Aarti Drugs Limited (524348) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Aarti Drugs Q1 FY '21 Earnings Conference Call hosted by Centrum Broking Limited. [Operator Instructions]. Please note that this conference is being recorded. I would now like to hand the conference over to Ms. Cyndrella Carvalho from Centrum Broking Limited. Thank you and over to you, ma'am.

Thanks, Janet. Good afternoon, everyone. On behalf of Centrum team, I, Cyndrella Carvalho, thank the Aarti Drugs management team for giving us this opportunity to host this quarter 1 FY '21 earnings con call. From Aarti Drugs management team, we have with us today, Mr. Harit Shah, Whole Time Director; Mr. Adhish Patil, Chief Financial Officer; Mr. Vishwa Savla, Director, Pinnacle Life Sciences. At the outset, I congratulate the management team on delivering excellent earnings in these unprecedented times. I now hand over the con call to Mr. Adhish for their opening remarks.

Hi. Good afternoon all. Thank you for joining the conference call of Aarti Drugs Limited. Management welcomes you all. Main purpose of the call is to brief you about the quarterly performance of the company and the current market conditions for the business. In the June 2020 quarter, the company recorded consolidated quarterly revenue of INR 544.67 crores, with year-on-year increase of 34.34%. API segment contributed approximately 85% and formulation around 15% of the total consolidated revenues. Within API segment, 65.11% of the revenue came from the domestic market and 34.89% from the export market. Domestic sales of the API segment grew by approximately 28.19% and exports by 29.13%. Around 50% of the overall year-on-year growth in the API segment was due to volume growth. Formulation segment revenues grew by around 89.49% on a year-on-year basis on the account of high export growth. In Formulation division, 50% of the sales came from exports in June 2020 quarter. For the period ended June 2020, 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 13%, antidiabetic around 10%, antifungal around 5%; and specialty and intermediate category put together another 5%. Rest can be classified as others category. As compared to last financial year, of 2019-'20, anti-inflammatory segment has increased from 10% to 13%, mainly on the account of higher sales of existing products and recently expanded diclofenac salts facility. Consolidated EBITDA for the quarter ended June 2020 is INR 135.23 crores, up by 146.89% and consolidated profit after tax for the quarter ended June 2020 is INR 85.45 crores, up by 280.63% on a year-on-year basis. Consolidated EBITDA margin improved to 24.83%. Despite challenges faced during COVID-19 lockdown, the company was able to maintain good operational efficiency, which, along with good realization in selling prices led to increased gross margins. Debt-to-equity ratio of the company reduced further down to 0.55 as of June 2020 on a consolidated basis. Company has already scaled up its antidiabetic and anti-inflammatory capacity, and it will give impetus to revenue growth in FY 2021. This would be further supported by good growth in formulation exports. Additional CapEx is planned for introducing new products in antidiabetic category towards the end of FY 2021. As the lockdown is easing out, project work should pick up pace in coming quarters. Also, company positively looks forward towards the recently announced production linked incentive scheme by the government. Now we would like to open up for Q&A session and take questions from the participants. Thank you.

[Operator Instructions] We take the first question from the line of Aditya Khemka from DSP Mutual Fund.

Adhish, first question on the top line growth. So our performance, Aarti Drugs' performance in fourth quarter of FY '20 and first quarter FY '21 has been pretty good on the top line growth. Most of it seems to be driven by formulations ramping up. When you consider your first quarter FY '21 formulations revenue, could you add a little more color as to what is the capacity utilization now in formulations? And how do you see the trajectory going forward for this segment of your business?

Yes. So our formulation capacity utilization at the moment is about 75% to 80%. Having said that, in our formulation division, we also focus on getting our products manufactured from various sites. So we are getting our products made from about 5 to 6 approved facilities where we do have spare capacities. And there, we are ramping up our next line of products. So in terms of the growth, our focus in formulations is on addition of newer products through our R&D and opening up of more and more markets because the export market, which is the higher profitable market, we are expecting many approvals in the next coming quarters and the coming years for the filing that we had initiated 2 years back. So the major growth will be supplied through the increase in exports and higher utilization in our third-party sites.

So in your third-party sites, when you get these products manufactured, the value addition that you as Aarti Drugs do is the R&D of the dossier and the registration?

Correct.

And when you sell it to these countries, you obviously sell it to business partners there, because you don't have a ground presence in any of the export countries. So it's your business partner who's selling the product to the local population, correct?

That's true. So in most countries, we sell it through our business partners, but we do directly or indirectly get involved in the marketing of the products in many of the countries. And going forward, we also have in -- Aarti Drugs has its own subsidiary in Latin America, Pinnacle Chile. So going forward, the formulation business would also, in Latin America, be done more as a front-end company rather than a B2B company.

So my question on Pinnacle was actually my second question. So in Pinnacle, could you explain the business model a little more to me? Do we have a field force? Is it branded products that we are participating in? Or is it that we are participating in the institutional business in Latin America? What segment are you targeting?

