Ladies and gentlemen, good day and welcome to the Aarti Drugs Limited Q1 FY 2023 earnings conference call. This conference call may contain forward-looking statements by the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involves risk and uncertainties that are difficult to predict. 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 zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Adhish Patil, CFO at Aarti Drugs Limited. Thank you and over to you, sir.
Thank you. Good morning, everyone, and thank you for joining us today to discuss our financial results for the quarter ended June 30th, 2022. The company's performance Q1 FY 2023 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 costs. 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's strategy to counter the ongoing difficulties. First, we'll take up standalone business performance.
Standalone revenues for Q1 FY 2023 stood at INR 551.4 crores as against INR 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 market, while the remaining 36% came from the exports market for Q1 FY 2023. 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%, antidiabetic around 13%, antiprotozoal around 19%, anti-inflammatory around 10%, antifungal around 9%, and the rest contributed around 4% to total API sales.
For the quarter, revenue from operations for specialty chemicals and intermediates stood at INR 56.8 crores, which grew 21% on year-on-year basis. Now we will discuss formulation segment performance. For the quarter, revenue for formulation stood at INR 85 crores as against INR 86.5 crores year-on-year basis. Formulation segment contributed approximately 14% to the consolidated revenue for the quarter. Approximately 15% of the revenue came from exports during the quarter. Exports continues to be the key focus area for formulation segment and so far we are able to achieve the targets. Now, coming to the consolidated results. As mentioned earlier, the company reported a revenue growth of 7%, which was mainly driven by higher realizations in antibiotics, antidiabetics, antiprotozoals and specialty chemicals.
Demand in API business witnessed lower than anticipated traction as the offtake by the customers remained lower on the account of inventory recalibration at the customers' level due to high API prices. Margins 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. This impact is likely to extend to some part of Q2 FY 2023 as well. Just to give you some perspective, there is an impact of approximately INR 4 crores due to Forex movement and INR 8 crores due to rate, only rate increase in power and coal costs. The company has undertaken multiple price hikes since the beginning of FY 2023 and as a result, the company witnessed the highest ever realizations for most of its products in Q1 FY 2023 when compared to previous four quarters.
Domestic demand for the antibiotic therapeutic category was slightly weaker for Q1 FY 2023. In the wake of a series of sharp price hikes across almost all our products, the demand was subdued for the quarter for the same reason. The company expects normalized margin levels once the input price volatility stabilizes, which is expected from second half of FY 2023 onwards. We are already witnessing softening in some of the raw materials and some other input costs, although they are still much higher than long-term averages. Debt-to-equity ratio has marginally reduced to 0.51 by the end of Q1 FY 2023, in spite of carrying heavier inventories. Thus, there is scope to further improve on net operating working capital. Now coming to the company's ongoing CapEx.
The company incurred a CapEx of INR 35 crores during the quarter and planning to invest around INR 250 crores-INR 350 crores for the entire FY 2023. The civil construction activity for Gujarat CapEx remains well on track. However, heavy monsoons have slowed down the pace temporarily. Tarapur Specialty Chemicals brownfield capacity, for which we had taken scale-up batches in the last quarter, has now been ramped up, and the optimization process is ongoing at the plant level. The company expects a meaningful contribution from this facility from second half of FY 2023 onwards. For Tarapur Greenfield API facility, boiler and zero liquid discharge treatment plant have been operationalized from May 2022, and commissioning of the main plant is expected by the end of FY 2023.
We firmly believe that most of the headwinds are transient in nature rather than structural, and hopefully it will improve soon. 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. With this, we can now begin the question and answer session. Please.
Thank you. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on your touch tone phone. 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 Rupesh Tatia from Intelsense Capital. Please go ahead.
Hello, sir. Can you hear me?
Yes.
Hello.
Yes, I can hear you.
My first question is in specialty chemicals, sir. What is the CapEx amount we have spent and what is the revenue potential?
Approximately you can say half of the budget what we have planned in that INR 500 crores CapEx plan is will be going for specialty. Typically overall, on a overall basis, the asset turn is somewhere around 2-2.5 for
I mean, currently we are doing commercial sampling batches, right? How much is that CapEx? This INR 250 crores is a medium-term plan.
Hello. I think.
Hello.
Can you repeat the question?
This INR 250 crores you are saying for specialty chemical, this is already spent or this is a medium-term plan?
No, no. That is the ongoing CapEx.
Okay.
which is happening in terms of greenfield project. It will take around a year to finish.
Yeah. Currently we are doing some sampling batches, right, in specialty chemicals?
