Ladies and gentlemen, good day and welcome to Aarti Drugs Limited Q3 FY 2022 earnings conference call. This conference call may contain forward-looking statements about 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 involve risks 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, Chief Financial Officer 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 ending December 31st, 2021. At the onset, I hope everyone is healthy, safe and taking all the necessary precautions in the wake of the third wave of COVID-19. Before I take you through the performance highlights, allow me to remind you that as communicated in the earlier earnings call, the financial performance on a year-on-year basis is not exactly comparable, especially in the terms of realization and margins because of elevated API prices driven by sudden supply disruptions due to COVID-19 related lockdowns during last year. The company posted robust growth in revenue and profitability, along with considerable improvement in the margins on a sequential basis. The robust performance was delivered in spite of the high freight cost, elevated coal prices and sustained high raw material prices.
I will now take you through segment-wise performance. First, we'll discuss standalone business performance. The standalone company has contributed around INR 579.9 crore to the total consolidated revenues in Q3 FY 2022. This contributed approximately 91% to the consolidated revenue. Around 59% of these revenues came from the domestic market and 41% from the export market. I would like to point out that we'll be putting up some corrections in our press release as follows. There was some mistake. Our domestic revenue for the standalone business grew by approximately 10% on year-over-year basis for the current quarter and exports grew sharply by around 54.4% year-over-year basis. We expect the trend in export to sustain for a few quarters considering the current inquiry generation pace of export markets.
Similarly, domestic business is at the cusp of witnessing a recovery. API volumes grew by around 12% year-on-year, led by secular growth in across acute as well as the chronic therapies. For Q3 FY 2022, within the API segment, the antibiotic therapeutic category contributed around 46%, antiprotozoal around 16%, anti-inflammatory around 10%, antidiabetic around 14%, antifungal around 10%, and rest contributed around 5%. Now we'll discuss formulation segment performance. For the quarter, revenue for formulations stood at INR 54.9 crores. Approximately 30% of the revenue came from exports during the quarter. The company is well on track to increase export share for this segment, primarily driven by growing penetration in Latin America and selective African markets, new registrations in export markets and government tenders. The company is strategically utilizing the foreign subsidiaries to tap these opportunities.
We'll discuss the specialty chemicals and intermediate segment performance. For the quarter, revenue for specialty chemicals and intermediates stood at INR 66.6 crore, which grew 62% quarter-over-quarter and 74% year-on-year. We firmly believe that this segment is at the inflection point and a unique value proposition. Niche product profile and upcoming capacities in chlorosulfonation products are expected to bolster the growth momentum further. On a consolidated basis for Q3 FY 2022, revenue stood at INR 641.5 crore. EBITDA stood at INR 96.7 crore and PAT at INR 58.3 crore. EBITDA margin came in at about 15.1% on a consolidated basis. The company posted robust growth in revenue and profitability, along with considerable improvement in the margins on a sequential basis, as mentioned earlier.
This robust performance has come amid multiple headwinds in terms of high raw material prices, high freight costs and high coal prices. The margin expansion is primarily driven by proactive price hikes, API volume growth across therapies and strict cost control. The volume growth is expected to accelerate further on the back of recently commissioned antidiabetic capacity. Also, upcoming antibiotic chlorosulfonation capacities in near future will give impetus to volume growth in next financial year. This, coupled with a growing share of niche products in chronic therapies and a strong API product launch pipeline, is expected to augment the margin profile and profitability. For nine months FY 2022, revenues from operations stood at INR 1,802.7 crores as against INR 1,656.6 crores last year, up by 8.8% year-on-year basis.
EBITDA stood at INR 251.8 crores. EBITDA margin came in at 14% and PAT stood at INR 149.7 crores. The investing cash flow for nine months, FY 2022, stood at INR 103 crores and is expected to be in the range of INR 150 crores-INR 200 crores for the entire FY 2022, which will be funded through a mix of internal accruals and debt. The pace of CapEx was impacted to some extent due to incessant rains in Maharashtra and Gujarat during first half of FY 2022. However, the CapEx of Maharashtra projects has picked up a good pace, and Gujarat projects will follow suit. The balance sheet continues to remain strong, with a comfortable net debt-to-equity ratio of 0.51x as of December 31st, 2021.
We can now begin the Q&A session, and we welcome questions from the participants.
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchtone 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. First question is from the line of Abdulk ader Puranwala from Elara Capital. Please go ahead.
Yeah, hi sir. Thank you for the opportunity. First question is on margins. Earlier we have been talking about achieving close to 18% margin. Sir, by when that would be possible or are we, first of all, reiterating that guidance ahead as well? Am I audible?
Yes, you are audible. However, it seems we have lost the line from Mr. Adhish Patil. We request all participants to stay connected while we reconnect him. Ladies and gentlemen, we request all of you to please stay connected. We are trying to reach to Mr. Patil. Please be on the line. Thank you. Ladies and gentlemen, we have the line from Mr. Patil connected. Mr. Puranwala, request you to please repeat your question once. Thank you.
