AARTIDRUGSNSEQ1 FY23August 3, 2022

Aarti Drugs Limited

8,183words

163turns

7analyst exchanges

3executives

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Management on call

Harit Shah

Whole-Time Director, Aarti Drugs Limited

Adhish Patil

Chief Financial Officer, Aarti Drugs Limited

Vishwa Savla

Managing Director, Pinnacle Life Science Private

Key numbers — 40 extracted

Rs.551.4 Crore

s. First I will take standalone business performance: Standalone revenues for Q1 FY2023 stored at Rs.551.4 Crores as against Rs.507.4 Crores a growth of 9% year-on-year. Standalone business contributed approxim

Rs.507.4 Crore

lone business performance: Standalone revenues for Q1 FY2023 stored at Rs.551.4 Crores as against Rs.507.4 Crores a growth of 9% year-on-year. Standalone business contributed approximately 86% to the consolid

tandalone revenues for Q1 FY2023 stored at Rs.551.4 Crores as against Rs.507.4 Crores a growth of 9% year-on-year. Standalone business contributed approximately 86% to the consolidated revenue appro

86%

gainst Rs.507.4 Crores a growth of 9% year-on-year. Standalone business contributed approximately 86% to the consolidated revenue approximately 64% of the standalone revenues came from the domestic

64%

year. Standalone business contributed approximately 86% to the consolidated revenue approximately 64% of the standalone revenues came from the domestic market while the remaining 36% came from the ex

36%

ue approximately 64% of the standalone revenues came from the domestic market while the remaining 36% came from the exports market for Q1 FY2023. Domestic revenue grew approximately by 3% while expor

remaining 36% came from the exports market for Q1 FY2023. Domestic revenue grew approximately by 3% while exports grew by around 23% year-on- year. Within the API segment the antibiotic therapeutic

23%

orts market for Q1 FY2023. Domestic revenue grew approximately by 3% while exports grew by around 23% year-on- year. Within the API segment the antibiotic therapeutic category contributed around 46%,

46%

d 23% year-on- year. Within the API segment the antibiotic therapeutic category contributed around 46%, antidiabetic around 13%, anti-protozoal around 19%, anti-inflammatory around 10%, anti- fungal

13%

n the API segment the antibiotic therapeutic category contributed around 46%, antidiabetic around 13%, anti-protozoal around 19%, anti-inflammatory around 10%, anti- fungal around 9%, and the rest con

19%

iotic therapeutic category contributed around 46%, antidiabetic around 13%, anti-protozoal around 19%, anti-inflammatory around 10%, anti- fungal around 9%, and the rest contributed around 4% to total

10%

tributed around 46%, antidiabetic around 13%, anti-protozoal around 19%, anti-inflammatory around 10%, anti- fungal around 9%, and the rest contributed around 4% to total API sales. For the quarter

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Guidance — 20 items

Adhish Patil

opening

“Our company remains confident of overcoming the challenges and remains optimistic on the opportunities for all the segments in the upcoming years driven by the ongoing project capex, Brownfield expansions and higher utilization of existing capacities.”

Adhish Patil

“Approximately you can say half of the budget what we have planned in that 500 Crores capex plan will be going for specialty and typically overall, on an overall basis the asset turn is somewhere around 2 to 2.5.”

Rupesh Tatia

“So these 250 Crores you are saying for specialty chemical this is already spent or this is a medium-term plan?”

Adhish Patil

“No, that is ongoing capex which is happening in terms of Greenfield project so it will take around a year to finish approximately.”

Adhish Patil

“That is a Brownfield, we do not give out the capex number but then it is much lower, but very roughly around 90 to 100 Crores revenue potential is what we expect from that facility at a full scale level.”

Rupesh Tatia

“Then my second question is I was going through your annual report you have done 39000 metric ton production and our capacity is 49000 metric ton roughly in FY2022 what can we expect by FY2023 both these numbers production and capacity?”

