Rajendra V Gogri, MD, Aarti Industries joins Outlook Business Editor N Mahalakshmi and Dr Hardik Joshipura, CEO, Innovassynth to discuss the “Success Story of Aarti Industries” at the first #Innovassynth Outlook Business “Advantage India Summit”.
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NewsTranscript
00:00 Welcome ladies and gentlemen to the next segment of Advantage India Chemical Summit.
00:12 I have with me Mr. Rajendra Gogri, CEO and Managing Director of Aarti Industries, one
00:17 of the shining examples of a successful company in the Indian speciality chemical space.
00:22 They've built a robust business model over the past decade and posted stellar growth.
00:28 I also have with me, Harthik Joshipura, CEO of InnovaSynth Technologies, to steer this
00:34 conversation to understand the successful business model that Aarti Industries has created.
00:40 Thank you Mr. Gorgi for joining us today.
00:44 My first question to you is, can you elaborate on the key pillars on which your company's
00:50 growth model is built?
00:53 Basically, you know, we started the company in 1985 and it was a small scale and then
01:00 we went on a listing in 1992.
01:04 And over the years, we had expanded our product range and you see basically last 10 years
01:16 things have really moved in favor towards India progressively.
01:24 If you see the easternization, you know, it took mainly in India and China for chemicals,
01:29 not in Thailand or Malaysia or anywhere.
01:33 And now because the Chinese cost started increasing post 2010, the overall Indian competitiveness
01:48 increased in last few years, year on year with environmental disruption also happening
01:56 and all that.
01:57 So that was a more macro scenario and by the time 2010, you know, we had built a very strong
02:05 business model with integrated product line.
02:11 75% of our products, we are in a global top 3 to 5 in that range.
02:22 And we could diversify in various end use industry across the world.
02:28 We had about 50% exports.
02:29 So that was another advantage we had at that time by 2010, very strong customer base and
02:37 also product portfolio.
02:39 You said, I mean, this primarily it started with this Chinese competitiveness.
02:45 So even back in 2010, when you say that your foundation was really dead, was that, were
02:54 you able to compete with the Chinese players or it was much, the value proposition was
03:00 something else?
03:01 No, we are one of the few companies who have been exporting to China for more than 15 years,
03:06 maybe 20 years.
03:07 Because the product line what we had selected was on an integrated line with the scale,
03:12 which was, you know, giving us quite competitiveness.
03:18 And based on that in certain our product line, we used to export the product to China.
03:26 So before 2010 itself, we had a very strong competitive business model where you could
03:34 compete China in China as well as abroad.
03:39 And do you see that when you look at the growth, you know, the growth strategy for your company
03:44 in that segment, because your diversification is into specialty chemicals, plus also a couple
03:50 of APIs, which I'm sure you must be exporting and also for domestic purpose and the CRO
03:56 and CMO kind of services and the contract manufacturing, which businesses do you foresee
04:02 which is at a growth stage in next three to five years time frame?
04:07 We see both is pharmaceutical as well as specialty chemical.
04:12 Pharmaceutical also we have substantially grown in the last few years, both on API and
04:19 some part of that CRAMS also.
04:21 So this year, you know, the pharma also will have about 200 crore habit.
04:27 And with more Atman Irpar and all we see that good potential for pharmaceutical business
04:33 also going forward.
04:36 And then specialty chemical now there is a huge global appetite from India for all this
04:43 China plus one strategy.
04:44 India is the only one you know, where the people want to more and more outsource the
04:52 products.
04:53 So chemical industry is the one industry I think it has got a triple growth drivers.
04:59 One is that the Indian own consumption is going to grow.
05:02 There is about $45 billion chemicals are imported into India and about $45 billion exported
05:09 out of India.
05:10 So there is an import substitution opportunity as well as a lot of demand pools.
05:15 So maybe one of the only sector which has all the three growth drivers going into that.
05:24 Mr. Gopri, I was curious to know about your backward integration strategy, because one
05:31 of the rare things about the industry is like you said, you chose a segment and a business
05:38 model that could make you really competitive and compete even against China so much so
05:43 that you export.
05:44 So how did you really go about building this, you know, your value chain?
05:51 Was it always clear to you that in benzene derivatives, if you had to cover the entire
05:57 value chain, you had to have a fully integrated model to be competitive?
