aarti industries ltd share price Management discussions

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

ECONOMIC OVERVIEW

In Financial Year 2023, the global economy encountered significant challenges that hindered its advancement towards achieving sustainable goals. On-going geopolitical tensions, supply chain bottlenecks and inflationary pressure weighed on global growth in 2022. Soaring global energy and food prices, coupled with the resurgence of Covid caseloads in few countries and the fall out of recessionary trends in various markets & end user industries have led to slower- than-expected economic growth and stringent monetary policies by central banks across the globe.

Within this backdrop, India is in a sweet spot reaping the benefits of its demographic dividend with the presence of a vibrant and huge young population. This along with pick-up in manufacturing activity, healthy consumption trends and recovery in private investment has helped India maintain its status as the worlds fastest-growing economy underscoring its resilience amidst global headwinds. The Indian Economy grew by 7.2% in the fiscal year 2022-23, positively surprising most experts and exceeding the Governments own projection of 7% GDP growth. This was driven by continued strong domestic macroeconomic fundamentals, supported growth in exports, moderation in oil prices, increase in capital investments, the fall in import-intensive consumption demand, etc. Easing of global inflationary pressure led by falling international commodity prices and favourable Government policies are expected to aid economic growth in India.

Despite a sluggish global economy, India is well poised to grow in the ensuing years and retain its position as the worlds fastest-growing economy, with an ambitious target of becoming a USD5 trillion economy by 2025 and more than doubling the annual exports trajectory to USD2 trillion by 2030 aided by rise in services and electronics exports. The Indian Government has announced a slew of initiatives towards achieving these targets and maintaining its growth momentum. The Indian GDP growth is expected to remain healthy in FY2024 (at 6.3% as forecasted by World Bank) supported by a favourable capital investment cycles.

GLOBAL CHEMICALS & SPECIALITY CHEMICALS - INDUSTRY OVERVIEW

The chemical industry plays a vital role in the global economy. The worlds chemical industry consists of several companies that produce basic chemicals as well as speciality chemicals. Industrial or basic chemicals are produced by converting raw materials such as fossil fuels, minerals and metals, and water into thousands of different products that are used by a wide range of end user segments. Speciality chemicals on the other hand, are either single-chemical entities or mixtures of various chemical ingredients that are designed for specific applications and sold on the basis of their performance or function rather than their composition.

The global speciality chemicals market size was valued at USD616 billion in 2022 and is expected to grow at 5.1% CAGR over 2023 to 2030. The growth is primarily attributable to growing demand for construction, water treatment, and electronics chemicals, along with advancements in process technology and trade liberalisation. The growth of speciality chemicals is also attributed to the growing demand from pharmaceuticals, agrochemicals, food and feed additives, and flavours and fragrances, among others. The Asia Pacific region dominated the market with the highest revenue share of 48.5% in 2022. This is attributed to factors such as economic progress, industrialisation, and growth of major end-use sectors. China and India are the major countries contributing to the growth of speciality chemicals market in Asia Pacific. The demand for additives in the region is influenced by food and beverages, personal care and cosmetics, and pharmaceutical applications.

Companies within Asia play a pivotal role in the global speciality chemical spectrum. On the back of rapid industrialisation, Asian countries expanded their share in the manufacturing of speciality chemicals, resulting in a structural shift in manufacturing from the EU and North America to Asia. Among the Asian countries, China had emerged as a global major in the speciality chemical manufacturing industry, dominating production levels as well as exports to the rest of the world. However, upon taking up the reforms journey and aligning with the global practices, transformation journey on environmental front (restrictions), labour reforms, etc. led to Chinas chemical industry going through a consolidation and restructuring.

Also, the relocation of hazardous manufacturing plants to designated industrial parks resulted in significant supply-chain disruptions in the countrys chemical industry. These factors led several global speciality chemical majors to re-think their sourcing strategies and develop a reliable "China plus one" alternative, in terms of business activities and manufacturing sites. India, given its large-scale manufacturing, expertise in process chemistries and strong relationships with global chemical conglomerates, became an obvious choice and emerged as a viable alternative for speciality chemical manufacturing. In addition, the operational cost disparity between China and India has reduced thereby giving an edge to Indian chemical manufacturers. Furthermore, as a result of the China plus one offshore strategy, numerous global manufacturers are relocating capacities to low-cost regions with high technological capabilities, such as India.

