Ladies and gentlemen, good day and welcome to Aarti Drugs Limited Q2 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 risk and uncertainties that are difficult to predict. As a reminder, all participant lines will be in 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, please signal an operator by pressing star then zero on your touch-tone phone. Please note this conference is being recorded. I now hand the conference over to Mr. Adhish Patil, CFO, Aarti Drugs Limited. Thank you, and over to you, sir.
Thank you. Good afternoon, everyone, and season's greeting to all of you present on the call to discuss our financial results for Q2 and H1 FY 2022. Aarti Drugs delivered a resilient performance despite continuous input cost pressures. Before I take you through the performance highlight, let me 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 terms of realizations and margins because of the elevated API prices driven by sudden supply disruptions due to COVID-19 related lockdowns during H1 FY 2021, that is last year. I will now take you through segment-wise performance. Stand-alone business performance. Stand-alone revenues for Q2 FY 2022 stood at INR 511.6 crore. This contributed approximately 87% to the consolidated revenue.
63% of this revenue came from the domestic market and 37% from the export market. Domestic revenue degrew by approximately 4.5% and exports grew by around 7% on year-on-year basis. However, contraction in domestic business is predominantly due to higher volume in Q2 FY 2021, largely due to the reasons mentioned earlier. API volume growth remained largely flattish on account of lower than anticipated volume growth in antibiotics segment. Within the API segment, the antibiotic therapeutic category contributed around 46%, anti-protozoal around 17%, anti-inflammatory around 13%, anti-diabetic around 11%, anti-fungal around 10%, and the rest contributed around 3%. The share of acute therapies remained subdued due to the second wave of COVID-19-induced lockdowns. Now we discuss formulation segment performance.
For the quarter, revenue for formulation stood at INR 75.7 crore, a growth of 6.4% on year-on-year basis. Approximately 26% of the formulation revenues came from the exports during this quarter. Now, on a consolidated basis for Q2 FY 2022, revenue stood at INR 579.7 crore, EBITDA at INR 73.8 crore and PAT INR 42.6 crore respectively. EBITDA margin came in at about 12.7%. As mentioned earlier, EBITDA margins are not exactly comparable on the year-on-year basis, though we were expecting much higher than the actual performance in this year as well. For H1 FY 2022, revenue from operations stood at INR 1,161.3 crore as against INR 1,124.3 crore, up by 3.3% on year-on-year basis.
EBITDA stood at INR 155.1 crore. EBITDA margin came in at about 13.4%. PAT stood at INR 91.4 crore. On a consolidated level, supply chain disruptions due to sudden power outages in China continued upward trajectory in the key raw material prices. A sudden spike in the coal prices due to demand-supply gap, elevated freight cost due to shortage of shipping containers and one-off earlier expenses related to the revision in the wages kept the EBITDA margins suppressed for the current quarters. However, as a strategy, the company continued to focus on maintaining the leadership position for its top revenue contribution products. The company will continue to follow the same strategy going forward as well.
In order to mitigate the impact of higher input costs, the company proactively undertook price hikes from time to time across the therapeutic areas to sustain the EBITDA margins. However, EBITDA margins and profitability did not commensurate with the input price hike growth due to the lag in passing on price hikes as many of the events that led to sudden upward movement in the input costs were due to unforeseen events such as China power outage, coal price hikes, port congestions across the globe, et cetera. Hence there was some lag in passing on this increased cost. We believe that the coal prices and high freight costs are short-term in nature and raw material prices are expected to taper off by the end of FY 2022. The company is considering further price hikes in the coming days if the raw material price momentum sustains.
As a result, EBITDA margins are expected to come back to the normal levels within the next couple of quarters. Looking beyond the short-term challenges, the company is confident of achieving EBITDA margins in the range of 18% over the next two-three years, driven by the ongoing transition towards lifestyle and chronic therapies, backward integration and operating leverage. The investing cash flow for H1 FY 2022 stood at INR 77 crore and is expected to remain in the range of about INR 100 crore-INR 125 crore for the remaining part of FY 2022, funded through a mix of internal accruals and debt. The pace of CapEx was impacted to some extent due to incessant rains in Gujarat and Maharashtra state during the quarter and the second COVID-19 wave during the start of this year.
