Ladies and gentlemen, good day and welcome to the Haitong Meet the Company Q3 FY23 earnings call of Ami Organics Limited, hosted by Haitong Securities. 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. I now hand the conference over to Mr. Tarun Shetty, pharma analyst from Haitong Securities. Thank you, and over to you.
Thank you. Good evening, everyone, and welcome to Ami Organics Q3 FY23 results conference call. We at Haitong would like to thank the management for giving us the opportunity to host this call. Today, from the management side, we have Mr. Naresh Patel, Chairman and Managing Director. Mr. Bhavin Shah, CFO of Ami Organics. I would now hand the call over to Mr. Bhavin Shah for his opening remarks. Thank you, and over to you, sir.
Thank you, Tarun. Good evening and Happy New Year, everyone. We are pleased to welcome you all to our earnings conference call to discuss Q3 FY23 financials. Please note that a copy of our disclosure is available on the investor section of our website, as well as on the stock exchanges. Please do note that anything said on this call, which reflects our outlook towards the future or which could be construed as a forward-looking statement, must be reviewed in conjunction with the risks that the company faces. This conference call is being recorded, and the transcript along with the audio of the same will be made available on the website of the company and exchanges.
Please also note that the audio of the conference call is the copyright material of Ami Organics and cannot be copied, rebroadcast, or attributed in press or media without specific and written consent of the company. With that, I would like to hand over the floor to our Chairman and Managing Director, Mr. Naresh Patel, for his opening statement. Over to you, sir.
Thank you, Bhavin. Good evening, everyone. Welcome to our Q3 FY23 earnings conference call. I would like to wish you a very Happy New Year. Before we dive into numbers, let me take a moment to comment on the global market and its implications on the industry in general. Towards the end of 2022, while global supply chain issues rationalized to some extent, the demand environment was impacted by inflation and resulted in a mild slowdown. As we enter 2023, inflation seems to be easing across the world, and gas prices have fallen to pre-war levels. The situation in China also appears to be improving with no surge in COVID cases post the lunar holidays. That said, even as these things are improving, we need to keep a close watch on each of them.
Coming to the industry, demand for pharmaceuticals continued to be soft during the start of Q3 FY23, but peaked in the second half of the quarter. We expect the demand to gradually improve in the current quarter. On that note, let us move towards the performance highlights of Ami Organics. The company continues its growth momentum and margin expansion path. During the quarter, our top line grew by 8% year-on-year. The slower growth was primarily due to the dip in shipments of certain goods. If you adjust them, we would have grown by 15% during the quarter. Coming to the business segment, the pharmaceutical intermediate business continues to deliver strong performance during the quarter driven by exports, whereas the specialty chemicals business was subdued during the quarter due to lower sales of top products.
Moving on to business updebts, I am pleased to inform you that during the quarter, we signed a multi-year, multi-ton, multi-million EUR contract with Fermion for one of their patented products. You may recall that during one of the previous calls, there was a lot of chatter on shifting APIs from Europe to India. Even during that time, I had mentioned that shifting of API to India is challenging. But what is happening is that European companies are reducing the stages of production and looking to outsource higher-level intermediates to India. This contract is one of the similar lines and demonstrates our marketing and technical finesse of capturing and converting the opportunity in a very short span of time. Coming to import substitute products, our two already commercial products continue to show strong traction in the market, whereas other two products developed this year have received trial orders.
We have one more product to be commercialized in this segment along with a healthy product pipeline for the future. Lastly, the electrolyte additives. So far, we have sent our electrolyte additives to nine customers, and one of them has already asked for the trial order, which validebts our product's quality and stability. Let me explain what I mean by product quality and stability. The product quality, purity, and stability are imperative and undergo various steps of sampling and validation, as very minute deviations can also affect the overall electrolyte solution and thus impact the battery performance and may create safety issues. Therefore, the gestation period to commercialize these products is fairly long, and I believe we are at the tail end of this period. I am confident in receiving commercial orders for these products in FY24. The geometry of sampling is in China, Korea, Europe, and India.
Now, let me discuss our efforts on the specific chemical business. On the product side, on the product side, you might recall I had mentioned during our previous call that our Jhagadia facility acquired from Gujarat Organics was using Furnace Oil as a fuel, and we plan to change it to coal. This project has started, and it will help us to boost our margins. Second, we have converted methyl salicylate to the flow technology and have also installed flow reactors during Q3 FY23. This will give us a competitive edge in global markets. Third, we are also striving towards becoming more competitive in parabens, and I will updebt you on the same once we complete the project. Now, on the demand side, during the quarter for the overall business, we added 39 new customers.