Indian Speciality Chemicals, Yes Securities

In terms of global market share, Indias speciality chemicals comprise approximately 4%, while China accounts for 26%. However, Indias speciality chemicals industry is predicted to grow rapidly, outpacing China, Japan and the rest of the world in percentage growth terms. Indias market share is predicted to increase to 6% by 2026, on the back of strong revenue growth of 15-20% during FY23. With this, India is well poised to capitalise on the USD 1 trillion global chemical market opportunity by 2040 with 10-12% market share, offering abundant sectoral opportunities for domestic and international chemical manufacturers.

EMERGING TRENDS IN THE GLOBAL CHEMICAL INDUSTRY

The chemical industry which has generally been a slow adopter of new digital or analytics technologies, is witnessing a sea change with tremendous technological development, thanks to higher emphasis on developing a buoyant supply chain as well as increasing the plant throughput. Digital Analytics is increasingly pervasive across all business functions such as production, marketing and sales, and R&D among others. Real-time information availability has the potential to change decision making.

Digital implementation is changing the decision-making landscape of chemical producers. However, the near-term focus will be on stabilising current platforms and capabilities, with the intent to monetise the current investment pool before expanding to newer areas. The digital focus is helping to modify structures and processes, connecting across front, middle, and back offices, facilitating information flow, thus aiding decision-making, planning, and support. There is gradual adoption of emerging technologies such as robotic automation, artificial intelligence, machine learning, and natural language processing. Companies may increasingly use digital technologies to empower materials innovation and expedite low-cost formulations by evaluating, optimising, and assimilating ingredient recipes and domain knowledge.

The merger and acquisition (M&A) activity has significantly stepped up in the chemicals space guided by respective entitys intention to achieve economies of scale, widen their product portfolios, and multiply their geographic reach. Moreover, there are a multitude of factors driving M&A activity, among them are cheap and plentiful debt, burgeoning private equity interest in the industry, liquidity pressures on distressed companies due to the pandemic impact, and a desire by some corporates to divest underperforming or noncore businesses.

Carbon neutral theme is also expected to gather pace and create several new opportunities in the chemical value- chain with focus on renewable energy, electric mobility, green chemistry, and growing prevalence of the 3R principle of reduce, reuse and recycle. Another evolving trend in the industry like many others is sustainability. Customers are increasingly showing interest in environmentally friendly and socially responsible products and services. Moreover, they are becoming conscious of health and hygiene and are demanding greener and safer products with pure ingredients. Global chemical producers can play a crucial role in effectively tackling climate change by aligning to their objectives and reducing the emission levels to meet their 2030 Sustainable Development Goals.

GOLDEN DECADE FOR THE INDIAN CHEMICAL SECTOR

The Indian chemical industry, over the last decade, has consistently been a global outperformer in demand growth and shareholder wealth creation. Rapidly changing geopolitical scenarios have prompted many countries to focus on domestic self-sufficiency and create localised supply chains. In addition, it has become imperative to develop a diversified sourcing strategy to limit the impact caused by over-dependence on a single supplier or geography. This is important to run a business in a more sustained manner with reduced downside risks. India has demonstrated its manufacturing competitiveness on a global scale and possesses a unique edge over other key global chemical clusters, with the likelihood of India becoming the next global chemicals manufacturing hub. India is playing an increasingly dominant role across both consumption and manufacturing in the global arena.

The Indian chemical industry plays a pivotal role in contributing to the economy of the country, accounting for ~7% of GDP and is expected to reach USD 304 billion by 2025, up from USD 178 billion in 2021. The sector is projected to grow at a CAGR of 11-12% during 2021-27 and 7-10% thereafter during 2027-40. The industry continues to remain an attractive hub for opportunities for both domestic and multinational manufacturers. Domestic consumption is expected to rise to USD 850-1,000 billion by 2040. The growing global popularity of biofriendly products is expected to benefit India, as it is among the leading producers of many chemicals that are used in such products. India could potentially emerge as a preferred destination for the global chemical majors given the evolving geopolitical scenario and the thrust on diversifying from the existing core manufacturing markets. Increasingly firms are seeking to make their supply-chains more resilient with emerging China and Europe plus one strategy.

