Aarti Drugs Limited (524348) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Aarti Drugs Limited Q4 FY '21 Earnings Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Adhish Patil. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone and a very warm welcome to all of you present on the call to discuss our financial results for Q4 and FY '21. In the wake of second wave of COVID-19, we hope all of you and your loved ones are healthy and safe. We hope everyone is following all the regulations and safety protocols laid out by various authorities. We are happy to share that in FY '21, Aarti Drugs has delivered a strong performance. For FY '21, our consolidated revenue stood at INR 2,159.3 crores, a growth of 19.5% year-on-year basis. Revenue mix between domestic and exports revenue stood at 65%:35% as compared to 66%:34% in FY '20. API contributed to 79%, specialty and intermediates put together contributed to around 8% and formulations contributed around 13% of the consolidated revenues. In the March '21 quarter, consolidated revenue stood at INR 502.7 crores, a growth of 11.6% year-on-year basis. During the March '21 quarter, API contributed to 78%, specialty and intermediates put together contributed to around 10% and formulations contributed around 12% of the consolidated revenues. I will now take you through the stand-alone business performance. For FY '21, stand-alone revenues from operations stood at INR 1,914.9 crores, a growth of 17.1% year-on-year basis. Approximately 10% of this growth in the stand-alone segment was driven by volume growth due to the good demand across multiple therapies. Therapy-wise, the antibiotic category contributed around 44%, antiprotozoal around 15%, anti-inflammatory around 12%, antidiabetic around 10%, antifungal around 6% and rest contributed around 13%. Anti-inflammatory segment share to the total stand-alone revenue increased mainly on the account of good sales of products like nimesulide, diclofenac sodium and its derivatives and Celecoxib. 65% of these revenues came from the domestic market, and 35% from the export market. Domestic revenue grew approximately by 15.4% and exports by around 20.6%. As discussed during our past earnings call, demand for antiprotozoal and some of the antibiotic products remained subdued due to lockdown across the country during the year. We are expecting this demand to normalize once people start traveling regularly. For the current March '21 quarter, stand-alone revenue stood at INR 452.08 crores, a growth of 11.2% on a year-on-year basis. During the quarter, we witnessed a shutdown of 2 of our Tarapur plants in the month of January and February. On the annual basis, the impact was not significant as the shutdown lasted less than couple of months. To mitigate this risk -- this kind of risk in future, the company has recently converted 2 more of its manufacturing locations to zero liquid discharge category in addition to 2 existing zero liquid discharge facilities since 2 years. Further, the company is in the process to achieve ZLD operations for 4 more facilities in Tarapur. For your benefit, zero liquid discharge is a treatment process designed to remove all the organic liquid waste from a system. The focus of this process is to segregate effluent streams into various categories, extract by-products like salts and produce clean water that is suitable for reuse, in some cases, thereby being more eco-friendly. Also, being a part of socially responsible corporate in the current dire conditions of pandemic, the company recently donated oxygen tanks to the government hospitals to help those who are severely affected by COVID-19. Now we'll talk about formulation segment performance. For FY '21, formulation revenue stood at INR 284.9 crores, a growth of 36.5% year-on-year basis. Approximately 36% of the formulation revenue came from exports for FY '21. For the March '21 quarter, revenue for formulation stood at INR 61.9 crores, a growth of 22.2% year-on-year basis. Profitability was slightly low due to lack of execution of export orders, which will come in coming quarters. Also, the second wave of COVID-19 had a little impact on the full utilization of the capacity. On a consolidated basis, for FY '21, gross margins expanded by approximately 400 basis points on a year-on-year basis to 38.7%. With the improvement in our operating leverage, process efficiencies and better realization in sales, our EBITDA margins showed a meaningful improvement to 20.5% for FY '21. We'll be able to maintain our EBITDA margins in the range of 18% to 20% going forward. Profit after tax before other comprehensive income for FY '21 stood at INR 280.4 crores as against INR 141.4 crores year-on-year basis. EPS for FY '21 stood at INR 30.09 compared to INR 15.14 in FY '20. We are very confident in strengthening our top line performance further in FY 2022 based on the incremental capacities which would be available in near future. For Q4 FY '21, EBITDA grew 13.3% Y-o-Y to INR 81.9 crores. EBITDA margin expanded to 16.3%. Profit before tax, excluding exceptional items, for Q4 FY '21 stood at INR 65.3 crores as against INR 52.3 crores year-on-year basis. Our balance sheet continues to remain robust. Our gross debt stood at INR 344 crores, of which INR 187 crores would be the term loan. Our net debt-to-equity ratio improved to 0.38x from 0.6x in FY '20. However, our leverage is expected to increase slightly to some extent as we continue to ramp up our capacities through greenfield and brownfield CapEx. Nonetheless, lower cost of debt is expected to augment our return ratios further. Return on equity for FY '21 stood at 35.8% as against 23.7% in FY '20. Significant improvement in ROE was led by better process efficiencies, lower interest costs and robust growth in profitability due to better realization in selling prices. Our pretax ROCE, return on capital employed, stood at 34.2% as against 20.4% in FY '20. Net operating working capital requirement was a little higher on the account of higher RM inventory level. We are taking steps to reduce it. And in the coming quarters, you will see the results in terms of working capital requirement. The company incurred a CapEx of INR 88 crores in FY '21, and we are planning a CapEx of tentatively INR 550 crores over a period of 3 years for backward integration and capacity expansions. The majority of this CapEx will be done over the period of next 2 to 3 years and would be mostly funded through internal accruals. We are expecting an asset turnover of 2 to 2.5x on this investment once the entire CapEx is completed and utilizations are at full potential. Credit rating agencies like ICRA and CRISIL both have reaffirmed our debt credit rating on long-term facilities to AA- with a stable outlook and A1+ for the short-term facilities. The strong credit rating will further allow us to cut down our rate of interest, which in turn would reduce our interest outlook, thereby improving our ROE further. In line with our shareholder payout policy, we have announced a share buyback worth INR 60 crores and a dividend of INR 2.5 per share during last financial year. The Board has approved a share buyback of INR 60 crores in March 2021, which is currently ongoing. Cumulatively, we have distributed approximately INR 195 crores in the form of dividend and share buybacks over the last 6 years, which includes the ongoing share buyback as well. Our strategy to invest in backward integration has played a pivotal role in our strong performance. While the industry is facing supply chain issues due to constraints of supply coming from China, our operations are largely unaffected due to the restrictions on the account of backward integration. We will continue to invest in backward integration to be self-reliant for various input materials and KSMs going forward. Apart from derisking, the backward integration will also help to improve margin profile and return ratios. The company is well on track of increasing the contribution from lifestyle and chronic therapeutic areas and reducing share of acute therapies in our API business. Our recently expanded anti-inflammatory capacity has already started contributing to the growth. We have a robust pipeline of products under development for API and finished dosages, with more focus on antifungal, antidiabetic and anticoagulant therapy. The company is also in the process of commissioning a new production line for antidiabetic products. In fact, we have already commercially launched one of the antidiabetic products as of now. In addition, brownfield expansion of one of the antidiabetic products would also be completed shortly. We remain committed to explore more opportunities in the regulated markets with enhanced data integrity and automation. As far as U.S. FDA is concerned, we had a recent dialogue with the authorities for one of our products for additional data. Due to the -- but -- however, due to the recent second wave, our plan for mock audit by an ex U.S. FDA inspector slightly got delayed. We can now begin with the Q&A session. So we'll be open to take questions from you, please.

