Aarti Drugs Limited (524348) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Aarti Drugs Limited Q2 FY '21 Earnings Conference Call, hosted by Centrum Broking Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Cyndrella Carvalho from Centrum Broking. Thank you, and over to you, ma'am.

Thanks, Faizan. Good afternoon, everyone. On behalf of Centrum Broking, I, Cyndrella Carvalho, thank the Aarti Drugs management team for giving us this opportunity to host the Q2 earnings con call. From Aarti Drugs management team, we have today with us Mr. Harshit Savla, Joint Managing Director; 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 continuing to deliver excellent earnings in these unprecedented times. I now hand over the call to our Chief Financial Officer, Mr. Adhish Patil, for their opening remarks. Over to you, Adhish.

Thank you, Cyndrella. So we welcome you all for the conference call of Aarti Drugs Limited. Main purpose of the call, like always, is to brief you about the quarterly performance of the company and the current market conditions for the business. In September 2020 quarter, company recorded a consolidated quarterly revenue of INR 578.11 crores with year-on-year growth of 21.07%. Domestic sales of the API segment grew approximately by 20.79% and exports by 8.58%. Around 55% of the year-on-year growth in the API segment was due to volume growth. Formulation segment revenues grew by around 48.38% on a year-on-year basis on the account of high exports growth. For the September quarter 2020, API segment contributed approximately 88% of the total consolidated revenue, and 12% was contributed by the Formulation segment. Within API segment, 66.17% of the revenues came from domestic market and 33.83% from the export market. In Formulation division, 32.77% of the sales came from exports in this quarter. For the quarter ended September 2020, revenues from the API segment can be broadly classified into following therapeutic categories. The antibiotic therapeutic category contributed to around 44%; antiprotozoal, around 15%; anti-inflammatory, around 12%; antidiabetic, around 10%; antifungal, around 7%, and the rest can be classified as others category. As compared to last financial year of 2019/'20, anti-inflammatory segment has increased from 10% to 12% mainly on the account of higher sales of products like nimesulide and diclofenac sodium. In September '20 quarter, consolidated earnings before interest, tax and depreciation is INR 116.73 crores, up by 70.41%; and consolidated profit after tax for the quarter ended September '20 is INR 75.27 crores, up by 132.96%. Despite the challenging additions, the company was able to maintain very good operational efficiency, which, along with good realization in selling prices, led to increased gross margin. Debt-to-equity ratio of the company reduced further down to 0.47 as of September 2020 on a consolidated basis due to strong internal accruals. Company has already scaled up its antidiabetic and anti-inflammatory capacity, and it will give impetus to revenue growth in financial year 2020/'21. This would be further supported by good growth in formulation exports. Additional CapEx is being done for introducing new products in antidiabetic category towards the end of financial year 2020 -- sorry, financial year 2020/'21. As the COVID-19 situation improves, the project work should pick up pace in coming quarters. Company will soon announce its CapEx plan for multiple projects, which will include active pharmaceutical ingredients, specialty chemicals and intermediates. The company is actively doing further backward integration of its products to reduce imports dependency. We would like to now open up the session for question and answers, and take questions from the participants.

[Operator Instructions] The first question is from the line of [ Vivek Gautam ] from [ GS Investment ].

Yes. So this is regarding the sustainability of our margin and the tailwind for the sector, the theory for our API sector. So is it sustainable? And how long would this last? Or already the peaking out has happened and slowly could -- we have seen the best of it?

Yes. So already the maximum prices were there in June quarter because of the shortages of supply. Now the situation seems to be stabilizing a bit. So for us, for Aarti Drugs Limited, we've seen that for our product line, our margins should somewhat continue in December quarter also. We thought earlier that December quarter would be dull, but then we feel that this will also be a good quarter in terms of margin. And let's see how it fares in March quarter. But for December quarter, we are very much confident.

Basically, the tailwinds still remain okay due to China Plus One factor and China Blue Sky policy, and due to the COVID, the demand for API and the related pharma products remains strong. And we also have that additional hope from the FDA approval for U.S. Any progress on that front, that might also help us out?

Correct. Correct. So any resolution on the FDA front, that is definitely going to be a big kicker, means we are not even estimating any additional margin benefits, which might come from that particular aspect. So even after removing that, we are very much confident with good EBITDA margins for coming years. And the thing is Government of India is also taking very good steps. Today itself, there was an announcement that in the PLI scheme, they are going to incorporate exports as well. Earlier export was excluded from the scheme. But then they heard from the industry players that if we want to be a global player with economies of scale and we want to compete with Chinese products, then we need to have -- we need to cater to entire global market and not just Indian market. So the government is also very proactive. So we feel that even from macroeconomic factors, it is very good for coming 3 to 5 years.

Very nice, sir. And our policy of making China import substitute products, which no one else makes in the country and -- or less people make, that is also helping around. And what about the formulation players in the rest of the world through our subsidiary, wherein we had the IP rights and we can contract out the manufacturing to other players so that capacity constraint doesn't come in? And even if we don't have that approval of environment right now, but we can cater to the demand from rest of the world market. How is that performing? And what is the growth CapEx like? Yes, the growth CapEx also, yes, which you plan to raise the funds for?

Yes. So in terms of formulation, again, the export division is performing well. We have -- like we said, we are increasingly investing in creating IPs. So our R&D is developing many new products. And we are working in many emerging markets, in Latin America, Africa and Asia. As well as now we have started through some partners in Europe and Canada as well. So that has -- so they tend to be regulated markets. So we are going with the strategy of owning the IPs and contracting out key manufacturing for many of these products and -- which is working well with us. Our margins are also as per our expectations, and the sales growth is also taking place. In terms of our own utilization of our plants, currently our utilization is quite high. So we are almost at 75% to 80% utilization. So at the moment, we are continuing with this strategy, with major investments being in R&D and IP. However, in future, we will -- at later stage once we have enough products in our pipeline, we will maybe in the future financial years look at investing in further capacity enhancement.