The speciality chemicals segment comprises a sizeable portion of Indias chemical industry. With rising demand for value-added products by both domestic and export customers, the industry has experienced a rapid increase in demand from key end-user segments such as the food industry, automobile industry, real estate, clothes, cosmetics and agrochemicals among others. Given its inherent strengths and expertise in complex chemistries and significant cost competitiveness (as presented in table below), the Indian speciality chemicals sector is primed to outpace its global peers.

Cost Competitiveness

The Indian speciality chemicals sector, valued at USD 32 billion, represents 22% of the overall chemicals and petrochemicals market. This industry has expanded exponentially in recent years and is anticipated to reach USD 64 billion by 2025, growing at 12.4% CAGR. The speciality chemicals segment has been one of the fastest growing segments in the Indian manufacturing sector led by increased demand from several end-user sectors, favourable Government policies like PLI scheme for manufacturing, a growing domestic customer base and changes in consumer lifestyle among other factors. From a trading perspective, speciality chemicals account for a significant share of more than 50% of chemical exports. Among the sub-segments, Agrochemicals, Dyes and Pigments, Active Pharmaceutical Ingredient (APIs) remain dominant in driving the potential for exports. The speciality chemicals segment is likely to demonstrate even stronger growth going ahead as a result of Governments smart cities mission, which is expected to drive demand for paints, coatings and other infra- led products.

India provides low-cost operations, feedstock availability, skilled labour, benefit of a long coastline and navigable waterways for ease of trade, favourable Government policies, significant import substitution opportunity, strong intellectual property protection, among other advantages. Macroeconomic factors leading to a positive ecosystem and improving the ease of doing business has been critical to attract foreign speciality chemicals manufacturers in the country. The country is well positioned to expand its global market share as it continues to invest in core R&D competence, technologies, scale and the capacity to deliver products at lower costs (through efficiency measures) in order to build a competitive edge. The China and Europe plus one opportunity is expected to attract more chemical manufacturers to set up and expand their production capabilities in India, which in turn will support the growth of the speciality chemicals market within the country.

Indias exports in some sub-segments like polymer additives, food additives, electronic chemicals, etc., are significantly lower, when compared to China. If India is able to scale up production in these sub-segments with keen focus on expanding the export capacity, then it will further improve its market position. Most leaders in this space are reevaluating their procurement from China to India, thereby aiding growth of the market if production is ramped up with export orientation.

Currently, there are significant imports of speciality chemicals, however, various policy initiatives and reforms by the Government, along with other strategic advantages, presents India as a viable destination for both domestic and multinational companies to align their priorities and capitalise on the import substitution opportunity, by scaling up production and resultantly reducing Indias dependence on imports. Indias chemical exports registered a record USD 29.2 billion in FY 2021-22 with speciality chemicals accounting for more than 50%. The exports of Indias top 10 speciality chemical manufacturers have grown at ~21% CAGR between FY15-FY20 as compared with revenue growth of ~17% during the same period. Indias current trade deficit, at USD 9-10 billion, is expected to grow to USD 40-42 billion by 2040. Out of the three main segments of the chemical sector - inorganic, petrochemicals and speciality, only speciality chemicals is expected to be a net exporter. By 2040, the speciality chemical sectors net exports are expected to rise by around 10x, from about USD 2 billion in 2021 to USD 21 billion.

Consumption of speciality chemicals in India is low per capita compared to the global averages. Given the potential gap, Indian companies have the opportunity to expand their market, target key segments & states for demand-creation and build a dominant position for themselves in the market. Resurgence in demand has influenced Indian companies to revisit their capacity expansion plans. Companies have been focussing on capacity expansion due to demand fuelled by growth in the end-user industries such as Agrochemicals, pharmaceuticals, food, construction, electronics, dyes and pigments, among others.

