ACUTAASNSEQ3 FY23February 10, 2023

Acutaas Chemicals Limited

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Management on call

Naresh Patel

CHAIRMAN AND MANAGING DIRECTOR, AMI ORGANICS LIMITED

Bhavin Shah

CHIEF FINANCIAL OFFICER, AMI ORGANICS LIMITED

Tarun Shetty

PHARMA ANALYST, HAITONG SECURITIES

Key numbers — 40 extracted

rs,

nings Conference Call. I would like to wish you a very Happy New Year. Before we dive into numbers, let me take a moment to comment on the global market and its implications on the industry in gener

continues its growth momentum and margin expansion path. During the quarter, our top line grew by 8% year-on-year. The slower growth was primarily due to the deferred shipments of certain goods. If

15%

marily due to the deferred shipments of certain goods. If you adjust them, we would have grown by 15% during the quarter. Coming to the business segment: The pharmaceutical intermediate business co

25%

the coming quarter and for the financial year 2023. We are working hard to achieve our target of 25% growth and I'm hopeful of achieving the same. With that, I request our CFO – Mr. Bhavin Shah, to

Rs. 152 crore

s. I will begin with quarterly updates: Revenue from operation for the quarter was at Rs. 152 crore, up 7.9% as compared to Rs. 141 crore in Q3 FY22. The gross profit for the quarter was Rs. 70 cro

7.9%

with quarterly updates: Revenue from operation for the quarter was at Rs. 152 crore, up 7.9% as compared to Rs. 141 crore in Q3 FY22. The gross profit for the quarter was Rs. 70 crore, which

Rs. 141 crore

es: Revenue from operation for the quarter was at Rs. 152 crore, up 7.9% as compared to Rs. 141 crore in Q3 FY22. The gross profit for the quarter was Rs. 70 crore, which was flat on YoY as well as s

Rs. 70 crore

152 crore, up 7.9% as compared to Rs. 141 crore in Q3 FY22. The gross profit for the quarter was Rs. 70 crore, which was flat on YoY as well as sequential basis. The gross margin for the quarter was 46%. The

46%

70 crore, which was flat on YoY as well as sequential basis. The gross margin for the quarter was 46%. The lower gross margin was due to high cost of inventory and change in product mix. EBITDA for

Rs. 30.8 crore

rgin was due to high cost of inventory and change in product mix. EBITDA for the quarter was at Rs. 30.8 crore, up 2.9% as compared to Rs. 29.9 crore in Q3 FY22. On a sequential basis, EBITDA for the quarter

2.9%

igh cost of inventory and change in product mix. EBITDA for the quarter was at Rs. 30.8 crore, up 2.9% as compared to Rs. 29.9 crore in Q3 FY22. On a sequential basis, EBITDA for the quarter increased

Rs. 29.9 crore

y and change in product mix. EBITDA for the quarter was at Rs. 30.8 crore, up 2.9% as compared to Rs. 29.9 crore in Q3 FY22. On a sequential basis, EBITDA for the quarter increased by 9.5%. EBITDA margin for

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Guidance — 20 items

Bhavin Shah

opening

“This conference call is being recorded and the transcript along with the audio of the same will be made available on the website of the Company and exchanges.”

Naresh Patel

opening

“We expect the demand to gradually improve in the current quarter.”

Coming to the import substitute products

opening

“Now, let me discuss our efforts on the Speciality chemical business: On the product side, you might recall I had mentioned during our previous call that our Jhagadia facility acquired from Gujarat Organic was using furnace oil as a fuel and we plan to change it to coal.”

Coming to the import substitute products

opening

“This project has started and it will help us to boost our margins.”

Coming to the import substitute products

opening

“Third, we are also striving towards becoming more competitive in paraben and I will update you on the same once we complete the project.”

Now on the demand side

opening

“These are all new customers and we expect the volume to ramp up from them in coming quarters.”

To conclude

opening

“We are working hard to achieve our target of 25% growth and I'm hopeful of achieving the same.”

Padma Raju Mathi

“Is it like whatever the volume offtake that was supposed to happen this quarter that is going to happen in the next quarter, it's because of some logistic issues or can you specify some color on this?”

