Aarti Drugs Limited (524348) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '21 Earnings Conference Call of Aarti Drugs Limited, 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, Margaret. Good evening, everyone. On behalf of Centrum team, I Cyndrella, welcome you all on the Q3 FY '21 earnings conference call of Aarti Drugs. I humbly thank the Aarti Drugs management for giving us this opportunity to host the earnings call. From Aarti Drugs management team, today we have 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 thank the management team for delivering consistent performance on earnings. And I hand over the call to Mr. Adhish. Over to you for the opening remarks.

Thank you, Cyndrella. Good evening, everyone. Welcome all of you on behalf of the entire management of Aarti Drugs Limited for the earnings call for the December 2020 quarter. In the December 2020 quarter, the company recorded consolidated quarterly revenue from operations of INR 530.25 crores with year-on-year increase of 11.98%. API segment contributed approximately 87%, and formulation segment around 13% of the total consolidated revenues. Within the API segment, 66.89% of the revenues came from domestic market and 33.11% from the export market. In the formulation division, 31.01% of the sales came from exports in this quarter. Domestic sales of the API segment grew by approximately 13.5% and exports by around 13.77%. Around 66% of this growth in the API segment was driven by volume growth due to good demand across multiple therapies. Formulation segment revenues grew by around 5.21% on a year-on-year basis. For the period ended December 2020, revenues from the API segment can be broadly classified into following therapeutic categories: the anti-biotic therapeutic category contributed to around 44%, antiprotozoal around 13%, anti-inflammatory around 14%, antidiabetic around 10%, antifungal around 7%, and the rest can be classified as other categories. 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 products like nimesulide, diclofenac derivatives and celecoxib. In this financial year, due to lockdown spread of waterborne -- due to lockdown, spread of waterborne diseases was less. And hence, in general, a lower demand of antiprotozoal segment was observed. Post Vaccination, once people start traveling more, this demand is expected to grow again. In December 2020 quarter, consolidated earnings before tax, interest and depreciation is INR 107.76 crores, up by 59.11%; and consolidated profit after tax for the quarter ended December 2020 is INR 68.03 crores, up by almost 144.88%. Consolidated EBITDA margin improved from last year to around 20.25%. Debt-to-equity ratio of the company reduced further down to 0.39 as of December 2020 on the consolidated basis due to strong internal accruals. This puts the company in a very good position for raising long-term debt in addition to strong internal accruals to finance upcoming greenfield projects. Recently, expanded anti-inflammatory capacity is contributing to growth. The company is also in the process of commissioning new antidiabetic production line for new product launches later this year. In addition, brownfield expansion of one of its anti-biotic product would also be completed in near future. Top line growth would be further supported by good traction in the formulation exports. The company is also ramping up its R&D facilities, both in API as well as formulation segment to support future growth and innovations. In efforts to support environment, the company has recently converted 2 more of its facilities to zero effluent discharge category and has already applied to the pollution board for the same. And we are adding 2 more units to this category in coming weeks. Now we would like to open up the discussion for question and answers, and take questions from the participants. Thank you.

[Operator Instructions] The first question is from the line [ Pranay Dhelia from Panchmantra Advisers ].

What is the total debt of the company at the moment?

So it is around INR 334 crores right now. And around INR 186 crores would be term loan.

INR 186 crores would be?

Term loan.

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

So could you please provide an update about how the pricing in APIs? How has it changed from Q2 to Q3 and even as we speak and what is going to -- how is it going to pan out in Q4? Because you had last time mentioned that in June, you were able to see the prices had peaked, and you would -- and accordingly, we could see in Q3, EBITDA margins have come off, although the gross margins have remained at higher levels. So could you please comment on the same?

Yes. So -- yes, last time, we did said on con-call that in September quarter, during the middle of the quarter, the pricing had gone down a little bit and then it had stabilized. So fortunately, as of today, the pricing has remained same from that point of time. That is, I think, during the month of August, the pricing had come up a little bit. But after that, the pricing is quite stable as of now. So -- and that is why the gross contribution is also healthy even for the December quarter. So as of now, we don't see any price erosion.

Okay. So does that mean the EBITDA margins, which are seen in this quarter, which is Q3 of 20-plus percent, without considering the other income. So do you think this will be a new normal for Aarti Drugs? Because earlier, you had mentioned that 18% is what you would target, but now is that -- is 20% becoming the new normal?

Yes. So we also thought that by December, the pricing might come up. But then as per the current market scenario, we feel that 19%, 20% seems to be doable. But let's see for 2 more quarters to go, once the COVID is -- once the entire globe is out of COVID problem, then, I guess, we'll get a new long-term normal.

Okay. And my second question is on the volumes front. I mean how are you seeing the demand progressing? So is that why you're putting up new capacities? Or is it because your existing capacities are almost [ big utilization ], so any comments on the demand scenario for the Q4 as well as for the next financial year?

