Q4 23/24

May 15, 2024

Summary

Q4 FY24 set records for consolidated EBITDA and PAT, with FY EBITDA up 13% and PAT up 12%. FY25 brings ₹550-600 crore of planned capex, while growth depends on CDMO/CMO expansion, new capacity and volatile pharma markets.

Ladies and gentlemen, good day and welcome to the Aarti Pharmalabs Limited Q4 and FY 2024 earnings conference call hosted by Valorem Advisors. 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. Anuj Sonpal from Valorem Advisors. Thank you, and over to you, sir. Thank you. Good evening, everyone, and a very warm welcome to you all. My name is Anuj Sonpal from Valorem Advisors. We manage the investor relations of Aarti Pharmalabs Limited. On behalf of the company, I would like to thank you all for participating in the company's earnings call for the fourth quarter and financial year ending 2024. Before we begin, let me mention a short cautionary statement. Some of the statements made in today's earnings call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to the management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's earnings call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. Let me now introduce you to the management participating with us in today's earnings call and hand it over to them for opening remarks. We have with us today Mr. Ashish Gogri, Chairman, Mrs. Hetal Gogri Gala, Vice Chairperson and Managing Director, Mr. Piyush Lakhani, Chief Financial Officer. Without any further delay, I request Mr. Gogri to start with his opening remarks. Thank you, and over to you, sir. Good afternoon, everyone. I welcome all the analysts and investors to this earnings call on the performance of Aarti Pharmalabs for the quarter and the year ended March 31, 2024. Our results documents were shared with you earlier, and I hope you would have got a chance to go through them. To begin with, let me provide you the business highlights. The company operates in three distinct areas within the pharmaceutical industry. One, xanthine derivatives, two, API and intermediates, and three, CDMO/CMO space. The xanthine derivative segment contributed to 44% of the turnover in Q4. As you know, we have the largest manufacturing facility in India for the xanthine derivatives. In order to fortify our position, we are undertaking brownfield capacity expansion and working diligently towards debottlenecking of our plants. The API intermediate business contributed 37.6% of the turnover in Q4. Out of the API and intermediates turnover, the regulated market contributed 54%, the rest of the world contributed 34%, and the balance 12% was from the non-regulated market. The regulated business continues to remain our area of focus while offering higher profitability and stability to our business. Strategically, we are present in lifestyle drug market, which is low volume, high value business. This category includes antihypertensives, antidiabetic steroids, and oncology drugs, which are sticky in nature. We offer dual advantage to the customer. That is, one, lower cost due to backward integration, and two, minimum dependence on China for KSM. These advantages position us as a favorable partner among global customers. Third segment, CDMO/CMO business contributed 18.4% of the turnover in Q4. In CDMO/CMO space, we are presently working with 16 customers on 40 projects, of which 21 projects are commercial and 19 are under different stages of development at customer's end. This highlights our presence in late-phase projects. We are also working on expanding existing chemistry capabilities of peptides and oligonucleotides, ADC linkers, et cetera. In CDMO/CMO, our USP is strong expertise in commercial scale-up manufacturing, which enables us to form long-term supply partnership with our customers. Now I will share the key financial highlights. Consolidated financials. I am pleased to announce that Q4 FY 2024, we have recorded the highest EBITDA and the net profit till date. For the Q4 FY 2024, the consolidated EBITDA from the operations stood at INR 117.5 crores as compared to INR 95.7 crores in the previous quarter. That is an increase of 23% QOQ. On a YoY basis, the consolidated EBITDA grew by 47%. The consolidated PAT for the quarter was INR 65.3 crores, which was higher by 24% QOQ and 52% YoY. For the entire year FY 2024, the consolidated EBITDA stood at INR 386 crores. This was 13% higher YoY. The consolidated PAT for the FY 2024 was higher by 12% at INR 217 crores, resulting in EPS of INR 22.9. The consolidated net debt to equity as on March 31, 2024, was 0.14%. Stand-alone financials. For Q4 FY 2024, the standalone EBITDA was INR 107.3 crores. This was higher by 22% QOQ and 40% YoY. Standalone PAT for the quarter was INR 63 crores, which was 31% higher QOQ and 58% higher YoY. For this entire year, 2024, the standalone EBITDA stood at INR 346.2 crore, and this was 12% higher compared to the FY 2023. The standalone PAT for the financial year 2024 was higher by 17%, at INR 201 crore, and this translates into a standalone EPS of INR 22.1. The return on capital employed improved to 18% for the FY 2024 as compared to 17.7% for the FY 2023. The board has recommended a final dividend of INR one per share in addition to an interim dividend of INR two per share paid earlier in this year. Let me now share the updates on the ongoing expansion projects. We are expanding our relationships with several large corporations for supply of xanthine derivatives, primarily caffeine. For the same purpose, we are in the process of enhancing our production capacity of our xanthine derivatives units, such that additional land parcels are likely to be purchased and we target to complete this brownfield expansion project by the end of FY 2025, and thereby a total production capacity of 750 metric ton per month will be achieved. This expansion will entail a capital expenditure and additional working capital borrowings. Our project at Atali, primarily focusing on CDMO, CMO, and intermediate manufacturing, is progressing as per plan, and we expect the commissioning by Q4 FY 2025. As discussed with you last time, we are nearing completion of semi-commercial block at our USFDA intermediate manufacturing site at Vapi, and this is expected to become operational in the current quarter. I would also like to share that we have undertaken a project in Akola last year to set up a solar power plant. This will help us to get the clean and green electricity, which is estimated to fulfill over one-third of our power requirement and reduce overall manufacturing cost. At the same time, it will support the sustainability goals by reducing the carbon footprint. These steps underscore our deep and continuous commitment to business expansion, sustainability, self-reliance, and keeping up with the customers' needs. Talking about the future outlook, we expect to achieve EBITDA growth of approximately 10%-12% in FY 2025 and remain well-positioned to achieve a long-term goal of around 15% annual growth in next three years. I now request the moderator to open the forum for Q&A session. Thank you. Thank you very much, sir. We will now begin with 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. