Aarti Drugs Limited (524348) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Aarti Drugs Limited Q1 FY '22 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 a guarantees for future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference [ has been ] recorded. I now hand the conference over to Mr. Adhish Patil, CFO, Aarti Drugs Limited. Thank you, and over to you, sir.

Thank you. Hello, everyone, and a very warm welcome to all of you present on the call to discuss our financial results for the first quarter of financial year 2022. So from Aarti Drugs Limited today, we have our Joint Managing Director, Mr. Harshit Savla; then the Whole Time Director, Mr. Harit Shah; and myself, CFO of the company. We hope all of you and your loved ones are healthy and safe in the wake of this pandemic and floods across the country. The downward trend of COVID-19 cases is certainly a good sign, and we can still hope that the pandemic breaks over soon. I would also like to highlight that the company has not faced any major disruption in terms of supply chain or plant shutdowns due to ongoing flood situation in Maharashtra. We are happy to share that Aarti Drugs delivered a resilient performance despite facing multiple headwinds during the quarter. Our consolidated revenue stood at INR 581.6 crores as against INR 545.9 crores year-on-year. Revenue mix between domestic and export revenues stood at 69/31%. This time, the domestic share was a little more than previous year. I will now take you through [ detailed ] price performance. First, we'll discuss stand-alone business performance. Standalone revenues stood at INR 505.8 crores, a growth of 6.4% year-on-year. This contributed approximately 85% of the consolidated revenue. 69% of these revenues came from the domestic market and 31% from the export market. Domestic revenue grew approximately by 12% and export contracted marginally by around 4.1% year-on-year. However, contracting exports can be attributed to the fact that around INR 9 crores of exports from March '20 quarter was accounted in June '20 quarters due to [ low volume ] last year. So if we take out that [ list ], then export has grown marginally. Approximately 13.2% volume growth was offset in the API segment in the first quarter. Within the API segment, the [ antibiotic therapeutic ] category contributed around 43%, antiprotozoal around 13%, anti-inflammatory around 11%, antidiabetic around 10%, antifungal around 9%, and the rest contributed around 14%. So [ that's ] -- to the total standalone revenues. The share of [ Aarti therapies ] remained subdued due to [ secondary ] of COVID-19 [ use in small firms ]. Our Tarapur plant, which witnessed a shutdown during Q4 FY '21, it is now completely functional and operating normally. The company is well on track to mitigate this kind of risk in the future. The company has converted additionally, 4 office manufacturing locations in Tarapur to [ zero ] liquid discharge category in current calendar year. Further, the company is in process to achieve the building operations for more facilities in Tarapur by the end of financial year '22. This has marginally increased factory [ orders ], which we plan to overcome in future by making more byproducts from the waste and use high [ caloric ] value waste [ in various ] waste recovery boilers. Now we'll discuss about the formulation segment. For the quarter, formulation revenue stood at INR 86.5 crores, a growth of 6.7% year-on-year. Approximately 19% of the formulation revenue came from exports during the quarter, which we expect to grow in near future. Sudden increase in the raw material prices. Now we talked about business in general, about the API segment as well. Sudden increase in the raw material prices, driven by demand supply whiplash, increasing crude oil purchase, and plant shutdown at the support level affected the gross margins. This was coupled with reduced demand for acute therapy products because of the second wave of COVID-19 in these [ long terms ]. As a result, passing [ contact in this input took up onsoot ]. However [ it was a result ] [Audio Gap] It was only partial as compared to increased input cost. We believe that the worst is behind us [Audio Gap] normal levels in the coming couple of quarters. We remain confident of achieving the EBITDA margins in the range of [ 18 24 ] under current [ trends ]. The profit after tax for the quarter [ here is ] [ however ] the June quarter [ is 50% ] the important margins. Internal CapEx of around [ INR 38 crores ] is [ current quarter ] CapEx of around [ 1 6 20 ] crores.

Sorry to interrupt Mr. Patil, this is the conference operator. Sir, we unable to hear you. Sir, your voice is breaking.

[ Now is it better ]

No, sir. Let me disconnect your line and call you again, just give me a minute. Ladies and gentlemen, we have the management line reconnected to the call. Please give me one moment. Yes, sir, you're in the main call, sir.

