Aarti Drugs Limited (524348) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Aarti Drugs 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 ma'am.

Good afternoon, everyone. On behalf of Centrum Broking, I welcome you all on today's Aarti Drugs earnings con call for the fourth quarter. I take a moment to thank the management for giving us this opportunity and their time. From the management today, we have with us, Mr. Harshit Savla, Joint Managing Director; Mr. Harit Shah, Whole-Time Director; Mr. Adhish Patil, our CFO; Mr. Vishwa Savla, Director of Pinnacle Life Sciences. Over to Adhish, CFO, please.

Thank you for introducing us. We welcome you all for the conference call of Aarti Drugs Limited. I think the main purpose of the call, as you all know, is to brief you about the quarterly performance of the company and the current market conditions for the business. In March quarter, company recorded the consolidated quarterly revenue of INR 449.64 crores with a year-on-year decrease of around 2%. Domestic sales of the API segment grew by approximately 1.31% and exports down by 14.93% due to unavailability of cargo. Formulation segment revenues grew by around 26.52% on year-on-year basis. For the March 2020 quarter, API segment contributed approximately 89% of the total consolidated revenues and Formulation segment contributed approximately 11%. Within the API segment, 63.57% of the revenues came from domestic market and 36.43% from the export market. In the Formulation division, 49% of the sales came from exports. For the period ended March '20, revenues from the API segment can be broadly classified into following therapeutic categories. The antibiotic therapeutic category contributed to around 44%, antiprotozoal around 16%, anti-inflammatory around 10%, antidiabetic around 10%, antifungal around 7% and the rest can be classified as others category. As compared to last financial year of 2018-'19, antibiotic segment has increased from 41% to 44%, mainly on the account of higher sales of ciprofloxacin, ciprofloxacin and norfloxacin. In March 2020 quarter, consolidated EBITDA is INR 80.68 crores, up by 32.47%, and consolidated profit after tax for the quarter ended March 2020 is INR 58.86 crores, up by 114.48%. Consolidated EBITDA margin improved to 16.08% even after removing exceptional item of land sales in this quarter. Company has improved on its gross margins on the account of better operational efficiency and better realizations in selling prices. Due to continuous improvement in the working capital, the company was able to further reduce its debt-to-equity ratio to 0.58 as of March 2020 on consolidated basis. Company has already scaled up its antidiabetic, anti-inflammatory capacity, and it will give impetus to revenue growth in financial year 2021. Further CapEx is planned for introducing new products in antidiabetic category. Due to lockdown, a lot of services are scarce, and hence, it is affecting productivity to some extent. However, due to essential nature of our business, we are running our factories after practicing appropriate social distancing measures, regular health checkups and enhanced insurance, et cetera. Now we would like to open up question-and-answer session and take questions from the participants. Thank you.

Shall we open the floor for question-and-answer session?

Yes. We will open for the Q&A session.

[Operator Instructions] The first question is from the line of Aditya Khemka from DSP Mutual Funds.

Adhish, on the gross margins for the quarter, so we were earlier -- if you look at our FY '18 numbers, we were at this 37%, 38% gross margin. From there, we came down to 32%, 33%. We cited the increase in cost from China on raw material as the main reason. And this quarter now, we are back to 37%. So one question is what drove the gross margin in the fourth quarter of FY '20? What changed from third quarter to fourth quarter in terms of the gross margins? And number two, how sustainable do you think it is?

Okay. So one thing is, the fall in the crude prices. Definitely, reduce the arranged rate for us. Apart from that, we have been continuously improving on the efficiency part of our business. So that is the ongoing process, and we have improved a lot as compared to previous quarter. Product mix also plays a role. But most importantly, I would like to point out that in this particular quarter we got much higher selling prices, the realization was much better because of lot of disruptions were there in the market during last quarter. So on a going-forward basis, as of today, the margins are stable, but then once this vaccination of corona comes out, then maybe but still we can eye EBITDA margins of around 15% to 16% on an ongoing basis still.

The pricing realization improvement in the fourth quarter was the biggest driver of gross margin improvement or was it crude?

So it's a mix of both actually, mix of both.

Understood. And how does the lower crude price help us relating it decreases the cost of our raw material? And how does it help us?

Yes, Yes. So a lot of crude based raw materials like our basic materials. So the pricing goes down for those items.

And the vendors for those basically pass on the fall in their cost to us?

Yes. Most likely. Yes.

Understood. Understood. And just in terms of your other expenses and employee expenses, right? So both of them are up -- so employee cost is up 25% year-over-year and other expenses, although it has been high for the past 2 quarters, is again high for say INR 76 crores, INR 77 crores, 45% growth year-over-year. So one, what drove this high cost on employee as well as other expenses this quarter? And next year, what is the outlook on both these costs?

Actually, we had some views in fact for our labor contracts, negotiations are going on. So approximately INR 1 crore of extra payment was done in this quarter for the areas of the labor contracts. So that is why there was some exceptional bump of INR 1 crore in this quarter. And apart from that, we have also grown the number of facilities as compared to last year. So the workforce has also increased along with the increase in the salaries of the people.

So yes, other expenses, growth of 45% is largely driven by capacity expansion?

Look, yes. It is also processing cost. And also, yes, I will also like to point out in other expenses, manufacturing expense will also be the part of that. So in that, we are focusing more towards stating the effluent and moving towards 0 discharge in most of our factories. So because of which -- these of operational expenses also goes up in evaporating all these liquid effluents. So that is also one of the reasons why the manufacturing costs has gone up.

Understood. Just a couple of questions on the follow-up. So let's say -- so your improvement in manufacturing infrastructure to make it 0 discharge, et cetera, all that is already done or is it a work in progress and therefore, the cost will continue to grow?