Yes, yes. That is a brownfield expansion that we have carried out in the Tarapur facility.
How much is the amount, sir, for that one?
That is a brownfield. One second. We don't give out the CapEx number, but then, it is much lower, but very roughly around, you know, INR 90 crores-INR 100 crores revenue potential is what we expect from that facility at a full scale level.
Specialty chemical has a better gross margin, EBITDA margin. Is that a fair understanding, sir?
Yes. Yes. That is true.
My second question, sir, is, I was going through your annual report. You have done 39,000 metric ton production and our capacity is 49,000 metric ton roughly in FY 2022. What can we expect by FY 2023 exit? Both these numbers, production and capacity.
Production numbers, definitely some brownfield expansions will add up sooner. Yeah, if our target date for the greenfield expansion of Tarapur facility completes, this number will be much higher. Right now, because we have not disclosed the product name and the capacity for the greenfield project, that is why we cannot answer it right now. It's an import substitute product and the capacities will be quite huge by the end of FY 2023.
It will be at least INR 80,000 crores and above, sir? Is it from currently roughly INR 49,000 crores-INR 50,000 crores, would it be at least INR 80,000 crores and above, sir? Walpass? Hello?
I think yes, it will be more than INR 80,000 crores.
Hello.
Two, three projects come into commercial production.
Another observation, sir, from annual report was your R&D expenses were, you know, only INR 7 crores, although the detail of R&D projects was quite extensive. What we see in other API companies is, sir, that R&D spend is, you know, like 3%-4% of the revenue. Why this number is so low or is there some, you know, different way in which we are doing accounting and, you know, other companies are doing accounting? Because on a INR 2,500 crores revenue, INR 7 crores number looks really low.
Adhish is offline, is it? Operator.
Ladies and gentlemen, Mr. Adhish, can you hear us? Ladies and gentlemen, the management line is disconnected. Please stay on hold. We'll quickly get him back. All right? Thank you. Ladies and gentlemen, the management line is reconnected. Please go ahead, sir.
Yeah. Hello. Hello, sir. Do you want me to repeat my question?
Yeah, please.
Hello.
Okay. Yes, please.
Sir, my question is I was going through annual report. The R&D spend number was INR 7 crores for a revenue base of, you know, INR 2,500 crores roughly. The R&D spend number of INR 7 crores looks really low. When we look at other API companies, the R&D spend is, you know, in the range of 3%-4% roughly. Is there some, you know, accounting difference, we are accounting it differently, the other companies are accounting it differently? That is my question.
Probably, to some extent that can be the case because what happens is sometimes we have to take trial batches at the plant scale also, you know, so which is a part of R&D, but then we expense it out and we don't label it as R&D. Probably that is why it is looking low. Mainly our R&D is into process development and process improvement of the existing products. That is why I think the number looks low.
Then my final question, sir, is in Metformin we were I think roughly around 1,100 tons per month capacity. What is the current capacity as of quarter one exit? Can you just give me the number?
As of now, we have reached 1,200 tons per month that can be achieved.
This is supposed to go to 2,000 tons per month by when?
Yeah. It might take, you know, a year, I mean around 12 months-18 months time to achieve that number probably.
Okay. What is the capacity utilization right now of Metformin?
Yeah. Last year, we did roughly you can say 2/3, means in somewhere in mid-60s or something like that.
Okay. Thank you, sir. I'll come back if need be.
Thank you. Next question is from the line of Aejas Lakhani from Unifi Capital. Please go ahead.
Yeah, thanks for taking our question. In the press release, you mentioned that we've had the highest ever realizations for several API products in Q1 FY 2023. Despite the fact the EBITDA margin has been the lowest over the last three years. Does that mean the cost pressures were far higher than the realization? And could you comment. Some of it you have already mentioned that some cost pressures are easing out, but what about the realizations? Would realizations sustain at current levels?
The thing is, the reason for taking all this price hike was because the input cost had escalated quite sharply in the beginning of this calendar year for multiple reasons which are highlighted. Then we started taking price hikes, you know, but there is always a lag in taking price hikes because of which definitely the margins, 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, you know. That will probably help in the beginning of this Q2. Now that the price little bit easing is there in some areas, not everywhere, in some areas, hopefully the situation should improve quickly.
The thing is, you know, this time for EBITDA margins there had been pressure on two sides. I mean, you know, two sides. One was gross contribution margin, and the other was even at the manufacturing overhead side because of this coal and there was a lot of rate variance and increase in the manufacturing cost, which also needs to be taken care of ideally by the further enhancement in the gross contributions.