The balance sheet continues to remain strong, with a comfortable net debt to equity of about 0.5x as of September end 2021. The company is well on track of growing the contribution from high-value lifestyle and chronic therapeutic areas and reducing share from acute therapies from the API business segment. Similarly, specialty chemicals and intermediate business is expected to grow at a robust pace, driven by the niche value proposition and multiple industry and geopolitical tailwinds. On a formulation business front, the company has a robust pipeline of products under development with multiple therapeutic areas. The company remains confident about the opportunities across all the businesses. We can now begin the Q&A session. Thank you.
Thank you very much, sir. Ladies and gentlemen, we will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on your 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. We will wait for a moment while the question queue assembles. Ladies and gentlemen, to ask a question, please press star and one on your touch-tone phone now. We have our first question from the line of Rashmi Sancheti from InCred Capital. Please go on.
Yeah, thanks for the opportunity. I just want to have a query on gross margin. How many other products apart from metformin are we dependent on China and in which all major products are we facing high input cost?
To answer this question, out of the total RM purchases, around 55 odd percent is coming from imports, and that is spread across the products that way. Recently also there are two factors why the prices went up. One was because of the power outages, which created shortage in supply, and second was, freight which got increased and hence the RM prices were revised upwards. The thing is, we do have options of procuring these raw materials from alternate sources. The thing is, once the supply shortage is created, this particular RMs even if we procure from other parts of the world, the prices are still high.
That is the reason why, across the board, I mean, I can tell you that 17 out of top 23 RM products which we procure, both import and domestic, included, we saw that in the September month, the prices were maximum out of all the six months for this year.
In antibiotic segment, what I understand, you know, for all the major products, you know, which contribute significantly to the overall revenue, that is backward integrated, right? Is there something called basic chemicals or something which is used in even those products, you know, we are seeing some sort of price pressure?
Yes. Yes, we do.
Okay. What is, you know, on your metformin product, is it something that, you know, we have underutilized the capacity because of the high RM cost at this quarter or how is it?
Right now we are taking, we are having good orders of metformin. The capacity utilization has been fairly okay. Though not fully utilized, but fairly okay. Your point is quite valid in the sense that because this September quarter, the prices were so volatile and the situation was so dynamic and fluid that, you know, openly taking lot of orders for our finished good was little bit of a challenge because we were not sure that how the RM prices are going to react in future. So in such scenario, taking, you know, orders in bulk is also a challenge, and that is why we also went slow. Perhaps that is also one of the reasons why a lot of volume growth is not seen in this particular quarter.
Only in this product or it is across other products also we have seen the same challenges and that is why the volume growth was low?
This is for across all the products. This was a challenge.
Okay. If you can just, you know, guide, like, you know, you commented that the demand for the antibiotics has come down. Is it because of the challenges in higher input costs or what exactly, if you can throw some light, you know, why the demand has come down?
There are two things to it. We also went slow in taking the orders. That is one reason why we might have temporarily lost on few orders. Overall also, see, there are few antibiotic products where the demand was very strong as per the numbers published. What needs to be considered here is that for 1.5 years, because of the COVID, people were afraid to go to hospitals. The people who were about to get operated now, you know, the hospitals are quite full in terms of operations. The kind of antibiotics which are used in those kind of applications are different. The ones in which we are fluoroquinolones are different.
The application area for our antibiotics is more related to, you know, either respiratory infection or stomach infection or UTIs, which mostly happen when people are going out and eating outside. Now that has picked up. I mean the situation is much better. With this complete second vaccination, I think that demand will be back very soon.
Sir, one last question. After this subdued quarter in terms of gross margins, what kind of gross margins are we seeing for the entire FY 2022? I mean-
The thing is, the first two quarters more or less it remained similar. Though we were expecting an improvement in this quarter. Frankly speaking, we were seeing an improvement in the middle of the quarter. Then again, this kind of new macroeconomic factor, the gross margins slide down further. We expect December month to be choppy, but the March quarter should ideally, we should be improving on the gross margins. Once the situation stabilizes, means there are no more, you know, further hikes in the raw material prices, then the improvement in the gross margins should start coming in.
From the fourth quarter, can we expect your regular gross margins of around 35%-36% to come back?
We can definitely target that, provided there are no further price hikes or no further changes in the market conditions.