[Operator Instructions] The first question is from the line of Shanti Patel from Shanti Patel Investment Advisors.

Yes. Now this CapEx, which is spread over a period of 3 years, will result into how much increase in the turnover?

Sorry to interrupt, Mr. Patel. This is the conference operator. There is an airy disturbance coming from your line, sir.

[Technical Difficulty] little bit disturbance will be there, but I'm trying. Now is it okay? Hello? Are you getting my voice?

Yes, I can hear you. Yes, yes.

My question was, after completing this CapEx spread over a period of 3 years, what will be the approximate turnover of the company? It will be 2x or 3x as compared to our turnover at present and our profitability ratio, and return on capital employed and equity will remain constant or it will increase according to you?

I got your question. So the thing is after the completion of this CapEx and once we start utilizing these capacities to the full extent, we are confident that we should be able to reach a turnover of anywhere between INR 4,500 to INR 5,000 crores per annum on a consolidated basis. So -- and as far as the return ratios are concerned, definitely, FY '21 was very good. But still, we feel that, with all these products coming into picture, our EBITDA ratios should get enhanced and it should be upwards of 20% on a very stable basis.

No. In fact, the return on capital employed and return on equity will increase then? Is it okay -- correct?

Yes, yes.

And as far as strong capacity at present is concerned, how much it is utilized? 100% or less than 100%?

So the thing is like this. With 100% of utilization, our stand-alone will make a sale of around INR 2,500 crores to INR 2,600 crores and formulation another, you can say, can easily go to INR 350 crores to INR 400 crores. So with the current capacities, we do have a potential of anywhere between INR 2,800 crores to INR 3,000 crores.

The next question is from the line of Runjhun Jain from Nirmal Bang.

And sir, you have said that due to -- in the opening remarks that due to the COVID-related issues, there was some lower capacity utilization. Would you like to elaborate that? And because I was wondering -- because Q4 didn't have so much cases, which were actually started coming more in -- from April. So would we have this kind of an issue in -- for quarter 1 also?

Yes. As far as the API capacities are concerned, means for the month of April and till half of May, we did not have any shortages in production due to COVID. But on the formulation side, I would like to ask Vishwa to comment on it.

Yes. On the formulations side, we've -- also in the quarter -- in the Q4, we did not have any production-related issues because of COVID. It was, in fact, more of a demand -- lower demand in the Q4. However, in the current quarter, in April and May, we have faced severe manpower issues due to the COVID-related issue.

