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Edited Transcript of AARTIIND.NSE earnings conference call or presentation 14-Nov-19 10:00am GMT

Q2 2020 Aarti Industries Ltd Earnings Call

Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Aarti Industries Ltd earnings conference call or presentation Thursday, November 14, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chetan B. Gandhi

Aarti Industries Limited - CFO

* Rajendra Vallabhaji Gogri

Aarti Industries Limited - Chairman & MD

* Rashesh Chandrakanth Gogri

Aarti Industries Limited - Vice Chairman & MD

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Conference Call Participants

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* Abhijit R. Akella

IIFL Research - VP

* Arun Prasath

Spark Capital Advisors (India) Private Limited, Research Division - Research Analyst

* Dipan Anil Mehta

Elixir Capital Limited - Chairman of the Board

* Dipen K. Sheth

HDFC Securities Limited - Head of Institutional Research

* Dipesh Mehta

SBICAP Securities Ltd., Research Division - Information Technology Analyst

* Naushad Chaudhary

Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps

* Nav Bhardwaj

Anand Rathi Financial Services Limited, Research Division - Research Analyst

* Nitin Agarwal

IDFC Securities Limited, Research Division - Analyst

* Rishab Bothra

Sharekhan Limited, Research Division - Equity Research Analyst

* Ritesh Gupta

AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals

* Rohan Gupta

Edelweiss Securities Ltd., Research Division - Research Analyst

* Sanjaya Satapathy;Ampersand Capital Limited;Portfolio Manager

* Surya Narayan Patra

PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst

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Presentation

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Operator [1]

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Good afternoon, everyone, and thank you for joining us on Aarti Industries' Q2 FY '20 Earnings Conference Call. We have with us Mr. Rajendra Gogri, Chairman and Managing Director of the company; Mr. Rashesh Gogri, Vice Chairman and Managing Director; and Mr. Chetan Gandhi, CFO. We will begin this call with opening remarks from the management, following which we will have the forum open for a question-and-answer session.

Before we begin this call, I would like to point out that some of the statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation shared with you earlier. We will begin the call with opening remarks from Mr. Rajendra Gogri, who will take you through the performance of the company and the outlook on the business. We will then have the forum open for an interactive question-and-answer session. Now I would like to invite Mr. Rajendra Gogri to share his views.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [2]

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Good afternoon, and a very warm welcome to all of you. Our financial performance during Q2 is more representative of the planned transition that is happening in our core business. From the revenue standpoint, there are 3 key points that need to be highlighted. We have carved out revenues from the erstwhile homes and personal care segment that will be listed as Aarti Surfactants. There has been a sharp decline in the price of some key raw materials, which largely get passed on to the customers; and 3, continuing increase in the contribution from downstream products, which increased from 70% to 75% Y-o-Y.

As a consequence of these factors, reported revenues are optically lower compared to the same quarter last year. Export remained relatively stable. Export contribution to revenue has expanded from 36% to 44% on a Y-o-Y basis. Overall, we see this as a positive performance from the perspective of our longer-term business objectives. Our gross profit and operating profit are the more appropriate parameters to evaluate our business and both these remained almost flat on a Y-o-Y basis.

On the lower base of revenues, reported margins have expanded significantly. EBIT margin expanded by 400 bps Y-o-Y to 19.7% in Q2 FY '20. We recorded our highest level quarterly PAT of INR 142 crores on a stand-alone basis, representing growth of 15% Y-o-Y. These numbers need to be looked at the backdrop of continuing macro challenges in the global agrochemical and automobile sectors. Aarti Industries, with differentiated capability, relationship and wide range of chemical products continue to be well organized to -- well recognized by most of the largest customers globally. At present, we have engagements with more than 1,100 global and domestic customers with a growing number of long-term partner-of-choice relationships.

Our diversified portfolio of over 200 products manufactured in -- to stringent client specifications are sold in over 60 countries. We maintain low concentration on geography, client and product parameters, thereby significantly de-risking the business.

Our Speciality Chemical business revenue were lower by 19.5% Y-o-Y in Q2 including a 7% impact from lower raw material prices and due to demand like factors. I explained earlier EBIT were lower by 4.8% and EBIT margin expanded by about 400 bps Y-o-Y during the quarter. We have been continuously leveraging our consumer capacity to optimize our product mix to maximize the margins, resulting in the higher EBIT, but the lower volume growth. Contribution from downstream products further increased from 70% to 75%, which is a trend driving our business to the next level of customer engagement and into segment that's relatively less competitive intensity. Selling more of higher value, lower volume products also brings about related savings in shipping, handling and transportation costs, especially for exports.

We produced about 13,900 metric tonne of Nitro Chloro Benzenes during Q2 FY '20 as against 17,000 metric tonne for Q2 FY '19. Growth in the quarter was lower due to ongoing scale-up and expansion activity at the said unit base. The expansion of NCB capacity from 75,000 to 108,000 metric tonne per annum expected to be implemented in FY '21 will cater to the increasing external demand in India and also our requirement of manufacturing downstream products. Plant capacity addition in 2 phases would entail an investment of about INR 150 crores. We had also witnessed a temporary shortage in one of the key raw material, nitric acid, during Q2 FY '20, which had impacted the volumes of some of our products.

Other major ongoing projects such as speciality chemical complex and chlorination plant in Jhagadia, projects at Dahej SEZ in Gujarat are progressing as planned and are expected to be commissioned in the second half of current fiscal. Likewise, our 4th R&D and scale-up center, which is coming up at New Mumbai is going to commence activity in the second half of the current fiscal. This center will facilitate further enhancement of product portfolio and also help improve our manufacturing processes.

The Pharma business saw some decline in revenue on a Y-o-Y basis. This is partly attributed to the continuing change in product mix towards higher value addition, which is evident from the strong growth in profitability, both on absolute basis and as a proportion of revenue. Segment margin expanded by more than 350 basis points to 18.7% with overall capacity utilization that has been running at higher levels due to some lines being occupied by new products that were undergoing a validation trial.

