Ladies and gentlemen, good day and welcome to the Q3 FY25 earnings conference call of Aarti Drugs Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then Z to turn your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Adhish Patil, COO and CFO, Aarti Drugs Limited. Thank you, and over to you, sir.
Thank you. Good morning, everyone, and a warm welcome to present our earnings conference call of Aarti Drugs Limited. On this call, we are joined by Mr. Harshit Savla, Joint Managing Director, Mr. Harit Shah, Whole Time Director of Aarti Drugs Limited, and Mr. Vishwa Savla, Managing Director of Pinnacle Life Science Private Limited, and SGA, our Investor Relations Advisor. I hope everyone had an opportunity to go through the financial results, press release, and investor presentation, which we have uploaded on the stock exchange and on our company's website. We are pleased to announce that Aarti Drugs has recently received approval following a successful inspection by the USFDA authorities at its API manufacturing facility located at Plot Number E22, Tarapur, Maharashtra.
Now, the company is in receipt of the Establishment Inspection Report, also known as EIR. EIR is a report which includes details of audit done. Due to this, the company can now export its API products such as Ciprofloxacin HCl, Zolpidem Tartrate, Paracetamol, Celecoxib, and Niacin in the US market in coming years. This milestone underscores the company's commitment to maintaining high standards in its manufacturing operations. Additionally, we are excited to share that Aarti Drugs has entered into a shared subscription and shareholders' agreement with Prozeal Green Power Pvt. Ltd. and Prozil Green Power 6 Pvt. Ltd., a special purpose vehicle.
The initiative is aligned with the company's commitment to green energy and optimizing energy cost. As part of this agreement, Aarti Drugs will acquire at least a 26.25% equity stake in the SPV in compliance with applicable electricity laws. The SPV is formed for developing, constructing, operating, and maintaining a solar power plant for captive consumption by the company.
This solar plant will give us approximately 8.9 million renewable units per annum, and it is expected to commence the operation by end of H1 FY26. This can result in a full-year annual saving of around INR 3.6 crores for our Gujarat plant. This initiative will reduce around 1,000 tons of carbon dioxide emissions due to the use of renewable energy. The company remains committed to further take up more such initiatives in the near future. Also, we are delighted to share that our EcoVadis Assessment Score for the current year is 69, 89th percentile globally, and we have only secured the silver medal for the company as a whole, covering all the locations. The EcoVadis platform helps you manage ESG risk and compliance, meet corporate sustainability goals, and drive impact at scale.
This should also help the company in marketing its products in highly regulated markets like Europe and the U.S. Coming to the financial performance for Q3 FY25, the company reported a revenue of INR 568 crores compared to INR 607 crores, reflecting a slight decline of 6%. This is mainly due to reduced market prices and weaker demand in the formulation segment and antibiotic API segment. Although prices remained stable during the December quarter, there was a slight negative price revenue when compared to the same period last year. Despite this reduction in revenue, the gross profit increased by 7%, reaching INR 207 crores, up from INR 202 crores. Formulation revenue for the quarter stood at INR 48.6 crores, with 47% of its revenue coming from exports. We are focused on strengthening our export-driven growth while managing the domestic performance.
Now, coming back to the API segment, the Greenfield Project at Saykha, Gujarat for specialty chemicals, which is also related to the backward integration, will commence trial production in this quarter, most probably in the month of February itself. With this, the operating leverage is expected to kick in from the subsequent quarter with improved capacity utilization. This will also help us in improving our gross margins. There had been certain seeding issues in the Tarapur Greenfield Project, which are sorted now, and we expect to ramp up the production to 500-plus tons per month by the end of March 2025. In total, we will have a sequential ramp-up of capacity to 1,600 metric tons per month by the end of FY26.