Adhish Patil

“Production numbers definitely some Brownfield expansions will add up sooner and if our target date for the Greenfield expansion of Tarapur facility completes this number will be much higher.”

Adhish Patil

“Right now since because we have not disclosed the product name and the capacity for the Greenfield project that is why we cannot answer it right now, but then it is an import substitute product and the capacity will be quite huge by the end of FY2023.”

Rupesh Tatia

“So it will be at least for 80000 above from currently roughly 49000, 50000 would it be at least 80000 and above?”

Adhish Patil

“I think, yes, it will be more than 8000, two, three projects comes into commercial production.”

Risks & concerns — 9 flagged

The company’s performance Q1 FY2023 was impacted due to the challenging business environment in terms of constant depreciation in the domestic currency leading to provision of notional forex losses, lockdowns in China affecting purchase decisions in uncertain scenario, fear of recession in key geographies driven by ongoing geopolitical conflict, and continuous upward momentum in crude, coal and other raw material input cost.

— Adhish Patil

I will now quickly take you through segment wise performance and then I will delve more into impact of rising input costs, the overall demand scenario and the company strategy to counter the ongoing difficulties.

— Adhish Patil

Margin and profitability continued to remain affected as sustained inflationary pressure impacted raw material cost, crude, power and coal cost coupled with sharp depreciation in the currency.

— Adhish Patil

There is an impact of approximately 4 Crores due to forex movements and Rs.8 Crores due to only rate increase in power and coal cost.

— Adhish Patil

Right now still approximately our imports and indigenous purchases like 50:50 and as I said that around 15% to 18% of the raw materials are available only in China rest can be procured from rest of the world so that risk is always there so we have developed technologies, but right now we are not going ahead with the capex of that particular backward integration.

— Adhish Patil

You do not see a challenge basically in market?

— Chirag Dagli

Yes, we would expect it to have higher margins and since that would be more concentrated on regulated markets however as currently the scenario in regulated markets is also there is a lot of margin pressure so while we would expect it to be better, but there is also significant competition in oncology in those markets.

— Vishwa Savla

Have you seen the prices of intermediates and key starting materials soften over the last month or two for you?

— Gagan Talreja

My dilemma is that for the last so many quarters it has been difficult not only for you but for the entire sort of API industry to pass on the input inflation in commensurate measure in output prices to formulation companies.

— Gagan Talreja

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Q&A — 7 exchanges

My first question is in specialty chemicals what is the capex amount we have spent and what is the revenue potential?

Adhish Patil

Approximately you can say half of the budget what we have planned in that 500 Crores capex plan will be going for specialty and typically overall, on an overall basis the asset turn is somewhere around 2 to 2.5. So these 250 Crores you are saying for specialty chemical this is already spent or this is a medium-term plan? No, that is ongoing capex which is happening in terms of Greenfield project so it will take around a year to finish approximately. Yes, but currently we are doing some sampling matches right in specialty chemical? Yes, that is the Brownfield expansion that we have carried out

Thanks for taking my question. In the press release you mentioned that we have had the highest ever realizations for several API products in Q1 FY2023, but despite the fact the EBITDA margin has been the lowest over the last three years so does that mean the cost pressures were far higher than the realization and could you comment, so, some of it you have already mentioned that some cost pressures are easing out, but what about the realizations, would realization sustain at current level?

Adhish Patil

Yes, so the thing is the reason for taking all these price hikes was because the input cost had escalated quite sharply in the beginning of this calendar year for multiple reasons which are highlighted and then we started taking price hikes, but there is always a lag in taking price hikes because of which definitely the gross margins were squeezed in last quarter, but what we could see the pending orders are even higher than what realizations we achieved in June quarter so probably that will help in the beginning of this Q2 and now a little bit easing in some areas not everywhere in some areas

What is concerning about your business model is that you do not have any control over your EBITDA margin, the kind of reasons you are giving on INR depreciation and input cost inflation and all that, that is going to happen in some form or the other all the time, that is out of your control, but it seems that when you raise prices, (inaudible words at 23:41) so given this how are you planning for so much capital expenditure when you do not know what your level of profits is going to be because you do not have control over your margin?