So we are basically targeting institutional as well as the private market. Currently, our sale, the higher portion of the sale is coming from the institutional markets. You could say the split would be about between 60% to 65% from institutions and the rest from the private retail market. In the retail market, again, there are different models in different countries. In some countries, we -- we have the strategy of just selling it to the end consumer, that is the distributor and then the distributor promotes those products. Whereas in some of the markets, we are deeply involved in marketing the product ourselves and the distributor is just taking care of the logistics and the storing and distribution.

Understood. My last question for this is on the revenue that we did in fourth quarter, and there were some shipments, I think, in the fourth quarter con call we had indicated, which got deferred because of the lockdown in the last 10 days of March. Can you guys call out the top line impact of recognizing that revenue in the first quarter? And therefore, how much is the normalized INR 45 crores that we have done in the first quarter? How much is the normalized revenue, excluding the booking of sales, which were supposed to be booked in March?

So we can say about the revenue that we missed in March and that got pushed to this quarter would be about -- anywhere between INR 5 crores to INR 6 crores.

INR 5 crores to INR 6 crores, so that's not a big number. Okay. Yes, I'll have more questions, but I'll get back in the queue. I'll give others an opportunity.

We take the next question from the line of Sudhir Bheda from Right Time Consultancy.

Congratulation on very good set of numbers, sir. I just wanted to know, just was listening to your TV interview in the morning, and you said the EBITDA would be ranging between 18% to 20%. While in Q1, you have shown the EBITDA of 24%. Does it mean that EBITDA will fall going forward? That is the first question. And second, sir, just can you throw light on API industry as a whole in view of China's problem vis-à-vis the world, which is looking at the China with some problematic manner. So can you elaborate on that?

Yes. So what we said was, right now, our EBITDA -- consolidated EBITDA margins are between 24% to 25%. So we will close the entire year around 18% to 20% is what we feel because right now, the margins are very good. There is shortage of product in the market. Chinese competition have increased the prices of the products, sort of API products. And traditionally, since last 4, 5 years, we have introduced a lot of products which are import substitutes. So most important competition for Aarti Drugs Limited is a Chinese company. So that is the reason why we showed very good -- one of the reasons -- one of the main reasons why we showed very good margins in June quarter. So going forward, as this pandemic eases out, we don't know how the situation will pan up. The thing is, as of now, the margins are similar. But we don't know how the margins will look like in December or March. Because right now, the situation is very dynamic. It's very difficult to predict a long-term margin forecast based on today's conditions. So that is why we said -- so that is why we gave a conservative estimate of, we might still close the entire year around 18% to 20% of EBITDA margins. And historically, before COVID, we always used to project around 15.5% to 16%. So there, we do see some improvement, no doubt about that. But 24% might be a little high in very long-term -- on a very long-term basis. As far as your second question is concerned, the China perspective and how it will affect API industry. So it is somewhat related to this first question, that earlier means in March month, we thought that this COVID-19 impact seems to be very temporary one. But then as the situation panned out, lot of countries that there is growing discontent against the Chinese suppliers, and they want to add more and more suppliers and want to favor some other countries for that matter, so because of which that can be a kind of structural change, which would lead to higher demand for Indian API going forward. And so the thing is API industry and the chemical industry in general are -- will do quite well is what we feel going forward, say, 3 to 5 years. And also Indian government is taking lot of urgent steps to make sure that this particular industry thrives going forward and India's dependency on China is reduced.

Next question is from the line of Sunil Kothari from Unique Asset Management.

Sir, my question is also related to some previous questions. Broadly, I wanted to understand is you said our top line growth out of this API growth. What you said, I think what I understood is 50% is because of volume and 50% of the -- because of price. So largely, this is because of non-supply from China or people -- customers are ready to outsource from other source other than China, and that is the reason they are paying a little higher price also. So broadly, if you can talk a little bit more about volume growth and volume opportunity?

So see, one of the main reasons, which hindered volume growth in June quarter was also because of the fact that in April month, we were not able to run the factories efficiently. And also some of the stock in last few days of March month, and that time there was complete shutdown. So obviously, initially, we were able to sell using whatever opening inventories we had, we liquidated those. But we did feel some shortage at the production side also. So that is why -- one reason why the volume growth was not that handsome, which we expected. In fact going forward, we expect more better volume growth. But as far as the price growth is concerned, it is a mixture of means -- yes, a lot of companies -- most importantly, the Chinese companies have increased their prices also. So across the board, means even the competition in our industry, those have also increased the selling prices. So it is not that just we have increased the selling prices, but the market itself has gone up for these APIs. And that is why we were enjoying better margins in June quarter.

Sir, currently, we hear about China has again came back to full production, they are supplying very easily and prices also have fallen. So any update from your side on these things? Because normally, industry, what happens when price of raw materials or API fall, they again go back to original suppliers. So how do you see this current temporary situation? And what's your view for a little medium to long-term?

