Aarti Drugs Limited (524348) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Aarti Drugs Limited Q3 FY '22 Earnings Conference 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 the date of this call. These statements are not the 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, Chief Financial Officer at Aarti Drugs Limited. Thank you, and over to you, sir.

Thank you. Good morning, everyone. And thank you for joining us today to discuss our financial results for the quarter ended December 31, 2021. At the onset, I hope everyone is healthy, safe and taking all the necessary precautions in the wake of the third wave of COVID-19. Before I take you through the performance highlights, allow me to remind you that as communicated in the earlier earnings call, the financial performance on a year-on-year basis is not exactly comparable, especially in the terms of realizations and margins because of elevated API prices driven by sudden supply disruptions due to COVID-19-related lockdowns during last year. The company posted robust growth in revenue and profitability along with considerable improvement in the margins on a sequential basis. The robust performance was delivered in spite of the high freight cost, elevated coal prices and sustained high raw material prices. I will now take you through segment-wise performance. First, we'll discuss stand-alone business performance. The stand-alone company has contributed around INR 579.9 crores to the total consolidated revenues in Q3 FY '22. This contributed approximately 91% to the consolidated revenue. Around 59% of these revenues came from the domestic market and 41% from the export market. I would like to point out that we'll be putting up some corrections in our press release as follows, there was some mistake. So our domestic revenue for the stand-alone business grew by approximately 10% on year-on-year basis for the current quarter, and exports grew sharply by around 54.4% year-on-year basis. We expect the trend in export to sustain for a few quarters, considering the current inquiry generation pace of export markets. Similarly, domestic business is at the cusp of witnessing a recovery. API volumes grew by around 12% year-on-year, led by secular growth in -- across acute as well as the chronic therapies. For Q3 FY '22, within the API segment, the antibiotic therapeutic category contributed around 46%; antiprotozoal, around 16%; anti-inflammatory, around 10%; antidiabetic, around 14%; antifungal, around 10%; and the rest contributed around 5%. Now we'll discuss formulation segment performance. For the quarter, the revenue for formulation stood at INR 54.9 crores. Approximately 30% of the revenue came from exports during the quarter. The company is well on track to increase exports share for this segment primarily driven by growing penetration in Latin America and selected African markets, new registrations in export markets and government tenders. The company is strategically utilizing the foreign subsidiaries to grab these opportunities. Now we'll discuss our specialty chemicals and intermediates segment performance. For the quarter, revenue for specialty chemicals and intermediates stood at INR 66.6 crores, which grew 62% quarter-on-quarter basis and 74% year-on-year basis. We firmly believe that this segment is at the inflection point. And our unique value proposition, niche product profile and upcoming capacities in chloro-sulphonation products are expected to bolster the growth momentum further. On a consolidated basis for quarter 3 FY '22, revenue stood at INR 641.5 crores. EBITDA stood at INR 96.7 crores and PAT at INR 58.3 crores. EBITDA margin percentage came in at about 15.1% at consol basis. The company posted robust growth in revenue and profitability, along with considerable improvement in the margins on a sequential basis as mentioned earlier. This robust performance has come amid multiple headwinds in terms of higher raw material prices, high freight costs and high coal prices. The margin expansion is primarily driven by proactive price hikes, API volume growth across therapies and strict cost control. The volume growth is expected to accelerate further on the back of recently commissioned antidiabetic capacity. Also, upcoming antidiabetic chloro-sulphonation capacities in the near future will give impetus to volume growth in next financial year. This, coupled with a growing share of niche products in chronic therapies and a strong API product launch pipeline, is expected to augment the margin profile and profitability. For 9 months FY '22, revenues from operations stood at INR 1,802.7 crores as against INR 1,656.6 crores last year, up by 8.8% year-on-year basis. EBITDA stood at INR 251.8 crores. EBITDA margin came in at 14%, and PAT stood at INR 149.7 crores. The investing cash flow for 9 months FY '22 stood at INR 103 crores and is expected to be in the range of INR 150 crores to INR 200 crores for the entire FY '22, which will be funded through a mix of internal accruals and debt. The pace of CapEx was impacted to some extent due to interesting trends in Maharashtra and Gujarat during first half of FY '22. However, the CapEx of Maharashtra projects has picked up a good pace, and Gujarat's projects will follow the suit. The balance sheet continues to remain strong with a comfortable net debt-to-equity ratio of 0.51x as of December 31, 2021. We can now begin the Q&A session, and we'll welcome questions from the participants.

