Aarti Drugs Limited (524348) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Aarti Drugs Limited Q3 FY '20 Earnings Conference Call hosted by Centrum Broking Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Cyndrella Carvalho from Centrum Broking. Thank you, and over to you.

Thanks, [ Imba ]. Good afternoon. I welcome all the participants on behalf of Centrum Broking Limited to Aarti Drugs quarter 3 FY '20 earnings call. We have with us Aarti Drugs management represented by Mr. Harshit Savla, Joint MD; Mr. Harit Shah, Director; Mr. Adhish Patil, CFO; Mr. Vishwa Savla, Director from Pinnacle. I hand over the call now to our CFO, Mr. Adhish.

Hi, good afternoon. Hello, and welcome, everybody. Hello. Yes. This is Adhish. Good afternoon, all. We welcome you all for the conference call of Aarti Drugs Limited. Main purpose of the call, again, is to brief you all about the quarterly performance of the company and the current market conditions for the business. In December quarter, company recorded the consolidated quarterly revenue of INR 473.51 crores, with year-on-year growth of about 24.57%. Domestic sales of the API segment grew by approximately 26.39% and exports by 5.27%. Entire growth of the API segment is driven by volume growth. Formulation segment revenues grew by around 72.5% on year-on-year basis. For the December 2019 quarter, API segment contributed approximately 86% of the total consolidated revenues and 14% was contributed by the formulation segment. Within the API segment, 67% of the revenues came from domestic market and 33% from the export market. In the formulation division, around 40% of the sales came from exports. For the period ended December 2019, revenues from the API segment can be broadly classified into following therapeutic categories. The antibiotic therapeutic category contributed to around 46%, antiprotozoal, around 16%, anti-inflammatory around 11%, antidiabetic around 10%, antifungal around 7% and rest can be classified as others category. As compared to last financial year of 2018, '19, antibiotic segment has increased from 41% to 46%, mainly on the higher sales on the account of higher sales of ciprofloxacin, ofloxacin, and norfloxacin. In December '19 quarters, consolidated EBITDA is INR 63.82 crores, up by 22.68% and consolidated profit after tax for the quarter ended December '19 is INR 27.78 crores, up by 33%. Company expects to improve on its gross margin in recent future due to better efficiencies in production. Due to continuous improvement in working capital management, company was further able to reduce its debt-to-equity ratio to 0.7% as of December '19 on a consolidated basis. Company recently expanded its antidiabetic capacity and successfully scaled up its production quantities for the same. Further brownfield CapEx is in progress to expand few capacities in anti-inflammatory therapeutic category. As expected, exports -- export markets are opening up for the formulation division, and it will drive the margins for that division. Now we would like to open the Q&A session and take questions from the participants.

[Operator Instructions] Our first question is from the line of Raj Kumar from Green Portfolio.

Sir, my question is related to coronavirus. As we know that there is a coronavirus. So how this thing is affecting the supply, as our company repairs API, it is a good opportunity for us? Or it is just like a temporary solution?

Presently, we have covered our major raw materials till March, and we expect our raw material supply from China to start by end of this month if everything goes well as per plan. And we see a short-term opportunity. But long term, we don't see any disruptions in supplies.

Okay. It means it will create a negative impact if the coronavirus persists?

Yes, if it persists -- yes, if -- yes, if it was more than a month or so further, supplies are affected by more than 1 month more, we'll be suffering little negative.

Okay. So can you express your view in terms of number?

Pardon?

In terms of number.

No, number it is very difficult to give. This is Adhish. The thing is Chinese New Year has been already extended from 3rd of February to 10th. And now they are in a citizen discussion not finalized, but they might extend it to 17th February, and after which they will start the shipments. Now only few of our raw materials are coming from the affected areas, the areas like Wuhan. So the thing is, we are already -- we have adjust stock -- enough adjust stock for the material, plus, we have enough raw material stock also to have a full-scale production till 15th of March. And even after that, we have another Indian source for the same intermediate. For -- and even if the China stops completely, we will still be able to operate at 60% of our capacities going forward after 15th of March, provided there is no shipment from China. And because we already know this, the prices of the finished goods has already gone up. So even though the volume might go down, the margins for the same products will increase in this quarter.

Okay. But that would not impact us?

The risk will be mitigated slightly by this.