Yes. So as we had discussed last time, so our current API capacities without considering this brownfield expansion, which are going on, can you give us revenues up to INR 2,500 crores and plus formulation revenues will be extra. But with this brownfield expansion, which is going on right now, then, plus, we are putting up antidiabetic production line also. So that too, coupled with the greenfield projects what we are putting up, those will be the main growth drivers for the next 3 to 5 years. So that is why we are putting up the capacity so that we can achieve a revenue target of around INR 4,500 upwards in 5 years.

Okay. So this is on the capacity front? Do you think that volume growth will be as good as what has happened in the current year? Or could it stabilize in the next year?

Yes. So actually speaking, we felt that antiprotozoal and anti-biotic segment, the volume growth could have been much more than what we saw in this particular year, and mainly it has to do with lockdown and people not moving out. A lot of less interaction between the people, that is why the spread of diseases -- infectious diseases is less. So we feel after vaccination, this demand will again become strong. So -- and even as of today, on an aggregate basis, in December 2020 quarter also, we observed 66% of the 12% growth, which you have seen in the API segment is driven by volume growth.

Okay. And any updates on the capital raising plans? Have you appointed any merchant bankers?

No. So the thing is, as of today, the internal accrual and the debt situation, debt to equity ratio is so low, 0.39%, and we want to keep a target of around 0.7% kind of a debt-to-equity ratio because that is a very, very comfortable situation for the company, and ROE will be much higher because the cost of debt for us is very, very low. In fact, long-term capital is available to almost 6.7% or something like near about that level, 6.7%. So we feel that we will raise term debt along with internal accruals to find our greenfield projects.

So okay. See, because H1, you had mentioned that you had completed INR 40 crores of CapEx. And what's the targeted CapEx in H2?

So H -- yes. So in H2, we feel another INR 40 crores will go. But the main greenfield CapEx that will start in -- we are estimating in like a couple of months' time, it should start in a big way.

So that's the last -- like you mentioned last time, that's the INR 600 crore CapEx for 2 to 3 years?

Yes, yes.

Okay. So the diabetes capacity, are you referring to, gliptins or the metformin itself?

Yes. Gliptins. The metformin will be the much bigger expansion, that will commence in 1 or 2 months' time.

The next question is from the line of Chirag Dagli from DSP Mutual Fund.

On the PLI scheme, we have a couple of products. Can you just highlight broadly the kind of investments that can potentially require? I know we haven't been awarded yet. But just broadly your thoughts on the kind of market opportunity that exists and the kind of investments needed?

So as of -- we have applied for a few products, and we are hopeful that 1 product -- 1 intermediate product we will get. But we are not announcing anything because since the results are not out. Mostly in the month of February, they will be out. But if everything goes well, we have around a -- budget of around INR 120 crores to INR 150 crores of CapEx related to PLI scheme.

And what is the kind of opportunity for this INR 120 crore CapEx?

So one of the product is our own -- means for captive consumption. And another product that's anti -- that particular is still yet to be applied because that second level of PLI scheme is yet to be announced, that second product will come in that. So the first one, where we have applied, there we have around INR 60 crores, INR 65 crores of revenue potential from external sales and -- plus similar kind of captive consumption would be there of the same product.

Understood. This is for what you will spend the INR 120 crores for 1 product?

No, no, no. That is for the entire basket. This I was talking about only 1 product.

Okay. Okay. So for that 1 product where you are saying INR 65 crores internal plus INR 65 crores external, what is the kind of CapEx that one would need?

So we are not giving product-wise CapEx as of now. But in the INR 600 crores CapEx plan what we have announced, there are 7 main projects in it. So it's like that. So it's product based CapEx and we are not giving out details. But I will tell you broadly what all 7 projects are. 1 -- 2 of them are related to the intermediates which we'll be consuming on our own. One would be our metformin expansion itself, another would be a sulfuric acid plant, which will be, again, mainly used captively for our chloro-sulphonation products. And another would be skin treatment API, which would be more or less import substitute.

Okay. Understood. And sir, there was this -- recently, there was a Cipro process in antidumping duty levied. Can you quantify the -- if this is relevant at all? And what is the kind of impact that we can see?

Yes, we got 5 years antidumping duty from the government. So definitely, it will get benefit against China, of late, they were dumping it. So we'll be stabilized, and margin will be improved on that.

Sir, can you quantify the kind of impact that one can see, just broad numbers?

See, they have put a duty from $1.5 to $3 from the different suppliers. So that much will be quantify -- but it is a per kilo, $1.5.

And this -- the way we should think about this is that this flows straight to your bottom line, sir?

It may -- no, that is antidumping duty. Now you cannot -- I mean, yes, you can say that, but there are other local player also in India. So we have to compete with them also.