[Operator Instructions] First question is from the line of Abdulkader Puranwala from Elara Capital.

The first question is on margins. So earlier, we have been talking about achieving close to 18% margin. So sir, by when that would be possible? Or are we, first of all, reiterating that guidance ahead as well? Am I audible? [Technical Difficulty]

Yes. You are audible. However, it seems we have lost the line from Mr. Adhish Patil. [Operator Instructions] Ladies and gentlemen, we have the line from Mr. Patil connected. [Operator Instructions]

Yes. Sure. Sure. So sir, my question was basically on the margin front. So this quarter, we did see some improvement on an EBITDA front. But I wanted to understand, are we still holding our long-term EBITDA margin guidance of close to 18%? Or -- and by when should we actually see the start of retreating into our reported numbers as well? [Technical Difficulty]

[Operator Instructions]

Yes. Abdul, I heard your question. The thing is the recent drop in margins was mainly because of -- gross margins was mainly because of rising raw material prices. Now we have taken the price hike at the output side, which [ is our ] prices have gone up. And now we are seeing a trend of a reversal, which will take time, though. But we have fixed the negotiated prices in the month of December for raw materials. They are coming off. They are tapering off, but we do feel that the gross margins will improve in future. And also, as far as the EBITDA margins are concerned, the coal has been a major factor. I mean, we lost almost INR 5 crores to INR 6 crores of EBITDA per quarter just because of the rate variance in the coal, which seems to be of temporary nature and should revert back. So in the long-term basis, yes, we do aim for that 18% margin of EBITDA.

Understood. My next question is basically on this chloro-sulphonation opportunity, what you highlighted. So I mean, going ahead, how should we look at the specialty chemical as a division? And I mean, in terms of the -- what could be the contribution of this business, say, in the next 3 to 4 years?

Yes. So the thing is we are adding up capacities in specialty chemicals. In fact, one of the chloro-sulphonation lines will be active in the -- this current month itself, in February 2022. So we expect the specialty chemicals, potentially, the capacity potential to almost double from what we have right now with this current capacity addition. And we also plan for a greenfield capacity yet to start for specialty chemicals. That should -- that will be another leap forward in terms of increasing the contribution to the pie of specialty chemicals segment to our overall consolidated revenues. But right now, in short term, in near future, like in the next 2 years' time, we can see that we can double the revenues from specialty chemicals from where we are right now.

Sure, sir. Sir, in the spec -- just to follow up on this. Sir, the spec chem revenue, when we're talking about doubling, does that include what we're doing under the PLI as well?

No. That's our regular products. I'm talking on overall basis.

Okay. Okay. And sir, I heard on the opening remarks, you mentioned about some delay which has happened on Maharashtra because of the ongoing pandemic. So sir -- but how should we look at our overall CapEx trend? I mean, has the time line now revised by almost 6 months? What are you going to complete, say, by end of next year?

Yes. Yes. So the thing is right now, we are doing big greenfield expansion at 2 locations, Maharashtra and Gujarat. So the Maharashtra capacity ideally should come up by December 2022. It should be commissioned and ready, whereas the Gujarat facility should come up by February, March 2023, around that. So approximately in 12 months' time, we still expect both these capacities to become operational.

Okay. So not much of a delay. And just one final question on the formulation business. So this, we have seen from the last couple of quarters that our formulation business is not picking the pace as kind of what we expected. So sir, going ahead, I mean, as you mentioned, one would be the Africa segment. But what could be the other driver of this business within the existing geographies, what you're currently catering to?

Yes. I think Vishwa can handle the question better.

[indiscernible]

Sorry. Vishwa, your voice is breaking, sir. Mr. Savla, please go ahead.

Yes. Yes. So the...

Mr. Savla, your voice is breaking. I request you to please...

Can you hear me now?

Yes. This is better.

So [indiscernible] from the existing geographies in the next -- for the next couple of years, where we've established ourselves majorly in Latin America and Africa. We have now our distribution in place, and we are adding more and more products. A lot of our products are under approval, and we are receiving approvals. And we're also participating in institutional tenders that will give us a higher growth push. So for the next 2 years, we will continue having growth from our existing territories. And at the same time, we are working heavily on the development of products for regulated markets in Europe and North America. And those products -- those markets will start picking up for us in about 2 to 3 years. So for long-term growth, we are anticipating from regulated markets, whereas short term, for the next 2 years, we have good growth plans from our existing markets.