Is it fair to assume this is the, I mean, this is sort of a bottom that we have hit, and from now on, EBITDA margins can only improve?
Yeah, yeah. We definitely feel so.
Okay. In terms of volumes, would you take a call of, I mean, reducing some prices so that your volumes are back on track, or you would want to have the current prices and then work with new partners to increase the volumes?
Yeah. It was very challenging. To maintain the margin and to pass on the increased input cost, we had to take very sharp price hikes. When that thing happens so quickly, you know, there definitely is a hit on demand side. Because if at the customer side, if the inventories are not at critically low levels, they will refrain from making a purchase decision. That impact definitely we have seen in, majorly in the domestic market. Hopefully right now, we don't want to make any variable losses, but as far as we are not making any variable losses for incremental production, I think we should go for it. Means more than margins, we should try to focus on the absolute EBITDA numbers. In shorter term, that is.
Got it. Just one more question.
Mr. Patil, hi. Aejas here. I wanted to ask you that you mentioned the inventory recalibration and, you know, the demand, which was subdued. Can you speak a little bit about customer and inventory levels today? Is that normalized and should we start to see volume upticks in second quarter or, you know, there's still inventory left at their end?
I think our director, Mr. Harshit Savla, would be better able to answer this question.
I think there is still in many of the products we see demand picking up again, but still it is not at the like pre-COVID levels you know like about two years back. What has happened also is that during COVID period there was very high growth rate and all companies have budgeted high growth rate for this quarter also. The inventory was very high at the beginning of the year because last quarter they produced more of finished formulation and all the stock levels at distributor and super stockist levels were very high. We expect now this quarter at least we started seeing some improvement from July.
Got it. Sir, for all the increase in cost, is the present price hike adequate to maintain our levels of gross margins or is the price hike still needed?
Now the raw material prices started softening. Basically all basic chemical prices went up like caustic flakes, sulfuric, all sulfur-based chemistry due to crude oil, solvent prices, you know. They have started correcting now due to overall the de-growth in textile, in pharma last quarter. So we feel this, that this quarter there should be definitely improvement in the gross margin. Yeah.
Got it. Sir, what is the debt today? Because we are expecting to take some incremental debt in the current year for the INR 250 crores-INR 350 crores of CapEx, right?
Yes. As of today, the total debt figure on a consolidated basis is around INR 541 crores. Out of which around INR 187 crores is long-term, and rest is short-term for working capital.
Got it. Sir, this number is likely to go up by about, say, INR 150 crores during the course of the year. Is that understanding correct?
Yes, probably. It should. With the increase. So what we were expecting, at the peak, debt to equity can go around 0.7 or something, 0.7, 0.775, 0.78. From there it should start coming down with each quarter because of the additional profits.
Sir, could you quantify that as a number of the debt instead of the 0.7? You know, is the number at peak 700?
Yeah. Right now. Okay. Debt number, you mean?
Yes.
Debt number. Yes. We were in by the end of it, say around 50%. This is roughly, it is a very rough calculation. Around 50% of our this thing will be funded through term debt. At the same time, there will be some repayments also around INR 30 crores per annum, INR 30 crores-INR 40 crores per annum every year.
Got it.
Yeah. You can say around INR 150 crores, something like that.
It's roughly about INR 130 crores. Yeah. INR 130 crores incremental from here. INR 545 crores is what we are at. We should peak out at INR 700 crores and then start to taper down. Right. Okay. Got it, sir.
Okay.
Okay. Thanks, sir. Thanks.
Thank you.
Thank you. Next question is from the line of Bobby Jayaraman from Falcon. Please go ahead.
Yeah, hello. One of the big concerns about your business model is that you don't have any control over your EBITDA margins. The kind of reasons you're giving on INR depreciation and input cost inflation and all that's gonna happen in some form or the other all the time, right? That's out of your control. It seems that when you raise prices, it hits demand. Given this, how are you planning for so much capital expenditure when you don't know what your level of profits is gonna be because you don't have control of your margins?
Yeah. 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 over competitors and the level of backward integration, 15%-16% EBITDA margin is fairly easy. It is not something very optimistic. Definitely this, you can say scenario, it's transitory in nature, and it won't sustain for long. We know that it will revert. With this, if we stop doing CapEx, you know, that will definitely impact our growth in third and fourth year.