06:02 Or did it did it happen piece by piece?
06:09 The important thing was to select the product.
06:11 Product selection was not based on the customer side that you know, you focus a particular
06:16 end customer and the people who want the intermediate you go and making for them or so it was a
06:24 very selected you know, that integrated chain and select chemistry.
06:29 So we selected a few chemistry in this integrated chain like chlorination, nitration, amino
06:34 acids, hydrogenation and 7-8 chemistries which we specialized in that.
06:40 So and then the products were sold at various end use industries.
06:47 It was not an end use focused product selection.
06:51 Products or selection was a integrated and chemistry based which could give us a expertise
06:57 in the chemistry as well as the scale and competitiveness.
07:02 So that was the main model at that time selected in that sense.
07:08 So going forward, I mean, you say you've been very careful about your selection of
07:13 product or chemistry that you will focus on.
07:19 So how much more growth runway do you see and what kind of chemistries will you be considering
07:24 and where do you see opportunities considering that a lot of things right now China has a
07:32 fairly high share.
07:33 So I'm presuming that in a lot of chemistries, they have already become fairly competitive.
07:40 So how does how does the lay of the land really look right now?
07:46 We look at the three points.
07:49 One is where is there is an import substitution possibilities or where there is a global growth
07:54 or where the customers want to diversify from because they're only China dependent.
08:00 They want to add one more source.
08:02 So that is a typical criteria for sub product selection.
08:07 And but in terms of competitiveness, I mean, are we I mean, even if they do a plus one
08:14 strategy, isn't it imperative for an Indian company to be cost competitive to be able
08:20 to capture that share?
08:22 Or is that something customers are willing to take a slight compromise on?
08:25 No, you'll have to be competitive.
08:28 That's where you know, the scale and the chemistry skills both become important.
08:32 So you have to decide, you know, what particular we cannot make all the products, we'll have
08:36 to decide, you know, where you have a good chemistry skills and the skill and focus on
08:43 that line.
08:44 So our idea will be to add more and more chemistry skills in our integrated chains.
08:50 And now the buzzword is that they want supply chain independent of China, that anything
08:55 and everything, you know, should start from India.
08:59 That is so that is where the company like us, you know, who are totally backward integrated.
09:04 Now the appetite, you know, benzene, which is less than one dollar, people want to come
09:08 as 20, 30, 40, 80 dollar product also, which will be 5 to 8, 10 step synthesis also.
09:18 So that is the kind of appetite.
09:19 So we'll be doing building on this, our own intermediate and on more advanced chemistry
09:28 going forward.
09:29 So, I mean, when you talked about certain segments, which you are focusing when the
09:36 same product might go into a pharmaceutical, it might go to into a paint industry, it might
09:40 go to a different application.
09:41 So from the from the growth strategy or maybe expanding the customer base, how do you focus
09:47 on it?
09:48 I mean, you would probably focus on selecting the select customer base or key companies
09:52 and then, you know, you deploy your go to market strategy.
09:55 I mean, what's the broader thought and strategy on that?
10:00 So integrated chain, you know, we'll see the what are the products further, you know, are
10:04 being manufactured in the and consumed in the world and what are the customers and based
10:09 on that, you know, then we move forward and then contact the customers.
10:12 So that's how we know we have a very strong base with all top agrochemical company, top
10:18 engineering polymers company, pharmaceutical companies and pigment dye stuff.
10:24 So because of this base, it becomes easier.
10:28 Like who is our customer, whether it's a buyer, BASF, Clariant, DuPont or Japanese
10:35 company like Toray, Teijin, Solveig.
10:41 And all the Indian, all big Indian names like UPL, Atul, they are all subversion.
10:47 They are our customers.
10:48 And one of the things that I was interested to know about your CRO, CMO strategy.
10:52 I mean, what are the thoughts?
10:54 Because right now you're at probably you're at a stage where you're offering the full
10:58 time equivalent or fee for service based chemistry services.
11:03 But how about increasing or going upwards of the value chain in terms of high potent
11:07 API contact manufacturing or antibody drop conjugate or any idea or any thoughts in terms
11:12 of moving to a biopharma segment?
11:14 Because that's a growing sector.
