Ladies and gentlemen, good day and welcome to the Aarti Drugs Ltd Q1 FY 2022 earnings 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 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, CFO, Aarti Drugs Ltd. Thank you and over to you, sir.
Thank you. Hello, everyone and a very warm welcome to all of you present on the call to discuss our financial results for the first quarter of financial year 2022. From Aarti Drugs Ltd today, we have our Joint Managing Director, Mr. Harshit Savla, then Whole- Time Director.
Hello, everyone.
Whole-Time Director, Mr. Harit Shah and myself, CFO of the company. We hope all of you and your loved ones are healthy and safe in the wake of ongoing pandemic and floods across the country. The downward trend of COVID-19 cases is certainly a good sign and we sincerely hope that the pandemic gets over soon. I would also like to highlight that the company has not faced any major disruption in terms of supply chain or plant shutdowns due to ongoing flood situation in Maharashtra. We are happy to share that Aarti Drugs delivered a resilient performance despite facing multiple headwinds during the quarter. Our consolidated revenue stood at INR 581.6 crores as against INR 545.9 crores year-over-year. Revenue mix between domestic and export revenues stood at 69:31. This time the domestic share was little more than previous year.
I will now take you through segment-wise performance. First, we'll discuss standalone business performance. Standalone revenue stood at INR 505.8 crores, a growth of 6.4% year-on-year. This contributed approximately 85% to the consolidated revenue. 69% of these revenues came from the domestic market and 31% from the export market. Domestic revenue grew approximately by 12% and export contracted marginally by around 4.1% year-on-year. However, contraction in exports can be attributed to the fact that around INR 9 crores of exports from March 2020 quarter was accounted in June 2020 quarter due to lockdown in last year. If we take out that mix, then export has grown marginally. Approximately 13.2% volume growth was observed in the API segment in the first quarter.
Within the API segment, the antibiotic therapeutic category contributed around 43%, anti-protozoal around 13%, anti-inflammatory around 11%, anti-diabetic around 10%, anti-fungal around 9%, and the rest contributed around 14% to the total standalone revenues. The share of acute therapeutics remained subdued due to second wave of COVID-19-induced lockdowns. Our Tarapur plant, which witnessed a shutdown during Q4 FY21, is now completely functional and operating normally. The company is well on track to mitigate this kind of risk in the future. The company has converted additionally four of its manufacturing locations in Tarapur to zero liquid discharge category in current calendar year. The company is in process to achieve ZLD operations for more facilities in Tarapur by the end of financial year 2023.
This has marginally increased factory overalls which we plan to overcome in future by making more byproducts from the waste and use high calorific value waste in waste heat recovery boilers. We'll discuss about the formulation segment. For the quarter, formulation revenues stood at INR 86.5 crores, a growth of 6.7% year-on-year. Approximately 19% of the formulation revenue came from exports during the quarter, which we expect to grow in near future. Sudden increase in the raw material prices. We'll talk about business in general, about the API segment as well. Sudden increase in the raw material prices driven by demand-supply mismatch, increasing crude oil prices and plant shutdown at the supplier level affected the gross margins. This was coupled with reduced demand for acute therapy products because of the second wave of COVID-19-induced lockdowns.
As a result, passing on the increased input to customers was. However, the average unit. It was only partial as compared to increased input cost. We believe that the worst is behind us in normal levels in coming couple of quarters. We remain confident of achieving the EBITDA margins in the range of 18% going forward. The current profit after tax for the quarter stood at INR 48.8 crores as against INR 85.5 crores year-on-year. We know the June quarter was an exceptional one in terms of margins. The company incurred a CapEx around INR 48 crores during the current quarter and planning a further CapEx of around INR 150-200 crores.
Sorry to interrupt, Mr. Patil, sir, this is the conference operator.
Okay.
Sir, we're unable to hear you, sir. Your voice is breaking.
Now, is it okay?
No, sir. Let me disconnect your line and call you again. Just give me a minute.
Okay.
Ladies and gentlemen, we have the management line reconnected to the call. Just give me one minute. Thank you. Now over to you, sir.
Pardon?
Yes, sir. You're in the main call, sir.
I will repeat the last few lines which I was talking about. The sudden increase in the raw material prices driven by demand-supply mismatch, increase in crude oil prices, and plant shutdowns at the supplier level affected the gross margins. This was coupled with reduced demand for acute therapy products because of the second wave of COVID-19 in this quarter. As a result, passing on the increased cost to customers was a big challenge in this situation. However, the average realization for most of our products have increased compared to Q4 FY 2021, but it was only partial as compared to the increased input cost. That is why our gross margins contracted in this particular quarter. We believe that the worst is behind us in terms of raw material price hike and EBITDA margins are expected to come back to normal levels in coming couple of quarters.