Yes. Yes. I will repeat the last few minutes [ I was talking about ]. So the sudden increase in the raw material prices driven by demand/supply mismatch, increase in crude oil prices, and plant shutdowns at the supplier level affected the gross margin. This was coupled with increased demand for [ Aarti's therapy ] products because of the second wave of COVID-19 [ in this lockdown ] as a result passing on the increased cost to customers over this [ challenging ] situation. However, the average realization for most of our products have increased compared to Q4 FY '21, but it was only partial as compared to the increase in [ discount ]. And that is why our gross margin contracted in this [ particular ] quarter. We believe that the worst is behind us in terms of raw material price hikes, and EBITDA margins are expected to come back to normal levels in coming couple of quarters. We remain confident of achieving EBITDA margins in the range of around 18% going forward for the current [indiscernible]. Profit after tax for the quarter stood at INR 48.8 crores as [ against INR 85.5 crores ] year-on-year. However, we know that [ June '20 ] quarter was an exceptional one in terms of margin, and we had discussed that last year as well. The company incurred a CapEx of [ INR 48 crores ] during the quarter, and plans on a CapEx of INR 150 crores to INR 200 crores for the remaining part of FY '22. This might get affected [ should ] COVID-19 [ recur ]. The balance sheet continues to remain strong with our comparable net debt-to-equity of around [ 0.54x ] as of June 30, 2021. The net debt-to-equity ratio is expected to improve going forward, driven by strong internal [ efforts ] in the forthcoming quarters. Credit rating agencies like ICRA and CRISIL have reaffirmed the debt credit rating on long-term facilities to AA- with a stable outlook, and A1+ for the short-term facility. The strong credit rating will allow us to further lower our rate of interest [ reducing somewhat ] our interest [ outlay ] whereby [ are in ] server. I'm happy to announce that the share buyback completed during the quarter gives us [ a natural ] response from the [ near term ] and was oversubscribed by almost 111 [ times ]. The company bought back [ 6 lakh ] shares with [ INR 60 crores ] during the [ minor ]. With this, the company has [ recouped ] around INR 195 crores, almost 26% of net profit in the form of dividend and buyback of shares over last 6 years to our shareholders. I would like to highlight here that [ the bondholders ] also participated in this [ buyback ]. The company is well on track of growing the contribution from lifestyle and chronic therapeutic areas, and releasing shares on [ Aarti therapies ] from the [ AC energy ] businesses. Our recently expanded [ onic ] therapy capacity has already started contributing to the growth. We have a robust pipeline of product under development and -- for both [ vesia as well as ] with more focus on antifungal, antidiabetics, [ in treatment ] and anti-inflammatory. We remain confident of overcoming the near-term challenges. Our growth projection is expected to be robust, driven by robust demand, [ excellent ] operational execution, and capacity of [ sponsors ] through a combination of brownfield and greenfield traffic in [ Asia and Southeast India ]. Our margin, profitability, and [ recent escher ] are also expected to improve due to operating leverage and [ that for is ] in coming quarters. The company will continue to explore various opportunities in terms of [ new spirit in elefin ] and geographic expansion. We can now begin the Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Pranav from Invesco Mutual Fund.

So basically, just wanted to understand, you alluded to the thing that you've taken price increase even in the current quarter. But if you've taken price increase, all I'm trying to understand is why is your volume growth then higher than the pricing growth or the value growth, if you've taken price increase across segments?

So yes, I [ refer ] to that in the last year [ 2 or 3 quarters ] in the quarter that the prices are exceptionally high. During last year, [ all of the quarters ] the prices [ rest of ] quarter and the prices will kind of a [ bit part up ]. And after that, the [ raw materials were on ]. So we have taken price [ in fitter part ]

Sorry to interrupt, Mr. Patil. Sir, this is the conference operator, but your audio is not clear, so we are unable to hear you, sir.

Is it okay now?

Yes, sir, you may go ahead.

First thing that -- yes, if you compare with June '20 quarter, then the prices have gone down because June '20 quarter was -- at that time, the selling prices were exceptionally high. But if you take the normalized quarters of December and March, and with respect to the December and March, the prices have now gone up, of the raw material. And so does the selling prices have also gone up. But then, the increase in the selling prices is not proportionate to the increase in the input prices. And that is why there is a squeeze in gross contribution.

Okay. So let me sort of highlight. Quarter-on-quarter, you saw, what, 13% volume growth. Is that the right number?

No, that was year-on-year [ one ].

And quarter-on-quarter, how these things have moved, actually, say, volume and value?

So value-wise, there is growth. In fact, quarter-on-quarter, there is more growth because last time on consol, we had done INR 502 crores of [ sale ] and this time, [ by it even ] [ INR 581 crores ] of sales we have done. That is quarter-on-quarter, March quarter versus June quarter.

Okay. And how much would have been the volume growth rate?

That -- quarter-on-quarter, I don't have the numbers right now, but I have the numbers for Y-o-Y. And year-on-year, it is around 13 -- more than 13%.