So you're saying that because of the COVID-related issue, there was lower demand in Q4 which led to the lower profitability?

As far as formulations is concerned, there was a lower demand, which was due to higher stocking, the stock levels were kept higher in the domestic market overall, which rationalized in the Q4, and due to which there was a fall in demand in Q4, which again picked up in April. For APIs, Adhish can comment.

So Q1 is normalized now?

Q1 is normalized, yes.

Great. Sir, can you give also some outlook about the growth -- sales growth about the next year? You are saying that the new facility is coming up. So what kind of a growth we can see in the coming year?

Yes. So on the API side, on the stand-alone business, there are a few incremental capacities which are coming up, nothing too meaningful if you compare as compared to the greenfield CapEx, which we were talking about. But still, we are targeting a growth of around 10% to 15% -- a volume growth of around 10% to 15% in the coming year.

That's only for API as well, right?

Only for API I'm talking about, yes.

And [ CapEx ] on formulations would be?

So for formulations, in this financial year, all our increment would come from our existing capacities only as well as in formulations we do have a substantial business from our contract manufacturing site. So we are estimating revenues in the range of around INR 330 crores to INR 340 crores in the coming financial year. And we do have a CapEx plan of around INR 40 crores to INR 45 crores in the current financial year, which would start bringing in revenues partially from the next year.

Sir, this INR 40 crores to INR 45 crores of CapEx, is it the part of that INR 550 crores CapEx which you have given for over 3 years?

No. The formulation CapEx is in addition to that.

Okay. And sir, just last question. This year we have seen that -- we have seen, over the last year, profitability has improved quite handsomely. And next year, you are saying that -- and that is why you are being, I think, conservative, we've always did that. You are maintaining 18% to 20% of EBITDA margin. So we have done around 20% in FY '21 itself. So you're saying that we might see some pressure on profitability in FY '22?

Yes. I mean we are just being conservative. There were few instances in the March quarter -- in the late March quarter, few of the raw material prices going up on the account of some shortages in terms of one of the suppliers going down in a particular product. But then with the streamlining of supplies, some of these prices which have gone up should ease down. That is what we are expecting. But just to be on the conservative side, we are saying 18% to 20% is fair enough to estimate or expect.

The next question is from the line of [ Lakshmi Singh from Athenahealth ].

So my first question is I wanted to know like why the promoters holding have been decreased by more than 2% in the last 2 years? Can you give some idea about it?

Yes. So it hasn't decreased significantly as such. And the thing is some extended families might be selling their shares, but the core promoter families, they are not selling much. So there is nothing like a decided plan of reducing the holding because -- maybe one of family because of the cash flow requirement might have sold a little bit. But overall, there is no such systematic selling in promoters.

Okay. So is the debt-to-equity ratio has been same? Or is it increased in this quarter?

Debt-to-equity ratio?

Yes, yes.

Debt-to-equity ratio has improved quite a lot. In fact, in the history of the company, I think it should be the lowest. It is 0.38x right now.

Okay, okay, okay. And can you tell the reason for decrease in sales last -- like in Q4?

Yes. So as Vishwa told on the formulation side, a little bit of demand aspect was there. But on the API side, it was mainly on the account of lower utilization also. So there were a few position-related issues in the Tarapur region because of which our capacities did suffer in Q4. The utilization was only 64%, which usually is very high for us. So that was the main reason why the sales were low in Q4. But as a -- but to reduce that risk in future, what we have done is that -- in that particular unit which faced shutdown, we have already converted that into zero liquidity discharge operation. And we already got the permission also from MPCB for operating as a ZLD unit. And we have applied for 3 more. So -- and we have already started operating as zero liquidity discharge units. We have to get formal letter from them. But as far as operations are concerned, the new 4 units are already converted into ZLD.

Okay. And you mentioned that we are opening a few more facilities also?

I was saying that a couple of more -- existing facilities only. That also we are converting into zero discharge in near future, maybe in a couple of months to quarters' time. And we have just installed few equipments related to that in Tarapur region.

[Operator Instructions] The next question is from the line of Abdul Puranwala from Anand Rathi.

So my first question is in relation to the geographical mix in FY '21. So as mentioned in the presentation, North America still has gone up from 7% to 11%. So would you throw some light on why this increase were there considering that the plant is still not approved?

Yes. So there were a couple of reasons to it. One is we also sell specialty chemicals and intermediates to U.S., North America. And another thing, Mexico is also part of North America continent. So I guess that is why you might be misled.

Okay. And so -- just one more question on the product under development. So under the formulations, could you throw some light on what could be the opportunities on the diabetes and anticoagulant products? What is under development? Because if you see your guidance, not much is getting buildup for the next 2 years. So from when do we see contribution from these products coming on stream?

So the antidiabetic products, we have already launched one of the products at commercial scale. But what we have done is our plant is yet to be commissioned because of the high demand on the -- from the marketing side. We were not able to take a small shutdown required to convert that to the -- to start -- commission that facility. So we have taken that in another -- one of our another multipurpose plant as of now. But then this product will give at least 100 to -- something about INR 100 crores of revenue potential might come from this new capacity. And we are also expanding our existing products through this debottlenecking. So that is why around 28 -- at least for the API and intermediate and spec chem business, around INR 2,600 crores of sale can be reached with whatever capacities which should be available for FY '22.