We remain confident of achieving EBITDA margins in the range of around 18% going forward for the current. Profit after tax for the quarter stood at INR 48.8 crores as against INR 85.5 crores year-on-year. We know that June 2020 quarter was an exceptional one in terms of margin, and we had discussed that last year as well. The company incurred a CapEx of INR 48 crores during the quarter and planning a CapEx of INR 150 crores-INR 200 crores for the remaining part of FY 2022, which might get affected in case there is third COVID-19 wave. The balance sheet continues to remain strong with a comfortable net debt to equity of around 0.54x as of June 30, 2021. The net debt to equity ratio is expected to improve going forward, driven by strong internal in forthcoming quarters.
Credit rating agencies like ICRA and CRISIL have reaffirmed the debt credit rating on long-term facilities to AA- with a stable outlook and A1+ for the short-term facilities. The strong credit rating will allow us to further lower our rate of interest, which in turn would reduce our interest outgo, thereby improve our ROE further. I'm happy to announce that the share buyback concluded during the quarter witnessed a massive response from the investor and was oversubscribed by 111 times. The company bought back 6 lakh shares worth INR 60 crores during the buyback. With this, the company has distributed around INR 195 crores, almost 26% of our net profit in the form of dividend and buyback of shares over last six years to our shareholders. I would like to highlight here that the promoters also participated in this buyback.
The company is well on track of growing the contribution from lifestyle and chronic therapeutic areas and reducing share from acute therapies from the API business segment. Our recently expanded chronic therapy capacity has already started contributing to the growth. We have a robust pipeline of products under development for both API as well as [inaudible], with more focus on antifungal, antidiabetic, skin treatment, and oncology therapy. We remain confident of overcoming the near-term challenges. Our growth trajectory is expected to be robust, driven by robust demand, excellent operational execution, and capacity expansion through a combination of brownfield and greenfield projects in API and segments. Our margins, profitability, and return ratios are also expected to improve due to operating leverage and backward integration in coming quarters. The company will continue to explore various opportunities in terms of new therapy areas and geographic expansion. We can now begin the Q&A session.
Thank you.
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 the 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. Requesting you to limit two questions per participant. Should you have any follow-up questions, please join the question queue. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Pranav from Invesco Mutual Fund. Please go ahead.
Hello. Hi. Good afternoon. Hello. Adhish? Hello. Am I audible?
Yes, sir. You are audible. Mr. Adhish Patil.
Adhish.
Yeah.
Yeah. Okay. Basically, just wanted to understand, you alluded to the thing that you've taken price increase even in the current quarter. If you've taken price increase, all I'm trying to understand is why is your volume growth then higher than the pricing growth or the value growth, if you've taken price increase across segments.
Yeah, I will take you back to the last year. June 2020 quarter. In that particular quarter, the prices are exceptionally high. I think last year, around August, the prices had tapered down. Recent quarter and last quarter prices were kind of a break-even. After that, the raw material prices have gone up. We have taken price hikes with respect to December and March. This is something.
Sorry to interrupt, Mr. Patil, sir. This is a conference operator, but your audio is not clear, sir. We are unable to hear you, sir.
There seems to be some problem. Is it okay now?
Yes, sir. You may go ahead. Thank you.
I was saying that if you compare with June 2020 quarter, then the prices have gone down because June 2020 quarter, at that time, the selling prices were exceptionally high. If you take the normalized quarters of December and March, and with respect to the December and March, the prices have now gone up, of the raw material. So does the selling prices have also gone up. The increase in the selling prices is not proportionate to the increase in the input prices, and that is why there is a squeeze in gross contribution.
Okay. Let me sort of highlight. Quarter-on-quarter, you saw what? 13% volume growth? Is that the right number?
No. That was year-on-year volume growth.
Quarter-on-quarter, how this thing have moved, actually? Say, volume and value.
Value-wise, there is growth. In fact, quarter-on-quarter, there is more growth because last time, on consol, we had done INR 502 crores of sale, and this time, INR 581 crores of sale we have done. That is quarter-on-quarter, March quarter versus June quarter.
Okay. How much will have been the volume growth like?
Quarter-on-quarter, I don't have the numbers right now, but I have the numbers for value-wise.
Okay.
Year-on-year it is around more than 13%.
Have you taken any inventory write-offs or write-downs in this current quarter?
No. This is purely because of the raw material prices and we have seen hikes in almost more than 20, 22 raw materials. The hikes were also quite drastic in the sense of, in some cases, more than 250% hike, more than 100% hike like that.
Okay. Thank you.