For our CapEx fund, investment of INR 506 crores have been made in H1 and the planned full year CapEx is expected to be in the range of INR 1,000 crores to INR 1,200 crores. The company continues to operate at a healthy gearing level and would utilize the surplus cash from the [CIJ] project for the ongoing CapEx program.

Summarizing on our performance. Despite macro challenges, we have been able to achieve consolidated PAT of INR 286 crores for H1 FY '20 as against full year consolidated PAT of INR 491 crores for FY '19. Looking at this in the current situation, we expect to be able to close the year with a bottom line growth of about 10% to 15% on an annualized basis.

To conclude, we believe that India is emerging as a more significant player in the global chemical supply chain with its scalable, low-cost manufacturing ecosystem, improving infrastructure and established ESG compliance framework. The country is well positioned to expand its market share globally, and there are also opportunities to replace imports with domestic production. Investments into operational excellence and new product development can create differentiation and strong long-term visibility -- business visibility. We are making several initiatives and investment to participate in this growing potential.

On that note, I conclude my opening remarks. We will be very happy to give you our perspective on any questions that you may have. I request the operator on this call to open question and answer.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We take the first question from the line of [Metin Gupta] (sic) [Ritesh Gupta] from AMBIT Capital.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [2]

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Sir, I just wanted to check on the contract manufacturing capacities for the 2 of the large clients. When are they expected to get commissioned and when do you expect them to start running at full utilization? That's question number one sir.

Secondly, sir, that NCB capacities were impacted on 2 accounts. I think there was commissioning of the new capacities or expansion [that's what we want to know] and of course, nitric oxide was also limited. So does it -- did it just impact the NCB and the downstream product or it impacted some other products also? So yes -- so these are the 2 major questions that I have right now.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [3]

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As mentioned in my opening remarks that those projects are going as per plan, and we'll be commissioning in Q4 of FY '20, and FY '21 and FY '22 are where we'll see the major volumes coming in from these 2 contracts. As far as the Nitro Chloro Benzenes is concerned, this nitric acid has also impacted our nitrotoluene production also in addition to Nitro Chloro Benzenes.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [4]

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Okay. Any top line impact or an EBITDA impact that you would like to quantify on that account?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [5]

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That's why overall, you see, basically, the top line has been impacted, especially on the basic chemicals, which are Nitro Chloro Benzenes and nitrotoluene.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [6]

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Okay. And sir, on the toluene capacity side, I mean, how is the utilization for the nitrotoluene capacity right now? And I just -- I mean I know you had some disruption, but how -- is it like if this nitric acid can neutralize, it gets resolved, do you expect them to reach full utilization soon or will it still take some time for the toluene capacities to get fully utilized?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [7]

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For this quarter, it was substantially lower. We had about 1,400 tons production. But progressively, we see that it will increase.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [8]

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Got it, sir. And sir, just on the -- you said that the slowdown has been impacting. So is it -- the realization has also been impacted badly or is it just the volume impact that has been there? So like realization on a like-to-like basis or EBITDA per tonne, [all that is small on] some of these products? Has it seen a major decline or has it remained the same as last year?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [9]

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Generally, we make so many different products for different end use and different geography. So it will always -- the impact would be on a product to product. Some [may not] we have a structural contract where the margins may not be impacted, but the volumes only may be impacted. And then some place, where you are in a multi-product situation, you might have impact on both volume and margins. But generally, in our cases, margin impact is relatively less. It is more on the volume impact.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [10]

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Right. And last question from my side, sir. Employee costs have increased by 55% Y-o-Y. I mean what was the reason? I mean is there any one-off into it? Or is it just the people buildup that you had?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [11]

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No, I couldn't understand.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [12]

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Employee cost increase for the quarter on a Y-o-Y basis looks heavy. So is it in line with the people addition you had? Or is there some one-off into it?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [13]

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Yes. And now we also have this merger also of Nascent Chemicals coming into that. And basically that's what increased our overall employees also. We have also recruited people for upcoming projects. They are on a training.

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Operator [14]

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Next question is from the line of Abhijit Akella from IIFL.

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Abhijit R. Akella, IIFL Research - VP [15]

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First, on the PDA segment, last quarter you had mentioned there was about INR 10 crores boost to EBITDA because of higher prices over there. What was the impact this quarter, sir?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [16]

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This quarter, maybe more around INR 15 crores or so will come as an additional impact because of PDA.

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Abhijit R. Akella, IIFL Research - VP [17]

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About 15 crores?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [18]

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Yes.

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Abhijit R. Akella, IIFL Research - VP [19]

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Okay. And how are you seeing the prices there are trending in 3Q as well?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [20]

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Now it has peaked. So it has started correcting in Q3. Q2 was a peak.

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Abhijit R. Akella, IIFL Research - VP [21]

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Sure. And if it were not for these temporary issues such as nitric acid shortage and the plant shutdown for the debottlenecking, is it fair to assume that NCB volumes would have been the full 17,000 tonnes this quarter rather than -- the actual number was 13,000-odd, right, this quarter?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [22]

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13,900.

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Abhijit R. Akella, IIFL Research - VP [23]

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Okay.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [24]

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Yes. Otherwise, it would have been around 16,000, 17,000, which is our normal run rate.

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Abhijit R. Akella, IIFL Research - VP [25]

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Right. And nitrotoluenes was about 1,400 this quarter?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [26]

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Yes. Yes.

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Abhijit R. Akella, IIFL Research - VP [27]

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Okay. Fine. And on the Pharma segment, sir, we've seen some sequential decrease in revenues from 1Q to 2Q. Is that because of any specific client-side issues or anything more? And you've been guiding to about a 20%, 25% growth for the full year for Pharma, so how do you see that now?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [28]

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Yes, this quarter, we had some product -- validation being taken up and certain high-value products were not produced -- high value of sales products are not produced in this quarter. So overall, I think that will be taken care of in the next quarter.

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Abhijit R. Akella, IIFL Research - VP [29]

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Okay. Perfect. One last thing on the tax rate, if you could just give us some guidance for what we should think of going forward?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [30]

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So we've generally been at a lower tax rate. We used to be in somewhere between 17%, 18%. I believe we will be in that range only.