Yes. In medium term, means, as of today, the situation is more or less similar. But in longer term, for any business for that matter, very high margins are not sustainable for any business. There is always a new entry possibility. So but for API industry, there are -- as of today, there are quite a few entry barriers, one of them being the products which we manufacture, means in top 12 to 13 products, we are leading manufacturers in India in almost all of them barring one. And in 3, 4 products, we are a leading manufacturer globally. So no big company will enter fresh into this business, in these products because they know, because the position of Aarti Drugs is already consolidated as far as market is concerned. The small companies might come in. But again, the CapEx involved in putting up API plants is now very high. And plus, the fact that government have made sure that pollution norms are met, regulatory norms are met, or else, they're giving closure notices to most of the companies. That will also serve as one of the entry barriers in the API industry. So these factors will definitely help us sustain some of the increase in margins. But then definitely, means '24 -- right now what the situation that might get -- the pricing might get little relaxed. But still, what we feel is, going forward, the margins will be higher than the historical margin.

We take the next question from the line of [ Vivek from GS Investment ].

Congratulations for the fantastic set of numbers, sir. So just wanted to know more about the sustainability of these numbers because this is especially in view of very little exports going out to U.S. So -- and U.S. FDA approval is still pending. How could be that give a trigger for us in the future, sir?

Okay. So Vivek, sustainability of the ROW market we just spoke about in the last question. Regarding your question about U.S. market, so our current API status is such that, fortunately, we were able to contact FDA just a month back, in June quarter, in fact. They have given us a clear requirement, what they expect from us, and now we are working in much focused direction. One of the most important things, which FDA has demanded from us is that whatever work we have done so far for compliance, they want external certification of that work from some third-party auditor, from some recognized third-party auditor. So we have given them time line for August and to reply with the -- we have already given them the action plan. But we will be giving them the current status by August end and then 1 or 2 months later, we'll be giving them the certification of the implementation of CAPA from the third party. And then I think FDA will trigger the audit because already couple of ANDAs which have referred our DMF are active in U.S. So that should speed up our approval process as far as U.S. FDA is concerned. As far as Europe is concerned, means we already have a good approvals for few of our big products for Europe market. And we are definitely very positive towards increasing our sales in Europe market in near term. So that will definitely a big add on as far as EBITDA margins are concerned.

That's very good, sir. And could you just highlight a few of the differentiator for our company in the segment, which we are operating in? Besides the API and formulation, we also have a presence in chemical -- speciality chemical segment where our parent group, Aarti, is very, very focused on and they have there the policy of substituting China made products and that is turning out to be very successful for us also, I think.

Correct, yes. So in fact, Aarti Drugs has also been following that strategy of import substitutes, right, since, I would say, 2013, '14. So we have expanded a lot of products, gone for backward integration as well to compete against China. And we had successfully done so in the past, especially in floxacin, if you can say. China was very dominant in floxacin historically. But then as of today, we are proud to say in many of the products like ciprofloxacin, we will be joined largest, Cipro and Imdur together. Then in norfloxacin, possibly we'll be largest in the world. Even enrofloxacin, as of now in India, there is no one -- virtually no one other than Aarti. And ofloxacin also we must have become largest in the world. Levofloxacin, again, it's slightly laggard, but I think we will pick up pace in that product also. So import substitution has always been one of our strategy, and it is doing well. And it will do even better because now government has also become very active to promote the import substitute. So that will further benefit us.

We take the next question from the line of Dhwanil Desai from Turtle Capital.

Congratulations for a very good set of numbers. So a few questions. First one is on margin trajectory. I think you indicated that post COVID structurally things would have improved for API industry in general and for us. And then whatever, 15.5%, 16% margin that we were looking at would probably move towards 18% kind of a range. So is that because Chinese import will come down? Or is that because people will have preference for Indian APIs? I mean, how does the dynamic work? Can you throw some light on that?

Yes. Recently, what we had observed that even in China, it's like the Chinese company get a lot of export incentive from their government. Another confirming evidence of that is when we sell our product to China, we get very high selling prices as compared to what China exports to outside world. So the thing is even Chinese companies, in general, they are also increasing their prices because they also wants to become more profitable. And going forward, as most of the companies are getting listed in China also, so this margin -- earlier, margins were not big of a concern for them, means they used to operate even at 3%, 4% level. So that way, structural, we feel that the Chinese prices will also remain high. That is what we feel. And the thing is, even in some of the specialty and intermediate products, we have also seen a trend where Chinese people, they want to partner with Indian people for setting up plants in India. So which also tells us that structurally that Indian industry, as far as chemicals and APIs are concerned and -- means intermediates, it should do well in future also.

Okay. Got it. So my second question is, I think you had alluded to possibility of some longer-term arrangement for some of the product, either existing or new, with our customers. So I mean, is there any concrete proposal on table or more of any conversation on that type going in? Or is that -- because typically, that is not a structure on which API markets work. So have -- is anything changing to warrant any change in the structure of the business?

So, one thing what we have seen that many of the companies are pushing towards longer-term contracts. So that is one thing where we can see that they want to tie up with Indian companies from long-term point of view.

The longer-term means, you mean -- I mean, it's like instead of every consignment basis, maybe 2, 3, 6 months or it's more of a year kind of a thing?

They typically go for supply agreement in terms of quantity, and then they try to fix the price based on some parameters. It is something like that. Because we also don't want to fix price because market is dynamic, right? So what if the price -- prices of raw material goes up. So that will be difficult.