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Thank you. We take the first question from the line of Rahul Jain from Credence Wealth. Please go ahead, sir. Thanks for the opportunity, and congratulations on a wonderful set of numbers, sir. My first question is with regards to CDMO/CMO. We have done exceptionally well on this segment of the business for last two quarters, and in the current quarter, we have almost reached about INR 76 crores of sales from CDMO/CMO versus INR 53 crores. For the full year to date stands at INR 177 crores compared to around INR 100 crores last year. So sir, two questions. What is the sustainability of this segment to grow further from here? In the previous call, you had spoken that we expect this segment to grow around 40%-50% for next two, three years. Can you share some more details on the sustenance and the growth of this segment? Yeah. As I mentioned to you earlier, and as is reported, now we are working with more than- 16 companies. 16 companies on 40 projects, out of which 21 have become commercial. With this expansion and the way in which the progress of these projects happens with our partners, we will see growth in this business area. That is why in last call I had projected and we seen retain that kind of a number possibility in this business segment. We have done all the right things. Now we have a new R&D center which is completely focused towards innovators. We are also investing in a new manufacturing facility which can cater to the additional requirement of manufacturing capacities. With the right regulatory focus, I think we can grow this business faster. Mm-hmm. Sir, with regards to margins, again, this quarter we have recorded record margins both on the EBITDA and the gross margins. Our gross margins today stand for standalone entity at almost 55%, and on consol basis at 50%. How do we see the sustainability? What is driving these margins? It is only on increased CDMO contribution. Secondly, what do we feel are the sustainable gross margins? Yeah, definitely the CDMO business is more lucrative than the rest of the businesses that we are operating. However, our overall other business segments are also API, and the caffeine business segment is also having reasonable gross margins. Quarter to quarter, as we deliver and meet the customer's requirement. Quarterly there would be ups and downs, but we are hopeful that we will be able to maintain close to 50% gross margin, I think. Yeah, at annual basis. Yeah, 50% on consol basis, right? Yes. We generally talk about annual standalone, because consol we have got trading entity also which gets consoled, and in the trading activity we may not have that kind of gross margin. Because standalone gross margins are 55%, sir. That is why I asked that question. That will rationalize to around 50 long term. Fair enough. Just to add to it, apart from the percentage margins, we normally track the absolute numbers because the percentage margin is again a function of FG prices, which in turn is a function of RM prices. So at least in some of the business when the RM prices goes down like in Xanthine or for consol, we have Ganesh Polychem, where the pass through mechanism is when the RM prices go down, we pass that advantage on to the customers. So normally, we track the absolute growth in the profit numbers. Sure. Sir, with regards to your guidance on EBITDA growth, previous presentation and con calls you were talking about EBITDA growth of 12%-17% for next 2-3 years. In the current presentation you have mentioned that we expect EBITDA growth of around 10%-12% in FY 2025. Now if I just take the average of last two quarters EBITDA, even if I sustain that average of last two quarters, we can be at around 10% EBITDA growth for the full year FY 2025 compared to FY 2024. Are we trying to be a bit more conservative on giving guidance for FY 2025 for the EBITDA growth? Yeah. For the FY 2025, we are already sitting on two good quarters and of course, the market is volatile as you know the pharmaceutical industry. However, we are trying to be more and more in the stickier business and with the profitable business. Generally we want to be moderately conservative in all our guidances. Okay. Last question, sir. With regards to the CapEx which has been completed till date, because this CapEx which has been completed, you had done some bit of it in FY 2023 and also FY 2024. Typically as we speak today, at today's prices of all the segments, typically what kind of business can be generated on a standalone basis from all the three segments put together at optimum utilization? Yeah. Currently we are almost utilizing our Xanthine plant at 90% capacity utilization and other plants are also utilized at 85% capacity currently with the expansion. Now going forward in next one and a half year, we will have lot of CapExes which are upcoming like Atali manufacturing plant, a new block at USFDA location in Vapi as well as the debottlenecking of Xanthine plant. All these three projects will entail a lot of capacity unlocking or new capacity addition, which will come up for the FY 2026. That is when we will see a growth, 2026 onwards as we occupy more and more of these capacities with the production. Sure. Thank you so much, sir. Wish you all the best. Thank you. Thank you. Thank you. We take the next question from the line of Prateek Pantia from Girik Capital. Please go ahead, sir. Yeah. Hello team. Great set of performance. A couple of questions from my side. Firstly, in the last quarter, we were supposed to start the backward integration for Xanthine, which would reduce our dependence. Has that led to some bit increase in the margins and was the plant started in the fourth quarter? No. That manufacturing asset is operationally ready, but looking at the current manufacturing cost and the prices of product availability from China, we are not opting