Our next question is from the line of Aditya Khemka from DSP Mutual Fund.

Adhish, just following up on the previous participants. So you said even if the supplies were to be stopped for a longer time, you would be able to operate at 60% of capacity. So what capacity are you currently operating at?

We are right now operating at full capacity that particular product

100%?

100%, yes.

So you're talking about a particular product or you're talking about a total product franchise?

No. We are talking about only 1 of the antiprotozoal product.

Antiprotozoal, okay. So if I look at your total revenue base, so see the concern that we as investors have is that, if this situation goes out of hand, your current quarterly revenue, whatever, INR 470-odd crores...

That product will be contributing anywhere between 8% to 10% of the revenues.

Correct. But out of the total sales of INR 475 crores, how much -- for how much product do you get API -- sorry, intermediate or starting material from China? And for how much of the products gross API, you can still procure or intimate it, you can still procure from the domestic market, but at a higher cost. I understand. I'm asking you...

Understood, understood. The thing is, our import local split is around 60-40. But even in that 60% of the raw materials is if we procure from China, about 45%, 50% can be procured in India also.

So at risk is 10% to 15% of your raw material?

Yes, means 20%, 30%, maybe, you can say.

20%, 30%. So if China were to completely shut down for the next 1 year, let's say, then 20% to 30% of your revenue will also be addressed?

Right, right, definitely, but then the thing is Aditya what will happen, our -- one of the main competition is also from China. So then there will be no player in the market who can supply that API.

No, correct, correct. So there will be a shortage. But now to the -- the second corollary of the same argument, as you said that you have already seen some price inflation in your output, right? And when did this price inflation exactly happened, because coronavirus actually broke out somewhere end of December.

No, no, no. We -- may be a couple of weeks back we took a call that we need to take it slow, means, we're not selling our product, means -- there are a lot of inquiries coming in, but we are trying to hold off because we want to be sure that the future supplies will be there.

Okay. So the inquiries are coming from longer-term contracts. And that is why you're not entering on the longer-term contract because you're not sure of the supply.

Correct, correct.

But are you selling spot at higher prices?

Yes, yes.

Okay, okay. Fair enough. And Adhish, I'm slightly unsatisfied with the level of revenue disclosure we have here. I mean, we have these 4, 5 segments in which we report revenue, right, API formulation, specialty chemical, intermediate and others.

Right, right, right.

Why don't we put the revenue split in our press release, because it just improves the visibility for the investor.

We'll do that. We'll do that.

Yes. Otherwise, every call, now as I have to ask you the quarterly split for revenue. So can you give me the quarterly split for revenue for this quarter please between API formulation, specialty, and intermediate.

So your API, as I told earlier in the opening, that around 86% is contributed by the stand-alone company and 14% is from the formulations. And in the stand-alone company, around 3% is specialty chemicals. And around -- again, around 3% would be intermediate and others. And rest all 94% would be APIs in the stand-alone company.

Sorry. So firstly, why do we give a revenue split on stand-alone and not consolidated?

No, means you can do that stand-alone into 0.86, so that will give you the consolidated revenue split.

Okay. Okay. I understand it, but we will take it offline.

Okay.

But I just need this breakup for the last few quarters as well because we don't put it in our press release and that's very disconcerning.

Okay, okay.

Okay. My next question is on your margins. So on the gross margin side, we had some expansion, right, from 2Q to 3Q, you have seen some expansion in gross margins. Was this a function of you being able to take some price increase or was this a function of the cool off in raw material prices from China?

Kind of both and also the fact that our -- you can say consumption efficiencies have improved.

Okay. Okay. Is it also a function that you're able to sell more formulation versus earlier?

Yes. In this particular quarter, the formulation margin was quite good, no doubt about that.

And any particular product you would like to call out on the formulation front?

But then -- even then the main reason for the gross margins going down was not because of formulation because they're the -- even though the margin -- the overhead companies are lot lower in the formulation, but the gross margin levels are not that high as the -- as for the -- as the -- as compared to the API business. So the main driver for gross margins is the API business.

Is the API business. So we have higher gross margins on the API than we have on the formulations?

Right. But on the overall profitability point of view, the formulations did quite well in December quarter.

Fair enough. Any updates on the USFDA import rate, Adhish, any conversations there?