That's very good intent. Keep up the good work, sir.

Thank you.

The next question is from the line of Anand Bhavnani from Unifi Capital.

I have 2 questions. One is with regards to this fund raise. Are you, I mean, having some newer CapEx plan other than what you had at the start of the year that you are doing this fund raise? And if you can elaborate a bit more on that?

Yes. So our CapEx plans are more or less on lines with what we had decided at the start of the year. Definitely, the new processes are -- we have -- there is a lot more development in the R&D as of now. So the projects are much more clear as compared to, you can say, 4, 5 months back. So there are a lot of projects, around 7-odd projects, which we are planning to go ahead with. One of the main projects would be the -- around 60% of the projects would be, I would say, API based, mainly antidiabetic and skin treatment related therapeutic areas. Then the rest would be in sulphonated products and chloro-sulphonated products, and also a couple of intermediates.

Okay. So this fund raise, is this imminent, like, are you planning to raise it, like, in the next 2 -- in the next quarter or so? Or is it more like an enabling resolution you might raise as and when you feel the need?

Yes, you're correct. So this is an enabling resolution what we have passed. So as of today, for the company, both options remain open, debt as well as equity. So at the time when we are raising the CapEx, we will see whether the equity we are getting good valuation or not. Or else, we always have a very cheap debt option with us. Our long-term debt proposals are below 7% for more than 6 years, which is very good. And -- plus the fact that our internal accruals had been very strong since last year. And right now also, our debt to equity has reduced to 0.47. So even if we take the entire debt for taking up this project, even then our debt-to-equity ratio won't go beyond 0.7.

Sure. And sir, can you share some time lines? You mentioned there are about 7 projects, if I heard correctly. What is the time line for these projects, like, for API, the sulphonation and chloro-sulphonation that we are doing?

Yes. We are doing it in 2 phases. For the -- so mostly first phase will be -- the majority of the CapEx will take place in first phase itself. It's a time line of 18 to 24 months -- 18 months to 24 months. And the second phase will most probably start in third or in fourth year, like that. And...

Yes. So recently.

Yes. You were saying something.

Yes. So I wanted to check with, is the first phase has already started? And what is the time line for commissioning and commercialization?

Yes. So the thing is we just acquired another 9-acre land in the Tarapur itself through auction in last quarter. It is adjacent to our existing -- one of the biggest facility, which we have in Tarapur. So that will give us very good operational efficiency because we'll have common departments. We'll be expanding on the already existing location. In fact, that is one of the biggest contributing location for us in Tarapur. And the land parcel we have taken is 2x the existing land parcel of that location. So that will be a very good area for expansion for API products. And plus rest of the products, we are expanding in Gujarat. And so there are -- there is another scheme also, capital subsidiary scheme also. And plus there also, there is a project which we might go for PLI scheme because that particular product is also there in PLI scheme. So we can say that around 20%, 30% of the projects will kick start in Tarapur, rest will be in Gujarat.

Okay. And the time line would be like Q1 of '23 or something?

So we'll start immediately. So 18 to 24 months is the time line we are keeping to start the production.

The next question is from the line of Ravi Naredi from Naredi Investment.

Thank you very much for nice result. Can you raise more debt instead of equity for new CapEx, INR 350 crores you have mentioned today? So why not you go for debt instead of equity?

Yes. So that option is always open. So the resolution what we have taken is a feasible one. So we can also go for debt, and we can also go for equity, it is like that. So as you said, the debt option is always open for us.

The next question is from the line of Sriram Srinivasan from Sincere Syndication.

First of all, my hearty congratulations to the management for the stellar results. [Technical Difficulty]

Sir, we are not able to hear. This is the operator.

My hearty congratulations to the management for the stellar results. I hope, I'm audible right now, right?

Yes. You are audible, sir. Please go ahead with your question.

Yes. Yes. My heartly congratulations to the management for the stellar performance during the quarter. I have 2 to 3 questions to be answered from the management. First thing is, what is the quantum percentage that the supplies of our -- from our -- supplies coming from China? First thing is that. Is this margin will be going to continue for upcoming quarters for us? What is the revenue variance and the bottom-end variance that we can expect from the management for the next 2 years down the line?

Srinivasan, we'll take one by one. So first, you said that how much supply is from China, right?

Yes, yes.

So it is dynamic, but anywhere between 15% to 20% of our end consumption would be from China. And we are taking a good amount of steps to develop alternate vendors in India, either through the way of contract manufacturing or identifying new vendors. We are also doing tie-ups wherein we are helping them, some of the vendors, to setup the plant for -- to be supplier to Aarti Drugs. And in some cases, where we find that, that business is lucrative, we are also going ahead with backward integration. So what was your second question?

We have been posting in EBITDA margins of almost 23% last quarter and this quarter it is 20%. Is this margin will sustainable going through? And in last con call, you have mentioned that the margins are likely to get stabilized in the upcoming quarters because there will be a severe surge in the API cost from China last quarter. Is that trend has been -- started declining? Or is it in the same mode?

Yes. So towards the end of first quarter, that is June quarter, already we had seen some tapering of the prices. And that is why you've seen that 23 -- 24 -- upwards of 24% EBITDA for the API side. 24.6% EBITDA was there for the first quarter. Now it is 21 -- upwards of 21% for the API segment. What we are seeing is that now the prices are more or less stable. See the thing is there are always a couple of products where supply demand issue will be there and the prices will go down. But that apart, more or less, we are seeing that even for December quarter, the margins should continue. So things are going well. March quarter, it will be difficult to say as of today. But March quarter -- typically, December quarter is lean in terms of the therapeutic areas where we play. March quarter is usually good for us in terms of demand. So I think March quarter will be good in terms of top line and everything else.