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Abhijit R. Akella, IIFL Research - VP [31]

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17%, 18% is where it will remain?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [32]

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Yes.

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Operator [33]

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We take the next question from the line of Naushad Chaudhary from Systematix Shares.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [34]

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Congrats on a decent set of numbers. 2, 3 quick questions I have. First, on the finance costs, sir, if I look at the half year interest cost and calculate it with the debt which you have on the balance sheet, it comes to around 3% and 4% of the interest cost, if you can help me understand why?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [35]

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Okay. So there had been certain interest income, which gets netted off in interest expense, so the -- because we had QIP proceeds. In last quarter also, we had that interest income, which was netting off. So the actual cost would have been higher by around INR 4 crores to INR 5 crores to that extent.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [36]

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And do we include the forex gain and loss in this line item? Or is there -- or do we do that in the other expenses?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [37]

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The forex gain or loss in respect of long-term loans are as a part of the finance cost. The gain or loss in respect of the trade transactions like exports or imports and other stuff is part of the operating income.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [38]

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So that's not the part of this line item, right?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [39]

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No, no, that's not part of this line item.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [40]

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Okay. Second question, sir. If I -- from our consolidated, if I subtract the stand-alone amount, I get the numbers of subsidiaries, and I -- if I look at the EBITDA margin of these numbers, I get around 32%, 33% of EBITDA margin versus the consolidated margin of around 24%. Sir, can you help me understand what are these products which is making these kind of margins?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [41]

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There will be cancellation of sales, which is happening to subsidiaries. So that's why you are seeing lower numbers. Actually, the EBITDA percentage is similar only. So what happens is we've got 2 subsidiaries, which are more of marketing extension in U.S. and Europe. So the sales revenue gets knocked off on an overall basis. And another entity, which is Ganesh Polychem, which is the -- in fact, among the major -- all the subsidiaries, that's the only larger manufacturing entity, so they have an annual profit of around INR 20 crores to INR 25-odd crores after tax. So that's the major addition to the bottom line for the company.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [42]

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Okay. So these 2 are only marketing entities for us.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [43]

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Yes.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [44]

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Okay. Lastly, if you can share -- I missed it, you shared the NCB volume. And if you can also share hydrogen into the hydrogenation and PDA production volume of this quarter.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [45]

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Yes, Nitro Chloro Benzenes was 13,900 metric tonnes and hydrogenation was 2,340 tonnes per month level in this quarter and PDA was 433.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [46]

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433, and hydrogenation, how much you said?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [47]

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2,340.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [48]

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And Jhagadia, you said 1400, right? nitrotoluene volume.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [49]

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Yes.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [50]

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Do you also share the ethylene -- ethylation volume at Dahej plant?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [51]

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No, that we are not giving.

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Operator [52]

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(Operator Instructions) Next question is from the line of Surya Patra from PhillipCapital.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [53]

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Sir, you have been saying for some time that value-added product has been really supporting...

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Operator [54]

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Sorry to interrupt, Mr. Patra, but requesting you to please use the handset mode while speaking.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [55]

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Sir, since last few quarters that you have been mentioning about the increasing sale of the value-added product, which is supporting the margin performance for the company. So sir, can you add some color to the kind of nature of the new product that you would have seen progress in the recent few quarters? Or what are the kind of value-added products that you are looking at and what are the kind of scenarios that one should really see in terms of product mix going ahead?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [56]

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Basically, the products there are similar to whatever [other] products we make. But in general, we are trying to push more and more the downstream products. That's why you see the impact on EBIT is relatively much less because the major down -- production less is on the base product. So all of our downstream products, we are trying to expand the volumes and see that we are able to utilize maximum capacities.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [57]

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Okay. But is it possible to say -- see if not the product name-wise, but at least, what are the key additional chemistries that you have added to your process, which is resulting in the value-added product? Why because -- see the interesting aspect what I'm finding is that, see since the last 4, 5 quarters, we have started seeing price correction sequentially. And from that specific point, we have started seeing the sequential margin expansion or EBIT margin expansion for our Speciality Chemical business, so -- which is a kind of very interesting trend. So if you can add something -- if any new chemistries that you have added for your downstream products, then that will be useful.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [58]

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Our downstream products have been same, basically. All these chloro anilines and some chloro products and all that. Basically, they're trying to get more volumes and also the margin in general has improved, which we have been telling in past also. Last few years, overall, the downstream margins have expanded, so -- but there are no new products as such except now we have this hydrogenation on ONT, PNT we have started. So that's [toluenes] -- but that is generally consumed internally, not selling outside.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [59]

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Okay. And see, what is the -- see in fact the quarterly EBIT margin for Speciality Chemical, if I see -- so it has over -- let's say, first quarter of FY '19, which was 17%. From there, we have gone up to like 24% this quarter. So already that we have raised that way, so some portion of this would be possibly the lower prices that would be helping, but this kind of expansion cannot possible just because of the lower raw material cost. And subsequently, possibly, we will see the commissioning of the agro compound supply, which you have been guiding about 40% margin profile. So where do you see really your margin trajectory reaching to over, let's say, 1-year period or 1 to 2-year period?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [60]

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So basically, it will increase. Yes, you rightly mentioned the new contract is at 40%. So in general -- now the trend will be whatever the base chemical, I think even after we do this Nitro Chloro Benzenes expansion to 108,000, I personally don't see any Nitro Chloro Benzenes further expansion in next 5, 7 years. So that entire idea will be going towards more value-added downstream products. Even in a chlorobenzene also, once we have this expansion done on the base chemistries, then entire hope that will be on going on more value-added products. Actually, appetite is now that people want product supply chain independent of China. So here we have product to be made from our value chain further up to $30, $40, $50 per kg level also. So in general, these are the last phases of this chemical expansion, but in the future, we will be moving more towards value-added.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [61]

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Okay. Sir, another thing. You have said the numbers, so the NCB, whether we talk about the NCB thing or the hydrogenation or the PDA, I think for most of the product for which you have said the number, it is, I think, the lowest over -- lowest number -- quarterly number over the last 3 to 4-year period, so was it that surprising that nitric -- suddenly the availability became a kind of issue? Or -- see, if I remember right, then you were procuring from Deepak Nitrite for the nitric acid.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [62]

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No. The hydrogenation number has increased actually. It is the nitration, which number was impacted. So that's why some of the base Nitro Chloro Benzenes, nitrotoluene was impacted.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [63]

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How sustaining or how -- what time that you will take to really correct it? Or whether it is a kind of a continuing problem for it in the near term? Or what is the situation here, sir?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [64]

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Here, I think, in New Bombay, there is some water issue in Taloja, their plant.