Have you taken any inventory write-offs or write-downs in this current quarter?

No, no. This is purely because of the raw material prices, and almost around more than 22 -- we have seen hikes in almost more than 20, 22 raw materials. And the hikes were also quite drastic in the sense of -- in some cases, more than 250% high -- more than 100% rate hike there.

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

So some more color on your raw material price increase. So in terms of -- in the last quarter, you had given a guidance of around 38% kind of gross margins. So by when would you expect to reach those kind of margins? And in terms of price increases, by Q3, should we expect -- how are the raw materials prices as of now? Have they started stabilizing? Or are they continuing to grow?

So one thing I would like to answer that in a couple of quarters, we are expecting that our gross contribution should improve by 4% or so. As far as the current raw material tracking scenarios, I'll ask Mr. Harit [ by ] to answer that question for you.

Yes. I don't know [ when the ] raw material prices are tapering down to [ minus 50% ] of the cases. But [ since develop ] the case is price is still at the same level as the first quarter. But we expect that also to be slowly coming down by a month or so. So we expect -- in this quarter, we expect [ that in ] 1% or 2% raw material price coming down, definitely.

And are you continuing to -- even in current quarters, you're continuing to take price hikes in your product for customers? Or how is that working for you? Is there any -- so is there any -- sort of what portion of your business there would be a formula-based mechanism for passing through [ perhaps your ] raw material prices?

Yes. [ modern is ] happen you took in first quarter due to 4 weeks, demand scenario was also very weak. So we were unable to pass on the price increase to the customer due to competition. And also one more for the next full year, the container freights have gone up by almost [ 600% ] in most of the cases. So there also, we are being affected. So overall situation, we expect we should do better than fourth quarter, yes, in second quarter.

And one final question before I get back to the queue. So in Q4, you had mentioned that there was some spillover of sales from Q4 to Q1. So in Q1, what portion of -- could you quantify that portion for Q1? How much is it -- how much of those sales are in Q1?

So [ as it ] last year, we are accounting exports from deal of [ year end ] date. So [ until ] that matter is shipped, we are not taking it as a sale. And because of that, last year, a lot of merchants [ or a lot of sales ] got spilled over in June '20 quarter.

9 to 10 bps.

Yes. And this year, in fact, the opening inventory of port was lower than the closing. So this year, actually, we had shown a couple of [ credits ] of sale less in exports because of the same deal accounting.

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

Sir, just 2 questions. Firstly, on the product mix side. So as I heard in your opening remarks, the export [ field ] had been quite lower in this quarter. So how should that [ pan out ] for the entire year? Is there any sort of a demand contraction, which is happening from [ overseas ] plant? Or this was just a temporary phenomenon from a quarter basis owing to the priority was given to domestic customers?

So one thing I would like to say that going forward, the export demand is looking strong. We have a lot of pending orders also. So it was more of one-off case because of more priority [ given ] to domestic market, but we have a lot of big pending order at least for exports. So it's not that of worry for us next [ alim ].

Okay. Sure, sir. And second, sir, I refer to the presentation where you mentioned that the investment, what you're doing to M&I backward integration, that number is slightly lower as compared to what we are doing previously. So any color on that trend? And whether the INR 600 crore guidance for 2, 3 years, is that entirely intact?

Yes. So the only thing is, in some cases, because of improved process, you can say, we might be able to reduce the CapEx number, in absolute same. But that doesn't impact anything related to the capacities we are planning to install. That plan is still on.

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

Sir, in this quarter, do you have the contribution from [ metformin ] [ as far as used in ] Phase I?

No, no. So that specific market constructed the -- what we are talking about from 1,000 to 2,000 tonnes per month, that is still not yet commissioned.

So when is likely -- when actually will see revenue coming from this facility?

So it will take around -- because of this COVID thing, conservatively safely we can say, 10 to 12 months more.

Okay. So are these new projects start earlier than we anticipated but at least by second half of FY '22 where Phase I will start contributing. So I think this is pushing...

Yes. Correct, correct. Slightly, there is a delay because of this construction activity getting [ in it ].

Okay. And have your participant asked about the gross margin outlook. So you said 4 percentage point improvement may happen in the next couple of quarters. That's what you said?

Correct, correct. We expect it. Correct.

From 31, it can go [ to 35 ], that is the math we can see in this financial year?

For -- yes. For this -- correct. For this kind of product mix that is what we are assuming, is around 18%, 19% EBITDA levels.

So even -- so that 38% kind of gross margin as [ previously ] we had. So that is -- that seems not achievable in this financial year, right?

In this financial year, no.

