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Edited Transcript of AARTIIND.NSE earnings conference call or presentation 14-Aug-19 10:30am GMT

Q1 2020 Aarti Industries Ltd Earnings Call

Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Aarti Industries Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 10:30:00am 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

* Archit Joshi

Dolat Capital Market Pvt. Ltd., Research Division - Analyst

* Chirag Dagli

HDFC Asset Management Company Limited - Senior Equity Analyst

* Dhruv Bhatia;BOI AXA Mutual Fund;Analyst

* Dipesh Mehta

SBICAP Securities Ltd., Research Division - Information Technology Analyst

* Kishan Gupta

CD Equisearch Private Limited, Research Division - Senior Analyst

* Nav Bhardwaj

Anand Rathi Financial Services Limited, Research Division - Research Analyst

* Rishab Bothra

Sharekhan Limited, Research Division - Equity Research Analyst

* Ritesh Gupta

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

* Rohit R. Nagraj

Sunidhi Securities & Finance Ltd., Research Division - Senior Research Analyst

* Sagar Jethwani

Karvy Capital Limited - Equity Research Associate

* Sneha Talreja

Edelweiss Securities Ltd., Research Division - Research Analyst

* Surya Narayan Patra

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

* Vishnu Kumar A.S.

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

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Presentation

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Operator [1]

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Thank you, everyone, and good evening, today, and thank you for joining us on Aarti Industries Q1 FY '20 Earnings Conference Call. We have with us Mr. Rajendra Gogri, Chairman and Managing Director; Mr. Rashesh Gogri, Vice Chairman and Managing Director; and Mr. Chetan Gandhi, CFO of the company.

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 disclaimer to this effect has been included in the results presentation shared with all of you earlier. I would now like to invite Mr. Rajendra Gogri to take you through the performance of the company and its outlook on the business. We will then have the forum open for an interactive Q&A session. Over to you, sir.

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

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Good evening, and very warm welcome to all of you. We have started FY '20 on a strong note, recording profit after tax of INR 137 crores on stand-alone basis. This is the highest ever profit in our operating history till date. We concluded the composite scheme of arrangement between Aarti Industries, Aarti Surfactants Limited and Nascent Chemical Industries Limited during the quarter. Reported revenue from operation was up 1% Y-o-Y, impacted by decrease in raw material prices and seasoning contribution from HPC business. Adjusted for the demerger of HPC business, revenue is up 8.8% Y-o-Y. Our absolute EBITDA, which is a key metric to track our relation linked to global crude oil prices grew 26% Y-o-Y in Q1 FY '20 to INR 237 crores. EBITDA margin expanded 440 bps Y-o-Y to 21.8% on account of expanding contribution of higher-value product and better operating leverage.

The Specialty Chemical business expanded revenues by 5% Y-o-Y; however, after adjusting for the impact of raw material prices, that is at constant raw material prices, the revenue growth for the segment was 9.44% Y-o-Y.

EBIT margin expanded 500 bps Y-o-Y and 70 bps Q-o-Q to 22.5% in Q1 FY '20. Contribution from downstream products further increased to 72% from about 70% a year ago, indicating a higher value addition of downstream products in the mix and bringing a substantial rise in both contribution margin and operating margin. We have successfully leveraged our large range of product offering and fungible manufacturing facility to optimize our product mix towards high-margin products, resulting in higher EBIT, despite a lower volume growth.

We produced about 16,103 metric tonnes of nitrochlorobenzene during Q1 FY '20, as against 17,000 metric tonnes for Q1 FY '19 and 15,807 metric tonnes for Q4 FY '19.

As you are aware, we are in the process of further expanding NCB capacity from 75,000 to 108,000 tonnes per annum to cater to increasing domestic demand and also for downstream capture requirement. The capacity addition would come up into basic Phase 1 in FY '20 and Phase 2 in FY '21, and we returned an investment about INR 150 crores. We achieved over 75% capacity drive for our utilization unit in Dahej SEZ at the end of Q1 FY '20. The Pharma business delivered a robust revenue growth of 28% Y-o-Y. EBIT margins remained steady at 16.7% as compared to 17.54% in Q1 last year and 13% in Q4 FY '19. The segment pro forma has improved on the back of higher capacity utilization and our focus on high-growth product baskets, such as Xanthene derivative and Pharma intermediates in regulated market.

We have continued to execute on our CapEx plan and have invested about INR 238 crores in Q1 FY '20. Our planned annual CapEx for FY '20 is expected to be in the tune of about INR 1,000 crores to INR 1,200 crores.

The major ongoing project is a Specialty Chemical complex and chlorination plant in Jhagadia in Gujarat, which should be commissioning in coming quarter, and capacity-related project at Dahej is expected to be commissioned by end of the year. Other projects include API and Pharma intermediate debottlenecking and expansion in Vapi and Tarapur. We are also in the process of setting up our fourth R&D scale of unit at New Bombay that will facilitate further enhancement of product portfolio and also help to improve our manufacturing processes.

Given the strong performance and profitability delivered over the past few years and in appreciation of the continuing support from our shareholders, our Board of Directors recommended the issue of 1 bonus share for every share held by them, subject to the approval of shareholders of the company. This may also lead to increase in the liquidity available for the shareholders at the stock exchange.

To conclude, this has been a good start to the year in a challenging global macroeconomic environment. We have developed a diversified and derisked portfolio comprising about 200 products that are marketed to more than 400 global customers in over 60 countries and 700 customers in India. Our top 10% and top 20% contribute 27% and 38% to the total revenue, respectively. The company is also benefiting from its deep relation with domestic customers, who are setting up for expanding capacity and downstream product, as a structural shift of global demand continues to favor consistent Indian suppliers. However, factors such as prolonged tariff and trade discussion, evolving global equation, constantly evolving China factor, political instability, extreme weather events, et cetera, creates uncertainty. These are creating some near-term weaknesses in the agrochemical and automotive sector in some key global geographies. We will be continuing to monitor the situation closely and take necessary actions as may be deemed necessary.