to continuously operate that plant. Okay. Looking at very lower pricing availability from the market. So we are keeping it ourselves ready, but there is a upper cap. So if the prices go above certain value, then we will always operate our facility. So that has not impacted on our margins per se. Understood. So how should we understand the improvement in the EBITDA margin it's driven by, if you could, in terms of which was the segment which has the highest impact followed by the next segment. If you can just line up that way, which segment has impacted the highest in terms of incremental EBITDA for the quarter? Yeah. We are seeing improvement of overall performance in CDMO, CMO segment and also API and intermediate segment has also done well. Okay. Traditionally, our Xanthine segment was doing well. Now overall with this growth percentage, I think Xanthine has peaked in terms of with the current capacities that we have and we are anyway further going to enhance our capacity next 12 months or so. Then we will again have more improvements from that segment going forward. Interesting. You mentioned Q1 2025, our factory at Vapi is going to see some expansion. Is it the API or is it going to be on CDMO side? Yeah. Q2. This current quarter, we will have an expansion. We are going to have additional manufacturing block, which basically is a semi-commercial block, and we will have more of this capacity so that we can do more seeding projects for the early requirements of the customers of 200 kg can be max from this manufacturing side. Okay. So it will reflect in Q2, the revenue? Yes. Q2 onwards. Yeah. It is around 28 reactors of 28,000 liters capacity, right? Yeah. They are very small reactors, and that was a gap that we had in our current setup of intermediate manufacturing, to have this size of the reactor, which is predominantly required for the customers for their development stage. We are trying to fulfill. Okay. Again, on the CDMO, incrementally, I think two new molecules have been commercialized in the quarter, if you just go by the commentary made in the presentation. What sort of incremental revenue would those two new molecules be contributing? Can you just give us again your outlook on CDMO, which therapies is more focused upon, and what is the share of innovator you look over the next two year? Because it is CDMO, CMO, both. Yeah, that. We are operating in both the segments of CDMO and CMO, and largely it is more CMO which brings larger revenue, repetitiveness in the business. We are currently working with 16 innovators or the partners. As you see that there are 40 products that we work with them, and these products have grown over a period of this entire year. We started the year with close to 28 products, and now we are at 40 plus. So we have added 12 new projects in this year. These projects normally take 2-3 years to fully grow minimum. As the projects grow and depending on the product outlook of the customer, so we have some good projects with large customers which have shared good outlook with us. Okay. Should we assume around, you mentioned on the 30%-35% growth in CDMO for the next 2-3 years? No, we are projecting, yeah, that kind of. Overall, we are projecting higher growth in this segment. Interesting. Okay. Since Xanthine is a 90% in the fourth quarter exit, until our new expansion comes, which will take a capacity to 9,000 per annum, then this number, INR 220 crore which we did in Xanthine should remain at this, right? For the next three quarter, four quarters till the time we have capacity. Yeah, the products are remain same. Yeah, the top line is dependent on the overall pricing and the metrics, how the prices are sustained in the marketplace. But I think in the spot market, the prices have now bottomed out. So we are not going to see further prices going down. That is what is the current understanding of the market that we have. Even on- We will have the expansion only next year. The expanded capacity will come up. Still, I think there is a possibility that we may further increase our utilization to 95% also. That may happen in this year. But later on, next year, we will have higher capacity. Okay. On the APIs side also- I am sorry to interrupt you, sir. May we request to rejoin the question queue as we have several participants waiting for their turn. Can you give the last question, then I will join back. Sir, last question on the cash flow statement. We have stated a R&D project write-off of INR 6.76 crore. What is it regarding? Sure. Pratik, that is the projects that basically we stop working on. We think that there is not enough market or we don't want to pursue. We do this exercise every quarter and whichever projects we think we are not going to pursue in future, we take that as an expense in P&L. Okay, thanks. I'll join back in the queue. Thank you, sir. Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants in the conference, please limit your question to two per participant. Should you have a follow-up question, we request you to rejoin the question queue. The next question is from the line of Vikas Sharda from NT Asset Management. Please go ahead, sir. Yeah, hi, good evening. I have two questions. One is, what is the CapEx guidance for FY 2025? Secondly, in your opening remarks, you mentioned about the brownfield expansion of Xanthine. I didn't get it correctly. Could you repeat that, please? Yeah. In total for the FY 2025 is going to be CapEx heavy for our overall size. I think we are going to have a total CapEx of around INR 600 crores happening in this year with the three big projects as we mentioned in my speech. Out of this, the xanthine overall capacity, which is currently at 5,000, we are debottlenecking it to 9,000 metric ton in the existing assets that we have by taking adjacent plots and doing a brownfield expansion. Okay. All right. Thank you. Thank you. Thank you. The next question is from the line of Ahmad Madhav from Unifi Capital. Please go ahead, sir. Thank you for the opportunity, sir. I just wanted to understand the CMO business a little better. The kind of products we have in the pipeline, are these the full APIs or just the key starting materials and intermediates for the NCE? In the CMO business, largely the products are in KSM, RSM, regulated starting material, key starting material, a large component of them. We still also operate in few APIs, but 80%-90% of the portfolio is in this first two segment. Okay. What are the shipments or the scale-up which has happened in the last two