Okay. Sir, my question was specific to the products under development and [indiscernible] where there are 5 products on antidiabetics and 3 on anticoagulants.

Was more to, I think, do with API, I think. There might be some mistake. But Vishwa, there are a few under development...

Yes. Yes, we do have antidiabetic and anticoagulant products under development, and some are under filing. However, these are for regulated markets and the patent expiry -- I mean the generic launch for these products is 2023 and onwards. So we would expect commercial sales for these products to kick in after mid of 2023.

The next question is from the line of [ Ranvir Singh ] from Sunidhi Securities.

Sir, just you mentioned that INR 2,600 crore revenue for FY '22, that is total revenue you're talking about or from the current capacity, peak revenue you've mentioned?

That is the peak revenue which we can achieve with the current capacity.

Okay, okay. So like in Phase I, metformin product is already on and Phase II was scheduled. So in FY '22, any part of Phase II metformin capacity would be commercialized?

Yes. So this Phase II means -- actually, it's like this. In metformin, when we created plant back in 2013, we were supposed to have 2 phases. First was 600, second was 1,200. So that -- those 2 phases have already been completed. Now another round of expansion, which we are planning, that also we are going to do in 2 phases. So of that, first phase will be done by the end of this financial year most probably.

So Phase I metformin capacity is already contributing to revenues, right?

Correct. So around 1,000 to 1,100 tonnes per month of capacity is already there.

Yes. So what you said that will -- by FY '22?

So what we're planning to do is we are going to scale up this 1,000 tonnes to 2,000 tonnes per month by the end of this year. And then after 3 years, it will be scaled up to 3,000 tonnes per month.

Okay, okay, okay. And secondly, for buyback, what is the rationale for this small buyback? Because already we had it in our balance sheet. So how does it help us?

So it is a part of our shareholder payout policy, which is around 20 -- anywhere between 20% to 30% of PAT. So that is the reason why we announced this buyback.

Okay, okay. And last one, if I can. You have already given EBITDA margin guidance. But can you give gross margin guidance also? Because I believe that new capacity may have some higher overhead.

Gross margins, difficult to give right now, but I would say it will be anywhere near about 36% or something like that, 36%, 37%.

The next question is from the line of Umang Shah from AMSEC Life PMS.

Congrats on good set of numbers. Sir, the first question was you have some multipurpose plants also and some capacity which is for specific products. So if you could talk about the asset turnover and unit-level economics for both those kinds of plants, that would be very helpful.

Okay. Yes. So Umang, it's like this. So you are correct that we have -- do have multipurpose plants also. I would say around 80% of our revenues must be coming from dedicated plants. So in the dedicated plants, we run only those products. In multipurpose plant, what happens is products with similar reaction chemistry can be manufactured in the same plant by taking a changeover. But the problem is, whenever we do a changeover, under the regulatory aspect, almost 5 to 7 days are lost in the cleaning process and everything of the product changeover. So the efficiency of the plant goes down -- keeps on going down as the number of changes increases. So that is the reason why whenever the product is big enough, we always go for dedicated capacity. Possibly to start off with the product, we might start with multipurpose plant because we might want to test the waters as far as marketing is concerned. And then ultimately, as the product grows, we convert that into a dedicated facility.

Right, right. This is very helpful. Sir, I ask because you have one of the best asset turnovers in the industry from what I understand. And also the asset turnovers on new capacity which is coming up, it is 2, 2.5x. Is it working capital included? Or it's just on fixed assets?

It is on fixed asset, actually.

And with working capital, how much we will see? If any indication?

So typically, working capital is very roughly around 25% to 26% in our business or 25% to 26% of the sales. So you can do that calculation.

Yes, yes, I can do that. And sir, just last, if I could squeeze in, was -- sir, regulation-wise, in your export market in the last 5 to 10 years, have you seen any changes? Are they getting better, stricter, stringent? Anything on that would be helpful. And do you export on tender basis or do you have your own distributor?

Yes, for the API business, you're asking, correct?

Yes, yes.

Okay. So as far as regulatory aspect is concerned, it has definitely become more and more strict over the last 5 years. In a lot of cases, like genotoxic impurities, photostability studies, then your -- recently NDMA impurities, elemental analysis. So a lot of new, new studies are coming up as far as API manufacturing is concerned. So it is -- so API manufacturing is becoming more and more difficult and a very skilled job. The kind of specifications pharmacopeia refers as of now is very, very stringent if you compare the same with 10 years back. So as far as the regulatory aspect is concerned, definitely, it has become very strict. It is, in a way, good for people like us, established players like us because it will reduce new entrants. It becomes that much difficult for a new player to enter into a newer molecule. So it is good for us. You asked another question, right?