Okay. Got it. And another 2 questions. So one is on the formulation side. I think we have got -- done a very good job on the formulation side, too. I mean, our top line has shown very smart growth. Our gross margins have improved significantly on the formulation side. So can you elaborate on what are the reasons? How should we think about the sustainable number? I remember, we were targeting around a INR 200 crores plus and I think at this run rate, that looks very achievable. So if you can throw light on that, that would be very helpful.

Yes, Vishwa will answer your question.

Yes, sure. So in the formulation, in fact, the major growth, like Adhish said before, has been top line because of the growth in exports. So earlier, whilst we were mainly only a domestic company, we now have almost 50% of our revenue coming in from exports. And that is what's been triggering our growth in the last couple of quarters. Going forward also, we still have a lot of registrations that are expected to get approved in the next few quarters. And we are also opening up more and more international markets. Both in the ROW semi regulated side as well as the few expected approvals in the next 1, 1.5 years in the regulated markets. So in terms of our growth in formulation, definitely, we are foreseeing an increase in exports, and that will lead to a growth in top line as well as improve -- improvement in the gross margins. Having said that, in this current quarter, our -- both the revenues and the gross margins are higher because we had good institutional orders. So the higher proportion of them were shipped in this quarter. While we don't expect the same numbers to continue for every quarter, but in terms of the top line, we can expect between INR 250 crores to INR 280 crores on the formulation front in this year.

And last one is on the speciality chemical project, greenfield one that we were planning, any updates on that, that could be helpful?

Yes. So the specialty project, means we were doing -- trying to find out an innovative process. R&D work was on, and we've got a good success in that. But because of the COVID thing, that project got delayed, what we wanted to start. So as soon as this is get done, we will be starting that in -- mostly in our land parcels in Gujarat. So there we'll start-up this project for specialty chemicals. But it is looking very promising for us.

Okay. Which will come on stream in FY '23 and like -- something like that?

Yes. Correct. I mean, yes, towards the end of FY '22, at least the facility should -- at least something should come up, some of the products will come up, we believe.

We take the next question from the line of Abdul Puranwala from Anand Rathi.

Sir, just on the domestic growth. On the API side, I mean, I just wanted to understand, [ growth ] over year in the customer side, would this be again on a particular quantity uptake basis? Or these would be certain long-term contracts which would be -- which we would have signed with the domestic clients, and so similar performance could be seen in the rest of the year?

Yes. So Abdul, for domestic clients, as far as volumes are concerned, in fact, we feel that June quarter was quite nominal. Means we expect much better volumes than what we did in June quarter going forward from domestic market. And that is mainly because of the acceptability of our product with most of the clients. Means, we keep on getting -- it is a continuous process. So we try to keep on getting more and more approvals from more formulation players so that they will register us as their approved supplier, and then can start uplifting commercial quantities. So we are doing good in most of the products -- it should remain -- that volume growth should -- it should be much better than in June quarter going forward is what we feel.

Sure, sir. And sir, just next question on the government scheme, which has been announced of close to INR 10,000 crores. So how our CapEx plans have been aligned because as what I get a sense is, it is only going to be offered for companies who do new greenfield expansion plants. So any CapEx outlay what we have? Any number we have in our mind currently, what we are going to go for the scheme?

So yes PLI scheme is 1 thing, but other than PLI also, irrespective of that, we had quite a few projects in mind. So for next 3 years, we have a clearcut visibility of projects requiring CapEx of almost around INR 300 crores to INR 400 crores. That visibility is there. In many of them, most -- many of them would be a backward integration projects also where we will be captively consuming most of the products. And in some of them, it will be like for outside sale as well because -- and because the PLI scheme also, there are a lot of products in the PLI scheme, where there is a lot of synergy with Aarti Drugs. I mean couple of intermediate products are of great interest to us, then even 2, 3 APIs are there for which we will be doing investments. Now the policy will become clearer. I mean, definitely, there was one session today which I was not able to attend, unfortunately. But I will get the minutes of those. The thing is, even though it is greenfield, but you can have a brownfield kind of expansion is what we learned from one of the big 4 -- big player companies before. So they told us that downfield -- means greenfield is defined as anywhere where you need to do a CapEx. For API, I believe it was around INR 20 crores, for intermediate, it was around INR 50 crores per project kind of a thing. So if you do that kind of a CapEx to put a fresh production line, maybe in your existing -- maybe in your existing location, but a new production line, something like that is what they'll need.

Understood. And just one final question, again, from the bookkeeping side. So when I see the stand-alone numbers and I compare it with the consol, so I believe that the subsidiaries in this quarter would have done remarkably well. So would that be largely because of a good uptick in formulations or some clarity on that front would be very helpful.

Yes. So the thing is our formulation 100% subsidiary, Pinnacle, has done really well on a year-on-year basis in June quarter, mainly on the account of very good exports. And in fact, we have good pending exports. Still, we have very good pending orders lined up for that company.

We take the next question from the line of Saravanan Viswanathan from Unifi Capital.

Yes. Congrats on set of numbers. We had -- in the last con call, we had mentioned about the land bank that we have and that could be used for future expansion. And so at what stage would we go in for the environmental clearance because it could take time, right?

For that, we are already gone ahead for a few products, and for few, we are going right now. So that process, we have already started trying to take approval.