[Operator Instructions] The next question is from the line of Cyndrella Carvalho from Centrum Broking Limited.

Adhish, if you can help us understand, if I look at -- you mentioned in your commentary also that there is some supply side pressure on the input cost is reducing or easing off. But in terms of our earnings reflection, when do you see that will reflect meaningfully? And if the pricing have passed, the levels are coming off or easing off, would that mean that our final price also would get adjusted to it? And by when do you see all these things? Even there will be a gap, we understand, in terms of seeing current prices in our earnings. So can you help us understand the current scenario where we are and how it should proceed over coming 2 to 3 quarters?

Yes. Thank you for the question. So yes, I will answer this question like with a few details. Like after we order local material, typically within 1 month's time, it is delivered to the factory. After we order or import, we do import purchase orders, then within 2 to 3 months' time, they get delivered to a factory. Now the trend what we have observed is that on a monthly basis, if I analyze our -- the purchases, which we receive at factory in the last quarter, still we saw that more than 60% of the raw materials, 60%, 70% of the raw materials, has the maximum rate in the month of December when that matter came into our factory. So that will definitely affect the margins of the month of January and February. On this -- but because we have taken price hikes, that will insulate us to some degree, no doubt about that. And as far as the purchase orders are concerned, which are negotiated purchase order rates, what we have observed is that only 17% of the raw materials, 1-7, had maximum purchase negotiated rates in the month of December. And the rest, more than 80% of the raw material, rates have fallen down in the month of December. So that will definitely show up towards the end of -- coming from this Q4 and in the beginning of the first quarter of next financial year.

So basically, starting next year, we should see normalized rates. Would that mean that our end prices also will adjust accordingly if the raw material comes down or you see some impact on pricing?

To some extent, we will see, no doubt about that. But the main challenge, what we had been facing in last year was the sudden changes -- variations in the price. Whenever the price is settled out, for, say, 3 months or so, I'm talking about the raw material prices, then we can easily reach that 17%, 18% EBITDA margins based on the volumes which we are manufacturing. But then any movement in the prices, usually that kind of shocks, it is difficult to exactly correlate the selling prices and the input prices.

Understandable. Understandable. Helpful. On the demand side, we are seeing some good traction, which is a very positive scenario. But I understand that most of it would be driven even by the price hikes that we are taking. So how is the outlook on the demands in that? And like if you can help us understand on the specialty and the API side, both put together. And I mean, if you can help us understand the formulation run rate that we should look at from an annual basis, that will be helpful.

Okay. As far as the specialty is concerned, right now, our capacities are very small as compared to the global demand. So it will be relatively easy to capture the market as it won't be that difficult. And our new processes or cost will also be much lower than our existing cost of production for the same product in [indiscernible] formulation. So definitely, specialty chemicals, we should be able to sell quickly. As far as the APIs are concerned -- can you repeat the question related to the APIs?

API also, I am asking you on the demand side. We are seeing some strong traction. But however, it has accompanied by the price increases also. So how should we see this?

Yes. As far as the exports are concerned, we have a lot of demand because we already have a lot of pending orders in line. And domestic sales, usually, our domestic API demand usually picks up in the fourth quarter of every financial year because that is the time when most of the formulation company increases their production volumes. So now in Q4, ideally, the demand should be more for APIs in domestic. And for formulation, from 2 to 3 years' perspective, I would request Vishwa to answer the question.

Yes. So in formulations as well, we are expecting good growth mainly due to some capacity enhancements in our existing facility as well as product line extension in terms of getting new products and products with better margins. And our new greenfield project into oral oncology is also upcoming, which we are expecting to commission in -- by the end of quarter 2. So that will also, over the next 3 to 4 years, give us good revenue growth and with improved EBITDA levels.

So what should be your annual run rate? And since we have seen some decline in the 1H, how should we see it over coming 2 to 3 years? Any range that you can help us understand? Because if you're talking about oncology, also how big it is, what is the basket of product? How much can it contribute? Would [ trauma ] pay 10% share? Can it become 15%, 16% or 18%, 20%? What range are we looking at? If you can just help us with some numbers, some broad range would be really helpful.