quarters? Can you give some sort of understanding on what kind of products are there or what kind of products we are selling? Number two, will the consistency in the volumes be there in the CMO every quarter or will it be fluctuating in second half or in one or two quarters? How will it function? Yeah, basically, we will see quarter-to-quarter fluctuations because normally these are multi-stage products that we produce. If we have the orders of these products, then it may take more than a quarter to do the manufacturing, and these are all campaign-based products that our innovators partners order with us. In terms of the profile of the products, we are working with 21 which are already commercialized products, 19 products are under development. That is the current profile that we have. Will you be the only sole supplier for the KSM which we are supplying or will there be multiple suppliers? Most of the innovators and the manufacturers, they have multiple sources. That could be a Chinese source or other European source possibly for these products. Okay. Are we seeing any shift from the other suppliers to us? We are also basically trying to pitch in phase II, III when the innovators are looking for more commercially viable sources, and that is where we are trying to pitch in. The movement is basically between the medicinal chemistry companies, those which are operating in that space to us, where we are more commercialized-focused company. That is the shift which we are seeing. Geographically, also, I think innovators have been largely dependent on China for KSM, RSM, and they want to reduce their dependence on China for sure. Okay. The second question is on the xanthine derivatives. If I look at the standalone numbers and I look at the annual reduction in the top line, is it about 15%? Can you share how was the volume growth and the price decline this year, the breakup between the volume and the pricing? Yes, sir. There is definitely a volume growth vis-a-vis the last year. As earlier we explained that one brownfield expansion that we did last year. However, the xanthine prices have reduced drastically and along with that, the raw material prices also have reduced. Because of that, you are seeing the top line de-growth. Can you quantify the price decline, rough range? About 20%? Yeah. Price decline should be around 20%-25%. It will be around 20%-25% price reduction, and I think capacities have gone up by around 12%-15%. Okay. Got it. I just want to clarify on the CapEx part. You said INR 600 crore CapEx. Can you just break it down in the three projects which you are doing? Yeah. Major one is going to be the Atali project. That is the greenfield project that is coming up at Atali in Gujarat. That's going to be about INR 300 crore or so. Okay. Then additionally, as Rajeshbhai clarified in the beginning itself, we are expanding the xanthine capacity at Tarapur. Additionally, we are also going to continue to spend on intangible asset development also. Another INR 40 crore-INR 50 crore will go on that. We are also spending almost INR 80 crore-INR 90 crore on the solar project this year. INR 80 crore-INR 90 crore on solar project? Yeah. Sorry, I didn't get that. That will basically take care of one-third of our power needs. Once we have our own solar, we will have a huge savings in electricity energy consumption and spend that we have. I just want to build a little bit in the CapEx part. In Xanthine, if the capacity will go from 5,000 to 9,000, what will be the CapEx cost? We are still working on the numbers. We are not saying, but the numbers would be INR 130 crore to INR 180 crore, in that range. We are still fixing those numbers. Okay. The solar plant, what kind of ROI you are looking at? What kind of cost-saving based on INR 80 crore-INR 90 crore CapEx? Because the number is large considering the size of plant. What will be the savings, roughly? Ash, you want to answer? Yeah. The payback on that one would be less than five years, between four and five years. Okay. In terms of rate of return, it would be about 20%. Okay. This is my last question. Intangible development, you said INR 40 crore-INR 50 crore cost. All this we are capitalizing on our books or how? Yeah. It goes under the intangible assets under development initially, and when the project is handed over to the plant, then at that time it gets capitalized and amortized over a period of time. So this year we had about INR 40 crore intangible asset cost. How much did we book in the P&L? See, INR 43 crores was the total spend, of which INR 17 crores was capitalized. Around INR 7 crores was basically written off to P&L, and the other is still under development. So it remains under intangible assets under development. Okay. As soon as the project- Sorry to interrupt you, Mr. Madhav. May we request you to join the question queue? Just finishing on this part. As soon as we commercialize a project, we will book the cost on P&L, is it? Yes, correct. Okay. No, it is amortized over five years. It goes into the fixed asset block. Got it. Thanks. Thank you. Before we take the next question, a reminder to all the participants to please limit your question to two per participant. The next question is from the line of Ankit Gupta from Bamboo Capital. Please go ahead, sir. Thank you for the opportunity, and congratulations for a good set of numbers. My first question was on the CDMO segment. During the year, if you look at it, our commercialized molecules have gone up by, we have added five molecules in our already commercialized molecules of 16, which was there at the start of the year. The scale-up that we have seen in the CMO/CDMO segments, has that been planned because of these five new commercialized molecules which have been added? Second part to that question was, in the commercialized molecule portfolio that we have, are there any molecules which have a potential to become blockbuster molecules and scale up to INR 200 crore-INR 300 crore kind of revenue per molecule over the next few years? Yeah. Just to give clarity on these numbers. This is a cumulative number of the products that we are mentioning, is that 21 commercialized, we may not operate all 21 manufacturing may happen in the entire year. These are the projects which have been viable, and they are in the commercial stage. Whereas 19 products are in the developmental phase at our end. That is the breakup. Every year, we may do some of them, or we may do more of them. It depends on how the customer's requirements are and how they request us