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Chetan B. Gandhi, Aarti Industries Limited - CFO [65]

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So basically, MPCB had asked MIDC to curtail water supplies to Deepak Fertilisers, which resulted, and then they had in their Dahej alternate plant some issues related to the production, so which led to the -- so we had to buy product -- nitrated product to do further processing. So that's why overall also, we could sell more of downstream, but we had to by using up base products or one step plus base products.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [66]

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Okay. Do you have any plan for this, sir, for availability -- to ensuring the availability of nitric acid smoothly? Why, because long back we had similar situation once, again we are facing that.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [67]

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So now Deepak Fertilisers put up a plant in Dahej. So now they've got 3, CNA stream in Taloja and 2 in Dahej. So why we didn't go for expansion was because Deepak had announced. So as their overall capacity is not a major issue for us, but if there are any -- simultaneously if the problem happens at both the locations, then we are going to have an impact.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [68]

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Okay. And this correction, what we have seen in the revenue side, you said 7% is because of the lower input prices. Is that correct, sir?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [69]

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Yes.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [70]

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And have you seen any impact of the slowdown by -- in any manner or -- and if any part of the business got impacted because of the global slowdown, or you think...

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [71]

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Yes, that's what we have mentioned, no? The agrochemicals, especially in the U.S. and automobile sectors, some of the products which are going in there, there the volumes have been impacted.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [72]

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So like the 7% decline is because -- on account of lower prices and balance is because of what percentage about slowdown and what percentage about lower volume?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [73]

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That will be difficult to bifurcate basically. And that also -- there is switching because of the base products, the volume reduction is more.

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Chetan B. Gandhi, Aarti Industries Limited - CFO [74]

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In case of certain products where the volume is lower because of the slowdown, we will switch the product profile to a different product where the margins and the product volumes are higher. So it's not a simple comparison possible.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [75]

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Okay. And this agro unit will be commissioning by fourth quarter?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [76]

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Yes.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [77]

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Okay. I have a couple more. I'll come in the queue.

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Operator [78]

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Next question is from the line of [Dipay Mehta] (sic) [Dipesh Mehta] from SBI Capital.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [79]

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Sir, 2, 3 questions. First about, can you help us understand, net of raw material changes what would be the revenue growth this quarter in Speciality Chemicals?

Second question is about the long-term contract. I think one you addressed about 10-year, which is likely to start in Q4. For the second one, 20-year, are we on track for Q1 kind of commercialization of that plant also?

And the third question is, now if I look the margin in Speciality side, earlier we always used to indicate when raw material price correction happened, we have some benefit in terms of percentage calculation of margin. So how much margin expansion you attribute to raw material price softness versus how much would be -- you attribute to a mix change kind of thing?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [80]

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Yes, this raw material impact in our -- it's overall about 19% is the top line reduction in Speciality; 7% is because of the raw materials and another 12% where there is volume reduction. But within that, there's more -- volume reduction is more on the base chemicals as compared to the value-added chemicals. So that is how the overall volume has panned out. And as far as the second contract you mentioned, yes, that is also online, that supply which will be starting in the next year first quarter.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [81]

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Sir, the third one, if you can address the raw material price also...

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [82]

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The 7% is basically because of the raw material prices.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [83]

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Sir, the question was more about the margin, the EBITDA margin or EBIT margin which we report for the segment.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [84]

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So that has a margin -- basically, we'll always have to track absolute margin, even the constant raw material prices, if I have high value-added products, then my margin to sales is going to -- even the constant raw material price is also going to increase. In general, just the top line may not be correct. So correspondingly, margin as a percentage also will not be a correct way to judge. It will be more on the absolute EBIT number.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [85]

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Sir, that is what I tried to gauge a sense now because percentage is not right way to judge about the mix change.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [86]

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That's why we are saying now basically, the base chemical last time was around 30% and the value added was 70%. And this quarter Y-o-Y it's 25% base chemical and 75% value-added. So that's why, so that even with the top line reduction, if you take out the raw material impact, that is about 12% top line reduction, whereas the EBIT reduction is only about 4%.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [87]

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Understand, sir. That ratio will give us some sense.

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Operator [88]

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Your next question is from the line of Rohan Gupta from Edelweiss.

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Rohan Gupta, Edelweiss Securities Ltd., Research Division - Research Analyst [89]

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Sir, first question is on your MCV volume, which you mentioned is affected almost by 20%, though it's more of the base chemical which has been impacted, but I understand it would have also impacted your value-added product portfolio also because you use maximum for your product. So like 12% impact on volume, which is coming from the 7% price impact, is it going to remain there? Because you are still going ahead with the expansion. So just looking at the second half, how impacted it will be in terms of volume?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [90]

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No, basically, downstream, we either will reduce our sales of the base chemical or generally we'll procure the -- from the supplier.

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Rohan Gupta, Edelweiss Securities Ltd., Research Division - Research Analyst [91]

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1

So base chemical, you were saying that...

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [92]

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No even if the volume is less, our...

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Rohan Gupta, Edelweiss Securities Ltd., Research Division - Research Analyst [93]

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[downstream will not be] impacted?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [94]

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Either we will reduce outside sales or sometimes we buy the base chemical from outside for our captive consumption. So our own downstream is not impacted.