Okay. Okay. Fine. And one more thing, sir. What is the quantum of CapEx that you have allocated for this FY '21?

FY '21?

Yes.

Okay. So FY '21, we may not be able to do a CapEx more than -- so by half year end, we have done somewhere in 40s -- INR 45 crores or something. But that is also to do with one of the land acquisition which we did.

Yes. INR 140 crores, right? 1-4-0?

No, no, no. This year, we may not be able to do that much. Maybe if we buy a land or something, maybe that much. But otherwise, it won't be above INR 100 crores. But majority of the CapEx will accelerate in the calendar year of 2021. Because as of now, the things are little slower. Now they are picking up pace for the CapEx. But it is -- the calendar year 2021 will be the year where we will be doing majority of the CapEx.

Okay. Okay. Almost -- we have been proposed to raise almost INR 350 crores. All of this INR 350 crores will be going for CapEx -- will be going for the next 2 years? Or else that we have in plan to distribute in some other areas on product developments or kind of thing?

Okay. So the thing is this INR 350 crores, which we raised, we are also getting a lot of good opportunities in inorganic space -- inorganic growth. So that area is always there. Our CapEx plan itself stood at INR 600 crores plus. So that is another area. And product development, that is something which is we are doing continuously. So that we take care in the part of regular CapEx also. So these are the main applications.

Okay. Okay. Okay. We are rightly running at more than 30% to -- 25% to 35% of revenue growth, that applies for the first half year of this year. Is this momentum will continue going forward?

December quarter -- it's difficult for me to predict because, generally, it is a lean quarter. But then year-on-year, we should be doing good growth, no doubt about that. March quarter, we are very much confident for a good -- very good sales growth. And one thing I would like to point out that we are very strong in antibiotic and antiprotozoal segments. In fact, one of the world leaders in the kind of molecules we are operating in. And because of lockdown, this June quarter and September quarter, the spread of infectious diseases was very low. So frankly speaking, the full potential of our product range was not explored in this particular year during the COVID period. So what we expect, after vaccination is out for COVID, when the people start going out, at that time again this particular range of product will do better in terms of quantity sales as compared to FY '21.

Okay. If my understanding is correct means once the footfalls of the clinics started happening, then the domestic antitherapy segments will also come to the market, which I'm right, right, sir?

Yes. Yes. So a lot of growth potential is still not unlocked, I would say.

Okay. Okay. And the last question for my side. What will be the potential upside for the next 2 years in terms of business growth that we have been looking forward?

I didn't get that question, sorry?

For the next 2 years, what will be the potential business growth that we are looking forward in terms of growth potential, for next 2 years, both revenue as well as profitability?

Yes, next 2 years, we'll be doing good incremental growth, no doubt about that, and because a lot of debottlenecking projects, we continuously keep on doing apart from the big CapEx, which we have planned. And plus 1 antidiabetic production line will become active towards the end of this financial year, which is other than the main CapEx, which I talked about. So that will also drive future growth. How much -- in terms of -- I would give you a potential, our current capacities, what we have, as of today, not considering the lines, antibiotic lines which will be coming towards the end of this year. Without considering that line, our current product capacity can give a revenue -- has a revenue potential of around INR 2,500-plus crores, if we consider our September month selling prices. Not even the entire quarter. I'm just talking about September quarter.

Okay. Okay. So we can do almost INR 2,500 crores of top line by the end of this fiscal year, right?

No, not at the end of this fiscal year. But that is the potential which we have.

For next fiscal year?

Last. Yes -- last quarter, we did 81% of the -- last quarter, it was 81% for September quarter. And plus by the end of this year, additional antidiabetic facility will come in. So that will increase the potential further up. And plus do some debottlenecking projects.

My hearty congratulations once again to you.

Thank you.

The next question is from the line of Mr. Resham Jain from DSP Investment Managers.

Congratulations on good numbers. Sir, my question is on CapEx. You have highlighted about this. But if you can just give the number in terms of the amount of CapEx, which you are -- which is already planned, and something which you might be planning? If you can give some color on the same as well. So something which you have planned and the future CapEx also, which is under the drawing book currently.

Yes. So our overall plan for the CapEx for next 3, 4 years, as of today, means there are about 7 projects. It will cost us around INR 600 crores of CapEx. And it will be done in phases. But majority of the CapEx will take place in the first phase. That will be 18 to 24 months. And apart from that, whatever small debottlenecking projects which we are taking up in the existing locations, that will keep on happening. So they may not take more than INR 20 crores, INR 25 crores per annum for those kind of projects. So that will keep on happening. Apart from that, we have the big greenfield project which we are planning.

And sir, if you can just broadly explain us the CapEx which you are doing and the products which you have selected, how are those projects -- or those products being selected in terms of opportunity size? And what is your thought process behind selecting those specific products?

Yes. So the 7 projects which we have selected, many of them are integrated with one another. So one of the main thought process is, we are creating an ecosystem of products. It's not just that we'll be going ahead with one product or something like that. So that -- all these products will be somewhere linked to each other. And because of this linkage, we will be able to have very big capacity, and it will be easy to sell some of the products -- some of them we'll captively use. So being an integrated manufacturer, that will give us a lot of competitive advantage also. And that is the main strategy going ahead with this product. Obviously, some of them are independent also, like there are some APIs for skin treatment and everything. But other than that, this is like chemicals, intermediates and API, all mix are taking place.

Understood, sir. And sir, if you can just help us, just giving the ballpark number, out of the INR 600 crores, you mentioned, a lot of projects are, in a way, backward integration kind of projects. So out of this INR 600 crores, what will be that ballpark number for backward integration?

