GLOBAL PARTNER OF CHOICE
These four words do not just represent a thematic positioning; they encapsulate ouroperating philosophy. The statement describes not just what we do but fundamentally whatwe are and what we believe.
The core philosophy of this statement resolves around one critical word: relationships.At Aarti Industries we have always believed that the most successful those haveinevitably been companies driven by the power of enduring relationships - with customersvendors employees and communities. The more stable this relationship the stronger thebusiness sustainability and related stakeholder value.
At Aarti Industries this relationship- driven approach has paid rich dividends.
Our company has reported profitable growth (profit growth higher than revenue growth)in five years out of the last five.
Our Company enhanced EBITDA from H253 cr to H655 cr in the five years ending 2016-17.
Our company enhanced return on employed capital from 19 per cent five years ago to 24per cent in 2016-17. Our company was valued higher on the markets: from H470 cr as on 31March 2012 to H6285 cr as on 31 March 2017.
We believe that the improvements were achieved because we enriched our entireeco-system.
We generated more than 85 per cent of our 2016-17 revenues from customers with whom wehad worked for five years or longer; virtually every single customer reported a largerquantum of purchase; and yet our largest customer accounted for no more than 9 per centof our 201617 revenues indicating business broadbasing and corresponding de-risking.
At Aarti Industries we believe that our partnership or relationship-driven approach isinsurance in a challenging global industrial environment.
The global industrial environment has been marked by extensive global shifts over thelast couple of decades.
The biggest shift has been the emergence of china as a competitive manufacturer ofvirtually every product delivering in many cases products at prices that do not cover theconversion costs of manufacturers in developed countries.
The second driver of shift has been increased ageing in developed markets making itdifficult to replenish experienced professionals with younger talent. Besides a number ofthese markets have been marked by higher capital expenditure and operating costs makingit necessary for a number of industrial companies to moderate their direct manufacture andincrease their outsourcing.
The third driver has been the Black swans of the global environment manifested inunexpected shocks that have often diverted the attention of industrial companies away fromtheir core competence to fire-fighting necessitating a wider managerial bandwidth.
The fourth driver has been a large expansion in global markets partly arising out ofwider global access to more markets on the one hand and partly out of increased incomes inthe less-developed markets that have been driving consumption and enhanced lifestylestandards.
The net result of these phenomena is that a larger number of companies have cappedtheir investments in facilities inside developed markets commissioned facilities indeveloping markets - or taken a strategic call to moderate their manufacturing exposureand focused on product development and marketing.
As an extension of this reality a number of large global customers have also graduatedfrom having a large number of outsourcing vendors to a smaller number. The result is thatwhereas these companies brought small volumes from a large number of vendors or partnersin the hope of deriving the most competitive prices from them there has been a rethinktowards the procurement of large volumes from few vendors today.
Even within this evolution in engagement format and frequency there has been asensitive transformation: a larger number of global industrial players are graduating fromvendor enlistments to strategic partnerships; the conventional cost arbitrage model isbeing replaced by knowledge arbitrage; short-term opportunism is being replaced bylong-term stability and sustainability. This contextual background represents the singlemost defining reason behind the significant transformation of Aarti Industries from asmall-cap company a decade ago to one of the most prominent companies in its space Indiatoday.
At Aarti Industries the word 'global' is more than a geographic reference; it is alsoa reference to an excellence- driven mindset.
Over the years we have graduated from a completely Indian focus to a globalperspective. We derived 43 per cent of our revenues from the international markets in2011-12; this increased to 50 per cent during the year under review. our internationalrevenues were derived from over 60 countries.
over the years the increased proportion of revenues derived out of the global marketsdid more than merely enhance our revenues; it helped mature our company through anenhanced exposure to demanding (and often evolving) global standards; it exposed us tocutting-edge technologies; it exposed us to the highest standards of customer service; itexposed us to global mindsets in terms of business models; it exposed us to incipientshifts in marketplace realities.
We believe that the value of this education has been immeasurable the more demandingthe client the greater the education. In turn this inspired a number of one-time andon-going changes that have since strengthened our business sustainability.
In view of this the word 'global is not intended to denote the destination of oursale; it stands for the origin of our ambition to graduate our company to the next level.
At Aarti one of the biggest cascades arising out of our global presence has been inthe evolution of our personality: from a vendor into a partner.
There is a significant difference between the two: a vendor stands outside thecustomer's personality; a partner represents an extension of the customer's personality. Avendor engagement could be one-off and transactional; a partner relationship is enduring.A vendor engagement provides profits for the moment; a partner relationship assuresrevenue visibility. A vendor engagement could be largely about profitability; a partnerrelationship is about business sustainability.