Yes. So that was the question, sir. Do you think the local players will also raise prices to the extent of this?

Yes, ideally, it should happen.

Ideally, it should happen like that.

Okay. Okay. And when do you think we will start seeing this?

I think it's already started because antidumping duty was already there from the month of September than -- previously, they had given for 6 months, now they have given for 5 years.

Okay. So the quantum doesn't change.

Yes. In the sense. Yes.

Understood, sir. And sir, can you help me with the 9-month volume growth in API?

Adhish?

Yes, 9-month volume growth as of -- means I know this quarter, it is around 66%. Last quarter, it was around 55% or something. I don't recollect the first quarter's number. So I will get back to you on that.

No worries, Adhish. And just a last question, if I can squeeze. For how many of your products are prices -- for your prices, are prices quoted in dollar, in yuan or in INR? If you can just throw some light.

Yes. So domestic market is entirely in INR. And in export market, almost 95% of the business is being done in USD. Very rarely, some are in euros and a few in AED for the middle east countries.

So dollar then flows through your P&L, right, Adhish? I mean you will get a clear benefit out of it.

Yes. I mean -- I didn't get your question actually.

I'm saying that rupee-dollar moving from INR 70 to INR 75, that INR 5 is flowing to your profitability?

It does, but then we also have imports the opposite side. So what we have seen that more or less, we are hedged. But definitely, in longer term, when the rupee depreciates, we are a little bit more competitive than China -- Chinese suppliers. So that definitely helps us.

The next question is from the line of Abdul Puranwala from Anand Rathi.

Sir, what would be the cash flow from operations for the 9 months FY '21?

One second. I will get you this figure in one minute. One second.

So should I proceed to my second question? Maybe I can take this off-line.

Yes. So the cash flow from operating activities should be around INR 140 crores for the 9 months.

Sure. Sir, my second question is basically, as you mentioned that the INR 600 crore CapEx plan what you have envisaged. So sir, I mean I just wanted to understand that what proportion of this could be from internal accruals, considering you have started generating very healthy cash flows? Would we see -- I mean what would be the quantum of debt we can -- we may have to raise? I understand you said that it would be 0.7x maximum side where you can [ take off ] -- but in -- I mean just wanted to understand on this cash flow perspective?

Yes. So the thing is ample amount of room is left for us to raise the money from debt because our internal accruals itself will be very strong. In fact, they will be strong enough to even do a little bit of shareholders payout. So on cash flow front, we are absolutely not worried. We already have tied up long-term loans from a couple of banks. And the thing is mostly internal accruals -- we may not require more than 40% debt, frankly speaking. But then it all depends upon the timing because more quarters will go, the more and more internal accruals we'll achieve. So less and less debt will be required. So there is no quick answer to that. But then what we are saying is that even if we fund entirely through debt, our debt-to-equity ratio may not go beyond 0.7x.

Understood, sir. Understood. Sir, just my last question would be on this top line target what you said for the next 5 years to about INR 4,500 crores. So going ahead, how do we see mix between API and formulations by next 5 years? Would it be largely driven by formulations? Or we'll see the similar kind of run rate being followed ahead as well?

Yes. So the growth opportunities are on both the sides. In fact, on the stand-alone side also, API as well as specialty chemicals will grow quite -- at a more pace than the APIs. So specialty component will grow. And formulation will also grow definitely. So we are estimating anywhere between 15% to 20% would be from formulations and rest would be from API in intermediate segment.

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

Adhish, congratulations on a good set of numbers. Adhish, on the specialty chemicals, I mean what kind of, I mean, opportunity, are we really looking? And how that it's EBITDA margin versus currently what we have at company level? And when it will start really showing in the contribution in the top line as well as bottom line?

Yes. So the new projects, especially specialty chemicals, I would give an aggregate for all the 7 projects which we are thinking of. So the EBITDA margins, if we consider entire sales as external sales, then the EBITDA margins are anywhere between 24% to 25% for the product mix. But I would like to highlight one thing that -- and the revenue potential is around INR 1,500 crores of external sales. But then considering the fact that some of the products would be consumed captively, the external revenue potential will be anywhere between INR 1,170 crores to INR 1,200 crores of external sales.

And this you are referring with this INR 600 crore CapEx, correct?

Correct, correct. That one.

Okay. So I mean the specialty chemical, it will be more of in-house consumption, captive consumption? Or it will be external sales?

So the sulfuric acid, some products are -- will be captively consumed, whereas some will be sold outside as well. And the chloro-sulphonation entirely will be sold out -- means mainly it will be external sales.

Okay. So how do we -- well, really, because of this in-house intermediate, captive consumption as well as the sulfuric acid, what you are talking, so can clearly have I mean EBITDA margin from say 20%, how do we expect to grow over the next 2, 3 years?

