Setting up complete value chains in India: Rajendra V. Gogri, CMD, Aarti Industries

Rajendra V. Gogri, Chairman & Managing Director, Aarti Industries Limited shares his views on global trends on Speciality Chemicals and pharma, plans for FY 2021-22. Excerpts of the interview:

What are the global trends in speciality chemicals in 2021 and how will it impact India?

The global trends in speciality chemicals are a well-known combination of global companies diversifying their supply chain with a China+1 strategy, as well as the US-China trade issues and China’s environmental policies driving many opportunities and interest in sourcing from India.

The speciality chemicals story in India is quite attractive with three drivers - growing domestic demand, the substitution of imports and harnessing export opportunities. Within speciality chemicals, there are many segments such as agrochemicals, dyes and pigments, flavours & fragrances, water treatment chemicals, polymer additives, etc. Each segment will have its growth trajectory driven by end-user demand and also differing industry-market dynamics. Some of these segments were negatively impacted by the COVID-19 disruption whereas others were quite resilient or even registered growth in the pandemic year.

In 2020, as the US and Europe were hit by multiple waves of COVID-19 infection, China emerged as a key export destination for Indian chemical players. Going forward, as countries and economies return to the growth path in 2021, this is expected to reverse and some speciality chemical segments may see a strong revival in demand. I think this period may see major disruptions in global supply chains as demand for some products may rise very sharply and may be accompanied by a corresponding rise in prices. As crude prices continue to move upwards, there would be further inflationary pressures on chemical prices across the board.

We believe Indian companies are at a good inflexion point and are well poised for high growth in various end-user applications. On an overall basis, we are entering the golden era for the Indian chemical industry and much more is to be achieved in this decade.

Global trends in the Pharma industry in 2021 and how it will impact India?

According to the IQVIA’s 2019 Global Use of Medicine in 2019 report, the spending will exceed US $1.4 trillion by the end of 2021. The growth is driven primarily by new products and innovative technologies in leading pharmaceutical markets, such as India, China and the United States.

This trend will likely continue through 2023 despite the pandemic. There is an opportunity for the Indian pharmaceutical industry to play a larger role in global drug supply-security. As per a McKinsey survey report, from a market size of US $12.6 billion in 2009, the Indian pharmaceutical market grew to US $ 55 billion by 2020, with the potential to reach US $ 70 billion in an aggressive growth scenario very soon. India’s domestic pharmaceutical market turnover reached US $ 21.5 billion with a growth of 9 per cent y-o-y in 2020. The advantages of Indian pharma companies are cost efficiency, innovation, economic drivers, policy support, and increasing investment.

Key milestones achieved by Aarti Industries in FY 2020-21 and what are your plans for FY 2021-22?

During the year, the company commercialised a few of its critical projects for instance the expansion of Chlorination capacity from 110,000 tpa to 175,000 tpa. There are various other projects such as projects for long term contracts, Expansion of USFDA approved facilities, etc. are lined up for commissioning and commercialisation which will drive the growth of the company for the next 3-5 years.

We have a strong project pipeline and based on the opportunities available, we firmly believe to drive the growth forward while continuing onto the growth momentum. We expect to continue investing over Rs. 1,000 - 1,200 crore annually for various such growth initiatives over the next five to six years and create a stronger presence of the company in the global speciality chemicals space.

Despite the challenges faced during the lockdown, Aarti Industries has honoured every offer that we had made and hired more than 700 people in the last year. In addition to 700 employees coming on-board, we also on-boarded 150 management trainees from various colleges and universities across the country. We also announced brownfield and greenfield expansion, and this will require additional manpower which will be hired.

Company's performance expected in terms of revenue and profit during FY 2020-21 and what is the forecast in FY 2021-22?

Aarti Industries has a high brand position in areas such as reliability, productivity and reduction in the total cost of ownership to customers. Our strategy has expanded PAT from around 7 per cent to 10-11 per cent. The Group has been growing phenomenally at a CAGR of approximately 13 per cent over the last six years.