Out of these 39, the majority of the customers have been added on the specialty chemical side of the business. These are all new customers, and we expect the volume to ramp up from them in coming quarters. There are many smaller initiatives we have undertaken to ramp up the specialty chemical business. So, as all these levers start to align themselves, I am confident in driving strong growth with sustainable margins in the specialty chemicals business in the coming financial year. Before I conclude, I would like to mention that we are working on several new products and projects on pharma as well as the specialty chemical side, and we will updebt you as we approach certain milestones.
Also, we will witness $ billions' worth of patented products going off-patent in this year as well as coming years, and it will create an immense opportunity for the advanced pharmaceutical intermediate business. We already have many of these products in our product basket, and we will see them growing as the patent expiry comes closer. To conclude, I am confident in delivering stronger growth in the coming quarter and for the financial year 2023. We are working hard to achieve our target of 25% growth, and I am hopeful of achieving the same. With that, I request our CFO, Mr. Bhavin Shah, to discuss the financials with you. Over to you, Bhavin.
Thank you, Nareshbhai. Good evening, everyone. I would like to briefly touch upon the key performance highlights for the quarter ended 31st December 2022, and then we will open the floor for questions and answers. I will begin with quarterly updebts. Revenue from operations for the quarter was at INR 152 crore, up 7.9% as compared to INR 141 crore in Q3 FY22. The gross profit for the quarter was at INR 70 crore, which was flat on YOY as well as sequential basis. The gross margin for the quarter was 46%. Lower gross margin was due to high cost of inventory and change in product mix. EBITDA for the quarter was at INR 30.8 crore, up 2.9% as compared to INR 29.9 crore in Q3 FY22. On a sequential basis, EBITDA for the quarter increased by 9.5%.
EBITDA margins for the quarter were at 20.2% compared to 21.2% in Q3 FY22 and 19.1% in Q2 FY23. We continue to improve EBITDA margins on a sequential basis. EBITDA margins in Q1 were at 18.1%, and we have been successful in gradually improving our EBITDA margin to 20.2% and an expansion of 210 basis points. I believe we will see the improvement in EBITDA margin in Q4 as well, driven by lower freight utility costs and the impact of cost optimization programs. Now, dissecting margins further, I am happy to report that EBITDA margins for the pharma business have crossed the 22% mark in the current quarter, but our margins on the specialty chemical side were flat at around 10%. PAT for the quarter was at INR 22.3 crore, up 14.4% on a YOY basis and 17% on a sequential basis.
The PAT margins for the quarter were at 14.6% as compared to 13.8% in Q3 FY22 and 13% in Q2 FY23. Exports for the quarter were at 66%, whereas the domestic business was at 34%. With this, I conclude my remarks and request the moderator to open the floor for a question-and-answer 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 their touch-tone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to use hands-free while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We have a first question from the line of Padmaraj Mati from SBI Life Insurance. Please go ahead.
Yeah. Good evening. Thank you for taking my question. Am I audible?
Yes, sir.
Yeah. Sir, my first question is related to our segments classification. Till Q1 of this financial year, we used to classify it under three segments: pharma, specialty chemicals, and others. In the last quarter, we started classifying others as well in pharma. Now, when I see this quarter, it looks like the others are being classified under specchem. So, from here on, we are going to classify other segments in the specchem or the pharma?
Sir, we have now broadly two segments only: pharma and specchem. So, the products which fall under pharma and supply to pharma as an advanced pharma intermediate will be classified under pharma intermediate, and the product which is coming as a specialty will go into specialty. So, we clearly have two segments only.
Sir, the reason why I was asking is when I look at our first-half reported number in the presentation, and if I add up this segmental number in Q3, it's not matching to the nine-month reported numbers segment-wise. So, that's the reason I asked. Anyway, I'll take this offline. So, my second question is related to the deferment order which you mentioned. So, how should I understand this? Is it like whatever the volume of take that was supposed to happen this quarter that is going to happen in the next quarter, it's because of some logistic issues, or can you specify some color on this?
Yeah. So, what happened is that because we are in a chemical supplying to the API manufacturers, and they are having several intermediates coming from several vendors. So, what happened is that some of the intermediates which they are supposed to come from China did not come in time. So, then their year-ending was there. So, they don't want to keep an inventory on a higher side. So, that's how they asked us to defer the shipment by 10 days, 20 days, so that they can be able to get the product in time from China, and they can start the production.
Okay. Sir, and my last question is on our gross margin side. Basically, is it fair to understand that a large part of the high-cost inventory is liquidebtd in Q3, and things should get normalized from Q4?
Yes. So, most probably, high-cost inventory has been consumed. The last leg will be there in Q4. Q1 2024 will be the clean quarter, and so, the impact in Q4 will be very minimal on this account.
Okay. Sir, but is it fair to assume that my specchem utilizations have come down sequentially?