Thank you. The next question is from the line of Anandha Padmanabhan from PGIM Mutual Fund. Please go ahead.
Yeah. Thanks for taking my question. Am I audible?
Yes, sir.
Yes.
You may go ahead.
Yeah. Sir, some more color on your raw material price increase. In terms of the last quarter, you had given a guidance of around 38% kind of gross margins. By when would you expect to reach those kind of margins? In terms of price increases, by Q2, how are the raw material prices as of now? Have they started stabilizing or are they continuing to go up?
One thing I would like to answer that in a couple of quarters, we are expecting that our gross contribution should improve by 4% or so. As far as the current raw material pricing scenario is concerned, I will ask Mr. Harit Bhai to answer that question for you.
Out of around 20 raw materials, prices are tapering down in almost 60% of the cases. Since 50% of the cases, price is still at the same level as of 1st quarter. We expect that also to be slowly coming down by another month or so. In this quarter, we expect around 1% or 2% raw material price coming down, definitely.
Are you continuing to Even in current quarter, you are continuing to take price hikes in your product for customers, or how is that working for you?
Yeah.
Is there any for what portion of your business there would be a formula-based mechanism for passing through raw material prices?
Yeah. What is also happened is in first quarter, due to COVID, demand scenario was also very bleak. We were unable to pass on the price increase to the customer due to competition. One more thing is in export, the container rates have gone up by almost 600% in most of the cases. There also we are being affected. In the overall situation, we expect we should do better than first quarter, yeah, in second quarter. Sure.
One f inal question before I get back to the queue. In Q4 you had mentioned that there was some spillover of sales from Q4 to Q1. In Q1, could you quantify that portion for Q1? How much is it? How much of those sales are in Q1?
It's like last year, we are accounting exports from bill of lading date. Unless that material is shipped, we are not taking it as a sale. Because of that, last year, a lot of March sales, almost INR 9 crore-INR 10 crore worth of sales got spilled over in June 20 quarter.
INR 9 crore-INR 10 crore?
Yeah. This year, in fact, the opening inventory of port was lower than the closing inventory. This year actually, we had shown a couple of INR crores of sale less in exports because of the same bill accounting.
Okay. Thank you. Thank you, sir. I will get back into the queue.
Okay.
Thank you. The next question is from the line of Abdul from Anand Rathi. Please go ahead.
Yeah. Thank you for the opportunity. Sir, just two questions. Firstly, on the product mix side. As I heard in your opening remarks, the export sales had been quite lower in this quarter. How should that pan for the entire year? Is there any sort of a demand contraction which is happening from overseas client or this was just a temporary phenomenon from a quarter basis wherein the priority was given to domestic customers?
One thing I would like to say that going forward, the export demand is looking strong. We have a lot of pending orders also. It was more of one-off case because of more priority being given to our domestic market. We have lot of big pending order list for exports, so it is not that of a worry for us. Export demand.
Okay. Sure, sir. Second, sir, I refer to the presentation where you mentioned that the investment what you're doing in two M&A backward integration, that number is slightly lower as compared to what we were doing previously. Any color on that front, and whether the INR 600 crore CapEx guidance for two, three years, is that entirely intact?
Yes. The only thing is in some cases, because of improved process, you can say, we might be able to reduce the CapEx number in absolute sense. That doesn't impact anything related to the capacities we are planning to install. That plan is still on.
Understood, sir. Okay. 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. Sir, in this quarter, do you had contribution from new metformin facility, phase I?
No. That facility is not yet constructed. What we are talking about from 1,000 tons- 2,000 tons per month, that is still not yet commissioned.
When actually we'll see the revenue coming from this facility?
It will take around, because of this COVID thing, conservatively, safely, you can say 10 - 12 months more.
Okay. All the new projects start. Earlier we anticipated that at least by second half of FY 2022, the phase I will start contributing. I think this is pushing towards FY 2023.
Correct. Slightly, there is a delay because of this construction activities getting delayed.
Okay. Earlier participant asked about that gross margin outlook. You said four percentage point improvement may happen in next couple of quarters. That's what you say?
Correct. Next couple, correct.
From 31 it can go to 35, that is the max we can see in this financial year?
Yeah. Correct. For this kind of product mix, that is what we are estimating. It's around 18%, 19% EBITDA margins.
That 38% kind of gross margin aspiration we had, so that seems not achievable in this financial year, right?
In this financial year, no.
This price increases, the passing on price increases you talked about. What proportion of our contract is based on long-term, where we can have the price increases cannot be passed on in a smaller time? How much is the business where we can pass on? That will give some understanding going forward that because price is likely to remain volatile for most of raw materials. Can you give some light on it?