Bhavin Shah

“Q1 ‘24 will be the clean quarter and so the impact in Q4 will be very minimal on this account.”

Naresh Patel

“So, due to these efforts, this quarter and next quarter will be much more advantageous for us to improve our Speciality segment as well.”

Risks & concerns — 6 flagged

Before we dive into numbers, let me take a moment to comment on the global market and its implications on the industry in general: Towards the end of 2022, while global supply chain issues rationalized to some extent, the demand environment was impacted by inflation and resulted in mild slowdown.

— Naresh Patel

I believe we will see the improvement in EBITDA margin in Q4 as well, driven by lower freight utility cost and impact of cost optimization programs.

— I will begin with quarterly updates

And sir, like, how should be the impact of the flow chemistry assessed, like how much yield will be increased?

— Kevin Gandhi

And going forward, I mean, is it very difficult to get in this area or any Company based out of India can get into it if they invest time and money?

— Vishal Prasad

So, we are not able to sell them, but they are quoting it at a lower price and keeping us at pressure.

— Naresh Patel

There are some prices having decline also in the old product and some are flattish.

— Naresh Patel

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Q&A — 11 exchanges

Sir, my first question is related to our segments classification. Till Q1 of this financial year, we used to classify it under 3 segments, pharma, Speciality Chemicals and others. In the last quarter, we started classifying other segments in pharma. Now, when I see, this quarter looks like the other is being classified under Spec Chem. So, from here on we are going to classify other segments in the Spec Chem or the pharma?

Bhavin Shah

Sir, we have now broadly 2 segments only, Pharma and Spec Chem. So, the product which fall under pharma and supplied to pharma as advanced pharma intermediate will classify it under pharma intermediates and product which is coming as a Speciality will go into Speciality. So, we clearly have 2 segments only. Sir, the reason why I was asking is when I look at our first half reported number in the presentation and if I add up this segmental number in Q3, it's not matching to the 9 months reported numbers segment wise. So, that's the reason I asked. Anyway, I will take this offline. So, my second

This contract, the numbers I can't say because the counterparty is also a listed Company. So, we both are bound with several bindings. So, the thing is that this is a very brand-new launch product and having exclusivity with them for the next 10 years. So, 10 years, they will remain as a sole supplier in the world. And the demand is increasing every gradually very exponentially I can say for 30%, 40%, 50% kind of things, and they want to expand their production capacity as well. And that is the reason why they signed a contract with Ami Organics for long-term supply. And these will be gradual.

Naresh Patel

Yes, it will be a very meaningful association with them. Sudarshan Padmanabhan: And coming on to the chemical side, I mean, this flow chemistry that is largely done and that should basically start probably by the fourth quarter, this methyl salicylate, I mean just trying to understand given that there is going to be a huge jump in volume, I mean when do we see the actual numbers kicking in because this year the capacity is underutilized and this high fixed cost can easily be absorbed by just the scale of this one product for the next few quarters? You rightly said that if it will be scaled up,

Sir, first on overall top line, I just wanted to understand given the deferment we have seen in this quarter and we are seeing positive momentum in Spec Chem side, what kind of growth one should expect in FY23 and FY24.

Naresh Patel

See FY23, as we say is that we are expecting and we are trying for the CAGR 25%. And that is where we are right now in line with that. The only thing is that everything goes well, there is no issues in that because we have a very good order book also in our hand. In FY24, similarly, we will remain in expectation of CAGR of 25%. Because forward contracts what we had done that will be helping us in pharma, will helping us to boost the business and as well as some originators who were not buying from us some of our products, they had also started buying from us. So, that will be adding more reven

Sir, my question is on the other expense side. We have seen 9% Q-on-Q in other expense. And in the notes we found you have mentioned that there is Rs. 27 million one-time shortfall fees for the insurance gain. Could you please throw some light on that.

Naresh Patel

So, in 2021, we had some small stock fire and that we had claimed in the insurance and that we received claim on that and shortfall of Rs. 245 lakhs or something like that. So, that will be in other expenses like that which we have booked as expenses. This is recognized in the third quarter. Because we received the claim in the third quarter. It happened in February 2021. Sir, on the financial expenses, the interest costs that we have recorded this quarter, so there is substantial increase Q-on-Q. So, here we have arbitrage of getting finance at a lower rate and we have kept investment at a hi

Sir, I was not able to understand the deferred shipment part. If you can please explain again. So, that was my first question. And the second question is that the EBITDA margin on the Spec Chem segment, that is quite reduced based on the Q-o-Q. So, like what is the exact reason for that? So, yes, 2 questions.