Yes, sir. I just wanted to know if it's tender based, how much is tender based and now much is self-distribution?

Yes. So as far as the export business is concerned, it depends on the country. So if in a particular country, the customer -- if the customer base is fragmented, then it is through distributors. If the customers are large enough to have their own -- to ship their own consignments, like in a container, half container load, then it is always a direct business because those kind of customers prefer to do it. But if customer base is fragmented, it is through distributor.

The next question is from the line of Sagar from Edelweiss.

So of the CapEx that you mentioned, INR 550 crores coming up over 3 years, what is the CapEx that will come on stream in FY '22?

As is put to use. Put to use will be very less because these projects will go on, and they will be put to use in FY '23, most probably. But there are a few, like antidiabetic small expansion is there, then antibiotic small expansion is there. And then we are also expanding a chlorosulfonation product at our Tarapur plant. Those 3 projects, mini projects you can call, they will happen in this financial year itself. In fact, the chlorosulfonation capacity which I'm talking about, it is almost to the tune of around 400 tonnes per month.

Got it. And can you quantify what was the loss in sales in Q4 due to the regulatory issues?

Yes, yes, yes. So regarding that pollution issues, if we take our utilization of capacities and compare Q4 actual production with our Q2 productions, anywhere between INR 60 crores to INR 80 crores we must have lost.

Lost? Okay.

The next question is from the line of Nimish Mehta from Research Delta Advisors.

One thing, if you can let us know how many intermediates are we manufacturing for our own convention? Or in other words, how many of the APIs that we manufacture are backed up by our own production of intermediates? And plan that we have in terms of CapEx is that -- even the backward integration, is that also towards more capital consumption? Or it's more towards sales in the open market?

Yes. So the plan which we have for further expansion is for both, capital as well -- many of it is for capital consumption. So it will be a part of backward integration, and some of it will be selling outside as well. And as far as the previous question was concerned, that how much backward integrated or -- in how -- rather, in how many products we are backward integrated? So this top 14 to 15 products which we manufacture, they are contributing almost to around 88% to 90% of our total sales -- or total stand-alone sales. And in all these 14 to 15 products, we are at least equally or more backward integrated than our competitors. So you can say almost this 88% to 90% of the sales is backward-integrated.

So -- I mean is it fair to understand that all the KSMs required for the 14, 15 products are manufactured by us?

So it is more like this. So if you can go "n" number of steps behind, but the logic to do -- go behind is that, first of all, you should be more backward-integrated than your competitors and your peers. That is the first rule. And second would be the KSM which you're procuring, there should be multiple manufacturers available for that KSM so that there is enough competition among them so that you can get that KSM at a good price. If there is some sort of curtailing or undue profit available in the KSM, then usually we go behind and manufacture that.

But is it not fair to assume that most of the KSMs are imported from China, and you are almost required to manufacture all the KSMs from a competitive angle?

So it depends. I mean just to give you a few examples, like ofloxacin, norfloxacin and levofloxacin, So these products were absolutely imported from China back in, I think, 2013 or so, almost 80%, 90% of the India's consumption used to come from China. So when we launched this product, we launched along with the OS, means the acids, whatever acids, which are required as an intermediate to manufacture this product at capacity to also be launched in India. But definitely, if you say the raw materials required for those acids, yes, some of them are coming from China. But then in spite of that, as of today, we are proud to say that almost 80% to 90% of the India's consumption is happening through our Indian capacities for these 3 APIs. So it all depends upon the competitive landscape. That is how we decide. And there are a few intermediates which we are supplying to China as well, few intermediates are delivered. So that is also there.

And lastly, I mean is it fair to understand -- assume that intermediate is a bigger opportunity than API? Or wherever you can manufacture intermediate, even for -- only there where we can see an opportunity? I mean is that a fair understanding or how will you put it?

Yes. So definitely, we have seen ample cases in the market where intermediate manufacturers have done really well. What we believe in is that specialty chemicals, that line of business, we feel is more attractive, reason being it has a lot wider application in terms of end use. So -- so that is the reason why we are looking into this chlorosulfonation products. And we have been already doing those products since last 20 years. Now just that we are going through a better route, better continuous process. So now we'll be scaling those products like tenfold than what current capacities we have. So that is the route where -- which we are following for expansion.

So that will be beyond pharma as well. The target customer would be beyond pharma as well?

Yes. Some of them are pharma, some of them are beyond pharma as well by their intermediates or pigments, colors.

The next question is from the line of Kunal from Vallum India Discovery Fund.

I really wanted to understand...

Sorry to interrupt, sir. Your voice is not audible, sir.

Yes, is it better?

Yes.

Yes, sir.

I wanted to understand -- just wanted to have the split of the CapEx in 3 silos. So how much would it be for greenfield, brownfield? What will -- and backward integration?

Okay. I will slightly -- answer your question a little different way. So the brownfield expansions or whatever debottlenecking incremental capacity enhancement, which we do, or that -- and that also include our maintenance CapEx as well. So all this put together, we are keeping a rough -- very rough budget of INR 50 crores to INR 60 crores per annum for this kind of CapEx maintenance plus brownfield. And for greenfield, we have already announced that around INR 550 crores of CapEx is lined up for next 3 years. So that is how it is split.