Yeah, sure. Hi, sir. My question was basically on the margin front. This quarter, we did see some improvement on an EBITDA front, but you know, I wanted to understand that, are we still holding our long-term EBITDA margin guidance of close to 18% or and, you know, by when should we actually see this start reflecting into our reported numbers?
Sorry, it seems we have lost the line from Mr. Patil once again. Ladies and gentlemen, please stay connected while we reconnect him. Ladies and gentlemen, thank you for patiently waiting. We have the line from Mr. Patil connected. Sir, over to you. Please go ahead.
Yeah. Hi. Abdul, I heard your question. The thing is, the recent drop in gross margins was mainly because of rising raw material prices. Now we have taken the price hike at the output side, which I think prices have gone up. Now we are seeing a trend of reversal, which will take time, though, but we are seeing the negotiated prices in the month of December for raw materials, they are coming off, they are tapering off. We do feel that the gross margins will improve in future.
Also, as far as the EBITDA margins are concerned, the coal has been a major factor. We lost almost INR 5 crores-INR 6 crores of EBITDA per quarter just because of the rate variance in the coal, which seems to be of temporary nature and should revert back. In the long term basis, yes, we do aim for that 18% margin of EBITDA.
Understood. Sure, sir. Well understood. My next question is basically on this chlorosulfonation opportunity what you highlighted. I mean, going ahead, how should we look at the specialty chemical as a division and, you know, I mean, in terms of the. You know, what could be the contribution of this business, say, in the next three to four years?
Yes. The thing is, we are adding up capacities in specialty chemicals. In fact, one of the chlorosulfonation lines will be active in this current month itself, in February 2022. We expect the specialty chemical, you know, the potential, means the capacity potential to almost double from what we have right now with this current capacity addition. We also plan for greenfield capacity which is yet to start for specialty chemicals. That should, you know, that will be another leap forward in terms of increasing the the pie of specialty chemical segment to our overall, consolidated revenues. Right now, in short- term, in near future, like in next two years' time, we can see that we can double the revenues from specialty chemicals from where we are right now.
Sure, sir. You know, just to follow up on this. The spec chem revenue when we are talking about doubling, does that include what we are doing under the PLI as well?
No. Those are the regular products. I'm talking on overall basis.
Sir, I heard in the opening remarks you mentioned about some delay which has happened in Maharashtra because of the ongoing pandemic. How should we look at our overall CapEx trend? I mean, has the timeline now revised by almost six months? What are we going to complete, say, by end of next year?
Yeah. The thing is, right now we are doing big greenfield expansion at two locations, one in Maharashtra and Gujarat. The Maharashtra capacity ideally should come up by December 2022. It should be commissioned and ready. Whereas the Gujarat facility should come up by February/March 2023. Around that time. Approximately in 12 months' time, we still expect both these capacities to become operational.
Okay. Not much of a delay.
No.
Just one final question on the formulation business. This we have seen from the last couple of quarters that, you know, formulation business is, you know, not picking up the pace as kind of what we expected. Going ahead, I mean, you know, as you mentioned one would be the Africa segment, but what would be the other driver of this business, you know, within existing geographies, what you're currently catering to?
Yeah. I think Vishwa can handle your question better.
Yeah, yeah. Yeah. Sure. I mean...
Sorry, Vishwa, your voice is breaking, sir.
Uh-
Mr. Savla, please go ahead.
Yeah. Yeah. I can hear you. Yeah.
Mr. Savla, your voice is breaking. I request you to please.
Can you hear me now?
Yeah. This is better. Please go ahead.
Growth from the existing geographies in the next couple of years, where we've established ourselves majorly in Latin America and Africa. We now have a distribution in place, and we are adding more and more products. A lot of our products are under approvals, and we are receiving approvals. We are also participating in institutional tenders that will give us a higher growth push. For the next two years we will continue having growth from our existing territories. At the same time, we are working heavily on the development of products for regulated markets in Europe and North America. Those products, those markets will start picking up for us in about two to three years.
For long-term growth, we are anticipating from regulated markets. Whereas short-term, so the next two years, we have good growth plans from our existing markets.
Sure, sir. Well understood. Thank you for answering my questions, and wish you all the best.
Thank you.
Thank you. A reminder to our participants, please press star and one if you wish to ask a question. The next question is from the line of Cyndrella Carvalho from Centrum Broking Limited. Please go ahead.
Yeah. Thanks for the opportunity. Adhish, if you can help us understand, if I look at, you mentioned in your commentary also that there is some supply side pressure on the input cost is reducing or easing off. In terms of our earnings reflection, when do you see that will reflect meaningfully? If the pricing at past levels are coming off or easing off, would that mean that our final price also would get adjusted to it?
By when do you see all these things, even there will be a gap, we understand, in terms of, you know, seeing current prices in our earnings. Can you help us understand the current scenario, where we are, and how it should proceed over coming two, three quarters?
