AARTIDRUGSNSEQ2 FY23October 31, 2022

Aarti Drugs Limited

8,154words
162turns
14analyst exchanges
4executives
Management on call
Harshit M. Savla
Joint Managing Director – Aarti Drugs Limited
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
INR 77 Crore
s also expected to be completed by the end of FY 2023. The total capex during H1 FY 2023 stood at INR 77 Crores and is expected to be in the range of INR 200 Crores to INR 300 Crores for the entire FY 2023.
INR 200 Crore
3. The total capex during H1 FY 2023 stood at INR 77 Crores and is expected to be in the range of INR 200 Crores to INR 300 Crores for the entire FY 2023. Coming to capex for formulation segment - expansion at
INR 300 Crore
during H1 FY 2023 stood at INR 77 Crores and is expected to be in the range of INR 200 Crores to INR 300 Crores for the entire FY 2023. Coming to capex for formulation segment - expansion at Baddi plant is ne
INR 55 Crore
facturing facility. The total planned capex including product development expenses is budgeted at INR 55 Crores, out of which around INR 40 Crores is done. We expect plant to commence commercial operations in
INR 40 Crore
ed capex including product development expenses is budgeted at INR 55 Crores, out of which around INR 40 Crores is done. We expect plant to commence commercial operations in March 2023. At full capacity, the
INR 200 Crore
commence commercial operations in March 2023. At full capacity, the plant can generate revenue of INR 200 Crores. Products manufactured in this site will be majorly new age oncology drugs with pa
17%
e quarter, API segment, the largest segment of the company in terms of revenue contribution, grew 17% Y-o-Y. As stated earlier, the growth was mainly driven by an increase in selling price with an 11
11%
7% Y-o-Y. As stated earlier, the growth was mainly driven by an increase in selling price with an 11% volume both in export market and marginal volume growth in domestic market. We anticipate a hea
INR 82.5 Crore
d integration and falling raw material prices. Revenue from the Formulation segment stood up at INR 82.5 Crores for the quarter, up 9% Y-o-Y. The Formulation segment's share of the total revenue for the quart
9%
rial prices. Revenue from the Formulation segment stood up at INR 82.5 Crores for the quarter, up 9% Y-o-Y. The Formulation segment's share of the total revenue for the quarter was around 12%. The
12%
r, up 9% Y-o-Y. The Formulation segment's share of the total revenue for the quarter was around 12%. The Formulation segment's core focus area continued to remain export. During the quarter, export
44%
ment's core focus area continued to remain export. During the quarter, exports contributed around 44% of the total revenue. Now coming to Specialty Chemicals, Intermediates and others. This segment c
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Guidance — 20 items
Adhish Patil
opening
“The company is well on track to make this facility operational by the end of Q1 of FY 2024.”
Adhish Patil
opening
“We are resolving few scale-up issues of Tarapur Brownfield capacity installed in this financial year, and we expect this facility to start contributing to the top line from H2 FY 2023 onwards.”
Adhish Patil
opening
“We expect plant to commence commercial operations in March 2023.”
Adhish Patil
opening
“Products manufactured in this site will be majorly new age oncology drugs with patent expiry in coming few years.”
Adhish Patil
opening
“The business model for the unit will be a mix of contract manufacturing and own portfolio.”
Adhish Patil
opening
“We expect further moderation in the input cost going forward, which can further aid the operating margins.”
Adhish Patil
opening
“We anticipate a healthy growth for this segment, along with a sustainable increased profitability on the back of operating leverage, ongoing capex, backward integration and falling raw material prices.”
Adhish Patil
opening
“We expect the growth to remain in upward trajectory over the next few quarters for this segment.”
Rashmi Sancheti
qa
“And so earlier in last quarter, we said that from the second quarter onwards, we will be seeing improvement in the operating margin from the second quarter.”
Rashmi Sancheti
qa
“In the second half, how do you see this operating margin and gross margin going forward and for this full year, if you can give any direction or any guidance on it?”
Risks & concerns — 7 flagged
The company achieved a healthy top line growth in spite of geopolitical uncertainties, adverse currency movements across the globe, macroeconomic volatility and sustained inflationary pressure on some operating costs such as power and fuel expenses.
— Adhish Patil
Yes, actually, for a few of the KSMs, the market has been very volatile from January till date.
— Adhish Patil
It is very difficult for me to quantify.
— Adhish Patil
So there, also because of that also manufacturing utility costs have gone up quite considerably for manufacturing companies, I would say and as far as this gross contribution is concerned, as I was explaining, the negotiations which are happening, so if you take any particular month, the margins looks higher, but the problem is in the uncertain scenario of last 9 months, what has happened that we end up booking a lot of raw material at a higher price.
— Adhish Patil
Because I would have thought we are up for another wave of difficult Chinese supply chain.
— Gagan Thareja
Normally, we have volume contracts and prices due to volatile situation, we have decided to offer quarterly pricing only and quantities and volumes are fixed, and based on this quarterly raw material pricing situation, we change our pricing for the next product for long-term contract.
— Harit Shah
The issue is the pricing are so volatile every month, the price valuation is as high as some products, is as high as the 10%.
