Ladies and gentlemen, good day, and welcome to the Aether Industries Limited Q2 FY23 Earnings Conference Call, hosted by HDFC Securities. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nilesh Ghuge from HDFC Securities. Thank you, and over to you.
Thank you, Ashasri. Good afternoon, all. On behalf of HDFC Securities, I welcome everyone to this Aether Industries Conference Call to discuss the results of the quarter ended September 2022. From Aether Industries, we have with us today, Dr. Aman Desai, Promoter and Whole Time Director, Mr. Rohan Desai, Promoter and Whole Time Director, and Mr. Faiz Nagariya, Chief Financial Officer. Without further ado, I will now hand over the floor to Mr. Ravi Bhojani, the Investor Relations at Aether Industries, to begin with the earnings call today. Over to you, Ravi.
Good afternoon, everyone, and thank you, Nilesh, for the brief introduction. I would like to take this opportunity and wish everyone here a very happy and a prosperous New Year. On November 11, 2022, our board has approved the result for second quarter and half year of fiscal year 2023, ended on September 30, 2022, and we have released the same to the stock exchange, as well as updated on the website. Please note that this conference call is being recorded and a transcript of the same will be made available on the website of Aether and exchanges. Please also note that the audio of the conference call is copyright material of Aether Industries Limited and cannot be copied, rebroadcast, or attributed in any press or media without specific and written consent of the company.
Let me draw your attention to the fact that on this call, our discussion will include certain forward-looking statements, which are predictions, projections, or other estimates about future events. These estimates reflect management's current expectation on future performance of the company. Please note that this estimate involves several risks and uncertainties that could cause our actual results to differ materially from what expressed or implied. Aether Industries or its officials does not undertake any obligation to publicly update any forward-looking statement, whether as a result of or future event or otherwise. Dr. Aman will begin the discussion by sharing on the ongoing expansion and strategy of the company going forward. Then Mr. Faiz will cover the financial highlights for the period under review, and Mr. Rohan will talk on a high-level overview of latest business. Now, I hand over the call to Dr. Aman Desai to share the updates.
Over to you, Dr. Aman.
Thank you, Ravi. Good afternoon, everybody. I hope everybody is doing well, and I'm happy to connect with you all to discuss the performance of our company for the second quarter of the current fiscal year 2022-2023. In this quarter, we have fully completed the CapEx of our newly expanded R&D center, and it was inaugurated on October 11, 2022, by Padma Vibhushan Professor Dr. Manm ohan Sharma, Ex-ICT Director. CapEx on our upcoming Greenfield production phase III is going as per plan, and this construction was fully completed in the second quarter, and the installation of the reactors was also started in the second quarter.
We expect the production lines to be live by the end of this calendar year, 2022, i.e., December 2022 to January 2023, where we'll begin stepwise the production of five new advanced intermediates, which are pharmaceutical applications in our large-scale manufacturing site number three, and these five advanced pharmaceutical intermediates will be made by us for the first time in India. Our plans towards the next two Greenfield manufacturing sites, that is Site 4 in Surat and Site 5 in Panoli, are also advancing well, and various activities are going on towards the planning, initial civil construction, product selection, regulatory approval, and the overall design of these few new other additional Greenfield production sites. I think one of the most important highlights of this past quarter has been the growth of the business models of CRAMS and exclusive/contractual manufacturing, which have shown significant and promising growth.
We are continuing to see a significantly upward trend in the inquiries, customer additions, previous contract renewals and actual business being translated into revenues in these business models of CRAMS and contract/exclusive manufacturing. This is evident in our growth numbers for these two business models, where the CRAMS business model has grown 69% year-on-year, and the contract exclusive manufacturing business model has grown 112% year-on-year. The R&D expenditure for the first half of the financial year is at 8.7% of the total revenues, which is significant, and includes revenue and capital expenditures. The strength of the R&D team has also increased significantly from 164 in March 2022 to 193 in September 2022, with four new senior scientists, including three PhD project leaders, have already joined or joining in this current month.