Yes. Thank you for the question. So, yeah, I will answer this question, like, in few details, like, after we order local material, typically within one month time it is delivered to the factory. After we order or import, we do import purchase order, then within two to three months time they get delivered to our factory. Now, the trend what we have observed is that on a monthly basis, if I analyze our, the purchases which we received at factory in the last quarter, still we saw that more than 60% of the raw material, you know, 60%-70% of the raw materials had the maximum rate in the month of December when that material came into our factory.
Percent of the raw materials, the rates have fallen down in the month of December. That will definitely show up towards the end of coming up with this Q4 and in the beginning of, so that is the first quarter of next financial year.
Basically starting next year we should see normalization. Would that mean that our end prices also will adjust accordingly if the raw material comes down? Do you see some impact on pricing?
To some extent we will see, no doubt about that. The main challenge what we have been facing in last year was the sudden changes, variations in the price. Whenever the prices settle down for say three months or so, I'm talking about the raw material prices, then we can easily reach that 17%-18% EBITDA margin.
driven by the price hikes that we are taking. How is the outlook on the demand scenario? Like, you know, if you can help us understand on the specialty and the API side both put together. I mean, if you can help us understand the formulation run rate that we should look at, from an annual basis, that will be helpful. Over to you.
Okay. As far as the specialty is concerned, right now our capacities are very small, you know, as compared to the global demand. It will be relatively easy to capture the market. It is, it won't be that difficult. Our new processes, our cost will also be much lower than our existing cost of production for the same product in total formulation. Definitely, specialty chemicals we should be able to sell quickly. As far as the APIs are concerned, you also. Can you repeat the question related to the API?
API also I'm asking you on the demand side. We are seeing some strong traction, but however it has accompanied by the price increases also.
So demand-
How should we see this?
As far as the exports are concerned, we have a lot of demand because we already have a lot of pending orders in hand. Domestic API demand usually picks up in the fourth quarter of every financial year because that is the time when most of the formulation company increases their production volumes. Now in Q4, ideally the demand should be more for APIs in domestic. For formulation from two to three years perspective, I will request Vishwa Savla to answer your question.
Yes. In formulations as well, we are expecting good growth, mainly due to some capacity enhancement in our existing facilities as well as product line extension in terms of getting new products and products with better margins. Our new greenfield project into oral oncology is also upcoming, which we are expecting to commission by the end of quarter two. That will also over the next three to four years give us good revenue growth and with improved EBITDA levels.
What should be your annual run rate? Since we have seen some decline in the one edge, how should we see it over the coming two to three years? Any range that you can help us understand, because if you're talking about oncology also, how big it is, what is the basket of product? How much can it contribute? Would trauma take 12% share? Can it become 15-16% or 18-20%? What range are we looking at? If you can just help us with some numbers, some broad range would be very helpful.
Sure, sure. Over the next three years, we are looking at a growth rate of about 25% annually. We have about 10-12 products lined up in the oral oncology sector, which we would be filing in international global regulated markets. However, since we are targeting products with patent expiries from, I think, 2024 to 2027. Oncology as a sector for us, a segment for us, would start contributing post FY 2024. Even our general segment would give us growth of about 25% annually.
Okay. Thank you, Vishwa. I have more questions. I'll join back the queue.
Sure. Thank you. Anyone who wishes to ask a question at this time, then please press Star and one. Our next question is from the line of Riya Verma from Oracle. Please go ahead.
Hi, sir. Thank you for this opportunity. My first question is, formulation segment witnessed a decent amount of fall in revenue. So can you throw some light on that? When can we see a pickup in revenue again?
Yeah. I'll answer that. The revenue fall in formulations in Pinnacle was a temporary blip in this particular quarter due to lower demand, especially in the domestic segment. However, we are seeing in the current quarter, in Q4 itself, we could see a good recovery. Going forward in the next financial year, we will expect, like I said, a growth of about 25%. I'll say the drop in revenue was temporary, and we are already seeing a recovery in that.
Okay, sir. Secondly, you mentioned about the strong pipeline for product launches. Can you give us some guidance in what are the products we are planning to launch in API formulation as well as specialty chemical segment?
Yeah. I'll answer for formulation and probably Harsh can answer for this, API and specialty chemicals. In formulations, we are currently having a pipeline of eight products, majority of which are with backward integration with the API. Majorly are into cardiac and diabetic products, new age products. Products which would be going off patent from the next financial year. We will be targeting day one launches in majority of our markets. Apart from that, in oncology segment, we have a pipeline of about 10 products, which are majorly you know tablets and capsules, new age oncology products in especially the mid category of products.
Okay, sir.
Regarding the API, if I will tell you the main therapeutic areas where we are expanding in a big way. Antidiabetic obviously is one of our favorite segment. There, we already launched a couple of listings in the current year. They will, in the next couple of years, their contribution should become meaningful. We are launching a derma product in the next financial year. We already expanded one and one we are further expanding in antibiotic segment. In antifungal, we are launching a new product very soon, and also expanding the current one which we already have. We are also doing brownfield expansion of one of our cardiovascular product, which is very popular.