— Harit Shah
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Q&A — 14 exchanges
Q
Thank you for the opportunity. My first question is that higher realization in the API and the Specialty Chemicals segment, and then we are also talking about moderation in the KSM. We are still seeing the quarter-on-quarter drop in the gross margins so any specific reason behind that, any kind of forex loss or any other reason for such a drop?
Adhish Patil
Yes, actually, for a few of the KSMs, the market has been very volatile from January till date. And the thing is based on these macro situations we had piled up inventories also. So in some cases, we had purchased at a very high rate. If you see the ongoing negotiations on the raw material and selling prices for a few products, we can easily see 3% to 4% better margins. But then when it comes to taking the inventory loss on the accounting part, it is coming down. That is the main reason why still we are not able to show it in the rates. And there is no forex loss element right. Forex loss noti
Q
Thank you for taking my question. One thing, you commented EBITDA margin of 15%. So this is the overall EBITDA margin you are talking about? Or only API part, you said and secondly yes, you can continue, then we will have another question.
Adhish Patil
Yes, on an overall basis, but also on the API side because almost stand-alone business is contributing around 88% to the total revenues. So more or less, it will go hand-in-hand. Okay. Yes, fine. So in this quarter, whether we have any contribution from intermediate facility, any new projects we are working on. I did not understand your question. That new products were supposed to intermediate facility was suppose to start contribution. Correct. So that Brownfield expansion, what we had done in Tarapur for Specialty Chemicals, we are still not able to fully ramp up the capacity since you can s
Q
Thanks for the opportunity. So I just wanted to cross-check the number of capex mentioned in the commentary. So can you repeat that?
Adhish Patil
Yes. We said that around Rs.77 Crores has been done for this year. And what we hope that it will go around Rs. 200 Crores to Rs.300 Crores for this entire year because what has happened is we have ordered a lot of equipment for 2 of our Greenfield projects. So when you order, typically, you give around 15% to 20% advance. But when the delivery will come in, at that time, the outflow will be higher. So we expect that second half capex are much higher than the first half of the FY 2023. Got it. Thank you so much.
Q
Thank you for the opportunity. Actually I have couple of questions. First one would be how much revenue can we expect from the recently commissioned capex for the entire FY2023?
Adhish Patil
So you are asking how is the total revenue potential of the existing capacities right. Yes. So based on the last quarter prices, we can do upwards of INR 3,000 turnover even for the stand-alone company itself. Yes, so around upwards of INR 3,000 Crores for stand-alone company. And then we can add another INR 300 Crores for Formulation. So that will be a full scale potential for existing capacities. But then there are more capacities which are coming up in Q4 and then Q1 of next financial year. Yes, that was helpful. Second, I wanted to ask that in the press release, you have mentioned about th
Q
Thanks for the follow up. Just one question on gliptins, which we have started last year, last quarter, Q4 where are we in terms of both Teneligliptin and Vildagliptin and have you started any exports for the gliptins?
Harit Shah
So Teneligliptin, we are more or less production is stable. Our cost efficiency has improved, and we are working on making intermediates ourselves. So we are already going to get, we are improving our market share in domestic market, and export for this product is not substantial but we are concentrating getting more and more Indian market by another 1 or 2 quarters. And about Vildagliptin, we have just started export marketing and started submitting samples and validation batches, etc. So most only another 2 quarters, Vildagliptin we will be able to export more volumes, yes. Sir, if you all a
Q
Thank you Sir for the opportunity. I have a couple of questions. Sir, can you bifurcate capex for API and Specialty Chemicals for FY2023 for INR 200 Crores to INR 300 Crores capex?
Adhish Patil
Okay. So on a broader scale, some of it, say, around INR 40 Crores, INR 50 Crores would be the Brownfield and your maintenance-related capex. But the majority of it is almost 50- 50 at Tarapur Greenfield and Gujarat Greenfield projects. Okay, Sir. And what is the current capacity utilization for API and Specialty Chemicals? So current would be somewhere in mid-70s only. Thank you so much Sir.
Q
Thank you for follow up. Just on capex side, you said in first half, how much capex we have spent and how much remains to be spent in second half of FY 2023?
Adhish Patil
Yes. So the first half, we have done almost INR 77 Crores. And by the end of the year, we expect it to remain between INR 200 Crores to INR 300 Crores. Now the reason we are in such a broad range is because it might just go in April. So that is I am giving a range of INR 200 Crores to INR 300 Crores for the entire year. For the entire year, okay. So of that INR 600 Crores total capex, we are half in FY 2023. Yes. So the 2 Greenfield projects with almost INR 350 Crores kind of capex that will be completed by, you can say, June of 2023, June month of 2023. Most of the capex, which is like INR 35
Q
Hello Sir, with the chloro-sulphonation project moving to Tarapur, what exactly Greenfield expansion are we doing in Gujarat facility?