And this price increase, the passing on of price increases you talked about. So what is actually -- how -- what proportion of our contract is based on long term, where we can have the price increase cannot be passed on in a smaller time? And how much is the business where we can pass on? So that will give some understanding going toward that because price is likely to remain volatile for most of raw materials. So can you give some light on it?

3 Yes. Typically, what happens, our exports contract, the prices are fixed for 2.5 to 3 months on an average. So we already carry fixed orders for almost around -- yes. You can hear me, right?

Yes, yes, yes. Okay. Yes.

So the export orders are usually 2.5 to 3 months. So that is there, so where we cannot do much. Then our domestic orders would be somewhere around 1 month, but then for a few of the MNCs, we are fixing up price contracts also in domestic market for a quarter -- for 3 months period, and then we revise it. So in some cases, it is difficult to revise immediately. And as I was saying that, especially the [ arti gesenan ] like antibiotic and antiprotozoal because of this lockdowns. At one side, there was an increase in raw material prices -- sudden increase in raw material prices and severe hikes are there. So it is very difficult to justify to the customers, especially in this market to get very severe hike in our selling prices. So it's like a little slow process, but it is happening. So it is more of a temporary gross margin contraction right now.

The next question is from the line of [ Bob ] from [ Falcon ].

A couple of questions regarding your products. You're a leader in fluocinolones, but there's been quite a bit of backlash against that because of the side effects. So I'd like to understand your comments regarding this. And similarly, for [ municulae ], again, there have been some negative articles around the side effects on liver, et cetera. So how do you see the demand panning out for such products?

Yes. So as we said, the company as a whole, we have -- for new [ plan for ] CapEx, we are focusing more on [ chronic like scale ] business and less of a [ acute ] therapies. So that is the way of derisking ourselves from such kind of things happening in future. But as of now, what we see, so we have 5 [ lirip in once ], Supro, Imbro, Nord [ Evo ] and Oxy. So they treat 3 different kind of acute [ you can say ] symptoms. So we haven't seen much of a problem. But right now, what has happened that because of lockdown, this particular infection has spread, and some of them are respiratory. Some of them are spread through waterborne amebic infection, or bacterial infection through water. And because people are not going out, not meeting other people, not eating out, and because of all these things, the demand has been slightly low. Not mainly because of the side effects, because these [ products ] are quite stable as of now. And since they are used in very short burst, what I'm trying to say is it's not like we have to consume a lot of doses of this particular molecules. So that is a form of insulation in terms of -- for the demand of these products. And as far as [ mucilae ] is concerned, so along that, in fact, if I'm not mistaken, more than 5 years back, [ mucilae ] is both is very effective molecule but is [ banned in ] pyretic use. That thing happened a long time. But even after that ban, for adult [ purpose ], it is being prescribed quite [ heavily ]. So we are not seeing that much of a problem as far as the demand of [ mucilae ] is concerned. And in fact, [ mucilae ] has done quite well in last financial year for us.

Right. So you're not seeing year-on-year contraction in growth. You're actually seeing the demand increase year-on-year for these molecules, [ ciprofloxacin and mucilae ] and...

Yes, revenues, yes.

Okay. And the other question I had was you have a large scale and you've been one of the leaders in Metronidazole and tinidazole, et cetera, because you have been producing these molecules for a long time for the past 15, 20 years. I understand that. But how -- when you're venturing into these new APIs, how do you establish leadership because you wouldn't have scale in the beginning and there will already be established players. So how do you compete on price with them?

Right. That's a good question. The thing is when we launch a particular molecule, we see to it that what is the competitive landscape of a particular product. So most often, when we entered, there were like 6, 7 players in that particular molecule, which in turn also means that the market share is quite fragmented. So there is no clear-cut dominant player in the market. Obviously, there will be top 2, top 3 players, but there is no clear-cut dominance as such. So if the market is fragmented like that, it is easier for new players to enter. And then obviously, because of, you can say, process R&D, the way we improve the processes, our engineering schemes are also very good, especially when it comes to handling products where a lot of material movement needs to be handled, a lot of material [ movement there ]. So whatever we manufacture, they are manufacturing like [Audio Gap]. So that is how means we try to become cost leader. Then obviously, backward integration is always there, always one of the key, you can say, factor for achieving that cost of production leadership. And that is how we start getting more and more market share. So initially, there are price wars. So we have seen that whenever we try to expand in a meaningful way for any particular product, there is a little bit of margin contraction. But in the longer run, the margins revert back to [ the mean ]. So that is what our main strategy is.

I see. Okay. And finally, we've been hearing from a couple of players that have announced their results recently in formulations that they're seeing a lot of price erosion. So if there's price erosion in formulations, would that not feedback to API and lead to lower prices for you as well?