One project -- Adhish, for 1 product, we already got environment clearance already.

Okay, which you can -- I mean, you can start...

Speciality chemicals, which we are proposing, we already got environment clearance for that product. So these are big sites, so we have taken approval for 1 project. But we'll do multiple projects there. So 1 product, we wanted to do on speciality chemicals that environment clearance we have also received -- already received.

So that allows you to start the work now itself, if everything is available, man and material?

Yes, yes.

Okay. And this production linked incentive scheme or even the government's thrust on APIs, do you think it will also propel smaller players to put up more capacities? Would it also increase domestic competition for larger players like us?

No, the issue is -- for intermediate, you need -- we need an investment of INR 50 crores other than land. And for API, you need INR 20 crores. So how small players can put it in INR 20 crores of each product, it's very difficult.

My colleague, Anand, has a question.

Congratulations for wonderful numbers. This growth for Pinnacle in export market, is this sustainable? I mean, do you see these orders that you've got and you have currently some backlog. Is this more a structural change, clients which should give us business every quarter now? Can you elaborate a bit on that?

Yes, Vishwa will answer your question.

Yes. So like we said, for this coming quarter, we already have a lot of open orders and going forward, like I said this current quarter was exceptionally high, I mean, because of some pending from the March quarter and additional orders for this quarter. But we do feel that with our growing registrations and growing markets that the growth is sustainable, we will -- most of our clients are long-term clients. So that business will continue, and the growth will be coupled by addition of new markets and new products.

Okay. And in terms of our current capacity, how are we placed? Would we need CapEx in formulations in this year or next year? And if yes, how much are we planning?

So currently, our utilization is somewhere between 70% to 80% in formulations. However, we do have several third-party sites where we are also getting our product manufacturer and loan license where we have kind of exclusive tie-up with those manufacturers. And we have increased our capacities at those sites. As well as our increase in revenue will come from an improvement in the product mix. So we are -- the growth in exports will be of products that are higher value, both in terms of revenues and in terms of gross margin as compared to the lower value products that we were making for the domestic market. So in the current year, we are not expecting any major CapEx. Our major investments are going into the R&D and the marketing side to develop good products and to declare bioequivalence studies and filing several products, but no immediate plan on increase -- on major CapEx investment.

Once you obtained U.S. FDA approval or clearance, how will the capacity -- I mean, allocation, will there be a change? Can you take us through that?

Yes. Right now, the E22 Tarapur plant, which is under U.S. FDA alert, the utilization is -- that is quite less, lesser than around 50% or so. And we are now manufacturing for other clients also from that plant -- some in Europe, where we are getting better margins. But then as the U.S. business grows, definitely, we will be replacing the plant with the U.S. business because ultimately, we want to maximize the profit. Overall potential for the current product in line would be anywhere between INR 70 crores to INR 100 crores. But then we have another adjoining block area for expanding -- putting up a fresh production line within the same [indiscernible] number. So the scope of expansion is there in that facility.

We take the next question from the line of Aditya Khemka from DSP Mutual Fund.

So Adhish, on the API side, you -- so just -- sorry, first of all, just to check your previous comments. So the total revenue, both API and formulation put together, that got spilled over from March to June quarter is INR 5 crores, correct?

Actually, that needs to be -- I mean Vishwa must have told for formulation that INR 5 crores. And plus API is another INR 10 crores, you can say, approximately, a little here and there.

Okay. So INR 15 crores in overall number. That's fine. On the API side, in the split that you gave, antibiotics being the highest contributor to our revenue still, could you talk a bit about how much is our dependency on raw materials from China for our antibiotic franchise? And how are you guys looking at that dependency going forward?

Yes. So in most of the processes, we are quite backward integrated. But it doesn't mean that you are totally insulated. The thing is, for many of the imported raw materials, we still have options in domestic market also, but at a slightly higher price. So in the case of absolute stoppage of supply, but then in that case, the selling prices will also go up and that will mitigate the risk of rising input cost. However, there are few products where we are already doing R&D since we already developed technology. We are thinking of putting up plants and also have to get tie-ups done with some of the other chemical companies to put up those plants by giving them the technology. So that process is continuously on. So I don't feel more than 20% of the raw materials is there where we are critically dependent where we don't have any other source, you know.

So more specifically, just to understand your comment, if we take an example of metformin, so the intermediate called DCBA, for DCBA, are you looking to like produce DCBA in-house? Or would you continue to procure it from China?

DCBA, frankly speaking, it has a wide application, not just metformin. So that is why the risk involved in procuring DCBA is not much that way. However, we -- in the past also, we have been looking into the technology to manufacture DCBA, so that is always there. We always try to keep the processes ready even though we don't have plan, maybe we don't have immediate plan to put up the plant, but we will develop the process and keep so that in case of such event happens, at least we have some head start to go ahead with.

Got you. And you said that some of these intermediates cost more in India than they do when we procure from China. What is the price difference on an average, Adhish, between the product from India and China?

Harit-bhai might be able to answer them.

