won't be able to get into sort of individual details, but there's a dedicated team internally, which focuses on achieving the targets on the cost optimization. Okay, sir. And sir, my second question is that, can you provide some colors on what kind of new products are you planning to manufacture on the Zone 4? So we've talked about some of these products in the previous call.

1:01:34 Originally, the chain was designed to manufacture a lot of products, which were linked to chlorotolvien and downstream value chain. We also added the products belonging to the toluene side chain chlorination value chain. And then there are increasingly now we are receiving inquiries for sort of specialty products, which may not be a part of a specific value chain, but they are a specific requirement from a customer for which the asset is sort of fit for purpose kind of asset. So we will have combination of all three coming out of Zone 4. And the objective is to do the overall planning in a way where we maximize maximize the contribution coming out of the last year. And it is to be commissioned back at the end of FY 2028, right? The commissioning will happen within this financial year.

1:02:19 The ramp up will happen throughout FY twenty Okay, Rahul. Thank you very much. Next question is from the line of Sahil Dhawan from SD Investments. Please go ahead. Hello, sir. Am I audible? Yep. Sir, my question is on the energy segment. So are we looking at expanding from three sixty kt to further capacity, or are we comfortable with three sixty kt going forward, sir? So for the time being, our objective is to stabilize at this capacity. And as I mentioned earlier, stabilize our integrated value chain presence, which brings more robustness, more stability to the earnings profile of these value chains.

1:03:11 Once we have achieved that, then we could go back and potentially evaluate further expansion. But I think the near term priority now is shifted to how do we make the current capacity more robust in terms of integrated value chain presence. Okay. Thank you, sir. Sir, in terms of the market share, can you suggest us in terms of the Chinese competition, where do we stand in terms of... I know we have the dominant market share in MMA, but where do we stand in terms of the market share in the MMA segment, sir? It is difficult to quantify that number, to be honest, because the market itself is not very well established in terms of absolute size. As we have approached newer geographies and newer customer, new order books have kind of opened up.

1:03:58 So it will be unfair for me to give the market share numbers. But what I can say very confidently is that we have been able to open up new geographies and new customers over the course of last eighteen to twenty four months, and we continue to be on that journey to ensure that the market remains large enough for all of us to operate. Yeah. And, sir, one last question, if I can, sir, on the energy segment overall. Sir, looking at the TAM in this segment and our total share of energy has touched 50% in quarter two. So, sir, considering the medium term outlook, where do you see the energy segment settling in, let's just say, the next two, three financial years? Where do we see it settling? Because one segment crossing 50% creates a lot of volatility as well, sir. So can you throw some light on this, sir?

1:04:59 You mentioned this in the previous calls as well. We expect the energy to settle somewhere between 30 to 40% kind of a range of overall portfolio. And especially as the Zone 4 ramp up... Ramps up many of the products coming out of that site as well as revenue getting contributed will balance the overall portfolio. I think the pricing corrections in the global markets will also contribute to some extent. But our expectation in the midterm is that energy will remain 30% to 40% of the overall portfolio. Okay, sir. Thank you, sir. These are all my questions. Happy to well. Thank you. Thank you very much. I'll now hand the conference over to the management for closing comments.

1:05:48 Thank you everyone for taking our time this afternoon. As we mentioned earlier, we've started the year on a positive note with a strong year on year growth, both on volumes as well as on EBITDA, despite the macro volatilities and challenges. We remain quite focused and committed on our growth drivers to deliver the long term value accretive growth. Please feel free to connect with us for any follow-up queries. Thank you everyone again and season greetings from us. Have a good day and happy Diwali everyone. Thank you very much. On behalf of Aarti Industries Limited, that concludes this conference. Thank you all for joining us and you may now disconnect your lines. Thank you all.