So the talks are -- we are already -- as we spoke last time, the -- we have impended one of the very veteran person from the pharma industry, who is working on it very closely. Now in February itself, one of our customer who has referred our DMF will be having USFDA audit in their plant. And that should ideally trigger audit at our plant.

When is this expected to happen?

That, that I won't be able to tell but their audit is scheduled in February itself, in this month.

Okay. So once they are -- the customer is audited, soon thereafter you should be audited because your DMF is referred by the customer?

Right, right, right.

All right. Fair enough. Just a couple of bookkeeping questions. What was our free cash flow generation for the 9-month in FY '20? And what was our CapEx?

1 second. I'm sorry, I don't have that -- I will take some time to get this number.

No problem. We can take it later. But what was the CapEx for 9 months? Do you have that number?

It is lesser -- I mean, somewhere in 30s, I believe.

INR 30-odd crores?

Yes. 30s, yes, mid-30s or something like that. But I will get back to you on this in detail.

Okay. Would you care to guide on your CapEx for FY '21?

Yes. In FY '21, you're saying. Okay, FY '21, we have a budget of around INR 100 crores.

And FY '20 would be a similar budget or a lower budget?

No, FY '20 -- this year itself we'll close at much lower -- around 50.

Around 50, so what is the increment INR 50 crores we are spending on?

That will be greenfield projects, especially on the specialty chemicals side.

Okay. Any particular opportunity in the specialty chemical that excites us? So that we're doing this CapEx?

Yes. So we have a chloro-sulphonation line of products. So we have lot of products in pipeline, which can be expanded to a great level. So that is why we are thinking of this.

Okay. Just one last question. I'm sorry, too many questions but I see your other expenses growth being fairly high. Just trying to gauge as to what is driving that sort of a growth in other expenses?

Other expenses.

So just to give you some color on my numbers, I see that you have -- your other expenses in this quarter have grown 29% year-over-year. And for the 9-month, your other expenses number has grown by 30% year-over-year. So being a business model of ours like...

It should be related to, otherwise, manufacturing expenses itself. Power and fuel might have gone up. And then as compared to last December, one more thing what happened was, last year, in 2018, '19, we used to provide gratuity only at the end -- in the March quarter. But this year, we have started providing every quarter. So the March quarter impact won't be that high. So even that is one of the reasons. And plus, the insurance has gone up, as you all know. Since the insurance have gone up like 4, 5x because of the newer regulations from the government.

Regulations, right, right. So just in terms of that power and fuel costs, I was looking at your annual report, your other expenses largely has 2 big heads. One is obviously power and fuel, and the next is employee costs at the manufacturing plants. So both these costs are growing at 30%? Or is it power and fuel growing at 40%, 50%, and employee costs growing at 10%, 15% within the...

Employee costs won't grow that high because...

This is labor charges...

Correct, correct. Power and fuel are directly related to the sales and the production. So that, that will be in line with the sales growth. And Aditya, just to answer your question, means INR 195 crores -- around INR 195 crores is our operating cash flow and around INR 36 crores, we have spent on CapEx till December.

So INR 160-odd crores is our free cash flow, or working capital would have also gone up?

Yes, yes. Net operating cash flow was INR 195 crores and minus INR 36 crores, yes.

Okay. So INR 160 crores is a 9-month free cash flow?

Right, right. Correct.

Okay. So just -- sorry, just to complete on our agreement on other expenses. So 9-month top line growth has been 23%, and your 9-month other expenses cost growth has been 31%. So given that your power charges are in line with your sales, your power and fuel costs would have gone up by 23%, which means the rest of your other expenses were actually grown up by 40%, to give you the aggregate growth at 30%, right?

Yes.

There is something -- I'm saying, unless your cost per unit of power has gone up, has the cost per unit of power gone up?

Yes, yes. It has gone up, yes.

By how much?

Around INR 1 or so, I think. So 10%, 15% it might have gone up.

10%, 15%, okay, then it makes sense.

Our next question is from the line of Dhwanil Desai from Total Capital.

Congratulations for a good set of numbers. Two questions from my side. So first is, I think you are talking about the improvement in gross margins. So if you can call out what kind of improvement that we are looking at gross margin without factoring in, of course, the share pricing, spot prices. I mean, that is temporary. But inherently because of the product mix and yield going up, what kind of margin improvement are we looking at a company level?