Not come down. Actually, as we are transforming ourselves from production from some batch and operational improvement to the continuous as well as some other improvement in the production side. So, that's happening, and because of that, we have and then also, the specific chemical side is a highly competitive market. So, there, you have to be very, very precise in terms of costing as well as supply chain and everything. So, that is where we are working all around, and also, that is the reason why we have 39 new customers which we added in specialty. These all are to reopen we opened new windows for these specific chemicals. So, all efforts will be given us next quarter. This quarter and next quarter will be much more advantageous for us to improve our specialty segment as well.
Okay. Sir, I have more questions. I will join back the queue. Thank you.
Thank you. A reminder to participants to press star and one to ask a question. We have a next question from the line of Sudarshan Padmanabhan from JM Financial PMS. Please go ahead.
Yeah. Thank you for taking my question. Sir, my first question is to understand a little bit more about this Fermion contract, the long-term contract. You did mention that I mean, we are really pleased to know that it's an opener for the patented product, and it's a multiyear, multi-ton product. But just to understand, I mean, from here, I mean, the kind of run rate that we are running at, and I'm not talking about the fourth quarter or the next quarter, with this contract coming in, I mean, what is the kind of run rate that we should look at, say, in FY24 and beyond?
So, this contract, the numbers, I can't say because my counterparty is also a listed company, so we both are bound with several bindings. So, the thing is that this is a long-term. This is a very brand-new launch product and having exclusivity with them for the next 10 years. So, 10 years, they will remain as a sole supplier in the world, and the demand is increasing every year gradually at very exponentially, I can say, for 30%, 40%, 50% kind of things. And they want to expand their production capacity as well, and that is the reason why they signed a contract with Ami Organics for long-term supply. And this will be gradual. So, this year will be the year for validations and qualifications and regulatory Site Master File, DMF changing year. So, for them, this year is financial year 2023.
From our Q4 2024, Q4 2024, it will be for us starting our commercial demand, and then gradually, it will be increased, and it will be matured by 2025 on a top line.
I would assume that because of our scale, this should be fairly meaningful. I mean, if I'm looking at it from a uncertain perspective.
Yes. It will be a very meaningful association with them.
Sure, sir. And coming on to the chemical side, I mean, this flow chemistry that is largely done and that should basically start probably by the fourth quarter, this methyl salicylate, I mean, just trying to understand, given that there is going to be a huge jump in volume, I mean, when do we see the actual numbers kicking in? Because here, the capacity is underutilized, and this high fixed cost can easily be absorbed by just the scale-up of this one product over the next few quarters.
You rightly say that if it will be scale-up, then it will be much more operational viability is there, and that is where we are working. So, to increase the scale-up, we introduced the flow reactors and also that we can enhance our production capacity with the minimal operational expenses. And that is where we are now finishing everything. Samples are sent to every vendor, and we will see that in the next two to three quarters, it will be ramped up gradually at 2%-3%, 2%-3% in terms of EBITDA and everything.
Sure, sir. One final question from my side is on the electrolyte part. I mean, we have supplied samples to nine customers, and one person has started. So, I mean, how do we see this business? Because, I mean, when we look at electrolyte opportunity as such, I mean, it is niche, but it's growing substantially. And also, on the LiPF6 side, I mean, I would understand that here again, the demand eventually would be outstripping supply, and we should be in stronger steel. So, on the scale-up part, I mean, what are the timelines over here, and how do we see in the next two to three years this portion of the business scaling up both in sales and profitability?
Thank you, sir. First of all, always, I'm saying on my call that our projections and our planning are excluding electrolytes. So, electrolyte is only whenever it is maturing; it is adding into our top line and everything. So, this is where we were in the phase of almost ending the qualification area, and it will be commercialized from, as per our customer's comment, it will be commercialized by Q1 or Q2 of FY 2024.
Would it be meaningful, or it will be gradual?
It will be gradual, definitely, because the customer will also not immediately transfer all weightage from China to India. But when it will be matured, it will be equivalent size of our current existing so. For us, it is a very sizable business in terms of revenue and all, and that's why the capacity temptation is also we are planning in a such way that when the fuel demand will come, we will be ready for that as well.
Sure, sir. Thanks a lot. I have more questions. I'll join back the queue.
Thank you. We have a next question from the line of Chirag Lodaya from ValueQuest. Please go ahead.
Yeah. Thank you for the opportunity. Sir, first on overall top line, I just wanted to understand, given the deferment we have seen in this quarter, and we are seeing positive momentum in specchem side, what kind of growth one should expect in FY23 and FY24?
See, FY23, as we say, is that we are expecting and we are trying for the CAGR 25%, and that is where we are right now in line with that. The only thing is that everything goes well. There are no any issues in that because we have a very good order book also in our hands. In FY24, similarly, we will remain in expectation of CAGR of 25% because forward contracts, what we had done that will be helping us in pharma, will be helping us to boost the business, and as well as some originators who were not buying from us some of our products, they had also started buying from us. So, that will be adding more revenue in that. So, our budget and everything is planned in a such way that 24 will also remain a CAGR 25%.