Okay. Sir, I have more questions. I'll get back in the queue. Thank you.
Okay. Thank you.
Thank you. To ask questions, participants can press star one. We have next question from the line of Abdulkader Puranwala from Elara Capital. Please go ahead.
Yeah. Hi sir, thank you for the opportunity. In your opening remarks you mentioned you have taken a price hike this quarter. Would you be able to quantify the quantum of the price hike, which has been taken?
That's a little difficult to say. If we look at our top 10 products, I can see that if we look at the last five quarters, that is September 2020 quarter till September 2021 quarter. In the top 10, almost 80% of the products, the prices are maximum in the last five quarters as of September 2021 quarter. The problem was the increase in the raw material prices was even sharper. That is the reason why the gross contribution shrink a little.
Sure. Also, next question is on the inventory. What is the typical raw material inventory which we have on hand, you know, at a glance, you know, considering now that, you know, the raw material prices are up. Are we at the same level as per what we were a year ago or, you know, we are trying to be a little conservative and hopeful of the prices coming back, and this is why we would not have much.
Actually, the situation is very, very challenging. More from the prices, we are more worried from the shortages point of view. You know, but we are carrying about somewhere in late forties in terms of days of RM inventory.
Well, yeah. Just a final question, if I may. On the formulation side, so the export, though it is growing, but, in the overall pie, if you see, the domestic is again quite high, I mean, at 74%, as compared to exports, which is 26%. For any reason why there is lower traction in export, from the last few quarters?
For the formulations, right?
Yes, sir.
Yeah. Vishwa, can you answer this one?
Yeah. Actually, you know, there are two reasons. One is in the formulations, you know, we are also slightly dependent on some of our tender orders, which in this particular quarter we had the lower execution of tender orders.
Some of the shipments because of logistical issues, export consignment shipments have been lower and due to that, export execution was low. Domestic business has been, you know, steady and growing. That's why the percentage on the domestic is higher. However, with more and more registrations coming in and more, you know, product list expanding and also markets expanding, we are quite confident over the next couple of quarters export business will be contributing much higher percentage in our overall sales.
Got it. Just final if I may. What would be the current capacity utilization on the API and formulation side?
For the API side, it will be for last quarter, it was near about 70, about that much. For the formulations also, Vishwa.
Yeah, for formulations also it will be about 75%. Between 70%-75%.
Sure. Yeah. That would be all from me. Thank you for answering.
Thank you.
Thank you. We have the next question from the line of Chirag Dagli from DSP Mutual Fund. Please go ahead.
Yeah, sir. Thank you for the opportunity. Am I audible?
Yes.
Yes, you are.
Yes. Thank you. You mentioned 55% of raw material purchased is imports.
Correct.
How much of this is China, sir, or from China?
Around 80% of the imports would be from China as of now.
Okay. Also, you mentioned, you know, would there be final API products also where you compete with China and there also could be some supply challenges and hence, you know, it'd be easier for you to take price hikes. Is there a set of products which fall into this bucket?
Yes. Harit Bhai, would you like to.
Yeah, there are many products, particularly antibiotics we are competing with China. We are revising rates and Chinese companies have revised their rates and we are also getting better price realization in exports now. We started getting better realizations.
Can you quantify, sir, what percentage of our products?
It depends on the product- to- product. Basically, see, the situation is so volatile. For example, coal prices, which went to $200 a ton, now it is $160. The Chinese government target is to do at $83, you know. There is so much volatility. The power cost also has gone up and it will come down. As of now, whatever raw material increase percentage-wise, whatever API we got increased, so that much increase we have done in sales price basically. The cost of utility has gone up, so we are also taking that into account. Overall, we want to have that stable margin basically. Yeah. We hope that in export we will be getting better margins, I think. Whatever old contract we have, but besides that we will try to get better prices. Yeah.
Understood, sir. You mentioned about some one-time staff costs for the quarter, which would not be recurring. Can you quantify what this number is?
It was slightly less than INR 1 crore.
Okay. Not much basically. Okay. The last question was, you know, you mentioned the capacity utilization in API is 70%. For which products is it lower and for which products is it higher? Just broadly, you know, some sense.
Uh.
Some extremes, you know, where, wherever you are seeing dramatically lower utilization.