to produce these products. But these are the commercial products that we have with the existing customers that we have. In terms of overall, we have good projects. Of course, we can't share confidential detail about the size because we are bound by the confidentiality agreement with our customers. And sir, the second part of the question, do you have some forecast from your innovator company that some of these molecules or few of these molecules have a potential to become blockbuster and reach a scale of INR 200 crore-INR 300 crore from a single molecule? Not in the near term, but let's say, three, four years down the line when they scale up. Yeah. I did reply to you that we can't share that information. There are some good potential products. That is what we can share with you now. Got it, sir. My second question was on the xanthine part. Xanthine, despite significant decline in prices, we are expanding our capacity in a big way from around 5,000 tons to almost 9,000 tons. What is leading to this expansion, such a big expansion, and how are we seeing the growth in the segment over the next 2, 3 years? Typically- Yeah, Aarti. Yeah. Typically, all our customers are looking at us as a sustainable partner, and to have a significant portfolio on their purchasing list, we find it is important for us to expand and be a world-scale capacity for xanthine business, and that is the reason why we are expanding. As everyone also is seeing, China+1 is a very important criteria for all the customers in current times. So you already have tied up for this incremental capacity which is coming up, like we have indication from our customers for that? Yeah. The indications are there, and beyond that, it is confidential to share more details. Okay. On the API intermediate part, we saw a top-line growth of around 9% last year. What is the outlook for this segment? How do you see this segment shaping up for us over the next two, three years? Yeah. As Rashesh explained in his speech, we have our lifestyle APIs which are sustainable and which are sticky in nature, where anti-cancer, anti-diabetic range of products, which we are looking at some growth potential in coming years. Thank you. We take the next question from the line of Nitesh Dutt from Burman Capital. Please go ahead, sir. Sir, thank you for the opportunity and congratulations on a wonderful set of numbers. My first question is: Is it possible for you to quantify the economics for your three segments differently? Basically ROE or ROCE, gross margin and EBITDA respectively for xanthine and non-xanthine. CDMO and APIs, I understand it might be clubbed, but for xanthine and non-xanthine, if you can separately classify. Yeah. Currently we are not doing this classification. Maybe we will look at it if there is possibility of doing it in future. Got it. Sir, on xanthine side, right, the end market demand of xanthine derivatives in my understanding is growing at a 5%-7% CAGR. With 15%-20% market share, you are a sizable player already globally. If I look at a longer-term horizon, 5-7 years, will you be growing at a similar rate as the end market, or are you looking at a much faster growth rate, and what will support this growth? As you know that we are 15%-20% in terms of market share with these large customers, but they are definitely requesting more quantities from us, and that's why we are expanding. As Hetal mentioned, that we would be doing this expansion wisely to ensure that we remain a very sizable player in this market among top three in the world. That is the endeavor that we have, that we have sizable capacity available for their requirement. Overall, we see developed market growing. India market is also growing in terms of demand, and we also see diverse usages of these xanthine derivatives in home and personal care. I was reading an article today that there is a possibility of usage of these xanthine derivatives in the EV space also. There are newer end usages which we anticipate may come apart from the traditional end usage of the xanthine derivatives. There is a possibility of that also. Got it. Sir, you had previously also hinted at new capacities for xanthine in China, et cetera, right? Now as you are also significantly adding capacities. Do you foresee any kind of overcapacity scenario in the market and especially competition from Chinese players? Also this 9,000 MT capacity, how soon do you think you will be able to utilize that effectively? Basically, I think since it is a brownfield project, just to answer to your second question, the capacity utilization can be relatively faster, though the approval gestation period will be there. But we see that we will be able to have the capacity utilization within 2 years' time. And yes, there is going to be significant capacities. As I mentioned earlier, the strategic geographical which we would want to bring in, and our customers are also excited on the expansion front with us. Basically, the advantage that we are giving to our customer is completely non-dependence and also the green and sustainable manufacturing assets that we have with the green power that we are now investing in and our overall total carbon footprint also will be much better than the other competitors. Yeah. Got it. Sir, basically you don't foresee that overcapacities might be a challenge because of non-China and sort of green product, your value chain. Second, if it is active at the end of FY 2025, expansions happen by end of FY 2025. By FY 2027, you are expecting to utilize it fully, if I got that correct. Yes. Got it. Sir, on your P&L this quarter, OpEx has seen a drastic increase of 35% QOQ and 27% YoY. That is one. What do you see as a normalized level? Second, our tax rate has also been 32% in Q4 and 28% for FY 2024, and there are some deferred tax liabilities of INR 100 crore plus. Want your input on OpEx and tax rate. Yeah. OpEx in this quarter has been higher. The major component as we earlier also touched upon was that there is a write-down of R&D, the projects in R&D to the tune of almost INR 6.5 crores. Also in line with the increase in the sales, there has been an increase in the freight. These two are the major components which has basically contributed to the increase in OpEx quarter-on-quarter and YoY. But if you see year-on-year, it has barely grown by INR 4 crores, so from INR 303 to INR 307 on consolidated basis. Thank you, sir. Before we take the next question, participants are requested to limit their question to two per participant. The next question is from