11:17 Yeah, that we are looking at, you know, overall, you know, biocide, whether it's biopharma
11:22 or biochemistry or bioenzymes and all.
11:25 That is one sector currently we are also looking at that, you know, whether this can be a good
11:29 future growth avenue in that sense.
11:36 As far as the CR and all, we have both.
11:39 We are our own API as well as a contract reacher.
11:42 So that combination, our pharma team is continuously trying to see what can be the best opportunities
11:48 there.
11:49 Another important thing, what we had, we had signed one contract, 20 year contract, where
11:58 the customers gave us the technology.
12:00 They also gave us the market and they also find a finalizing the funding the project.
12:07 So this is a very unique thing in chemical industry that capital cost in India is almost
12:15 50 percent of the capital cost in West or in US or Europe.
12:19 Very true.
12:20 Which is very rare, you know, not any other industry will have that because here the chemistry
12:25 matters rather than the equipment.
12:28 And a lot of fabrication, erection, piping and all because of that, the capital cost
12:34 is very relatively much less.
12:37 So India actually can become a...
12:38 50 percent of the cost, are you comparing it to the Western world or like competing
12:43 nations like China or Vietnam or all the newer outsourcing destinations?
12:48 It will be with the US, Europe and Japan, but against China, maybe we'll be down by
12:55 maybe around 20 percent.
12:57 So we can become a very good manufacturing...
12:59 Lower by 20 percent compared to China too in terms of capital cost?
13:04 Yes, because now the China labor cost is almost two and a half to three times India.
13:11 That labor component, which is part of the project cost is quite high in chemicals.
13:16 So there is definitely a project cost advantage against China.
13:22 But India can become a very good manufacturing destination for the global company because
13:28 India has got a lot of captive market also.
13:31 So whoever wants to expand in the US and Europe, you know, they can be attracted to come to
13:36 India.
13:37 And that is one of the reasons why we could attract this contract that they saw that there
13:43 is a good advantage on the capital cost.
13:47 And you need a good strong partner who has a strong sustainable manufacturing experience.
13:55 So you were talking about focus on safety and environment.
14:00 Can you just elaborate on that?
14:01 I mean, what is it that you have done that is different, which makes it a better value
14:06 proposition?
14:07 Yeah, in chemical, there will be two.
14:11 One is a process safety and operation safety.
14:13 The process safety, take it from the research step itself, R&D to even when anything which
14:18 goes to pilot, they go through the detailed process and in the piloting stage itself.
14:25 Then from piloting to the commercial, all the hazardous analysis and the entire detailing
14:33 is done at the time of plant design and corresponding automation.
14:39 We have proper risk metrics based on that the automations are also put in place.
14:44 And while operating, you know, chemical manufacturing is actually a discipline.
14:49 It's not an agility.
14:50 You have to follow very strict procedures.
14:53 So what the procedure called management of change, anything you want to do, there has
14:57 to be proper set of procedures and do the detailed analysis.
15:02 Then you have to have proper permit systems, job safety analysis, and all those very disciplined
15:09 manufacturing culture has to be at the ground level.
15:14 So we also have this behavior based systems in place.
15:18 So continuous emphasis on safety and training on the jobs and all the risk associated with
15:25 the jobs is a very, very ongoing practice.
15:31 And there is an entire organization that culture becomes very important that you know, you
15:37 have to be very, very disciplined in manufacturing and maintenance and all that activities.
15:45 So one is on process safety and another is operation safety.
15:49 Sure.
15:50 So how about after treatment because more and more pharma companies and also even regulatorily
15:57 both regulators and large companies are becoming more and more particular about how after treatment
16:03 is taken care of and the entire supply chain at every stage they want to know how those
16:12 standards are met.
16:13 Now, how do costs for a company of your size in terms of environment really stack up?
16:21 And the fact that we don't, I don't know where your plant locations are.
16:25 One of the allegations is that we don't have a very strong industrial pop culture where
16:31 there is a shared cost for after treatment and stuff like that, which makes it slightly
16:36 slightly tricky for India to put up these capacities because the burden of these amenities
16:43 fall on smaller companies, which often may not be able to spend that much on these things.
16:50 What is your view and from your company's perspective, how does this work?