Our financial performance in Q3 showed continued improvement and we have forecast a stronger turnaround in the second half of the financial year. The sustained strong momentum on both operating and financial parameters during the third quarter is based on improving visibility across all end-user markets. During Q3, we reported a revenue of Rs. 1,311 crore, which was higher by 7.6 per cent Y-o-Y, driven by a turnaround in demand for our regular markets and established relationships. The company also recorded its highest-ever quarterly EBITDA, PBT and PAT for the company in Q3 FY20-21.

Our long-term ambition is to further embrace open innovation and create a fit-for-purpose and sustainable organisation. We will continue to expand our manufacturing base; launch new products; and invest in R&D, product and process development. We are also geared to benefit from the trend of global supply chains favourably looking at strong Indian chemical companies to establish long-term strategic supply arrangements. We see multiple avenues for growth, in expanding our existing value chains, getting into new value chains, co-developing new products with our customers, forming strong partnerships for tapping manufacturing outsourcing and pursuing available opportunities in the pharmaceutical sector.

How has the company performed internationally and what are your plans for exports? Are you focusing on any new geography internationally?

Direct exports account for about 40-45 per cent of the total revenues. However, a bulk of the company’s products sold in the domestic market is value-added by its customers and exported for global market requirements. Thus in a way close to 65-70 per cent of the company’s produce is directly or indirectly exported.

Aarti Industries has a de-risked portfolio that is multiproduct, multi-geography, multi-customer and multi-industry. Its 200+ products are sold to 700+ domestic and 400+ export customers spread across the globe in 60 countries with a major presence in the USA, Europe and Japan. Its speciality chemicals and intermediate products find usage in pharmaceuticals, agrochemicals, polymers, pigments, printing inks, dyes, fuel additives, aromatics, FMCG and various other industrial sectors. Presently, the company continues to focus on various opportunities in the end-user applications of pharmaceuticals, agrochemicals, eng polymers & various other speciality products.

The company is planning to increase its efforts towards R&D and innovation. Please take us through key R&D initiatives that the company is focusing this year and your achievements in 2020?

Aarti Industries has evolved from being a vendor to becoming a partner of choice. Our four state-of-the-art R&D centres located at Dombivli and Navi Mumbai in Maharashtra, and Vapi in Gujarat, are continuously researching to develop new products and finding a way to make the by-products marketable. Equipped with modern machinery and dedicated laboratories, these research centres promise to further enhance the product portfolio and improve the manufacturing process.

We have a clear strategic focus to become a reference in speciality chemicals and pharmaceuticals the world over. Our long-term ambition is to further embrace open innovation and create a fit-for-purpose and sustainable organisation.

Key R&D initiatives that the company is focusing on in 2021: Continue building and commissioning Phase-2 of Navi Mumbai R&D centre with a further doubling of manpower while adding new capabilities and dedicated state of the art infrastructure for process safety and scale-up data generation facility; Setting up state of the art Bio-fermentation laboratory to support Bio innovation aspiration of the organization; and Scaling-up of several molecules from lab to pilot scale, which are critical raw material and intermediates for agro, pharma and special application.

What's your plan on speciality chemicals expansion and products which you are planning for expansion?

In line with our value chain approach, our focus is to set up complete value chains in India with no dependence on imports for key raw materials. We set up the nitrotoluene value chain in 2016, which created an opportunity for setting up metolachlor manufacturing by UPL (since the key intermediate of MEA became locally available). We are now working to expand our nitrotoluene value chain as well as set up a value chain starting with chlorination of toluene over the next 3-5 years. This value chain has a current import bill of nearly US $ 300 million and also a sizable export potential. Besides, the availability of early intermediates is expected to spur downstream investments in India.

While we work to set up new capacities in new and existing value chains, we are building our capabilities in new chemistries and setting up multipurpose plants to improve our speed to market going forward. We are also actively seeking opportunities to work with global chemical majors to set up manufacturing facilities in India to leverage the India advantage in terms of cost of manufacturing and investment, technical capability, improving regulatory environment and sizable domestic market.

What's your plan on API, Intermediate and Xanthene expansion?

Our Pharma business continued to deliver growth in revenue with positive operating leverage on increasing volumes. Segment revenue grew by 32 per cent Y-o-Y during Q3 FY21 to Rs. 232 crore, which is the highest ever top-line achieved historically by the pharma business. Based on the higher utilization, continued throughput from our regulated market and higher contribution from value-added products and a growing pipeline of new introductions, the segment margin is seeing structural improvement.