It's actually difficult to say because the thing is some of the projects, what we are doing -- some of -- half of it, like maybe 30%, 40% will be backward -- I mean, like captive consumption. But the rest will have to sell outside also. So those kind of things are also there. But to answer your question in a reverse way, I would say that external sales potential of this CapEx would be any -- very roughly, vaguely around INR 1,500 crores, the external sales potential.

And because you are doing backward integration also, your normalized margins will be slightly better than what you have done historically?

Correct. Correct.

That's also is very much right?

Yes.

[Operator Instructions] The next question is from the line of [ Hemant Shriram ] from Bearing Advisors.

I just have 2 questions regarding the industry and competitors actions. Firstly, you mentioned China earlier on in the call. Could you maybe elaborate a little bit on whether you expect the China factor to be a temporary source of competitive edge? Or do you think it's a structural change in your results?

Yes. We believe it is a bit earlier. Frankly speaking, someone asked this question to me back in the month of February or March. And that time, we said it is a temporary thing. But as of now, the things look like it is a structural change. What had happened was in 2017/'18, there was a string of closures in China because they wanted to have a greener -- means they wanted to move like U.S., more towards service industry, close down all the polluting industries and et cetera. So there was a lot of shortages happening in 2017/'18. And at that time also there was quite a big structural change in terms of many of the foreign clients started looking towards more and more Indian suppliers. And in the very short span of 3 years, again, this thing -- this COVID thing happened. And initially, it was not that big of a deal, but then it turned out to be such a pandemic. And most importantly, created a lot of discontent in a lot of countries against China. And because of that, we feel now -- it looks like a structural change. And even the Indian government started taking steps, drastic steps. They had planned it, I would say, maybe 4, 5 years back. But right now, they are really going ahead and starting to implement everything. So our macroeconomic factors are looking very good for next 3 to 5 years. So we feel that this has turned out to be a structural thing for the industry.

Got it. Okay. And the second question is on competitor action. In light of the structural change that you expect the industry to enjoy over a 3- to 5-year time frame, and you have been on a CapEx program, how do you expect your competitors to react as well? And would that have any adverse effects on normalizing margins?

You're talking about Chinese competitors?

Chinese as well as Indian, if you have.

No. I mean the thing is, the reaction I think, it will remain, ideally remains stable, whenever we -- in past also, for few of our products when we expanded or doubled our existing capacity, it was mainly because we were confident of gaining more and more market share from the competitors. So that is always going to be a weakness. Competition is -- will always be there. And we are not afraid of it means and our key strength is making bulk production, keeping the cost of production low. We also -- our regulatory teams are quite strong. We've got a lot of European approval also for our APIs. So the thing is overall, I would say, Aarti Drugs as a company has a good insight to capitalize on volume products. So we are not afraid of the competition as far as the volume products are concerned.

The next question is from the line of Bharat Sheth from Quest Investment Advisors.

Congratulation on good set of number. Adhish, I mean you say that we have a potential with existing capacity to go up to INR 2,500 crores. And now we are also doing some debottlenecking. And that also -- so what would be with that debottlenecking our potential? And at what capacity utilizes our level? And second, the line which we are aiding for this diabetic, so what is the potential of the contribution from that? That is the second question. So I mean top line potential over the next 2 years before any greenfield CapEx start contributing?

Yes. [Technical Difficulty]

This is the operator, Mr. Patil, we are not able to hear you, sir.

Yes. Yes. So the thing is -- can you hear me now?

Yes.

Yes. So the kind of products which we're looking, gliptin basically, the market potential is very good. Means, obviously, the capacity which we are planning as of now are more like getting the foot set in the market for those products. And once we start doing well, there will be a second round of expansion for those products, gliptin, which will be like the global capacity. So that is our action plan. So the debottlenecking and the -- are -- like frankly speaking, we haven't put it on paper, but it can be anywhere like incrementally what we have seen in past INR 200 crores to INR 300 crores, when we put all the debottlenecking projects together in a year or something like that. We usually keep adding revenue potential of around INR 200 crores to INR 300 crores, something like that.

Okay. And with this new diabetic gliptins that we are talking, I mean which will come in the end of FY '21 financial year, so what will be the potential of that business?

I'm including that as well because that is not a very big capacity, frankly speaking. It will be good -- decent capacity, but not a very big one. And these molecules are going off patent, and they will be growing. So as soon as we see the capacities have started filling up, then we have enough land parcel to immediately go for a big greenfield project because the processes will be similar. So it will be very easy for having the quick setup done in the Tarapur itself. And now that we have a land adjacent to our existing facility, the common utilities and everything, these are already there. So in that case, that becomes kind of half brownfield, half greenfield, but the speed of that CapEx will be very fast. So it's more about we are creating an opportunity for us.

Okay. And what will the potential of these formulation? I believe this -- we are talking of -- for API only, correct? And formulation, first half, we have already done, I mean, INR 132 crores as against INR 172 crore last year, full year. So how do we really see this formulation business growing?

Yes. Vishwa's here, Bharat.

Yes. So we'll -- like Adhish said, majorly the growth in formulation is coming because of increase in exports. At the same time, there is -- we are also now seeing some volume growth. So both in terms of domestic and export, we are anticipating volume growth for the remaining 6 months as well as in the next financial year. And we are also increasing volumes at our third-party manufacturing sites. So in terms of revenue growth, we see with our current setup revenues going at about anywhere between INR 350 crores [Technical Difficulty] in the next financial year. And thereafter, considering some of the new capacities that we'll add and considering more registrations that will come, in about 2 years, we can foresee a revenue of anywhere around INR 450 crores to INR 480 crores.

Okay, sir. INR 350 crores you said for FY '22 potential, correct?

Correct. Correct. Yes. Yes.