The most challenging phase in the existence of our company was in our evolution fromvendor to partner. I am pleased to report that the company graduated with speed for anumber of reasons that extended beyond timely and quality delivery. Most vendors offeredcustomers a value that was derived out of a cost arbitrage; at Aarti we graduated to aknowledge arbitrage that resulted in our offering enhanced product value to the customer'stable. Most vendors provided products of the grades and standards that customers desired;Aarti went one step ahead to offer what we felt would take the business of our customersahead.
Most vendors delivered products; we provided the complete cultural eco-systemcomprising governance values and client confidentiality. Most vendors provided anassurance of adequate product delivery for the day; Aarti offered the comfort of a robustBalance Sheet that made it possible to invest periodically out of accruals to service thegrowing consumption appetite of our customers.
They began to see possibilities that when they expanded their capacities of downstreamproducts we would be in a position to invest proactively and participate in their growth;somewhere down the line they recognised that we possessed the organizational depth toprovide a range of products needed by their different plants across different countriesgraduating us from the usual make-to-stock to the trusted make-to- order partner;
At Aarti Industries we are under no illusion that large global downstream buyers havea number of choices when it comes to selecting vendors.
We believe that this reality is humbling keeps us grounded and insecure in a positivekind of way.
Having said this we derived security from the fact that we provide our customers oneof the most compelling price-value propositions.
So what is this price-value proposition? At Aarti Industries we believe the core ofthis superior value is derived from one of the most competitive cost structures that wepossess in the global speciality chemicals sector.
This in turn translates into enhanced value in the hands of our customers coupled withthe superior service that we provide clients with speed.
What a number of our customers were quietly impressed was that Aarti had grown from itstechnocrat-originating background to a balance of hands- on promoter interests and pool ofprofessional talent. They respected our decision to invest proactively in process andproduct research ahead of the curve; they were favourably inclined with our mix ofconservatism and aggression; they were impressed with our specialised understanding of thebenzene and toluene chains; the appreciated the fact that were a visible and listedcompany valued attractively on the Indian stock exchanges; they were comfortable with ourpositioning as a knowledge- and research-driven organization; they were assured that wecould successfully extend process chemistry (recipe focus) to engineering competence thatcould take the business to commercial scale (asset utilisation); they took a positive viewof the fact that we invested proactively in environment-protecting equipment and processeseven before these became mandatory; they were relieved to see that even as we had investedin equipment years ago we had proactively upgraded technologies in line with theprevailing standards of the day; they drew comfort from the fact that we respectedcontracts irrespective of external market movements; they saw a long-term partnershippotential in the fact that we provided the widest complement of products that they needed.
The result is that whenever we commission new capacities we are largely covered forprospective offtake. This extension to make-to-order provides us with revenue visibilitythat makes it possible to plan for the longterm.
Taking our customer value ahead
There are a number of initiatives that we undertook during the financial year underreview to strengthen our partnership model.
one we commissioned an ethylation initiative in the Dahej sEZ that will sourceethylene through a pipeline directly from the supplier Reliance Industries a few kms awaywhich will enhance supply seamlessness and moderate logistical challenges. The facilitycommissioned in september 2016 will reinforce our capability by increasing the output ofagrichemical intermediates by 8000 to 10000 tonnes per annum.
Two we intend to commission our toluene derivatives during the first half of thecurrent financial year.
The integration of ethylation and toluene derivatives will provide an attractivefoundation to service existing customers accounting for a larger share of their wallet.The ?190 or capex possesses an annual revenue potential of around H400 cr at peakutilization. Three the company quadrupled its pDA capacity from a level of 250 tonnes permonth (TpM) a few years ago to 1000 TpM which was commissioned during the financial yearunder review. This expansion will service the growing needs of engineering polymercompanies with a peak annual revenue of H200 cr.
Four the company announced its intention to commission a new research centre andInnovation complex in the area of advanced chemistry and speciality chemical applicationsfor downstream users.
This research centre will strengthen the confidence of our customers and enhance ourcompetence in the area of advanced chemistries positioning the company for sustainablegrowth across the foreseeable future.
At Aarti Industries we believe the core of this superior value is derived from one ofthe most competitive cost structures that we possess in the global speciality chemicalssector.
In a significant post-Balance Sheet development Aarti Industries entered into aten-year partnership agreement with a large global downstream customer; this arrangementstarting 2020 entails projected revenues of H4000 cr. More importantly this arrangementrepresents a new high in the company's customer engagement; it represents a validation ofall that we have professed over the decades; it stands for a fitting showcase of how wehave evolved into a trusted partner.
At Aarti Industries we believe that we have an exciting future ahead.
The number of customers that we are working with is growing; each our customer accountsare growing; we believe that our prospective investments in plants and people as well ascapabilities and competencies will translate into a larger production that addresses thegrowing appetite of our customers.
In view of this I am optimistic that the company will sustain its multi-year growthenhancing value in the hands of our shareholders.
chairman and Managing Director