“Reaping Benefits of Backward Integration”

Rajendra Gogri,
Chairman & Managing Director, Aarti Industries Ltd.
De-licensing, which allows the private players to by-pass the tedious process of taking permissions to expand product basket and setting up new facilities, is the best thing to have happened to the chemical industry, says Rajendra Gogri, Chairman & Managing Director, Aarti Industries Ltd. He talks exclusively to Mittravinda Ranjan about the growth of his organisation from small scale manufacturer of one chemical in 1975 to a producer of over 150 chemicals that are supplied to more than 800 customers in domestic and international markets.

Aarti Industries has come a long way since its inception in 1975. Please tell us about the early years of company.
Well! This is a milestone year for us as we complete 40 years of our journey. In the year 1975, my elder brother Chandrakant Gogri, a qualified Chemical Engineer and his financial partner, set up a small scale unit in Dombivali under the name - Alchemie Labs to manufacture a single product - Dimentyl sulphate. This was the period of license raj and the government was feeling the need to step up indigenous chemical manufacturing and encouraging entrepreneurship through various schemes to set up small scale units with the aim of increasing import substitution. I joined the business in 1983 after completing my Masters in Chemical Engineering from USA and two years later, in 1985, we formed Aarti Industries Ltd.

Over the years, we started more such small scale units across the industrial belts like Tarapur MIDC and later in Gujarat in the backward areas to take advantage of the government’s schemes to expand the business. We set up a facility in Vapi, where we did not receive any benefits from the government since the location was not considered as the backward area, but this place offered huge advantage in terms of infrastructure.

All these facilities were planned as a part of backward integration to secure the feedstock supplies for the existing units, which has continued to be our philosophy of expansions. We have expanded our product basket with the help of our in-house R&D team and now supply intermediates for dyes, pigments, agrochemicals, pharmaceuticals and rubber chemicals across 800 valued customers from India and overseas.

Why did the group restrict itself to small scale in the initial years; for almost fifteen years? When did the management start thinking about economies of scale?
Pre 90-91 was the licensing era. While the government allowed private players to set up small scale manufacturing units, the license raj restricted them from setting up large scale plants or expanding the product basket. From the early years, we were very keen on having large scale production units and applied for license in the year 1984 to set up a large scale unit for chemical products which were produced only by 1 chemical manufacturer and were in huge demand but its supply was scarce. We were using this chemical in our Tarapur facility and applied for license to set up a large scale unit as it augured very well as the backward integration for our existing plant and we saw huge opportunity as the import substitute in Indian market. However, we were denied the license and were compelled to set up 2 small scale units Alchemie Organic and Aarti Organic instead. This product was consumed in paracetamol and was in acute shortage in the following years and the government granted license to us in1989 and we were able to put up our first large scale plant in 1990 in Vapi.

Later, in the following year de-licensing came into play which turned out to be a boon for the chemical industry. Chemical manufacturers could now add more products to the product basket without the hassle of getting license for each and every product. This allowed the private players the freedom to plan their future growth strategies and decide upon adding new products, scaling up and take other key decisions for future within the existing regulatory framework. De-licensing opened up the chemical field thus creating immense opportunity for the manufacturers.

Later in 1992, we went for the first public issue and went on to further expand our business. Today, we have 16 manufacturing units spread across Gujarat and Maharashtra supported by strong research and development with sophisticated instruments and pool of scientists.

What are the other in-house capabilities that the group has developed?
Our in-house research and development team is our greatest strength and enabler of our growth. We also have our engineering and fabrication unit which caters to the demand of process equipment required only for our group. This unit does not supply services outside our organisation. Initially, we had set up this vertical with the aim to reduce lead time to procure equipment and enjoy the low cost advantage. However, as we have grown, we have developed a strong vendors’ network to meet the growing needs.

We are living in the times when many companies are apprehensive about investing in innovative technologies despite this being need of the hour, while Aarti Group has gone ahead and taken several path breaking initiatives to introduce as well commercialise innovative technologies. Where does this come from?
Innovation has been one of the cornerstones and strongest pillar of growth. The credit goes to both the founders - the accomplished technocrats with strong business acumen, who could foresee the changing market trends and nurtured the culture of research and development in the DNA of the organisation. R&D has been a key driver for our business which has enabled us to carve a niche for ourselves in the market space and become a preferred business partner for organisations of high repute not only from India but also from across the globe.