In the interim, taking a conservative view, we expect growth in profits to be lower than earlier guided by us during the last con call. Overall, increasing business strength allow us to negotiate any short-term impact from weakness in the operating environment, while long-term growth parameters and competitiveness remains largely intact.

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

Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

The first question is from the line of Sneha Talreja from Edelweiss.

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Sneha Talreja, Edelweiss Securities Ltd., Research Division - Research Analyst [2]

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It was more pertaining to how much has been the volume growth in the current quarter for your Specialty Chemical's division?

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

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Yes, the constant raw material -- the growth was 7 -- sorry 9.4%.

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Sneha Talreja, Edelweiss Securities Ltd., Research Division - Research Analyst [4]

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So that's the volume growth?

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

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Yes. That's -- now we are working out not on absolute volume growth but at a constant raw material prices, what is the revenue growth, which is at 9.4%.

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Sneha Talreja, Edelweiss Securities Ltd., Research Division - Research Analyst [6]

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Okay. And then you said in the initial remarks that you were seeing some kind of a slowdown in the agrochemicals and the automotive space because of which you are lowering the guidance compared to last quarter. Have you given up any number or I have missed on the same?

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

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No, we have not given any number. Basically, it is still an evolving situation. So any revision -- or maybe we can -- we may give after Q2. But overall, it seems to be that it will be lower than what we had guided earlier.

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Sneha Talreja, Edelweiss Securities Ltd., Research Division - Research Analyst [8]

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Okay. Sir, can you just highlight the sense that you're getting from your customers, in which all spaces are you seeing more of a slowdown?

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

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Basically, the 2 sectors are certain agrochemical -- especially in the U.S. because of the weather situation, agrochemical, overall, even acreage also has reduced this year in agrochemical usage. And automotive sector, I think is globally impacted, whether it's China, India. So these are the 2 major sectors where the impact is there.

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Operator [10]

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(Operator Instructions)

The next question is from the line of Ritesh Gupta from AMBIT Capital.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [11]

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Just one quick clarification. You said the volume growth rate was 7.9% in the quarter or 9.4% in the quarter?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [12]

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9.4%.

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Rashesh Chandrakanth Gogri, Aarti Industries Limited - Vice Chairman & MD [13]

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So what we have done is, as discussed last time, in our business, now the volume growth has its own set of challenges because there is a significant shift of product profile towards a high-value and higher-margin profile product, where the volumes are relatively lower. So as discussed last time, we probably look at comparing it at constant raw material prices what is the revenue growth, which would be the combination of a product mix driving the higher contribution as well as the volume growth. So the revenue growth at constant raw material price is close to around 9.4%.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [14]

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Okay, okay. So and that is what you're saying that is in a way volume plus mix kind of a growth.

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Rashesh Chandrakanth Gogri, Aarti Industries Limited - Vice Chairman & MD [15]

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Yes.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [16]

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Okay. And just on the slowdown bit. Is it that on the agro side, clients have already started to indicate you there is a slowdown in the demand? Is there a direct communication that you've got from some of your clients? Or is there something which is basically more cautionary wherein you see -- you read the same thing as what we read and kind of that's more cautionary in nature?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [17]

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No, the impact is already seen. We are getting the feedback from the clients because the actual usage this year, especially in the U.S., has been lower.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [18]

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Got it. And Latin America is not able to make up for that is the industry...

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [19]

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Yes, yes.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [20]

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Okay. And sir, just on the improved profitability bit, I mean I understand that there was some mark-to-market losses in the -- sitting in the other expenses last year same quarter. So if you could just give us a sense, I mean like is it -- I understand those are hedge gains and losses, but if you could just take us through the details of these losses and remind us on that?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [21]

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So last year, basically, we maintained a hedge book. So last year the currency was very volatile. So on the hedge book, we had an impact of close to INR 29 crores, on the hedge portfolio, which we were maintaining for the exports orders what we have.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [22]

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Okay.

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Rashesh Chandrakanth Gogri, Aarti Industries Limited - Vice Chairman & MD [23]

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Yes.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [24]

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So that basically gets reversed as and when the hedges kind of unwind?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [25]

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Yes.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [26]

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Okay. Okay. And just on the CapEx bit, could you just remind which are the key, like projects on which this money is going to be spent? I think Mr. Gogri mentioned it, but it was a little fast. So we just couldn't note it actually.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [27]

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Yes, there were 2 projects which are coming up in Dahej for our long-term contracts and another is corresponding in Jhagadia we are putting up Specialty Chemical and chlorination complex. So these are the major projects in addition to debottlenecking some expansion at Vapi and Tarapur for API as well as Specialty Chemical and a new R&D center. So these are the major projects.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [28]

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Okay. And just on the other expenses and employee cost side of it, just for the mark-to-market losses, I think other expenses increased by 34% and employee cost was also up by about 30% Y-o-Y. So like I think gross profit growth was pretty decent at 20% odd. So if you could just take us through, I mean what is driving the changes? Just the new plants which are being added and kind of new capabilities that you're adding in R&D? Or is it something else also? Or is there something one-off in this numbers?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [29]

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No, basically, overall, we are building a stronger team looking at the long-term requirement. So that is increasing the employee costs. And other expenses, I think because of some merger -- the Nascent Chemical merger also comes into the picture in standalone. That is one of the reasons.

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Rashesh Chandrakanth Gogri, Aarti Industries Limited - Vice Chairman & MD [30]

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Yes, and then other thing would be normally linked to inflationary or changes during the year and other stuff.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [31]

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No, but even then, I mean 30% growth versus, let's say 20% gross profit growth, I think will be more than inflation. So basically saying that new capacity addition and employee cost addition is what you're saying?

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

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Yes, the other expense actually increased by about 10% actually.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [33]

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No, so if I adjust for that hedge book impact, so [telling] INR 29 crores...

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [34]

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Hedge book (inaudible).

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

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The hedge book comes from the revenue, sir, not in other expenses.

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Operator [36]

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(Operator Instructions)

The next question is from the line of Nav Bhardwaj from Anand Rathi.