Our 16-megawatt solar power plant was commissioned in quarters... in the second quarter and has already shown 85% output in the initial month itself, which is now helping us to save on electrical load, electricity load, and we will thereby set up 24,000 tons of carbon dioxide per annum. This has also helped us reduce our hydro carbon and save cash outflow and to our PAT as well. Our three business models continue to be robust, and we are seeing growth in all the three business models. The large-scale manufacturing business model contribution will increase by the end of the current fiscal year, 2023, as the application, new products are being launched.
... in this upcoming greenfield manufacturing Site 3, which are of high value and have a significantly high demand in the current market scenario already. Also, the pipeline is packed in R&D future molecules, with plans to launch these molecules in all three business models in the coming years in the Site 4 and Site 5 greenfield manufacturing sites. So with this very high level overview, I will now request our CFO, Faiz Nagariya, to share the financial highlights of the second quarter of FY 2023. Faiz?
Yeah, thank you, Dr. Aman. Good afternoon, all of you. I hope you had a great New Year celebrations. The company has recorded a total revenue of INR 1,466 million in quarter two of financial year 2023, leading to a total revenue of INR 31,000 million in half year of financial year 2023, which has led to an increase of 6% in the revenues of half year to half year. EBITDA remained almost flat, half year to half year, from INR 912 million in half year 2022 to INR 918 million in half year 2023, thereby resulting in an EBITDA margin of 29.4% in half year 2023.
The PAT has increased from INR 575 million in half year 2022 to INR 500 million in half year 2023, being almost flat. Revenue for quarter two of financial year 2023 by 1.5% year-on-year, compared to the quarter two of FY 2022, from INR 6,445 million- INR 1,466 million, but further dropped by 11.8% compared to Q1 of FY 2023, which was anticipated well, and well informed by the company in the last quarter also, due to the slowdown in the pharmaceutical industry. The company earned an EBITDA of INR 423 million in Q2 of FY 2023, which was down by roughly 8% Q2 of FY 2022, and down by 8.9% compared to Q1 of FY 2023.
The PAT of the company has been INR 272 million in quarter two of FY 2023, which has increased by 8% compared to Q2 of FY 2022, and reduced by 1.1%, in line with the drop with the drop of revenues compared to Q1 of FY 2023. As mentioned earlier by Dr. Aman initially, we have the solar power plant, which has completed its commission and operational from July 2022. The plant is running at 85% efficiency already, and the efficiency is going to increase. The quarter of July, September was rainy season, and now the season will give more output. This has helped us reduce our tax net and save cash outflow, and also add to the PAT. The use of IPO funding is done for the CapEx prepayment of loans from the banks and business working capital requirements.
IPO expenses, except the ASBA and commissions have been also paid off. We have utilized the funds as per the, as object, close of the IPO, wherein the we utilized the funds from the date of IPO till second September, as per the table given below. Funding capital ex- CapEx, the total requirement was INR 1,630 million, out of which we already drawn INR 310 million, and the remaining is INR 1,320 million. The funding for the capital requirements of the company, the total requirement was INR 1,650 million, compared to we already used INR 600 million, and 1,050 is to be used now.
For the repayment of the loans of the banks, we already done that when the IPO was done in June, and so this figure is unchanged, and we have just got this info for investors and the analysts. The GCP was 1,276, in that we have used INR 960 million, and 360 is excess. Now I will request Mr. Rohan Desai to talk on high-level overview of Aether's business. Thank you.
Thank you, Faiz, for the financial highlights. We are fully committed to make these numbers look better in the quarters to come. Aether has shown stable revenues in Q2, in spite of the volatility in demand and sustained the margins. The good news is that the raw material prices are now getting stabilized. We are also seeing the demand coming back, and we are foreseeing growth opportunities due to China Plus One and Europe Plus One company-wide mandates. We are also seeing a lot of inquiries coming from Europe, especially, for the contract slash exclusive manufacturing due to ongoing energy crisis.
Coming to our three independent business models, in half year of financial year 2022-23, we have seen 52% of our total top line coming out from large-scale manufacturing business model, which has shown a decline primarily due to the downturn in the global pharmaceutical industry. We, however, anticipate good future growth in this business model due to the launch of five products in the upcoming greenfield manufacturing sites, which is this fiscal year. 30% of our total top line comes out of contract research and manufacturing services, which has shown 10% growth in the half year of financial year 2022-23, as compared to half year financial year 2021-22.