So the price -- I mean, the price erosion in terms of the final prices of the retail products, that we haven't seen in -- at least in the developing markets as such. And moreover, the -- for the API contain the cost of APM vis-a-vis the retail price of a particular [ ostratoe ] tablet is very, very low. So actually, the more margins are there in the distribution chain of the formulation, the wholesalers, the retailers on the stock list. So in fact, even if they try to [ save on it ], it won't be meaningful for them [ in those coming ].

I mean, more in the export markets like U.S. and more the developed markets.

So actually, we haven't seen any pressure [ as yet ] because ultimately, the [ API rates ], generally, historically, they are driven by the input prices. Because even if you take 3 manufacturers for any [ API ], for all of them, the input prices more or less are similar. So everyone is in the same boat. So typically, if there is any movement in the input prices, that is of the basic chemicals, then the API prices do get revised. And accordingly, the ultimate formulation prices should be getting [ revised ] finally.

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

First, the basic question about raw material pricing. I mean, what is the reason behind the increase in the price? I mean, I couldn't get it in the initial comments.

Harit, would you like to answer this question?

I didn't get the question. Can you repeat?

Yes, the main reason for the raw material price hike.

Yes. One is there is a couple of plants, which were taking a shutdown and there are some 1 or 2 plants in the U.S. had exceeded -- they had some issue on the power and [ restitutions ]. So that has caused the -- and they are not able to operate for last plus quarter, almost -- so 3 to 4 months, there were plants where shut down. So that is one of the reasons. And overall, the crude prices also has gone up from $50 to $75 per barrel. And overall demand/supply mismatch was there. So all put together, this has created a very big price increase in major raw material.

So these plants that got shut down we are missing is in which country, China or in the U.S.? And is it for all the products because we have been seeing pricing...

It's part of the work, yes. Some of the products, yes. So of the 30, 5 or 6 products were affected because of that. And there was supply mismatch also, supply-demand mismatch due to sudden demand [ in part ] the prices went up also.

Okay. Okay. The other thing, I mean, following up on the last question as well. I'm trying to understand how do we select products. And in the presentation, you mentioned that every API company should have some niche. So what is the niche that we are talking about in a technical sense? And how can this niche help us expand, or how much can it help us expand beyond where we are currently in terms of number of products [ that are ]?

So the main niche for us as far as the API segment is concerned is the cost of production. So that is the main thing. And the cost of production comes from multiple [ effection ] manufacturing efficiency, of course, that is important. Process is important. That is the ROS. So R&D is important. Engineering [ seenchin ] are important in the quantum means once your cost of production is less, then you should expand very quickly to scale up your operations because once you scale up, the [ audits ] also go down per kg. So that also helps in bringing the cost of production further down. And apart from being the price leader in API, recently, in last 5, 6 years, the quality of the impurity profile, the regulatory requirements, that has also become very stringent. And because we are there in this business since last 36 years, and all our customers are repeat customers. So there is a good brand name of repeat in formulation space. So -- and that also helps us in getting more market share from [ our edi ]. And our customer base is also very [ high ]. So whenever we launch a new product, we get back much easier access to those project managers because many of the formulation companies have a basket of products. So that -- buying a certain set of APIs from us, then obviously, they will give us a reference for the newer launches also. So that is one. Then for expansion, we're saying that the thing is we have a big list of products. So top 13, 14, we have already established leadership whereas in some cases, the leadership is very, very, we can say, we are much larger than the second -- next best [ biggest vendor ]. So that kind of leadership, we want to achieve for almost all the products because -- so we will capture more and more market share for older molecules because then it will give further stability to our margins for those products. And meanwhile, we have a big tail of molecules like 15 to 48 API manufacturers, and they are contributing very less. The top 20 molecules must be covering almost 94%, 95% of the stand-alone sales for the API and spectrum segment. So all these trailing molecules, like next 20 molecules, they're contributing only 5%. So those are the molecules which will grow in the future. And then by doing R&D, we'll keep on adding new molecules also. So that is where we are, trying to...

Yes. So are there any processes or technology where we have developed any expertise, which is what...

So what you say is correct. So when you manufacture, say, a certain type of -- now we manufacture wide range of products like antibiotics also [ flows in those ], then we manufacture antivirals in a big way, then anti-inflammatory also, we are manufacturing in a big way. The cardio protectant, antifungal, antidiabetic also. So what I'm trying to indicate is that a lot of the change, not all the reaction, but a lot of chemical reactions, we are very well versed in, and [ back to recovery ] to a very large scheme. So we are manufacturing all these products, which I talked about in a very large scheme. Very, very large scheme, even the -- few of the smaller -- when I say smaller products, I still mean 25, 30 tonnes per month of capacity. So that level of production, talking about. So obviously we get, you can say, expert in keeping the cost low for these reactions. And that is what we use when selecting a new molecule, you also see that the chemistry involved in manufacturing this new molecule is somewhat similar to what we are already doing because that helps us a lot in [ nonsimilar products we have got ].