It is a work in progress. So it is both, the CapEx nature and also the OpEx nature. Even the CapEx is -- we have taken up -- so keeping a budget of around INR 10 crores or a little bit around that figure for coming year also so that we can get better technologies in evaporating the effluent so that our OpEx part will reduce. And we are also trying to -- again, as we did it in past, also trying to get more and more byproducts out of the effluent stream so that there will be some addition to the revenue also which will take care of the increase in OpEx. But this is an ongoing process.

So for next year, also, we should expect like a 20%, 30% growth in other expenses?

20 -- that will depend on the volumes. We'll check the volume growth, then a little confident.

And along the same lines, how much was the volume growth in fourth quarter and how much was the price growth in your revenue?

So in volume growth, we were able to reduce, but that the problem was in the last week starting almost March 22, because of the lockdown, the dispatches were halted. So our inventory went up a little, finished goods, because of that. And that is why there was no volume growth as such. We have seen -- local, we were able to match the volumes. But in exports, whatever we had produced that got stuck at the plant level itself. So exporting -- in fact, you can see a 14% reduction in exports because of the lockdown.

Right. And your tax rate going forward will be this 22%, 23% or do your tax rate will be...

Correct. So including all the surcharges around 25%.

Tax rate. Okay.

22%. Yes. Yes.

Okay. And lastly, on your CapEx, so you said you have INR 10 crores budget of CapEx for improvement and how much would be a total CapEx budget?

Okay. So total CapEx budget, we have a 2 years plan. So that is more. But in the coming financial year, possibly anywhere between INR 70 crores to INR 100 crores because already, we have passed 2, 3 months in the lockdown. So because of that, maybe major of -- a little bit of the CapEx will be to shifted the next financial year. But still, we are keeping a budget of INR 70 crores to INR 100 crores in CapEx.

The next question is from the line of [ Sajal Kapur ], Individual Investor.

So I have a couple of questions. So first one being over the last 10, 20 years, the API industry has seen some serious headwinds in terms of the competitive intensity, mainly from the Chinese players as they have had some unfair advantages like much lower power cost, reduced financing costs and other state-funded incentives, which our Indian players obviously don't get. But when I look at your 10-year performance, the cash generated from operations has grown at a very healthy CAGR of 28% and the market value of the business as a whole has compounded at a similar CAGR of 28%, 29%. So the question is, what according to you have been the critical success factors? And as the external environment has been very hostile and very challenging, if not completely hostile, but you have still delivered a very healthy CAGR on both on the cash side as well as on the market cap side. So what are you doing differently or better than the competition, please?

Yes. Thank you for the fair detail analysis of our company since last 10 years. I would just like to point out that in last 10 years I think it is the first...

I have been a shareholder. I've been a shareholder.

Yes. Okay. Okay. So out of last 10 years, I think first 5 years were really good in terms of the growth. We had a very exponential growth. Last 5 years, there were a lot of challenges, frankly speaking. As you correctly pointed out, the collapse of crude 2x -- a heavy collapse of crude that is, right, from [ $140 ] levels till the [ $90 ] and then from [ $90 ] to [ $30, $40 ]. So that's when the pricing went down for a lot of raw material and so the selling price also went down. So that was one factor. Pollution was another key challenge which we faced since last 5 -- which we are facing since last 5 years because our India's government has also become strict on that part, which is rightly so. Chinese competition has always been there. In fact, what I would like to point out the China competition is relatively easing out since last 3, 4 years. Since that November 2017, when the Chinese government took that drive of making all the pollution norms stringent and closing down a lot of China factories. I think that had been a structural change and a lot of global competition is also moving more towards India as compared to China. So as an API player, which we were always talked from the technological front, in technology and in technical front, our main focus area has always been to consolidate on our strength. So whatever our top 10 products for the earlier, the contribution of top 10 products was at 55%, then become 60%, 65%, 75%. It has now come to around 75% to 78% range. The main reason has been we improved if -- we enhanced our capacity in the top 10 products and we consolidated the market position in those products. So that had given us another benefit in becoming more competitive in those products and because of which, fortunately, our company had a very healthy profit growth. And also, as you correctly pointed out, the operating cash flow has improved drastically. That is mainly because of the few market dynamic changes in the API industry since last 2, 3 years. Our credit period with the receivables have become better and the credit terms have also increased in terms of China. So that is one of the reasons why the operating cash flow also improved drastically.

Okay. Understood. Understood. And the second question I have is, if I look at your annual reports over the last few years, our company has had difficulty in-sourcing raw materials for antibiotics as well as the other therapeutic areas. And to mitigate that risk, we went for backward integration and A to reduce the cost and the dependency on a somewhat easy supply chain. And we have been incurring an annual CapEx of approximately INR 100 crores. I think last fiscal was a little less than that, but on an average basis it's INR 100 crores over the last 4, 5 years. So my question is, are we relatively immune now in terms of the future supply chain related disruptions across all our key therapeutic areas. How confident are you now?

In terms of disruptions in the raw materials supply?

Yes, exactly because you have done a lot of backward integration, right, to mitigate that risk and are we -- we should be in a better position now, right?

Right. We are in a better position definitely as compared to past 2 years, but we still foresee quite a few risk in terms of sourcing a few of the key raw materials. In fact, we are working in that direction. You must be aware that -- in fact, even the government has identified many of our few key raw API intermediates and bulk drugs which they want give subsidy to the private players and come up with large capacities in India to reduce our dependence on the China. In fact, many of our products are highlighted in that. So in fact, there was...

No, no, so I was just adding to that question. So I think on the top of my head, there are about 53 APIs, if I'm right?

Correct, correct. Perfect.

And some were in that ballpark. So how many of Aarti Drugs APIs are in that...

We could -- as far as I remember, not accurately, but 4, 5 are there our products.

So 10%?

Yes. And in fact, most of them are from our top 10 list. So they are big for us.