And our third business model, that is contract plus exclusive manufacturing, which has contributed to 33% of our top line, has shown a growth of 112% in half year 2022-23, as compared to half year 2021-22. Our endeavor is to achieve balance between large-scale manufacturing business model and contract plus exclusive manufacturing, so that we are not dependent on any business model. Our sales mix stands at Pharmaceutical 46%, Agro 33%, Dental Science 6%, High Performance Photography 7%, Coatings 4%, and others, including Oil and Gas, as 5%. Our exports stand at 29%, which includes exports to SEZ and EOU units in India, and domestic sales stands at 51%. Exports outside the geography of India accounted for 36% of our total revenue from operations.
We believe that with the launch of new products, setting up the new capacities, seeing the increasing demand in the current quarter and renewal of the existing contracts, we are certain to deliver good growth in the coming quarters.
... Thank you. Back to you, Ravi..
Thank you,Rohan. We'd like moderator to open the line for questions now.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question, please press star and one on the touch-tone 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 for the question to assemble. Participants who wish to ask a question are requested to press star and one on their phone. Participants who wish to ask a question, please press star and one on their phone now. We have a question from Rohit Nagraj from Centrum Broking. Please go ahead. One moment, please. Mr. Nagraj?
Yeah. Am I audible? Yeah. Okay. Thanks for the opportunity. The first question is, in terms of large-scale manufacturing, you indicated that business was impacted due to downtrend in global pharma. So have there been any postponements or cancellations of orders, which we have experienced during Q2? And, any, you know, anything similar that we have experienced in the first half of or the ongoing Q3? Thank you.
Yes, there is. I get the question, Rohit. Thank you for this question. There was no cancellation of any contracts or any orders. There were postponements of few domestic orders, which were paused, and deliveries were made to be done in the Q3 of this current fiscal year, and we have restarted that shipments already.
Right. Got it. And, just by looking at the first half performance of, this year, and comparing it with the last year and in the second half of last year, so more or less, our, revenues were similar for first half of FY 2022 and FY 2023. Is there any seasonality factor, which, which is there for, you know, first half and second half, and probably for the second half, revenues could be, different than first half? Thank you.
There is no seasonality in Aether's products. The only problem was the lagged demand of the pharmaceutical industry. Except for that, we did not face any issues, and we do not have any seasonal products.
Then one last question: In terms of the raw material prices and energy prices, have we seen any impact during Q2, and how they are behaving in Q3? Are there any high-cost inventories which are still left, and which will have some impact on the margins in Q3, or we are completely safe from that end? Thank you.
So, Q2 is the inventory, higher inventory levels, which we had already mentioned in the last earnings call, that we will be flushing out this inventory in Q2. And in Q3, there will be very small impact of this inventory because we could not flush out the full inventory because of the lag in demand. But we have done our analysis, internal analysis, and we see a good, better Q3 and Q4.
Right. Got it. Thanks a lot for answering all the questions, and I come back with you.
Thank you, Rohit.
Thank you. Ladies and gentlemen, to ask a question, please press star and one on your phone. We have another question from the line of Nilesh Ghuge from HDFC Securities. Please go ahead.
Yeah, hi. This question is to Aman. Aman, can you elaborate on the opportunity in CRAMS owing to current ongoing crisis in Europe? And second thing, in our last interaction during con call post monthly result, you mentioned that you are planning to increase your CRAMS revenue share going ahead on the background that you recently commissioned your R&D center. So what are the chances that the CRAMS revenue will be the revenue from CRAMS revenue to go up significantly over the next couple of years?
Yeah. Thanks, Nilesh. Great questions. Let me answer the Europe opportunity question first. Because of these problems that have been happening in Europe, which are really unprecedented in our times, fortunately unfortunately, we are seeing actually a good influx of increased opportunities.
... customers that we have been talking to for the longest times have actually started translating some of the under discussion projects into actual reality. And we are seeing a significant push of inquiries. But also more interestingly, we are seeing actual conversions of inquiries into projects and revenues happening within months, which is considerably increased as compared to, say, for example, the same time last year. And so we are seeing a real opportunity in the Europe crisis. And to answer the question, yes, the R&D expansion that has happened, which is critical in nature, it is fully operationalized since the last quarter. And we have increased our R&D team's strength from, I believe, 160 to almost 200 now, and we are even further increasing. Additional project leaders have joined.