Understood. So what would be common like among the top products in terms of chemistry, or process, or technology other than some sort of processes would be common among the top, whatever, 5, 10 products. I'm just trying to understand like what is common across all the various products?

No. So there are different synergies like, for example, a particular -- what we manufacture, one particular [ we can ] get growth in 2 products. Then, one particular [ in term get ] which goes in 3 or 4 products. So when you have such kind of ecosystem, then you can manufacture that it turns into a large scale and then we have a cost leader. So those kind of efficiencies we do [ copy ], first of all.

Okay, okay. So focus on intermediate would be?

[Operator Instructions] The next question is from the line of Runjhun Jain from Nirmal Bang.

Sir, just one question I have. The thing there was sudden price increase, what we have seen. Is it possible for you to quantify what kind of overall price increases what we have seen in the raw material? And against that, what price increases what we have taken, which probably will reflected in coming quarters?

It is in a way, slightly difficult that how much will come back because there are cyclical events also. But what -- I will give a very rough idea, that when I compare gross margins of few of the products from December quarter versus June quarter, then we almost could see more than INR 30 crores of difference in purely in terms of gross contribution for this quarter.

Okay. So that is the kind of price increases you have seen. And the benefit of any price increases, what you have also taken is not reflected in this quarter at all.

Some extent, it has been reflected to some extent, but not completely.

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

So just to understand the commentary [ you could ] you said the demand on a few products are lower. I think the second wave of COVID.

Sorry to interrupt Mr. Singh, but your voice Is breaking, sir.

Is it better now?

Yes.

Adhish, just wanted to understand your opening comments a little better. You said the demand for acute products were subdued in the second wave, whereas this is contrary to what the IPM is reporting and the company with more acute focused reporting super normal growth. So where is the disconnect? I just wanted to understand this.

Yes. The thing is it might be related to particular products, or a particular company getting market share from some other company or something like that. But the kind of molecules which we manufacture that -- many of them go for therapies like bacterial infection -- respiratory bacterial infection, or your UTI, urinary tract infections, stomach upsets because of waterborne diseases. And because of that, I think this particular product might be affected. So it's the same thing. The thing is one of the antibiotic has -- though, I won't name because we don't disclose product-wise. But then, one of the antibiotic products has done phenomenally well, the sales has been doubled as compared to last year. But then the rest were subdued. So it was more of a holistic statement than for a particular product.

Okay, okay. Product-specific has picked up. And given the onset of monsoon also, the demand remain strong as seen for your kind of products?

Yes. So usually, the Q4, Q1 and Q2 are the stronger quarters for us.

Right, right, right. And one last question from my side. Sir, our new capacity would come onstream by FY '23 end. So prior to that for this financial year and for next financial year, FY '22 and FY '23, can we grow at 15% on the top line? Would that be comfortable? Or that is, let's say, [ stretched ]?

So the thing is we are targeting that much growth. So right now, we had 13% volume growth. We'll still target for that 10% to 15% growth.

[ value ] growth?

Yes, yes.

Okay. And gross margin, you said, 35% to 36% and margins at operating level in the range of 18%, 19%. Is that correct?

Correct. Correct. Correct. [ So 18 or so ].

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

So would it be possible to quantify the impact of [ user charge ] cost, which is there in other expenses [ or there was ] the cost pertaining to the share buyback?

See, approximately, a lot of OpEx might have gone up per quarter for that. And buyback would be also to the tune of similar expense, 50 to 75, something like that.

50 to 75. Okay. Okay. And secondly, on the growth side, so any update on the FDA? Would we have -- or any partnerships you see having in the US for API you'd like to address?

Yes. So the thing is FDA, we have been listening to communications from them. But because of the -- we were planning for more [ dictum ] from [ FDA ] inspector back in April, but because of this shutdown in travel from U.S. they were not able to travel. So we are planning for this now, August -- August or early September. We have already -- we're already adding -- everything is final, it's just that travel arrangements have to be made. And the report of tax would be submitted to the FDA directly. And then that might lead to either a virtual audit or I don't know how the FDA will proceed further. But because this will be [ ex USA ] sector and goes back to from U.S. itself, it will carry a lot of [ weightings ].