Sir, just one clarification here. For 25% growth, the ask rate for Q4 is pretty high. Will we be able to deliver that kind of growth? It could be almost now upwards of 45%.
See, the current pharmaceutical situation is sluggish, but the thing is that some contracts which we signed this year, I mean, Q3, will definitely help us to grow in the revenue side. The 24%-25% is what we can see right now because we already get some committed demand from several intermediates in several APIs for the originators.
Right, right. And in terms of profitability, you mentioned 2%-3% kind of QOQ improvement we can see on specchem side, and pharma intermediate in this quarter already earned 22% margins. Coming to FY2024, what kind of margins one should expect in API intermediate business, I mean, pharma intermediate business?
Yeah. So, Chirag, as we have mentioned in earlier call also that FY21 was a best year for us, we have achieved around 23%-24% kind of margin in pharma. So, our first endeavor to reach there, with regard to specchem, we are gradually improving, and our effort would be to improve by 1%-1.5% every quarter. So, initially, what we are trying to look at is 23%-24% for pharma business. Got it. That's quite encouraging. And just lastly, on overall working capital situation, if you can help us understand, what would be the working capital days at the end of the quarter?
Pardon?
Working capital days at the end of the quarter.
Yeah. 123 days currently.
It is improved by 13 days.
Yes.
Okay. What do you expect in coming next 3-6 months?
Our aim is to bring it to 100 days. That will be the aim. And again, in the next 1 year, it should be between 90-100 days. Base will be 90. That is our target to bring there.
Right. Thank you, and all the best.
Thank you.
Thank you. A reminder to participants to press star and one to ask a question. We have a next question from the line of Kumar Saumya from Ambit Capital. Please go ahead.
Yeah. Hi, sir. Good evening. Good evening, sir.
So, the question is on the other expense side. So, we have seen a 9% Q-o-Q decline in other expense, and in the notes, we found we have mentioned that there is INR 27 million one-time shortfall fees for the insurance claim. So, could you please throw some light on that? Why is it? Okay. So, in 2021, we have some small stockfire, and that we had claimed in the insurance, and we received a claim on that and a shortfall of INR 245 lakhs, something like. So, that will be the that will be the other expenses like that, which we had booked as expenses.
This is recognized in the third quarter?
This will be because we received the claim in third quarter. It was in February 2021.
Okay. And on the financial expense side, interest costs, we are seeing substantial increase Q-o-Qo. If you could throw some light on that?
Sir, did you pardon, sir? We are unable to hear you.
Sir, on the financial expenses, the interest costs that we have recorded this quarter, so there is a substantial increase Q-o-Qo.
Here, we have an arbitrage of getting finance at a lower rate, and we have kept investment at a higher rate. We are getting EPC at a lower rate. So, we have utilized that, and there is, consequently, my other income was also on the higher side against that.
Okay, sir. Thank you. That will be the.
Thank you. We have a next question from the line of Kavan Gandhi from CapGrow Capital Advisors. Please go ahead.
Hello, sir. Hi. Sir, I was not able to understand the before shipment part. If you can please explain again. So, that was my first question. And the second question is that the EBITDA margin on the specchem segment, that has quite reduced based on the QOQ. So, what is the exact reason for that? So, yeah, two questions.
Okay. So, deferred in the sense that the shipment which is planned in December is deferred by 10-15 days, so it will go now in January. So, that is how it is a deferred shipment from our side. So, that's why the sales is not booked in the Q3, which will be happening in Q4. Whereas in a specchem margin, it is stable, and it is flat in Q2 and Q3. In fact, we improved our margin as we announced that quarter on quarter, we improved our EBITDA margin, and that is you can see also from the result. Q1 was 18%, Q2 was 19%, and Q3 was 20.5%. And this is continued, as I said, that it will be every quarter, we will be improved 1-1.5% in EBITDA margin, and we will go up to our 21% EBITDA margin.
And then onwards, we will start because during that period, our specchem is also now started contributing into the margin, and then later on, it will go beyond that.
Okay. And, sir, how should the impact of the flow chemistry be assessed? How much yield will be increased? And if each and every molecule of the specchem is transferred to the flow chemistry, what shall be the exact financial impact? If you can give some color on that.
See, yield improvement and all is a confidential matter, but definitely, flow continuous production will help you in terms of operational efficiency as well as in terms of better quality, less fluid generations, better safety. So, these are all included in that, and that will help us to make our margins better because you have to spend all this area for handling this kind of waste or everything. So, that will help in overall helping your margin. So, that is how flow reactor chemistry will help you. And in terms of what's the second question? Volume. So, volume in the batch, you have to batch to batch, you have to have a downtime, which can be avoided in flow reactors, and that will give you the larger production in a shorter time.
Okay, sir. Thanks.