As far as this INR depreciation I was talking about, because it has happened suddenly in one quarter, we had to provide notional Forex losses, you know, for our open inputs. Against that, our export orders, which we have already taken for 2.5 To three months, they will be going at a much higher price in the June quarter. Part of that will be offset in the September quarter. Sorry, in the September quarter. Another thing what had happened is that power had gone up, power rates had gone up in the month of April, and you get all those numbers and bills and everything by, you know, mid-May or May.
There was some level of rate variation in the power cost, more than approximately around INR 1.5 crores. There was almost INR 6.5 crores variation in the rates of coal. What happens is that many of the times, you know, when you negotiate contracts in shorter term, it is always done based on what are the input costs, the main key intermediates and accordingly, what should be the selling prices. Slowly, when this kind of coal prices becomes a new norm, then definitely those gross contributions needs to be revised in the newer negotiations. That will come, that also will come back on track.
Apart from that, we foresee that approximately around INR 2 crores, means two to 2.5 , means around 0.5% of the EBITDA margin we can recover by reduction in some costs. Means last quarter, we had some exceptional one-time maintenance as well as US FDA remediation costs, which also we have booked in last quarter. That will also be not there from the next quarter. What we feel is that 15%-16% EBITDA margin, we should recover. It is just a matter of time. Once the volatility stops in macro factors, then it should be back on track.
What about the competition from China? Is it back to pre-COVID?
The stiffest competition from China was in the decade of 2001- 2010. I mean, after that, from 2011- 2020, what we had seen that we had become very competitive against China. Means I'm talking even before pre-COVID levels. Towards the end of 2020 decade, the Chinese government had started implementing very strictly all the pollution norms and everything. Their OpEx has also gone up. Sometimes there might be few cases where, you know, a particular raw material or a commodity is available cheaper in China, so they might get a benefit of that in few products, what we have seen.
Apart from that, from the efficiency point of view and the overall cost point of view and the process and the technology point of view, we are very much competitive with China. It's in the top 10 products, top 14 products what we manufacture, in that, around four or five products, we are even larger than Chinese capacity.
Right. In terms of pricing, because if you go back to the earlier era, right, 2001-2010, your margins were only at 10%.
Correct.
Right? You only started getting to 15%, 16% after 2030. Given that there has been this major reset after COVID, what gives you the conviction that things won't go back to the old days? I know the pollution and all that, I take that point, but the Chinese can always cut prices on price, right?
Even if it goes back to the old days, that is what we feel it will be around 15%-16%. Pre-COVID. I mean, in the COVID, actually, the margins had gone up even beyond 20%.
Right. The reason is because you think the Chinese have higher costs and they won't, you know, get into a pricing competition with you. Is that the reason or?
Yeah. I mean, certainly that has been the trend.
Right. You've made a statement in your press release that when you increase the API prices, there was some demand destruction. What are these dealers waiting for? Lower API prices? Because at some point they do have to stock up, right? These are medicines and I mean, it's not discretionary.
Yes. Very true. That is the reason why, you know, we were at least able to achieve some bit of sale at very high prices. For the players where, you know, they had a little bit higher inventories, they must have refrained. The players where, you know, the inventory was critically low, they had to make that purchase at the higher price is what we have observed.
If input prices don't come down, assuming they are at the same level, which is a very probable scenario, your margins will only be around this 11%/12% level. Is that right?
No, no. If it gets stabilized at this price, this level, then slowly you're seeing if they remain high for a year like this, it should again move upward. It should start going up. Ultimately, all the businesses, they look at returns in longer term. If you know, a particular company is not able to make decent enough returns in this business, especially API manufacturing is a capital-intensive business, then people start exiting, the competitors start exiting. That is what we have seen in the past.
You're saying if inputs stabilize at a higher level, the formulation guys would have no alternative but to purchase at higher prices.
Yes. What will happen, you know, as of today, there are certain pricing caps on the finished formulations at the retail level. Even those will be revised by the governments if such cost pressures persist for a long time.
Okay. All right. If the margins aren't at 15%/16%, then your ROICs don't make sense. Is that correct? The CapEx that you're undergoing, the INR 600 crores, it's not gonna be commercially viable if you don't get that level of margin. Correct?
No, no. What we do internally, we check whether the IRRs of the project is beyond 18% or more for the project, for the new products what we are launching. If they are, then we do. Whatever products we have selected as of now, they make a lot of sense as of now. Only thing is, see, when we launch a particular product, obviously, initially since say for depending upon product to product, we have, you know, three to six months goals, you know, in optimizing the process. Whatever results we have achieved at the plant or, sorry, at the lab or the pilot level, it takes some time to achieve the similar kind of results at a very big commercial batch level.