It would be in the range of 5% to 10% depending on the products. Some products, they have -- most of them -- many times now, they have started matching the price because Chinese intermediate prices have started going up. So more and more products, we are trying to source from India now, even if cost is higher by 2% or 3% or 4% but some products which is very high beyond 10% we still import from China. But I think many Indian companies are now started making, this way, some chemicals, which are predominantly produced by Chinese company. So we have a lot of opportunities in India to produce that products actually.

Right. And sir, this 5% to 10% average difference in price, what was this price difference, let's say, 2 or 3 years back between the Chinese product and the Indian product?

Yes, at that time, India -- the Indian producers were not producing. So now once people have started producing, we don't mind paying some premium also, Indian companies, basically, yes. So some of the products we were not producing earlier.

Right. And the reason you are willing to pay a premium is because you have the ability to pass on that to your customer?

Yes. Also, the supply chain is issue like in China. Chinese supply and prices are very erratic. So we should have another source from India.

Yes, so that was my question. Is the supply chain from China still being erratic? Are consignment still coming with delays and getting stuck at various spots? Or is the supply chain contract...

No, no. Actually, only 3, 4 days, we had some issues starting our imports, but things are normal now. We don't have an issue. You will not believe in April month, we have cleared 100 containers -- imported containers in spite of so much COVID situation, transporters were not available, and we were able to manage that same in April also.

Fantastic. Just 1 last question. We spoke about some greenfield and some brownfield efforts on our side and getting environmental clearances. From an ease of doing business perspective, are these processes now taking longer, shorter versus 2 years back? Or how has the time line changed, if at all, it has changed?

Actually government is very responsive nowadays, at least particularly if API for Pharmaceutical -- Department of Pharmaceutical is very responsive. They have come out with PLI scheme for COVID times, that was a biggest plus point. They were talking last -- 3, 4 years back, but even Prime Minister's Office has pushed them to come out with a policy even in COVID time. So a lot of positive developments that are there from government side, at least now for API. They want to reduce dependency from China. Basically, the whole purpose of government is to not depend on China.

Right. Sorry, one last question I had. On the U.S. FDA side, Adhish, what is the status now? Where are we? And if you want to comment, what is your expectation on when the audit could happen?

Yes. So actually, we unfortunately, there was some communication, which we missed out from FDA because of change in personnel, and they had communicated only through hard copy. Unfortunately -- it's a very unfortunate event. But now when we asked them, again, we reached out to various -- different people from FDA and one of them replied to us. So they gave us that communication, what are their clear expectations from us. So one of the biggest -- main expectation is they want -- whatever changes -- compliance we have put in, in our facility for all the points which they have observed in past 3 audits. So there, they want -- a compliance certificate from an external auditor. So that is what -- so that is one of the most important things which they want. And once we provide them that, then they are willing to inspect the facility.

So how long would it take for you to...

That might be like a physical inspection or that might also be what we call a remote inspection, what they're doing with the companies right now.

Right. All right. And how much time and money would it cost you to send them this external report from the consultant?

So total -- I don't think total cost should go beyond INR 50 lakhs or -- it shouldn't go beyond that, all inclusive I am saying, certifications plus compliance and everything.

And time?

The time -- we have taken 2 months' time for this, 2 months means, this August end, we'll be replying them with all the current status of all the points from last 3 audits where we are. In some of those points, there will be already -- external certification might be already present in some of them. In some of them, there still might be time. Because of -- we have taken another 2 months after August that is September and October for someone, possibly from ex FDA inspector, something like that, to come and visit the facility and give the compliance report. So that they will trust if someone is ex FDA, then they will trust them more from certification point of view. And then they will be willing to do the audit. Either that might be a paper audit or that might be a physical audit that we also don't know. Because if we do it from a reputed person, the third-party, I don't know how FDA will go forward with it.

We take the next question from the line of [ Sajal Kapoor ] from [ Unseen Risk Advisors ].

Congratulations on this very strong performance. Just a couple of questions I have. One is, what is the target ROC and the gross block asset turns for this incremental CapEx that you spoke about, so INR 300 crores to INR 400 crores over the next 3 years. So what is the target ROC and the gross block asset turn? That's 1 part. And this Indian government supported PLI scheme, will that be diluting our target ROC?

Target ROC, it's difficult for me to answer for all of them, but target asset turns, what we look forward to ranges from 3 to 5x. It depends on product to product. But then the thing is, the things is that is based on what market price is going on for that product as of now, but many of the products which we are launching are also for captive consumption. So in a way, that may not reflect in assets on the top line, but definitely, it will impact the bottom line.

Yes. So Adhish, when we talk to other competitors in India, other API companies, they usually talk about asset turns in the range of 1.75, maybe 2. Rarely, we get to know this asset turns upwards of 2.5, and you mentioned 3 to 5. So what is it that we are doing? Is it our chemistry is very different and we unable to squeeze better asset turns? I mean, can you just add some more color?

So frankly speaking, it's like we are there in this business since last 36 years. So technologically, our company is very sound. And that is one of the only reasons why we are able to survive through commodity kind of products. I mean, not anymore. We cannot call them commodities anymore, but earlier people used to call bulk drugs like commodity products. Now with the stringent regulations and more stringent impurity profile, that has gone up -- those days are gone away. But the thing is, yes, our manufacturing operations are quite efficient. Usually, we put very high capacities, which, in turn, help us to increase the asset turn because the kind of CapEx it doesn't go up that exponentially when you double the capacity. It is not in the linear fashion. So when you put a bigger capacity, the asset turns are much better.