Thank you. Ladies and gentlemen, to ask a question, please press star and one on your phone. We have a next question from the line of Vishal Prasad from VP Capital. Please go ahead.
Hi. Good afternoon. Sir, in the past, we have talked about our partnership with a firm who is helping us with opportunities in the electrolyte additives. Could you talk about, I mean, what is the kind of relationship that we have with that firm, and what other things are they trying to help us with?
Okay. The firm is based in Israel, and that is called Raz, and they are our marketing partner worldwide. So, our job is to make it, and their job is to sell the product worldwide. And it is on a commission basis, and revenue will be direct invoicing by Ami to the customer. So, it is an association between both of us. They will exclusively supply or represent Ami Organics worldwide.
So, especially in the area of electrolytes, or is there something else that we are working with them?
No, only in electrolytes worldwide, whereas they are our partner since the last 14 years in Israel.
Okay. When you say 14 years, it means we have been making these electrolyte additives in the past as well, is it?
No, no, no. Sorry, my answer is confusing for you. I apologize for that. So, Raz Chemicals is based in Israel. They are the commission agent for us for pharmaceutical supply in Israel, like Teva, Taro, Wavelength, and some other small, even Sharon Laboratories and all. So, their way, they represent Ami Organics for our pharma sales. And because we have a long-term relation, and Raz Chemicals has offices in China, in Europe, and in Israel, so they figured it out. They found out this opportunity, and they came to us if we can grab it or not. And we grab it in time, and then we supply through Raz Chemicals's network in China, and then later on with Raz Chemicals network in Europe and in Korea. So, this is how we make an agreement, separate agreement for our electrolyte in 2022, where they are our exclusive electrolyte marketing partner worldwide.
Okay. Got it. So, what I find, sir, we have a very strong R&D organization, it seems. I mean, we work in pharma and specialty chemical, and then this opportunity came to us, and we were able to come up with the product. So, if you could help us understand our R&D organization, what kind of people we have, what kind of incentives they get, and in future, what kind of people we are going to recruit, which will help us grow in other areas, that would be great.
See, basically, Ami Organics, right from the beginning, always says that we are a chemistry-driven company, and our foundation was made on R&D only. We are saying that whatever the chemistry we are strongly holding, the application of that chemistry, either in pharmaceutical or in agro or in electrolyte or in OLED or electronic chemical or in cosmetics or in pigments. So, these are applications of our chemistry. So, we have a very strong R&D base, and R&D center is having 130 people working inside. They are PhDs. They are masters of science. They are bachelors of science. They are BTech. They are people from the process engineering. They are people from the analytical doctorate. So, these are the people who are handling the projects.
We are having a team distributed very well, the people working on new chemical entity intermediates, people working on a generic product, people working on a spot-basis demand, people working on specialty chemicals, and also a team working for converting the batch processes and batch chemistries into the flow chemistries. So, these are a bundle of people who are continuously working. We are adding numbers in R&D as well, and we are recruiting time to time the people from big pharmas and big chemical companies, people from Teva, people from Glenmark, people from Macleods, people from Dr. Reddy's, Mylan. So, these are the people who join us, and they are happy with us in terms of liberty and democracy we had given to them.
That will help them to think themselves and come up with a non-infringing innovative route of synthesis, which makes us file a new patent and a new route of synthesis to avoid any conflict in terms of IP and all.
Okay. Thanks for that, sir. So, these electrolytes, I mean, in the past, you have mentioned that by 2028, the worldwide market would be closer to $2 billion, and we would like to capture at least 10% of that. So, if we talk 2023, so right now, I mean, what would be the market size of these two electrolytes that we have?
Based on the reports of what we have and the market intel, it will be $1.2 billion somewhere around.
Okay. So, from 1.2-2, so additional INR 800 million, we would like to capture 25% of that, INR 200 million.
Yeah.
Okay. Last question, sir, I mean, there are very few organizations in India who are working on continuous flow reactors, and we are one of them. So, I mean, could you help me understand what kind of benefits we, as an organization, are trying to get out of that continuous flow process? And going forward, I mean, is it very difficult to get in this area, or any company based out of India can get into it if they invest time and money?
It's like a flow reactor is nothing but a small reactor against your big batch reactor. So, you are just making your reaction in such a way that microgram or milligram or a gram level, you are making the same reactions what you are doing at a large scale. So, in a batch reactor, you dump everything, and then you wait for complete cooking, whereas here, you just have pushing the reactor, which is already react. You push them out from the reactor, and continuously, new raw material gets inside, and they cook it, and then they go out. So, it's like a pushing kind of things where you make the product on a spot and then go out from the reactor.
It's a completely engineering and technology-driven sector where you need to have a thorough knowledge of the reaction kinetics, chemical reaction kinetics, and some other thermodynamics and other parameters. Based on that, you can develop in a lab and then from scaling up from lab to the pilot and pilot to the plant.