That much time goes, but then ultimately we are very confident to achieve, you know, good return on investments for the newer products.
Okay. Thank you very much.
Okay. Thank you.
Thank you. Next question is from the line of Anchal Kansal from Green Portfolio Private Limited. Please go ahead.
Good morning, sir. Am I audible?
Yes, yes. 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 INR 20 crores, not meeting the government's CapEx requirement of INR 80 crores. In recent investor presentation, PLI scheme is still mentioned. I wanted to know if these both are linked in any way.
Okay. No, no, sorry. No. The thing is, I think that is missed out, overlooked. We'll correct that. Thank you for pointing that out.
Okay. No worry, sir. 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? I wanted to know how dependent are they on China for raw materials for financial year 2022.
Okay.
Sorry, 2023.
The thing is that right now still, you know, approximately, our imports and indigenous purchases are like 50/50. As I said that around 15%-18% of the raw materials are available only in China. The rest can be procured from the rest of the world. That risk is always there. We have developed technologies, but right now we are not going ahead with the CapEx of those, that particular backward integration. The newer projects what we are launching, few import substitutes also what we are launching, for that-
Okay.
For raw material of those, we are not, we won't be dependent on China.
Okay.
Overall, on an aggregate basis, our dependency should come down ideally.
Okay. Sir, can you tell me the capacity utilization on an average, give or take, and your revenue has decreased 11% quarter-on-quarter. How about volume in the same period?
Yes. Our volume has also decreased, right? This particular, in exports, the volume has grown, but in domestic market the volume has gone down. The main reason was very high prices, which, you know, we were trying to pitch in the antibiotic category. There we saw a lot of volume decrease for the first quarter because of the very high price escalations.
Sir, are we underutilizing the capacity?
Yes, we are.
Sir, since the volumes.
Go up.
Sir, since the volumes are not rising and we have spare capacity, so what is the point of doing capital expenditures?
volumes what we have now, the spare capacities what we have are for particular products.
Okay.
We typically 80%-90% of our revenue comes from dedicated plant. It is not-
Okay.
It is just transient in nature, meaning for one quarter. It is not that the overall market of that product has gone down or will go down. It should come back. That volume should come back. Plus there is a lot of scope in further increase of market share as well.
Okay.
That scope is also there.
Sir, one more question. EBITDA margins can be seen declining due to high other expenses. Can you please shed some light on the other expenses that you have incurred? Does this include one-time maintenance and US FDA re-inspection cost that you just mentioned?
Yeah. Other expenses will means that will also include all our manufacturing expenses. I think the one format which you're looking at. Right? That's. Am I right?
Uh-
That includes manufacturing, right? There is no separate manufacturing expense in that. We are looking at what we published in the SEBI, right?
Yes. Yes. What you published in the report.
Yes.
Yes, sir.
Yes. I saw that. That includes all the manufacturing expenses. One of the most important variation what we have seen is in coal, around INR 6.5 crores and around INR 1.5 crores in power. That is only because of the rate variation year-on-year. Even if we keep the consumption same, just because the increase in the rates of coal and increase in the rates of power means kWh unit, that much cost have gone up. Risk and others and some other will be means increments in the employee means EB expenses and then selling and distribution freight has gone up because of the increase in the crude since February.
There are few expenses, one-time expenses as well related to the US FDA remediation and a few other expenses which were one time in some very old plants we had done some maintenance, which we experienced so.
Okay, sir. Thanks a lot, sir.
Cool.
Thank you. Next question is from the line of Chirag Dagli from DSP Mutual Fund. Please go ahead, sir.
Yes, thank you for the opportunity. What is the volume growth in Q1?
No, this.
Decline.
There is no volume growth, thank you. There is no volume growth in Q1. Only the export has some very small, low, I mean 2%-3% kind of a volume growth. Mainly all the growth is because of the higher rates that we have charged in Q1. Basically that it was like either that or you achieve the volume growth and keep the rates low. Those are the two options.
Understood. Volumes were flat for the quarter.
We expect it to grow because it cannot remain flat for, you know, longer period because then the inventories will go down.
Sure. Sure. I understand. What percentage of your revenue is long-term contracts versus spot business? Or is it mostly spot?
I will give you a brief summary and then I will ask Harshit Savla to answer that question. In domestic market what happens, you can say, very roughly I'm saying 70%-80% would be more of short-term, I mean within one month or one and a half months delivery. In exports, the pending orders are around 2.7 to three months typically. Also, a few of the customers, they like to do longer term contracts as well in terms of supply of quantity. That ranges anywhere between six to 12 months. That also is there. It is mainly observed in the case of bigger MNCs. They like to do longer term contracts.