Yes. So basically, margins are at the company level are driven by 2 things. One is the efficiencies. Of course, we are improving on that but also based on the product mix. So what -- which products are sold more in which quarter, that also drives the margin. But anywhere...

Ladies and gentlemen, it looks like the management line has just experienced a disconnection. We request you to please remain connected while we join them back. [Operator Instructions] [Technical Difficulty]

Yes. Sorry, the call got dropped. Hello?

Yes, yes, yes.

So we are eyeing anywhere a margin improvement of 0.5% to 1%. But then in March quarter, it's very difficult to predict because of this coronavirus issue, means, how the margins will behave.

Okay. So -- but that will be more with respect to the upward buyers, right, because your raw material you're anyway secured and the realizations are going up. So it may reach up more than 50 to 100 bps, is that the right way to think?

In March quarter, you're saying?

Yes.

Yes. But we also have a few pending orders, which we need to execute at the earlier selling prices. But definitely, the new orders which are coming in are at much higher selling rate -- levels, higher margins.

Okay. Okay. Okay. And can you share update on the specialty chemical greenfield project that you were contemplating and you had bought land. What is the progress on that? And when do you see the commercialization of that happening? And what kind of revenue that we see in FY '22?

So right now, we are in planning phase. So we are working on the layouts for the greenfield project. So then we will commence greenfield project. Right now, we are at just the designing phase.

Okay. So I mean, is it fair to assume that 18 months after you start putting things on the ground, and then fairly 6 months of ramp-up and stabilization, right?

Yes, you're correct.

So you're looking at around FY '22 and last quarter or something like that when the specialties and chemical revenue can kick in?

Right, means around 18 months it will take to commission the plant. The only thing is because this will be specialty chemicals, the approvals would be slightly faster. The gestation period would be lower than the 18.

Okay, okay. And -- so I mean, again, if I remember correctly from our earlier conversation on the call, we have enough capacity currently to reach up to INR 2000 crores of revenue, right? And that is the ballpark number that I feel that is the capacity that we have. So probably, we will be reaching closer to that number this year. And thereafter, next year, if we continue to grow at 20%, we will be kind of working at a very high capacity utilization. So how are we planning about growing to the next level? I mean what are we -- what is our thinking in terms of putting up capacity for the future growth?

Yes. So we have few projects in pipeline. So currently also, we are expanding in anti-inflammatory -- existing anti-inflammatory segment. Plus, we are introducing few -- new range of products in anti-diabetes also and plus this specialty chemicals. So -- and also, we are in very advanced stage of getting few projects on contract manufacturing of intermediates also. So there are quite a few projects lined up for the growth.

Our next question is from the line of Debanjana Chatterjee from HDFC Securities.

My question was regarding what are your ongoing products that are contributing to your top line as of now? And by which quarter which products will be contributing in the next coming 2 to 3 quarters, say. The ongoing products that are contributing as of now and the coming -- upcoming products that will contribute?

So product, hello? The product-wise split, we don't disclose much, but means you got that -- those numbers, right? The antibiotic, we are doing at 46% right now, in which we have 5 fluoroquinolones. Antidiarrheal is 16%, in which we have a couple of products, anti-inflammatory we are doing 11%. In that, we have -- means you can say, 3, 4 products. Anti-diabetic a couple of products, we are doing 10% now and anti-fungal is 7%.

Anti-diabetic, you said?

10%.

And 7% is?

Anti-fungal. So this is the split for 9-month period ended December '19 -- 2019.

This is for 9 months, right?

Yes, yes.

Okay. And can you also share your December quarter, long-term and short-term borrowings?

Long-term and short term?

Borrowings?

Borrowings?

Yes. For this quarter?

Yes, 1 second, 1 second. So over a long-term -- as far as I can recollect, our long-term is somewhere between 210 to -- it's 216 to be precise. And short-term borrowing is 194.

Okay. And your long-term you said 210 to 216.

216, yes, correct.

Okay. And your purchase of project business has also increased by 150%. So what is the composition of purchase of project in business? In consolidated terms, I'm talking about? It has increased from INR 11 crores to INR 27 crores. Yes.

That are -- few of the raw materials which we need to procure because we get much better rates from outside -- means foreign countries. And we use those raw materials for -- to give it to contract manufacturers.