No, no. There is no such product where there's extreme, you know, low utilization. It is more or less across the board.
Understood. This should normally scale back to how much over a very short period?
It should scale back to at least late 70s, 75%-80%.
Okay. Perfect. Thank you, Adhish. Thank you.
Thank you.
Thank you. We have next question from the line of Nilesh Doshi from GL Capital. Please go ahead.
Sir, thank you for the opportunity. The question again relates to gross margin reduction on YoY basis. You alluded that largely it's because of the raw material price increase and that from China, and that too because of some power shortage and, I mean, the cost of power has gone up. If I remember and what we read from the newspaper and understand is that the real power shortage or the cost of power happened from August, September. Whereas the supply chain would have forced you to buy these raw material at least three months in advance. Am I missing something in the process? The impact of this power shortage and the price increase should actually happen in Q3 and not in Q2.
Am I missing something in between, sir?
No. See, what the logic you're pointing out is, so in a sort of way, it is correct. What happens is, there are some prices or some materials which you are also buying locally. Whenever such a thing happens, you know, some news come out, immediately those prices are revised. The local purchases that means the lead time is very short.
Sir, that would not be a very high percentage, right? Because to impact 7% on the overall revenue, I mean, the local purchase would not be to that extent, would have impacted. The other way to understand, sir, is that what kind of price increase actually has happened for those intermediates and raw materials? On a YoY basis, if you can just quantify, in a percentage terms, what kind of actual price increase have you seen?
Actually, I don't have that number. You mean? We'll try to find out and then release.
Yeah. If you can help us with the trend, you know?
Yeah. I'll just add one thing. Like, what has happened is, power outage started in August.
Correct.
What is happening, immediately Indian producers of basic chemicals, to give you an example, formic acid, which was available at INR 45, they have increased the price to INR 125.
Oh.
It's more than 100%, you know.
Right.
There I can give you example of at least 10, 15 chemicals which-
Okay.
... price over there made almost 2x , 3x price, you know. Although the Chinese shipments were still coming-
Right.
... you know, at old price, but the domestic price in China went up, so they immediately increased the price here.
I see. Okay.
That too government company also. Like caustic flakes, which was available at, say, INR 30 a kilo, now it is available at INR 60 a kilo. It is a commodity driven. This is required in all the APIs, you know, medically, these chemicals. This local chemical producer also increased the rate on, you know, that has also caused a lot of, you know, disturbance.
Those are not purchased on some monthly basis, or those are like-
No, they are spot purchases. They have contracts, but what they have done recently, every seven days they revise their price.
I see.
Yeah. They keep-
Sir, during these quarters, whether the product prices have fallen, I mean, if I look at last year versus current year, is there any change, downward revision in the product prices, for example, metformin?
No. Except metformin, otherwise no. Yeah.
More or less, the product prices have remained the same.
Yeah. Yeah. It has gone up in price.
Yes. Yes, it has gone up.
Yeah. To answer your question, the selling prices you are asking.
Right.
September 2020, that is the last September quarter, the prices were high, but then the prices had come off in December and March quarter. Then again in June quarter and September quarter they went up. Current September quarter's prices are as high or in some cases higher than the September 2020 quarter.
Okay. In that case, sir, what has happened that why our revenue is flat YoY?
That mainly is because of the fact that, as I was saying, you know, in this volatile situation, it's very difficult to go aggressive in taking orders.
Okay.
You know, in such situation, customer comes and they start asking that, "We want to fix price for three months down the line and we want to give you order," something like that. That is risky for us. We took it little slow in this particular situation, volatile situation.
Sir, then what kind of our revenue is on spot basis we sell and what could be on a long-term, especially on the volume side? I can understand pricing-
Uh.
... would depend on the formula or something.
Difficult, but I can give some sense, like for example, say 65% is domestic, 35% is exports in API, at least I'm talking about.
Right.
In the export market, usually the pending order is two and a half to three months.
Okay.
Domestic market, there are few customers like MNCs operating in India. They are trying to fix price for three months and all. There are few B and C type of customers who order like, you know, like 10, 15 days lead time for that much period.
Do they not give us, sir, some kind of planning or some kind of advance intimation that? Is it really a spot basis like?
No, no. The organized players, they do.