Sure. Sure. So over the next 3 years, we are looking at a growth rate of about 25% annually. And oncology, we would -- so we have about 10 to 12 products lined up in the oral oncology sector, which we would be filing in international, global regulated markets. However, since we are targeting products with patent expiries from -- I think from 2024 to 2027, so oncology as a sector for us would -- a segment for us would start contributing post FY '24, yes. But even our generic segment would give us growth of about 25% annually.

[Operator Instructions] Our next question is from the line of [ Riya Varma ] from [indiscernible].

My first question is formulation segment. We posted a decent amount of fall in revenues. So can you throw some light on that? And when can we see a pickup in revenue again?

Yes. So I'll answer that. So the revenue fall in formulation and chemical was a temporary blip in this particular quarter due to lower demand, especially in the domestic segment. However, we have seen in the current quarter, in Q4 itself, we will see a good recovery. And going forward, in the next financial year, we will expect like a growth of about 25%. So I'd say the drop in revenue was temporary, and we are already seeing a recovery in that.

Okay. Sir, secondly, you mentioned about the strong pipeline for product launches. Can you give us some guidance on what are the products we are planning to launch in API formulation as well as specialty chemical segment?

Yes. So in -- I'll answer for formulation. And probably, Adhish can answer for this API and specialty chemicals. So in formulations, we are currently having a pipeline of 8 products, which are -- majority of which are in backward integration with the API. And we majorly are into cardiac and diabetic products, new age products, so products which would be going off beginning from the next financial year. So we will be targeting day 1 launches in majority of our markets. And apart from that, in oncology segment, we have a pipeline of about 10 products, which are majorly tablets and capsules, new age oncology products in -- especially the [indiscernible] category of products.

Yes. And in API, we have the -- so I will tell you the main therapeutic areas where we are expanding in a big way. So antidiabetic obviously is one of our favorite segments. There, we are -- have already launched a couple of gliptins in the current year. So they will -- in the next couple of years there, the contribution should become meaningful. Then we are launching a derma product in the next financial year. Then we are expanding -- we already expanded one, and one we are further expanding in antibiotic segment. In antifungal, we are launching a new product very soon and also expanding the current one, which we already have. Then we are also doing brownfield expansion of one of our cardiovascular product, which is very popular. And then in specialty chemicals, as we discussed earlier in earlier con calls that we are coming in a big way in chloro-sulphonation. Then we are also doing backward integration of -- for a few of the intermediates, which we may also sell outside, the derivatives of the [ antifungals ], we will sell outside. And we also have a contract manufacturing with MNC for one of the specialty or intermediate product, which we have expanded recently because they have increased the business volume with us, looking at our performance in the last couple of years. So the growth is still across a lot of products actually in coming future.

Okay. Sir, that is helpful. And my last question is, what is the current status of our U.S. FDA inspection for our facility?

Yes. Yes. So we already paid the default in this December quarter for U.S. FDA. And the thing is, we were in very close contact with the ex-U.S. FDA inspector. So they have already started reviewing our -- all the responses and everything. We already have done all the work. All the background work is done. So the last step is this -- once this ex-U.S. FDA inspector reviews everything, they will come for -- with a focused approach to audit our plant in person at the site. And then they will represent the case. They will represent the findings to the U.S. FDA directly. Actually speaking, it was supposed to happen by now. December, it was supposed to happen, that was it. But because of this third wave, their travel plans got delayed. So that is why they took another approach of first doing the remote audit -- or remote review kind of audit and then come in and the do the on-site thing quickly.

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

Congratulations for a good result. Sir, just -- I wanted a clarity on your earlier comment. So 17%, you said the raw material cost was negotiated for a price. That's what you said?

Yes. I will explain again. The thing is, we did 2 types -- different analyses. One was the material which came into the factory every month, and that material price was negotiated a couple of months before in the purchase order. And the one analysis what we did was regarding the new purchase orders, which we have raised. That material will come in after 1 month or 2 months or 3 months. So what I was saying that the -- out of the total raw material, for 17% of the raw materials, the negotiated prices in the month of December was still the highest amongst October, November and December. But for rest of the -- more than 80% of the raw materials, the prices have tapered off. The negotiated prices have tapered off in the month of December.

Okay. And this is -- the tapering of the price, it's triggered due to a softening of prices there or...

Yes. Mainly, yes, because the broad -- more of opportunistic kind of price hike by our vendors because of demand-supply situation. And there was frantic buying also in the market because the surety of the supply was not there in those months. So a lot of people have bought even -- in fact, even we have ramped up our inventory quite a lot in the quarter of December. And that is one of the -- another reason why our RM inventory has gone up. So that will also be one of the focus area in the coming quarters, to reduce our operating -- working capital cycle. But then that was the reason, mainly the frantic buying, because of which the prices had gone up. So now with the clearer picture coming out in the market, the prices are softening a little bit.