Okay. Right. That bodes well, then right. Okay. And so you said that there is still a looming threat in terms of the supply chain disruption. So as a percentage, if I remember, I think, it's about 20%, 30% of your raw materials you're still getting from China or some of these Iffy jurisdictions. So is that number reasonably correct? It's 30%...

It's slightly higher. I would say around 40% to 50% is sourcing from China. But what we are trying to do, when the number of manufacturers are more and that particular raw material is going in lot of applications, then we don't go further back. But if the application is narrow, and it is -- means the application is only for our APIs, in that case, we do go for backward integration because then we become overly dependent on the supplier.

No, correct. So 50% is that risk but I heard that in the previous calls as well that you were looking to sign in some Indian vendors to mitigate that risk.

Correct. Correct. Correct. We have done that. We have done that.

So to cross with 33% what is your net exposure?

I didn't understand the meaning of net...

So 50% is what you get and so that RM is at risk. But of that 50%, you have started qualifying some of the Indian vendors for the raw materials. So what is the net risk? I'm just trying to get the net risk...

Net risk -- correct, net risk could be anywhere between 15% to 20%, possibly.

Yes. So that's more like the number that I thought.

The next question is from the line of Manish Poddar from Nippon Asset Management.

So yes, this is Manish here from Nippon AIF. So just wanted to get a sense, what is the outlook, let's say, on volumes this year?

In terms of volume growth?

Yes.

Because of this COVID-19 situation, production of the first quarter is hampered a little bit. Tentatively, you can say we would be able to achieve around 70% of our actual capacity, 70% production of our actual capacities on an average basis in the first quarter. So that will hamper a little bit of volumes. But apart from that, from demand point of view, we feel that there is significant growth available. We are expecting anywhere between 10% to 15% growth still, like in spite of this COVID situation on a yearly basis.

And this is just volumes? Minimum volumes 10% to 15%?

Yes, correct, correct. Considering this not entirely volumes, it will be both. So the major is around 70-odd percent volume driven and 30-odd percent will be rate-driven, something like that.

Okay. And can you just provide an update on the -- this chloro-sulphonation line which you are planning to put? What is the status of that?

Yes. So we already have the land. The CETP is already placed by the GIDC in that area. Now the only problem is because of this COVID-19, we had planned certain visits to -- outside India for the techno -- to get with the technology partner and all. So because of this COVID-19 that plan is a little bit delayed. So maybe after the lockdown is lifted, we will again start with the process. But then that is still in the designing phase, designing as in the layout of the plant and all. We have the process, but we still have to design the plant and finalize everything.

So when you say this CapEx number of INR 7,200 crores, that doesn't include this chloro on CapEx, right?

So the part of chloro, we have an option of putting in Tarapur itself. So that we might go ahead with. So around a small part of INR 7,200 crores might go in that. But otherwise, in the INR 7,2000 crores we haven't considered the main specialty chemicals space. Even if comes, it will come in phase-wise manner. So suppose, even if the project is of INR 150 crores, we might end up spending only INR 20 crores, INR 30 crores in this year, something like that. It will be in these figures.

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

Adhish, so this year, we have done free cash flow, that is operating cash flow minus your CapEx of about INR 200 crores, right? How have we used this cash flow? Can you break it up into debt repayment, buyback and then reinvestment into the business?

Can you come back to the first line, what you said?

Yes. Yes. So this year, our operating cash flow has been INR 250 crores consolidated and our capital expenditure has been about INR 48 crores. So free cash flow that we have at disposal is INR 200 crores after CapEx. So how have we -- yes -- FY '20?

Yes. Understood. So the thing is most of it has gone into debt repayment. We did a total outflow to shareholders was around INR 30 crores to INR 33 crores, something like that because it included 2 dividends. We had one unplanned dividend just before 31st of March, plus we had one planned dividend back in August. These 2 dividends and 1 buyback took place in last year. So it went there. And plus it went in the reduction of working capital rate.

Right. So our net debt today stands at how much, I mean, because I can't see borrowings on your balance sheet?

Yes. So our -- on consol basis, around INR 380 crores. On a stand-alone basis, it is around INR 360 crores.

INR 380 crores on consol, which would mean -- okay. So I can see INR 330 crores, INR 340 crores on your balance sheet. Rest INR 30 crores, INR 40 crores will be under other financial liability?

Correct, with the long-term loans stable in 12 months.

Right. That will be under other financial liabilities?

Correct. Correct. Perfect.

Or other current liabilities -- sorry, other current liabilities.

Yes.

Okay. Got it. So INR 380 crores. So next year, assuming, say, CapEx of INR 70 crores, INR 100 crores, you said. So let's say, next year, you do INR 100 crores of CapEx and your operating cash flow also goes by INR 50 crores, right, because we have a INR 250 crores base of operating cash flow, so 20% growth. So if you are looking at INR 300 crores of operating cash flow and INR 100 crores of CapEx, how would you plan to use the INR 200 crores of recash next year? How much of borrowings -- so INR 80 crores of borrowing is coming due next year, right, which is your other current liabilities, INR 80 crores of borrowing is coming up for repayment next year, right?

Repayment yes, correct.

So INR 80 crores will be repaid and you will be left with INR 120 crores of cash after repayment of borrowings and everything. So how would that be utilized?

Mainly, it will be utilized in -- first of all, all the CapEx plans will take care of that. Working capital debt might go down a little, then obviously, we'll be doing a shareholder payout. But typically, we keep it around 30% approximately -- around 30% profit. And the thing is we do have a lot of CapEx planned maybe in the year after that. So we will not pay it out to shareholders completely, but then release the debt considerably. And then, again, when the new projects come in, our debt will slightly go up. So that will help us there.

Correct. And to a previous participant's question, you said that out of the list of products that the Indian government has released for increased self-reliance, you have 4, 5 products which had appear in that list. How significant are these 4, 5 products as a percentage of revenue today?

I don't have the exact number but then this thing is, it will be quite significant. We can safely assume 15% to 20% of our revenues.