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Rohan Gupta, Edelweiss Securities Ltd., Research Division - Research Analyst [95]

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But if you were to force more of the raw material, base chemical, then it means it will affect your margins, right?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [96]

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Yes, actually. It improves the margin if it is a switch from here to there. But we -- generally, we see that our own downstream requirements are fulfilled even if the base chemical production is down.

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Rohan Gupta, Edelweiss Securities Ltd., Research Division - Research Analyst [97]

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So the NCB volume which was affected in current quarter, you mentioned 2 reasons; one is expansion, which is going on, and raw material availability, especially nitric acid. How is the scenario in second half, sir?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [98]

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Second half also might have some impact on NCB.

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Rohan Gupta, Edelweiss Securities Ltd., Research Division - Research Analyst [99]

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It is on the both the fronts? The nitric acid availability still remains under pressure and you mentioned that Deepak Fertilisers and Dahej plant is going to be a problem ...

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [100]

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Nitric acid it's...

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Chetan B. Gandhi, Aarti Industries Limited - CFO [101]

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First 15 days, we had effect last month.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [102]

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Overall, not significant. So third quarter might have, but in general now, currently, in November, nitric is stabilized, not much issue on that front.

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Rohan Gupta, Edelweiss Securities Ltd., Research Division - Research Analyst [103]

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Okay. But the expansion is still going on, and that may [have] our operation of current plant, right?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [104]

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Yes. No, that is because it's a kind of a debottlenecking in terms -- so in between we take 7 days to do part of the work. It's not a greenfield, it's more of a brownfield and hooking up various debottlenecking equipments.

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Rohan Gupta, Edelweiss Securities Ltd., Research Division - Research Analyst [105]

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Okay. Sir, the second question is on your guidance. So you sounded more confident of 10% to 15% PAT growth, while in the Q1 you were seeing that you don't want to stick to any guidance because of the volatile scenario globally and also in agrochemicals and auto market. So how -- I mean, the current scenario, you see that now you are confident about this kind of growth. And also, that this is basically EBITDA growth which you're talking about, or it will be PBT growth? Because we see that your EBITDA growth is quite significant while PBT growth you have achieved in last -- I mean, in first half.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [106]

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This number is [part of PAT] on bottom line. The guidance is more on the bottom line. Because right now, we've got already for 6-month number already there and October is over. So now we have more visibility on this number. That's why we have given the revised numbers.

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Rohan Gupta, Edelweiss Securities Ltd., Research Division - Research Analyst [107]

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So if we have -- if we have to work out on that numbers backward with a 10% sort of PAT growth, you have to just only achieve 10% growth in the second half?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [108]

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Yes.

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Operator [109]

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We take the next question from the line of Nav Bhardwaj from Anand Rathi.

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Nav Bhardwaj, Anand Rathi Financial Services Limited, Research Division - Research Analyst [110]

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While most of my questions have been answered, one key one remains, is that for the long-term contracts that we have, have you faced any pressure in terms of reduction in volumes or postponement of delivery for this year?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [111]

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Pardon?

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Nav Bhardwaj, Anand Rathi Financial Services Limited, Research Division - Research Analyst [112]

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The long-term contracts that we have, are we facing any kind of postponement or any kind of pressure from the client side in terms of postponing the delivery for the products that we expect next year for -- and last quarter this year, for the long-term contracts?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [113]

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Yes. As of now, no, there is no such indication. But we are still awaiting whether there is any impact is there on that side.

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Nav Bhardwaj, Anand Rathi Financial Services Limited, Research Division - Research Analyst [114]

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And what kind of utilization levels can we expect in the initial year for the -- specifically for the long-term contracts?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [115]

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Yes, it will depend on how that commissioning also goes, because it's going to be a greenfield plant for them. So based on that, the first year will be -- it will be difficult to guide on the -- so next year will be more of a stabilization. But subsequent to that, I think the utilization has to be much better.

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Nav Bhardwaj, Anand Rathi Financial Services Limited, Research Division - Research Analyst [116]

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So 50% for the first year and going ahead 60%, that will be a fair assumption?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [117]

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Yes. From second year onwards, I think everything gets stabilized, both their production as well as corresponding qualification and everything.

So first year, maybe because of that being a greenfield, there may be some impact.

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Nav Bhardwaj, Anand Rathi Financial Services Limited, Research Division - Research Analyst [118]

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Okay. So for FY '21, 50% utilization should be a good number to work with?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [119]

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Yes. But we have to still get those -- more clearer idea from them. But in general, this being a stabilization year, there will be an impact.

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Operator [120]

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Next question is from the line of Dipen Sheth from HDFC Securities.

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Dipen K. Sheth, HDFC Securities Limited - Head of Institutional Research [121]

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I have a very simple question here. In fact, there are 2 questions, slightly unrelated. So the easier one first, if I may. On the pharma side of the business, I'm seeing a gradual, but steady expansion in EBIT margins. Intuitively, I would have thought that the pharma products line -- product line, so to say, would ordinarily have been more profitable than specialty, it is not so in our case. Is that something which I should take for granted over a period of time? Or is it likely to lag specialty profitability for a while? Or is that catch-up playing out?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [122]

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I think, in pharma, the EBIT numbers have been lower and we are catching up with the chemical number. So it will take some time.

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Dipen K. Sheth, HDFC Securities Limited - Head of Institutional Research [123]

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Yes, because inherently, I would suspect, and correct me if I'm wrong, the product range affords better profitability. Is that the right way to look at it? Or is it -- it varies so much that there is no point trying to see whether it can converge into specialty profitability eventually?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [124]

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Technically, we have done a few brownfield expansions and some more expansions are going ahead, happening, which will result in capacity creation in the same location and where we will have more operating advantage and more margins because the fixed cost will be taken care of. So that is what we will see in next year also.

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Dipen K. Sheth, HDFC Securities Limited - Head of Institutional Research [125]

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Okay. So there is confidence that margins should expand in the pharma segment over a period of time?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [126]

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Yes.