We are further enhancing our formulation capability with the addition of CapEx by updating facilities by the end of this financial year, which will broaden our market reach and product diversity. Over the years, we have dedicated our efforts in developing niche capabilities by leveraging our expertise and innovative approach. Through continuous research and development, we strive to stay ahead of the curve, pushing boundaries and setting new standards for product innovation in our segment. During the nine-month FY25, the company incurred CapEx of INR 136 crores, mainly towards capacity expansion, backward integration, and new product launches. We anticipate a total CapEx of INR around 200 crores for the full year.
These CapEx would be mainly through internal accruals and partly through term loans. By controlling the entire supply chain from raw materials to finished goods, we significantly reduce our reliance on external vendors. This integration allows us to maintain strict quality control at every stage of production, ensuring that we consistently meet the highest standards. Although we are currently dealing with some short-term challenges, our focus remains on our long-term goals. We are optimistic that our ability to achieve strong double-digit growth in revenues in the coming years. For FY26, we are aiming for EBITDA margins between 13% and 14%, which highlights our commitment to maintaining financial health and enhancing operational efficiency.
Despite API pricing pressures driven by fluctuating raw materials, heightened competition, and regulatory demands in global markets, we remain committed to achieving growth and profitability by enhancing operational efficiencies and expanding our market presence in regulated markets. We are dedicated to tackling these challenges and emerging stronger in the future. With this, we can now begin the question and answer session. Thank you.
Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchstone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Ankit Gupta from Bamboo Capital. Please go ahead.
Thanks for the opportunity and congratulations for getting the USFDA approval for our API plant. So my first question is on this, the approval and the kind of opportunity this opens up for us. So Adhish, if you can talk about how much revenue we can generate post this USFDA approval from this plant, and how do you see the US market opening up for us? What are our plans to go there? What kind of margin improvements we can see from once we start production from this plant and selling to the US market?
Perfect. Our current USFDA plant has two main production lines, and in addition to that, it has one small pilot scale line for niche means high-value and low-volume APIs. Now, if we go to the full potential of the plant, we can reach INR 70-80 crores per annum. Having said that, we had actually in past plans to further expand our USFDA block, and we had in fact put up one building, but we halted that CapEx because we received more data back then. Two more big production plants can come. With that, probably we can double the current potential of INR 70-80 crores per annum. However, the margins from this plant would be quite different from what we make in the rest of the units.
In fact, when USFDA inspected structures, the product which you are selling in the US market through this facility was having EBITDA in almost, you can say, late 30s% EBITDA margin. So we can at least expect 30-plus% EBITDA margins coming from this facility.
Sure. But hello?
Yes.
Yeah. But Adhish, the market has, even the regulated markets for the products that we do have become more competitive now. There have been more players which have gone into, and the kind of product that we manufacture currently seem to be relatively pretty competitive kind of products. So when we had USFDA approval, the times have changed significantly now. So do you think 30%-plus kind of margins from this plant is possible even currently, or?
Yeah. Actually, it is quite possible because when it comes to API manufacturing facilities for USFDA, so there are very limited facilities which manufacture APIs for USFDA. In formulation, it might be slightly different, but in API space, and the main trick is to manufacture that product year-round. If there are more changeovers in the plant, obviously the EBITDA margins get a hit because of the changeover.
It takes a lot of time, and we lose around 14-15 days for each changeover in terms of capacity. So the key would be to keep one product in one production line and try to run it as maximum as possible. And if we are able to do that, I think 30-plus EBITDA margins should be fairly achievable based on what prices we observe for those APIs running the European markets. The price is quite high.
Which products do we plan to manufacture here from this plant?
There are certain products where we already have US DMF. Obviously, now there will be more queries from U.S. to update the DMF now that the plant is under NAI status. So in fact, we have received a few queries, and we have been responding to them. So we hope that these old products, if we can run them for a maximum period of time without changeovers, then it should get us that 30-plus EBITDA margin.
Okay, but when do you start selling to the US market post-operation for the DMF from here?
Sorry?
When do you start?
Okay. Understood. So the first market, I think, which shall open up should be the European markets for us because we had imported from that facility. Even though we had EDQM approval, we were not able to sell even in the European markets. So I think the first factor would be European markets and then US markets as well. But as you correctly pointed out, that, because this is a highly regulated market, the gestation period is higher. So the meaningful contribution may not come from FY26 itself. Probably it will start flowing in FY27.