the line of Anil Desai from Total Capital. Please go ahead, sir. Hi, good afternoon, sir. My first question is on the CDMO. You talked about development on the peptide side. If you can talk a bit about capacity development on some higher entry barrier things like ADCs, peptides, sterile. Where are we on that capacity and capability building? A question tied to that, globally with GLP-1 thing, there is a lot of shortage on the API side, which are peptides and pill to finish side. Are we anywhere there in that value chain present? Yeah. As you rightly mentioned that these are high barrier research which requires us to enter this segment and our endeavor with the new R&D center and the newer capabilities of the partners that have joined us in this new R&D center is to establish this business going forward. I think it will take a couple of years, two to three years for us to gain confidence, have more skill sets, and some manufacturing assets being put up simultaneously to develop these segments in future. That is what I mentioned that we have started the journey. I think it will take two, three years for us to see some light of the day in this area. Okay. So it's safe to assume that Aarti expansion in current form doesn't include any of this. Safe to assume that. No, no. We are investing in R&D assets currently. Okay. We are investing in R&D assets for the peptide, R&D, and we are also investing in the flow chemistry and other newer chemistry where we can do the high barrier research. Okay. Got it. Second question, sir, on the API side, I think our API expansion, I think the validation and everything should start and kind of get completed. So, API moved from INR 550 crore to INR 600 crore this year. So do we look at slightly better growth, because now this capacity will come on stream and we'll start utilizing that. When do we expect 60%-70% utilization of this additional API capacity that we have put up? Yeah. Maybe, Hetal, you want to take this question? Yeah. Most of the validations are completed, and we have DMFs has got approved, and from this year onwards, we will see the growth coming in from the additional block that we put up last year. Okay. The 10% growth that we had last year. Should we expect better growth because now the capacities are in place? Yeah. Yeah. Okay. Got it. Thank you. That's all I mentioned. Thank you, sir. The next question is from the line of Rahul Agarwal from Himalaya Investment Advisors. Please go ahead. Thank you so much for the opportunity, sir. My question is also on the CDMO side. Can you say that the main work that you do is mainly KSM and RSM? Are you supplying these to the API manufacturers who in turn make the APIs and sell to innovators or are you working directly with innovators? We do both. In the space of CDMO, CMO, whatever the APIs are made by whichever partners, all the rights and the patents are assigned to the innovator only, and innovator completely understands who are the KSM, RSM providers. Whoever we may be working with, ultimately, we are working with the innovators at the end of the day. An innovator is aware that Aarti is working with them directly, indirectly, and collaborating with them for this project. Understand. Typically in the CDMO space, what stage do we get involved in? Do we get involved in after the innovator has at least commercial approval, or we get involved a lot more during the phase I, phase II trials as well? See, there is a pre-clinical phase and there is a clinical phase, and then there is a commercialization phase. There are three phases. We largely do enter. We are not doing too much work in the pre-clinical phase. We do clinical phase, largely late clinical phase and the commercial phase. Most of the projects that we are getting entry and where we are working more closely is the middle segment, clinical phase, where we are partnering with them. Then once the product become commercial, we can see large growth happening in the projects which are passing through this clinical phase approvals. Understand. The choice of working with Aarti is made by the intermediate supplier or by the innovator? Who makes that decision? Innovator. Innovator is making decision. Understand. Typically, what would be our market share for the molecules where we are working? You mentioned we won't be the sole supplier, but typically of the supplies of the KSM or RSM that we are supplying, what percentage would be from us and what percentage would be from other suppliers from China and Europe? Shreya, your line is on the talk mode. Please go ahead with your question. Hello, please go ahead with your question. Yeah. Just a clarification on Sir, you mentioned that the primary raw material facility for xanthine is currently non-operating because we are sourcing the raw material at better pricing from China. Sir, can we use that facility for any other product? Yeah, we are trying to develop new projects also based on that capability, and I think in future coming years, we will see that happening also. Smart. Those products will be value-added products. And sir, next question. Sir, you mentioned the big rationale for investing into xanthine capacity is because a lot of innovator companies and our customers are trying to find an alternative other than China. Sir, but is it not because we ourselves are sourcing the raw material from China, so that doesn't directly reduce the dependency on China. Just wanted to get a picture of how are the customers landing on xanthine and what is the big rationale for expanding into this? No, we have capabilities of completely being zero dependence on China also. Only one intermediary that we have an option to buy from China or manufacture ourselves, but other than that, all other 30 raw materials are being sourced from elsewhere. So that is the rationale that they have, and we have developed and demonstrated the capabilities to do that also. And that we are operating in time to time that facility also because we have to keep that ready as well, just in case. Got it, sir. And that's it ma'am. Thank you. Thank you. We take the next question from the line of Gaurav from KCM. Please go ahead, sir. This call is now being recorded. Am I audible? I have two questions. Yes, Gaurav. Yeah. First, as you said that we have increased the capacity from 4,000 to 5,000 in the xanthine. That 1,000 in that, by 2023 we have increased the capacity. Is that for export or are we consuming it domestically? Export. Export. Okay. The second one is, are there any approvals required for the