Aarti Industries Q1 FY27 Earnings Call Summary

Event Participants

Executives

2 Chetan Gandhi, Suyog Kotecha

Analysts

12 Abhijit Akella, Aditya Khetan, Archit Joshi, Arun Prasad, Gagan Dixit, Ojas Sawant, Prateek Dugar, Rohit Nagraj, Sanjesh Jain, Surya Narayan Patra, Tushar Raghatate, Viraj Vajratkar

Financials & KPIs

Geographic & Segment Commentary

• Energy / Fuel Additives: Demand visibility remains robust with healthy gasoline/naphtha cracks of $15-18/bbl. West Asia exports were temporarily halted by the conflict (revenue share fell from ~15% to ~2%), but volumes were redirected to US, Europe, Africa, and India. Capacity expanded to 360 KTPA with high utilization targeted within Q2. Product portfolio is being broadened beyond MMA with 3-5 products in the pipeline, though management declined to name them. Winter seasonality (Oct-Dec) is expected to impact cracks and demand.

• Non-Energy – Polymers: Demand was soft in Q1 due to weak downstream demand in US and China, with Q4 FY26 bulk shipments to US customers pulling forward volumes. Recovery is expected in Q2, with growth anticipated on a full-year basis.

• Non-Energy – Dyes & Pigments: Demand headwinds persisted from subdued end-demand amid high raw material pricing and seasonal factors. The suspension of export tax rebates in China has created favorable pricing opportunities for the NCB value chain.

• Non-Energy – Pharma & Agrochemicals: Pharma demand remained stable; agrochemical volumes were marginally lower due to customer resistance to sourcing at elevated RM prices. Volume recovery is expected in Q2, supported by stable underlying demand.

• Zone IV / Specialty Projects: Five chemistry blocks with 97% equipment erected and 85% piping complete; commissioning delayed 3-6 months due to labour constraints and war-related issues. Phased commissioning is expected during FY27 with ramp-up across FY28-29; 5-10 products targeted in FY27 and 25-30 products by FY28.

Company-Specific & Strategic Commentary

• Zone IV Expansion: Project delayed 3-6 months due to labour shortages (March-May: LPG issues, elections, monsoon) and war-related issues; multipurpose plant (MPP) product-out expected in August with the calcium chloride unit also commissioning. The five chemistry blocks retain capability to produce the original chlorotoluene chain plus multiple other chemistries; full manpower restored.

• Augene Chemical JV (with Superform): 50:50 JV commissioning in Q2 FY27; first raw material sale to the JV already completed and order book traction visible. Steady-state revenue guided at ₹300-400 crore; targets coatings and agro end-markets with a higher margin profile than the existing portfolio; meaningful PAT contribution expected in 2-4 quarters.

• Aarti Circularity (with Re Sustainability): Plastic recycling initiative slated for commissioning in H2 FY27, utilizing advanced recycling technologies for hard-to-recycle waste streams, anchoring the ESG-led growth agenda.

• Global Footprint Expansion: Subsidiaries in UAE, UK, and USA progressing well; a new China subsidiary is planned to access the >45% global chemical market share and strengthen raw material sourcing and supply chain efficiency.

• Long-term Contract Backward Integration: Project linked to previously announced long-term contract is in execution phase with civil/building work ongoing; commissioning expected around September-October 2027, underpinning contract-driven growth visibility.

• CapEx Strategy Pivot: With major expansion programs nearing completion, capital deployment will pivot toward high-growth, high-return niche projects starting FY28.

• DCB Debottleneck & PDA Commercialization: DCB capacity debottlenecking to 140 KTPA planned, backed by PDCB and downstream demand; PDA project progressing through market-seeding activities with commercialization expected very soon.

• Sustainability Recognition: Achieved EcoVadis Platinum 2026 rating with a score of 87/100, placing Aarti Industries among the top 1% of companies globally for sustainability performance.

Guidance & Outlook

Risks & Constraints

Q&A Highlights

Zone IV Delay & FY28 Guidance

• Question: Given the 6-month delay in Zone IV, how confident are we on reaching the lower end of FY28 guidance? (Rohit Nagraj, 360 ONE)
• Answer: JVs (Augene, ReAarti), MPP, and calcium chloride units remain on track; the five Zone IV chemistry blocks are where the delay is, leading to slower ramp-up versus original aspirations. Management will clarify once commissioning and ramp-up speed of these blocks is better understood. (Suyog Kotecha)

Earnings Quality: Inventory & FX Gains

• Question: What was the inventory gain this quarter, given the press release specified forex gain? (Rohit Nagraj, 360 ONE)
• Answer: Combined FX and inventory gains are difficult to quantify precisely, estimated in the range of ₹50-60 crore. April-May saw elevated RM prices, late-May/June saw sharp corrections, then renewed West Asia conflict pushed prices back up — extreme intra-quarter volatility made exact quantification unfair. (Chetan Gandhi)