In specialty chemicals, as we discussed earlier in concalls that, we are coming in a big way in chlorosulfonation. We are also doing backward integration for few of the intermediates, which we may also sell outside, means the derivatives of those intermediates we will sell outside. We also have a contract manufacturing with MNC for one of the specialty or intermediate products, which we have expanded recently because they have increased the business volume with us, looking at our performance in last couple of years. The growth is spread across lot of products actually in coming future.
Okay, sir, that is helpful. My last question is: What is the current status of our USFDA inspection for our facility?
Yes, yes.
Which is under important.
We already paid the resources in this December quarter for USFDA. The thing is we were in very close contact with ex-USFDA inspector.
They have already started reviewing our all the responses and everything. Means that we already had done all the work. All the background work is done. The last step is this next USFDA inspector reviews everything. They will come for a with a focused approach to audit our plant in person at the site. They will represent the case, means they will represent the findings to the USFDA directly. Actually speaking, it was supposed to happen means by now, by December it was supposed to happen, that visit, but because of this third wave, their travel plans got delayed. That is why they took another approach of first doing the remote audit, re-audit or remote review kind of a thing, and then come in and do the on-site thing quickly.
Okay, sir. Got it. Thank you, and all the best.
Thank you.
Thank you. The next question is from the line of Ranvir Singh from Sunidhi Securities. Please go ahead.
Yeah, thanks for taking my question and congratulations for good result. Just, I wanted a clarity on your earlier comment. 17% you said the raw material cost was negotiated for a price. That's what you say?
Yes. No, I will explain again. The thing is, we did two different types analysis. One was the material which came into the factory every month, and that material price was negotiated a couple of months before in the purchase order. The one analysis what we did was regarding the new purchase orders which we have raised. Means that material will come in after one month or two months or three months. What I was saying that out of the total raw material, for 17% of the raw material, the negotiated prices in the month of December was still the highest since October, November and December. For the rest of more than 80% of the raw material, the prices have tapered off.
The negotiated prices have tapered off in the month of December.
Okay. This is the tapering off of price is triggered due to a softening of prices there or.
Yeah. Maybe, yes. Because the sudden surge was more of an opportunistic kind of price hike by our vendor because of, you know, demand-supply situation. There was frantic buying also in the market because, you know, the surety of the supplies was not there in that, in those months. A lot of people have bought. In fact, even we have ramped up our inventory quite a lot in the quarter of December, and that is another reason why our inventory had gone up. That will also be one of the focus areas in the coming quarters to reduce our working capital cycle. That was the reason.
Mainly it was frantic buying, because of which the prices had gone up. Now with the clearer picture coming out in the market, the prices are softening a little bit.
I wanted to understand this dynamic. In case, after witnessing a hike in price and then again price has softened, in case again the price is hiked, or a normal industry, you know, runs in a way it was running last year. Yeah, again, the raw material prices goes up, then a negotiation of only that portion of raw material you will be able to do, or it is nothing to do with this, again the new negotiation will happen?
No new negotiations will happen. This is done. It means we have placed the order.
Okay. Yeah, thanks. Another thing on oncology side, what kind of API we are planning to produce? Whether we'll have high potency facility there, or what kind of API setting we are doing?
Oncology, we are doing at the formulation side, not at the API.
Okay. This is on formulation side. Yeah. The last one, in budget, you know, some solvent, customs duty has been reduced. Anyway, are we benefiting from it?
I mean, the quantum very roughly speaking around INR 30 crore-INR 50 crore somewhere in that range of the raw materials where the duty has reduced. I'm talking about paracetamol.
Okay, that's it from my side. All the best. Thank you.
Thank you.
Thank you. The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead. Tushar, your line is unmuted. Please go ahead.
Yeah. Am I audible?
Yes, you're audible now.
Sir, while you have explained nicely in terms of pricing and pricing factor, but just would like to understand this disruption in China. Is this fundamentally or structurally driving more volumes to, you know, Indian companies like yours?
See, basically, right since 2018, a lot of events have happened in past that suddenly which basically is giving us the indication that China is moving more towards greener technology, and they are focusing less and less on the manufacturing of specialty chemicals or intermediates and so on. Definitely they will continue to focus in the areas where they have natural resources, so that they will continue to do. But more or less the trend what we have seen is they are focusing more towards generic ones. So definitely these, all these events give indication to go-global buyers that, you know, they should be de-risking their supply if they're depending only on China. That has started to happen. In fact, in this COVID only, one of.
For one of the very big top three molecules, one of the biggest MNC customers for that molecule we were able to crack.
Okay.
Which was the business of which earlier was going to China, you know. We are seeing that trend, no doubt. It means it will be helpful in long run.
Understood. Fair enough. Particularly for this gliptins, while you are seeing a good orders for the gliptins front, but what's happening on the, let's say, the existing, or let's say the other molecules in the diabetic portfolio, in your diabetic portfolio?