increasing capacity from 5,000 to 9,000? What are the price delta for the pharma and the food and beverages end use? Because in the report, it is mentioned that we are increasing the end use as a food and beverages. Yeah. The difference is pharma, currently we are not present in the regulated pharma space in caffeine and theophylline for CEP and USDMF. But with this new expansion, we will enter into that space as well. Along with the increase in the food and beverage, the volumes are much bigger in food and beverage relatively compared to the pharma. Pharma has a better realization, but at the same time, the volumes are lower. Okay. Are there any pending approvals for the No. Basically, regarding the Since we are doing a brownfield project, the approvals for the new capacities will be easier compared to the greenfield project. Okay. In the past, if you see in the two to three years, the price of the caffeine was very high, that was the reason why we were able to achieve the good margins. Now the prices are reducing day by day. Are there any preparations done by APL to overcome that and sustain the margins? Yeah. Along with the finished goods prices, the raw material prices also have come down to relatively same level. At the same time with this solar project, we are continuously working on the improvement on manufacturing costs as well as on the raw material cost. That is a continuous practice at our end. We will see, going forward, our endeavor is to be always competitive. Are we trying any backward integration for the manufacturing of synthetic caffeine? We manufacture synthetic caffeine only, and as we have earlier mentioned that we have an option to be fully independent of China and have a lot of our intermediates manufactured in-house by Aarti and the group companies of Aarti, apart from other intermediates to be bought from India alone. Okay. Now we are increasing capacity to 9,000. Again, 4,000 ton capacity. Are we seeing any opportunities domestically or exporting the whole? It will be both. Good. Yeah. Okay. Thank you. Thank you. The next question is from the line of Ashish Agarwal, an individual investor. Please go ahead, sir. Hello. Yeah, I am audible? Yes. Yes. I just wanted to know, the brownfield expansion that we are doing in Atali for INR 300 crores kind of a thing. How much is the asset turn that we expect there in a year's timeframe? Atali is a greenfield expansion. It is not a brownfield expansion. Yeah. Sorry. Greenfield. Yeah. In the greenfield expansion, the endeavor is to get 1 plus asset turn, 1 to 1.2, depends on the number of stages that we are doing. Ultimately, the idea is that how do we get the gross margin improvement with these newer assets. I think gross turn, even if it is lower, I think the number of stages that we are adding and the margin profile of the products that we will do there will define the profitability of these new assets. As you know, once we are doing more and more CDMO, CMO work and that site gets operationalized with those large requirements of the customer, we will have good overall gross margins. It may not have great asset turn of more than 1, I think. We will see how it goes. Okay. How about the other greenfield CapEx apart from this? You had a total of INR 600, right? There are only two greenfield CapExes that we are doing. Total Atali project was INR 375 crore apart from the land cost. The greenfield project that we are doing is the solar, where we are spending close to INR 80 crore-INR 90 crore for the solar. These two combined projects are close to INR 500 crore. Solar you mentioned that- We already spent some money. Okay. Solar will be operational in the current year only. Yeah. That will be operational within end of this year. Last quarter it will get operationalized. Payback would be five to six years, the payback will recover. No, less than five years. Four years. Four to five years. Four to five years. Okay. Four to five years. Yeah, that's it. Thank you. Thank you, sir. We take the next question from the line of Rahul Jain from Credence Wealth. Please go ahead, sir. Thanks for the opportunity again. Sir, with regards to the Zensar project of 5,000 to 9,000, in how much time do we expect to start this project? Or by when do we start project? It will be done in phase manner. I think we will have 12 to 15 months in which we'll be able to complete the expansion. 12-15 months from today? Yeah. Yeah. Typically, how much time it will take to ramp this up to the optimum utilization? Two years after the expansion is completed. Okay. Sir, this year, that is FY 2025, because that means the new additional capacity will start generating sales from FY 2025 onwards. So current year for FY 2025, do we feel the volume growth given the optimum utilization, what kind of volume growth do we expect this year, FY 2025 on Zensar, or we'll be falling short of capacity? Whatever current utilization is 90%. We will try to increase the utilization. The endeavor is that how we can go to 95% or more. That is what the endeavor is. However, as it is a brownfield expansion, we will also be carrying out certain modifications in the existing assets. With that, we will have more disruptions also. It's a mixed bag I think. We will have to see how best we can utilize our assets. Okay. And sir, just to clarify, in the previous call, we have been mentioning about Atali CapEx giving an asset turn of somewhere around 1.6 to 2 times. Just to understand, you just mentioned it is around 1 to 1.2 times. Is there some change in what we are doing? No, that 1.6 to 2 number needs to be revisited. I think that's- No. We have not. I don't think that number. There may be some confusion for that number. Yeah. Okay. Sure, sir. Thanks. Thank you. We take the next question from the line of Ahmad Madhav from Unifi Capital. Please go ahead. Just one question. If you look at the amount of CapEx you have done in the last three odd years and also in next two years, which you have guided, my guess is we are roughly doubling our gross profit between FY 2022 and FY 2026. If you look at the guidance which you are giving in terms of 10% or 12% to 15%, are you being too conservative or how should I look at it? Because I am not able to synthesize between the CapEx we are doing and the growth guidance we are giving. Currently, our gross block is close to INR 1,000 crore, and we are going to add another INR 600 crore of gross block in this next year or 15, 18 months. With that, we will have a sizable, almost 50%, 60% additional gross block, and