Yeah. Typically what happens, our exports contract the prices are fixed for two and a half to three months on an average. We already carry fixed orders for almost around. Yes? Hello? You can hear me, right?
Yeah.
Okay. Yeah. The export orders are usually 2.5-3 months. That is there. There we cannot do much. Our domestic orders would be somewhere around 1 month, for few of the MNCs, we are fixing up price contracts also in domestic market for contract, means for three months period, we revise it. In some cases it is difficult to revise immediately. As I was saying that especially the acute therapies like antibiotic and antiprotozoal, because of these lockdowns, at one side there was increase in raw material prices, sudden increase in raw material prices and severe hikes were there. It is very difficult to justify to the customers, especially in this market, to get very severe hikes in our selling prices. It's like a little slow process, but it is happening.
It is more of temporary gross margin contraction right now.
Okay. Fine. Thanks. Thanks a lot.
Thank you.
Thank you. The next question is from the line of Bob from Falcon. Please go ahead.
Hi. A couple of questions regarding your products. You're a leader in fluoroquinolones, there's been quite a bit of backlash against that because of the side effects. I'd like to understand your comments regarding this. Similarly for nimesulide, again, there have been some negative articles around the side effects on liver, et cetera. How do you see the demand panning out for such products?
As we said that company as a whole, for new greenfield CapEx, we are focusing more on chronic lifestyle diseases and less of acute therapies. That is the way of de-risking ourselves from such kind of things happening in future. As of now, what we see, we have five fluoroquinolones Ciprofloxacin, Enrofloxacin, Norfloxacin, Levofloxacin and Ofloxacin. They treat different kind of acute, you can say, symptoms. We haven't seen much of a problem, but right now what has happened that because of lockdown, this particular infection has spread and some of them are respiratory, some of them are spread through waterborne amebic infection or bacterial infection through water. Because people are not going out, not meeting other people, not eating out, and because of all these things, the demand has been slightly low.
Not mainly because of the side effects, because these molecules are quite stable as of now. Since they are used in very short burst, what I'm trying to say is, it's not like we have to consume lot of doses of these particular molecules. That is some form of insulation in terms of for the demand of these products. As far as nimesulide is concerned, long back, in fact, if I'm not mistaken, more than five years back. Nimesulide is, though it is very effective molecule, but it is banned in pediatric use. That thing happened long back. Even after that ban, for adult purpose, it is being prescribed quite heavily. We are not seeing that much of a problem as far as demand of nimesulide is concerned. In fact, nimesulide has done quite well in last financial year for us.
Right. You're not seeing year-on-year contraction in growth. You're actually seeing the demand increase year-on-year for these molecules, [inaudible], nimesulide, and all that.
Yes. Very much, yes.
Okay. The other question I had was, you have a large scale, and you have been one of the leaders in metronidazole and tinidazole, et cetera, because you have been producing these molecules for a long time, for the past 15, 20 years. I understand that. When you're venturing into these new APIs, how do you establish leadership? Because you won't have scale in the beginning, and there would already be established players. How do you compete on price with them?
Right. That's a good question. The thing is, when we launch a particular molecule, we see through it that what is the competitive landscape of our particular product. Most often, when we entered, there were six, seven players in that particular molecule, which in turn also means that the market share is quite fragmented. There is no clear-cut dominant player in the market. Obviously, there will be top two, top three players, but there is no clear-cut dominance as such. If the market is fragmented like that, it is easier for new player to enter. Obviously, because of what, you can say, process R&D, the way we improve the processes, our engineering skills are also very good, especially when it comes to handling products where a lot of material movement needs to be handled. A lot of material movement is there.
Whatever we manufacture, they are manufacturing like. That is how we try to become cost leader. Obviously backward integration is always there, always one of the key, we can say, factor for achieving that cost of production leadership. That is how we start getting more and more market share. Initially there are price wars. We have seen that whenever we try to expand in a meaningful way for any particular product, there is a little bit of margin contraction, but in the longer run, the margins revert back to mean. That is what our main strategy is.
I see. Okay. Finally, we've been hearing from a couple of players that have announced their results recently in formulations that they're seeing a lot of price erosion. If there is price erosion in formulations, would that not feed back to APIs and lead to lower prices for you as well?
The price erosion in terms of the final prices of the retail drugs, that we haven't seen in, at least in the developing markets as such. Moreover, for the API content, the cost of API vis-à-vis the retail price of a particular strip of tablet is very, very low. Actually, the more margins are there in the distribution chain of the formulation, the wholesalers, the retailers, and all the stockists. In fact, even if they try to save in API, it won't be meaningful for them. Most of them.
I mean more in the export markets like U.S. and more the developed markets.