15% to 20%. So this will be mostly floxacins?

Floxacins are there. Yes, they are also there. If floxacins are, metronidazole is there and then these products are there.

And how do you benefit from this because you still get the raw material for these from China, right? So Indian government follows it loudly?

So I mean M&As we were importing. In fact, we were importing from a couple of Chinese sites, one was our own JV in China and one was another player. We have another player in India who is an exclusive partner to us for that product. So we are increasing that because we will be getting capital subsidy also most probably. And this is all not retained from that ideas, most probably we might get capital subsidies. So we might expand those intermediates also in India. If not directly then through our partners.

Right. And your partner has enough capacity to substitute the Chinese volume?

Yes -- no, means we will be putting capacity.

Okay. So greenfield you will do the capability.

Greenfield or brownfield something like that.

Okay. Okay. Got you. And sorry, I missed your response to my previous question on how much has the rupee-dollar helped you in this margin expansion?

Rupee-dollar did not help much because the thing is our -- we have net-net or exports is also -- sorry, imports is also there. In fact, we have booked around INR 9 crores of ForEx losses in the March quarter.

Which is under which line item?

They will be in the raw material.

Raw material.

Yes, raw material.

Okay. Understood. So if the rupee-dollar continues at the current rate of INR 75, INR 76, would you see upside to your margin guidance of 15%, 16% or it would be downside?

If it's absolutely stable in this because the thing is the dollar rate went up gradually from 1st Jan to 31st March. But all the equities are open were to be valued at 75 points or something of that exchange rate. So all the notional loss has been booked. So now if the -- it remains fail, no further notional loss will come. However, all the exports will be done at the higher rate -- all the pending orders what we have will go at a higher rate. So we might benefit a little bit more there.

Right. So what was the average currency realization for you on the export side for fourth quarter?

We don't have that number. I will get back to you on that. We'll note down that question.

Understood. Understood. No problem. We can discuss later. Also, Adhish, on the gross block turnover, so we are doing CapEx and our average gross block turnover in the past has been 1-point something, right? It has been 1.16, 1.2 in that range. What is -- I mean, in your new CapEx, what kind of gross block turnover do you expect given the current scenario? I mean, is the cost of putting the plant going up more than the potential revenue or is the revenue going up more than the cost of putting up the capacity?

Actually, more or less the numbers are same, means it is not that, means whatever CapEx we had been doing in the last couple of years, more or less the assets turn is same. It depends on product to product basis is different, but it was -- anywhere between 3 to 4.

So that implies -- but I mean, my question -- the reason I asked that question was because some of your CapEx seems to be done on the vertical integration part, right?

Right. In that what we can do is...

So when you do more CapEx on -- yes, so that will not necessarily reflect in your sales, it will actually reflect in your margins.

Correct, correct. So now the new CapEx which we have planned, mainly it is all related to the one which will be sold out there.

Okay. So in the past, what you had done is more on vertical integration, but going forward...

Yes, Yes. Correct, correct.

But going forward, your CapEx is going to be more on capacity expansion and not vertical integration?

At least for the next couple of years we can say that actually for the mix revenue more...

Understood. Understood. And this China sort of diversifying away from China globally becoming a theme and obviously, you are also working towards adding domestic vendors to your arsenal, are you also getting more customer inquiries because of them looking at an alternate source other than China for your products?

Definitely, we have seen that trend that people -- at least from the long-term contracts point of view that we are talking with -- there are ongoing talks also for not exactly contracts trends actually, but the kind of that for -- especially for products which are coming from China -- in terms which are coming from China. So we might manufacture that also as import contribution. So which indicates that people are more and more moving towards Indian companies.

Understood. Understood. Sorry, one last question. So this government scheme that came out for API manufacturers, how far along is the government in implementing this because I saw that you hesitated in responding to if you get capital subsidy or not. So I just want to understand, although the government has announced the scheme, where is the implementation today and how long do you think it will take to implement? Number one. Number two, assuming it gets implemented perfectly, how does it benefit -- how much does it benefit you across these different lines in terms of cost or capital expenditure or whatever? How does it impact you?

So I haven't worked on this at all, impacting numbers, how exactly it will impact us finally. But where it will help, I will tell you. One, we feel that -- actually we are also in talks with a few of the officials through PhDs which are working in those government committee. They took out few circulars regarding the incremental sales will get 10% of sequentially, something like that for few of the products. But that is absolutely wrong strategy on the part of government because you cannot talk about incremental sales of 2019-'20 because the existing supplier will have no benefit. Anyone who puts a new capacity, they will be at benefit. So there are few likelihoods in the way they are trying to implement, but we are constantly giving them feedback. So we have given this feedback to the committee. So that they will come up with appropriate figure. So that is why I was a little hesitant in saying that though they have the will to do it, but now the way they do it is more important.

But it defeats the purpose, right? I think the idea of the incentive is to make India more competitive versus China?

Exactly. Exactly. Exactly. So the thing is our industry needs to give them feedback because they may not have the real-time experience of manufacturing and also in making the policies. If they don't take the feedback from the existing players, they might mess up a little bit.

That I think, therefore, is not good for the industry, right?

Correct. But then, I think they are very much open to listening to industry. So that is because in fact, the 1% contracted from their side to us, so which is a good thing. As I think they want to know how the industry will be held from the industry itself rather that doing it on the road.

Okay. Sorry, one last question for me, Adhish. On the formulation sales that we have booked this quarter and how we have been doing in the past, so we have seen a very good ramp-up from what FY '19 was to FY '20. Would you care to comment on what has driven the growth in formulations FY '19 -- 2019?

Yes, I think Vishwa will answer your query.

Yes I'll take that. So the major reason for the increase in sales and increase in margins has been the growth in the export formulation business. So since the last -- past this year, we were in the process of finding a lot of products in many territories and kind of establishing our marketing presence. So that has started coming along, and that's the reason since the last few quarters there's been an increase in the export sales and where we drive better margins and that helped us grow the business.