Naresh Patel

Deferred in the sense that the shipment which is planned in December is deferred by 10-15 days. So, it will be going in January. So, that is how it is a deferred shipment from us. So, that's why the sales is not booked in Q3, which will be happening in Q4. Whereas in Spec Chem margin it is stable and it is flat in Q2 and Q3. In fact, we improved our margin as we announced that quarter-on-quarter we improved our EBITDA margin and that is you can see also from the result, Q1 was 18%, Q2 was 19% and Q3 was 20.2%, And this has continued as I say that every quarter, it will improve 1%, 1.5% in EBIT

Sir, in the past, we have talked about our partnership with a firm who is helping us with opportunities in electrolyte additives. Could you talk about what is the kind of relationship that we have with that firm and what other things are they trying to help us with?

Naresh Patel

The firm is based in Israel and that called ARZ, and they are our marketing partner worldwide. So, our job is to make it and their job is to sell the product worldwide. And it is on a commission basis and revenue will be direct invoicing by Ami to the customer. So, it is an association between both of us. They will exclusively supply or represent Ami Organics worldwide. So, actually, in the area of electrolytes or is there something else that we are working with them? No, only in electrolytes worldwide, whereas they are our partner since last 14 years in Israel. When you say 14 years, it means

Naresh, congratulations on this deal with Fermion, I wanted to understand that we had given this Rs. 190 crores of capital expenditure guidance for 2 years. Does that take care of our capability to serve in this particular contract? Or will we have to do some more capacity expansion?

Naresh Patel

No. This will definitely cater this contract. So, this contract is from our new capacity, which we are building in Ankleshwar, but currently, it will be supported by our unit 1 in Surat. Later on, it will be transferred to our Ankleshwar facility. And in terms of not asking on margins for this contract, but we've historically made return on equity, return on capital employed of about 25%. That will not get diluted while in this contract. Those economics will continue for us. Yes. Naresh, just one more question on the revenue, how it has come so far in these 9 months, even if I take into accoun

I wanted to know what is your utilization in pharma and Spec Chem for this current quarter?

Naresh Patel

For pharma, it will be somewhere around between 60 to 64 whereas in Speciality it will be 35 to 40 in between that. Sir, this utilization seems to have remained similar for quite a long period of time. So, just wanted to understand what is it restricting your utilization to be in the similar range? And when can we see a meaningful increase in this? See, if I continue with the batch processes, my utilization will go up, but I had transferred several processes from batch to continuous. So, this has given us a leverage of releasing 6% to 7% of the utilization. So, that is the reason why you are s

Sir, the first question is, I mean, it's more a clarification than a question. When you say you maintain 25% sales growth guidance, are you talking for the full year of FY'23? Or are you talking about quarter 4 of FY'23?

Naresh Patel

Full year of FY23. Quarter 4, if I do 25%, then it will not be 25% for full year. So, I mean, as one previous participant asked, to be able to do 25% for the full year, fourth quarter will have to be very strong at more than 40%. Very strong. There is some slippage, which will benefit you because you indicated there is a deferment of sales from Q3 to Q4. But even adjusted for that, you will require north of 35-odd percent sort of a growth. Sorry to interrupt you here, but if you see in my past commentary also, our business is like Q1 is lower than Q2, Q2 is lower than Q3, and Q3 is lower than

Actually, I had a few more questions if the management permits. Yes, sir, can I go ahead with questions?

Naresh Patel

Yes, Tarun, you want to ask questions? Yes. Yes, please go ahead. Yes. Just a few questions on the volume and price, did you see most of the growth on the volume side or the price side on the pharmaceuticals? All are from the volume side. So, do you indicate pricing for each product has been flattish? Or do you see some decline? There are some prices having decline also in the old product and some are flattish. So, any revenue contribution from your key products, trazodone, entacapone, apixaban, can you give the percentages? So, the #1 product is contributing 22%, number 2 is 10% and number 3

Thank you Haitong team for hosting our conference call. Thank you, everyone, for your patience, and we hope we have been able to answer most of your queries. If we have missed out on any of your questions, kindly reach out our IR advisor E&Y and we will get back to you offline. Thank you very much once again for remaining patient on your holiday. Thank you very much.