While there are enough opportunities favouring growth in the speciality chemicals sector, it is essential to emphasise on critical aspects of manufacturing and innovation such as R&D investments, process engineering, achieving economies of scale, etc. The Governments aim to increase public investment in R&D to ~2% of GDP by FY25 will aid incremental focus on R&D. Indian companies in the speciality chemicals industry face low risk from new competitors due to barriers such as large capital investment for global scale facilities, need for R&D and technical capabilities for manufacturing quality products, talent management, penetrating existing markets, etc. However, there is an urgent need to address import dependence. With an aim to expand geographical and segment footprint, companies need to realign their focus to exploit economies of scale.

To gain technological advantage, Indian companies can look to acquire small to mid-sized firms in Europe, Japan, and the US, which can leverage their abundant resources. Acquiring or partnering with such companies with expertise in specific innovative chemistries, Industry 4.0 and efficient technologies can help enhance their own domestic manufacturing capabilities. Many companies in the industry are focussed on investing in scaling up their capabilities, as Indias macroeconomic factors have presented a viable business opportunity for international investors. Entry barriers in the industry are relatively high, so opportunities lie in creating a leadership position in the market. The speciality chemicals sector is going through an accelerated growth phase, and conducive factors can drive the industry to emerge as one of the worlds major markets.

With the above macro tailwinds the future of the Indian chemical sector looks promising, and the country could potentially become the driving force of the world chemical market with speciality chemicals leading the growth for the sector.

COMPANY OVERVIEW

Established by first generation technocrats nearly four decades ago, Aarti Industries Limited (hereafter referred to as Aarti Industries Limited or the Company) is one of the most competitive and highly integrated benzene-based speciality chemical company in the world. Aarti Industries Limited is a rare instance of a global speciality chemicals company that combines process chemistry competence (recipe focus) with scale-up of engineering competence (asset utilisation). The Company has successfully evolved as an Indian multinational selecting to manufacture out of India and servicing the varied needs of the global markets. Aarti Industries Limited has a strong presence across a wide range of chemistries with base raw materials such as benzene, toluene, nitric acid, chlorine, methanol, aniline, and sulphur among others. It has pioneered in India in introducing various product value chains and introducing new chemistries. The Company has been able to effectively utilise co-products and generate value-added products due to its integrated operations across the product chains.

The Company globally ranks among the top 4 for 75% of its portfolio and is "Partner of Choice" for several major global and domestic customers. Aarti Industries Limited is among the top 3 global players in chlorination and nitration and among the top two global players in hydrogenation. The Company is well diversified in various aspects of business due to its wide portfolio with 100+ products sold across the globe in over 60 countries serving multiple customers across different industries. The Company supplies to 700+ domestic and 400+ export customers with major presence in the USA, Europe, China and Japan. Its speciality chemicals intermediates find applications in Pharmaceuticals, Agrochemicals, Aromatics, Dyes & Pigments, Fuel Additives, FMCG, Polymers, Printing Inks, Rubber Chemicals and various other industrial sectors. Over 50% of the demand comes from essential/non-discretionary industries like agrochemicals, pharmaceuticals and FMCG, while the rest is from discretionary industries like automobile, construction, fuel additives, textiles, paints, electronic, aviation applications, etc. The same is represented in the below graph

Aarti Industries Limited has created a strong foundation through an integrated and well-diversified business model with a relentless focus on R&D and chemistry capabilities. Various products and processes had been developed by R&D and commercialised over the past two decades. The Company had gained expertise in wide ranging chemistries, such as Ammonolysis, Chlorination, Diazotisation, Halex (Fluorination), Hydrogenation and Nitration among others, both at plant and lab scales. It has state-of-the-art R&D centres across Maharashtra and Gujarat. Its new R&D centre in Navi Mumbai has over ~18,000 sq. ft. covered by an ultramodern synthesis laboratory amongst various other new R&D capabilities. The Company has a robust R&D team with 250+ engineers and scientists, 19 PhDs working on several high potential projects. Currently, Aarti Industries Limited has 40+ products in the R&D pipeline of chemicals at various stages.

