Aarti Industries is a leading manufacturer of specialty chemicals and pharmaceuticals in India. The company manufactures chemicals used in the downstream manufacturing of pharmaceuticals, agrochemicals, polymers, additives, surfactants, pigments and dyes. Aarti Industries specializes in benzene-based derivatives. The company’s key value chains include nitro-chloro benzenes, di-chlorobenzenes, phenylenediamines, nitro toluene value chain and sulphuric acid.
Muted June Quarter 2023
Consolidated revenues came in at Rs 1,414 crore, down 28% YoY in Q1FY24 due to lower raw material price and high inventory present in the system.
Operating margin stood at 14.21% in June Quarter 2023 compared to 18.73% in the same period previous year. Lower operating margins were due to lower demand from end user industries such as dyes and pigments, agrochemicals and auto. The management expects gradual demand recovery from the second half of FY24. Operating margins are expected to be moderate in FY24 due to weak industry trends. Net profit fell 63%YoY to Rs 70 crores in Q1FY24 against Rs 189 crore in the same period previous year.
Excessive inventory and high costs of funds impacts demand
According to the management, in a $ 75 billion chemical industry, there is inventory stocking of about $ 65 billion. But how did this happen? With non availability of containers and other uncertainties during Covid-19 period, high stocking was undertaken by end user industries. Another reason was the low carrying cost of inventory which was as low as 1-2%. With the system flush with heavy stocks, chemical manufacturing companies are currently facing low demand. In addition to this, currently due to high interest rates, inventory carrying cost has increased to 7-8%. Thus, end user industries and other clients are maintaining low inventory levels. The management is expecting inventory rationalization by Q3-Q4FY24. While inventory rationalization due to low demand was an issue even during the 2008 financial crisis, interest rates were low. Thus in the present scenario, due to high carrying cost of inventory, a client which normally keeps a three month inventory is resorting to just one month stocking. And even delaying orders to further reduce carrying cost of inventory.
Aarti Industries 70% business is linked to the international market and balance to the domestic market. Slowdown in China’s domestic market has resulted in high volume dumping leading to high imports in India. Further, the depreciation of Chinese currency vis a vis Indian Rupee also impacted the competitiveness of Indian manufacturers leading to margin contraction across few products for Aarti Industries in the domestic market.
Long term demand intact, capex undertaken
Speaking on inventory rationalization, Rajendra Gogri, Chairman and Managing Director, Aarti Industries said, “ It is not that the products or ultimately the consumers are not going to consume, it is in the system that so much inventory was built up over the last couple of years.” Chemicals are required mainly for auto, construction, textile, electronics, or consumer products. And there is no replacement for these chemicals in these end user industries. “We don’t see any structural change in the consumption pattern” said Gogri. And the company is moving ahead with its capital expenditure (CAPEX) plans. In Q1FY24, Aarti Industries undertook capex of about Rs 260 crore. The company has also planned capex of about Rs 2,500-3,000 crore in the next two years to augment its manufacturing capabilities and expansion in value added portfolio. New projects for chloro-toluenes and multi-purpose plants are expected to start gradually and come on stream from FY25 and drive growth beyond FY26.