Right. So when you say you promote yourself, are these branded generics or are these like those unbranded generics that you sell in developed markets of U.S., Europe, et cetera?

So we are presently in U.S. It depends on the country of operation. In some, especially in the emerging markets of Africa and Asia, we are more in the branded generics. Those products are ethically promoted. And also, there are some countries in Latin America and other parts of the world where we are selling them as generic substitute, similar to how it's sold in the U.S.

What percentage would be branded of your current revenue in formulations and what is unbranded?

From the export sales, it could be about -- 60% to 70% would be branded and the remaining would be generic.

And your domestic formulation revenues are all unbranded, right?

Domestic is all contract manufacturing revenue, which is solely -- it's more like a service product. We manufacture it for the domestic players and they brand it further.

And your customers are branded players in the domestic formulation sales?

Yes. Yes. And they're kind of most of the top Indian companies.

Got it. And 40% of your export formulation revenue -- 40% of your formulation revenue is exports?

Yes.

Is that the comment I heard from Adhish in the opening remarks, 40%?

Yes. It was about 49% in this quarter and...

49%? Okay.

Because we would expect it to be around 40% would be exports.

Sorry, come again, going forward?

40%, between 40% to 50% would be exports contributions going ahead.

Export contribution. And how different is your gross margin in your export formulations versus your gross margin into domestic formulations?

It's -- export margins are significantly higher than domestic.

Got it. And going forward, which of the 2 segments would you see growing faster, exports or domestic?

We will see exports growing faster.

But it's 49% as a percentage of sales already, and you're guiding to 40% to 50%?

So -- yes, I mean, because this quarter -- I think last 2 quarters has been exceptionally high for exports. But from an annual perspective, there will be a growth. But from the quarter-to-quarter, we would expect it to be around 50% -- 45% to 50% contribution because there will be some growth on the domestic part also which will be lower in the last quarter.

Adhish, one final suggestion here. I mean, if that revenue breakup could be given between API formulation, specialty chemicals and intermediates?

Actually, the thing is, we are thinking on those things. Right now, your intermediates is only 4% of the total API segment. The thing is the -- it is not that significant right now. So it will be only hovering around 3% to 4% right now. Maybe in a couple of years' time, that might become significant, then we might have to actually do separate segments as well. But as of now, this is too less to report separately. But to answer your query, it's around 4% and last year, it was around 3%, specialty chemicals.

Understood. And -- but if you could give the breakup between API and formulation, at least, because these 2 are now very...

Yes, that we are giving. That practice we have started. So in the press release, we will be giving 2 seperate things.

And that to divide formulation and API to domestic and exports.

Yes.

So 2x2 metric, API formulation and domestic and exports because you understand the dynamics of this business is a very different, right?

Right, right.

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

At this point, do we have any foreign currency debt?

Foreign currency debt, we don't have right now. Means, whatever the balance credit we have in foreign currency, those are completely hedged.

Okay. Even the net, let's say, I mean, we have net exports position. So that is hedged -- that is fully hedged or partially hedged?

No, no. Right now, we may not have net export. It is matching more or less, but imports might be slightly higher than exports. What we do is whenever dispatches takes place in exports, at that time, we hedge the exports.

Okay. Okay. So you're not expecting any significant volatility from foreign currency fluctuations?

No, no, no. More or less, we are naturally hedged, but little bit whenever the dollar goes up immediately -- whenever there is a sharp increase in dollar, means rupee depreciates sharply towards the end of the reporting period, at that time we have to book notional losses on the imports. That is the only thing, but rates -- but on overall basis, the impact is very subdued because we have a natural hedge.

Okay. In your -- to a earlier question, you had guided volume growth plus price growth, all in all, 10% to 15% revenue growth for FY '21. Although you also mentioned that Q1, you've been able to function only 70% of your capacity.

Correct.

What are the COVID-related safety measures and related costs that you'll have to undertake? And how will it affect EBITDA margins?

Okay. So right now -- means, what we saw that initially, even though we got the permissions from government to run the factories, the key issue was transportation of the labor workforce and the moral of workforce. That has been the major challenge in running the factories in this lockdown period. So we have taken initiatives, like, having our own transport buses, means, social distancing, reduction of workforce in one area. But frankly speaking, the workforce available itself is low, so we don't have to reduce it. But we are taking few deviations in our existing processes so as to manage the 70% to 80% production with this reduced workforce. We have documented everything in the record, our planned deviations. And I think that is okay from the regulatory standpoint. That is something which we are doing to be able to produce 75% to 80%, even though the workforce is actually much lesser there.

] So does that mean that -- I mean, is this the new normal? So you will...

No, no, it is the new normal for -- means, only for a couple of months, then it will revert back to normal, I think. Once the lockdown is over, then at least 90% you can say it will revert back to normal. The current situation is very exceptional.

What would be the full year capacity utilization FY '20?

Full year? So what we are expecting is, first quarter we are expecting 70% and that is also to give you the fact that many of the workforce are not from the same locality. And when this COVID thing happened, many of them traveled to their native places. But when they came to know that the companies have started, but they don't have -- they are not able to travel from their home town to the Tarapur or Sarigam. So that was one of the reasons why many of the workforce is stuck at their native places. So once the lockdown is lifted, that problem will be solved immediately. That is one of the key problems for us today. So for first quarter, we are giving on a conservative basis 70% utilization. But going forward, we should come back to normal utilization.

No, I was asking FY '20, last year, what was the final capacity utilization?

It will be somewhere in the mid-70s to late-70s.

Okay. So -- and you had mentioned that you had -- last year, you had several efficiencies and that's why EBITDA margins also went up. So considering that and considering the COVID-related costs and first quarter sort of subdued production numbers, what is the overall margin guidance?