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Nav Bhardwaj, Anand Rathi Financial Services Limited, Research Division - Research Analyst [37]

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Few questions. Number one, for -- in order to get a like-for-like comparison, can you share as to earlier what would be the part of the expenditure on raw materials for the HPC segment in the previous quarter won by few others?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [38]

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So if you look at it, HPC segment in last year had a segmental EBIT of INR 16 lakh.

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Nav Bhardwaj, Anand Rathi Financial Services Limited, Research Division - Research Analyst [39]

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And the raw material cost would be?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [40]

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The EBIT earnings before interest and tax for the HPC segment was INR 1.99 crores. I don't have the breakup right now with me in terms of the raw material and other stuff, but the overall EBIT, if you just compare the EBIT, the EBIT contribution last year of the HPC segment was around INR 1.99 crores. So you can just reduce that from the previous year numbers just to have a like-to-like comparison.

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Nav Bhardwaj, Anand Rathi Financial Services Limited, Research Division - Research Analyst [41]

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Okay. All right. And also on the Nascent front, I remember you sharing that the company had pretty decent margins, much above Aarti as a company earlier. Now post-merger, will there -- since we're going to be completely owning it, is there going to be some kind of an absorption of the margins? Or is it going to be remaining at the same for the company as a whole right now?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [42]

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These are very small, actually. If you see what the number of shares which has been issued only about 4 lakhs -- 5 lakhs.

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Chetan B. Gandhi, Aarti Industries Limited - CFO [43]

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(inaudible).

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [44]

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So overall, in Aarti's balance sheet, it's not going to be a huge impact as such.

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Nav Bhardwaj, Anand Rathi Financial Services Limited, Research Division - Research Analyst [45]

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Great. And also in terms of, at the end of the year, what kind of capitalization of the -- into a gross block can we see, based on the run rate of the CapEx that's going on right now?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [46]

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Yes, I think substantial thing will get capitalized. First quarter, we capitalize only about INR 70 crores.

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Chetan B. Gandhi, Aarti Industries Limited - CFO [47]

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INR 70 crores.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [48]

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But at least around -- more than INR 700 crores, INR 800 crores, I think will get capitalized by end of the...

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Nav Bhardwaj, Anand Rathi Financial Services Limited, Research Division - Research Analyst [49]

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Okay. Also if you could add as to what kind of increment or contribution to EBITDA must have come from the increase in prices if at all there was any PDA prices due to the recent event?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [50]

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It will be more, I think about INR 10 crores or so.

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Operator [51]

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(Operator Instructions)

The next question is from the line of Abhijit Akella from IIFL.

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Abhijit R. Akella, IIFL Research - VP [52]

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First of all, just a clarification on the previous point you made, sir, about the price impact of INR 10 crores. Is this the impact on the entire portfolio of products? In other words, I mean the benefit due to increased prices across the entire portfolio of products was INR 10 crores?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [53]

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No, no, it was specifically for this PDA line.

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Abhijit R. Akella, IIFL Research - VP [54]

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Okay. For the overall portfolio, you've been giving -- you've been sharing some numbers, sir, in the past. So if you can share something?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [55]

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So that was the last year, basically, what we have seen that abnormality about 10% last year. Last year, overall, we had substantial increase over FY '18 in FY '19. At that time, it was about 10% increase and part of that was corrected in last year also and this year also some correction has taken place. So this year, one of the major impact is continuing is the PDA line.

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Abhijit R. Akella, IIFL Research - VP [56]

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Okay. Otherwise, prices are close to normal?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [57]

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Now other prices are virtually getting normalized.

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Abhijit R. Akella, IIFL Research - VP [58]

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Right. And sir, just on the PAT growth guidance that you provided. If I just take this quarter's profit, standalone profit of INR 137 crores, and I assume even just a normalization -- assume that the same run rate continues throughout the year for the full quarter, it would still lead to about 17%, 18% net profit growth for the full year. So given that you're moderating your guidance, should we assume that this quarter's run rate is a bit on the higher side? There could be a correction in the run rate going forward?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [59]

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No, actually if you multiple 4 times, it will be more towards 12%, I think. Last year, we had INR 491 crores on an annualized basis. So if you just make it 4x, then it comes to around 11% over the last year.

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Abhijit R. Akella, IIFL Research - VP [60]

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Okay. I think that is consolidated.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [61]

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No, no. You understand that is the revised standalone what we have guided.

Yes, so 4x will take it around 11% to 12%.

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Abhijit R. Akella, IIFL Research - VP [62]

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Okay. So you would think this run rate is at least sustainable for this quarter?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [63]

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So overall, we had given the guidance of 12% to 20%. So now we see the 20% is something which is -- doesn't seems to be feasible. And same way, it can go below 12% also. So that's -- overall, the range will go downwards. That's what we are looking at.

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Abhijit R. Akella, IIFL Research - VP [64]

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And you specifically mentioned agrochemicals and autos as 2 sectors of weakness. If you can just share some color in terms of agro, are we catering more to the generic part of the market? And is that where the weakness is? Any specific product segments that you could talk about? And then similarly, in autos...

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [65]

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Agro, in U.S. has been impacted across the board because, overall, the acreage of some of the products has gone down, corn and soya. And even in that acreage also the application of agrochemical has been lower. So corresponding impact is coming as far as the agrochemical is concerned. And automobile, I think is -- China is a major slowdown. And India -- but Indian market is relatively much smaller, even though the percentage in India is -- slowdown is higher. But overall, auto sector globally is impacted because of mostly China impact.

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Abhijit R. Akella, IIFL Research - VP [66]

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Agro, our portfolio is mainly to the generic side, is it, sir, or...

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

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Yes, it is basically -- most of the products are generic.

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Abhijit R. Akella, IIFL Research - VP [68]

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Right. And would this have any impact on the long-term contract at Dahej, which is for the away side? Would there be any impact on that at all or...

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

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No, this year, the impact is mainly because of this weather of the current year. So I don't think there will be any carryover impact for the next year.