Sure. Sure. And on the other markets that we do in our segment, so how is the market scenario currently? You have mentioned about the price pressure continuing, although there is some stability in this quarter. But even on YOY basis, we have seen, as you mentioned in the press release and presentation, that the pricing pressure on a YOY basis continues. So if you can talk about how is the scenario in the market currently for the markets we cater to, domestic as well as unregulated markets, and how do you see this scenario panning out for us next year? Although you mentioned that we should improve our margins for 2022, if you can talk about the industry landscape currently and comparisons.
So first, let's talk about the December quarter, which went by. So in the December quarter, on YOY basis, we have seen a price decline of only around 2%-2.5% on an average basis. So it is not that much. It was expected by us that on YOY basis, the price negative variation should decrease because the decline in the prices had started back in December 2023 itself. And the current prices, the quarter-on-quarter prices, they are seeing a similar trend. There's only a couple of percent we have seen the prices have gone down. In fact, in certain products, the prices have gone up as well, depending upon the raw material scenario.
So what we see now is that further price decline should not be there. In fact, it is not there in the last quarter as well throughout the three-month run. And if at all, if the crude starts going up, probably because of the Russian sanctions or whatever, in case it goes up, the prices of API might, in fact, veer off the trajectory.
But even if it stays stable, and in fact, I would say that if it stays stable, it is good for us, there should be gross margin unlocking, which might take in coming quarters purely because in the falling trend, because we carry an inventory of around 9,200 days and we do FIFO basis for accounting, it always impacts our P&L in the falling raw material as well as selling prices scenario. So now that it has stabilized, I think the gross margin should, in fact, improve on a sequential basis.
Sure. Sure. One question on the medium to long-term basis. With this USFDA approval and the specialty chemical plant commencing operation hopefully in this quarter, over the next two, three years, given how the pricing pressure is currently, and let's say the prices remain for the APIs, our products, and specialty chemicals remain around that, two, three years down the line, how do you see the revenue and the margins panning out for us, let's say, in 2027, 2028?
Yeah, so the revenue guidance, what we had given, obviously, we revised it down in the last quarter because of the fallen prices to say roughly around INR 4,000 crores of revenue on a consolidated basis. It's still achievable in three years' time, but as far as margins are concerned, see, we can say that if the situation what is there now, if it remains like that for the next two to three years, we should definitely start inching towards 15% EBITDA margins, frankly speaking.
Now, we are basing that estimate based on a few factors like one is backward integration, as we pointed out in the specialty plant in Saykha. Second is the higher utilization of the capacities of the second greenfield project, that is the Salicylic Acid. That should give a positive impact on the gross margins and EBITDA margins.
And thirdly, based on the regulatory approvals which we have got, USFDA apart, we have also got EDQM approvals for certain products. And also, recently, we were inspected by ANVISA, the Brazilian authority. A few of them were the renewals, so that is okay. But one was related to the antifungal product of ours, which was the first time. So it has a big market in Brazil. So that will also help us grow more and more in higher margin markets. So based on all these factors, we feel that we should inch towards that 15% EBITDA margins in two years' time.
Sure. Thank you, and wish you all the best.
Thank you.
Thank you. Ladies and gentlemen, to ask a question, you may press star and one. The next question is from the line of Dhwanil Desai from Turtle Capital. Please go ahead.
Hi, Adhish. Good morning and congratulations for the USFDA approval. So my question is, if I go back in the history of the company, when we were making this 34%-35% gross margin, at one point in time, till 2015, 2016, we were making 14%-15% EBITDA margin. While we are now with 16.6% material cost, which is 34% gross margin, we are now making 12% EBITDA margin with much higher revenue. So do you think this is because of the under-absorption of the cost from the newer facilities and operating leverage itself is good enough to take margin to 14%-15% even without any improvement in gross margin that you are alluding to? So any thoughts on that?