Okay. Correct me if I'm wrong, I think 500 -- you say INR 500 crores to INR 550 crores is for the greenfield amount -- greenfield CapEx. And the rest is -- some amount is for the brownfield and maintenance. Is that the right way to look at it?

Correct, correct. Yes. That is what I said.

Okay, okay, okay. And -- got. And regarding gross margin, do you expect any major pressure -- or major, I would say, pressure on the gross margin because of -- the raw material prices are moving up?

Harit bhai, would you like to answer this question?

Yes. Actually, this last March-April onwards, prices of some of basic chemicals have moved up considerably due to shutdowns and closure of 1 or 2 major plants in U.S. and Europe. So we expect this to cool down in the next couple of months. So we are feeling that there will be pressure for at these first 2, 3 months in this year. But eventually, selling price also will go up accordingly because we'll pass that -- whatever increase price in capacity to the customer. So net-to-net basis, 1 or 2 months, we will see -- we will be suffer -- we will be suffering, but otherwise, we'll catch up once the price stabilizes.

Sure. Sure. And just wanted to understand, could you give us an understanding -- so regarding the greenfield projects which we are setting up and which is coming onstream in the next 3, 4 years -- 2 to 3 years, so what is the product basket that you're targeting there? You mentioned that you're targeting specialty chemicals where you already used to manufacture those products and now you're increasing the capacity. And the specialty chemical facilities would be able to come up onstream much quicker because the regulatory requirements of approval will be lower. So could you give us an understanding other than these specialty chemicals, what else is there which you're targeting in terms of these new products for the new CapEx?

Yes. So broadly, this greenfield, you can split into 4 categories. One is the expansion of our current antidiabetic product as such because of the expansion in a very big way. Then there is one product which also goes as an intermediate and API in few of the applications like for skin treatment. And then there are a lot of intermediates which will be capitally consuming. And along with that, we'll be also manufacturing its allied intermediates, which we will be selling outside. Then there is a huge capacity of chlorosulfonation products, which is coming up. That also will be -- means that mostly we'll be selling outside and very minor part of it will be consuming capitally.

The next question is from the line of [ Arun Kumar from Aries Investments ].

I just wish to ask that what is your forward outlook on margin side and revenue side? Because earlier you had stated that due to your just production -- and in the month of January and February, you had problems with the production. I suppose that must be overcome in this quarter. What are you planning for it?

Yes. So definitely, our -- because of the higher production, the operating leverage should definitely help us in improving the margins in the coming quarter. No doubt about that. So that -- it will definitely push the margins on a little higher side, because of higher utilization.

And what about like revenue -- on revenue front, like how much growth do you expect?

Revenue trend for the entire year, so we are -- so we're targeting anywhere from 10% to 15% of volume growth as in -- from next year.

The next question is from the line of Dipen Sheth from Crystal Investment Advisors.

I have a question, which is more of a strategic issue that I can't figure out at your company. And perhaps you can provide some clarity on this. From what it seems to me, and I must confess I'm not very familiar with the business, but it seems to me that you are, say, close to about 80% of the business is in the manufacture of [indiscernible] drugs, from a new perspective, 78%, 79%. And to the best of my understanding, none of these products, while they -- some of them might be specialty, but none of these products are patented products. They are mostly generics or almost all of them would be generics. And -- so the ability to maintain margins when you are supplying these 2 formulation makers, whether in India, maybe 2/3 or so, 60% or so of your sales are to other formulators in India, some of them could be to overseas markets. Your ability to maintain a 20-odd percent margin profile on this kind of product mix at a time when so many other players in the generic drug space are saying -- in fact, some of them are formulators as well, are saying that they are suffering from the effects of continuous price erosion in many of these products. This is what surprises me. And maybe there is a strategic insight that you can share. Because I do have a very high opinion of the group's ability to identify niche areas where it can do high margin, sustainable margin work. So I'm not questioning that this is not going to happen. It's just that I can't understand.

So, Dipen, the thing is that there are a lot of other intermediate and spec chem business also within India itself. Close to product profile, what we manufacture, they are also doing -- they have been doing relatively, for the last 2, 3 years, EBITDA margins of annual -- in mid 20s, 23%, 25%. So it is quite possible. If you scale up a particular product to a large extent, then your economies of scale kick in. And -- plus -- and when you are able to do that in a product like API, which is also governed by regulatory aspect, so even more entry barriers are there from regulatory point of -- standpoint also for APIs, and plus the economies of scale in this area too. So I think the combination of these two and -- plus the fact that -- and the reason that we reach these economies of scale is purely because of good technology, good R&D, good process improvement and backward integration. Because of these 3 factors, we have big capacities. And once we achieve big capacities and our regulatory framework is already there well organized, so I think these 2 skill sets combined help us to achieve this kind of margin.