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Abhijit R. Akella, IIFL Research - VP [70]

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Fine. One last quick thing, Ind AS 116, if Chetan-bhai could just elaborate on the EBITDA benefit and the impact on depreciation and finance cost?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [71]

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Sir, it won't be significant because we don't have such assets, which is majorly off balance sheet. So Ind AS 116 impact was, I guess INR 2 lakh, INR 3 lakh only.

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Operator [72]

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(Operator Instructions)

The next question is from the line of Sagar Jethwani from Karvy Capital.

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Sagar Jethwani, Karvy Capital Limited - Equity Research Associate [73]

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My question was pertaining to our exposure with regards to the agrochemicals and automobile. Do you have any number what revenue is dependent on those 2 sectors?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [74]

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No, actually, lot of our products have multi-uses and some of that are used maybe in agrochemical and simultaneously it will used in other products also and auto. So same product goes into variety of sectors. But overall agrochemical is around, as a segment, around 25% to 30%.

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Sagar Jethwani, Karvy Capital Limited - Equity Research Associate [75]

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Okay. And in terms -- and for auto?

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

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Automobiles and aerospace and electronics and all these generally will be combined. There will be what we call engineering polymers and all. It is not purely in auto, because it goes in electrical, electronics, aerospace and also. That is around 20%.

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Sagar Jethwani, Karvy Capital Limited - Equity Research Associate [77]

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Okay. So this is overall revenue pie?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [78]

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Yes.

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Operator [79]

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(Operator Instructions)

Next we have a follow-up question from the line of Ritesh Gupta from AMBIT Capital.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [80]

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So just wanted to check another clarification on this other expense thing also, I mean you say that -- in the notes, you go on to say that it is expensed on the P&L. So I'm not sure if, like, it's expensed, how can it be expensed from the sales directly? I mean it has to be through one of the cost accounts, right? So it has to be either through other expenses or...

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Chetan B. Gandhi, Aarti Industries Limited - CFO [81]

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No, sir, so the point is because it is related to an export contract, which are linked to the revenue stuff, so the accounting standard requires it to be adjusted against the same stuff. Now that's how it is.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [82]

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Okay. So sales has to be -- if I have to do it a like-for-like, then I have to adjust it in the sales rather than in other expenses? Is that what you are saying?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [83]

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Yes, sir.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [84]

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Okay. And on the agri bit only, I mean when you -- on the agri end, like, the auto bit, is it the volume growth rate that gets impacted because of this demand slowdown? Or is it that the realizations kind of see an impact of the demand slowdown?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [85]

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So volume gets impacted and somewhere the margin also gets impacted, but volume will be the first thing which will get impacted.

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Operator [86]

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The next question is from the line of BOI AXA Mutual Fund.

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Unidentified Analyst, [87]

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Sir, my question is on the large contracts that are going to be starting from the end of this year. Because of the slowdown that you are seeing in the agrochemical sector, is there a risk to doing that type -- the revenue also from these large contracts?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [88]

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No, we have certain structure in place in that. So we don't expect any big impact of that. And as I mentioned earlier, this year the impact is mainly because of the weather condition in U.S., which has led to the across the board reduction in the usage of agrochemicals.

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Unidentified Analyst, [89]

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And there is no -- I mean and from the Europe geography, are you seeing similar type of slowdown or that is going as per your plan?

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

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No, Europe there is -- we have not seen any impact in the Europe.

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Unidentified Analyst, [91]

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Okay. And the contracts are -- I mean the timeline in terms of execution are on track?

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

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Yes.

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Unidentified Analyst, [93]

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All right. And sir, could you just tell us what the debt number is currently?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [94]

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So the debt number would be close to around INR 2,200 crores.

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Unidentified Analyst, [95]

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Yes, I didn't get that number.

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Chetan B. Gandhi, Aarti Industries Limited - CFO [96]

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INR 2,150 crores.

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Unidentified Analyst, [97]

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And cash is?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [98]

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So we still would have got close to around INR 300-plus crores, which we are yet to deploy in projects.

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Operator [99]

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The next question is from the line of Abhijit Akella from IIFL.

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Abhijit R. Akella, IIFL Research - VP [100]

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The finance cost has come up quite significantly this quarter as well as -- so if you could just share some color on that, whether this is a good run rate going forward?

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

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So if you refer to the Note 7 on the financials, so there is an income of around INR 6 crores, which was there because you've got the QIP proceeds towards the end of the March and we had to deploy it for the projects and other stuff, which will have its own timeline for deployment. So that -- there was certain interest income, which was received, which was netted out.

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Abhijit R. Akella, IIFL Research - VP [102]

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Right. But adjusted for that also, it would have been around INR 36 crores, INR 37 crores.

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Chetan B. Gandhi, Aarti Industries Limited - CFO [103]

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Yes, yes.

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Abhijit R. Akella, IIFL Research - VP [104]

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So is that the right number to work with now?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [105]

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So it should be -- yes, it should be around INR 36 crores, INR 40 crores kind of number.

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Abhijit R. Akella, IIFL Research - VP [106]

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Right. And obviously, the QIP proceeds were planned to be deployed in growth projects. Now with this environment of slowdown in certain sectors, how do you see prospects of winning more multiyear orders? Do you think that, that sort of -- those plans get delayed by a few quarters? Or how do you see that?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [107]

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So there was a -- the objects for the QIP were very clear in terms of the projects where we need to deploy the money. Those projects are continuing. There's no delay or challenge in terms of implementation of those projects. And as Mr. Gogri said in the [earning] opening statement that we are committed to keep on engaging on the project activity and continuing the investment further. So the macro outlook on a long-term basis still prevails and is still stronger from an Ind AS position.