Actually, we haven't seen any pressure as such because ultimately the API price generally, historically, they are driven by the input prices. Even if you take 3 manufacturers for any API, for all of them, the input prices more or less are similar. Everyone is in the same boat. Typically, if there is any movement in the input prices, that is of the basic chemicals, then the API prices do get revised. Accordingly, the ultimate formulation prices should be getting revised finally.
Okay, I understand. Thank you very much.
Thank you.
Thank you. The next question is from the line of Nimish Mehta from Research Delta Advisors. Please go ahead.
Yeah, thanks for the opportunity. First, the basic question about raw material pricing. What is the reason behind the increase in the price? I couldn't get it in the initial comment. If you can please be helpful.
Harit bhai, would you like to answer this question?
I didn't get the question. Can you repeat?
He's asking the main reasons for the raw material price hikes.
Yeah. One is, there are a couple of plants which were taken a shutdown, and there are one or two plants in U.S. had accident. They had some issue on the power and the situation. That has caused delay, and they are not able to operate from first quarter almost. Three to four months, their plants were shut down.
That is one of the reason. Overall, the crude prices also has gone up from $50 /barrel- $75/barrel . Overall demand and supply mismatch was there. All put together, this has created a very big price increase in major raw materials.
Yes. These plants that got shut down, you're mentioning, is in which country? In China or in U.S.?
China.
Is it for all the products? Because we have been seeing pricing.
It's part of the product, yeah. Some of the products, yeah. Out of 20, five or six products were affected because of that, and there was supply mismatch also. Supply-demand mismatch due to sudden demand fall, the prices went up also.
Okay. The other thing, following up on the last question as well, I'm trying to understand how do we select products. In the presentation, you mentioned that every API company should have some niche. What is the niche that we are talking about in technical sense? How can this niche help us expand, or how much can it help us expand beyond where we are currently in terms of number of products, let's say?
The main niche for us, as far as the API segment is concerned, is the cost of production. That is the main thing. The cost of production comes from multiple things, actually. It means manufacturing efficiency, of course, that is important. Process is important, that is the ROS. R&D is important. Engineering skill sets are important. The quantum, means once your cost of production is less, then you should expand very quickly to scale up your operations, because once you scale up, the overheads also go down per kg. That also helps in bringing the cost of production further down. Apart from being a price leader in APIs recently, in last five, six years, the quality of API, the impurity profile, the regulatory requirements, that has also become very stringent.
Because we are there in this business since last 36 years, and all our customers are repeat customers. There is a good brand name of Aarti's in formulation space. That also helps us in getting more market share. Our customer base is also very high. Whenever we launch a new product, we get that much easier access to those purchase managers, because many of the formulation companies have a basket of products. If they're buying a certain set of APIs from us, then obviously they will give us preference for the newer launches also. That is one. For expansion, the thing is, we have big list of products.
Top 13, 14, we have already established leadership, whereas in some cases the leadership is very, very, means we can say we are much larger than the second next best player, you can say. That kind of leadership we want to achieve for almost all the products. We will capture more and more market share for older molecules because then it will give further stability to our margins for those products. Meanwhile, we have a big trail of molecules, like 15th to 40th API which we manufacture, and they are contributing very less. The top 20 molecules must be covering almost 94%, 95% of the standalone sales for the API and the Spec Chem segment. All these trailing molecules, next 20 molecules, they are contributing only 5%. Those are the molecules which will grow in future.
Then by doing R&D, we will keep on adding new molecules also. That is the way we are trying to expand.
Yeah. Okay. Are there any processes or technology where we have developed any expertise?
Yes. What you say is correct. When you manufacture, say a certain set of products. We manufacture wide range of products, like antibiotics, also fluoroquinolones. We manufacture antidiarrheals in a big way. Anti-inflammatory also we are manufacturing in a big way. Cardioprotectant, antifungal, antidiabetic also. What I'm trying to indicate is that a lot of the chemistry, not all the reactions, but lot of chemical reactions we are very well versed with, and that too at a very large scale. We are manufacturing all these products which I talked about in a very large scale, means very, very large scale. When I say smaller products, I still mean 25 tons/month, 30 tons / month of capacity. That level of production I'm talking about.
Obviously we get, you can say, expertise in keeping the cost low for these reactions, and that is what we use. When selecting a new molecule, we also see that the chemistry involved in manufacturing that new molecule is somewhat similar to what we are already doing, because that helps us a lot in launching a product with low cost.
Understood. What would be common, let's say, among the top products in terms of chemistry or process or technology? Are there even some sort of processes would be common among the top, whatever, five, 10 products? I am just trying to understand what is common across all these various products.