So if you'll allow me to add to that, sir, is it fair to assume that you would probably be a cost leader in many of the core high-volume products that...

The ones which we manufacture? Definitely. That is how we have -- yes, the one which we manufacture, means our top 15 products, definitely yes.

And you would be like a cost leader by a mile. You wouldn't be a small-time cost leader...

So the thing is this being a cost leader and process improvement, in particular, is a very continuous process. I mean, 1 year, we improve. Second, third years, the competitors catch up somehow. Then you have to improve further. So that race continues.

Yes. It's a treadmill. And this applies at a global level because...

Sorry to interrupt, sir. I would request you to rejoin the queue for follow-up questions.

Sorry.

Our next question is from the line of Mitesh Shah from ICICI Direct.

I just have a couple of questions. First of all is, zero discharges are too expensive that we lost around 60, 70 type of phase and then we have decided to do the zero discharge. And if it is not required for us, then when we can do the zero discharge for all of our plants?

Yes. That's a good question. Actually, the thing is zero discharge is slightly expensive, no doubt about that. Initially, the CETPs of Tarapur are functioning smoothly. And in fact, the new one also has come up, the Phase I has already started. The Phase II is yet to come in. And some -- so there are 2 CETPs right now in Tarapur, old and new. So the units which are connected to new CETP, they are running fine. There is no problem. But the one which was connected to old CETP, it was not performing properly. There we faced a little bit of issues in terms of production. So now definitely, we have taken a call that, in fact, 2 of the Tarapur units are already zero discharge -- ZLD since last 3 years. Two of them, we have already converted, means we've got the permission also. Another 2, we are running in ZLD operations, but permission is yet to come. But that's okay because we are already running as ZLD. And 2 more units we are looking forward to do in a couple of months or 1 quarter's time. So we have already done that CapEx in the month of Feb, March and April, where we're installing [indiscernible] and whatnot to evaporate and convert that into solid by-products. So from OpEx point of view, a bit of -- we might feel a little bit of pinch early on. But on the very [indiscernible], I would say, maximum on a yearly basis, maybe around INR 15 crores to INR 20 crores of OpEx will go up. But then there is also a probability of revenue stream being generated from this, which will offset at least 50 or more percent of this cost -- increased cost. So ZLD does take efforts. It occupies space also. So it's the space which is otherwise [Technical Difficulty] to manufacture finished goods. So overall, yes, it is expensive. But then I think that is the need of the hour, and the shortages of production cost due to these closures are much more expensive than the ZLD operations. No doubt about this.

So -- means in a couple of months, you mean to say that we are having the zero discharge for all the plants, right?

Yes, one of them, which is connected to new CETP we might continue to run like that. But then we'll be very close to converting that to ZLD, but we don't see the need to do it because CETPs were operating properties in that case.

And the -- have you seen any increasing in the competition recently after FY '21, the China has an impact and the other players as well? So any change in the competition intensity?

Harit bhai, would you like to answer this question?

No, I don't think so. I don't think so, so far. The only issue is due to COVID, our product profile, there was a demand issue in January, February. Otherwise, we don't see any competition problem. New competitor coming in our product range is not there.

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

Sir, just one question on the plant capacity. So by when would we expect this capacity to come in? And what would be the quantum of investment on it?

Sorry, Abdul, which capacity you said?

Para-aminophenol.

No, it is not with Aarti. It is [indiscernible]. We are not doing that.

The next question is from the line of Purvi Shah from Kotak.

Adhish, I had 2 questions. One is related to this given update on the ongoing buyback as to how much have we bought so far? And the other one was if you could just share some updates on the PLI scheme wherein [indiscernible] going forward how do you see drug movement or update on the back of this event?

Actually, I could not hear the question very clearly. But the second one, I think you asked regarding the PLI scheme.

Yes. One was the PLI scheme and the other one was on the buyback update.

Buyback update. So buyback, the thing is the buybacks are done. Obviously, it is oversubscribed now. I think this week -- very soon, there will be a shareholder payout now in coming few days. So the process is almost completed. And as far as PLI scheme is concerned, the government recently announced -- they came up with 1 more notification recently, where they have mentioned 3 categories and 3 groups -- 3 categories of product, 3 groups of companies. So we fall in category 2 and group B. So where -- the outlay -- that way it is not huge. It is just, I think, INR 2,200 crores for our group spread over 6 years. So it is like 10% of the selling price for first 4 and then 8% and then 6%, something like that. And the conditions what they have mentioned are the CapEx about INR 250 crores, that anyways, we were supposed to do. So that anyways we are going to do. So satisfying the conditions is absolutely not an issue for us. But then the details of that scheme is not yet out. So we don't know the intricacies of that scheme. So once it is out, we'll come to know.

So what I wanted to understand was also that whenever this PLI scheme comes in effect, when you actually start production, so they start reflecting into numbers maybe 2 years down the line is what I wanted to understand.

Okay, okay. Yes, yes. Correct. Because I think -- yes, you are correct.

CapEx, right? Yes. So there's nothing that is on [indiscernible]? So whatever comes, comes after FY '24 only?