Sure, sir. So maybe that would happen sometime in the second half of the [ fiscal ]. Does that seem right?

By the next quarter, I think we should be coming up with [ actually ] some update on the issues.

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

This is Ram here. So Adhish, we have -- I believe that you got the approval for PLI scheme from Government of India, right? When do you think you will start taking the benefit of this scheme? That's the first thing. And second question I would like to ask you about, do you have any group blueprint of shareholder? We have a lot of expectations from you guys, okay? So do you have any sort of blueprint so that you can be a market leader in the next few years? If you have, what is the time line, I would like to ask you.

Yes. So the thing is to become market [ leading ], it takes time. And it also depends upon the product to product because some products are more export-oriented, some are more domestic-oriented, some are like import subsidies. So in products like import substitutes and more domestic-oriented products, it is fairly faster. If everything goes right, then 3 to 4 years, we can become a market leader for a particular product. But for export-oriented product, maybe you can -- a couple of years more because approvals and everything takes time. Further -- and in exports also it depends whether it is more -- it is growing more in ROW markets or regulated market, either the European market or U.S. market. That also decides how much time it will take to achieve leadership in a particular product. And as far as the first question was concerned, [ to realize ] first year of benefit ideally could be FY22 [Technical Difficulty]

This is a disturbance coming from your line, Mr. Krishna. Mr. Krishna, there's a lot of disturbance coming from your line. Request you to rejoin the conference, sir. Mr. Kushner? The line for the current participant was disconnected. The next question is from the line of Ranvir Singh from Sunidhi Securities.

Yes. In this quarter, you had additional overhead expenses related to a liquid discharge thing. So what was the amount? How much do we have to spend additional?

Yes, approximately [ a total for a quarter ], but back to -- going forward, we are having a lot of ideas in terms of using it for the [ circulatory ] for the utility purpose and deriving more byproducts from it, which can add some amount of revenue stream to the waste [ recovery ]. So in the longer run, we will reduce those costs, but approximately, it was increased by, you can say, INR 1 crore per quarter.

Sir, still INR 1 crore, 1 quarter would be an incremental spend on related to this?

Yes, yes.

Okay. So just I was calculating like, so currently, we have INR 84 crores kind of expenses in this quarter. And if we maintain -- if that run rate is maintained going forward, and we assume that 34% gross margin happens every quarter after this, so from second, third and fourth quarter, still EBITDA margin would not be 18%. So it would [ still be ] 17% kind of thing.

Really what happens, I mean, [ volumes ] -- once we start selling more, immediately the operating leverage is taken in terms of the fixed expenses. So 3% to 4% in your increase in the gross contribution and a bit higher sales will definitely take it to 18%, 19% [ would be ] 4% gross.

Okay. So to answer, sir, on gross margin front, you can see even better than what we are anticipating and...

So definitely, there is a scope of improvement in gross margins.

Okay. Okay. That clarifies.

The next question is from the line of Umang Shah from Asian Market Securities.

Are you observing any capacity increase in top 10 molecules from your competitors in India?

[ so metformin ] people have increased capacities. Harit, would you like to answer this question? For top 10 molecules, whether any compete has recently [ increased ] capacities?

No, I said metformin [ I think ]...

Sir, would you say that you've reached a stage in your antibiotic that it would be difficult for any of your competitors to put in additional capacity, contribute to scale?

Yes, yes. It looks like, yes. Because nobody -- yes. We already reached a very high scale. So to enter any new entrant would be very difficult, yes.

And just one more question. Sir, currently, Aarti has had the highest margins in last 20 years. So sir, would you be able to roughly attribute what percentage of the margins are structured and what percentage would be [ sofited ]?

It is difficult to say because, see, last year, initial part of the year, the margins are exceptionally high. But after that, from December quarter onwards, they were fairly, can say structural, not much of [ sofited ]. The thing is apart from this sudden price hike, there was no reason, there was no downfall in selling prices of the products or anything like that. So whatever was there was structured as such.

The next question is from the line of Cyndrella [ Thomas ] Carvalho from Centrum Broking.

Just 2 quick clarifications. Adhish, can you please help us with how is the status on the recently expanded [ gliften ] and clopidogrel? I mean, if you could update us how these products are doing?

So the teams, we just launched one of the products [ iniliptin ]. Then clopidogrel, that product is going strong as far as the sales are concerned. The product is doing good. And -- yes, we believe that going forward, this clopidogrel should be a blockbuster molecule for us.

Okay. And if you could help us understand how do you see the ramp-up of this thing over coming 2 to 3 years' time?