Okay. And Adhil (sic) [ Adhish ], whatever backward integration we are talking, so that will take us, our backward integration, what level currently say if we are relying say in API around 15% to 20% on China. So what stage, how many percentage is backward integrated? And what level we reach once your full CapEx will start? Hello?

Sorry, sorry, my mic was on mute. So backward integration, the thing is around 2, 3 projects from the 7 projects are backward integrated projects. But in that also, some of the products we might be selling outside because the kind of capacities which we'll be putting in, they won't be totally used by captive response, captively. So we'll have to sell outside also. It is a mix of both, backward integrated project and CapEx.

Okay. And for this PLI, whatever CapEx will be you are doing, are we going to form a separate subsidiary or will be done on Aarti Drugs only?

Yes, that's a good question. So we will be thinking of that because the products which will be new, we can definitely go ahead with 100% subsidiary. So that is always an option for us because we do have a chemical subsidiary, 100%. So there is a possibility starting the new company.

Okay. Okay. And in first quarter call, you said that we have -- our capital turnaround ratio, asset turn ratio in case of API is around 2.5 to 3x. And of course, formulation is much more. So still we stand there at 2.5x to 3x?

Yes. So this particular quarter, what we saw -- if we see our assets turn to net 3x, not the gross flow, so now it has crossed 3. It is up upwards -- about 3 for last quarter. And for the new projects what we have seen, we are getting anywhere between 2.5 to 3. But that is also because of the fact that some of the production will be captively consumed. So that is why the asset turn seems to be lower. But then the profit potential is much higher.

And last question on this operating cash flow this quarter. I mean this first half, we have reported around INR 54 crores and CapEx of around INR 45 crores only. So is there any dip -- I mean vis-à-vis the first -- last year, I mean, around INR 196 crores operating cash flow. So what do -- I mean, so of course, sorry, INR 195 crores was the full year. First half is around INR 54 crores operating cash flow. So is there, I mean, some kind of a strain on our cash flow?

Okay. Not really. So the main reason for the cash flow -- means operating cash flow being low in the first half was because our sales has increased tremendously in the first 2 quarters. That was the main reason. So what we are estimating that considering the second half, if we repeat the performance, then the cash flow generation for the second half will be much higher, almost 2.5x more than the first half or probably, for the next year.

The next question is from the line of Aditya Khemka from InCred AMC.

Adhish, I just wanted to ask you on the same lines as the previous participant, where while your cash flow remains suppressed, it seems like mostly because of 2 reasons. One is your trade receivables have gone up significantly, INR 114-odd crores in trade receivables. So just trying to understand this incremental business that we are getting. What is the nature of the customers to whom we are selling these products? And what is the credit period that we are allowing these customers?

Yes. So the thing is -- the main reason why the receivables have gone up is because, typically, our credit period is around 90 days. It hovers from 60 days to very -- in very rare cases 120, but on an average it is in mid-90s. So whatever -- usually, what happens is if a particular quarter has done exceptionally well in terms of sales, then all the sales usually sits in the working receivable. And that is why our -- because of the -- that is why the net operating working capital requirement for the first half year looks pretty high because that is because our September quarter has done about more than INR 570 crores -- around INR 574 crores to INR 575 crores of sales. And that is the main reason why it is. And the customer mix, that question, it is more or less the same. Means it hasn't changed anything as compared to the previous period.

Right. No, I understand what you're saying. But Adhish, on the same thing, your trade payables have actually come down in the 6 months, while your sales and your procurement must have also gone up. Would it be fair to say that your suppliers are gaining bargaining power versus your franchise base because their products are also in high demand, and therefore, you have to pay them earlier prices?

I think Harit bhai will be able to answer your question.

Sure. Sure.

Yes. No. Actually, typically, it has not come down significantly, but small percentage it has come down. But we will be able to, again, regain that credit terms further. Some of the raw materials which were in short in first quarter, because of that cash flow has got affected, but we should be able to recover that at the earlier levels.

Yes. And Aditya, the thing is -- yes, Aditya, one more thing. The thing is in the March quarter -- towards the end of March, because of the lockdown, all the payments were stopped for last 8, 9 days. Because we are comparing this with 31st March, it looks little bit skewed. So that is the main reason for this.

So that was the case with your receivables as well, right? So in the March year...

Receivables, it was not impacted at that time.

Okay. Okay. Okay. But just to follow up. So if the materials were in shortage, that led the -- your suppliers to ask for money quicker? Or did they also ask for a higher price along with the quicker payment terms during the last 6 months?

No. Ultimately, even if raw material cost goes up, we definitely pass that -- our raw material cost goes to our customers. So net to net, we are not getting affected for the raw materials because everyone has to pay higher price. If I am paying higher price, someone has to pay a little more higher price than me because of our volumes. But net to net, raw material pricing -- prices are actually at lower levels than earlier year, except some of the raw materials which are Chinese predominantly having monopolies, some raw materials. But otherwise, all due to low crude price, all solvent prices and other crude price -- other chemicals are at lower levels in first 6 months, actually.

Right. Right. So just to follow up on that, just to understand this better. Sorry about that. I just want to understand, when we enter into procurement contracts with our suppliers, is the price fixed for 3 months, 6 months, 9 months? And can we commit volumes? Or is it that we do spot buying depending on who is selling at what price?

No more or less -- some of the contracts are based on raw material pricing. For example, some raw materials are based on toluene. So we take the toluene price as a base price and then based on that, we fix the price on a monthly or quarterly basis normally. So it is all purely raw material driven pricing.

Raw material. So you basically give your supplier a markup over his raw material cost?

Yes, yes, yes.

Right. Right. And then if I were to invert the question to your customer side, when you sell to your customer, does your customer treat you the same way? They give you a markup over your raw material? Or is your pricing of your end product determined by the product market?

No, both actually. Because ultimately we are into API space where we are not the only ones. So whenever raw material cost goes up, we normally pass it on to the customer normally. Yes.