This has been -- this raw material is basically for contract manufacturing that you've started?

Yes, mostly, mostly, yes.

Mostly, from which country have you ordered?

No, no. What we are doing is, we have 5 or 6 contract manufacturers who makes the product for us. So we buy raw material and then sell it to them. And then get -- couple are converted to -- back to us basically.

Okay. So you sell it to -- that is not domestic, right?

That is domestic. Yes.

That is domestic?

Correct.

Okay. Okay. And there was some anti-dumping duty on Ofloxacin. So is that -- yet -- how -- for how many years?

It is for 3 years, Ofloxacin.

So which year is it expiring?

It is expiring in 2021.

'21.

2021.

Okay, okay. And there was a doubling of antiprotozoal capacity. Is that still -- is it done? Or has it started contributing?

Protozoal, we're almost done, and we are further debottlenecking about 20% capacity. So we will be...

About how much?

About 20%.

Doubling is already done.

Doubling is done. And we are further doing some more -- slight modification. And we'll increase our capacity further by 20%.

Okay. And it has started contributing to the top line, this quarter, it has started?

Yes, yes.

How much has it...

Antiprotozoal is about 17%, right? Yes. Total sales.

Total sales. For this quarter, right?

Yes, yes, yes.

Okay. And there was also commissioning a few products in our anti-inflammatory, so that is also done?

Yes. That is done, yes. But actually, production has just started in January this quarter. So -- and it is slightly delayed. We expect full capacity by first quarter.

Full capacity by first quarter of FY '21?

Correct, correct.

Okay. And there has also been a brownfield expense, an enhancement in anti-fungal.

No, no. The brownfield expansion was for anti-inflammatory.

Okay, okay, okay. And in anti-fungal line?

Anti-fungal, we have already done the expansion last year. So that capacity is already there.

Okay, so that is full swing right now?

Not full swing, but 70%, 80% utilization is there.

We'll take our next question from the line of Chintan Sheth from Sameeksha Capital. [Operator Instructions] There seems to be no response from this line. We'll take our next question from the line of Runjhun Jain from Nirmal Bang Securities.

Sir, I just would like to know. So is it possible to give what would be the revenue -- total revenue which is contracted and which is open for spot?

Means, do you want to know how much pending orders we have?

Sir, I just want to know, like you said there might not be an EBITDA improvement in this quarter, March. On the other hand, you were saying that there is spot orders coming at a higher price. So just trying to gauge how much is the -- revenues is totally contracted.

So what will happen, the domestic -- in domestic market, usually, the pending orders is not anywhere between 15 to 25 days. So for -- from domestic point of view, the higher margins will start coming in, in this quarter, at least towards the end, means, you can say latter half of this quarter. Only in the case of exports, the pending orders are like 2.5 to 3 months sometimes, 2.5 or so.

And total -- out of total revenue, domestic contributes how much?

Last quarter it was 66 -- 2/3 was domestic, 1/3 was export.

Sir, that means on the 66, we can have some improvement?

Yes, yes.

Even if export is at the same price?

Correct.

So ideally, we can see some improvement in margin sequentially also?

Yes, yes. In this quarter, correct.

Yes. Sir, second thing is, you said that few of the products have seen the price increase. So can you -- it would be possible for you to give the products and what kind of percentage increase we have seen, like what was their quarterback and on to the -- what kind of a price increase we have seen during the quarter?

So 1 second.

Sure.

So it's difficult to say because the thing is that price are -- prices are still going up because of the shortages, because the pursued shortages, you can say, expected. So around 10% or so, in some of the products, the prices have gone up.

Okay.

In some of the products.

No problem. Okay. And sir, can you give the full CapEx which is required for the specialty greenfield you are doing? So is the INR 50 crores, I'm sure it won't be the full amount. So you would need to do invest further.

Usually what happens, in our INR 100 crore CapEx, usually around, you can say, around INR 25-odd crores might go in maintenance and enhancement CapEx, INR 25 crores to INR 30 crores, and rest would go in project.

Sir, INR 75 crore for the next year, would it cover the whole project cost?

No, no. The project will be done in phases because the land parcel is quite big. And total project will be quite big, but we'll do it in phases.

In phases, so it has started from this year or it will start from next year? So total what is the project cost, sir?