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Abhijit R. Akella, IIFL Research - VP [108]

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Right. So I guess, from a 3, 5-year perspective, the targets that we've talked about in the past of maybe 15% plus kind of growth, that still is in place?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [109]

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Yes. Because overall India is emerging as a low-cost definition. So we are seeing a huge appetite for sourcing from India, and I think that will continue. Whatever the slowdown in auto and all, that is a separate matter, but the chemical -- manufacturing and chemical requirements from India, because Chinese labor cost is now double than India. And environmental costs are similar because now everybody has to be compliant whether they are in China or in India. So inherently, there is a cost advantage in India, and also because of the risk-sharing customers want a supply chain which is totally independent of China and that is where the company like us have a big advantage because we don't import any raw material from China for our chemical business. We are totally backward integrated. So lot of places now we are asked for a product, which value may be starting from (inaudible) which is less than $1 to $30, $40, $60, $70 also. And that's where our additional investment in R&D activity is going to help us down on the road for capitalizing those, but appetite is substantial appetite for backward-integrated chemical from India.

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Abhijit R. Akella, IIFL Research - VP [110]

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Sir, just last thing on that point itself, just to check. Given the substantial appetite and India's strength, I mean do you still see a possibility that new orders could still come to the company, even in this environment of a slowdown this year itself? Or do you think that customers have become more reluctant to engage on signing long-term contracts for now and they will wait for signs of resolution and clarity in the global environment before they sit down at the table and sign these contracts?

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

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No, the entire process will always continue. The actual signing of the projects sometime will depend on the exact timing of when they will require and all. But this is an ongoing process. Just because of this slowdown, we are not seeing that, customers still continue to because something which they may require after 12 month might get delayed to 15 or 18 months. But still basically their requirement, their preference towards India is remaining and those inquiries are continuing.

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Operator [112]

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The next question is from the line of Chirag Dagli from HDFC Mutual Fund.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [113]

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Have you seen this slowdown impact in the first quarter?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [114]

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Not significantly, no.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [115]

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So second quarter onwards, you will see full impact?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [116]

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Yes, second. Maybe third and fourth might be more impacted.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [117]

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Okay, okay. And sir, what will be the CapEx for FY '20/'21?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [118]

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FY '20 is around INR 1,000 crores to INR 1,200 crores this year and next year will be within INR 500 crores to INR 700 crores, but ultimately depending on how we finalize projects, but that range will be definitely there.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [119]

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Okay, sir. And sir, if you can talk a little bit about the import substitution opportunity in intermediates. We were looking at this seriously. What has happened over there? If you can share some update there?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [120]

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There are huge opportunities. We have already -- have taken up lot of projects in R&D on that front also. As you know, chemical basically all this -- this entire cycle is quite long. That you have to do the R&D and then put up the project and all that. But we have identified product which can be considered for putting up manufacturing and import substitute space also.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [121]

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How many products have you identified?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [122]

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Absolute number wise, [entire] 15, 20 products kind of number you can put.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [123]

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And this is across the chain of pharma, ag chem, others as well? This is intermediates essentially?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [124]

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This is on the chemical side.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [125]

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Okay. And would you -- if you were to think about this piece, say 3, 4 years out, do you think this can be a materially large business in the context of where we are or where we will be at that point in time?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [126]

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Yes. Actually what is going to happen, once you have those intermediates available in India, import substitute, you will see their consumption also will increase. It kind of becomes a catalyst whether a product starts becoming available in India. So in general, the entire supply chain is the more (inaudible) comes, then entire supply chain will further grow. So that is what has happened now. Our domestic consumption market increased than earlier expectation.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [127]

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Sir, when do we see the light of revenues here, first signs of revenue here?

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

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For?

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [129]

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For these intermediates, import substitution intermediates?

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

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It's about at least 2 to 3 years.

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Operator [131]

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The next question is from the line of Archit Joshi from Dolat Capital.

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Archit Joshi, Dolat Capital Market Pvt. Ltd., Research Division - Analyst [132]

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I missed out on the NCB volume numbers that you gave earlier. And also if you can share PDA and hydrogenation volumes this quarter?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [133]

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So NCB volume for the quarter was 16,100, which in Q4 was 15,800.

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Archit Joshi, Dolat Capital Market Pvt. Ltd., Research Division - Analyst [134]

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All right. And sir, PDA and hydrogenation also?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [135]

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PD for Q1 was 446 tonnes per month and for Q4, it was 318 tonnes per month. And hydrogenation was close to 1,880 tonnes per month, which earlier quarter was 1,990.

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Operator [136]

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The next question is from the line of Suryakanth Patra (sic) [Surya Patra] from PhillipCapital.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [137]

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Sorry, I missed the initial portions since I joined late. So could be repeating the question. So just wanted to know as you're mentioning that there is a likely slowdown, so are you cutting our -- the current year's growth guidance, sir?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [138]

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Yes, that's what we have said in our opening remarks, where earlier our guidance was 12% to 20%. We don't see going towards 20%. And this lower guidance, 12% also may go down. So the range is, basically we see that the range will shift downwards. The band is here 12% to 20% and the band will shift downward.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [139]

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Okay. Are you revising the -- to what extent it will come down? Is it telling anything? Or it is just...

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [140]

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Overall, we see that it will be downward. No specific number. I think it's too early. So maybe after Q2, we might be able to give more specific range.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [141]

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Okay. And on the Specialty Chemical side, strong set of numbers, particularly the EBIT margin also, possibly highest in last 3, 4 years. So how is that -- where from that you're getting this? Why because since last 2 quarters, we have been seeing a kind of softening in the pricing trends for most of the key products. And despite that we have seen sequential improvement over last 3, 4 quarters in the EBIT margins. So whether it is entirely flowing from the improving product mix? If yes, then can you just share couple of high-value products what you're talking about where you should be seeing improved margin scenario?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [142]

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Yes, what first initially we had thought, the constant raw material -- Specialty Chemicals revenue had grown by about 9.4% and the high-margin, which was witnessed in FY '19 for a variety of products that has come down, but some of the product there still remains. So as we had said in the beginning, even the year-end con call, so that extra margin products are kind of changing depending on the situation.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [143]

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Great. Okay. Any benefit that you have witnessed from the PDA side because of the kind of blast what we have witnessed in China recently?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [144]