Yeah. It's an interesting question and nice observation, actually. So yes, what you say is correct. We had last year, since the beginning of the year itself, we started this current year, 2025, we started with the greenfield project of Salicylic Acid. And frankly speaking, it caused quite a bit of drag as far as profitability is concerned. If you talk about EBITDA level, I can say at least 1% of drag it might have created had it been properly utilized. And along with that, there are certain products, there are certain products which we have scaled up in terms of market share. But we haven't really put the most efficient process at the plant scale. And there are plants which we have already done the R&D with the process ready.
We'll be going with small brownfield. I won't say brownfield expansion, but it's more related to the modification. Some brownfield Capex would be there, mainly to the gross contribution profile of certain antibiotic products where we are strong in terms of market share, but we are not that strong in terms of profitability. I think with those few changes, the profitability will be right on track with the higher utilization of the greenfield facilities which have come up online and with a few tweaks in the processes in the antibiotic space. In the last particular quarter, our formulation segment also did not do well, which has created further a bit of drag in terms of EBITDA margin. That is related to the December quarter. Perhaps for the coming quarter, Vishwa, are you on the line?
Yes. Yes. I'm on the line.
Yeah. Can you explain the recent features?
Sure. So for the current quarter, basically, we had lower sales, both specifically in the domestic market and also in some of the international markets. We had slightly lower sales. However, going forward into the next two quarters, we have a strong order book. So we will be seeing a good growth, especially in the export segment.
Okay. So essentially, I think our formulation segment was close to 300% growth, if I understand correctly. So how should we look at formulation segment, both in terms of top line and margins going forward?
Yeah. So in the very short term, it was in the next coming quarter, we are expecting a flat growth. But over the next for the next financial year, we have pressed up our capacity. So we have recently completed a Brownfield expansion in the formulation segment, which has added about 30% additional capacities, for which revenues will start kicking in from Q1. And we have also received the UK MHRA and the USFDA approvals for the formulation plant over the last few quarters.
And we are also expecting to launch a few products, a few new products from that side. So considering all of that, we are prepped for a higher growth with the added capacities and new products. And the shift of revenue more from the domestic segment, which is PMO, to the international markets, we would also see a considerable improvement in these years.
Got it. One last question, and I'll come back into it. So another question, Adhish, is that let's say next year, we are expecting a decent growth, and I assume it is based on the there is no negative rate variance that we are kind of factoring in that number. So with this new capacity coming in and no negative rate variance, can we look at 20% plus kind of a volume growth next year?
Yeah. So volume growth, we will definitely try for 15%-20%. No doubt about that. We'll try to, with the help of salicylic acid, I hope we'll get to those numbers.
However, as far as the negative rate variance is concerned, what I see is if you see current year on a sequential basis, quarter on quarter, so June quarter, then September, and in December, I think there was in total, the way we started the quarter and where we are right now, we have seen some 5%-7% price drop in the current financial year itself. Now, it is not dropping December onwards. But so let's say 6% and for half year. So probably 2%-3% on entire yearly basis, there might be a negative rate variance for FY 26.
Okay. So essentially, then we are looking at, let's say, 15%-20% volume growth and 2%-3% negative rate variance. Then we're looking at 15% value growth over the next year. Is that how we should look with much better margins?
Correct. Correct.
Okay. Got it. That's it from my side. Wish you all the best, Sadus.
Thank you.
Thank you. Participants who wish to ask a question may press star and one now. The next question is from the line of Rashmi Shetty from Dolat Capital. Please go ahead.
Yeah. Thanks for the opportunity. Just a quick question on the other expenses. This quarter, it seems to be pretty high compared to the one on a YOY basis, if I just compare. Is it that it is taking up all the new facility cost also, or there are more to come yet? Is this a new beast? That is what needs to be understood from a quarter-to-quarter perspective.
Thank you. Actually, this year, sorry, this quarter, we have additionally provided around one crore of doubtful debts, so there was a slight bump because of that, and certain cost was related to the CPhI fall, which took place in the quarter of December and because of the Diwali expenses, so because of that, there were slightly higher other expenses in this quarter.