Correct. Understood. And it is better in case of brownfield, right? I think that's what you're alluding to.

Perfect. Perfect. In case of brownfield, it is fantastic. The asset turns are very well -- it's very good.

Yes. No. Yes, that's what I thought. And maybe if I could just press you on that ROC part. So currently, we are hovering in the region of 20%. With the increasing volume and this brownfield capacity expansion, is it unreasonable to expect an upwards of 22%, 23% ROC in midterm?

In midterm, may not be unreasonable, but then in longer term, if at all the selling price is correct, but still means 20% to 25% is something which we can always expect since there's nothing...

Yes. And that's a very healthy range, 20% to 25% in API in our kind of business is very healthy. I was just trying to get some sort of range here. That kind of answers my first question. And secondly, if you could just quickly confirm the operating cash flow we had in Q1, please?

Yes. The operating cash flow means, it was quite -- I will get you that number. There was a slight...

I can see the operating profit, right? So I just wanted to get the equivalent on the cash flow side.

The thing is the net operating working capital slightly went up around INR 100 crores. So other than that, means everything is available for operating cash flow. INR 100 crores is the net operating...

So INR 100 crores adjusting after the working capital, i.e., the receivables and the inventory?

No, INR 100 crores will adjust the working capital is what I'm saying.

We take the next question from the line of Karan Rathod from AUM Advisors.

Sir, if you can just quantify for us the total benefits that accrue to Aarti from the anti-dumping duty that have been imposed by the Indian government on the full range of ofloxacin antibiotics. Just to give us a sense on how much of this profitability is at risk if that duty were to be removed? Just an approximate sort of estimate would also do.

Yes. Actually, we have only one product as of now, which has anti-dumping duty called ofloxacin, which is -- we are going to apply for renewal, which is going off by next year March. Recently, we got anti-dumping duty on ciprofloxacin. There is a provisional duty. So only, we have 2 products where we -- but ciprofloxacin anti-dumping duty is not notified. So there is no dumping duty as of now. But only we have 1 product where we have anti-dumping duty as of now, ofloxacin.

So how much would that be? As in, how much would the sales...

So it is $3 -- $3 to $4 a kilo, depending on the producers. So depending on the each manufacturer, different, different duty is there, up to $6. So, yes.

The other question was, overall, on your capacity utilization, if you could tell us, with your current sort of capacity plus the CapEx that you've planned in FY '21, what would be the total potential turnover at peak utilization from these facilities? From your existing capacity and the expansion that you're putting up this year, how much would be the total potential turnover at full utilization?

See, from stand-alone point of view, I think INR 2,200 crores, INR 2,300 crores is -- now the selling prices have gone up, but from -- with the earlier selling prices, it was around INR 2,000 crores to INR 2,200 crores for stand-alone company and plus Pinnacle would be extra.

Okay. And how much would Pinnacle be at peak utilization?

So right -- I guess, this year itself, we will try to achieve anywhere near 300 kind of mark.

Would you say about 20 -- sorry, INR 2,000 crores, INR 2,200 crores at the stand-alone and 300 at the Pinnacle level would be peak utilization of all your capacities?

You can say so, but then the Pinnacle model is such that capacity utilization is not that important for -- in the Pinnacle case because there we are holding IP, so we can get it done outsourced. We can outsource also the manufacturing part a little bit. So there is no limit as far as Pinnacle is concerned. As far as API is concerned, you're right around INR 2,200 crores is -- but we need to check that, frankly speaking, because now the prices are high, so that might have gone up right now.

We take the next question from the line of Umang Shah from Asian Market Securities.

My questions have been answered.

We take the next question from the line of Anurag Roonwal from Moneybee.

Congratulations on the excellent set of numbers. I actually wanted more clarity on this anti-dumping duty, which has come in on ciprofloxacin. So I understand now it is provisional. When do you think the final order is expected? This is the first part. Secondly, I wanted to understand what's the kind of improvement in margins that we would be having because of this duty? And what's the kind of share that ciprofloxacin has, if you just could give a ballpark sort of number on that in our total API sales?

Normally, this is a provisional duty. And there will be -- the Finance Ministry will not normally notify in 2 months most probably. So we are expecting notification to come in effect from somewhere in August. Further, they are -- because of COVID, Chinese companies have not -- must have not given all the data and all the -- there is WTO norms, so which might take another 4 to 5 months to get final duty basically. There is an injury government has accepted -- the department has accepted there is an injury. So how much is injury? Unless they get data for Chinese companies, they will not able to process further. So it might take another 4 to 5 months from today. As far as -- what is your second question?

I wanted to understand what's the kind of impact that could -- that it could have on the margins for this product? And whether this product is a...

See, typically, we used to keep our price in such a way that we don't allow Chinese producers to sell more products here. And there is an anti-dumping duty of $2.2 average. So we expect at least that much margin to go up. And plus, we have additional -- there -- India was importing about 300 tonnes of ciprofloxacin for domestic consumption. So that market we can capture basically by competing with Chinese companies. So that is an additional advantage.