Energy Business: Volume Diversion & Competition

• Question: How sustainable is the diversion from Middle East, and can utilization return to 90-100%? Are you worried about competition replicating your success? (Arun Prasad, Avendus Spark)
• Answer: Business remains in market development phase; portfolio is now well-balanced across US, Africa, Europe, Middle East, and India, with Southeast Asia yet to be cracked. Strong cracks support Q2 ramp-up. On competition: 2-3 Indian and 2-3 Chinese players already exist; strategy includes newer products, differentiated offerings for specific customers, global supply chain planning, and top-decile cost positioning. (Suyog Kotecha)

Augene JV: Commissioning & Steady-State Revenue

• Question: Can you quantify steady-state expectations for the JV and timeline for reflection in quarterly numbers? (Arun Prasad, Avendus Spark)
• Answer: Steady-state revenue guidance of ₹300-400 crore maintained; commissioning this or next month with first raw material sale already done. Operations and ramp-up visible within the current quarter; decent utilization in 1-2 years; meaningful PAT-level contribution in 2-4 quarters. (Suyog Kotecha)

Volume Decline & Export Dynamics

• Question: What were the volume numbers for the quarter, and how do exports recover given the sharp dip? (Aditya Khetan, SMIFS Institutional Equities)
• Answer: Energy volumes down 17% QoQ, non-energy down 7% QoQ, overall down 12% QoQ. Exports were actually robust at 59% of revenue; revenue recognition is impacted by DAP Incoterms for US-bound shipments (2-3 month voyage times), creating quarter-on-quarter volatility that should smoothen. Absolute sales volumes were removed from slides as they were "getting utilized in a situation which was not favorable for the company." (Suyog Kotecha)

EBITDA Trajectory to ₹1,800 crore

• Question: Stripping out ₹47 crore forex and inventory gains, the run rate is ~₹300-310 crore — how do we reach ₹1,800 crore EBITDA by FY28? (Aditya Khetan, SMIFS)
• Answer: FX gains are part of routine business. As volume recovery happens and pricing stabilizes, the underlying true potential of existing assets will show through. Management remained cautious, noting inventory/margin outcomes depend on the West Asia situation and the pace of price movements; volume growth is the confident component. (Suyog Kotecha)

Value Chain Margin Dynamics & Price Sustainability

• Question: Are margins improving across the benzene isomers, and will price hikes sustain if commodities reverse? (Sanjesh Jain, ICICI Securities; Aditya Khetan, SMIFS)
• Answer: MCB chain margins have recovered after being suppressed for a long time; DCB chain remains decent; NT chain is still suppressed due to isomer imbalance with innovative rebalancing strategies in place; PDA chain is structurally weak from technological disadvantage with cost-efficiency work ongoing. Price hikes in pharma and dyes reflect both RM inflation and the NCB chain pricing regime change from China's VAT removal — the latter element may sustain. (Suyog Kotecha)

Risk Management: Inventory Loss & Forex in Volatile Markets

• Question: With crude reversing, could we face inventory losses, and why was the forex gain higher this quarter? (Sanjesh Jain, ICICI Securities; Ojas Sawant, Haitong Securities)
• Answer: Inventory loss risk always remains in a crude-linked environment. Domestic RM inventory is typically 7-15 days with quick pass-through; imported RM carries 1-1.5 months exposure, mitigated by forward booking of customer orders and hedging strategies. Forex gain resulted from rupee volatility (92-97 range), squaring import positions at favorable rates, and mark-to-market; should be treated as part of operating profit. (Suyog Kotecha; Chetan Gandhi)

Strategic Projects: Backward Integration & Zone IV Product Pipeline

• Question: Where are we on the backward integration linked to the long-term contract, and what is the Zone IV product approval status? (Archit Joshi, Nuvama Asset Management; Sanjesh Jain, ICICI Securities)
• Answer: Management does not name specific customers; the project is in execution phase with civil and building work ongoing, commissioning expected September-October 2027. For Zone IV: target customers are identified and pilot-facility qualification is largely done; commercial batch re-qualification will occur post-commissioning. Products targeted: 5-10 in FY27 and 25-30 by FY28, diversified across agro, pharma, coatings, and polymers with no single end-market concentration. (Suyog Kotecha)

Key Takeaway

Aarti Industries reported a strong Q1 FY27 despite significant macro headwinds, with revenue of ₹2,627 crore (+41% YoY), EBITDA of ₹385 crore (+79% YoY), and PAT of ₹155 crore (+66% YoY), though approximately ₹50-60 crore of EBITDA came from combined FX and inventory gains. The West Asia conflict cut the region's revenue share from ~15% to ~2%, but successful redirection of energy volumes to US, Europe, and Africa, along with healthy $15-18/bbl gasoline/naphtha cracks, supported performance. Total volumes fell 12% QoQ (energy -17%, non-energy -7%) with recovery expected in Q2. Strategic execution continues: fuel additives capacity expanded to 360 KTPA, Augene JV (₹300-400 crore steady-state revenue) commissions in Q2 FY27, and Zone IV faces a 3-6 month delay with phased commissioning through FY27 and 25-30 products targeted by FY28. FY27 CapEx guidance of ₹700-800 crore is maintained; the ₹1,800 crore FY28 EBITDA guidance, which includes Augene, remains under watch given the slower Zone IV ramp-up, while management stays cautious on near-term margin sustainability amid volatile crude-linked pricing.