I think FY '23 is the first year, for the previous PLI scheme, I think.

Right.

Yes. And the newer one, I think -- for the newer one, [Technical Difficulty] scheme also they have mentioned FY '23, but then they might come with rectification. I don't know.

No, sir, what I'm trying to say is that for RPA [ tracks ], when does it start reflecting into the numbers?

Yes. Possibly '23 or '24 onwards. You're correct. This year, it won't be there.

Right, right. And the other thing, just wanted to reconfirm on the raw mat front. That since we've seen a lot of peers starting raw materials and supplies from China where the price increase has been quite significant. But do we -- I mean we know that mostly for a quarter or 2, we are protected, but what after that? So are we -- So how the situation panning out is all I want to understand, because there are only few players who are getting affected and the others are not getting affected. So just wanted to understand what is...

Yes. Yes, Harit bhai will answer your question.

So it depends on the product mix also, depending on the product mix and normally now what China has done is if there are 2 or 3 producers, they just made it curtail and increase the price. If there are more than producers, then it is difficult to curtail anybody in China. So -- and whenever Indian producers start thinking to produce that product, they want to make money for next 2 years because Indian company will start making -- they will take 2 years to form that -- produce that product. So there, typically, I said they are those products like PAP, para-aminophenol, or DCBA, price has almost doubled in the last 2 years. So there are many other ports. And they also make very fast money, and then they will -- once the Indian company starts producing, they want to dump. That is their strategy. That's what we feel now.

So basically, it's just sabotaging the India plans...

Yes, yes, yes. Every producer has a strategy. The Chinese producers now have realized that's better to -- a lot of Indian companies have started producing intermediate chemicals, the KSMs -- yes, yes.

So basically I just would like to understand your thoughts on that whatever the PLI schemes that the government has shown us like both PLI 1 and PLI 2, do you really think that the ground reality could change over the next couple of years for trying to move from China to India, that shift that we are talking of?

Whether it is PLI or not PLI, Indian companies who are able to compete Chinese in the technology products and other things, they will continue to do irrespective of PLI or not PLI. The PLI is only like small-time subsidy. And there are a lot of ifs and buts and a lot of value addition is there, 70% local valuation is required and all that. So it's very difficult to meet PLI conditions actually speaking.

So forget PLI also. If you do not say PLI, but irrespective of that also because as companies also, we are trying to derisk ourselves from Chinese players for raw materials. How successful can the entire industry be? I mean moving China out of equation is...

No, it depends on the chemistry -- yes. It depends on the chemistry. Fermentation, we are not at all -- India is not at all there in fermentation technology. And some of the products like phosgenation -- they're like -- depend on the chemistry -- Yes, yes. So China is ruling the world, actually speaking. So those chemistries, phosgenation and all, India will take 4, 5 years more to come -- for Indian companies to start, government giving permission and all that. So generally, for the next 10 years -- we feel it will take 10 years for chemical industry and many multinational companies across the world wants alternative to China. So definitely, Indian companies eventually will come up with -- more and more Indian companies...

Do we have the focus all we want to understand. We have the focus to...

Yes, yes, yes. Sure.

The next question is from the line of Imran Khan from Ratnatraya Capital.

Am I audible? Hello?

Yes, yes.

Okay. Good. Sir, just wanted to understand what is happening in terms of pricing, especially on the API side, let's say, compared to Q4 FY '21 compared to Q1, Q2 and Q3 of FY '21. So how this pricing is in the recent quarters?

Pricing is more or less stable, but raw material prices have gone up due to shutdowns. And as discussed earlier, there were some basic chemical prices have gone up and some intermediate KSM from China has gone up. So eventually, we will take -- we will also increase our price. So it is just short term, there will be an issue. But otherwise, longer term, we will be able to pass on that cost to the customer basically.

So there has been -- I understand that there has been a cost pressure, but the prices are the same, right? I mean there is not much difference in the pricing?

No. In many products, prices have gone up, like many API, prices have gone up recently, depending on the cost, basically.

The next question is from the line of Mitesh Shah from ICICI Direct.

I have a couple of questions more. Actually, post the cephalosporin antidumping duty, have you seen any major benefit on that? Or we can see in FY '22 again?

We are not into cephalosporin. So we can't answer that question.

You have some antidumping duty on one of your....

No, it is ciprofloxacin. Okay.

Ciprofloxacin, yes. Okay.

Yes. So there will be less import from China. There will be definite advantage to India -- Indian companies.

And how much we are depending on the China for the raw material procurement?

It depends on the product to product. See in China also, the API manufacturers are different and raw material producers are different. So whatever China is producing -- API producers are producing, we are not -- they are not as backward as we are. We are also on the same line or we are more backward. So we do import from China, but there is no issue on the availability as of now.

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

Thank you all for joining us on this call. So please reach out to us, to our IR company, Strategic Growth Advisors, or us directly should you have any further queries. Stay safe. And now we will close this call. Take care. Bye.

Thank you very much all.

Thank you, everyone.

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