Yes. So we do feel that [ overheads ] per kg will go up as you rightly estimated for the first quarter. But right -- as of now, the selling prices are also higher because of the shortage of supply. So that is one of the reasons why the increase in cost will be taken care by the increase in selling prices. So margin side -- frankly speaking, we are giving the same guidance. EBITDA level margins, we should be able to achieve between 15% to 16%. But let us see because we are also not sure exactly how it will pan out. But we are hopeful that we'll be able to maintain the margin in the first quarter also.

And one question on U.S. FDA inspection, so what is the status? Do they have any Indian inspectors who can review the facility?

They do have Indian inspectors, but we are not -- we don't know yet how many, but they do have that much we know. So we are trying to contact them. Now let's see. That had been on the backseat in this COVID situation. Even our one of the Chinese clients, who has referred our DMF in their ANDA, their inspection was also postponed because of this COVID thing. It was supposed to happen in February, end of February 2020. That has also been postponed. We are trying hard but right now the situation is not clear even to us how it will pan out.

Anand, has a question.

Adhish, congratulations for wonderful set of numbers. Just want to understand, we have antidumping duty protection in our floxacins products. So do you anticipate a similar antidumping duty protections might come in other products, given government is trying to incentivize?

There is a chance -- I mean, there is a good chance that it might happen.

So any of our products which are currently being studied for antidumping duty protection?

We -- there are few floxacins, which are under study.

Okay. And the antidumping protection that we already have on the ciprofloxacin, ester and the intermediate...

No. Ofloxacin.

Floxacin. Okay, Ofloxacin. So this is until December of 2020, correct?

I don't have the exact date, but I will have to come back to you on that. It was given for 3 years, that's much I remember, around 3 years.

If you can check the exact date and whether we are -- there must be some process that we'll have to undertake in order to get the continuation of this ADD.

Correct, correct, correct.

You can just check the date and let us know if...

Definitely.

The next question is from the line of [indiscernible] Capital.

Adhish, congratulations for a very good CapEx numbers. So 2 questions from my side. So I think you alluded to this potential or favorability of long-term contracts coming your way. I mean, in the products that you manufacture, the nature of the market is where you sell it on a stock basis, right? So I mean, is the nature of the market for the existing products changing? Or are you referring to some new products, which may come or people are talking about for contract manufacturing? If you can throw some light on that?

Right, right, right. So this particular product which I was referring to is a new product -- that is a new product. But even...

For that you will need a separate facility and investment and all those things.

Correct, correct, correct. So we have factored in that CapEx in the plan for this year.

Okay, okay, okay. And second question, I think, we have been saying that our current capacity is good enough to take us to INR 2,000 crores kind of a revenue given the pricing that we currently have barring the current bump up in the prices. So we are already at that INR 1,700 crores, INR 1,800 crores mark now. So 10%, 15% growth from here and we would be running kind of out of capacity and this year our CapEx also may be curtailed because of the COVID crisis. So I mean, do you see capacity becoming a constraint for us going forward during the new capacity in FY '22 when it comes up?

Right. So the thing is, last year we did say that, means, we can easily reach INR 2,000 crores. Now our antidiabetic facility has scaled up. Then we were -- we also expanded anti-inflammatory products in the March quarter. So that will be additional capacity. Plus there are a few antidiabetic -- couple of antidiabetic production line which will be implemented this year also. So the incremental CapEx is continuously on, which should ideally take care of further revenue growth. So that is on. Brownfield projects are definitely on. The bigger CapEx -- the specialty chemical CapEx is yet to happen, but there are still lot of other CapEx which are happening. And what we feel is right now the prices are up, but with the current scenario, even INR 2,200 crores is possible from the existing products. I'm talking about the standalone company.

That is based on the current pricing, right, but which may not sustain as the timing suffice?

Which may or may not be -- correct, correct, correct. And right now there are standalone sales of INR 1,636 crores -- around INR 1,636 crores.

Okay. So you on a standalone basis think that can reach up till INR 2,100 crores, INR 2,200 crores, so close to around 25% growth from hereon.

Correct, correct, correct. Yes, and the Pinnacle will be additional.

Okay. Okay. And my last question is on specialty chemicals. So if I heard you correct, that project implementation and the work will be taken up only after the lockdown ends. So essentially we were targeting somewhere in the FY '22 and the commercialization of some production starting from the facility. So now will it be pushed back by 6 months or you think it will be more than that?

You are asking in general or specific to specialty chemicals?

I'm saying the greenfield capacity that you are planning, right?

The specialty chemicals. Okay. So that is -- around 6 months it will be delayed, but there is a -- we have other few projects, which were not there earlier. That we are taking up speedily in this particular year -- financial year. So that we will start from Q2 itself.

Okay. Then that will start kicking in from FY '22?

So some of the facilities will come towards the end of this year itself.

The next question is from the line of Chintan Sheth from Sameeksha Capital.

I just wanted to check on the CapEx pool you are providing, bits and pieces, on few of the product categories you are planning and there are process improvement CapEx and specialty chemicals plant. So overall, if you can lay down next 3 years to 5 years plan, which looks like you have internally target already been discussed. Can you just lay out or what kind of CapEx we are planning over the next 3 to 5 years across our 3 category of businesses, that is formulation, API and specialty? That will be really helpful to understand the scale and opportunity of the business.

Okay. So right now, from 3 to 4 years perspective, we can definitely -- means, we have a CapEx plan of around INR 300 crores, INR 400 crores. But again, that is very dynamic. It might change as the situation changes. So -- but for the next 2 years, we do have visibility of around INR 200 crores CapEx plan, which is excluding your specialty chemicals. Excluding specialty chemicals, there is another CapEx plan of INR 220 crores also which we have in front of us. But obviously, as you said that we may not take it in this year itself. So some of the projects might get deferred, like that. And the priorities of the projects might keep changing based on the market dynamics.