Okay. And is the product a significant part of our API sales? Or is it...

Yes, yes, yes. We are the largest producer of ciprofloxacin in India and we are the second largest in the world. So that is a major product. It is one of the major products.

So it will be around 20%, 22% of our total sales.

22% of sales, yes.

Of our API sales?

Yes, yes.

We take the last question from the line of [ Raj Rishi ], individual investor.

I just wanted your comments on this particular leading industrialist from your sector, pharma sector. She said that after this geopolitical issue, COVID, et cetera, and the supply chain shift, which is expected to happen, the API industry will prosper because the issue will not just be cost, it would also be a shift to diversify the risk. Could you just comment on that? Do you agree with this? It's not just going to be cost as a criteria.

So yes. Yes. What is happening is most of the -- see, even in India, whatever we sell, many of our API sales in India, ultimately they export floxacin to the world basically. No one prefers to buy -- everybody would like to prefer Indian source than Chinese source due to regulation, availably of documents. And now more and more countries are becoming more regulated type. Like even African countries are now asking for more and more documents, which we more -- many companies in China cannot offer, many companies, not all, but many companies. So more and more shift is there in India -- towards Indian formulation companies.

Yes. Okay. And do you expect -- like you as a entrepreneur, since 2019, whatever optimism you had about your sector and say today, July, end July 2020, based on certain -- certain issues which have happened, COVID, geopolitical, whatever. So what's your level of optimism? We as investors, traders, et cetera, we rightly, hopefully rightly we are much more optimistic about your sector. How -- can you -- like, are you more optimistic? Or you are -- your optimism level is similar to what it was?

No, no, we are very optimistic. Like in the last 6 months, our optimism level have gone up like anything.

And that is because of this COVID, et cetera?

Not COVID, before COVID also. Before COVID also. Last 3 years, you see chemical industry in China, they are more and more -- due to pollution norms, there is a shift going on last 3 years. So it is not one [Audio Gap]. Last 3 years, all India chemical industries are doing good, now it's the turn of API because it is like total shift towards pharmaceutic companies.

Okay. And do you expect any further measures from the government to boost the API sector? Or you think you as a player would be satisfied with what they have given the sector?

I think government cannot do more basically than what they have done because they have identified [ 54 ] products, and it is more China dependent. And out of that 26 is fermentation and 24 is of chemicals synthesis. So government signed -- due to government, their own limitation, they have tried their best.

And like do you have land available for further CapEx? Or you need to buy land?

Yes, yes. We already have 1 land parcel is Gujarat. We have 1 land parcel in Maharashtra also, Tarapur also, And recently, we have acquired 1 land parcel in Sarigam, MoU is signed. [indiscernible] we are already in the final stage of getting...

Your present land availability would take care of your CapEx for how many years as of now, your projections, whatever it is?

Whatever we are talking, next 3 years, we don't need see any further new land, unless we get free plot here and there, we might buy.

Okay. I didn't get your -- what did you say, last?

3 years. 3 to 4 years.

3 years.

Okay. And do you have any CapEx fundraising plan as of now?

Adhish, yes.

Yes. Fundraising plan in the sense of equity funding you're asking?

Yes, both equity or otherwise, debt.

See, our internal accruals will be very strong going forward. So that should take care of most of the funding of CapEx however, even as far as debt is concerned, right now, we are getting very good interest rates. So we are getting anywhere between 7.3% to 7.5% for as long as 6 years, long-term loan. And again, post-tax will be even lesser. So this cost of debt is even lesser. So source of funding is not a big issue for us.

Okay. Any equity raising plans because the financial markets are willing to give you at a good valuation. So don't you think it would be prudent to raise funds when market is willing to give you at a good valuation?

Right. So if whatever shortfall we might face apart from -- after sufficing from the internal accrual, we will evaluate, means whether the equity will be cheaper or the debt will be cheaper at that point of time. So we will evaluate.

Okay. What's the ball mark?

We want to maintain the debt equity ratio, so basically, yes.

So what sort of debt equity ratio would you work with, say, what sort of range?

See, right now, it is 0.55. Historically, if you go back 5, 6 years back, we were always at 1.4, 1.5. But then now with this kind of profitability, we -- and it is not like it has happened overnight. Means continuously each quarter, if you see the debt-to-equity ratio kept on reducing, kept on reducing. So yes, it's very comfortable right now. Even 0.75 is very, very comfortable debt-to-equity ratio for us that way.

Okay. Okay. But you would not like to go above 0.75 as of now?

We'll try to avoid it. And that is also -- even if it goes above -- see, even if it goes above or towards 0.75, immediately when the project cash flow start kicking, again, it will be reduced. It's like -- like it will be a temporary thing.

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments.

Yes. We thank you all. Thank you, Cyndrella, for hosting the conference. And thank you, all the analysts for coming and asking questions. It is always good to interact with you so that we are also on our toes and keep performing for coming quarters. Thank you.

Thank you.

Thank you. On behalf of Centrum Broking Limited, we conclude today's conference. Thank you for joining. You may now disconnect your lines.