So these are non-recurring in nature, you mean?
Yeah.
Okay. The fixed cost related to the newer facilities of the two greenfield facilities, that cost is expected to come in the coming quarters, or it's already been expanded?
Yes. So for the first greenfield project, which was in Tarapur, so that we have done, put to use. So all those costs are being expensed out, including the interest as well as depreciation as well for the first greenfield project. For the second greenfield project, where the trial production will be starting now, once the trial production is successful, once we are sure that at plant level, there are no teething issues, then immediately we'll do good deals. And then after that, the additional cost of the second greenfield projects will start coming in.
Understood. And your specialty segment, quarter on quarter, has improved? This is basically from the existing products only or from the new Greenfield plant or from the new Saykha plant? If you can elaborate on that part. And how should we see the specialty segment revenues in quarter four as well as in FY 26?
So the second revenue mainly was because of the campaign-based products. There are certain products which are old, old products itself, but there are campaign-based requirements. So that is why this last quarter we did well. Having said that, the chlorosulfonation line expansion, what we had done, actually, there is a slight update in that. So we were planning to have that 300-400 tons per month capacity with a different continuous process. However, what we have seen is that because of that new process, the quality of that particular raw material is causing lower rates in the derivatives. So because of that, the acceptability in the market of the product may not be high with that other newer process.
That is the reason why we have taken a call to roll back that process to the old one, where, in fact, last nine months, we have been suffering losses because of these quality issues for that chlorosulfonation, the newer chlorosulfonation line, which has been rolled back, and now, all those losses have been already curtailed. In fact, now it is running more efficiently in a batch format, so there will be slight improvement in gross margin on the immediate basis from March quarter onwards, but as we scale up that with the old process, the margin should improve, and we are taking steps to increase that capacity to the original planned levels with the older process as well. That might take some time, three to four months, to come up with that capacity.
So the Brownfield plant, for the chlorosulfonation line, that is rolled back. And is it going to start again, or you might look at the HEA Greenfield plant for this chlorosulfonation line?
Yeah. So it was from 300-400 tons per month. So it has been rolled back to 100 tons per month. And now it is operational at 100 tons per month as of now. But we'll be continuing.
It will be continued, right, at 100 tons? It will be continued at the same capacity?
Yes. So this is a new phase plant we're talking about. So it will continue with 100 tons and not with that 300, 400 tons. But anyway, we never reached that mark. We were operating that plant only at 40 to 50 tons per month.
Got it. So just to understand, this quarter was mainly driven by the ex-sulfonation products. And you are expecting similar sort of revenues in quarter four also?
Yeah. More or less, that should be a correct way to look at it.
Okay. And any plans for your greenfield project for chlorosulfonation line at the Saykha? Anything which you are planning, or it will get further delayed?
No. So that project is almost done. So we are starting. We got all the necessary permissions, forest permission and the EC permission. In fact, that was the main reason for a bit of delay. But we got all that. We also procured the raw materials. So anytime soon, we will be starting the trial production in that plant. So very soon.
In the Dahej plant, you meant?
No, this is the Saykha plant. The Dahej plant, we haven't started the project yet. We have the plant part, but we haven't started the project yet in the Dahej. What I was talking about was of Saykha, which is again in the order.
Okay. So just to clarify, Saykha is an ex-chlorosulfonation product, right? And the Dahej?
No. Saykha one is mainly for backward integration for antidiabetic line. And along with that, it will have, as you can see, byproducts, which will be second products which we'll be selling outside.
Got it. So basically, we just have one new line of chlorosulfonation only, which is a Brownfield plant, right?
That is in Tarapur. Correct.
Yeah. Okay. Thank you. That's it from my side.
Thank you.
Thank you. Participants who wish to ask a question may press star and one now. The next question is from the line of Nilesh Ghuge from HDFC Securities.
Good morning, sir. I hope I'm audible.