The Companys commitment to Safety, Health & Equipment Quality is reflected in the fact that all plants meet global standards of environmental norms. Aarti Industries Limited is a signatory to the prestigious Responsible Care and Together for Sustainability initiative demonstrating its commitment to improve all aspects of performance. The Company has 11 Zero Discharge units with greater emphasis on Reduce-Reuse-Recover across its 16 manufacturing sites. Such practices infuse customer confidence and create a sustainable business.

During the year, the Company demerged its Pharma entity into a separate company, Aarti PharmaLabs Ltd., which is listed on NSE and BSE. The demerger was effective from July 1, 2021, hence the financials from July 1, 2021 were restated & redrawn to effect the changes arising upon the scheme being made effective.

LONG-TERM CONTRACT FOR KEY RM

During last year, Aarti Industries Limited signed a binding 20-year contract with Deepak Fertilisers & Petrochemicals Corporation Limited (DFPCL) for supply of nitric acid, securing its supply of this crucial raw material, mitigating the major availability issues of the past. The contract kicks in from April 1, 2023, while the earlier contract expired on March 31, 2023. The contract provides for a formula-driven international prices with appropriate take or pay and supply or pay obligations for either party and thus will secure over 80% of Aarti Industries Limiteds nitric requirement over the long-term period from April 1, 2023. This will help eliminate the need to invest into backward integration of concentrated nitric acid and focus on the forward integrated opportunities. The long-term supply security for this crucial raw material will pave the way for future growth opportunities, introduction of new value-added products and value chains for niche applications.

FINANCIAL PERFORMANCE

As the global economy continued to face several challenges like high inflationary pressure, Ukraine Crisis, geopolitical tensions, demand concerns on few discretionary sectors, etc., parts of Aarti Industries Limiteds business were also impacted. Despite these headwinds, the financial performance remained resilient due to its dynamic approach of building a superior business enterprise by meticulously leveraging its strengths in complex chemistries, products, and processes and the Companys strategic shift to optimise the product mix. The share of value-added products stood at about 80%.

The financials for FY23 have been re-casted to consider the effect of Scheme of Arrangement for the demerger of Pharma Segment from the Appointed Date of July 1,2021. In addition, to draw an appropriate comparable, Aarti Industries Limited has excluded the shortfall fees and termination fees received in FY22, arising out of cancellation of the first long-term contract.

Revenues increased by 17% to Rs.7,283 crores as compared to FY22 revenues (net of termination income). Exports contributed to nearly 48.3% of the total revenues at Rs. 3,517 crores, as against Rs. 2,950 crores in FY22.

EBITDA (without termination, shortfall and pharma) improved by 18.5% to Rs. 1,089 crores in line with the guided EBITDA estimates of Rs. 1,100 crores. EBITDA in FY21 and FY22 had the shortfall income to the tune of Rs. 143 crores and Rs. 134 crores respectively arising out of the take or pay obligation under the first contract. In FY22, there was also a one time termination compensation income due to cancellation of a long-term contract, led to increase in EBITDA by about Rs. 611 crores.

Depreciation increased by 26%, in line with expectations, on account of the commissioning of ongoing projects. With continuing depreciation of Indian Rupee against US Dollar, the market-to-market loss stood at Rs. 60 crores in respect of the unhedged ECBs, resulting in the increase in the borrowing costs. Profit after tax stood at Rs. 545 crores in FY23.

Premised on a strong performance, the Board approved an interim dividend of Rs. 1 per share and a final dividend of Rs. 1.50 per share. Total dividend in FY23 stood at Rs. 2.50 per share i.e., 50% of the face value.

Demand was steady for key products under the essential end usages, further aided by volume gains. Demand for products pertaining to textiles end-use industry remained impacted dampening the performance for the year. However, demand recovery is expected to begin from the initial half of FY24.