So the thing is we are coming up with a multipurpose facility, first of all. So it will be more -- I mean, though -- okay, it will -- it can add up INR 70 crores to INR 90 crores of revenue. But then the major thing would be the next level of expansion once this product grows after going off it, it has gone off patent. So now the product will start growing. At that point of time, we will require a second phase of expansion, more like a dedicated facility for this production.

That's helpful. And if you could speak something more on the specialty chemical expansion that you've been talking about largely on the [ clorafil ] formation side. And what is the status? How is the CapEx coming up?

Yes. So there are 2 greenfield sites -- in fact 3, I would say, that's it. One is in [ Tarapur ] the other one in [ Diagesi ]. We recently acquired the third one in last quarter itself. And that's our biggest land parcel we acquired until now. And another one is also very big. And there, the [ plot ] development has already, is almost over. Now this foundation, all this work is done for our backward integration project and [ interim ] plant project. And then specialty chemical, the greenfield project, that will -- [ plot ] development will start maybe in 2 months. But what we are doing is we are going ahead with our brownfield expansion for Spec 10 in one of our current intermediate facilities in Tarapur itself. So there itself, we'll come up with a [ mix ] capacity, almost more than 400, 450 tonnes per month kind of a capacity for specialty chemicals. And that, we are doing mainly from the point of view of entering the market [ at end ].

So what kind of expansion in terms of overall share from specialty chemicals you can envisage over 2 to 3 years?

So up -- see, this current facility, maybe 2% or 3% will go up because other categories also growing. But once that greenfield project comes up, and the utilization of that capacity goes up, then it should become a little meaningful. So it can go to around 15% or so.

The next question is from the line of Rajat Srivastava from InCred Asset Management Company.

Sir, just to clarify, you said 15% of growth on the APIs or overall top line?

Overall top line. Overall top line.

And if I have to talk about only the APIs then how do you see the growth going forward for next 2 to 3 years?

It is similar, similar. In fact, formulation will also grow maybe even at a faster pace in terms of the base effect. But then if you take the average, then more or less it will be similar because API, right now -- API segment, I think the API plus [ pick in ] is right now around 85% of the consol business.

Got it.

Yes, sorry. You were saying something.

If I have to break out the 15% growth into price hikes and volume growth, I'm sorry, it might just be a repetition, but I missed your opening remark.

Okay. Okay. The thing is more or less what we are [ envisioning ] volume growth only, frankly speaking, because price growth, we cannot achieve it. So usually, we try to award including [ writing ] something. But even if you want to take, it will be very minimal. That is what [ we will be ].

So we are expecting around 14%, 15% of volume growth basically?

Yes, yes.

And sir, on the formulations, what percentage of the capacity is currently utilized? I think we're doing INR 350 crores, roughly INR 350 crores of sales, right?

Yes. This is [ for where we are at ]. We are right now operating at 80% of capacity.

And incremental metformin capacity is coming in the formulation, right?

No. No, right? It's in API.

Okay. So any incremental CapEx on formulation?

No, sir. In formulation, we are expanding in oncology product with -- for the response and product development, we're going to -- we have a budget of INR 55 crores.

And [ it's a ] commercialized line?

So from the cost it's a greenfield project. So it's -- will be -- we are talking about 2 years' time.

Okay. So basically for next 2 to 3 years, growth is going to be almost flattish for formulation because we are already nearing peak capacity, right?

Yes. Growth will come from the existing product, which we have registered in different part of the world. About 250 products have been registered. So the growth will come from there also. [ There we're ] growing at about 15% to 20% [ anyway ].

I would like to add here that our formulation model is slightly different. So it is not like you can say, asset specialty. It is more about IP specialty. We have intellectual property, and we can get it manufactured outside also.

Outside also.

Yes. So it is not [ keep all back ] capacity.

Okay. Got it. And sir, last question, like what is the capital employed overall, like 10% of total [ capital is all ] at the moment?

Not more than INR 40 crores, I believe.

Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Mr. Adhish Patil for closing comments.

Thank you, everyone, for participating in the call. Always enjoy answering your questions. So one of the key concerns going forward is that many scientists have predicted a possibility of third wave of COVID-19. We [ contend ] that this will be a mild wave or in the base case doesn't arrive at all, [ may ] the vaccination happen very quickly for most of the population. We would also like to assure you that employee safety and hygiene remains company's priority in this period, and the company is feeling fully geared up to face any disruption going forward. In fact, in second wave also, we were able to manage our production to the full extent by taking care of all the social distancing and fumigation, et cetera, transportation of [ intel ]. And thank you, everyone, for joining us on this call. Please reach out to us, either directly or to our IR consultant, that is Strategic Growth Advisors, should you have any further queries. Stay safe, and now we can close the call. 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.