Adhish Patil

So the thing is one thing is for sure because we have been doing this business since last 30 years what we have realized is that the kind of product profile we have and the kind of efficiencies we have our competitors and the level of backward integration 15% to 16% EBITDA margin is fairly easy means it is not something very optimistic. So definitely this scenario is transitory in nature and it would not sustain for long. So we know that it will revert back, but with this if we stop doing capex that will definitely impact our growth in third and fourth year and as far as this INR depreciation

Good morning Sir. In previous concall you said that you have backed out from PLI scheme as you were able to complete the project in 20 Crores not meeting the government’s capex requirement of 80 Crores but in recent investor presentation PLI scheme is still mentioned so I wanted to know if these both are linked?

Adhish Patil

The thing is I think that is missed out overlooked we will correct that. Thank you for pointing out. No worries Sir. As we know we have heard a lot about anti-China in some industries impact is already on ground how is it impacting the chemical sector and I wanted to know how dependent are the China on raw materials for FY2023? Right now still approximately our imports and indigenous purchases like 50:50 and as I said that around 15% to 18% of the raw materials are available only in China rest can be procured from rest of the world so that risk is always there so we have developed technologies

Yes thank you for the opportunity. Sir what is the volume growth in Q1?

Adhish Patil

So there is no volume growth in Q1 only the exports has some very small around 2% to 3% kind of a volume growth but mainly all the growth is because of the higher selling rates what we have charged in Q1 and basically it was like either you achieve the volume growth and keep the rates low. So those are the only two options. Understood so volumes were flat for the quarter? But we expect it to grow because it cannot remain flat for longer periods because then the inventories will go down. Sure I understand. What percentage of your revenue are long-term contracts versus spot business or is it mos

Good morning. Sir, my first question is on the tax rate, why is the tax rate for the quarter higher compared to Q1 of last year year-on-year and I think even sequentially?

Adhish Patil

I think that is more to do with the deferred tax otherwise it remains same because we have gone for that 22 point something plus taxation so we have opted for that. Full year what should be the tax rate for you then? Ideally around 25% is what we expect. What has been the reason for the formulation sales not growing in this quarter they have actually dropped 2% year-on-year? Though the formulation sales did not grow but then the profitability was very, very good I think Vishwa is on the call so he will answer this question. Yes, so basically last quarter or last year same quarter sales were hi

Thank you everyone for joining us on the call and having a full discussion. We look forward to interacting with you again with a bit of good set of numbers in the next quarter. Please reach out to us by our IR consultant SGA or directly to us if you have any further queries. We can now close the call. Thank you.

Management

Speaking time

Adhish Patil

Gagan Talreja

Chirag Dagli

Rupesh Tatia

Aejas Lakhani

Bobby Jayaraman

Moderator

Harit Shah

Vishwa Savla

Anchal Kansal

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Opening remarks

Adhish Patil

Thank you. Good morning everyone and thank you for joining us today to discuss our Financial Results for the Quarter Ended June 30, 2022. The company’s performance Q1 FY2023 was impacted due to the challenging business environment in terms of constant depreciation in the domestic currency leading to provision of notional forex losses, lockdowns in China affecting purchase decisions in uncertain scenario, fear of recession in key geographies driven by ongoing geopolitical conflict, and continuous upward momentum in crude, coal and other raw material input cost. I will now quickly take you through segment wise performance and then I will delve more into impact of rising input costs, the overall demand scenario and the company strategy to counter the ongoing difficulties. First I will take standalone business performance: Standalone revenues for Q1 FY2023 stored at Rs.551.4 Crores as against Rs.507.4 Crores a growth of 9% year-on-year. Standalone business contributed approximately 86% to

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