See, first phase would be anywhere between INR 80 crores to INR 100 crores. But if we speak about total project means, it's very difficult to tell right now, but it can go beyond INR 200 crores, INR 300 crores also.

No problem. So first phase is INR 80 crores, INR 100 crores?

Correct, correct, correct.

For which you are saying that we can expect the revenues from FY '22 end?

Correct, correct.

Okay. Sir last question is -- it's not a question, sir, this is rationale of the earlier participant has also said about the transparency and about disclosing the revenue.

The segment wise.

It would be grateful if it is in therapy wise, like that is what you've given, that is what the anti-inflammatory, anti-diabetic. So even that can -- we can do -- because that isn't something we disclosed during the con call very openly.

Okay, okay.

So it would be grateful if you can start disclosing that.

We will do that. We will do that.

[Operator Instructions] We'll take the next question from the line of Bharat Sheth from Quest Investments.

Sir, you say that, is that correct understanding that 60% of our raw material is coming from the China?

60% is imported raw material. We import about 60%. Out of that, about 70%, 80% is coming from China. Rest is from Europe, USA.

Okay. So, because I understand that from last annual report, we stated that around 35% of raw material is from China, and due to price advantage, then we were -- have been already working on diversifying the source as well as doing backward integration. But in this 9 months, there is -- we have seen that it has gone to almost 40-plus. So what exactly...

Some products like antibiotics, we need to -- there is a turnover has increased, volumes have gone up, and there we need to import raw material from China. So it depends on the segment, which segment is growing. That is why the China -- import from China has gone to 40% basically.

Sir, you say that we are almost working 100% capacity.

No, no. We never said 100%. It is 70%, 80% here.

Okay. So because now as earlier participant say that we will be able to do on total capacity around INR 2,000 crore kind of turnover, which we are going to expect achieve this year itself. So how do we...

No. This year we might close around INR 1,800 or something like that, near about that.

So you're talking of stand-alone?

No, consolidated.

We have already done... okay, okay. Sorry. So this year we'll do -- so future growth will be -- there will be some tepid growth next year. I mean, because we don't have capacity or really, I mean, now going ahead, how do we see these CapEx over a 3-, 4-year time?

CapEx for 3, 4 -- means, we are thinking that around INR 100 crore per annum budget would be there for CapEx.

Okay. And what would be the asset turnover, because out of that INR 100 crore, say -- you rightly said INR 20 crores...

Asset turnover will vary from product to product. In specialty chemicals, sometimes you get 4 to 5 also. But in API, we have also seen asset turn of around 2.5 to 3.5.

Okay. Okay. You said that our brownfield -- I mean, anti-diabetic expansion is completed. So that will contribute how much?

Anti-diabetic?

Yes, anti-diabetic expansion is over, correct?

Expansion is over. As of today, the -- it is about 9%, 10%. So we have doubled the capacity.

It can go to 18%.

So about 18-odd percent, it can go. But then what will happen, the other products will also grow.

Correct.

So that will be -- needs to be taken into account.

Okay. And anti-inflammatory, brownfield expansion, you say that has just started. So when do we expect that to complete?

It will complete in this quarter itself. And we will get few additional production in this quarter, but not 100%. 100% utilization would come maybe in the first quarter of next year.

Okay. And you said that we have brownfield -- sorry, total borrowing of around INR 410 crores, short term, long term. So how much cash and bank is there?

Cash on -- cash...

Or cash equivalent?

Cash equivalent, they are not much. They're only the -- basically, the cheques which we have, but not yet deposited or credited in bank. So that is only the cash on hand what we talk about.

Sir, I believe there is some disconnect because at year-end, I mean, we had a borrowing of around INR 500 crore. I mean free cash flow is INR 165 crore. So...

Our working capital utilization has gone down significantly.

But that is -- that comes in short-term borrowing, correct, sir?

Pardon?

So if INR 500 crore borrowing and free cash flow is INR 165 crore. So even after dividend payout, which would have gone our -- borrowings would have gone down below -- I mean INR 400 crore level, correct?

Not like that because for the -- on the expanded sales also we need working capital also, extra working capital. So that...

I'll take it off-line, sir.

Okay, okay, okay.

Sir, and when we expect to move to this new tax regime, because currently, we are on full taxpaying, correct?