Okay.
There are a lot of kind of, you know, formulation players in the market, so.
Right.
Mm-hmm.
Out of our business, what kind of domestic sales we do through dealers and the traders in, you know, this? Or everything is sold directly to the formulator?
Yeah. Most of our sales is directly to formulator companies. Most of the sales, yeah.
Okay.
Except some companies where we are not assured of our payment.
Right.
Payment issues. Yeah.
Okay. Sir, thank you. Thank you for answering.
Thank you. Thank you.
Thank you. We have next question from the line of Cyndrella Carvalho from Centrum Broking. Please go ahead.
Hi. Thanks for taking my questions. Adhish, could you help us understand, out of the top 10 products, if we look at, where are we seeing the demand weakness and what is the outlook that we have? Any sense that you can provide on these? Just to support that, if we look at the demand scenario, simultaneously if you can highlight, out of the top products, where we see EBITDA level pressure more and what is the view on that?
EBITDA level pressure?
Yes. Which are the products when you're seeing the impact of the higher raw material or the volatility in the market leading to the kind of pressure that we are seeing in our P&L? If you could relate the demand with the EBITDA and explain to us, that would be very helpful.
As far as, because this raw material prices went up across the board, typically all the products face that pressure. Especially even the anti-diabetic products, a lot of new capacities came up, and plus the raw material prices were also going up for that product sharply. The market was quite volatile. In last six months, we have seen that even anti-diabetic segment, the profitability had gone down as compared to previous years. We are seeing signs of recovery based on the orders which we are having in September month, which we took in September month and in October. It's dynamic because the prices were changing so drastically, it's difficult to pinpoint.
Once the raw material prices stabilizes and after that in two months time, you know, it will be very much clear that whether the you know, the slide in margin is slightly on permanent basis or it is very temporary. As far as demand is concerned, there is no specific category where we feel that it's a matter of concern. It is just matter of time. For antibiotics, yes, as I said, that the kind of applications in which we operate are stomach infection, respiratory infection and UTI. So those kind of. For that therapy, the demand was slightly lower, because of this second wave.
Apart from that, the new launches also in the cardio segment that we had planned.
Yes.
They haven't created any support. What is the outlook there? When you're talking only about anti-infective and anti-diabetic, what about the other key therapies or zones that we have? What is happening there exactly? How should we see these things? Because anti-infective, when you say, even in the base year, we had a complete miss on that segment as such. Where do we see this coming back? Do we have any sense around the demand per se?
If we compare our half-yearly basis, we have lost mainly in this one, as I said, antibiotic and anti-protozoal. Mainly, the products which are going in the application areas which I highlighted. It will come back. We are not much worried about that. Once the demand is back, the margins ideally should also be slightly better. Because now what happens is it is like a temporary excess supply for reduced demand. The margins also contract in that scenario.
Sorry. One more. On the scenario, the way we have described raw material and our contracting with our suppliers or our buyers, how do you do you envisage any strategy to protect ourselves in a better way going ahead? Is there any possible solution or strategy that you guys are working on? Or is it on cards? Or do you think this scenario will continue?
There are two things. There is a limit also, I mean, how much a formulation company can absorb increased API prices, because for them also, you know, it is a pressure situation. Because ultimately the prices need to be paid by the consumer, you know, in the MRP. Once this situation stabilizes only then, you know, we'll be able to really forecast something. But the thing is, in the past also what we have seen that most of the time such situations are temporary in nature and ultimately a new norm is formed. When that will be formed, then again the margins will be like before.
No, it's not just the margins. I'm trying to understand that from a raw material exposure.
Okay.
The volatility that we are experiencing, do we have any strategy in mind? Like we have said in past that we are backward integrated in most of the products, but, you know, still we are facing these kind of volatility, because of basic solvents and, at large on a basket level, inflation in terms of raw materials. Do we have any strategy here which can protect us going ahead, or are you guys working on it? The supply side, what I mean is, when you look at contracting, when you talk about your contracts domestically or in export term, could there be any provisions take care of such volatility which will help us to, have a more sustainable, you know, P&L going forward?