Yes. 2 -- next -- so these particular projects will kick in a little later, maybe third year from now, maybe FY '23 onwards, this particular project will come into picture. Not everything -- one metformin might come sooner, but rest of them will take time. But along with this, we are also doing a lot of expansion of our existing products in the same units as well, brownfield expansion. So like anti-biotic also, we have done almost 40% expansion. Anti-inflammatory, we had done 70% expansion of one product. Gliptins is totally new. So all these capacities are also coming up. Then we are also thinking of expanding Clopidogrel, which is our cardiovascular product.

Okay. So how are the profitability of those new brownfield expansion? And -- as well as operating leverage, you expect to kick in and subject that price hold on at current level. So going ahead, I mean, FY '22 in, do we expect some kind of improvement in EBITDA margin?

Yes. So typically, when we do brownfield expansion, the immediate impact is that there is a little bit of excess capacity in the market, a little bit. So there is downward pressure in price. But at the same time, because it is a brownfield expansion, our cost per unit also goes down. So our margins increase. So our products become profitable that way. So we are able to capture more and more markets. And after a year or 2, when one-off competitors goes off, then again the margins expand for that product. So that is the entire -- the strategy what we follow. So whatever products we are taking lead, we want to achieve more and more market share, so that new players won't come in.

Okay, and is it expansion of brownfield and greenfield capacity, so this INR 4,500 crore kind of top line that you are anticipate -- expecting is in FY '25, is it fair, or FY '26? And that is purely formulation...

'26 -- no that is including everything. Obviously, we have -- yes, that is including everything, more on a consolidated basis.

And I mean it will be by approximately FY '25 or FY '26?

Mostly FY '26 because this FY '21 is almost over. So we expect FY '26 or so.

And that with some kind of expansion in the margin, correct?

Yes, yes.

Okay. And this now greenfield expansion is coming under a separate company or it is part of Aarti Drugs because to avail that tax benefit?

So we had a detailed discussion on that. So as of now, what Board feels is that we might go under the same name, under Aarti Drugs itself.

Okay. Okay. And that will start kicking, I mean, CapEx from Q1 FY '22 or...

So -- correct. Yes, exactly. You're right. In Q1 itself, it will start coming in.

The next question is from the line of [ Subrata Sarkar from Mount Intra Finance ].

Sir, my most of the question has been answered, I'm just reconfirming it. The target which we are giving like for 5 years achieving INR 4,500 crores, that will -- that is sufficient if we consider the existing brownfield expansion as well as the new INR 600 crore CapEx on the greenfield projects? Is it my understanding perfect, sir?

Yes, it is including both of it. Correct.

Okay. So around INR 500 crore will come from greenfield projects as well as residual will come from the existing brownfield project, which is going on, sir?

INR 500 crores of CapEx you're asking or revenue?

No, no, no. What I'm saying, sir, INR 1,500 crore of revenue will come from greenfield and the balance will come from brownfield.

Correct. Correct. And formulations also.

And formulations also. Perfect, sir. Sir, now coming to your 7 projects, as you told like, can you give indication of -- out of these 7 projects, which will have a greater share in terms of revenue? The way we have mentioned, as per my understanding, this metformin -- means, this metformin as well as these gliptin projects should have higher margin and may have higher contribution. So if you can throw some -- at least the ballpark understanding where is the sulfonation and sulfuric acid may not be that -- may not add so much to our top -- external top line as well as may not have that kind of a margin. So -- and maybe this skin treatment API will have a higher margin. So if you can have some understanding on that, sir.

Yes. So the thing is sulfuric acid and chloro-sulphonation products, that some -- of products you're already doing in -- with the existing process. And what we are about to launch is with the newer process with a much lower cost of production. So the margins expected in chloro-sulphonation, that is the specialty chemicals, is very high actually. So that will be more profitable. And in fact, gliptins, we'll be just starting so we are not very much optimistic that we will achieve high margins right away in the first year itself. But definitely, as the processes improves, as the capacity scale up, they will definitely become major profit drivers for us, no doubt about that. Metformin, the thing is, metformin for domestic market, the margins are more or less similar to the company level, but the export markets are very profitable for metformin product. And definitely, with CEP approval, we are adding much -- means we are getting more and more export approvals for metformin product, and that is how the margin expansion will take place in the metformin product for us.

And sir, regarding this skin care treatment API, that should be higher-margin business, sir, whereas maybe from a top line perceptive will be lower?

Yes. So that is -- as of today, yes, it is more than the company level margin, that also.

The next question is from the line of C. Srihari from PCS Securities.

Firstly, on the pricing front, you said that it was fairly stable for the quarter across the board. But if you can just give a breakout in terms -- there would have been pockets where the pricing would have been lower? Whereas in some other pockets, it could have been significantly higher. So if you could give a breakout that? And secondly, the metformin unit that we are talking about. So you please give an indication, what is the kind of capacity you intend to get at?