There are different synergies. Like, for example, we manufacture one particular intermediate which goes in two products. One particular intermediate which goes in three or four products. When you have such kind of ecosystem, then you can manufacture that intermediate to a large scale and then be a cost leader. Those kind of efficiencies we do look after, search for.
Okay. Focus on intermediate.
Sir, sorry to interrupt. This is a conference operator, would request you to please join the queue.
Okay.
We'll speak again.
The next question is from the line of Runjhun Jain from Nirmal Bang. Please go ahead.
Yeah, thank you for the opportunity. Just one question I have. You were saying that there was sudden price increase, what we have seen. Is it possible for you to quantify what kind of overall price increases what we have seen in the raw material, and against that, what price increases what we have taken, which probably would reflected in coming quarters? Thank you.
It is, in a way, slightly difficult that how much will come back because there are cyclical events also. I will give a very rough idea that when I compare gross margins of few of the products from December quarter versus June quarter, we almost could see more than INR 30 crores of difference purely in terms of gross contribution for this quarter.
Okay. That is the kind of price increases you are seeing.
The benefit of any price increases what you have already taken is not reflected in this quarter at all?
To some extent it has been reflected, but not completely.
Okay. Thank you.
Thank you. The next question is from the line of Rajdeep Singh from ASK Investment Managers. Please go ahead.
Hello.
Hello.
Hi, Adhish. Am I audible?
Yes.
I just wanted to understand your opening comments a little better. You said the demand for acute products was lower in the second wave of COVID.
Sorry to interrupt, Mr. Singh, but your voice is breaking, sir.
Just one second. Is it better now?
Yes.
Yes, sir.
Adhish, just wanted to understand your opening comments a little better. You said the demand for acute products was subdued in the second wave. Well, this is a bit contrary to what the IPM is reporting and the companies with more acute-focused are reporting super normal growth. Where is the disconnect? Just wanted to understand this.
The thing is, it might be related to particular products or a particular company getting market share from some other company or something like that. The kind of molecules which we manufacture, many of them go for therapies like respiratory bacterial infection or UTI, urinary tract infection, stomach upsets because of waterborne diseases. Because of that I think these particular products might be affected. See, the thing is, one of the antibiotic has, though I won't name because we don't disclose product-wise.
Right.
I will tell you, one of the antibiotic products has done phenomenally well, means the sales has been doubled as compared to last year, but then the rest four were subdued. It was more of a holistic statement than applicable for all the.
Okay. Product specific has picked up. Given the onset of monsoon also, the demand should remain strong, you're seeing, for your kind of products.
Yes. Usually this Q4, Q1, and Q2 are the stronger quarters for us.
Right. One last question from my side. Sir, our new capacity would come on stream by FY 2023 end. Prior to that, for this financial year and for next financial year, FY 2022 and FY 2023, can we grow at 15% on the top line? Would that be comfortable or that is a little stretched?
The thing is, we are targeting that much growth. Right now we did have 13% volume growth. We'll still target for that 10%-15% growth.
Value growth.
Yeah.
Okay. Gross margin, you said 35%-36%, and margins at operating level in the range of 18%-19%. Is that correct?
Correct. Sure.
Okay. Thank you. That is all from my side.
Thank you.
Thank you very much.
Thank you. The next question is from the line of Abdul from Anand Rathi. Please go ahead.
Yeah, hi. Thanks for the follow-up. Would it be possible to quantify the impact of this zero discharge cost which is there in other expenses as well as the cost pertaining to the share buyback?
See, approximately INR 1 crore of OpEx might have gone up per quarter for that. Buyback would be also to the tune of similar expense, INR 50-INR 75, something like that.
INR 50-INR 75?
Right.
Okay. Secondly, on the U.S. side, any updates from the FDA would we have or any partnerships with you having in the U.S. for APIs that you'd like to highlight?
Yeah, FDA. The thing is FDA, we have been receiving few communications from them. Because of this tech, we were planning for a mock audit from ex-USFDA inspector back in April, May only, but because of this shutdown in travel from U.S., they were not able to travel. We are planning for this now August or early September. We have already identified and everything is finalized, just the travel arrangements have to be made. The report of that would be submitted to the FDA directly and then that might lead to either a virtual audit or I don't know how the FDA will proceed further. Because this will be ex-USFDA inspector and that too from U.S. itself, it will carry a lot of weightage, that report.
Sure, sir. Maybe that would happen sometime in the second half of the fiscal. Is that understanding right?
Yeah. By the next quarter, I think we should be coming up with at least some update on the report.
All right. Understood. Thank you.
Yeah, thank you.