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Dipen K. Sheth, HDFC Securities Limited - Head of Institutional Research [127]

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Okay. I would have assumed that to be true as well. The second observation I have is, that no matter how we try to slice and dice our business, the fact is that there is a bewildering product suite, so to say, the range of products that you manufacture and it's not like cement where I can evaluate EBITDA per tonne. So if I just look at the gross numbers that are visible in terms of profitability. It's very interesting and it's very visible right now that you are sitting on about INR 2,000 crores of net block today. And there is as much as INR 1,151 crores of capital work in progress. Obviously, this is known to us. And for a while and in fact, it has increased by more than INR 300 crores even over the half year. So there is a series of new manufacturing facilities likely to get commissioned over a period of time. Now as a person who is completely agnostic to what is happening inside this INR 2,000 crores of net block, you have generated something like INR 400 crores of EBIT in the half year with it. This is, obviously, written down value and the INR 1,151 crores on capital work in progress is a fresh value. But do you have some sense of what revenue and profitability is embedded in this capital work in progress and when it is likely to play out?

The addendum to this question would be, if you sense some kind of a global easing of demand, is this coming at the wrong time? Or are we confident that we can commission this and deliver profitably?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [128]

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Yes. No, this additional assets is going to result into sizable absolute EBITDA and EBIT, because more high value added as a percentage may not -- the top line may not grow as much. But this whatever project which will get commissioned this second half, starts contributing significantly in EBIT in next year and the year after.

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Dipen K. Sheth, HDFC Securities Limited - Head of Institutional Research [129]

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Okay. And you expect to derive a similar kind of profitability from this gross block that you will gradually commission over a period of time?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [130]

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Yes. Yes, we have long-term contracts, which are backing this -- for the 3 of the projects that we have. So corresponding increase in EBITDA also will take place once these assets are ready and commissioned.

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Dipen K. Sheth, HDFC Securities Limited - Head of Institutional Research [131]

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And as new products get added to the portfolio, will you add segments in terms of your disclosures? Or does this all get into specialty?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [132]

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No, it will get into speciality. We have a lot fungible capacities also in that.

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Dipen K. Sheth, HDFC Securities Limited - Head of Institutional Research [133]

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Okay. Okay. So I think the key thing hereon is to monitor the commissioning and the output getting ramped up from these new capacities?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [134]

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Yes.

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Operator [135]

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Next question is from the line of Milind (sic) [Miloni] Bagadia from HDFC (sic) [IDFC } Securities.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [136]

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Nitin from IDFC. Sir, on -- in terms of the management priorities going forward. Sir, where -- in terms of -- are we -- we've signed a couple of these large contracts a few quarters back. I mean, where are we in terms of signing on some more new contracts, the long-term contract as you've done before? And you in the past, you've talked about a lot of the opportunities beginning to come through because of downstream production being shifting to India. I mean, have you seen any dramatic changes in those trends over the last 6 months, sir?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [137]

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Yes. Actually, even for Q1 also, we had mentioned that the entire manufacturing is being shifted and a lot of our products which we used to export to China has started getting consumed in India.

So in general, the manufacturing in India is increasing. And we are also seeing a lot of further opportunities in our downstream for multiproduct customers as well as on a one-on-one basis that there is -- especially, again, this trade war also is going to help in India in a big way, between U.S. and China. Because in that situation, India become a very good destination. If somebody wants to export to China -- U.S.A. And even if you want to export to China, then also India becomes a big -- so that has given an additional push. And I think that will pan out very well for the next few years for the entire industry.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [138]

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Sir, have you started seeing any of that impact of the trade war? I mean, in the sense of potential importers in U.S. looking to diversify, derisk and looking at other opportunities in India or the other way around?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [139]

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Yes, Yes. A lot of customers they have started coming up and they want product in the next 2, 3 years, put up the plant and all that is going on. So -- because this is a long-term structural issue, I think, and they want to derisk. So this trade war is accelerating things specifically for U.S. market, if somebody wants to put material in the U.S. market, they'll try to move it faster.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [140]

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And does this -- for our perspective, does it really imply more of these dedicated long-term contracts or our business still is going to be largely up? I mean, how balanced is it going to be between these dedicated contracts and general, regular -- the usual -- long-term -- usual supplies to multiple customers [is that] the way we do it?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [141]

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Basically, when it becomes a long-term contract then -- because of customer timeline everything becomes a priority. So in that time, if that comes up, the other projects which are multicustomer where there is no customer timeline pressure that gets little bit backstaged. So that's how it works. So wherever we -- and we are now getting a lot of appetite from the customer side, so a lot of work goes on that front, on more priority in general.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [142]

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Just to sort of push a point over the next year, do we expect to close some more of these contracts like we've done in the past, as you -- based upon the conversation that you're having with customers?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [143]

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Yes, basically we are looking at that. But these 3 ones are very big, in the sense 2 are 10-year and another is 20 years of supply given to the market.

But I don't think in a smaller number of years and all, will come to the market. But in general, we see that we already -- we used to have contracts earlier also, we have a 3-year contract, which has been rolled over 5x for 15 years. In that sense, we have few contracts, which is for 4 years, and that might get extended. So those kind of businesses were there in past also. And our idea everywhere will be to try to get maximum period locked in. As a strategy, we try to negotiate we get it locked into towards more towards 10 years. If we have those kind of contracts then that will come into public domain, but lower number of years also contracts we are signing, and that will also continue.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [144]

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So -- and quickly on last one. Sir, on the pharmaceutical side, what proportion of our business right now is towards the regulated markets, sir, in U.S. and Europe?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [145]

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Out of the total API that we sell, more than 50% is U.S. and Europe.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [146]

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And, sir, in terms of incremental growth, are we looking at growing the existing volume, existing sort of portfolio products? Or it's largely the focus more on sort of adding more products to the portfolio?

I mean, where is the bigger opportunity in the current context?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [147]

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So for generic APIs, generally, we develop 8 to 10 newer APIs every year, and that is what we are doing this year. So every quarter, we will see hence onwards 2 to 3 validations happening. And that is what is going to continue. Even on our intermediate manufacturing activities that we do for global generic as well as the innovators, there also we have newer products, which are lined up in our portfolio.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [148]

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Sir, when you said 2 validations, so this is that U.S. DMS per quarter?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [149]

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Yes, for any DMS. So be it U.S. or EDQM, EDMF or -- for any market supply, we have to validate the product, because we are operating our plants as GMP plants.