80% of the domestic business, which is 2/3 of the business, is one month kind of delivery. Mostly spot kind of market.
For domestically.
Understood. Okay. Other thing was that, on this specialty chemical CapEx, you indicated INR 250 odd crores. Roughly you are likely to have INR 600 odd crores kind of sales, from this business. Question is how do you sell this? Who are the customers? Are these the same customers that you have for, pharma? How, you know, what is the customer set? How are you doing mark-
Yes.
For specialty chemicals, right? Harshit, would you like to answer that question?
Actually, most of the current customer would be chemical companies or intermediate company or these pharmaceutical companies, and we have already selling some products to them. It won't be a new customer. Some products, there will be a new customer specifically, for specialty chemical, products. Normally, we are in touch with them for most of our other group company also are selling some products with them. The question of, new customer won't arise. More or less same customers would be there.
You don't see a challenge basically in marketing.
No, no, we don't see any challenge. Yeah.
Understood.
One product which we are planning to do is import substitute products. They are mostly importing from China, so we will be replacing that with indigenous product. Yeah.
Understood, sir. Sir, in terms of new product launches that you've done in the last two, three years, on the API side, how has traction been there? Are we suboptimal there? You know, if you can just give some color of what part of our, you know, business today comes from new products launched in the last two, three years, and what is the kind of traction that we're expecting with it?
Mainly, the new product launches were more on the second side, where we have seen more traction in last couple of years. The APIs which we have launched recently, that is yet to receive traction. Since right now I would say it is, you can say almost break-even or that kind of a thing because scale-up batches are going on. Right now we haven't received any profit from those products, you can safely assume that.
How many are these? What is the potential there?
The market space is big. It can go INR 400 crores-INR 500 crores overall market potential for this product. Obviously we haven't put those high capacities yet. We have only put the capacities for around, say, INR 80 crores-INR 100 crores kind of a turnover. Once we get traction in that, after that we'll be in fact going for maybe a newer plant with much higher capacity once we get success with that level.
That INR 80 crores-INR 100 crores potential has also not been reached, sir?
No. We are far from that. We are still in the process of optimizing, meaning the intermediates and doing more backward integration, getting some tolling done for some intermediates so that we can reduce the cost and then we'll go full-fledged on those products.
Understood. How many products are these? How many APIs are these?
Mainly, newer using Gliptins we have two. In SpecChem, again, one or two products done. But obviously they are derivatives of chlorosulfonation chemistry only. Also in chlorosulfonation, lot of our earlier products which we used to make, since we had a long list of chlorosulfonation products, but many of them were like, though they are there, but meaningfully it was not there. We are hoping to increase the market of that. It will be like as good as a new product in terms of increase, you know, in the scale-up. There also we are focusing more.
No, but that is on the specialty chemical side, right, sir?
Correct.
No, I'm saying on the.
API side.
API side. There are two Gliptins that you talked about. What else?
Correct. There are few antifungal products. I mean, we have done piloting of that. As of now, they are not contributing anything on the bottom line.
Understood. Okay, sir. Thank you so much.
Thank you. Next question is from the line of Gagan Thareja from ASK Investment Managers. Please go ahead.
Hello. Am I audible?
Yes.
Yeah. Good morning. Sir, my first question is on the tax rate. Why is the tax rate for the quarter higher, compared to 1Q of last year-over-year and I think even sequentially?
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 tax, taxation. We have not opted for that.
Full- year, what should be the tax rate for you then?
Ideally, around 25% is what we expect.
Okay, what has been the reason for the formulation sales not growing in this quarter? They've 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.
Basically, last year's same quarter sales were higher because of some, you know, more of domestic tender execution, especially some of the COVID-related products were also in higher sales at that time. However, it has been our constant focus to shift from the domestic to more value-added sales. Due to that, although there is not a growth in revenues, but there's a substantial growth in profitability.
Okay. How should we then think of formulation sales from a full year perspective for FY 2023 and going ahead, both in terms of growth and in terms of margins?
In current financial year, our focus is to grow more in profitability and grow export sales. Our sales expectations for the remaining quarters are more or less in line with our current quarter sales. At the same time, we have a CapEx project going on, which is in the final stages and due to be completed in the next one quarters and which will start adding revenues from the next financial years. The new block will start, you know, add up capacities for us and start contributing revenues from next financial year.