The thing is, there are few contracts which are cost-based. There the impact is not much. There are few contracts which we take like three months or four months basis. Anyways, the prices are revised for three months. Within that three months, then there won't be any, you know. It's very difficult for us to, you know, go back to the customer and say that we want to increase the price of the existing three-month contract. Because that is, anyways in short-term nature. We may not be able to do that. For longer contracts, definitely we have that clause in writing.
Okay.
As far as backward integration, yeah. As far as backward integration is concerned, thing is, this particular situation, what we are seeing is not structural in nature as such. In past also, whenever we see that there is very high profits to be made on a long-term basis for any particular KSM or something, then we definitely do backward integration. Right now, based on the current scenario, I don't think we have any new plans, though we do have a line of products where we have already done R&D, where we can put the plant if we want to. We don't want to do it right now because we want to let the situation stabilize and then make a decision on it.
Any quick update on the USFDA side and on the CapEx, where we are in terms of our expected timelines?
As far as CapEx is concerned, right now the speed is very fast, though the first half of the year was tough, had suffered a little because of the two factors which I highlighted sometime back, that is the second wave and because of the rainy season, the civil work got delayed a little bit. Otherwise, all the projects have started and couple of greenfield sites we are planning to, you know, start the production by the end of next calendar year, that is calendar year 2022. USFDA side, we are at a very advanced stage. We are getting more audit done from FDA inspector.
The thing is, we recently got Australian audit done for the same plant, and that will go through. It's it will be cleared.
Thanks. Thanks. All the best.
Thank you.
Thank you. We have next question from the line of Manish Poddar from Nippon India. Please go ahead.
Yeah. Hi. Good afternoon, team. Three questions. First one is, this freight situation, has this now, you know, probably stabilized? Do you believe in sea, how is that?
Yeah. Harit Bhai, would you like to?
Yeah. Freight situation has become. It started being from China point of view. There are a lot of containers. Because of their power shortage, we are getting shipments on time now, at least as far as timing is concerned. Otherwise, there was delay of shipment from China. Freights have come down from peak levels. Around 20%-30% correction is there from China point of view. From India, the situation is getting normalized, but there is still delay in some countries where we want to export. Things, I think we'll get streamlined in next two quarters, more or less.
Okay. Could you also talk about, let's say, is there any, let's say, you know, issue with, let's say, power supply, let's say at the facility? Or any, let's say, cost inflation on the power side? Given that power, yeah, for us. Because I think power as a percent of sales should be 4%-5% of sales, right?
Yeah. Power and fuel has gone up because of the coal. Is that what you're asking for this quarter?
No. Like incrementally. For the quarter it's already done, but let's say incrementally.
There was a rate variance which was a 50% hike in the coal prices for the last quarter. That is the reason why the power and fuel segment has gone up for us. As soon as these prices come up, then it will again go down.
Okay. Just one last one, sir. Could you probably talk about, you know, supply from China, both in terms of let's say raw material and let's say competitive intensity in terms of finished products? How is that?
Yes. The thing is, in a lot of therapies, especially antibiotic therapy and, in some cases anti-protozoals also, in some cases. We do compete with China as far as our finished product is concerned. There definitely we'll get benefit. As far as the raw material, as we said that 55% of our total purchase is import and of that around 80% comes from China. Their situation means still it's very volatile. We'll come to know in a month or two how it stabilizes.
Okay. Thank you.
Okay.
Thank you. We have next question from the line of Rashmi Sancheti from InCred Capital. Please go ahead.
Yeah. Thanks for the follow-up again. Just to get a better sense, again on gross margin. Usually, you know, our revenues majorly come from the domestic business. What I understand that, you know, the price hike, you know, the transferring the price to the customer is a bit faster than the export business. Is it something that, you know, we have already started doing that or we expect that even the price hike on the product, which will be transferred to the customer, would be taking place in the third quarter?
As I was saying that we are taking price hike and but the problem was the back-to-back RM was also increasing. Whatever hikes we took for, say, month the for the month of April, May, June that is for but then again the RM prices kept on increasing till the month of September. It is a continuous process. Definitely, we are getting better realization now for the products for the finished products. But we need to see how it pans out. I mean, how much you are able to pass and how much you know further price hikes will take place at the input side or whether they will taper off. That is yet to be seen.
For in export also we have taken the-
Uh-huh.
... for the export contract.