It's an immediate pass on. There is no lag to the pass on?

No. Yes. No lagging. Normally, no lag. Yes.

The next question is from the line of Kunal Pawaskar from Indgrowth Capital.

My question was the top 10 products of the company are around 3/4th of the total sales today. The question was that, in -- generally, I mean, even if you could give it at a more granular level, that would be helpful. But in each of those products, either top 10, what types are standing at a global level be for the company? Without taking names of the products, but which countries you're competing within each? And what is the size of Aarti Drugs at a global level in each of those 10 products? Is it #1 position? Or is it in top 3? Or is it in top 5? Can some detail like this shared with us, please?

Yes. Most of the products of top 10 products, we are either #1 or #2 or #3. So all the 10 products, we are #1 or #2 or #3.

Okay. Just to follow up on that. Then the competitors are broadly from which country? Are they local? Or are they China or some other countries?

Either China or domestic. Either of it. Yes.

Okay. Okay. And then just to add to 1 question that an earlier participant asked. You are confident of adding CapEx today because of the changed environment. How do you mitigate the risk of these competitors also coming into the supply response for the changed demand environment? What are your thoughts on that? So is there a risk, let's say, 18, 24 months down or 36 months down, there is certainly a glut in certain output products that you have?

Yes.

And what is the chance of that happening in certain products? And how do you think about that?

Yes. I answered this question. So frankly speaking, the government policy is not the main factor for us to -- which is driving the CapEx. The fact that our internal approval -- the cash flow as the size of the company has also grown that this much CapEx can be taken, means immediately by the company, that is one reason. Another main reason, I would say, is also metformin because metformin has done really well for us in last year. We expanded the capacity to 1,100 tonnes per month. And now -- and the market of the metformin is also growing in double digits. So we will be doing a 2-phase expansion of that product. So the final capacity what we are eyeing is 3,000 tonnes per month for metformin. But we will be doing it in 2 phases. Initially, we'll launch 2,000 -- means total of possibility of 2,000 tonnes. Right now we already have 1,000. So it will become 2,000 tonnes per month on -- in the very near term. And then final would be 3,000 tonnes per month. So that is one. So that had nothing to do with the PLI scheme or anything like that. Then we had an idea -- means we are going into sulphonated and chloro-sulphonated products. So frankly speaking that is an integrated project. That product line we already had. We always had an -- means, in fact, we had given an idea of increasing chloro-sulphonated product last year itself before the schemes were announced. Fortunately, all the ideas which were on the drawing board, suddenly there is a lot of macro factors, which are becoming more conducive for the ideas which were already there for us. So that is just the reason why we are speeding up. But our main strategy, we are not diverting. Just because some benefit is available, that is not the reason why we are going forward.

Sir, Harit Bhai my question was not from perspective that PLI is announced and hence you are doing it. But in general, anyway, from the supply response that can be anticipated, that you anticipate that can be a potential risk and capacity finding ones.

The thing is even if PLI is not there tomorrow, we don't have any risk for the project. That is what we're saying, means the decision which we are making is irrespective of all these schemes which the government is making.

And the top -- and like you said top 1, 2, 3 in many of the top 10 products, are your competitors also similarly backward integrated in most or not?

I would say the main reason -- I will just add up to that point. The answer of Harit Bhai, that for the top 10 or I would say top 12 products which we have, globally, we -- as we said, that in all of them, either we are 1, 2 or 3, whereas domestically barring 1 or 2 products, we are #1 in all of them, barring 1 or 2 products in terms of capacities. And the main reason of that is because we are either similarly backward integrated or more backward integrated than the competitors because that is the only way you can keep the cost of production lower and capital more in to the market.

[Operator Instructions] We'll take the next question from the line of Palak Agarwal from The Tycoon Mindset.

My question is regarding the API industry outlook and our company's guidance with respect to that.

Okay. So -- means you are asking about the earnings guidance for the year?

Earnings guidance as -- sorry?

Or in general, the API industry outlook also?

In general, as well as with respect to earnings also, what could help our company to get info from that? And what is the guidance for that too?

Okay. So the thing is -- we would say that as compared to 2020 -- FY '19/'20, means 2021 and the future years are looking much better for API and intermediate industry, much better. In fact, I would say this industry has faced a lot of shock in the past years. Let it be like currency fluctuation shocks that is more on the financial level, but -- of the various countries that is. Then there was shock from the supply of raw materials from China. Then there was another shock of crude prices falling twice in last 5 years because of which lot of oil-producing economies, the demand from those countries had gone down. Then there was a lot of pollution drives in India, which is good in fact. We think that, that is a necessary for sustainability. But that had happened over the last 7, 8 years. So in spite of all these shocks, the Indian industry had done quite well. And now that the government is taking additional steps for our Atmanirbhar policies and everything, let it be antidumping duty, let it be PLI scheme, let it be subsidy schemes, which few of the state governments are using. So from -- means, from all perspective, I think the API industry and the bulk trade industry and the intermediate industry to do very well in coming years. So the outlook is very much positive, is what we feel. As far as we are concerned, so there's definitely means -- I think, a quarter back, we had given a guidance that our PAT growth will be around 80%, 90%. So that is definitely on start. In fact, if everything goes well, we might do even better.

[Operator Instructions] We'll take the next question from the line of Sagar Tanna from Edelweiss.

Most of my questions have been answered.

Okay. Thank you.

We'll take the next question from the line of [ Jensen San ] from Monarch Networth Capital.

I just wanted to know, you mentioned in your CapEx that a lot of your CapEx is going towards antidiabetic and skin-related therapies. Just wanted to know in the sulphonated and chloro-sulphonated products as well, what is the end use going to be? What's the potential in the sulphonated and the chloro-sulphonated products category? If you could delve more deeper into that.