Our team developed the process to produce dry HCl to produce chlorosulfonic acid, a reactive dye intermediate which has huge demand. We were producing chlorosulfonic acid at our facility using conventional process earlier which mandates the manufacturers to have HCl and H2SO4 plants next to each other. This new process offered two major advantages as it allowed us to utilise Dry HCl gas that was generated as the by product and eliminated the restriction of limiting capacity as there was no water. This technology picked up very fast since it allows the manufacturers to set up standalone plant with sulphur trioxide (SO3) and there is no restriction on capacity due to lack of water content which are the major advantages of this process. Similarly we introduced various process innovations for the first time in India, especially for by-product recovery and reduction of effluent.

We introduced hydrogenation process in India which is a clean technology with the aim to move to an environment friendly process which incurred no wastage and offered huge scope for capacity augmentation. We had purchased this technology from Switzerland and as the parent company upgraded the technology to continuous loop reactor process, we followed suite. Our group has carried out significant work on energy restoring and chilling from other sources. Lot of work was done on energy part.

We are the pioneers in introducing various technologies in India, such as Commercialising Continuous Loop reactor for Eco-friendly Hydrogenation Process and have become a key global player for various hydrogenated products. Though this technology is expensive, it is a clean technology over traditional and sludge producing iron acid technology.

There are two distinct phases in the growth of Aarti Industries – one from the year 1992 to 2006 and then 2006 onwards till now. Please comment.
As I have already said, 1991 was the turning point for the growth of chemical industry when the government abolished the licensing policy which allowed ample opportunities for the growth of chemical industry. We had the permission to set up our first large scale facility in 1989 and were reaping the benefits. We launched our first IPO in 1992 to further expand and scale up our operations.

By 2006, we had significantly expanded our footprint in the domestic as well as international markets. Being a backward integrated company provided us with a wider market opportunity across the customers who were constantly looking out for suppliers with a strong financial background and R&D competence. During the last 8 years, Aarti has grown from turnover of Rs. 700 Crores (2006-07) to Rs. 2633 Crores (2013-14) with exports of Rs. 300 Crores to Rs. 1281 Crores during the corresponding period.

Aarti Industries Ltd and Aarti Drugs Ltd - two Group companies are listed on Stock Exchange with approximate combined market cap of Rs. 5000 Crores. Our Group turnover in the year 2014-15 is also expected to be around Rs. 5000 Crores.

How has your experience of working in international markets been?
Well! It has been very good, I must say!! We export almost 50 per cent of our products to various markets. If I talk about the key markets for us, I would say one third to North America, one third EU countries and then the rest of the world.

Developed countries prefer buying from the developing nations especially India and China because of the cost advantage offered by these two countries. Moreover they always look out for suppliers who have the ability to deliver large volumes according to required specs in compliance with the regulatory standards.

Initially, it was only the dye stuff intermediates that were being exported, as the dyeing industry moved from West of Suez to the East, the exports of dyeing intermediates saw a sharp decline. But our business remained immune to the market shift since we still had the same clients who had set up their facilities in India and had continued buying from us. Moreover, there was thrust on the other sectors such as pigments, polymers, additives, agrochemicals where the developed nations started looking at India as a key supplier for products which is what gave the push in the last 10 years to our business as well.

Globally, crop protection companies are very bullish as far as growth is concerned and in the years to come we are witnessing a strong demand from this sector. Worldwide, there is a strong shift from metals to innovative engineering polymers on the materials side driven strongly by the applications in the space of electrical and electronics sectors.

What are your views on ‘Make in India’ campaign?
It is indeed a very good initiative, and with the new stable government in place, Indian market has already attracted lot of international attention. In my view, the government will have to address issues like creating conducive policies, simplification of the taxation structure, easing out the bottlenecks for approvals, etc, to further attract international interest in the chemical sector.

How do you react to the slide in crude oil prices and the shale gas boom in the USA which has completely disrupted the market dynamics for the downstream business?
Specialty chemicals businesses will continue to be immune to the crude oil prices since we are in further downstream side of refining and the impact of price fluctuation gets diluted as you go further down the value chain. Same goes with the shale gas as well. However, fluctuations in gasoline prices can significantly impact the overall energy costs for operations.

What are your plans for the future?
Through various continuous improvement and innovation drives, we are continually trying to making a significant impact of growing with sustainability for sustainable growth. Over the next five years, we plan to invest Rs. 800 - 1000 crore in India and further expand our market here as well as overseas.