Correct. So within the INR 200 crores CapEx, what will be the spread between your formulation and API?

No. This is just -- I'm sorry. This is just API I'm talking about. The formulation hasn't been discussed yet.

So what will be the -- if you can provide CapEx towards the formulation over the next 2 years?

Vishwa, can you answer this?

Yes, yes. So in our formulation business, this year and most of the year next year, we are not planning for a heavy CapEx. Most of our investments would be going into R&D projects since we are moving towards the more regulated markets. So most of our investments will go into product development. And for a couple of years, our aim would be to invest a major chunk of our internal accruals into the product development and market establishment. So we don't expect any major capacity enhancement or new facility for the next 2 years.

Sure. And on the earlier participant's question on the ADD front. So as we mentioned 53 APIs have been identified by government, of which 4, 5 products are part of your current product range. Apart from the capital subsidy, what way government can help to boost local manufacturing? What kind of discussions you had with the government -- yes, if you can throw some light on that.

There is quite a few areas which government suggested. One was capital subsidy, other was 10% incentive on the incremental sales with respect to 2019-'20. Then other was establishing solitary and intermediate arch, where they will give you common power and steel utility at a much lower rate -- subsidized rate. And they will also give the -- [indiscernible] power and fuel. So this way, they were considered as 3 areas which we discussed with them as of today but actually the incremental subsidy is the one which I don't think is the right way to go. The third option of having [indiscernible] pass where they can establish a bigger utility and then if they can supply that utility at a cheaper rate to all the units within that vicinity, that is one very good way of building the core competency and efficiency among the Indian manufacturers. That is one good thing. And other can be general subsidies like increased subsidies or something like that.

So this establishment of industrial part will obviously take a little bit longer time before companies take interest into it. The initial point, which earlier participant also asked, that if they are looking at securing through ADD -- imposing ADD benefit or incentivizing the local manufacturer and then, yes, obviously the longer-term solution is the initial part as you rightly said. Sir, any discussions on that, in the sense that, while actually considering ADD is some sort of duty to block imports of Chinese products in India and we can have a larger share as a domestic manufacturer?

Yes. Yes. So the thing is they are also in discussion phase right now. They are also having a series of meeting, discussing what is the best way to help industry. It's not a very easy thing to do, frankly speaking. The capital subsidy is one of the easiest forms. And if you don't have that capacities at all in India and you want to build those products in India, then capital subsidy is one of the easiest form for them to execute. Any other method might take a lot of time. Even the antidumping duty, right now, the process is very long. Right now, their process is like the manufacturers should make losses 1 year and then those losses they should go to government and then apply for the antidumping duty. So it's very dicey, frankly speaking. But the good part is at least wherever there were a lot of blockage in terms of expansion, permissions and all, at least that will become very easy for us. So even that is going to help us.

So indirectly, you are saying that ADD as such is not that useful compared to...

Sorry, you're talking about? What is the fullform of that, ADD?

Antidumping duty, sorry, ADD.

Antidumping duty, okay. Okay. Antidumping duty.

And so...

That is useful for temporary, because it's like whenever a new manufacturer comes in the business, usually, they have teething problems. So they don't have the most efficient process. So antidumping duty, we will just -- some time they will pick, in terms of, say, 2, 3 years, to become more efficient. Like that. So that is the main purpose of antidumping duty, so that you'll get some...

With ofloxacin ADD we are currently benefiting from, right now, how much is currently...

We are benefiting. So earlier, even from metronidazole, we had ADD. But then that antidumping duty was removed because we started making profit in that product. So we do not require that. So the thing is -- so situation keeps on changing. So as we manufacture the product over a number of years then you become more and more efficient. And so ultimately we don’t require these duties then.

[Operator Instructions] The next question is from the line of Umang Shah from AMSEC Research.

I had 2 questions. The first question was that once you have the U.S. FDA approval in place, do you envisage a certain amount of revenue that you are looking at by exporting to regulated markets or to innovative companies?

Yes. U.S. -- that plant would -- might be capable of manufacturing anywhere between INR 60 crores to INR 100 crores, but then the profit margins are much higher in the U.S. market. We do have one empty space where another plant can come in once you get the approval in a very short time, but we have one building also already. So there is a potential once we get the approval. But even before getting U.S. FDA approval, we do have lot of potential in getting European approvals. We already have AGMT for that plant. So we already have some kind of some form of -- though it's very less, as of today, but we have some regulated business for Europe also from that plan. But then getting FDA will definitely be a very big feature in terms of marketing that plant.

Correct. Correct. And sir, you mentioned the revenues as INR 60 crores to INR 100 crores, right?

Correct, correct, as of the current capacity.

Right, sir. And sir, one more question was, sir, that there's a significant difference in realization of ciprofloxacin and metformin. I think it's INR 2,000 per kg and INR 200 per kg. So on unit economics front, what is the margin that you look at while you are taking up new projects? And what is the IRR that you look at when you're expanding?

So we basically go with IRR. So the floor IRR is 18%. So it should be higher than that. But what we assume is, we assume 75% rate and 25% cost of equity. And we take equity cost around 20%.

20%?

Yes.

The next question is from the line of [ Ankit Gupta from Bamboo Capital. ]

Adhish, I just wanted to understand more about this contract manufacturing opportunity, like how much can this be over the next 2, 3 years? And apart from these molecules, do we have any other more molecules which are in discussion with the clients?

[ Ankit ], these are couple of molecules which we are discussing with our clients. In fact, we were able to -- means, it wasn't exactly contract manufacturing kind of contract, but then we did similar kind of arrangement with one of the Japanese player also in the past, now just a year back, and we are successfully able to supply them. Means, earlier they were procuring from some another client, from China, in fact, and now they are shifted to our client.

How much is it contributing to our top line currently?

That was -- it has the potential of -- I don't know the exact number. It has the potential of going till INR 90 crores to INR 100 crores.