So your first question was more from a product's point of view or the market's point of view?

Yes. Sorry. You can give us therapy-wise. I mean in which therapy...

Therapy wise. So frankly speaking, with anti-inflammatory, definitely is doing well as of now. Antidiarrheal, definite -- as I said, that because of the lockdown, the demand is a little less. So obviously, that reflects in the pricing also. So as of now, antidiarrheal will be doing little lesser than the company level margins, but anti-inflammatory are doing better than the company level margins. And as far as metformin is concerned, we already have around 1,100 tonnes per month capacity. So our first phase expansion will be taking it to 2,000 tonnes per month capacity. And the second phase -- which will be 2.5 years later, and that would be taking it to 3,000 tonnes per month capacity.

Okay. I mean on this pricing front, I mean, there were reports that in certain pockets, Chinese supply has commenced. So did you include that in any particular product comparison?

Yes. So we also import quite a few raw materials, chemicals from China. So that supply has started right since May -- towards the May end onwards. So we haven't faced any problem in terms of supply from China. So the same is applicable for API supply also from China. So all the factories have started, but then we haven't seen any major impact in terms of price erosion because of the Chinese supply, because that has started long back. I would say, in Q2 itself, the supply has started.

I mean it as one leading company was saying that they are looking at some pressure during this quarter. So how was that doing that?

Yes. Maybe it might be product specific, maybe because of that.

The next question is from the line of Nikhil Upadhyay from Securities Investment Management.

Sir, my question was on the PLI. You mentioned that we would be doing INR 120 crores of CapEx. And you mentioned 2 products are in the pipeline. So are there more products in the pipeline? Or is it like for 2 products, we are doing INR 120 crores CapEx? If you can just clarify that.

Yes. So one of the products we are yet to apply because that PLI scheme is yet to be announced. And another few products we have already applied, for 2, 3 of them. So the INR 120 crores to INR 150 crores ballpark figure, which you were talking about, that is considering 2 big products, actually, one which is yet to be applied, means that PLI has yet to come; and one which has already been applied.

Okay. But overall, you would be applying for, say, 4, 5 products, but these 2 would be the larger ones?

Larger. Yes, larger, the most significant ones.

And just if you can help me understand, with the PLI, the scheme and the proposals which are there, on your working, how competitive you become vis-à-vis, so -- Chinese or some other competitors on pricing side? Or how does it improve our pricing as such vis-à-vis other players?

Because of PLI scheme?

Yes.

Yes. So the PLI scheme, the logic is very simple. What they have said is whatever is the selling price, and we do have to give that selling size upfront while applying for the PLI. And 10% of that selling price would be given by the government in the next 6 years. And the thing is, there is one more condition that they will consider only incremental sales -- means increment -- sales incremental to -- as compared to '19/'20 sales. So whatever extra you sell, on that 10% government will give. And for various products, they have put caps also. Means for your API, there is a cap of around INR 2.5 crores, something like that, per annum. For intermediate, they have a cap of INR 10 crores per annum, for chemically synthesized ones. So that caps are also there. One very good thing is that government ammended that scheme to include exports as well. Earlier, exports were not covered in PLI scheme, but now they have covered exports also, which is very good.

So for us, for these 2 products, how does the -- so pricing scenario or competitive scenario improve? That's the only thing I want to understand, sir.

So basically, on selling price, 10%, you will get more margin, means, to be competitive, like that.

Okay. And by sixth year -- so most of the people had this issue that after 6 years, the PLI scheme goes out, so the industry will again become uncompetitive. But what -- how do you see in your business case?

Yes. Yes. So I would answer this question citing -- or on historical performance. Means in 2013/'14 onwards, we have introduced few import substitute products like [indiscernible] processing, [indiscernible] processing and [indiscernible] processing. So at that point of time, India's, almost 90% of the consumption was coming from China. And then we had put backward integrated facility for these 3 products. And then slowly, slowly -- means even without the existence of PLI scheme, we were able to capture almost 70%, 80% of the market share. So we are proud to say that already we have taken so much market share from China in the absence of PLI scheme. So basically, what -- this PLI scheme will help us in the initial phase and definitely, based on our R&D competency, we have to improve upon the production cost and compete against China. By the end of 6 years, our production processes should be so much efficient that even in the absence of PLI scheme, we should be able to take care of Chinese competition.

The next question is from the line of Charulata Gaidhani from Dalal & Broacha.

Congrats on the good set of numbers. My question pertains to metformin. What is your existing capacity of metformin?

So our existing capacity is around 1,100 tonnes per month.

Okay. And in case of -- are you seeing pricing pressure in the international markets because China has eased out and started supplies of the APIs?

Yes. I will ask Mr. Harit Shah to answer -- reply to this query. Harit, are you there? Hello? Mr. Harit Shah?