How much capacity will that effectively add for you?
Basically, it's a new line. Right now we are into general oral solids. This is a dedicated facility for oncology. In terms of the number of units, it will be lower since it's more of a high value product. Our ultimate expectation once it starts in about 1.5-2 years is to reach revenues of about INR 200 crores-INR 250 crores from the new facility.
INR 200 crores-INR 250 crores additional sales from the new onco line.
Yeah. At the full potential we can reach. Yeah.
It will take two to 2.5 years for you to do that.
Correct.
Right. When you say your margins have improved in formulations, you know, if you could give us some idea of how much they have improved year-on-year for you?
In this quarter, we've achieved a profit before tax of about INR 12 crores. In terms of margins, it's about 14%-15%. We expect to kind of
Yeah.
Yeah.
I will answer that. The margins mean the EBITDA margins year-on-year has grown from 6.7% to now 15% EBITDA in this particular quarter.
Got you.
The PBT margins have also gone up from around 5.8% to around 14%, 1/4 .
Okay.
For the quarter. This is mainly on account of higher export sales. As Vishwa said, that we are focusing more on profitability now and the export sales than earlier. Earlier, we used to do a lot of toll manufacturing sales, which has much lower profitability.
Okay. You've discontinued with toll manufacturing and you actually emphasized more on export sales. If you could give us some idea of the sales mix, you know, this quarter, how much was exports as a proportion of total formulation sales versus last year? And also, for toll manufacturing, how much was it as a proportion of formulation sales compared to last year?
We have not.
Yeah. Yeah, Vishwa.
Yeah. We have not discontinued the contract manufacturing or toll manufacturing sales. It's just that we are slowly trying to reduce that in favor of higher capacity utilization for exports. Current quarter would be roughly about 50% of our revenues would be from exports. There are also slightly higher about 5%-7% more in indirect exports as well.
Okay. With the oncology line, would margins have potential to grow further still because of, you know, it being, maybe a higher realization product, versus the plain vanilla ones?
Yeah. We would expect it to have higher margins and since that would be more concentrated on regulated markets. However, you know, currently the scenario in regulated markets is also there is a lot of margin pressure. While we would expect it to be better, but there is also significant competition in oncology in those markets.
Okay. The next question is around, you know, the capacity expansion that you're planning. What's the fixed cost associated with, you know, with the new facilities, greenfield and brownfield that will come up? What will be the, you know, break-even utilization for you in these CapExes?
You are asking about the formulation facility, right?
Not formulation. I'm looking at your capital investment plans in aggregate, you know, the Tarapur facility and the Gujarat facility. As and when they come on stream, what's the additional fixed cost and at what utilization do you break even?
Yeah. Typically, you know, the addition of fixed costs once the facility is put to use, then it will start coming into our financials. More or less, you know, whatever we have right now, you know, in terms of percentages, more or less it won't be impacted much, frankly speaking, with the addition of the current. It will be more or less in line in terms of percentage to sales. That impact won't be that high.
Right. What would be the break-even point in terms of utilization for these capacities?
This is probably. We feel that within one year's time we should be able to break even.
Okay.
The utilization will go up and on month-over-month basis should be in profit.
Okay. You're saying at one year's time post-commissioning, you know, you can see these capacities sort of contributing to profit?
Even.
Okay. You mentioned that, you know, the stringency of the Chinese government regulations on environmental standards has increased. I would then, you know, infer that a certain amount of input cost inflation coming from China is actually sustainable in nature and has nothing to do with, you know, the geopolitics or the COVID or the supply chain issues. It would simply be higher because the operating cost for your suppliers based out of China would have actually gone up.
If you could therefore, you know, sort of delineate as to how much cost inflation is coming from this sector and therefore is there for, you know, to stay for the future and how much can sort of soften because of, you know, the transitory impact of some of these issues related to COVID and supply chain and so on.
Yes. Harshit would like to answer this from the raw material side.
What has happened in China over the years, that chemical sector government is giving low priority now due to environmental issue. Many industrial parks, which were in near the cities have been asked to move to remote places, and plus environmental laws have become more stringent. In addition to that, the labor cost also in China is very high compared vis-à-vis India now. Overall scenario only if you are efficiently producing any product, you can always compete China. That is our philosophy. We feel that we can always compete China, basically.
No, no. My question is that your procurement cost of the inputs coming from China.
Yeah.
Not your competency versus the Chinese suppliers. I'm saying since you rely very heavily on Chinese vendors for your imports. Some of those input costs would have, you know, gone up simply because the operating costs of your vendors based out of China would have gone up on a sustainable and permanent basis.