Harit bhai, can you answer that?

Yes. Actually, it is multipurpose. It is mostly booked for pharma, agro and specialty chemicals. So it's a multiple use actually. And we are doing -- we are going to have a range of chloro-sulphonated products. So they are all different, different applications actually. So it is not specifically only to one segment. But agro and pharma is the major one.

Okay. And just if I could squeeze one more. Your gross margin, just compared to quarter-on-quarter, they have been under pressure a little bit with your raw material costs also increasing and employee costs also, I see if you just compare line by line. I just wanted to know what exactly happened in this quarter? Were realizations down as compared to quarter-on-quarter? Or what exactly transpired?

Yes. The other thing is in this particular quarter, we also gave arrears of around couple of crores. Apart from that, we had additional INR 1 crore of bonus issued also, which happened. So that was one of the reasons why the expenses were a little higher as compared to quarter-on-quarter. And as compared to -- if you're talking about gross margins, we had indicated last quarter itself that whatever we achieved in June quarter was exceptionally high because of the shortages, which were there in the market at that time. And we had given the guidance as overall EBITDA margin for longer term. Earlier -- last year, we used to give that 16%. But now we feel that 18% to 20% is something, which is more feasible, given the fact that the outlook is so positive for this.

[Operator Instructions] We'll take the next question from the line of [ Kunal Dhamesha ] from Emkay Global.

Just 1 question. Out of the...

Sir, please increase the volume of your phone. We are not able to hear you.

Is it audible now?

Yes, sir.

Yes. So just 1 question. Out of the INR 600 crores CapEx that you have indicated for the next 3, 4 years, how much of that would be for the PLI scheme?

PLI -- very, very broadly, if I were to tell you, it won't be like more than INR 150 crores or INR 200 crores. That's a very broad number I am seeing, INR 150 crores to INR 200 crores.

Okay. So within that, our margin should be even higher because we'll get incentives, right?

We'll get incentives. Even other products also, we are hoping for very good margin. I mean -- because intrinsically the business is good in the other products.

The next question is from the line of Kavita Thomas from First Global.

Hello?

Yes.

Can you hear me?

Yes.

I just had this 1 question. I wanted to understand in terms of what is our dependence still on raw materials from China? And what is the impact of this antidumping duty on the raw material for ciprofloxacin?

Yes. As we discussed before that about Chinese dependency in terms of overall RM, where we don't have much option, is around 15% to 20% and -- where we don't have option. And antidumping duty, that is definitely very helpful because it protects Indian players from the dumping of the product from China. Sometimes what happens is just to play the market, sometimes there is a temporary dumping from the Chinese player, and because of which government is giving protection to the player. So it's positive, in fact.

So it is positive. But for the raw materials, which will depend on them, sir, how is that? Is that having -- is that coming under the duty?

No, no.

No, no. Raw materials, whatever we are importing is not coming in the antidumping duty. Yes. No.

The next question is from the line of [ Shivam Sanghvi ], freelancer.

Sir, I have 2 questions for you. So as I can see the API business grew by 20% year-on-year. Sir, can you tell us that, was it volume-driven or price driven?

Yes. It was around -- this is 55% was volume-driven and 45% was price driven.

And for the formulation business?

Formulation business. Yes, Vishwa.

Yes. Formulation business was majorly price driven. Rather than price-driven, it was actually a change in the product mix because the kind of product and the market where we were selling changed. So that is the major reason for the growth.

Okay. And I have 1 more question. Sir, I can see in 2018 and '19, the export revenue was around 38%, overall. And I can see from the last 2, 3 quarters, it has reduced to 34%. Am I right, sir?

Yes, correct.

Yes. Can you just shed some light on this?

Yes. So the thing is our domestic market has done exceptionally well. And in the last few quarters, obviously, we had also even preference for the domestic market because we do have export demand as well, but the domestic market has done exceptionally well, and we have given preference to that market for last year. But there is growth in both the market, even for export there is [Technical Difficulty]

In addition to it, we do -- our customers export a lot of formulation based on our API. So indirectly, we are exporting API indirectly here.

[Operator Instructions] The next question comes from the line of [ Vivek Gautam ] from [ GS Investment ].

Yes. Just wanted to know the status of the FDA approval status for our application. And about the rest of the world export performance of the IT. And we don't have the constraint in terms of the capacity because we are able to outsource our contract manufactures. Hello?

Yes. Formulation export, I think Vishwa can answer that, because he...

Yes. So yes, like you said, we are basically investing in the IT. So we are developing products for global markets. And many of them, especially for regulated markets, we are outsourcing the manufacturing. So that way, because the basic control of the development as well as the marketing is with us, and there are enough capacities available where we can outsource. So that limitation in terms of capacity is not there. However, our own manufacturing plant is also available, which we are upgraded in terms of current GMP requirements, and we are triggering international front. So our own manufacturing plant will also be capable of exporting to many more countries from the next financial year.

[Operator Instructions] We'll take the next question from the line of [ Deepak Advani ] from Girik Capital.

I just have 1 question on pricing. So we still have like 45% of growth coming from pricing. So I just wanted to know when do you think will we return to pre-COVID level pricing? And whenever we return to that level, will our growth be significantly impacted? Or will it be taken over by volume growth and everything will still look good?

Yes. So definitely, as we said, that infectious diseases, like antibiotics and antiprotozoal, those categories will do better once explanation is out and people start going around. As of now, people are staying in. So even from doctors, we have heard that the state of this infectious diseases has been quite low. So that is one positive which is yet to come. Then some other benefit which will come in is because of the government policies. So that should also take care, even if the prices come down a little bit. But then the thing is, as of today, there is no indication as per the prices will collapse sharply from here. Like, for few products, it is a different issue because of the supply/demand constraint. But overall, the prices are stable.