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Yes, yes, we have seen about INR 10 crores more than anticipated.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [145]

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Okay. And sir, whether particularly in the press release also what you have mentioned in your presentation, rather, that there is a kind of meaningful demand visibility from marquee clients. So if you can share what is the kind of trend that you are witnessing with your existing clients and with the new potential clients?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [146]

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In general, basically, as I said earlier also that they want to derisk from China. So where the China source is now -- only China source is there, they want to add India as a source. And also, whatever may be the growth requirement, they want to increase more and more sourcing from India. Accordingly, we are getting lot of inquiries. And on that basis, we are carrying on further development work.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [147]

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Is it more about growth, better growth in the existing customers' supply and -- or it is from the new customers that you're talking about?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [148]

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Mainly existing, but now even the innovative pharmaceutical companies are also looking to diversify the supply chain, which is, those are generally not worried about the pricing. But now they are worried about the supply chain, and they are also looking at -- to have a supply chain which is totally independent of China.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [149]

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Okay. About the pricing trends, sir, whether -- how different that would be for domestic versus export pricing, product pricing? So whether it is significantly different, it is similar or some sense on that? Or which is better, which is relatively lower?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [150]

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It will be always product-to-product. Generally, when you are comforting on import parity then obviously in India the import duty benefit will come in. But now the demand in India itself may be small and the capacity for the downstream product to absorb the pricing may be lower. So sometime pricing in India can be lower. In general, the Indian prices has to be higher.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [151]

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Okay. Just last one question, sir. On the pharma side, after delivering robust growth here this quarter and you are anyway guiding around 20% kind of growth for the full year, so whether any capacity constraints or anything that in -- that showed that you are having currently? And if you can revise your growth outlook there, at least for the pharma for the full year?

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Chetan B. Gandhi, Aarti Industries Limited - CFO [152]

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Yes, yes, basically, last time also we have guided that the pharma will grow 20% to 30% top line. And we have existing capacities, which is available to grow in current, and we are expanding both our API as well as intermediate manufacturing sites, their expansion and this expansion will get over in a year's time from now in different phases. So we will have some plants which will come for use in last quarter and some will come in next year second quarter. So we have the new plants that are lined up for intermediates as well as API, which will bring additional capacity so that we can grow in next year as well.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [153]

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Okay. So then for your API business, how -- what percentage is backward-integrated? And to what extent it is integrated? If you we can say that would be useful.

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Chetan B. Gandhi, Aarti Industries Limited - CFO [154]

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In our API, there are 2 segments that we produce: one is Xanthene and one is regulated APIs for U.S. and European market. These are completely backward integrated. We have our own intermediates that we produce in-house, and it is a 4 to 5-stage process that we do in-house. Whereas in the regulated APIs that we manufacture, we have other than steroid, all other intermediates are largely multi-stages being done in our in-house, intermediate plant. And we also sell this intermediate for outside other manufacturers which are big generic companies. The steroids are the one which we don't do because it involves fermentation that we are not doing currently.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [155]

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Okay. So if it is that integrated, our EBIT margin in the pharma is meaningfully lower compared to specialty chemicals. Should we see comparatively here or something else is there?

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

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Yes, yes. So basically we are trying to grow the [specialty] EBIT margins, and eventually, we have reach to a high of 17.7% in one of the quarters last year. And long term, we have escalation to reach near 20%. Let us see when we can reach. I hope, next year, we will reach there.

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Operator [157]

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The next question is from the line of Dipesh Mehta from SBICAP Securities.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [158]

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I missed some of your comments in the earlier part of the call. So 2 things about -- first about the slowdown which you are referring. It is largely restricted to domestic market? Or you're saying even in export market some kind of slowdown for products? And in that, what kind of end-user industries where we are seeing more pronounced slowdown? If you can help us understand that. Second question is about, last year, because of China disruption, we have some benefit in our operating profit side. Is it continuing even in Q1 or now things are normalizing? If you can help us understand.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [159]

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Yes, the major impact is more on the export side as far as the slowdown is concerned. Basically, agrochemical intermediate for -- actually, it will be both. The end-use market is export, but our sales-wise the impact is both, on domestic as well as exports. The finished molecules are more going towards the U.S. as far as agrochemicals are concerned.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [160]

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Okay. And it is restricted to agro only? Out of, let's say, 5 segments generally which we refer to?

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

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And automobile segment also. So automobile segment, there is more impact is on export. There are 2 segments, which are impacted, one is automobile and second is agrochemical towards U.S. So agrochemicals, the impact for us will be both for domestic customer, who will be ultimately selling to U.S. their finished products and some of the export customers who will be selling to U.S. And for automobile sector, it will be major for exports, where the customers are making end products, which are used in automobiles.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [162]

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And sir, these slowdowns which we are referring to is something which, let's say, suddenly any kind of sudden major kind of reaction you have seen from clients? Or it is gradual and which we are witnessing even before Q1?

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

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No, this is -- basically, the event has happened in Q1 only. You see the overall automobile slowdown is continuing in China, and in general overall. And agrochemical impact, basically visibility, everything has come in Q1 only.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [164]

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Typically when, let's say, right now, we are seeing some slowdown. When it would be reflected in our number? Because Q1 number even at least from margin perspective, it is still showing some reasonably decent number. Do you expect it to have more revenue impact? Or could we have more even margins side impact for us?

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

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Sir, basically, the volumes will be impacted. That impact will be coming more towards end of second quarter and third and fourth quarter because the existing orders which were there, that get executed. The impact will be more on volume, and then some cases, the margins also might get impacted.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [166]

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Okay, okay. And so you are broadly indicating it's as of now, H2 seems to be relatively weaker than even Q1 kind of number?

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

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Yes, it's a very evolving situation. That's why we are not giving any specific numbers, but overall, the range what we had given 12% to 20%, will be a lower band than that. That's where we are right now.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [168]

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Understood. And sir, second question was about China. Last year, we had some benefits. Now Q1 number include any kind of benefit continuing? Or now it is normalized kind of number?