Yes, yes.

So actually, now it's a close call, in March -- in the March quarter, we are expecting to move to new tax regime. But it's not sure yet, but we'll take a call in this March quarter itself, in the March quarter results.

Okay. So how much of MAT credit we have so that...

We have MAT credit, but then it's now coming very close to -- both the tax regimes are more or less similar, but then there will be a lot less headache in the new tax regime. So we might favor that. Let's see.

Okay. So in future, how do we see -- I mean, formulation growth this year, formulation has grown at a good pace. And what are the initiatives that we are taking to improve the gross margin and EBITDA in that business?

So basically, the increase in gross margins as well as increase in sales revenue was mainly driven by exports. So we are expanding our footprint to many new territories. And also, some of the countries and registrations which are going on from the last couple of years are now getting commercialized. So that is mainly leading to the increase in gross margins and revenue.

Okay. And so with this current capacity, how much we can grow, I mean, formulation business from this level?

So our capacities right now are at about -- we are utilizing about 70% to 75%. But also in terms of formation, we are also growing more as a marketing company. So we are focusing on our branding and our product mix. So the increase may come because of the -- the growth may come because of a change in product mix also rather than increase in capacity.

Okay. And sir, this USFDA issue, so are we looking at U.S. market also for our API?

U.S. market, definitely, we are -- the USFDA plant which we have is for the API and intermediate for the U.S. market.

Yes. Go ahead, please.

No. Please ask the question.

And you said that this China opportunity is temporary. But what we have seen or several people talking of, I mean, creating a second source base from the China because you are -- also, there was an issue in Chinese raw material side. So how we are evaluating this as a long-term opportunity?

Yes. There are 2 things to this. When we said it was temporary, we meant about coronavirus. Coronavirus impact that is temporary. However, since couple of years back, there was acute shortages of raw materials from China due to pollution issues also. That is long term. So that has -- the operating cost of the Chinese company have gone up to treat the pollution. So from that point of view, it is more like a long-term impact on the Indian pharmaceutical industry. And that will positively help us -- help the industry to have more CapEx and be more competitive against China.

So how do we really look at -- I mean, to grow our company in that space, the kind of -- then we may need to sell a -- put up a large CapEx also. So how -- what will be the funding pattern will be?

Yes. So the CapEx -- whatever CapEx we'll put, the main funding pattern would be for any new projects. Usually, we take 75% long-term debt and 25% is from internal accruals. That is a typical formula which we use.

Our next question is from the line of Nitya Agarwal from EquityMaster.

The name is Richa Agarwal, but anyway. Sir, I wanted to understand what is the margin difference between API formulation and the specialty chemicals, especially now that we are planning to come up with a greenfield facility. So what kind of margins are we looking at? How are the margin profile is different for these product?

Specialty chemicals in few of them, the margins are slightly higher, around 4%, 5% higher than the APIs. But even in APIs, there is a wide range. In our current product mix also, we have APIs with varying margins. So it is very difficult to pinpoint the number to a particular category.

But between formulation and APIs, like average margins, how will the...

Formulations, the main -- because in formulation, the depreciation and the finance cost percentage are much lower. So EBITDA margins might look lower. But then on the PBT margin level, the margins will more or less equate the API business.

All right. And sir, for this quarter, what was the breakup between the volume growth versus realization growth?

Actually, the volume -- the entire thing is because of the volume growth because the realization point of view, in fact, the prices are slightly lower than the December '18 quarter -- December '19 -- yes, December '18 quarter. Yes.

Our next question is from the line of Saravanan Viswanathan from Unifi Capital.

As regards the permission, environmental clearance in [ SEIAA ] any update?

We got environment clearance from [ SEIAA ] and now our project is at designing stage. And by first quarter, next year, we'll start ordering equipments and stack tie-up of major equipment, basically. So we expect another 18 months to start the plant.

This is for the specialty chemicals, right?

Yes, yes.

And what -- I mean, what are the products, the key products?

It is majorly -- what we are doing is, we have one division which is doing chloro-sulphonation chemistry of some products. And we are expanding in the same range. And one -- we have very limited capacity. So 1 or 2 products we are expanding the same, but we're also adding more 3, 4 products in sulphonation...

And user industries for the specialty chemicals would be?

Sorry? User...