Sir, I'm sorry to interrupt. Mr. Harit Shah's number just got disconnected. Give me a moment, I'll call him back.

Okay. No. I will take this question. No issues. So what we have seen -- you're asking specific to metformin or in general?

In general.

In general. Okay. So yes, China has opened up. But then in spite of that, we are seeing very healthy growth in exports. So even this time, almost more than -- around 14% export growth was seen. And majorly, good parties -- most of this growth has come from -- almost entire growth has come from the volume growth for exports, which means that the demand for Indian product is growing in exports. And the China plus one strategy seems to be playing out. Definitely, it will play out in a much better way once the travel restrictions are lifted because when we want to sell to some new customers or establish new relationships, once the traveling becomes open, then it will be even more easy to get more and more new clients. However, for companies like us, what is there you know? We are already selling some other products to a particular company. And we just want to introduce one extra product in that product bucket, and it becomes relatively easy because we already have a relationship with that company. So that is why we feel that this China plus one strategy will definitely help for a company like us because we have very diversified client base as far as exports is concerned.

Sorry to interrupt, Mr. Patil. This is to inform you, Mr. Harit Shah is now on the call.

Okay. Okay.

Yes. So in terms of exports, what is the kind of expected growth going forward?

Yes. Mr. Harit Shah has joined. So I think he will reply to that. He looks after our marketing.

Okay. Yes, for export side, we expect around 12% to 15% growth for next year actually.

Okay. So in line with the domestic?

Yes. Domestic, more or less, yes.

Okay. Okay. And can you give me the geographic response?

It is across the world. It depends, because many countries, we are still facing lockdown situations like countries like Brazil, Europe and the U.S.A. So it depends on the country to country. So now our export to African countries have gone up considerably recently -- in recent 3, 4 months. So average, if you see, overall there will be a growth. In some 10 -- some months, this lockdown is over in Mexico and Brazil, we expect a lot of growth there -- in that country also.

The next question is from the line of [ Rajdeep Singh from ASK Investment Managers ].

Adhish sir, just reiterating your call of INR 4,500 crores of revenue after 5 years, that is FY '26, so that is approximately doubling our revenues from FY '21 base translating to 15%, 16% kind of top line growth. So just wanted a little bit clarity on the margin trajectory. So when we reach INR 4,500 crores of revenues by FY '26, will our margins be closer to 25%, 26% range from current 20%, 21% range? Because by that time, all our brownfield, greenfield, backward integration projects would be in place.

One second. So what you say is current, because the newer projects we are having better margins. Obviously, to achieve that level of margins, we will need to reach almost 80% utilization level because only then the operating leverage will kick in. So definitely, in the base case scenario, the margins should increase, means considering the fact that if the current margins remains where they are right now, then addition of new products should take it nearer to 24%, 25%. So let's see how it plays out because it's too far to estimate right now how it's going to play. But then it should move in that direction.

I understand the volatility between the quarters and in the medium term, but long -- just to get the longer picture, correct, at INR 4,500 crores of sales, 25%, 26% kind of margin is doable or achievable for us, with the kind of CapEx that we are putting in?

Right. Right.

And the INR 600 crores of CapEx is entirely towards API and intermediates? There's nothing on the formulation side?

Yes. So this INR 600 crores is entirely towards your API, intermediate and specialty chemicals. And the formulation one will be extra. That will be doing through Pinnacle Life Sciences.

Okay. And how much is that?

So Vishwa, can you answer...

Yes. On the formulation front, we are planning to expand into our capacities in our existing facilities, like a brownfield project. So there, the approximate CapEx would be around INR 40 crores to INR 50 crores. That is in the immediate future. And apart from that, there are no immediate plans of investing in CapEx, but our strategy of investing into product development and more into IP and R&D will continue.

Okay. So this INR 40 crores to INR 50 crores is for 2 years or 3 years, right?

Yes, for 2 years.

Cumulatively, sir?

Sorry?

Cumulatively, INR 40 crores, INR 50 crores?

Yes, cumulatively for 2 years.

Fair. Fair. That is helpful. And Adhish, sir, just one request that if you could just release the presentation well before time, it is helpful for us to go through. We have not received the presentation yet.

Okay. Okay. No doubt. Next time, we'll do that.

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

This is just more of a clarification. Does the INR 600 crore CapEx include this INR 120 crores CapEx pertaining to the PLI?

Yes. Yes, it does. It includes that.

Okay. So the 7 projects that you have mentioned, 2 intermediates for captive consumption, metformin and sulfuric acid, again for captive consumption, then skin treatment API. So the balance products are the PLI. So we have 3, 4, 5...

And chloro-sulphonation products also.

Okay. Chloro-sulphonation products also?

Yes.

Okay. Okay. And just -- the total debt that you mentioned of INR 320 crores, is it as of now?

