2QFY19  

Specialty
chemicals
segment Volumes in Specialty Chemical segment grew by 10% in Q2 FY19
  Seeing operating leverage from higher capacity utilization across the various units
Seeing increased demand from domestic market thereby creating a large opportunity in import
  substitution products for domestic end users.
 
Capex Invested Rs3.32bn during 1HFY19
  50% capacity utilisation achieved for ethylation unit
SEZ Nitrotoluene unit at Jhagadia at the end of Q2 FY19 reached 50% capacity. Expect to reach 80% to
  90% utilization by end of FY20.
Future expansions to be in existing product lines such as NCBs, CB derivatives, NTL derivatives and
  ethylated compounds, fuel additives and pharma
  Looking to expand NCB capacity by ~40% in next 2-3 years
  Originally guided Rs7bn/year for FY19/20.
Using the additional fund raising announced can move it to Rs10bn/year which should drive growth for
  FY22-23
  Off this, ~Rs2bn would be for the pharma business over 3 years
Could look at Chlorotoulene as well - which is not made in India as of now. There are chemistry of
Photochlorination and then oxidation etc. There are different chemistries in this value chain and have
  started doing R&D on that too.
  Expect commercial manufacturing for some of the new chemistries to start in next 3 years
 
Pharma
segment See expanding volume growth across articles
Since major fixed costs are already built-in, incremental volume results in significant increase in
  segmental profits
  Continue focus on off-patented generics to be supplied in regulated markets
See good growth in xanthine-based derivatives as well as intermediates. Both these segments are doing
  well and will be adding some capacities in intermediates as well as APIs in next 1-1.5 years
  INR depreciation has also helped
  45% of revenues are exports
  Out of domestic also 50% is import parity pricing
Which implies that ~75% pharma revenue are dollar linked while 30% of the RM is imported/dollar
  denominated.
  The balance is the benefit from currency which ARTO can retain
 
Pharma
opportunity Import substitution provides a large opportunity in pharma intermediates
  Will introduce 2 new products with a large potential
2 intermediates which were recently started are now stabilizing and hopeful of signing long tern contract
  with an innovator in this space
  The new molecules would be margin accretive for pharma segment
 
Guidance 12-15% volume growth in FY19
  Expect 15% overall volume growth over FY19-21
  30% PAT growth
 
Working
Capital Usually flustuates with currency and crude
  Did not happen in 2Q because pending GST collections have come in
  Increase was managed through internal accruals
Recd US$3m from the 20 year contract at the end of Sep. Will be accounted as of now as lower working
  capital (advance from customer)
  Need to check under which head GST refund is accounted
 
General Compete in China against Chinese players the margin definitely is about 10% to 15% lower than as the
Margins same products are being sold in Indian market
  Other than that not a big difference (+/- 5%)
In China, the freight, the Chinese import duty, Indian import duty and Chinese additional tax makes
  sizeable difference
 
Geographical
derisking Done by customers
  To reduce dependence their dependence on producing in China
  This has led to customers taking supplies in India / non China geogprahies
  Foreign customers also want to source more from India
  If they set up Indian capacity there can be more of a long-term shift of demand taking place into India
 
Products in
GSP list None of ARTO's products in the list
  It covers NCB, ONCB, PNCB
  None of these are consumed in the US
 
Pharma
margins Lag in pass through which is higher this time diue to currency also
  3 month lag in Pharma
  Margins should improve on this account in coming quarters
  Switch of fuel to biofuel and gas fuel impacted fuel cost
  Maintenance activities
  Would like segment margins to increase by 1-2% to 17-18%
  Product mix, CRAMs and CMO in intermediate as well as API should help
 
RM
passthrough Quarterly basis in contractual business
  In non contractual business primarily in the domestic market - on a month to month basis
 
Near term
margin Can be maintained at 2Q levels
  Due to currency passthrough which didn’t happen in 2Q
  RM recovery may stay similar because crude has corrected post quarter
 
Long term
margin 2Q margins are much higher than normal
  If they remain at similar levels, guidance of 30% will be beaten
  Margin clarity is not there in some products
 
EBITDA/ton Structural increase for some products due to INR and additional utilisation
  For the others, growth is better than normal due to China
  For those will have to see how things stabilize in future
  In general for most products - EBIT/ton should be at FY18/19 levels
 
Capacity
utilisation 80-90% systemic capacity utilisation
  May need to do more capex for some products
  Nitrotoulene at 45%
 
Other
Expenses YoY increase in excess of volume growth is due to crude impacting freight cost etc
  With capacities coming Other expenses could increase further
 
NitroToiulene Capacity is 30000 tonnes per annum
  Expect Nitrotoulene to reach 80% to 90% utilization by end of FY20.
 
Hedges Rs6bn vs Rs10bn hedges o/s at mar 18
  Hedge for 3 years ahead but 2nd and 3rd years are generally lower than first.
  Will maintain hedges at ~US$70-80mn
  Review policy every 6 months
 
Increase in
unallocateds Incremental admin cost
  CSR activities
  Certain R&D expenses not allocated
  Rs280-300m is a good run rate to work with
 
Protection
from China For example in Pharma, doing forward integration if possible and make API as well i.e. vertical integartion
For ex. producing Montelukast intermediate and also producing Montelukast (US$175m overall market) or
Moxifloxacin intermediate as well as Moxifloxacin (US$75m overall market). API opportunity is 20% of
coming back overall market.
  Looking at more generics as well where ARTO competes with China
Instead of having only Chinese manufacturers approved vendor for the filings, Indian companies are more
  open to have one Indian source as well
  Will not have to compete that significantly because they want to have an alternative
 
Margin
expansion in
4Q 4 things
  Spread increase due to shortage in China
  Structural margin expansion (value addition)
  Forex
  Change in geographical mix
 
Dividend 25% payout