Adhish Patil
Yes. So Greenfield, that is we are doing a few special I mean, sort of intermediate, you can say, on specialty side. It will serve as a backward integration for our other main products. Chloro-sulphonation, we will be putting in the second site of Gujarat. The current Gujarat facility how much are we doing the capex. So that will be roughly around INR 150 Crores to INR 200 Crores. Okay, okay. And this facility is likely to commence production in Q1 FY 2024? Correct, by the end of that by the end of that quarter. That is it from my side. Thank you.
Q
Good afternoon. So I think you mentioned that volume growth has been flat in domestic market, and I think some 10% to 11% growth in export markets. So with all the API capex that is coming into picture, how are we planning to like ramp up? Like where are we seeing the market for its export or domestic? Because I see the domestic is still flat?
Adhish Patil
Yes. So the capex also which we have planned, that is for additional products. So there will be right now so basically, the market will be new for that and for the current, you can say, 20%, 25% underutilized capacity for few of the existing API products. We have the visibility the domestic market will pick up. One is that. And secondly, there are a lot of small export geographies you can say. For each product, a bit of it is left out. And also, we are having a lot of European focus and to update on that, recently, recent limits in this week itself, 1 of the facilities of Tarapur, the E22 faci
Q
Thank you so much for the opportunity. I have one question. The total expense in Formulation, can you please share how much is the developed markets and how much is for emerging markets?
Vishwa Savla
Yes. As of now, majority of it is for emerging markets because in regulated markets, we are yet to receive our approval in registration in the last 2 years or 2.5 where we have been focusing on regulated markets so most of our regulated market pricings are either in pipeline or under approval stage. So as of now, a majority of the revenue is coming from the emerging markets. Thank you that was helpful. That is it from my side and all the best for the upcoming quarters.
Q
I just wanted to ask a few questions. So first of all, I would like to understand that we have witnessed highest ever prices for retail products So my question is, do we expect the realizations to fall as the input costs have started to come up?
Adhish Patil
Yes, it will happen slowly because that is true. Because most of the time, API prices follow the input prices. So because across the board, slowly, the raw material prices will start going down, the API prices will come off slowly. Okay. What kind of time lag do you expect to have? So it will depend on how much I mean, order book you have piled up, but typically 1 to 2 months, you can say. Understood. And secondly, how much is the current differential between domestic and export API prices? Okay. So again, product to product, it is different. But definitely, the export prices are high. In some
Q
Sir, the first question is on the margins. Throughout the last 12, 15 months, not just Aarti, but all API companies have struggled with margin contraction. The reasons given out largely centered around high input prices and difficulty in passing the input prices on completely, also there were freight and utility price increases. Now RM prices are softening and you yourself indicated that in a couple of months, finished good prices will also sort of fall in line. So I mean, if that is the case, then what are your views for margin expansion? You are saying that you are probably going to exit the
Adhish Patil
Yes. Actually, as I was explaining earlier, you correctly pointed out those utility prices have also gone up. And apart from gross contribution, other major impact which API players are facing as compared to last financial year. Especially for the first half that is, is because of the coal prices. So the prices have more than doubled. I mean, they have remained like that for the long period. We hope that to come down. And what has happened indirectly because of these very high coal prices, now the power rates have also gone up because of thermal power stations because they also rely on coal. S
Q
Just one another follow-up question; I just want to understand how are the long-term supply contract structured and also like I want to understand long-term contracts from a buyer perspective as well as supplier perspective, basically, is there any like is it fixed or any escalation clause?
Harit Shah
Sorry I did not get the question. I just want to understand how are our long-term supply contract structured and also how like as a buyer and as a supplier, how are the contracts structured. Normally, we have volume contracts and prices due to volatile situation, we have decided to offer quarterly pricing only and quantities and volumes are fixed, and based on this quarterly raw material pricing situation, we change our pricing for the next product for long-term contract. And is it linked to any, say, particular commodities, say, ammonia? Yes, yes, yes. So each product has a different. We are
Q
Thank you, everyone, for joining us today on this earnings call. We appreciate your interest in Aarti Drugs Limited. If you have any further queries, please contact us or SGA, our Investor Relations. Thank you.
Management
Speaking time
Adhish Patil
59
Ranvir Singh
18
Moderator
16
Niharika
14
Rashmi Sancheti
13
Gagan Thareja
11
Harit Shah
9
Esha Sawla
5
Parth Vasani
4
Harsh
4
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Opening remarks
Adhish Patil
Thank you very much. Good afternoon, everyone. On behalf of Aarti Drugs Limited, I extend a very warm welcome to everyone joining us today to discuss our financial results for the quarter ended September 30, 2022. On this call, we are joined by Mr. Harshit Savla, Joint Managing Director; Mr. Harit Shah, Whole Time Director of Aarti Drugs; and Mr. Vishwa Savla, Managing Director of Pinnacle Life Science Private Limited; and SGA, our Investor Relations Adviser. I hope everyone had an opportunity to go through the financial results, press release and investor presentation, which have been uploaded on the stock exchange and on our company's website. In the quarter gone by, the pace of civil construction activity for the Gujarat capex has picked up considerably towards the end of Q2 FY 2023, which remained affected at the beginning due to monsoon season. The company is well on track to make this facility operational by the end of Q1 of FY 2024. We are resolving few scale-up issues of Tarapu
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