INR 334 crores on a consolidated basis.

INR 334 crores. Okay.

Yes. Yes.

And out of that, INR 180 crores is term debt?

Around INR 186 crores is term debt.

Okay. So considering the way -- I mean your markets have shaped up, your CapEx have come online, the H1 as well as H2 will come online, and considering the pricing scenario also, is it fair to expect that next year will be more of a volume growth rather than price-led growth?

Correct. So next year, I think it's all about the volume growth. We also believe the same.

Okay. So are you expecting 10 -- I mean 10 plus? Or would it be high single digits, or 10% to 15%?

Yes, we are expecting and targeting 10-plus, no doubt about that, the volume growth.

Okay. Okay. That is useful. And from a next year perspective, this 20% to 21% margins can be sustained, right?

So as of now, we don't see any downward pressure. In fact, we thought that the margins would come off by Q2 itself, once the things normalize. But even after all the supplies have started, most of the companies are operational now, but still we see that the prices have stabilized. So at least, as of now, it seems like it should continue like this for a while.

So could you -- I mean in your assessment, what do you think is the reason? How come suddenly the pricing scenario has gone up to a higher level and it's able to sustain? What is the key risk to this assumption?

For us, definitely, this antidumping duty has also come in. So that has also helped us a little bit. Then the kind of products we are operating in, China is one of the major competitor for us, because the Indian competition in most of the, not in all, but in most of the products is very less for our product profile. And what we have seen there, the Chinese yuan has also become very strong. So overall, China seems to be less competitive. So that is why the prices are up for our product profile.

The next question is from the line of [ Anand Singh ], an individual investor.

I have 3 questions. Sir, first question is about exports. Now in Q3, we heard that a lot of companies in Q2 and Q3 faced container issues. Did we face any such challenges? And are there any revenues which are unrecognized because the shipment is pending at the port or delays in the shipment of any kind?

Yes, I will ask Mr. Harit Shah to answer that question for you.

Actually, we've faced some delays. But overall, we could be able to manage whatever containers we required. The only thing was freight has gone up. See, our freight has gone up considerably. In some cases, it is more than double, for that we are taking into account while quoting for next quarter requirement. But we have -- as far as our shipments are concerned, there is a delay, but we are able to manage.

Sure. Sir, my second question is about specialty chemicals CRAMs kind of opportunity. Now in the previous calls, there was some indication that we have some connections in Japan or something where we can potentially have kind of a CRAMs kind of an opportunity in specialty chemicals. So any update on that if you can provide?

So I would like to clarify, it's more about, you can say contract manufacturing, not exactly CRAMs. So the thing is -- yes, in fact, we have been doing good business with them. We have also expanded our capacity by 50% to supply more materials. So that business is going well. But the -- though it is made for a particular client, but then it's more like a buy-sell model -- stock and sell model for us. That way, but then that relationship has grown definitely.

But is it leading to any specific dedicated CapEx for them in the INR 600 crore CapEx that we are doing?

No, no. In that INR 600 crores, no.

Okay. So if any such opportunity on this specialty chemicals arise, that will be -- then we'll have to have -- do additional CapEx other than the INR 600 crores CapEx?

Other than this, correct. Yes.

And sir, in terms of this INR 4,500 crore number, is it fair to assume that this is like the base case kind of number. And if things surprise on the upside, we might even end up with higher numbers. So this is something which is very much achievable, right? This is not an aspirational goal that we are setting. This is a doable target that we have. Is my reasoning correct?

Yes, yes, correct.

Okay. And in terms of pricing, since you have not seen any significant erosion from Q1 or Q2 levels. What is your sense? Like is there a shortage in the market? Or is there some raw material constraint that is holding prices up? And they should come back? Or is it like a new normal?

No. I would like to correct on one thing on this one. Since Q1, the prices have come down, no doubt about that. In Q2, say, in the mid of Q2, the prices came down a little bit. And after that, they have stabilized. From the mid of second quarter till date, the prices have stabilized. Yes.

Yes. So we -- do you see any specific risk, like any competitor starting in China or any Indian competitor scaling up capacity, which can lead to margin pressure over in the foreseeable 12, 24 months?

Yes. So we don't foresee any new Chinese competition, frankly speaking. And even in case of domestic market, the kind of [ molecules ] in which we are operating, the newer ones definitely, like, say, for example, metformin, that's a very popular product. And there are a lot of players, more than 7, 8 players would be there -- Indian players in the market. But definitely, in a couple of years time, maybe 2 to 3 years' time, the things will consolidate like for other APIs, which has -- what we have seen. Typically, what we see in a country, in the longer run, around 3 players remain to manufacture a particular API. That is what we have seen for most of the products, bulk price i.e. so we don't see much of competition because once we grow at -- grow to a certain stage, then the economics of scale starts kicking in, and then the -- it becomes very difficult for a new entrant to come in, in that product?