Sir, there is a lot of disturbance from your background.
Can you hear me now?
We can hear you, but.
Can you hear me now? Can you hear me now?
Yes, please. Please go ahead.
Yeah. So I have a question on the slide number 33, where you have mentioned that product vendor development is in the pipeline. So can you just explain which products you are planning to launch maybe 15 months from now or maybe by the end of FY 26? This is my first question.
Okay. So Vishwa, would you like to highlight on the formulation part?
Sorry, I was disconnected. I just joined back.
Yes, so what they want to know, what they want to know is what products are we planning to launch in the next 15 months, one to two years?
So we have in the oncology segment, we have five products where we are either filed or will be filing very soon in the US as well as Europe. So these are the latest oncology new products. So products like Dasatinib and Lenalidomide, Abiraterone. These are some of the products that we are planning to launch both in North America and in Europe and, of course, in some of the emerging markets. As well as we are launching some of our antidiabetic portfolio in the DPP-4 inhibitors and SGLT2s. So we have about six or seven products in that category that we will be launching over the next one and a half years.
Okay. And as far as the.
Hello?
Yeah,
yeah. I can hear you.
Yeah. And as far as this API and the second line is concerned, so we have now a dermatology product. So we are ready with a few derivatives of that product as well. So it all depends on how quickly the sales of the dermatology product picks up. If it is normal, then we also have the option to manufacture the derivatives of that, which goes in cosmetic and skin line. And the methylamide-based products, what we were talking about, is actually the greenfield project which is happening in Saykha. So that will be mainly because we'll be going for backward integration. There will be some sister products or byproducts you can call, which will come out. So we'll have to sell that. So those will be those products. And antifungal, we recently have launched fluconazole since last few months.
Now you can already see that the antifungal contribution to the sales has already increased by 3% year on year. That's what the other one.
Okay. And just one clarification, sir. You mentioned that all these products will be launched, particularly the greenfield product, greenfield brand, will be launched in this month itself, or the commission will start in this month, right?
So you can say at least greenfield products will start with corporate itself, actually. So let's say by Q1, you can start seeing the results of the sales in the financial.
The products from your Saykha facility will start this year.
Correct.
Commercial orders will start in Q1. Okay. Thanks, sir. Thanks for your patience. Thanks, sir.
Thank you.
Thank you. The next question is from the line of Neha Kharodia from Abakkus Asset Manager LLP.
Yeah. Hi. Thanks for the opportunity. So my question was regarding the negative price variance in the API. So is there any particular API that you would want to highlight wherein the price decline may be higher as compared to the other general APIs?
So mainly what we have observed, mainly, it is the antibiotic segment, the Fluconazole, where the price decline was more than other products. In some products, it was in fact positive as well, but it was mainly due to the antibiotic segment.
Okay. And any comments on the metformin prices?
Harish, would you like to answer this?
The Metformin prices are very stable now. As of now, there's no change.
Okay. Understood, and in the antidiabetic portfolio, as of now, which are the other contributors other than Metformin?
Yeah. So we have another product called Pioglitazone, which goes along with Metformin in our antidiabetic category. And we have Teneligliptin as well. And Vildagliptin is another product, which means there is not a meaningful contribution yet, but we have taken commercial batches of that product as well.
Understood. And also, in terms of revenue contribution from Metformin for overall APIs, how much would it be?
Antidiabetic standalone basis, I think it was almost around 12%-13% now, the antidiabetic segment. Yeah. It is around that level for the standalone company.
Understood. Okay. Thanks for answering the question.
Thank you.
Thank you. Participants who wish to ask a question may press star and one. Ladies and gentlemen, to ask a question, you may press star and one. As there are no questions from the participants, I now hand the conference over to the management for closing comments.
Thank you. So thank you, everyone, for joining us today in this call. We appreciate your interest in Aarti Drugs Limited. If you have any further queries, please contact HDH or investor relations advisor or us directly. Thank you. And have a nice day.
Thank you. On behalf of Aarti Drugs Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
Thank you.