Okay. One last question, sir. What kind of CapEx would we be looking at once we decide to ramp up our two electrolytes?
That is still yet not finalized because currently, we are good to go with our current capacity, and we are waiting for the green signal from our major buyer. Once they will give us some time, meanwhile, we can cater continuously from our existing capacity, and then we will put up. We already acquired a land for that. Now, we are just waiting for the green signal, and then we will put up the. It's our own technology and our design of the process and all. So, that will be easy for us to scale up and put up a plant as quick as possible.
Thank you, and all the best, sir.
Thank you.
Thank you. We have a next question from the line of Hardik Bora from Union Mutual Fund. Please go ahead.
Hi. Thank you. Am I audible?
Yes, you are.
Yeah, yes, sir. Nareshbhai, congratulations on this deal with Fermion. Wanted to understand that we had given this INR 190 crore of capital expenditure guidance for two years. Does that take care of the capability to serve in this particular contract, or will we have to do some more capacity expansion? No, no. This will definitely cater this contract as well as we have pre-capped. So, this contract is from our new capacity, which we are building in Ankleshwar, but currently, it will be supported by our unit one in Surat. Later on, it will be transferred to our Ankleshwar facility.
Got it. So, okay, understood. And in terms of not asking on margins for this contract, but we've historically made return on equity, return on capital employed for more than 25%. That will not get diluted while in this contract. Those economics will continue for us. Yes, yes. Fine. Good.
Nareshbhai, just one more question on the revenue, how it has come so far in these nine months. Even if I take into account the deferred revenue of 15 days, we would have probably grown in the nine months at about 16% as opposed to 15% reported. So, I think we've been talking about the possibility of growing by 23%-25% year-on-year, which would have meant INR 600 crore of revenue, INR 620 crore of revenue for the full year. It seems that we will miss that. So, just in retrospect, can you tell us what has probably not gone right, what needs to be right for us to continue growing at this pace going forward? Just your opinion on that. What's done not right is not there, but yes, what needs to do that, that we had done it.
We had done it in terms of product development, qualification at the end of the customers, waiting for the orders, long-term contracts with them, supply contracts with them. The only thing is that because we are on a chemical side, and there are several chemicals used for the API, if some of the API manufacturers didn't get the other product in time, that will be the deferral in the supply. Otherwise, we have a long visibility, long discussions with the customers, and that will be helping us for our projections. And that is what we are reflecting in our numbers also. You can see similarly, we will continue like that.
Got it, Nareshbhai. All the best to you. That's all from us, sir. Thank you.
Thank you. We have a next question from the line of Reena Verma from Elara Capital. Please go ahead.
Hi, sir. Thank you for the opportunity. I wanted to know, what is your utilization in pharma and spectrum for this current quarter?
For pharma, it will be somewhere around between 60-64, whereas in specialty, it will be 35-14 between that.
Okay. Sir, this utilization seems to have remained similar for quite a long period of time. Just wanted to understand, what is it restricting your utilization to be in the similar range, and when can we see a meaningful increase in this?
See, if I continue with the batch processes, my utilization will go up, but I had transferred several processes from batch to continuous. So, this has given us a leverage of releasing 6%-7% of the utilization. So, that is the reason why you are seeing this flat line, but it is not a flat line. If we don't have a flow reactor, it will go to 72 in pharma, and it will be 40-45 in specialty.
Okay. Okay. Sir, you have talked about improvement in paraben margins you are looking at. Can you just give us some thought on how this can be done, and what is the road ahead for this?
Ma'am, this is highly confidential because if I disclose this in my computer, we also start doing like that.
Okay. Okay. What is your CapEx done so far, and what is your FY23 target and FY24 target CapEx?
Bhavin will give you the answer on that. So, CapEx done so far is INR 62 crores. For FY24, we'll have another CapEx of, say, INR 200 crores.
Okay. So, how this funding will be if INR 200 crores seems very on a higher side? INR 200 crores, can you give some bifurcation on this CapEx? How?
Yes, sir. No, no. Okay. 2023, 2024. So, 2023, 2024 cumulatively is INR 200 crore, and out of that, each year will be INR 100 crore, and that mainly in internal accruals as well as from IPO fund, and rest will be from the debt if needed.
Okay. Sir, do you have any target debt to equity ratio in your mind?
For the time being, we are very considering debt, so we are still not in a process of getting the debt. But if required, then we can go with it.
Okay. Okay. That's it from me, sir. Thanks.
Thank you. Ladies and gentlemen, to ask a question, please press star and one on your phone now. Participants, may please press star and one to ask a question. We have a question from the line of Gagan Thareja from ASK Investment Managers. Please go ahead.
Good evening, sir. Sir, the first question is, I mean, it's more a clarification than a question. When you say you maintain 25% sales growth guidance, are you talking for the full year of FY23, or are you talking about quarter four of FY23?