Which are the user industry?

It is -- depends. We have pharma, agro as well as normal chemical industries, pigments also.

Okay. So you would be anyway in touch with all this user industry. Nothing is new look for you?

Correct, correct, correct.

Okay. And last call, you had mentioned some gliptins you're working on and it should be...

Yes, that plant, erection has already started. We have already -- validated batches in pilot plant. So process, et cetera, is ready. And we expect plant to commission by the end of 2020.

Calendar year or financial year?

Calendar year, calendar year.

Okay. And as regards to Ciprofloxacin -- I mean, you said as an industry you would represent to government and try to get an anti-dumping duty.

Correct, correct. Yes. We have already applied and it is already initiated by Commerce Ministry. Yes.

Okay. So you will await the update from the ministry?

Yes, there is a normal procedure for about 6 months. So we -- 4 to 6 months, yes.

Okay. And are you -- I mean, any -- we should be using DMF as a solvent, right?

Dimethylformamide, yes. In 2 or 3 products, yes.

So what would be the revenues of those 2, 3 products?

No, but DMF is very negligible quantity we're using, not even 100 tons a month. We use many other solvents. So even if...

We can -- I mean, do we have the -- I mean, we have the flexibility to use alternate solvent?

No, no, no. Those products where we are using DMF, we'll have to use DMF. Only if the cost goes up substantially high, then we may have to do a just a little R&D and try to save some costs. But as far as we are concerned, I don't think there will be any impact even if there's anti-dumping duty on DMF.

We'll take our next question from the line of Cyndrella Carvalho from Centrum Broking.

And management just requesting you to help us understand this China issue. I mean, we have discussed this. But if you could help us understand what is your expectation from the industry perspective? How do you look at it? And would this create some kind of price benefit for us in the Q4 quarter, which might be momentary. But should we look at it that way?

No, the issue is, see, Chinese holidays, anyway, their last 3 weeks, there was Chinese holidays. Just the plants were almost closed. And we -- they were supposed to start the production by 3rd of February. So only 1 -- there are 3 provinces which are badly affected. So we expect that 3 provinces, products in to delay beyond 21st of February as of now, what information we have. But it's very difficult to get clear information from Chinese. So we expect other provinces where the chemical plants are there, they will start operating by fourth week of February. So we see short-term opportunity. But long term, really difficult to give any answer as of today.

So if you are right now, I mean we'll get more confirmation as we move ahead?

Correct, correct, correct. Yes.

Right. And sir, in terms of our dependency, we still have opportunity of doing second sourcing from India or elsewhere. If this adverse scenario turns to.

In some of the products, yes. Some -- in 1 or 2 products, we are trying to make products ourselves. We are working on the project and R&D to make product that feasible, to make -- we'll become less dependent on China. So let's see how fast we can do that.

Okay. And sir, on the second part of the question, would we be seeing some price increases in Q4 for us because of this scenario?

Yes. That we already explained in earlier call. This is already informed. Just this quarter, we expect some price improvement in domestic market, yes.

So earlier, we had guided that we will be exiting the quarter by kind of 15% margin. So should we see some meaningful change to that? Or do we maintain it there?

It will be slightly better than 15%.

Slightly better. Okay. And sir, coming to the anti-diabetic capacity, how should we look at it going ahead after like we have seen a good ramp up. We have come at a good capacity level. So how should we see it FY '21 and beyond? And the demand scenario for the same too, if you could give some light.

So what we are seeing is -- already whatever expanded production we are having, we are able to sell that capacity completely. So there has been good acceptance for the expanded capacity in the market. And what we foresee is that the capacity utilization should remain high for this product even in FY '20 -- 2021. And possibly, we might look at another leg of expansion in this product. So we are already looking into that matter right now for further expansion in the anti-diabetic segment.

So demand scenario remains strong?

Yes, yes.

[Operator Instructions] As there are no further questions from the participants, I now hand the floor back to Ms. Cyndrella Carvalho for closing comments. Over to you, ma'am.

Thanks for the opportunity to the management, and I hand over the call to the management for closing comments.

Thank you all for participating in the con call and asking questions. And any unanswered question, you can always get back to us and we will try to answer those. Thank you.

Thank you.

Thank you, members of the management. Ladies and gentlemen, on behalf of Centrum Broking Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.