Okay. Okay. This is in addition to one more molecule that you'll be supplying in this year?

Yes. Yes. This one, we already started last year, and now we are talking with some another player for another one.

And how much can this opportunity scale up?

This is, again, in a similar range, around INR 135 crores per annum kind of a business.

Okay. Okay. Okay. And secondly, on the specialty, as you were saying, we'll be doing one CapEx at our existing plants. So out of the INR 70 crores, INR 80 crores of CapEx that you have planned, how much will be allocated to specialty chemicals in FY '21?

So that would be around, say, anywhere between INR 30 crores to INR 40 crores, something like that.

Okay. Okay. And how much revenue can it generate?

Revenue generation...

The asset terms broadly...

Very broadly speaking, asset terms would be -- in these 2 products, asset terms will be very high. It can range anywhere between 4 to 5x.

Okay. Okay. Okay. And thirdly, on the pricing side, if you can guide us how much have the prices increased during Q4? And especially at the time when Chinese supply had reduced during January, February. And now how is the prices -- pricing behaving after March since the Chinese are back?

Yes. Yes. Frankly speaking, if we do a rate variance from March versus March, means, March '19 versus March '20, the prices are almost flat in terms of the sales which already happened, but the prices have gone up towards the end of March. So now that increased prices will actually come in this quarter. Last time also, means, it is almost flat. It means around 1.5% increase in domestic market. Exports were actually negative.

Sure. How much has it increased now in, let's say, post March?

I think it's difficult for me to say, but then in few of the products I have seen 10%, 15% increase.

Okay. So what was the key reason for the price increase, especially when the Chinese supply is back into the market in April exactly?

No, actually, you see, many of the factories are not running at full capacity. Even the Chinese factories, China is also facing a second outbreak of this virus, even though China has stopped publishing the numbers. But if you see some -- few other news sources, so they are also having lockdowns in few of the areas, like Harbin city and all. So the thing is, overall, the supply is not like in a regular scenario. So that is why the prices are high. Even us, for example, even we are going to manufacturing only 70% of our capacity. So similarly, everyone will be facing the same trouble. That is why...

The next question is from the line of [ Dheeraj Shah from [indiscernible] Capital. ]

My question is regarding the CapEx. So in FY '20, your CapEx figure was INR 50 crores, right?

Correct, correct.

So in that, we have expanded the capacity in anti-inflammatory and antidiabetic?

Yes. Antidiabetic, the thing is, part of the CapEx was done in the previous year and a part of it came in last financial year. Whereas, anti-inflammatory completely in last year.

Okay. And sir, what would be an optimum utilization of overall plant or within API?

Utilization? Overall, it was -- optimum means, see, what CapEx is...

Yes, yes.

Typically, go 95% of the capacity, usually.

Okay. Because we are -- pre COVID, we used to run at around 75% to 77%...

75% to 80%. Yes, yes, that is because we were continuously expanding in last 2, 3 years, right? So the capacity which we expanded recently, they were not completely filled, but few of the molecules which we were running since last 10, 15 years, those are almost completely utilized. So on an average, I was saying around late 70s.

So we still have a room to go up to 95% plus this expanded capacity. So FY '21 would cover these 2, right?

Right.

Okay. And so what about...

From the potential point of view, what you said is right.

Okay. And sir, when we are going to launch gliptin?

It might be this year itself. This year we'll be able to -- we are putting up one new production line. It will be a brownfield project because we already have the sales structure in place. So that is we are shifting. So in this year itself we will be able to launch the glipten.

So this, we are considering in our CapEx of FY '21, INR 70 crores?

Yes, yes, yes. INR 70 crores to INR 100 crores.

Okay, okay. And sir, about formulation. So what is our current utilization, capacity utilization in FY '20?

Vishwa, can you answer this question?

Yes, sorry, could you just repeat the question?

Sir, what is the capacity utilization in formulation?

Capacity utilization is at the moment at around 70% to 75%. And it was -- it had been around 75% in the previous financial year. And this year, we expect it to be at -- apart from the first quarter, the rest 3 quarters should be at -- between 80% to 85%.

So do we require any CapEx, maybe not this year but maybe in future FY '22, FY '23?

Yes, definitely not in this year. Maybe in the future some debottlenecking by just adding -- kind of facilities adding up new equipments in the next year to increase the capacity by another 10% to 15%, that may go through. But also, one of the main reasons for the increase in sales growth would come from a change in product mix and a change in market. So as we are developing newer products, we will be coming up with products that will give us a better value -- a better sales value and better profit margin. So the majority of the growth would come from a change in product mix.

Okay. And Adhish, sir, whatever CapEx we are planning of INR 200 crores and maybe we have a long-term vision of INR 400 crores, INR 500 crores. So what would be our debt utilization in that? Or it will be purely internal accrual?

So the thing is, as we were speaking with Aditya also, that we might generate a good amount of operating cash flow next year. So in that case, the debt proportion will go down. Last year, we did not get any new term loan debt. All the proposals were done from internal accruals. So a part of that will be done -- typically, what we do is we take 75% term loan and 25% is internal accruals. But because we might have surplus funds so that, that percentage will reduce in the future. And to answer your last question about capacity utilization of Pinnacle and whether it will reflect in new CapEx to increase its revenue. So in Pinnacle, we also hold IT. So in that case, we can get the manufacturing done from additional party also. So in that case, we don't make our actual CapEx to increase our revenue. So that is also one of the business model which we have implemented.

I now hand the conference over to Mr. Adhish Patil for closing comments.

Yes. I thank all of our participants for actively participating and asking very intriguing questions to us which also keeps management on toes to keep performing for the company and will continue to do so in future. So again, from the behalf of management, I would like to thank everyone for participating in this concall. Thank you.

Thanks again all for participating, and be safe.

Thank you. On behalf of Centrum Broking, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.