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Operator [150]

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We take the next question from the line of the Dipan Mehta from Elixir Equities.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [151]

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This is Dipan Mehta from Elixir Equities. Sir, last 3, 4 years, we have seen exceptional growth coming through from the company. And this is another -- after many quarters, we have seen a sort of flattish kind of quarter and we are all aware of the reasons why last 3, 4 years the company has done well. It is because of price increases and volume increases and various other measures taken. So is it fair to assume that it is going forward from here, it is more a business like usual environment where we can expect slightly tepid growth rates of 10%, 12% in the core business? And if the growth drivers come as and when new plants are getting commissioned especially for contract manufacturing or on the pharmaceutical side, is there a correct assessment of the company at this stage?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [152]

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Yes. Basically, as the capacity gets filled up then you need the newer plant, which is going to give you the more volume and EBITDA as well. That's why we are expanding in our Nitro Chloro Benzenes also from current 75 to 108. Now that's generally a multicustomer product and stepwise.

So there will be always both the mix, contractual one as well as on multicustomer. We are also looking at putting up an entire multicustomer chlorotoluene line of products, which has been actually there for a long time. But because of this contract, this has been pushed out, but we see there is no -- start some activity in the next year on [product based] on chlorotoluene chain. So that will be, again, in multicustomers. So we'll be looking at both the things, but customers related generally tend to get prioritized.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [153]

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But the onetime kind of benefit we got because of price increases and surge in volumes as our capacity got utilized last 3, 4 years because of whatever happened globally, especially what happened in China, where they had to curb their chemical output and their exports for environmental reasons or otherwise. That particular phase for the specific industry and subsector of the industry which you're operating in, has that particular tailwind now more or less over and done with, I mean?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [154]

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No, we have been able to set up our volumes as it is. The only thing is the volume has been now moved, like we used to export to China. Now those have started going to -- into India. So all this disruption has not increased much on a volume front for us. There has been -- time to time some margin has been there. A lot of other Indian companies there may be more both impacts, maybe both an increase in volumes as well as margins.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [155]

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All right. Sir, one question is the EBIT figure is not adding, because if I'm looking at what you have filed with the stock exchanges, according to that, the EBIT should come to INR 201.57 crores. Then in your presentation, Page 8, you have mentioned EBIT on stand-alone at INR 196 crores. And when you go down the line for Slide 9 and Slide 10,and if you aggregate the EBIT over there, that comes to INR 234 crores for Q2 FY '20.

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Chetan B. Gandhi, Aarti Industries Limited - CFO [156]

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So you're comparing a stand-alone and consol numbers plus the difference between INR 196 crores and INR 201 crores is the other income, because the stock exchange EBIT includes other income whereas the reported number ...

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [157]

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Okay. Sir, what about Slide 8, 9 and 10? If you see Slide 8 and 9. So Slide 10, EBIT for pharma Q2 is INR 34 crores, Slide 9 EBIT for specialty is INR 200 crores and Slide 8 is INR 196 crores, yes.

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Chetan B. Gandhi, Aarti Industries Limited - CFO [158]

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Yes, let me just help you on that. So the numbers what you are referring from INR 201 crores or INR 196 crores are the EBIT for the company as a whole. When you look at the segmental performances and you look at the segment report, there are certain expenses, which are directly allocated to the segment and the EBIT numbers are the segment EBIT. There are certain unallocated expenses which cannot be allocated [each] of the segment and those are separate numbers.

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Operator [159]

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We take the next question from the line of [Abhishek Bhanushali] from InterNex Capital.

As there is no response from the current participant, we take the next question from the line of Rishab Bothra from Sharekhan.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [160]

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I just wanted to understand our revenue mix better. How much of the revenue is on contractual basis and how much is on spot basis?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [161]

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So we have not -- I mean, that kind of a bifurcation done in this.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [162]

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Okay. And in the respect of product specific to a client and multiple clients. Is there -- that revenue split available?

I just wanted to understand in ...

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [163]

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No. Generally, we are not doing that kind of bifurcation.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [164]

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Okay. And are there any other players who are entering into multiyear contracts with a large MNC? And is there a contractual obligation that the partners which we have for multiyear contracts will not be able to enter into multiyear contracts with other parties in India?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [165]

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[Well, as you] see, the chemicals, there are thousands of chemicals, and there are hundreds of manufacturers. So there is always [restrictions] between supplier and customers. For different products, different companies have their contracts. Even for the same product, there's no restriction for somebody to enter into any with somebody else also.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [166]

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Okay. And on the other parties entering into multiyear contracts, are we aware any other Indian manufacturer listed or unlisted?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [167]

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For our own products?

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [168]

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Our product or other products as well.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [169]

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Other product, there is nothing has come in public domain as such. Different companies might be having -- there are so many companies in India who have been doing business with multinationals for many years. And they must be having a contract, I think, but maybe of a lower period. In this particular case, because the amount of investment and everything was much more, we could get this kind of years, these are difficult to get. It was in a much aggressive we had to do -- it was a complex negotiation to get this kind of years.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [170]

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And lastly, sir, by when will the demerged entity shares be allotted to investors? And what's the growth outlook there, if possible?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [171]

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It's mostly maybe in November, at the most December, I think. That's what I heard from the securities department.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [172]

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Okay. Because we are already in November, so...

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [173]

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So -- yes. So originally they were talking, but you see these are all SEBI and stock exchange related.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [174]

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But what's the growth outlook in that particular area?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [175]

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Yes, overall, I think we have invested there also. And in general, the volume and everything should expand. Other than that, I don't have much details.

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Chetan B. Gandhi, Aarti Industries Limited - CFO [176]

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We've also got certain new products within that range of [open source] chemicals, where the margin profiles are better which are under validation and so there is a lot of other pharma -- FMCG companies, so that should drive the margins and the growth of that business over a long-term basis.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [177]

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Okay. Because when we demerged, management mentioned that the business potential is there. And post-demerger, there will be -- the company will have a different path altogether in terms of revenue growth and profitability. So we believe that 1 year, we are seeing that momentum in that company.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [178]

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Yes.