For export contracts, the contracts are usually for two and a half to three months, that is, pending order. There will always be a lag of two and a half to three months for increasing the prices.
Okay. How many months inventory usually we keep it, because of this headwinds, which is coming from China?
Which inventory? Raw material inventory?
Yeah, raw material inventory.
Raw material inventory, it is in late 40, in terms of days, overall.
Sorry, I didn't get it. Raw material inventory you all keep it?
It is around 45-50 days.
45-50 days. We normally do it on CIF basis?
Yes. Yes.
If you are doing it on CIF basis, do you feel that, you know, whatever inventory that you have purchased in, say, late second quarter, as well as, you know, in the beginning of the third quarter will also have an impact on fourth quarter, the gross margins?
Yes. Typically, yes, but then we are also taking now price hikes.
It should offset that.
Yeah. To some extent it should offset that.
What is the reason behind degrowth in the intermediate and bulk drugs? It is also because there we have lost volume growth.
In, in the, uh... So, so-
The part which you combined with your specialty chemicals, intermediate and bulk drugs, I think there we have shown a drastic decline in sales on YoY basis.
If you look at our half yearly performance, half yearly numbers, so in that, the only culprit looks to be like this antibiotic, couple of antibiotics and anti-protozoal products, frankly speaking. The rest of the products are positive or flat. Yes. That's all.
No, what I'm trying to understand, I'm not talking about-
But that-
... API segment. I'm talking about the intermediate as well as-
Yes.
... the specialty chemicals.
Well, no .
Whatever breakup you have given in the presentation.
No, no, I'm talking from half yearly basis. Quarterly basis I'm not talking about because sometimes the orders flow from one quarter to another quarter. That can happen. On half yearly basis, there is no decline.
Okay.
That's all.
I got it. Finally, on the gliptin plant, have you commercialized that plant or you're...
Gliptins, yes. Gliptins we recently commissioned and two commercial batches also in that plant. It got commissioned recently, a month back. We have already taken validation batches for the new gliptins. Couple of gliptins, so it will be a new launch for us.
Okay.
This gliptin.
Lastly, last one question on the export side in formulation business. You mentioned that, you know, you know, shipments and everything were delayed and, you know, you all have lost the sales in the export formulation business. Is it something that, you know, this is just deferred and, you know, going to come back in third quarter? Or, you know, the sales which is lost is not going to come back? On the export formulation side.
It will come back. I mean, the only thing is the orders are delayed. Dispatches are delayed. I mean, the dispatches are delayed, so it will flow into the next quarter.
Okay. Third quarter is expected to be better in terms of export formulation business.
Yeah. As of now it looks good.
Yeah, slightly better than quarter we are expecting it to be.
Okay. Thank you, sir. That's it from my side.
Thank you.
Thank you. We have next question from the line of Chirag Dagli from DSP Mutual Fund. Please go ahead.
Yeah. Thank you for the follow-up. Just a quick one. You said, EBITDA margin should be back to normal levels in two quarters. What is that normal level, where?
We are targeting in short- term around 17%-18% EBITDA margin.
That is what you're targeting long- term also now, Adhish.
No. Long- term means, when I say long- term, I mean long- term, once we launch all those products, greenfield products also, and the utilization goes up, then ideally it should go up.
Understood. You are saying that fourth quarter we will start seeing this 17% EBITDA margin?
For next one or two years, yeah, we are keeping a target of 17%-18%.
No, Adhish, in the initial comment you made, you said that EBITDA margin should be back to normal levels in the next couple of quarters, you mentioned.
Correct.
Through the quarter you've been talking about price hikes, et cetera. In the fourth quarter, is that what you are guiding to, that fourth quarter one will start seeing a 17%-18% margin? That is the question.
Yes. If no further changes in the market conditions, then we should start reaching that. Correct.
Okay. Thank you, Adhish.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Adhish Patil for closing comments. Over to you, sir.
Okay, thank you. Thank you everyone for joining us on this call. Please reach out to us, to our IR consultants, Strategic Growth Advisors or us directly, should you have any further queries. Wish you a very happy and safe Diwali. We can now close the call. Thank you.
Thank you very much, sir. Ladies and gentlemen, on behalf of Aarti Drugs Limited, that concludes this conference call. Thank you for joining with us and you may now disconnect your lines.