Correct.
Which you therefore need to pass on to protect your margin, right? Some of the other input cost inflation is, you know, related to a sharp up move due to supply chain disruption caused by COVID and some coming from the sharp gas price move and so on. I am simply trying to parse or separate out, you know, the impact between these two elements because one is sustainable going ahead and one is, you know, sort of something that can normalize.
Yeah.
Therefore trying to understand how much of the input cost inflation is actually now permanently set in the base and how much can go away.
It depends on the product. Product to product it differs basically. 10%-15% pre-COVID level, the costs have gone up. That will be sustainable for future, you know. That will be the permanent cost gone up basically. Because many small producers have stopped producing in China. There are less producers for particular products, you know.
Okay.
Yeah.
Have you seen the prices of intermediates and key starting materials soften over the last month or two for you?
Not from China, but from domestically, yes. Some due to higher power cost, this commodity price. Basic chemicals like nitric acid, ammonia, caustic soda actually, which is very commonly used in all our APIs and chemicals, have started softening now. Yeah, basically.
Bulk chemicals I understand have softened. I am sort of looking more for each type of material.
Yeah. Intermediates prices are little bit softening. Yes, yes.
Okay. Final question from my side. I mean, in the products you know that you supply, you've said that you've not been able to pass on the input price increase. Having tried to do so, you've lost out on volumes. I mean, if that is the case, I'm simply trying to understand is the supply or the capacity for supply for these products in the market well in excess of the demand? You know, therefore even a very large and very cost competitive supplier like you has not been able to pass on
Yeah.
How-
Partly true. What has also happened is, last quarter, our sales were very high and all the formulation companies started believing that this, whatever growth was there in last two years will sustain. Their formulation, all distributor level, everything, their forecast was very high and they produced more in last quarter, basically. Now more of a destocking is happening than the happening in this quarter, basically. That was the major.
Q4 sales was not a sustainable sales.
Yeah.
It was basically a lot of channel inventory being replenished.
I will answer that question. See, what happened is, we are able to pass on increased prices, and that is why. You know, at least
You can say more than 90% of the customers have procured at that high level. Maybe 10% or some customers have refrained from purchasing at that higher level, probably because they might be the ones to have the better inventories in the last quarter. They were able to refrain, meaning rather postpone that purchasing decision. If it persists for longer period, then even they will have to start buying at such high levels. More or less, this impact is more in short-term nature than long-term.
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. This can happen only, you know, in the case where alternate supplies are available to formulation companies at lower prices. Otherwise, I fail to understand why, you know, this has been the case. Even intermediate suppliers have managed to protect margin better than API suppliers. I'm simply trying to understand what has been the underlying reason for this. You are at least in three or four molecules, you are the largest supplier globally, let alone in India.
even then, you know, it has been very hard for you to pass input inflation in full measure or anywhere close to full measure. What else explains that?
What I can make out of the period is only one thing, the last one year, you know?
Yeah.
The last five quarters, prices have gone up to a large extent. If we take current quarter selling prices with respect to, you can say, last quarter's purchase prices, then the margins will look fantastic. Right now it is not looking because again, the escalation had happened at the input prices means in the month of February till April, May.
I get that. Is it also a case that, you know, in the products that you supply, at least for the domestic market, most of them are under price control and therefore, you know, the formulation companies give you pushback and resist, you know, input inflation being passed on because they themselves can't pass it on and they are under DPCO.
Definitely that happens. They get escalations every year, no?
Yeah.
Based on the inflation.
Yeah.
If this kind of scenario persists, then definitely there will be more escalations in the final prices.
Yeah, DPCO now has given a 10%. This year they've been given a 10.7%, sort of a
They work on last 12 months data. They also have a lot of lag in terms of
Okay.
Obviously they will also want to be conservative in increasing prices. If it persists like this, then definitely they will have to look into it.
Okay. Thanks. Thanks a lot for taking my questions. I'll get back in the queue.
Okay.
Thank you. Due to time constraints, we have reached the end of question and answer session. I would now like to hand the conference over to Mr. Adhish P. Patil for closing comments.
Thank you. Thank you everyone for joining us on the call and having a good discussion. We look forward to interacting with you again with, you know, a bit of good set of numbers in the next quarter. Please reach out to us via our IR consultants, IR-Asia, or directly to us if you have any further queries. We can now close the call. Thank you.
Thank you.
Thank you.
On behalf of Aarti Drugs Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.