Yes. The other molecules are doing really well. December was good. Those are showing a promising sign lately in that portion.
Additionally, gliptins is further over and above that. That's the way to understand.
Mm-hmm.
All right. Interesting. All the best. Thank you.
Thank you. A reminder to our participants, please press Star and one if you wish to ask a question. The next question is from the line of Cyndrella Carvalho from Centrum Broking. Please go ahead.
Yeah, thanks for the follow-up. Adhish, coming to the API side, if I try and understand, you mentioned about gliptins. How about our metformin plant CapEx? Where are we on that? And in terms of gliptin, what kind of market share do you expect to, you know, acquire over two to three years? What is the plan there? And in terms of metformin CapEx, if you can update us, that will be helpful.
Regarding gliptins, means it's more like a stage-wise expansion for us. Means we already have set up a gliptins multipurpose facility for both the products, but we have four production lines in that particular location. Our next stage was once the gliptins grow for us, then we'll shift one of the gliptins in another line. We'll have two dedicated lines, one for each of the gliptins. From there, maybe after two, three years, if it grows even further, then we have space to put up another block itself. That will be a, like, very major capacity. When that happens, then definitely we will aim for, you know, more than 50% of the market share, that kind of capacity, which we do for typically top 10 of our products once we have done.
That round of expansion for gliptins will come maybe in third year or so. Right now also we are very much, the capacity is good enough to get a substantial share, of gliptins. Gliptins is a very growing market, so it's very difficult to put a number that how much share we will, capture. It's a growing market. One of them is, domestic focus and other is the export focus. As far as metformin is concerned, we are growing very strongly with our current capacity of 300 metric tons per month. The utilization is going up, rapidly. We also have, European approval for that facility. We plan to do USFDA soon. We already have, you know, all the plans are ready.
The civil work is yet to start, but it will be completed within once the project starts, it will be completed within a year's time. You know, the 3,000 tons per month capacity. Obviously, we'll be doing this in a phase-wise manner. First it will be 2,000 tons, and then it will be 3,000 tons per month. As far as the other brownfield expansions are concerned, this antibiotic expansion within next four months it will be done. Your derma capacity will come online maybe by December 2022. Another intermediate capacities will come online maybe around February to March 2023. That is the end of next financial year.
Antifungal product also, there also we are launching an antifungal product also, which we'll take up in one of the existing facilities. Once it grows again, we'll have a dedicated block for that. Our cardiovascular product also, we are looking almost to you know double the capacity from where we are right now because there also we are seeing good demand. Lots of expansions are happening. Small ones also and also the big one, that greenfield capacity.
Any update on the PLI side? Where we are? Do you think there is some delay there?
PLI side means we opted for in the PLI there was a condition of you know spending around INR 78-INR 80 crore CapEx to get that PLI. We had change of process and because of which we are able to put up the same facility in about 25 odd crore, INR 20 crore-INR 30 crore you know. There was saving of more than INR 50 crore. We thought that rather than you know taking applying and getting PLI every year about INR 8 crore-INR 10 crore per annum it was better to save upfront. We have already gone and set up the plant. Means whatever we had planned around three quarter of that capacity is already commissioned and the rest one-fourth will also commission very soon.
Basically what I'm trying to say, instead of going for PLI, we have expanded in the same product but with much, much lesser CapEx, which more or less equals to the PLI which we'll be receiving in next six years.
Thanks. That's helpful. I wish you all the best.
Thank you.
That's all from me.
Thank you. Next question is from the line of Bob from Falcon Investments. Please go ahead.
Hello. Could you explain why you continue to focus on formulations given that you're subscale even in API? There's a lot of scope for APIs going forward. What's the need to go into formulations?
Okay. More from strategic point of view you're asking me, right?
Yeah.
The thing is that, as you say that, basic strength of our company does lie in manufacturing bulk products where the volumes are very high. We are doing that wherever possible. Wherever we are getting opportunities, we are doing that. Specialty chemicals and intermediates is something very similar to what we already do, with much lesser regulatory framework you can say. The manufacturing skills which are required remains the same for chemicals and specialty chemicals and intermediates. There also we are expanding. The only piece which was remaining for us for vertical integration was formulation. There we integrated on the backward side, but on the forward side we were never integrated.
What we thought that there are few products, you know, very, very few products, which it's very difficult if the number of formulation players are concentrated, then it becomes very difficult. But the APIs where the number of formulation players are fragmented, there are 8-10 formulation players, then it becomes very good business case to manufacture API only. But if it is, you know, concentrated in two to three buyers, then it might be little difficult to sell that particular API with good margin. For this and for value addition purpose, we had introduced formulation as a strategy.
10 years back, you know, many of the formulation players, they used to purchase our API and give it to a third-party manufacturer or formulation manufacturer in Baddi, that is in Himachal Pradesh, and get their tablets manufactured from them. What we thought that rather than doing that, we can offer their tablets on our own. I mean, we can give them a combined pricing of API plus the formulation. That was the main, you can say starting point of our formulation business. Slowly we became expert. We had our own facility. Then we started registering in the export market because we saw there are few niche opportunities available with very high margin. That is the reason why we started the formulation business.