On the raw material prices front, there was some respite due to the declining trend at the end of FY23. The Company has robust pricing mechanisms in place to mitigate the impact of inflationary cost pressures, whereby the same is passed on to the customers which helps in protecting absolute profitability. The Companys profitability was bolstered by the contribution of value-added products with high growth and better margins.

Update on Key Projects and CAPEX Initiatives

During FY23, the total capital expenditure was of Rs. 1,306 crores towards various expansion initiatives.

The Company had signed three multi-year long-term contracts with global MNCs for supply of chemical intermediates. The first long-term contract to source a key herbicide intermediate product was cancelled by the customer due to demand-related challenges. However, in-line with contract terms, the Company received the eligible shortfall fees and termination fees. The Company has already started manufacturing the products at this plant and it is being supplied to other targeted customers across geographies. The production volumes are ramping up gradually and would be near optimum utlisation over next two to three years.

During FY 2021-22, the unit related to the second long-term contract was commercialised. The operations have been stabilised in FY 2022-23 and the facility has been operating as per the contract terms. During Q3FY22-23, the unit for the third long-term contract was also operationalised. The scale up as per the contract terms are underway.

During Q4FY22-23, the Company also commercialised two speciality chlorination units at Jhagadia. Other projects, including brownfield expansion of NCB facility, Acid revamp project at Vapi and few other speciality chemical blocks, are progressing well. These will become operational in the next couple of quarters and start contributing to the performance progressively from H2FY23-24.

The Company has started the initial work around expanding the ethylation capacity at Dahej SEZ, by three times with an investment of K 200 crores. The Company has commenced work related to debottlenecking of nitro toluene capacities, as it reached over 90% utilisation. The target is to increase the capacity by about 50% so as to cater to certain high growth applications in agrochemicals. Both these units are expected to be commercialised in first half of next fiscal.

The Company has initiated work on setting up multipurpose plants at Zone IV at Jhagadia, spread across ~95 acres. The Company plans to add new chemistries including chlorotoluenes value chain consisting of over 40 value added speciality products at the said Zone IV. The plants at this Zone are expected to be commissioned in a phase- wise manner gradually from second half of next fiscal, catering to the needs of mainly agrochemicals and pharma companies. Of the total production, about 50-60% will be catered to domestic markets while remaining will be intended for exports. Overall, the products from this project are more niche and high value added range of product with a potential of strong EBITDA margin of ~25-30%. In addition, this will also open up some niche opportunities in custom manufacturing.

We target the capital expenditure over next couple of years to be around Rs.3,000 crores. This will be aimed towards developing new chemical value-chains and introducing high potential products that will broaden the addressable market size and respond to increased demand from key customers.

BUSINESS OUTLOOK

The Company is well equipped with the necessary levers to be a leading participant in the Golden Decade of the Indian chemical industry. It is well poised for robust growth in the future with strong decisive actions to ensure that it remains at the forefront of its chosen chemical skill sets. Envisaging great potential in new chemical value chains, the Company is prepared to leverage its expertise to capitalise these emerging opportunities. The Company is set to explore new chemical value chains, add new chemistry like photochlorination, oxidation, etc. and expand its existing value chain. For this, the Company is looking to collaborate with worlds leading chemical companies, strengthen existing partnerships, build new partnerships and explore contract manufacturing/CDMO opportunities.

While the long term growth opportunities remains intact, the sector is witnessing significant headwinds in current financial year ie FY23-24. Inventory corrections across various global markets for various end use industries has impacted the demand for various products, including the demand for the products catering to essential enduse industry such as Agrochemicals, etc. Further the recessionary trends and other prevailing global concerns has also impacted the demand for products across various discretionary end use industries. These decline in demands has created a demand- supply gap, which would put pressure on margins over a short term period. We expect that these macro concerns to be prevalent over a short term period with its impact being significant in the first half of FY23-24 and are anticapting the improvement to be visible gradually and progressively from the second half of FY23-24. We are closely monitoring the development and taking adequate steps to steer through these unprecented circumstances. We remain confident on our ability to weather this challenging times and come out stronger and better poised to continue on to our long term growth aspirations.