Okay. And sir, by what time we anticipate this INR 600 crores CapEx to be completely done? As of today, what is the timing on your mind?

So FY -- by FY '23, most of it, 90% of it should be done. But it will be done -- but some projects will finish earlier, some will take time. So it will be like that.

The next question is from the line of Jason Soans from Monarch Networth Capital Limited.

Just a repetition, just wanted to confirm a few details. The CapEx for 7 projects, just wanted to -- I'll just confirm it to you. The 7 products are basically, first is an antidiabetic, second is the skin related, third is sulphonated products, fourth is chloro-sulphonated products, fifth is metformin and the sixth one are the 2 PLI products. Is that -- is my understanding correct?

Yes, yes, correct.

That's more or less, yes. And in your last con-call, you had also mentioned that this total CapEx has a total revenue potential of around INR 2,500 crores in the next 2 years. In the previous con-call, you had mentioned this. So I mean we do -- we still stick to that, right?

So current potential is INR 2,500 crores for our API segment. Yes.

For your API segment. Right. And sir, you also mentioned that external sales of these projects have a rough potential -- external sales have rough potential of around INR 1,200 crores, emanating from this CapEx.

Correct. Correct. From the greenfield projects, yes.

The next question is from the line of Anandha Padmanabhan from PGIM India Mutual Fund.

Sir, could you give some color on what is the average raw material inventory that you are maintaining today? And how do we expect it to progress in the coming quarters? And similar color on what is the kind of raw material inventory that you see your clients are doing? The reason why I'm asking this question is because there was some impression at the time of COVID, when there was a lot of disruption, across the board many formulation manufacturers had increased the average API inventory that we maintain at [ that rate ]. So if you could give some color on this it would...

Yes. I think I will ask Mr. Harit Shah to answer your query.

Yes. Normally we keep -- our raw material inventory is about 30 days, including import of raw materials. And we have not increased the inventory in recent past because the -- our raw material availability is quite imminent. So we don't see any shortage on the raw material front. And as far as finished goods are concerned also, we have inventory of about 21 days approximately. That is average of our last 2, 3 years.

Could you also give some color on what is the time -- do you see any trends -- do you see your customers maintaining a higher inventory than what they were maintaining initially based on your discussion with your customers?

So now -- in the second or third quarter, they have started reducing the inventory, which was in March, April, May quarter, June quarter, but now things are okay. They are normal. Yes.

So Q3 reflects the very normalized inventory at your customers end also.

Correct, correct, correct. Yes.

The next question is from the line of Nikhil Upadhyay from Securities Investment Management.

Just on the pricing point, sir. You said in the post Q1, in Q2 and Q3, the prices have stabilized. Now there are 2 points, which I wanted to understand is, one is like how -- if we consider the pricing versus pre-COVID, how higher the prices are in general? And secondly, would you say this is still an issue because of the supply not being commensurate? Or as a result, the prices are higher? Or is it because of the things which have been happening in China for the last 3, 4 years that the environmental issues in the companies closing -- shutting down their facilities. And as a result, the prices are higher. And vis-à-vis, today, if we have to see a cost of production in China, would their cost of production or their price of selling would be similar to what we are selling?

Yes. So you're very much correct. Your reading about that structural change in China since last 3, 4 years is very much correct because the cost of production for the Chinese manufacturer has gone up. But at the same time, because more and more Chinese companies are also getting listed, they're trying to attract external investors. Earlier Chinese companies used to work on a paper thin margins, like 4%, 5%. But now for them, also, margins have become important because if they want to attract investors, then they have to show good margins. So overall, what we have seen that competition which we used to face from China, from 2005 to 2010, almost 15 years back, that has drastically reduced in last 4, 5 years. And that is also one of the reasons why we were able to capture that import substitute product in the absence of PLI scheme also, we are able to capture that much market from the Chinese players. So cost of production is very much comparable, I would say. But I would like to add one -- that it will be comparable only if the Indian manufacturer is manufacturing that particular product to a big scale. Means if a small scale company may not be able to compete with the cost of production in China. But one who is a very big player in that particular product, they will be able to compete.

And on how higher the prices would be versus pre-COVID, in general, for the basket?

It's difficult to say.

Sir, just put it simply. Like last year, same quarter, if the prices were X for the basket of products, would it be now 1.3x, 1.2x of that X or...

See, our overall growth was around 12%. And you can say around 36% of that was driven by the price. So 0.36 multiplied by 12. So around that much prices are more...

As there are no further questions in the participants, I now hand the conference over to Mr. Adhish Patil, CFO, for closing comments.

Yes. So thank you, everyone, for participating in the call and asking the questions. It was quite insightful for all of us, to the management team of Aarti Drugs also. And we do look forward interacting with you in the next con-call very soon. Thank you.

Thank you very much.

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