It's a baby step and let us see where it takes us.
Thank you. Mr. Bob, is your question answered?
Yeah, I have another question.
Yes, please go ahead.
For how many APIs as percentage of revenue are you fully backward integrated?
Yeah. The top 10 APIs is contributing around 75%. Top 15 would be somewhere in the range of mid-80s. The thing is in top 10, out of top 15, in 13 of those molecules, we are largest manufacturer in India and in three of them globally also. I would say that the ones in which we are largest manufacturer, we have reached there because we are either same or more backward integrated than our competitors. You can roughly assume that, you know, more than 80% of our revenues are backward integrated.
Completely back. You don't import anything from China or elsewhere for-
No, no.
For 80% of your revenue?
No, no. See, the thing is, it's a very tricky phrase meaning completely backward integrated. Because there are lot of stages. We can go N -2 , N -4 , N -7 . Even for N -7 , you know, there might be some raw material which we might need from China. That is always there. We can never get rid of that. What we try to do is that we see how many manufacturers of that particular raw materials are there globally. Is there any risk of supply for that particular raw material?
If there is, you know, good margins in that product as well, then that is the time when we take a call to go further backward, go for further backward integration. For many of the products which we are buying from China or elsewhere, we already have developed technologies as well. It is just that, we are ready with the technology, but we don't want to put the plant yet because we don't want to over-invest. Because if you go further and further backward integration, your return on assets will go down because, you know, the sales turnover also will go down. The assets.
Yeah. I understand. When you actually say you're backward integrated for 80% of the revenues-
Mm-hmm.
What do you really mean? What's your internal definition of backward?
Yeah. What I really mean is, it is all relating to the competition. That will be the-
Okay.
Good way of looking at it. Means, as compared to your competition, how much you are backward integrated.
What you are saying is even the top manufacturer for these APIs?
Mm-hmm.
Would only be as backward integrated as you are.
Yes. Less.
Is that what your point is?
Got it. Correct. Either I is backward integrated or they will be less backward integrated than us.
Okay. In terms of pricing, you wouldn't lose out because of the level of integration.
Uh, it is more-
Would be-
Yeah.
Okay. Understood. Thank you. Thank you very much.
Thank you.
Thank you. Anyone who wish to ask a question at this time, they may please press Star and one. The next question is from the line of Surajit Pal from BoB Capital Markets. Please go ahead.
Hi. Good morning. I have only one question, is that about gliptins? What percentage of the revenue coming from gliptins, if you can, quantify that?
Yeah. As of now, we've just launched, so it is like, you know, negligible to our revenue. In a couple of years the contribution will become meaningful. As of now it is just like a launch. In API, typically, for local markets there is a gestation period of almost a year. For export markets, it can take anywhere between, you know, 18 months-36 months, depending upon what kind of markets you are supplying it to. In ROW market it will be less, but in semi-regulated and regulated markets it will be more.
No. My doubt is that because recently what we are hearing from the, you know, formulators in India.
Okay.
Gliptins is gradually and you know slowly losing the market share to the new generation of molecules. You know, as they say that you know metformin has always been a gold standard. From metformin, the second line of treatment is basically gliptins.
Correct.
Those gliptins are losing market share to the dapagliflozin kind of, you know, new generation molecule. Gliptins are mainly used as a, you know, one of those combination products in diabetic treatment. In that case if you go by the IPM data also, gliptins are, you know, losing market share and losing the value. I was just wondering, is that how prudent it is to, you know, get into gliptins and increase capacity in that?
Right now, it's good information for us, no doubt. Right now where we have put gliptins, it's a multipurpose facility. We always have the option to, you know, if any problem happens for gliptins, then we always have the option to convert that facility to something else. As of now, you know, gliptins is still way ahead of the next generation molecules in terms of API sales, I would say. Not formulation, but the API sales. That still, it will take lot of time for other molecules to catch up to gliptins.
Okay. Thank you and all the best.
Thank you. Our next question is from the line of Gagan Parekh from ASK Investment Managers. Please go ahead.
Yeah. Am I audible?
Yes. Just a little low, but you're audible.
Good morning. A couple of questions. One is what's your dependence on China for your KSMs and intermediates by value?
That would be a little less than 20% of our raw material purchases.
Okay. I mean, going into the future, you expect this to stabilize at these levels or is there an intention to bring it down?
Right now there is no business case to do so. There is one product though, which I won't name the product. There is one product where we are seeing a business case and we are already working on that. In rest of that scenario, means as of now, because the thing is, if the suppliers are stable and there are more number of suppliers in China, then it doesn't make sense to put up capacity right now. Wherever we see there is a problem, there are only two players, you know, something like that, if we see any risk of supply, then we decide to go further backward integration.
