'

At Aarti Industries, Global partner of choice do not just represent a thematic positioning; but also encapsulates our operating philosophy. The statement describes not just what we do, but fundamentally what we 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 have inevitably been companies driven by the power of enduring relationships – with customers, vendors, employees and communities. The more stable this relationship, the stronger the business 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 ₹253 cr to ₹655 cr in the five years ending 2016-17. Our company enhanced return on employed capital from 19 per cent five years ago to 24 per cent in 2016-17. Our company was valued higher on the markets: from ₹470 cr as on 31 March 2012 to ₹6,285 cr as on 31 March 2017. We believe that the improvements were achieved because we enriched our entire eco-system. We generated more than 85 per cent of our 2016-17 revenues from customers with whom we had worked for five years or longer; virtually every single customer reported a larger quantum of purchase; and yet, our largest customer accounted for no more than 9 per cent of our 2016- 17 revenues, indicating business broadbasing and corresponding de-risking.

CONTEXTUAL BACKGROUND

At Aarti Industries, we believe that our partnership or relationship-driven approach is insurance in a challenging global industrial environment. The global industrial environment has been marked by extensive global shifts over the last couple of decades. The biggest shift has been the emergence of China as a competitive manufacturer of virtually every product, delivering in many cases products at prices that do not cover the conversion costs of manufacturers in developed countries. The second driver of shift has been increased ageing in developed markets, making it difficult to replenish experienced professionals with younger talent. Besides, a number of these markets have been marked by higher capital expenditure and operating costs, making it necessary for a number of industrial companies to moderate their direct manufacture and increase their outsourcing. The third driver has been the Black Swans of the global environment manifested in unexpected shocks that have often diverted the attention of industrial companies away from their core competence to fire-fighting, necessitating a wider managerial bandwidth. The fourth driver has been a large expansion in global markets, partly arising out of wider global access to more markets on the one hand and partly out of increased incomes in the less-developed markets that have been driving consumption and enhanced lifestyle standards. The net result of these phenomena is that a larger number of companies have capped their investments in facilities inside developed markets, commissioned facilities in developing markets – or taken a strategic call to moderate their manufacturing exposure and focused on product development and marketing. As an extension of this reality, a number of large global customers have also graduated from having a large number of outsourcing vendors to a smaller number. The result is that whereas these companies brought small volumes from a large number of vendors or partners in the hope of deriving the most competitive prices from them, there has been a rethink towards the procurement of large volumes from few vendors today. Even within this evolution in engagement format and frequency there has been a sensitive transformation: a larger number of global industrial players are graduating from vendor enlistments to strategic partnerships; the conventional cost arbitrage model is being replaced by knowledge arbitrage; short-term opportunism is being replaced by long-term stability and sustainability. This contextual background represents the single most defining reason behind the significant transformation of Aarti Industries from a small-cap company a decade ago to one of the most prominent companies in its space India today.

GLOBAL

At Aarti Industries, the word ‘global’ is more than a geographic reference; it is also a reference to an excellence-driven mindset. Over the years, we have graduated from a completely Indian focus to a global perspective. We derived 43 per cent of our revenues from the international markets in 2011-12; this increased to 50 per cent during the year under review. Our international revenues were derived from over 60 countries. Over the years, the increased proportion of revenues derived out of the global markets did more than merely enhance our revenues; it helped mature our company through an enhanced exposure to demanding (and often evolving) global standards; it exposed us to cutting-edge technologies; it exposed us to the highest standards of customer service; it exposed us to global mindsets in terms of business models; it exposed us to incipient shifts in marketplace realities.

We believe that the value of this education has been immeasurable, the more demanding the client, the greater the education. In turn, this inspired a number of one-time and on-going changes that have since strengthened our business sustainability. In view of this, the word ‘global is not intended to denote the destination of our sale; it stands for the origin of our ambition to graduate our company to the next level.

PARTNER

At Aarti, one of the biggest cascades arising out of our global presence has been in the evolution of our personality: from a vendor into a partner. There is a significant difference between the two: a vendor stands outside the customer’s personality; a partner represents an extension of the customer’s personality. A vendor engagement could be one-off and transactional; a partner relationship is enduring. A vendor engagement provides profits for the moment; a partner relationship assures revenue visibility. A vendor engagement could be largely about profitability; a partner relationship is about business sustainability. The most challenging phase in the existence of our company was in our evolution from vendor to partner. I am pleased to report that the company graduated with speed for a number of reasons that extended beyond timely and quality delivery. Most vendors offered customers a value that was derived out of a cost arbitrage; at Aarti, we graduated to a knowledge arbitrage that resulted in our offering enhanced product value to the customer’s table. 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 customers ahead. Most vendors delivered products; we provided the complete cultural eco-system comprising governance, values and client confidentiality. Most vendors provided an assurance of adequate product delivery for the day; Aarti offered the comfort of a robust Balance Sheet that made it possible to invest periodically out of accruals to service the growing consumption appetite of our customers. They began to see possibilities that when they expanded their capacities of downstream products 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 to provide a range of products needed by their different plants across different countries, graduating us from the usual make-to-stock to the trusted make-to-order partner.

CHOICE

At Aarti Industries, we are under no illusion that large global downstream buyers have a number of choices when it comes to selecting vendors. We believe that this reality is humbling, keeps us grounded and insecure in a positive kind of way. Having said this, we derived security from the fact that we provide our customers one of the most compelling price-value propositions. So what is this price-value proposition? At Aarti Industries, we believe the core of this superior value is derived from one of the most competitive cost structures that we possess in the global speciality chemicals sector. This in turn translates into enhanced value in the hands of our customers, coupled with the superior service that we provide clients with speed. What a number of our customers were quietly impressed was that Aarti had grown from its technocrat-originating background to a balance of handson promoter interests and pool of professional talent. They respected our decision to invest proactively in process and product research ahead of the curve; they were favourably inclined with our mix of conservatism and aggression; they were impressed with our specialised understanding of the benzene and toluene chains; the appreciated the fact that were a visible and listed company valued attractively on the Indian stock exchanges; they were comfortable with our positioning as a knowledge- and research-driven organization; they were assured that we could successfully extend process chemistry (recipe focus) to engineering competence that could take the business to commercial scale (asset utilisation); they took a positive view of the fact that we invested proactively in environment-protecting equipment and processes even before these became mandatory; they were relieved to see that even as we had invested in equipment years ago, we had proactively upgraded technologies in line with the prevailing standards of the day; they drew comfort from the fact that we respected contracts irrespective of external market movements; they saw a long-term partnership potential 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 for prospective offtake. This extension to make-to-order provides us with revenue visibility that makes it possible to plan for the longterm.

OVERVIEW

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 accounts are growing; we believe that our prospective investments in plants and people, as well as capabilities and competencies, will translate into a larger production that addresses the growing appetite of our customers. In view of this, I am optimistic that the company will sustain its multi-year growth, enhancing value in the hands of our shareholders.

'

- Rajendra Gogri, Chairman and Managing Director