Thank you. We would like to remind participants that you may press star one to ask a question. The next question is from the line of Ram Krishnan, an individual investor. Please go ahead. Mr. Ram Krishnan, your line is unmuted. Please go ahead with your question.
Can you hear me now?
Yes.
Hello?
Yes, we can hear.
Hey, Adhish. This is Ram here. Adhish, I believe that you got the approval for PLI Scheme from Government of India, right? When do you think you will start taking the benefit of this scheme? That's the first thing. Second question I would like to ask you about, do you have any blueprint being a shareholder? We have a lot of expectations from you guys, okay?
Okay.
Do you have any sort of blueprint so that you can be a market leader in next few years? If you have, what is the timeline, I would like to ask you?
Yeah. The thing is, become market leader in any product, it takes time, and it also depends upon the product to product because some products are more export-oriented, some are more domestic-oriented, some are import substitutes. In products like import substitutes and more domestic-oriented products, it is fairly faster. If everything goes right, three to four years you can become a market leader for a particular product. For export-oriented product, maybe you can couple of years more because approvals and everything takes time for that. In exports also, it depends whether it is going more in ROW markets or regulated market, either European market or U.S. market. That also decides how much time it will take to achieve leadership in a particular product. As far as the first question was concerned, the PLI
There's a disturbance coming from your line, Mr. Krishnan. Mr. Krishnan, there's a lot of disturbance coming from your line. Request you to rejoin the conference, sir. Mr. Krishnan? The next question is from the line of Ranvir Singh from Sunidhi Securities. Please go ahead.
Hello.
Yes.
Thanks first of all. In this quarter you had additional overhead expenses related to liquid discharge thing. What was the amount? How much do we have to spend additional?
Yeah. Approximately INR 1 crore for a quarter. Going forward, we are having a lot of ideas in terms of using it for waste recovery for the utility purpose and deriving more byproducts from it, which can add some amount of revenue stream to the waste. In the longer run, we will release those costs, but approximately it was increased by, you can say, INR 1 crore per quarter.
Still INR 1 crore, one quarter would be an incremental spend on, relative to this?
Yes.
Okay. Just I was calculating like currently we have INR 884 crore kind of credit expenses in this quarter. If that run rate is maintained going forward and we assume that 34% gross margin happens every quarter after this, From second, third, and fourth quarter, still your EBITDA margin would not be 18%. We will still be 17% kind of thing.
Actually, once we start selling more, immediately the operating leverage will kick in terms of the fixed expenses. 3%-4% increase in the gross contribution and a bit higher sales will definitely take it to 18%-19%. 3%-4% gross margins.
Okay. Chances are on gross margin front, we can see even better than what we are anticipating.
Yeah. The thing is, definitely there is a scope of improvement in gross margins.
Okay. That clarifies. Yeah. Thank you.
Thank you. The next question is from the line of Umang Shah from Asian Markets Securities. Please go ahead.
Hi, sir. Thank you for taking my question. Sir, are you observing any capacity increase in top 10 molecules from your competitors in India?
For metformin, people have increased capacities.
Right.
Would you like to answer this question? For top 10 molecules, whether any competitor has recently increased any capacities? No, except metformin, I think no.
Yeah. No.
Yeah.
Right, sir. Sir, would you say that you've reached a stage in your antibiotics that it would be detrimental for any of your competitors to put any additional capacity, simply due to scale?
Yeah. It looks like, yeah. We already reached at the very high scale, so to any new entrant, it would be very difficult here.
Right, sir. Thank you, sir. Just, sir, one more question. Sir, currently Aarti Drugs has highest margins in last 20 years. Sir, would you be able to roughly attribute what % of your margins are structural and what percent would be cyclical?
It is difficult to say because, see last year initial part of the year, the margins were exceptionally high, but after that, from December quarter onwards, they were fairly, you can say structural, not much of cyclical. The thing is apart from this sudden price hike, there was no reason. There was no downfall in selling prices of the products or anything like that. Whatever was there was structural as such.
Absolutely, sir. Sir, that would be all. Thank you so much, sir.
Thank you.
Thank you. The next question is from the line of Cyndrella Carvalho from Centrum Broking. Please go ahead.
Hello, Cyndrella.
Hi. Thanks for taking my question. Just two, three clarifications. Adhish, can you please help us with how is the status on the recently expanded gliptins and clopidogrel? If you could update us how these products are doing.
gliptins, we just launched one of the products in gliptins. clopidogrel, that product is going strong. As far as the sales are concerned, the product is doing good. We believe that going forward this clopidogrel should be a blockbuster molecule for us.
Okay. If you could help us understand how do you see the ramp-up of Gliptins over coming two to three years' time?