Three new project leaders have joined High Performance Photography in the R&D, and they are already off and running on various multiple projects. If you compare the first half of this fiscal year with the first half of the last fiscal year, CRAMS has grown by a significant 69% in terms of revenues. Our exclusive contract manufacturing business model has grown by 120%, which are really significant numbers of growth for these two business models. Going forward, as these new group leaders and as the new assets and resources in the R&D are further translated into running projects, we do anticipate that these numbers will further increase and our CRAMS pie of the market and exclusive contract manufacturing pie of the market will further increase as well.
And so very upbeat and optimistic on these two business models, for very, well reasons. Thanks, Nilesh.
Okay, okay. And, Aman, in our annual report, you mentioned that you people are looking for the, any acquisition, particularly in U.S. and Europe, for R&D centers. So what kind of resource you are looking for, and what kind of investment you are planning to do?
Yeah. So, these are very preliminary discussions and very preliminary evaluations happening. In terms of areas that we would like to potentially acquire a company in, could be in, primarily in the geographic regions of U.S. or Europe, and primarily be in the area of R&D, where we add to our existing set of competencies or further complement our existing set of competencies in terms of initial technologies. And the area that we are solely interested in, in terms of acquisitions is R&D capabilities, either the US or Europe, which is further aided by the presence of our global technology and business development leaders in the U.S. and Europe, namely James Ringer, Ray Roach.
In terms of the size of the acquisition, it would be small, and so anywhere in the region of, say, between $5-$15 million, probably on the lower end of this range. In fact, you know, our, Dr. James Ringer, our business development leader in the U.S., likes to tell a story of this two fish named Haga and Walleye, and one is smaller and one is bigger, and he likes to go fishing. Many, many times, the bigger fish has swallowed the smaller fish while he is fishing. But every now and then, he comes across a small fish that has tried to swallow the big fish and has died in the process.
And so the moral of the story is he tries to convey being that, you know, be small in your approach towards acquisitions and to start with, so that, you know, you can, if any problems happen, then the company fully survives this problem. And so the idea is to go towards R&D acquisitions, very preliminary discussions. And these acquisitions, if we do these, will be small in to start with.
Okay. Okay, okay. Thanks, Aman. Thanks. And, next question is to Rohan. Rohan, can you just throw some... You mentioned that the raw material prices have come off, compared to last quarter. So can you throw some light, on this raw material, and how do you see the raw material prices?
Yes, sir. Please go ahead.
Hello. My next question is to Rohan. Rohan, in your initial comments, you did mention about the raw material prices coming off. So can you throw light on this? Going ahead, how do you see the raw material prices and the realization for your new products?
Yes, so, so overall, the raw material prices, 75% of the raw material, which are, which are the derivatives of food, has been corrected already. There are few acquisitions which has not been corrected, but, overall, the, the scenario of the raw materials is looking very good, and, it is now in the stable zone. So we see the, because of this, and, and after the flushing of the inventory, we see the, the robust, EBIT margins of it are coming back, to, to the actual where it were. We'll see this in the next two quarters, upcoming two quarters, definitely.
Okay. So, when you say, it will bounce back, so if I look at the first half of FY 2023, your margins were about 49% or so, compared to 51% in FY 2022. So do you think, it will bounce back to 50 or 50, close to 51%, as we close the year with a 51% gross profit margin?
... Yes, so our driver would be to come back to the first, to the numbers of H1 of the last financial year. That was when everything was good, but only today is the energy prices, which are there. And a few of the commodity prices are still at trading at the higher levels, like, which also impacts the segment and other costs. So except for that, we are seeing a good scope of increase in the EBITDA and the trade margins.
Okay. Thanks, Rohan.
Thank you. Ladies and gentlemen, to ask a question, please press star and one on your phone. We have our next question on the line of Rutvi from HDFC Securities. Please go ahead.
Hi, team. I just had two questions. One being that, how is the traction in terms of the five intermediates that we had announced in the Facility 3 already being released for production in Facility 2? What kind of plant response are you getting? And, also any plans,
There are more than 20 parties in the conference.