that is definitely going to add to the bottom line and profitability of the company. The guidance that now we have, earlier it was 12%-17%, now we are saying that it will be 16% and more. That is what we have done, is we have improved the guidance overall. Okay. In terms of working capital, is there any scope for squeezing or improving it from the current level, or this is the steady number? No, in terms of number of the absolute amount, we think it will remain at this level. But in terms of number of days, Understood we are trying to get it down. Okay. Thank you so much. That is clear, sir. Thank you, sir. The next question is from the line of Nitesh Dutt from Burman Capital. Please go ahead. Hi, sir. I had a pending question on our taxation rate. For Q4, we had a tax rate of 32% and entire year 28%. I want to understand what is the normalized tax rate for us. Also there are INR 107 CR of deferred tax liabilities. If you could just elaborate on that. These have increased from INR 80 CR earlier. Yeah. Let me answer that. Basically now, to answer the question on the normalized tax rate, it should be around between 25 and 28, five and a half PBT. The reason why in Q4 and the entire year, the tax rate has gone up is because of the operationalization and capitalization of the new R&D center which is coming in Maharashtra. In R&D, as you know, in tax, we get 100% deduction, whereas in books it has just come in Q4. That has created the difference, and that difference goes as a deferred tax liability. All right. Sir, on Atali, as you mentioned, 1 to 1.2 times asset turn. If we just assume 20% EBITDA margins, which you have been making, and roughly 180 days sort of working capital, our ROEs would likely be in low teens. So what kind of ROCE, ROE are we targeting from this project on optimal utilization? We will see, because the Atali project is largely directed towards the CMO, CDMO also. Overall, as that pie increases, we will see uptick in the gross margins also. With that, I think we will have a better number than what you are showing. Okay. Also, sir, on the intangible assets side, which you had elaborated on earlier on the balance sheet. I want to understand the nature of these capitalizations that you are making. What kind of expenses are these? Both intangible assets under development of INR 58 crore and also other intangible assets of roughly INR 17 crore that you have. No, see, other intangible assets are the capitalization of these products which we do R&D on. Once they are handed over and commercialized, they move under intangible assets from intangible assets under development. Okay. If you can just elaborate on what kind of expenses are being capitalized. Is it the salary of employees, material expenses? Yeah. So expenses which are directly attributable to the R&D activity. As you rightly said, it is salaries of all these people, scientists working on the development as well as the consumables, the RMC, that raw materials that are used. Understood. Other direct attributable costs like consumables. Understood. Last question from my side is on Vapi. The CapEx that you are doing. How big is the unit, how much are you planning to spend? Again, what kind of revenue potential or traction do you expect from it? Vapi- Semicommercial block expansion. Sorry. Go ahead. Semicommercial block expansion is not a very large expansion, but it is going to fill in the gap that we had. It may not have too big material impact on overall top line or bottom line, but it is going to provide us more seeding projects which can have future potential for our Atali and Vapi assets. Got it. Sir, would you like to give any EBITDA margin guidance for the standalone business? I think you have mentioned 20%-22%. 20%-22%. I am asking about the margin. Okay. Margins- Hemant, we are basically tracking more the absolute number increase as we earlier said. The margins is a function of top line, which in turn is a function of, at least in some segment, a function of finished good prices. Got it. Thanks. Thank you. Thank you. The next question is from the line of Prateek Pantia from Girik Capital. Please go ahead, sir. Yeah, hi. Just want some clarification on CapEx. In FY 2025, how much is going to be the actual cash outflow on account of CapEx? Yes. Around INR 550 crores on tangible and around INR 50 crores on intangible. We are looking at somewhere between INR 550 crores and INR 600 crores of CapEx on both intangible as well as tangible assets. Okay. In our previous presentations, Atali project CapEx is about INR 350 crores to final drawing. Phase 1 is what is written. Is there any change in that number? There is no change, but then some of that CapEx has already happened in this year. How much has happened out of this? What is the Aarti Pharmalabs CapEx total for? The total estimated CapEx that we had anticipated is about INR 375 crores. INR 375 Apart from the land. Land acquisition had happened a couple of years back. INR 50 crores. Yeah, that was another INR 50 crores. Okay, that was spent before? Yeah. Okay. Out of this 370- It's a very large land parcel that we have. We have close to 80 acre land, and where we can do current expansion, kind of 10 expansions. We can put 10 blocks of INR 100 crore plus CapEx in the same site. Now the trend is that we put a large site which does not require re-audits or re-approval from the innovators or the regulatory authorities, and that is the concept that we are driving with this Aarti expansion. That we will have one very large site where we can rationalize the cost of manpower due to consolidation of manufacturing assets. Okay. 375 was the actual Aarti CapEx, and how much is spent in 2024 out of this? Around INR 30 crores. Okay. Largely we will be spending the entire CapEx in 2025. Yes. This 80-90 crores solar is something new, right? Yeah. That was approved during the FY 2024. Okay. This 340 of Atali you will be spending, plus you will be spending 80-90 crores on the solar. Correct. Right? Plus 40- Plus brownfield of Xanthine. Okay. How much will be Xanthine? INR 150 crore odd. Yeah. As it was clarified, it is still being frozen. But yeah, that's the kind of numbers it would come to. Thank you. Thank you. Ladies and gentlemen, we take that as the last question, and I now hand the conference over to the management for closing comments. I would like to thank all the investors and analysts for joining our con call. Good day. Thank you. Thank you. On behalf of Aarti Pharmalabs Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.