Sir, full year of FY23. Quarter four, if I do 25, then it will not be 25 for full year.
So, I mean, as one previous participant asked, to be able to do 25% for the full year, fourth quarter will have to be very strong at more than 40%.
Very strong. Yeah. Very strong.
There is some slippage which will benefit you because you indicated there is a deferment of sale from Q3 to Q4, but even adjusted for that, you will require north of 35% or sort of a growth. So.
That's true. That's true. So, normally, sorry to interrupt you here before, but if you see in my past commentary, so our business is like Q1 is lower than Q2, Q2 is lower than Q3, and Q3 is lower than Q4. So, that is the reason why our Q4 is always higher than the Q3 and Q2 and Q1. So, that is how we and this is what we have in our hand.
Okay. But if the quarterly sales growth is going to be so high, it will also lead to operating leverage, which will mean that margins in Q4 should therefore logically also improve and improve substantially simply because you are going to get a lot of operating leverage. Would that be a right inference?
Yeah, theoretically, it's right.
Yeah. I mean, because also, you are now in an environment where the raw material or the input prices or rate prices are also softening. You are carrying some high-cost inventory but not a lot of it. Therefore, I mean, even if one looks from that perspective, your Q4 purchase cost or input cost should be lower, which means gross margin itself will be higher plus operating leverage kicks in. So, ideally, I mean, not ideally, even practically, it seems that margin should improve substantially in Q4.
Yes, I'm agreeing with you, sir.
Okay. On the Fermion deal, I think you indicated that commercial supplies will start only in Q4 of FY2024. Is that correct?
Yes. Some commercial supply will do for the validation in this quarter, and then we have to have a lean period for qualification at their end. Then by Q4 of 2024, it will be started regular supply.
Right. So, would the validation supplies in Q4 for Fermion contribute very meaningfully to your growth in Q4 of this year?
No, no, no, no.
Okay. It will be small relatively.
Yeah, because it's a validation batch. It's only three batches we'll go there.
All right. All right. Right, sir. And when you indicate or guide for FY24 being a year of, again, where you'll be able to at least as of now, you're guiding for 25% growth and some improvement in margins on both your businesses, is there a certain amount of order book visibility which gives you assurance to guide for 25%? And also, have you built some sort of low-cost inventory of input materials which gives you some assurance to guide for margin improvements? Is that the case?
It's a combination of everything. We have a long-term contract, long-term rolling forecast from the customer as well as inventory. Last year, we done that, but from the bad experience of keeping long inventory, now we have reduced the inventory stocking because of avoiding any impact on the margin with the higher inventory cost. But we have visibility in terms of rolling call forecast as well as the long-term contract.
All right. Would the margins on Fermion because it's a patented molecule with, as you indicated, 10-year exclusivity, consequently, pricing will be much higher than generic products? So, would it therefore be logical to presume that margins on the Fermion contract could be sizably more than what you earn on your generic pharmaceutical intermediates?
This is not innovated by us. It's a CMO kind of work where you cannot expect the very high margin. But definitely, it will be operating leverage will come when it will be the volume will be higher at the commercial side. Then it will be the margin which we are working in line with our or a little bit better than what we are doing right now.
Okay. And on the electrolyte additives, again, commercial quantities are unlikely to happen before the Q4 of FY24. Is that what you pointed out? Just trying to confirm.
FY23. Q4 FY23 is not possible. We got the order, but we are not shipping it because they are waiting for some documentation approval at their end. In FY24, definitely, it will be commercialized.
When in FY2024, sir? Early FY2024 or late FY2024 or mid of FY2024? Any timeline we can sort of?
Maybe in Q1 or maybe in Q. I'm not giving the exact timeline because each customer has different procedure for their approval and different procedure for their demands. So, one customer, the biggest customer what we have, they have placed an order for qualification. So, they are going in their methodology. Some are small manufacturers. They are faster in placing order. So, if our samples which we had floated them in last quarter can be qualified, then it can be commercialized faster than the normal procedure.
You indicated that at full scale, the electrolyte business could have a size which is similar to what Ami is today. Is that a correct assessment?
Yeah, based on the report, right? Based on the market report and intel, this can be possible if we can go up to that level.
But that would require how much market share for you to be able to achieve that aspiration?
Current market is $1.2 million, and it will go to $2.2 and a half billion based on the report we have. I'm targeting very conservative in that market share.
Okay. And any timelines over which you feel you have any reasonable clarity as to when this can be achieved?
As I told you, it will be gradually. It will be increment. And if everything goes as per the market, as per the till now, there is no any alarming for us, and all the process and qualifications, everything went well, and there is no any dark side of any qualification. So, if everything goes well, then by year 2025, it will be fully commercialized.
Do you have the capacity because if you're saying second quarter FY25, you expect it to scale that piece sizably, you will require the capacity for that to be there, right? So.