The thing is, we are coming up with a multipurpose facility, first of all. It can add up INR 70 crore-INR 90 crores of revenue. The major thing would be the next level of expansion once this product grows after going off-patent. It has gone off patent, so now the product will start growing. At that point of time, we will require a second phase of expansion, more like a dedicated facility for this product line.
That's helpful. If you could speak something more on the specialty chemical expansion that we've been talking about largely on the chlorosulfonation side, and what is the status, how is the CapEx coming up?
Yes. There are two greenfield sites. In fact three, I would say that way. One is in Tarapur, other two are in GIDC. We recently acquired the third one in last quarter itself, and that's our biggest land parcel we acquired till now. Another one is also very big, and there the plot development is almost over. Now this foundation, all this work will start for our backward integration project and intermediate plant project. Specialty chemicals, the greenfield project, plot development will start maybe in few months. What we are doing is we are going ahead with a brownfield expansion for Spec Chem in one of our current intermediate facilities in Tarapur itself. There itself we'll come up with a big capacity, almost more than 400 tons/month-450 tons / month kind of a capacity for specialty chemicals.
That we are doing mainly from the point of view of entering the market early.
What kind of expansion in terms of overall share from specialty chemicals we can emphasize over two to three years?
This current facility maybe 2% or 3% will go up because other categories are also growing. Once that greenfield project comes up, and the utilization of that capacity goes up, then it should become a little meaningful. It can go to around 15% or so.
Great, Adhish. Thank you so much. This is very helpful. Thanks a lot.
Thank you. The next question is from the line of Rajat Srivastava from InCred Asset Management Company. Please go ahead.
Hi. Thanks for taking my question. Sir, just to clarify, you said 15% growth on the APIs or overall top line?
Overall top line.
If I have to talk about only the APIs, then how do you see the growth going forward for next two to three years?
The thing is it is similar. In fact, formulation will also grow maybe even at a faster pace because of the base effect. If you take the average, then more or less it will be similar because API segment, as in the API plus tech-in, is right now around 85% of the consol business.
Got it.
That's.
If I were to break it into.
Yeah. Sorry.
If I have to break this 15% growth into price hikes and volume growth, I'm sorry it might just be a repetition, but I might as well open them up.
Okay. The thing is, more or less what we are assuming volume growth only, frankly speaking, because price growth we cannot estimate. Usually we try to avoid including price growth in. Even if you want to take it will be very minimal. That is what we believe.
We are expecting around 14%-15% of volume growth, basically.
Yes.
Sir, on the formulations, what percentage of the capacity is currently utilized? I think we're doing roughly INR 350 crores of sales, right?
Yes.
This is for.
Yes.
Yeah, please.
Harshit, you can tell, yeah.
We are right now operating at 80% of the capacity.
Incremental metformin capacity is coming in the formulation, right?
No.
No. Right now, it's in API.
Okay. Any incremental CapEx on formulation?
Yes, sir. In formulation, we are expanding in oncology product with product expansion and product development. We have a budget of INR 55 crore.
This will commercialize when?
It's from the scratch scale, it's a greenfield project, so we are talking about two years' time.
Okay. Basically for next two to three years, growth is going to be almost flattish for formulation because we're already nearing peak capacity, right?
Yes. Growth will come from the existing product which we have registered in different parts of the world. About 250 products have been registered. The growth will come from there also. We'll be growing at a rate of about 15%-20%, minimum.
I would like to add here that our formulation model is slightly different. It is not like, you can say, asset specific. It is more about IP specific. Means we have intellectual property and we can get it manufactured outside also.
Outside also.
It is not restricted by capacity.
Okay. Got it. Sir, last question. What is the capital employed over here? 10% of total capital employed at the moment?
Not more than INR 40 crores, I believe.
Okay. Thanks. That's it from my side. Thanks.
Thank you. Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Mr. Adhish Patil for closing comments.
Thank you, everyone, for participating in the call. Always enjoy answering your questions. One of the key concerns going forward is that many scientists have predicted a possibility of third wave of COVID-19. We sincerely hope that this wave to be a mild wave or in the best case, doesn't arrive at all. Let the vaccination happen very quickly for most of the population. We would also like to assure you that employee safety and hygiene remains company's priority in this period, and company remains fully geared up to face any disruption going forward. In fact, in second wave also, we were able to manage our production to the full extent by taking care of all the social distancing and fumigation, et cetera, transportation of employees. Thank you, everyone, for joining us on this call.
Please reach out to us either directly or through our IR consultant, that is Strategic Growth Advisors, should you have any further queries. Stay safe. Now we can close the call. Thank you.
Welcome.
Thank you. On behalf of Aarti Drugs Ltd, that concludes this conference. Thank you for joining us. You may now disconnect your lines.