Any plans in the Site 4 and Site 5 facilities, like do you have any to add to?
Yes, Rutvi, thank you for this question. I'll answer this question. The five products, out of the five products, we have already launched one in the last quarter. We are seeing full demand. We have managed to go to 24 tons of that product right now and that out in the existing assets. And we have seen a good demand on that product. On the remaining products, we are planning to launch it in the existing facility also in the next quarter and quarter four, parallelly, so that we can launch that product also simultaneously and get the validation quantities out of the existing site. This is cut short, cut short the definition period to a very great extent for the international clients sitting out in Europe.
And for the domestic clients, we have already been approved by everybody, and we are seeing a huge incoming demand, because we are having these products manufactured for first time in India, and we are competing against China. Talking about Site 4 and Site 5, we have already, we have already submitted for the approvals, for Panoli with the Pollution Control Board, and we are expecting the approvals to come in a short period of time. But-
All right, sir. You answered my question. Thank you.
Yeah. Thank you, Rutvi.
Thank you. We have our next question from the line of Kalpit Narvekar from Allianz Global Investors. Please go ahead.
Hello, sir. Thanks for taking my question. So my first question was on, you mentioned that there was some slowdown in on the pharma side. So could you, add some color on which geographies are you seeing slowdown or which, countries are you seeing the slowdown in?
So, thank you for this question. Again, the customers are sitting out in India and sitting out in Europe. What we have understood is they were holding a lot of inventory, and hence this slowdown had happened. This inventory was held because of the uncertain situation and time during the COVID time. And for this, they had increased their inventory holding period. And once the COVID went off from certain countries, they wanted to control the inventory back to their normal levels. And so, we are seeing slowdown in all the products or various products, except for one or two products, we have seen slowdown in the whole board, across the whole board, and that was the issue.
Great, sir. And, my follow-up to this was, do you see this inventory situation normalizing in a quarter, or is there an actual impact on the end user demand of these products? It's essentially the end, whatever the end medicine is going to the customer. Is there some impact on that because of macro, or the inventory situation will normalize by next quarter?
So the inventory situation, Kalpit, as we speak in quarter three, is already getting normalized. We are seeing inbound inquiries and rethinking of the existing orders already there. So, this inventory levels is not a slowdown of a particular product, because if you study our products are going into as a drug for curing anti-hypertension and is used in blood thinning agent, which is used quite popularly. So it's not an uncommon product or a product which can be shifted or which can be removed totally... And hence, I don't see the product or the demand going off totally at all on the products where we are in.
But we are seeing this only as a temporary phenomenon, which has now already been de-becoming as we speak in quarter three, and it will be, we believe it will be out of, it will be out of the, this question, in the quarter four.
Great. So that's very helpful. And, my, second question was on the ramp in the new facility. So how much revenue potential do you expect, on a steady state basis when that facility completely ramps up? And how quickly do you expect the ramp up to be? Or how much can you potentially, ramp it up to, and going forward as well, you know? Yeah.
Right. I would not be giving you an exact number, but I'll give you just an idea. We are investing around INR 200 crore, INR 190 crore in the Site 3. Traditionally we have done a 2x effect on this. We see a full maturity or 80% maturity to be arriving at in the two-year period, two financial years.
Mr. Narvekar?
Yes, that's, that's super. Yeah. Sure, thank you.
Thank you. We have our next question from the line of Yash Shah from Investec India. Please go ahead.
Hi, sir. Thank you for taking the question.
I'm sorry, Mr. Shah, there's lot of disturbance from your line.
Uh, hello.
We are not able to hear you clearly.
Am I audible? Is this better?
Please speak.
Yeah. My first question was regarding changes in the product mix-
I'm sorry, sir. I'm unable to hear you, Mr. Shah.
No, I will join back in the queue.
Thank you. Ladies and gentlemen, to ask a question, please press star and one on your phone. As there are no further questions, I would now like to hand the conference over to management for closing comments. Over to you, sir.
Thank you everyone for joining the call. We hope that we have covered most of the questions. If you still have any further queries, please feel free to reach us. Okay, have a great day. Thank you.
Thank you. On behalf of HDFC Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.