Apart from China, you, where else do you source your KSMs and intermediates?
Europe and Middle East.
Okay. Thank you. Are they entirely outsourced or do you also, you know, have some in-house KSMs and intermediates?
No, no. We do a lot of it in-house. In for a lot of products, we have like N-5, N-7 stages. So we manufacture a lot of products in-house. In fact, as I was talking earlier, that in more than 80% of the cases we will be either more or as much backward-integrated as our competitor. That is the reason why our cost of production is low. Apart from volume, means economies of scale, the second most important factor is backward integration in this business. That we have continuously done for our top 13 products.
Right. And just on the same topic, while I understand, you know, you indicated that December on there's a softening in input prices. They are largely crude derivatives, as I understand. Given the current crude price scenario, do you see, you know, this softening sustaining or do you feel that, you know, it's a small or a temporary dip and thereafter the prices move back up again? Is Harish available on the call?
No. Last year, whatever raw material prices went up was nothing to do with crude. It was mainly demand-supply mismatch. Some of the plants were closed in U.S. and China due to pollution and other things. Crude, of course, definitely will have some impact. The price increase in last year on many of the commodity chemicals was not due to crude, but some other factor, demand-supply mismatch. Which is now tapering off basically. Yeah.
This price increase, I mean, obviously, you know, is a consequence of the input price materials going up.
Right.
Right. I understand that one bit of it which you experienced is coming because of the disruptions in supply. Are these disruptions in supply, especially from China, of a temporary nature or do you think that because of the policy or regulatory changes in China, you know, some bit of the input cost increase is sticky and will stay because the cost of production itself would have gone up on a permanent basis?
Cost of producing chemicals and intermediates in China has definitely gone up because many of their plants they have to move to remote places from the cities where they were earlier. Definitely there was supply missing. This price will definitely be the issue now. You know.
Right. But this should not benefit your margins as material prices soften because it's just an absolute amount increment of inputs which you are passing on. Right? Therefore as that shifts or remains stable, I mean, as it stabilizes and the volatility goes out, your margins should remain in a stable band and not sort of move up is what I'm trying to understand.
Can you ask the question in more concise manner?
Okay.
because I was not able to pinpoint.
My question is simply this. Like, if let's say your selling price was INR 100 for a particular API and your input price was INR 60.
Okay.
Input price went up from INR 60 INR 70, there's a difference of INR 10 which you pass on.
Mm-hmm.
100 goes to 110, input 60 goes to 70. In absolute terms you've passed on that INR 10 but in percentage terms-
Margins will-
Margins will actually come down, right?
Yeah. It's a very good question. The thing is, you know, in short run what you say is correct, in short run, like month-to-month basis. Now, you know, most of the companies, they are evaluated, even bankers also evaluate the company based on margin side typically. Gross margin side. Right. In short run maybe people look at that. You know, on year-to-year basis, in longer run, people try to revert back to margins. Means, then what you say means, we will add one more rupee to return the margins as it was. Something like that. In short term may not be, in longer term, yes.
Right. You've got new capacities coming on stream throughout the next twelve months. What could be the OpEx related to that new capacity?
It's difficult for me to tell like that. It's difficult. I don't have exact numbers, exactly how much OpEx will go up.
Mm-hmm.
Typically what we have seen that, I mean, based on the historical numbers, historical trend, this thing has happened quite often in between. Between last 10 years it must have happened 3, 4 times when new capacities have come up. What happens is our earlier capacities, they also keep on getting more and more utilized, you know. More or less it averages out. That is what we-
Okay.
That is what we think.
What you're saying is that as you sweat your existing assets more it absorbs the impact of the additional cost and the margin remains stable.
Mm-hmm. Correct. Yeah.
What's your utilization on your existing capacities?
Right now, for the last quarter, it was somewhere in early 70s.
Okay. You have some more room to strike them?
Yes.
You can take them-
I think it will continuously come as a part of our means, what we call maintenance CapEx. But it is actually maintenance plus debottlenecking CapEx. We continuously try to keep on increasing capacities in the existing plants as well. We have successfully done it in last year for one of our antifungal products, one of our antibiotic products. Coming year, we are planning to do in one of our means, cardiovascular products as well. We continuously do that, means the brownfield expansions as well. That also helps us in case you know in having more margins in that plant, which subsidizes the cost of additional OpEx because of the newer CapEx and new plants.
Right. In your presentation mentions, you know, INR 600 crore CapEx with sales potential of INR 1,200 crore over five to six years. What's the base or reference here over which you are adding these five to six years?
The thing is, typically means we were assuming full capacity utilization in four to five years once the capacity is online by next December 2022.
Mm-hmm.
You can safely assume by the end of next financial year.
Mm-hmm.
Most of this capacity will be online. Not all of it, but at least 70% of it will be online.
By December of 2022.
December 2022 or March 2023.
March.
One by December 2022, another by March 2023.
The presentation also indicates that, you know, there is room to improve margins. You know, what's the cost levers or is it simply a sales mix related margin expansion? If you could, you know, sort of, help us understand attribution on both the sides.