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Operator [179]

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Next question is from the line of Arun Prasath from Spark Capital.

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Arun Prasath, Spark Capital Advisors (India) Private Limited, Research Division - Research Analyst [180]

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Just one interesting thought that when you were saying that trade war will be beneficial to Indian manufacturers. Recently, we heard or we heard commentary from other management saying that trade war is ensuring the Chinese government is becoming soft on the Chinese producers, thereby relaxing certain environmental norms. So how do you -- I just want to get a sense of how do you see the situation evolving over the next 1 or 2 years?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [181]

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In general, the environment is affecting the masses. So you don't see much relaxation in that, sometime maybe they will ask somebody to shift. Maybe in 1 year, they may say to shift in 2 years. But the direction what China is taking is going to be remaining on the -- on that front only. So I don't see much impact on that because in general, everybody will have to comply. So the environmental cost in China is now going to be more or less on a par with India. They're not going to be much difference in that because of trade war.

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Operator [182]

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Next question is from the line of Sanjaya Satapathy from Ampersand Capital.

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Sanjaya Satapathy;Ampersand Capital Limited;Portfolio Manager, [183]

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Yes. I just had a small question on regarding some -- is there any disruptions on the supply side on the raw material, which we heard in the market? Can you throw some light on this?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [184]

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In chemical, everything, basically, we buy from India. So...

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Rashesh Chandrakanth Gogri, Aarti Industries Limited - Vice Chairman & MD [185]

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We had some supply-side issue from nitric acid. That is what...

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Sanjaya Satapathy;Ampersand Capital Limited;Portfolio Manager, [186]

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That is what we heard, so you can throw some light on those. There are some plants where you are getting supplied, they had suffered from fire and something. Is there won't be any disruptions or how it is?

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Rashesh Chandrakanth Gogri, Aarti Industries Limited - Vice Chairman & MD [187]

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No, no. We have no issue with some plants, which have caught fire.

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Operator [188]

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Your next question is from the line of [Abhishek Bhanushali] from InterNex Capital.

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Unidentified Analyst, [189]

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Yes. I've got most of my questions answered already. Just one quick question. I've seen a pretty consistent reduction in promoter holding over the last 1 year. So can you throw some color on that? And what is the plan for the future in terms of the promoter holding?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [190]

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So that QIP, after QIP, obviously, the promoter percentage will go down.

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Unidentified Analyst, [191]

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Sir, not about the QIP. I mean, there's been sustained selling also on the open market, if I'm not mistaken.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [192]

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That's not -- it's not very significant, maybe 1% or 2%.

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Unidentified Analyst, [193]

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It's down from 53% to 48% over the last 1 year, the promoter holding.

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Chetan B. Gandhi, Aarti Industries Limited - CFO [194]

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So for that 53% to 49%, that was a QIP issuance, which was [offered at] 6.7%. So from 53% to 49% was purely because of the QIP issuances.

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Operator [195]

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Next question is from Abhijit Akella from IIFL

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Abhijit R. Akella, IIFL Research - VP [196]

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Just wanted to clarify regarding the long-term contracts. So year 1, you mentioned, will be slightly subdued kind of progress. But then by year 2, would we expect to reach full utilization at the agrochemical facility?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [197]

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Yes. Basically, first year being greenfield for them also, so we expect there are some stabilization issue will be there and that could get over. And second year onwards, it should be much normal.

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Abhijit R. Akella, IIFL Research - VP [198]

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So I mean, we've spoken about a INR 400 crores annual revenue potential from this project. So is it fair to assume that FY '22, that should be the number we should be targeting at 40% EBIT margin?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [199]

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Yes. Yes, that's what we are looking at.

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Operator [200]

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We take the next question from the line of Naushad Chaudhary from Systematix Shares.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [201]

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One question I have on the balance sheet. Sir, if I look at the working capital cycle, I see there is around 15 days of increase in our data days and inventory days. So if you can clarify that, sir? Overall working capital has gone up around 25 to 30 days, if you can add and clarify on that part?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [202]

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So as you would have noted the export revenues have also gone up. Typically, export operates at a higher working capital cycle as compared to the domestic receivable. So that one aspect is linked with that. And the inventory it's been there generally because of the higher scale of activity and the integrated business chain the inventory numbers have been going up. Plus we had that issue with some of the feedstock availability, so we've tried and maintained some buffer stock for some of the key materials what we wanted to have.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [203]

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So this availability is in context of this nitric acid which we are talking about, or some other raw material we had to maintain inventory?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [204]

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There will be more on pharma side where we import material from China. So that is -- now we have started keeping higher inventories than earlier.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [205]

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So this is the new normal for this inventory level? Or do you think it should correct going ahead?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [206]

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So we are giving higher inventory because, in general, in pharma, because of the supply issue, which we want to avoid. And I think we want to keep these high inventories until that increase in China normalize.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [207]

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Okay. What is the kind of margin do we make in export versus domestic?

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Rashesh Chandrakanth Gogri, Aarti Industries Limited - Vice Chairman & MD [208]

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Similar.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [209]

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So in terms of profitability, our export portion is less profitable compared to the domestic one?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [210]

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So you can't -- I mean you have to actually compare it on a product-to-product. Now in some cases, the revenue of export of high-value products has gone up and the margin profiles are higher.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [211]

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So it becomes product-to-product and sometimes the specific quality requirements and geography and all that. So -- but generally, all these chemicals are sold on specifications. There is not much branding. So you don't see going to be a big difference in the pricing.

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Operator [212]

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Ladies and gentlemen, that's the last question for today. I would now like to hand the conference back to the management for closing comments. Over to you all.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [213]

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It has been a pleasure interacting with you over the call. We thank you for taking time out and engaging with us today. We value your continued interest and support. If you have any further questions or would like to know more about the company, kindly reach our Investor Relations desk. Thank you.