Aarti Industries Limited remains confident in its ability to deliver on its long-term commitment led by its best- in-class manufacturing processes, continuous process enhancements, strong R&D focus and an unwavering commitment to innovation. The Company is investing on the R&D for products catering to various sunrise sectors with growing focus on sustainable and green solutions, battery chemicals, electronics chemicals, new age materials, high end polymers, etc. The roadmap looks encouraging and Aarti Industries Limited confident to be able to capitalise the opportunities created through rapid shifts in global chemical supply chains. Focus on R&D led product offerings together with incremental gains from existing value chains will enable Aarti Industries Limited to take advantage of the prevailing long term favourable industry trends and thereby create a stronger value proposition for all the stakeholders over a long term period.

RISKS AND MITIGATION

1. Regulatory Risk: Widespread geographical presence leads to exposure to different prevailing rules and regulations. Non-compliance to any new/change in policies may impact normal business functioning.

Mitigation: The Company follows highest Safety, Health and Environment (SH&E) standards. A proficient team is responsible for keeping a check on adherence to all applicable laws and statutes. Aarti Industries Limited has developed and adopted its own inhouse SOPs and a best in class compliance framework to manage and mitigate the risks.

2. Innovation Risk: R&D is crucial for sustainable growth in the speciality chemicals market. Aarti Industries Limited has to remain ahead of competition with innovation and focussed R&D.

Mitigation: The Companys two state-of-the-art R&D centres, with a strong team of PhDs and 220+ scientists, ensure high level of innovation. The Company is well- known as a knowledge-driven organisation, with product innovation being its USP and having earned it several awards for innovation in chemical engineering. Aarti Industries Limited strives to strengthen its technical skill-set around niche applications. Strong customer connect enables us to innovate specialised products with unique features based on the transfer of knowledge from customers.

3. Forex Risk: Aarti Industries Limited is exposed to several currencies due to widespread business operations in over 60 countries. Fluctuation in forex may thus impact earnings.

Mitigation: The Company has ~48% export earnings of which most is in USD. Lower exposure to multiple currencies reduces cross currency fluctuations. It enters hedging contracts of maturities ranging from 3 months to 3 years to help insulate any untoward movement in forex.

4. Raw Material Risk: All manufacturing organisations face the inherent risk of unavailability/limited availability of key raw material/s. In addition, fluctuation in costs may impact earnings.

Mitigation: Aarti Industries Limiteds long-standing vendor relationships enable us to maintain uninterrupted flow of raw materials at competitive prices. The Company is also fully integrated for key products thereby limiting the impact of raw material supply shortage. To further insulate impact of price fluctuation, Aarti Industries Limited signs cost plus pricing contracts for various speciality chemicals which helps it to protect margins in rising input costs scenario.

INTERNAL CONTROLS, SYSTEMS AND ADEQUACY

Aarti Industries Limited has designed well-structured internal control systems comprising detailed policies, guidelines and procedures, commensurate with the nature, size and complexity of the industry it operates in. The comprehensive internal control system ensures automatic checks and balances and robust financial reporting. Adhering to all applicable statutory compliances, Aarti Industries Limited follows stringent procedures enabling us to achieve high accuracy in recording and providing reliable financial and operational information. All business operations are monitored by the internal team and audit committee, ensuring smooth business functioning by designing, implementing and maintaining adequate internal financial controls. The Company is responsible for safeguarding assets, prevention and timely detection of frauds and errors, accuracy and completeness of the accounting records, and timely preparation of reliable financial information. Any deviation from normal, is reported to the management. Prompt action is ensured to run business as usual and keep these exposures at comfortable levels. Internal control framework ensures business continuity.

Cautionary Statement

Aarti Industries Limited may, from time to time, make additional written and oral forward-looking statements, including statements contained in the Companys filings with BSE and NSE, and the reports to shareholders. The Company does not undertake to update any forward-looking statements that may be made from time to time by or on behalf of the Company. All information contained in this presentation has been prepared solely by Aarti Industries Limited. The Company does not accept any liability whatsoever for any loss, howsoever, arising from any use or reliance on this Annual Report or its contents or otherwise arising in connection therewith.