One is the backward integration program, the big greenfield capacity we are doing that will help us. Another is having more and more space in the semi-regulated and regulated markets. We are consistently trying to capture, meaning take over, meaning get more market share in those kind of markets where the selling prices are higher and the margins are higher. Another is what we are trying to do is something that we have already done in products like metronidazole, wherein, you know, now more than 95% of India's production is our company's production, and rest is only China. We want to achieve that level of market consolidation, because once that all happens, then the margins become much more stable, you know. Something like that.
In which molecules do you see yourself getting, you know, that sort of a position?
There are quite a few antibiotic products. One antifungal product is there. In fact, one anti-inflammatory product is also there. There are quite a few molecules which we have been manufacturing since last 15 years.
Okay. You know, when your LatAm sales goes up, as it will over a period of time, it comes with its own, you know, set of issues in terms of currency volatility and probably higher working capital.
Mm-hmm.
If I understand, you know, that geography in some way. In terms of currency risk, in terms of working capital, in terms of debt to equity, you know, how are you thinking over the next three to five year timeframe, your thoughts there?
As far as currency risk is concerned, more than 95% of the business in Echopharm we are doing in U.S. dollars only. That takes care of that. As far as working capital is concerned, you correctly pointed out that Latin America being the opposite side of the globe, it takes maximum time, transit time. Definitely the working capital employed, required is more for those kind of sales, but then we accordingly charge means we build that cost into our selling prices. It is taken care in that. Your last question regarding the debt to equity ratio. Debt to equity means whatever CapEx we are planning and whatever internal accruals we'll be generating.
also, we plan to do a shareholder payout of, say, around 25% of profit after tax. If considering CapEx and the shareholder payout, both considered together, we still feel that our debt to equity ratio should not go at peak level beyond 0.7. That is what as of now we are envisioning.
Okay. You will take on more debt as you go. I mean, if you could just give us an idea of what's the CapEx like?
We will take debt. We'll take some loan debt no doubt for the greenfield CapEx to some extent because the cost of debt is much, much cheaper than the cost of equity for us. Historically, if you take out the last six to seven years, then before that almost 30 years, we have run the company with a debt-to-equity of around 1.5. There was absolutely no default in any of the years in working capital or nothing. We were quite comfortable. We realized that we had the option of reducing the risk, so we brought down with every year incrementally the debt-to-equity ratio kept on going down, and now it is at 0.51.
That is, hence I said at the peak level, we are aiming something around 0.7. With more quarters, as it will go by and the equity will add up, again, the debt-to-equity ratio should come down to 0.5.
What's the gross debt and where could it peak?
Around 500, roughly, something.
At what sort of levels would it peak out? Absolute debt.
Absolute debt?
Yeah.
Absolute debt, thing is, in this 500 also, you know, around INR 330 crore or INR 336 crore is short-term debt only, working capital.
Okay.
The long-term is less than INR 120.
You will be adding to that, right?
Yeah. Now we'll be adding long-term debt, more.
Mm.
There is a repayment schedule also. Almost INR 40 crores-50 crores of repayments also happen every year, you know?
Yeah. In long term.
In absolute, let's say point, we'll have to calculate that. We take another INR 200 crore of long-term debt. Whatever working capital required, for that also we take around 40%-50% of that we fund through debt.
Okay.
By improving the working capital.
Okay.
Typically, the way we will function is we will both put together term loan and working capital debt put together. We will make sure that, you know, the debt-to-equity ratio doesn't go beyond 0.7. When I say 0.7, I'm also considering shareholder payouts. In spite of doing that 25% shareholder payout, still there will be a debt-to-equity of 0.7.
Okay. Got it. Right. Finally, if you could just give me, you know, what's the budgeted CapEx for FY 2023, 2024. You've given some idea of FY 2024.
As of now, the plans whatever we have announced in this presentation also, those are the greenfield projects right now, which we have announced. Apart from that, say around INR 40 crores-INR 50 crores of CapEx we spend every year for enhancing GMP requirements or maintenance or debottlenecking, means doing brownfield expansions in the existing plant. All that is covered in INR 40 crores- INR 50 crores per annum. That plan will continue. The bigger ones we will announce as and when we decide. Means the INR 550 crores of CapEx we already announced, and maybe in a year's time we will announce further CapEx, greenfield CapEx.
Okay. Thanks. That's all from my side.
Thanks.
Thanks for answering the questions.
Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Adhish Patil for closing comments. Thank you, and over to you, sir.
Okay. Thank you for joining us on this call and giving more than one hour of your precious time. Please, reach out to our IR consultant, Strategic Growth Advisors, or us directly if you have any further queries. We can now close the call. Thank you and have a nice day.
Thank you very much.
Thank you.
Thank you. Ladies and gentlemen, on behalf of Aarti Drugs Limited, that concludes this conference. Thank you all for joining us and you may now disconnect your lines. Thank you.