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

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Yes, about INR 10 cores in our PDA business, I think, is little bit more abnormal than what we would have anticipated. But for most of the other products, I think things have quite a bit normalized.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [170]

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And this PDA disruption, which -- because of event happened in China, now going forward or even today now seeing some normalization or it is still continuing?

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

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No, that benefit we'll get in Q2 also. Q3, we don't have any visibility. But Q2, definitely, the benefit will come because that orders are passed. Going forward, how long it will continue in Q3 or Q4, that clarity is still not there.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [172]

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Sure. And sir, last question is about the CapEx plan, which we have announced. If you can help us give some status on it, where we are in terms of that execution?

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

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Yes, CapEx, first quarter was about INR 240 crores, which was spent. And this year, overall, INR 1,000 crores to INR 1,200 crores is something which we feel will be the CapEx.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [174]

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There we are not seeing any kind of slowdown kind of thing in terms of -- because of market, we are slowing down in spending and other?

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

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No, no, these are all ongoing projects, which are mainly based on our long-term contracts. There is absolutely no -- nothing -- no change in that respect.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [176]

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And slowdown, would there not any implication on our long-term take kind of implications?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [177]

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No.

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Operator [178]

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The next question is from the line of Vishnu Kumar from Spark Capital.

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Vishnu Kumar A.S., Spark Capital Advisors (India) Private Limited, Research Division - VP [179]

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If you could just tell us what percentage of your current revenue across key segments would be from spot and medium- to long-term contracts?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [180]

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Generally more than 50%, I would say, which is either a formal contract or a long-term structured business. It'll be more than 50%. Maybe 60% to 70%, but that business is much more visible and structured, only 25% to 30% where the -- there can be some variation in the volumes.

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Vishnu Kumar A.S., Spark Capital Advisors (India) Private Limited, Research Division - VP [181]

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Okay, 60%, 70% would be some kind of a formal arrangement and 30% would be more of a spot. So is this number same for specialty and pharma? Or would be different?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [182]

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Pharma also, virtually, the customer visibility is there. Within both the cases, I think will be similar as far the volume visibilities and the pricing structure.

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Vishnu Kumar A.S., Spark Capital Advisors (India) Private Limited, Research Division - VP [183]

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Okay. Got it, sir. And in terms of the new longer-term contracts if you could just explain how is the raw material pass-through and FX? Is it a pass-through? Or how do we manage that?

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

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No, the raw material will be all pass-through. That is -- and FX, so basically that we'll have to do the proper hedging for FX.

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Vishnu Kumar A.S., Spark Capital Advisors (India) Private Limited, Research Division - VP [185]

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So we will have to do the hedging for the FX. So generally, is it like more like per kilo, per tonne profitability or is it a percentage margin?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [186]

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It will be always on volume basis.

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Vishnu Kumar A.S., Spark Capital Advisors (India) Private Limited, Research Division - VP [187]

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Okay, volume basis, right. Got it, sir. And just going back in history, there was agro slowdown back a couple of years ago. If there is an inventory buildup kind of situation, like how long have you seen the customer coming back? Like is it like 2, 3 quarters? Or it is almost like year, 1.5 year away they come back and take their offtake volumes? Like if you were to go back and connect to those similar, let's say what happened 2 years ago and what is happening now, do you see there could be a prolonged delay for the markets to revive or...

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [188]

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No, it will be 2, 3 quarters, I think. And that also -- it's not in all the geographies, actually. Few years back, it was across the board. I think there was a slowdown. Basically, our 2 major markets, North America and Latin America, 2 major markets. Few years back, there was a slowdown over much -- spread over more geography.

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Operator [189]

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The next question is from the line of Rishab Bothra from Sharekhan.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [190]

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Sir, on the long-term contracts when will revenue start coming in? I missed out on that part. I think the first contract was on agro side about INR 4,000 crores and second one was for specialty, INR 10,000 crores. So will they accrue in FY '20 or both of them will accrue in FY '21?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [191]

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It will be -- FY '20 we'll be just commissioning the plants. All the major revenue will come in FY '21.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [192]

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Sir, both the plants will get commissioned in FY '20 or the second one will get...

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [193]

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Yes.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [194]

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Okay. And what will the debt scenario in terms of the CapEx? Is it sufficient or there will be debt borrowing as well for the CapEx?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [195]

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For this project proceeds -- QIP proceeds are going to go in project, but other part of that will be going to our internal accruals.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [196]

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Yes, okay, okay. So there is no additional borrowing for the CapEx?

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

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Not for the contracts.

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Chetan B. Gandhi, Aarti Industries Limited - CFO [198]

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Not for this year.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [199]

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Okay, fine. And what would be the tax rate for both the years?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [200]

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That will be on a 5-year tax holiday, 100% tax holiday. And after that 5-year, 50% tax.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [201]

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Okay. So we can assume that we will be under MAT for next 2, 3 years?

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Unidentified Company Representative, [202]

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Yes, we should be in MAT.

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Chetan B. Gandhi, Aarti Industries Limited - CFO [203]

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Yes, we should be in the MAT for next couple of years.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [204]

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And lastly, sir, how has been the realization moving legs? As you mentioned, there is slowdown. So has it cooled off for different products? Or how is it?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [205]

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Yes, it will always be product-specific because we are making so many different products going into different end-use. So it will be always product-specific.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [206]

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Okay. But for key products, which gives maximum revenue? Have we seen a dip in realization?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [207]

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No, basically, the -- few of the top 20 products, there is impact.

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Operator [208]

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The next question is from the line of Kishan Gupta from CD Equisearch.

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Kishan Gupta, CD Equisearch Private Limited, Research Division - Senior Analyst [209]

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Sir, how much is the volume growth in Specialty Chemicals last quarter?

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

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So the last time, we have discussed that considering the kind of business profile what we have and the product mix and value addition, which is happening, volume growth is not a right parameter for us to look at the performances because it's a combination of product mix as well as the volume growth, which is going to drive the overall EBITDA growth. So at constant raw material prices in this quarter and last quarter, we had a revenue growth of 9.4%. So that essentially means that this 9.4% is resultant of the product mix and margin profile change.