Currently, Aarti Industries manufactures various commercial APIs with 30 US Drug Master Files (USDMF), 12 Drug Master Files (DMF), of which seven are under assessment, and 18 Certificates of Suitability (CEP), two of which are under assessment. The growth in the Pharma segment is expected to sustain as additional capacity for API and intermediates are getting operationalized soon. We are also seeing the benefits of India's improving position in the global value chain. Going forward, we will continue to drive deeper penetration in therapies such as Antihypertensive, Cardiovascular, Oncology, Corticosteroids etc. We have a strong pipeline of approval and visibility to maintain our growth. Over the years, the pharma segment has grown to a substantial scale and size, having significant further growth opportunity for it to continue with a growth rate of about 20-25% for the next 4-5 yrs.

Capex invested in FY 2020-21 and what is the plan for FY 2021-22? Plans related to automation and digitalization?

Capex for FY2020-21 is expected to be around Rs. 1,200 crore and we expect a similar range in the next financial year as well.

We at Aarti believe in constantly evolving and transforming ourselves and we have gone through transformation journeys in the past however now we are at the cusp of our next wave of business transformation which will be primarily driven by digital technologies.

Sustainability is our topmost strategic dimension and we plan to leverage AI/ML-based video analytics for contextual intelligence to improve safety and perimeter security etc. Digital levers like Artificial Intelligence(AI), Machine Learning (ML), Internet Of Things (IoT), and Cloud Technologies will be the underlying foundation to derive Real-Time Manufacturing Insights. This will empower each of our employees to make faster business decisions and help the organisation achieve data-driven excellence across the value chain of operations, expansion, R&D, strategy, people and governance.

Chatbots and Robotic Process Automation will amplify organisational productivity and improve scalability and provide 365 days of 24x7 experience to stakeholders. In the areas of operational technology, we have taken efforts to inculcate technology across all levels of Aarti Industries. The latest innovation and technologies were adopted for Digital Control Systems (DCS), Programmable Logic Controller (PLC), Foundation FieldBus, Wireless Networks, e-logbooks and SCADA systems.

We will continue to leverage advancements in cloud and information/cyber security to ensure reliability and data security.

How is the company striking a balance between environment-friendly policies and sustainable growth?

We strongly believe that sustainability and business must go hand in hand. For us, sustainability is more than just countering risks. It is a path to generating inclusive growth while reducing our ecological footprint along the value chain. Sustainability, therefore, underpins our core principles and is our driver for growth, innovation, and productivity.

Since its inception, we have strived to provide responsible solutions to our customers. And we are doing this in a manner that balances the short- and long-term interests of our stakeholders and the business, and that integrates economic, environmental and social considerations into decision making.

All our operating processes and manufacturing facilities reflect our strong commitment to environmental protection. We are constantly on the lookout for energy-efficient systems and systems that sustain air and water quality or reduce or eliminate waste. In 2020, we achieved ZLD status for two additional divisions, making 14 out of 17 manufacturing sites ZLD.

Future business outlook for Aarti Industries in FY 2021-22?

Aarti Industries, with its integrated value chain and diversified product mix, strong technical capabilities, robust track record and cost-efficient operations, forms an ideal fit for entities looking for alternate suppliers independent of China. Aarti Industries is a knowledge-driven organisation, where we strive towards converting today’s knowledge into tomorrow’s chemistry. We remain committed to investing in technology and innovation to create new chemistry and unearth novel solutions that will contribute to long-term sustainable value creation for all our stakeholders. We are therefore continuously pushing the boundaries of innovation. We will continue to expand our manufacturing base; launch new products; and invest in R&D, product and process development.

We are also geared up to benefit from the trend of global supply chains favourably looking at strong Indian chemical companies to establish long-term strategic supply arrangements. Going forward, our strategic focus is on creating a sustainable growth framework as we align with India's growing position as a preferred partner of choice to global supply chains with scalable capabilities that will help us maintain our growth guidance of 15-20 per cent bottom-line CAGR for the next 4-5 years.