Bhavin Shah

Thank you very much, everyone.

Speaking time

Naresh Patel

Gagan Thareja

Moderator

Bhavin Shah

Tarun Shetty

Vishal Prasad

Reena Shah

Chirag Lodaya

Padma Raju Mathi

Hardick Bora

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Opening remarks

Tarun Shetty

Thank you. Good evening, everyone, and welcome to Ami Organics Q3 FY23 Business Conference Call. We, at Haitong, would like to thank the management for giving us the opportunity to host this call. Today, from the management side, we have Mr. Naresh Patel – Chairman and Managing Director; Mr. Bhavin Shah – CFO of Ami Organics. I would now hand the call over to Mr. Bhavin Shah for the opening remarks. Thank you, and over to you, sir.

Bhavin Shah

Thank you, Tarun. Good evening, and Happy New Year everyone. We are pleased to welcome you all to our earnings conference call to discuss Q3 FY23 Financial. Please note that a copy of our disclosure is available on investor section of our website, as well as on the stock exchanges. Please do note that anything said on this call which reflects our outlook towards the future or which could be construed as a forward-looking statement, must be reviewed in conjunction with the risks that the Company faces. This conference call is being recorded and the transcript along with the audio of the same will be made available on the website of the Company and exchanges. Please also note that the audio of the conference call is the copyright material of Ami Organics and cannot be copied, rebroadcasted or attributed in the press or media without specific and written consent of the Company. With that, I would like to hand over the floor to our Chairman and Managing Director, Mr. Naresh Patel, for his

Naresh Patel

Thank you, Bhavin. Good evening, everyone. Welcome to our Q3 FY23 Earnings Conference Call. I would like to wish you a very Happy New Year. Before we dive into numbers, let me take a moment to comment on the global market and its implications on the industry in general: Towards the end of 2022, while global supply chain issues rationalized to some extent, the demand environment was impacted by inflation and resulted in mild slowdown. As we enter 2023, inflation seems to be easing across the world and gas prices have fallen to pre-war levels. The situation in China also appears to be improving with no spurt in COVID cases post the Lunar holidays. That said, even as these things are improving, we need to keep a close watch on each of them. Coming to the industry, demand for pharmaceutical continue to be soft during the start of Q3 FY23, but peaks in the second half of the quarter. We expect the demand to gradually improve in the current quarter. On that note, let us move towards the perf

Coming to the business segment

The pharmaceutical intermediate business continues to deliver strong performance during the quarter driven by exports, whereas the Speciality chemicals business was subdued during the quarter due to lower sales of top product.

Moving on to business updates

I’m pleased to inform you that during the quarter, we signed a multi-year, multi-ton, multi- million-euro contract with Fermion for one of their patented products. You may recall that during one of the previous calls, there was a lot of chatter on shifting APIs from Europe to India. Even during that time, I had mentioned that shifting of API to India is challenging, but what is happening is that European companies are reducing the stages of production and looking to outsource higher level intermediates from India. This contract is on the similar lines and demonstrates our marketing and technical finesse of capturing and converting the opportunity in a very short span of time.

Coming to the import substitute products

Our 2 already commercial products continue to show strong traction in the market whereas other two products developed this year have received trial orders. We have one more product to be commercialized in this segment along with a healthy product pipeline for the future. Lastly, electrolyte additives: So, far, we have sent our electrolytes additives to nine customers and one of them has already asked for the trial order, which validates our products quality and stability. Let me explain what I mean by product quality and stability. The product quality, purity and stability are imperative and undergo various steps of sampling a validation. As very minute deviation can also affect the overall electrolyte solution and thus impacting the battery performance and may create safety issues, therefore, the gestation period to commercialize this product is fairly long, and I believe we are at the tail end of this period. I’m confident to receiving commercial orders for these products in FY24. Th

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