Yeah. So, we will start building the capacity in 2023, 2024 so that it will be get a full capacity in 2024, 2025.
Okay. How much time will it require for you to build the plant or the capacity?
Because it's a dedicated plant with a dedicated equipment, it will not take longer time against the other multipurpose plant. So, that will be within 6-9 months or maybe 1 year if something not go as per planning. It will be ready.
Right. And what could be the scale or size of the Fermion deal on an annual basis? Any approximate idea?
Start to close that.
Okay. But will it be material compared to what Ami cumulative size today is in? I mean, as in when it comes on stream, it can very materially impact your sales growth?
Yeah, multi-million EUR. So, definitely, it is a sizable contribution in our revenue.
Okay. Okay. And finally, sir, if you could give us any idea of the pipeline of products in your pharmaceutical intermediates business that apart from the Fermion deal, you probably are also working on and you indicated that a lot of products will go off patent in the next two years. While it sounds optimistic and nice, it would help if you could maybe flesh that opportunity out a little more for us in terms of what's the addressable market that you are targeting of products over the next two years and how many more can come in on the current base of products.
Sir, we have a sizable amount of product. More than 490 products are there, which is up to 2,040 commercialization. We had stopped disclosing the end use of the product considering several competition arising of more disclosure of the end use in our so 10, 12 years of effort we took to make qualification and all, and that will be impacting on our sales value. So, they are not able to sell them, but they are quoting it at a lower price and keeping us a pressure. So, to avoid these kind of things, we decided not to disclose our end use product. We have more than 480 products, which is already invoiced to the customer and having expiry till 2039 to 2040.
I get that point, sir. My question is not I do not intend to ask you the chemistries or the names of the product. All I'm saying is that whatever 430 products that you have right up to 2040, are they distributed, let's say, equally every year from here to 2040, which means over a period of time?
Yes, sir. Every year, 15-20 products are getting into the commercializations. Out of that, some are because we have application from large consumptions to the small like anticancer where you have not a big volume, but the value of the product is high. And then in anticoagulant and antidepressant where you have a big volume, but the price of the product is not that great. But so, these are so we have every year around 10-15, sometimes 20, or sometimes 8 only. Every year, the product goes into the generic applications, and that is how we have a so our growth is maintaining with this new incoming molecule give us the good growth like 30%-40%, whereas our very old product give us 7%-10% of the incremental growth annually, and then the rest is with these normalizations of the new product.
This is how we are more confident about our growth guidance of 24%-25% CAGR because of this kind of product pipeline, existing product, and old product.
Thank you. I now hand over the call to Mr. Tarun Shetty from Haitong Securities for closing comments. Over to you.
Yeah. Hi. Actually, I had a few more questions in the management.
Hello?
Hello?
Yeah.
Yes, sir. Can I go ahead with questions?
Yeah, yeah. Tarun ji, you want to ask question?
Yeah, yeah. Sir, just a few questions.
Yeah, just a few questions on the volume and price. Did you see most of the growth on the volume side or the price side on the pharmaceuticals?
All are from the volume side.
Okay. Okay. So, do you indicate pricing for each product has been flattish, or do you see some decline?
There are some prices having a decline also in the old product, and some are flattish.
Okay. Okay. So, any revenue contribution from your key products, trazodone and entacapone apixaban? Can you give the percentages?
So, the number one product is contributing 22%, number two, 10%, number three, 8%, number four, 5%, and number five is 3%.
Okay. And the products would be number one trazodone, second entacapone, and third apixaban. That is right?
Tarun ji, this time, we started a little bit conservative. One-on-one meeting also, we can give you, but we want to avoid our competitors, basically.
Okay. Not an issue. Sir, last question on my side would be sir, we have heard that a big pharma player would be putting up major capacity on the salicylic acid side. Do you see any kind of increase in competitive intensity, or are you firm with your orders?
Sir, salicylic acid is our raw material. So, it is good if somebody is making salicylic acid, we can have more leverage on buying from two, three more customers.
Okay. But they did allude to even selling the intermediate side. So, you're not seeing any kind of competition from any side?
No, because we use salicylic acid to make our methyl salicylate and benzyl salicylate. So, if they will go for the follow-up integration, then there will be the threat for us.
Okay.
Yeah, that's it from my side. Thank you.
Thank you, Tarun ji.
Any closing comments, sir?
Any?
Any closing comments?
Yeah. So, can I do the closing remarks?
Yes, sir. Please go ahead.
Thank you. Thank you, Haitong team, for hosting our conference call. Thank you, everyone, for your questions, and we hope we have been able to answer most of your queries. If we have missed out, sorry, if we have missed out on any of your questions, kindly reach out to our IR advisor, EY, and we will get back to you offline. Thank you very much once again for remaining patient on your holiday. Thank you very much.
Thank you.
Thank you very much, everyone.
On behalf of Haitong Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.