16:55 Yeah, most of our plants are in industrial development corporation, that's in GIDC, Vigarad
17:02 or Maharashtra.
17:03 But as a strategy, what we have done, we have done, I think 12 out of 15 of our plants are
17:08 zero liquid discharge.
17:10 So we are doing this internal system of bioreactors and reverse osmosis and all that.
17:20 So idea is to discharge from the common treatment plant, sometimes they are not able to operate
17:28 fully well and then your proteogenics gets impacted.
17:34 So as a strategy, generally we are trying to do is more move towards zero liquid discharge
17:40 in our own facility.
17:41 And how does that impact the overall cost?
17:48 Is it only at a certain size that it becomes viable or how does it work?
17:52 Yeah, I think for that you need a scale that becomes important.
17:57 So that's where you know, we get a benefit that we are generally operating at a very
18:01 sizable level.
18:03 So we are able to put that all those infrastructure.
18:06 Definitely it increases the capex and opex also, but it gives a customer supply security
18:12 that you will not be impacted because if the common treatment plant or something else which
18:18 is happening outside your own plant impacts you.
18:23 So that balancing between supply security and the additional cost has to be done.
18:31 So do these finally, I mean, the objective is to also take that research to the next
18:36 level into outsource manufacturing for those products etc.
18:41 Is that the path that it takes or it's?
18:44 Yeah, you know, that is generally the path.
18:47 One of the we had done one contract which is a 10 year contract.
18:52 We actually were there, we developed with them a specialty chemical intermediate for
18:57 four years.
18:58 They had the recipe, so we jointly developed, put up, made a pilot quantities and then they
19:04 got the product qualified and the entire manufacturing setup is being done by us in India.
19:12 So our idea will always be to that and not just restrict to the research only, but then
19:17 go for also setting up the manufacturing facilities.
19:20 Sure, any opportunities you see from the PLI scheme?
19:25 And what are you hoping for in the next round?
19:29 Yeah, actually, pharma PLI scheme directly not, but indirectly it will benefit us in
19:36 that sense, because some of the intermediary requires some of the products which we manufacture.
19:41 And we understand that government is also looking at chemical PLI scheme also, a lot
19:46 of imports of chemical which are taking place, which is actually ampering a lot of downstream
19:51 manufacturing in India.
19:54 So once that comes out, the chemical PLI scheme, then we'll have the idea and how much that
20:01 additional focus on that can be given by us.
20:07 Sure.
20:08 I think that's just give us a sense of what lies ahead for the industry's next couple
20:15 of years.
20:16 Yeah, next couple of years.
20:19 So whatever the projects which are currently under construction, they will get all commissioned
20:26 and they start giving revenues and whatever further R&D which we are doing, those projects
20:33 will go on construction for the next two years.
20:37 So looking at next five, seven years, we see a good growth, you know, 15-20% kind of a
20:42 growth rate is definitely possible in our line.
20:48 The reason I asked is because last year, some of the segments in speciality chemicals also
20:53 got hit because the automobiles and pigments, dyes, all of these have taken a, you know,
21:00 demand destruction has happened.
21:03 So how far before these things claw back to pre-COVID levels?
21:07 In general, basically, if you take this will take on an overall about two years of the
21:13 world economy to reach to the original level.
21:18 So different country might have a different, you know, some country two years, some two
21:23 and a half years, one and a half years.
21:24 So that impact is bound to come.
21:28 But the secular pull for chemical from India that continues.
21:33 So I think on a longer term, it will not going to have impact, but short term, obviously
21:40 that this year is the sales have been impacted on all the discretionary spends, you know,
21:47 product going in your automobile or construction and all that.
21:50 Maybe one question on the competitor space.
21:53 I mean, who are your closest competitor and what different state differentiates that they
21:58 are adopting and which you are keenly watching?
22:01 Yeah, in India, I says we because we have a very wide range of product.
22:05 We don't have any specific single competitor.
22:09 Actually Lanxess is the one where we have some overlap of product with Lanxess Germany.
22:15 But within India, we don't have any specific competitor.
22:19 Okay.
22:20 Thank you.
22:21 Thank you so much, sir.
22:24 It was a pleasure talking to you.
22:28 Thank you.
22:29 Likewise.
22:30 Thank you so much.
22:30 Thank you.
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