[Operator Instructions] The next question is from the line of [ Vaibhav ], individual investor.

The potential of INR 2,500 crore with the September pricing, which you talked about, is that -- that is at what capacity utilization level?

That is usually -- what -- it's 95%, I would say 95%, something like that.

And do you think we can reach to that or we need to do more debottling to reach there?

No, it is reachable. But then the thing is what happens, I mean, not all products do well at the same time sometimes. But then we do have the flexibility of converting one plant into another. But that is potential which can be reached. Usually, what we do is when you calculate capacity, it is rated at 28 days -- 28, 29 days. So based on that we have taken that number. 28 days in a month.

[Operator Instructions] The next question is from the line of Saravanan from Unifi Capital.

Congrats on good set of numbers. So one clarification I had this was a technology partner for chloro-sulphonation. Have you identified the partner?

Yes, we have.

So you're going to buy the technology? Or would that be a royalty or profit share arrangement?

No, no, no. It's not like that. We'll be -- so it's like some kind of form of confidence we might take, but that's about it. But rest of the process, we will develop in-house.

Okay. That's good to know. And from -- see, now the -- to insulate from EBITDA margin fluctuations, because we are mostly on the spot side, would you be able to undertake more longer-term contracts in our business profile? Is that on the cards? Now you have the capacity, scale and the customer reach, so are your conversations are becoming more longer-term in nature?

I think, Harit bhai will be able to answer this.

Actually, most of the contracts that customers -- they continuously buy from us, only the pricing -- we only suggest based on certain raw materials, we fix the price. So it's not that because of -- there are a lot of fluctuations in raw material price as well as the currency. So it's very difficult to do contract at fixed price. So what we do is normally, we fix the quantity. And based on this raw material price, we tell them these are the pricing. And based on -- for example, DCDA once we decide the price of metformin. If the DCDA price goes up, we increase the price of metformin, accordingly, something like that. So most of the contracts are very long term. But only pricing, we decide on monthly or quarterly basis basically. Is that okay? Is that -- hello?

Yes. So the specialty chemicals, you had highlighted -- I mean, long-term contracts from a Japanese customer. I mean I was trying to find out if there are more such conversations happening?

So chloro-sulphonation, our project also got little delayed and -- because of COVID. Actually, we were supposed to start in first quarter. But now I think we will start and -- still we are talking to them. It's not signed actually. Contract is still not signed. But we are talking to them still.

The next question is from the line of Palak Agarwal from The Tycoon Mindset.

Sir, I wanted to ask you regarding the product pipeline. And among that product pipeline, which products can give us some INR 100 crores mark or like that?

So the new upcoming products, you are asking?

Yes, and the products which are in our pipeline.

Pipeline, yes. The new -- whatever new launches, which will take place in the future, in fact, most of them, I would say all of them, are above INR 100 crores market potential because then -- otherwise if the products will be too small for the top line. It's INR 2,000 crores topline, INR 100 crores will be just 5%. So now we are eyeing for products which are minimum like, kind of INR 300 crores or more upwards of that INR 300 crores of revenue per year.

Okay. And then when we can have the remarks from our products? Like, are our products in our -- in the late stage or in the clinical charge or like that?

No. So -- okay. You are asking about the formulation products or the API as well?

Formulation as well as API, which can give us this remark.

Yes. What I told you just now was related to APIs. Formulation, I think, Vishwa will answer you.

Yes.

In formulation, we are basically targeting many of the block-buster molecules, which would be going off-patent from '23 onwards, so between '23 to '26. So many of those are similar to our API pipeline products. So again, mainly in antidiabetic and anticoagulant range of products, we will be targeting those kind of molecules, where the potential is very high because these are, at the moment, multibillion products globally. So basically, we'll be targeting day 1 launches for those products.

[Operator Instructions] The next question is from the line of [ Yogesh Bingarbhay ], individual investor.

My question is, these articles have been doing consistently quarterly good results, especially from last 2, 3 years. So I mean I have been recent investor. So even after this result also was very good. So was -- what was -- any particular reason that there was no gap between the results and the share price is coming down?

It's very difficult for us to comment, means why the share price is the way they do. But only thing we can say that it's not that anything has changed drastically even as of now. And the margins which are there right now, it should sustain for a quarter. And even for long-term point of view, we are very much confident that the kind of projects we are taking with the kind of margins we are getting by the increasing market share of the existing products. Above 18% is very much visible, even everything settles down, even after like everything settles down. Even after that, it should be very much possible.

Okay. Okay. So was there any -- because there are some few announcements coming in the quick sessions, like earlier, there was a bonus announcement and then there was recently dividend and this expansion -- fundraising announcement. So these announcements coming in quick sessions. So was there any kind of a particular long term or there was any view on this immediate quick announcements?

So bonus was pending since a lot of years. And last bonus was quite some years' time back. And it was pending since long due and the company has started doing well. So we thought this was the right year to give the bonus. And dividend is something which is part of our payout policy, means we had been giving -- the shareholder payout that could be either in the form of dividend or buybacks. So this year also means -- more or less percentage share of a -- payout percentage price will remain same. The fog might change here or there. We are not sure as of now. So this is just the interim dividend which we have given to shareholders as part of our long-term strategy that is. And the CapEx is purely based on the outlook. And we have very good opportunities right now to take leverage of the current financial situation of the company, the market outlook and the R&D which we have done. So that is why we will be putting up CapEx. And the fundraising is just a part of -- means, it is a natural progression of CapEx actually.

[Operator Instructions] I would now like to hand the conference over to Mr. Adhish Patil for closing comments.

Yes. It was pleasure interacting with you all. Very nice set of questions, and it also makes us think. And we'll continue to do our best. And hopefully, December results will be as good as this, and look forward to communicate with you all after our December results. Thank you.

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