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Kishan Gupta, CD Equisearch Private Limited, Research Division - Senior Analyst [211]

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So essentially, you are saying that you'll not be able to say anything about the volumes as such.

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Chetan B. Gandhi, Aarti Industries Limited - CFO [212]

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No, it will not be possible to look at the volume growth because we would have product at a higher value-added chain coming in. They will not significantly add up to the volume growth but they add up significantly to the overall EBITDA. So volume growth may not be a right way to look at it.

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Kishan Gupta, CD Equisearch Private Limited, Research Division - Senior Analyst [213]

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And what's the impact of domestic -- slowdown in domestic consumption of late? So what would be the effect on the Specialty Chemical business?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [214]

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Domestic consumption, the impact right now is not any significant impact we are seeing.

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Kishan Gupta, CD Equisearch Private Limited, Research Division - Senior Analyst [215]

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And you talked about the margins, EBIT margins for specialty last quarter was 22.5%. And how much of that would be because of lower crude oil prices?

The gains in margins from 17.5% to 22.5% year-on-year, so how much would be because of fall in crude oil places?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [216]

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Generally, we look at the absolute -- overall, the impact of this price reduction was about INR 34 crores. So corresponding, as a percentage, I think, maybe 1% or -- we'll have to check the actual number, but maybe about a percentage or so will be coming from reduction in the prices.

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Kishan Gupta, CD Equisearch Private Limited, Research Division - Senior Analyst [217]

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Because of reduction in prices, you are saying 1% gain would be because of that in margins?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [218]

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Yes.

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Kishan Gupta, CD Equisearch Private Limited, Research Division - Senior Analyst [219]

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And basically, you talked about changes in the product mix. Could you elaborate a bit on what you are doing now and you were not doing a year back?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [220]

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So we have certain capacities which are fungible capacities. So depending on the demand and the margin scenario, we move the product mix.

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Chetan B. Gandhi, Aarti Industries Limited - CFO [221]

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So for instance, if you look at the earlier presentations, we used to have that chlorination and nitration process products, which is the category A and category B products, which are contributing more than 30%. In this quarter, the contribution for those products was close to 28%. So it's more revenue coming in from a high value-added range of products.

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Operator [222]

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The next question is from the line of Rohit Nagraj from Sunidhi Securities.

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Rohit R. Nagraj, Sunidhi Securities & Finance Ltd., Research Division - Senior Research Analyst [223]

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Sir, you mentioned agrochemical formed about 25%, 30% and engineering polymers including auto, aerospace about 20%. Which are the other major segments for our products?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [224]

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Then there's dyes and pigment that is the third sector. And fourth will be more of within specialty, pharmaceutical, then rubber chemical, oil additives and all.

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Rohit R. Nagraj, Sunidhi Securities & Finance Ltd., Research Division - Senior Research Analyst [225]

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Okay. And dyes, pigments, how much would be the contribution for this?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [226]

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That will be around 25% to 30%. And 20% will be rest, pharmaceutical and others.

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Operator [227]

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The next question is from the line of Dhruv Bhatia from BOI AXA Mutual Fund.

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Dhruv Bhatia;BOI AXA Mutual Fund;Analyst, [228]

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Sir, just on China, have you seen any facilities being restarted? I mean we hear and we read about it that the plants have restarted. So have you seen that? And has that led to any spreads compressing for you?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [229]

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Actually, in China, there's continuously -- there are new plants, which are getting closed down and new -- some of the older plants who might get -- make the necessary changes, they are starting. So it's a very cyclic situation in China currently.

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Dhruv Bhatia;BOI AXA Mutual Fund;Analyst, [230]

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Okay. But have the spreads reduced? I mean because there is a little slowdown also in demand, so have you seen -- I mean if I categorize maybe in that A and B bucket, which you've talked about 28% of revenue, have you seen the spreads compressing for you?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [231]

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So that will again depend on product-to-product how the situation has changed. For some of the product, guides might have gone, some may have gone up.

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Dhruv Bhatia;BOI AXA Mutual Fund;Analyst, [232]

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Okay, but directionally is it -- I mean, it's a mix of both. It's either some are up, some are down?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [233]

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Yes.

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Chetan B. Gandhi, Aarti Industries Limited - CFO [234]

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Yes.

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Dhruv Bhatia;BOI AXA Mutual Fund;Analyst, [235]

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Okay. And sir, just last thing, last quarter, if I'm not mistaken, you had given a revenue guidance also 15%, 20%, though, and 12% to 20% of PAT guidance. Now you're saying that the PAT guidance is -- you're revising it down, with no number. It could be lower than 12% as well. But on the revenue guidance, I mean is there a number that you can share?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [236]

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That will be also lower, basically, revenue guidance also. There was a constant raw material prices we had given. So that number will also -- that band also will go on a lower side.

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Dhruv Bhatia;BOI AXA Mutual Fund;Analyst, [237]

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I mean will it be a single-digit number?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [238]

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No, I don't think it will be reaching single digit, but I think more clarity maybe after Q2, we'll be able to give.

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Dhruv Bhatia;BOI AXA Mutual Fund;Analyst, [239]

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Sure. And sir, lastly, just to understand when -- you've signed almost, you said 60%, 70% of your contracts are formula long-term contracts? How many quarters of visibility does the customer give you? I mean till last quarter, you had given a guidance of -- I mean a much better guidance in terms of revenue, but now you've seen some slowdown in auto as well as agri. I mean how much of visibility do you have from the client in terms of demand?

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [240]

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Yes, generally 2, 3 quarters, we'll have going forward.

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Operator [241]

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That was the last question. I would now like to hand the conference back to the management team for closing comments.

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Rajendra Vallabhaji Gogri, Aarti Industries Limited - Chairman & MD [242]

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Yes, 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 Relation desk. Thank you.

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Operator [243]

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Thank you very much.