Yes. So I wanted to understand this dynamic. So in case after witnessing a hike in pricing and again, price has softened, in case again the price is hiked, or a normal industry runs in a way it was running last year, so again, the raw material prices goes up. Then negotiation of only that portion of raw material we will be able to do? Or it is nothing to do with this? Again, the new negotiation will happen?

No. No new negotiations will happen. So this is done. It means we have placed the orders.

Okay. Okay. Yes. And another thing on oncology side, what kind of API we are planning to produce, whether we will have a high potency facility there? Or what kind of API is [indiscernible]?

Oncology, we are doing at the formulation side, not on the API.

Okay. Okay. So this is on formulation, sir. Yes. And then the last one, in budget, some solvent customs duty has been reduced. So any way are we benefiting from it?

A little bit, we will be, a little bit. I mean, the commentary, very roughly speaking, around INR 30 crores to INR 50 crores, somewhere in that range of the raw materials where the duty has reduced, per annum I'm talking about.

The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.

Yes. Am I audible?

Yes. You are audible now.

Sir, while you have explained nicely in terms of pricing factor, but just would like to understand this disruption in China. Is this fundamentally or structurally driving more volumes to Indian companies like yours?

See, the estimate is, right, since 2018, a lot of events have happened in the past that suddenly -- which basically is giving us an indication that China is moving more towards greener technology. And they are focusing less and less on manufacturing of specialty chemicals or intermediates and so on. Definitely, they will continue to focus in the areas where they have natural resources. So that, they will continue. But more or less, the trend what we have seen is they're focusing more towards greener technology. So definitely, these -- all these events give indication to global buyers that they should be derisking their supply if they're depending only on China. And that has started to happen. Like -- in fact, in this COVID only, one of -- for one of the very big top 3 molecules, one of the biggest MNC customer for that molecule, we were able to track, which was -- the business of which I believe was going to China. So we are seeing that trend, no doubt. So it means it will be helpful in longer term.

Understood. Fair enough. And particularly for the gliptins, while you are seeing good orders for the gliptins front, but what's happening on the -- let's say, the existing or, let's say, the other molecules in the diabetic portfolio -- in your diabetic portfolio?

Yes. So the other molecules are doing really well. December was good. And so those have shown promising signs lately in that quarter.

And additionally, gliptin is further over and above, that's the way to understand.

Yes. Yes.

[Operator Instructions] We have the next question from the line of Cyndrella Carvalho from Centrum Broking.

So I'm just coming to the API side. If I try and understand, you mentioned about gliptins. How about metformin planned CapEx? Where are we on that? And in terms of gliptin, what kind of market share you expect to acquire over 2 to 3 years? What is the plan there? And in terms of metformin CapEx, if you can update us, that will be helpful.

Yes. So the -- regarding gliptins, it's more like a stable expansion for us. We already have set up a gliptin multipurpose facility for both the products, but we have 4 production lines in that particular location. So our next stage was once the gliptins grow for us, then we'll shift one of the gliptins to another line. So we'll have 2 dedicated lines, 1 for each of the gliptins. And then from there, maybe after 2, 3 years, if it grows even further, then we have space to put up another blockage there. So that will bring like very major capacity. So when that happens, then definitely, we will aim for more than 50% of the market share, that kind of capacity, which we do for typically top 10 of our products or [indiscernible]. So that round of expansion for gliptins will come maybe in 4 years or so. But right now also, we are very much -- the capacity is good enough to get a substantial share of business. That business is a very growing market. So it's very difficult to put a number like how much share we will capture. It's a growing market. One of them is domestic focused, and other is export focused. As far as metformin is concerned, so we are growing very strongly with our current capacity of 100 metric tonnes per month. The utilization is going up rapidly. We also have European approval for that facility. We plan to do the U.S. FDA soon. And we already have -- all the plans are ready. The civil work is yet to start, but it will be completed within -- once the project starts, it will be completed within a year's time, that 3,000 tonnes per month capacity. Obviously, we'll be doing it in a phase-wise manner. First, it will be 2,000 tonnes. And then it will be the 3,000 tonnes per month. And as far as the other brownfield expansions are concerned, this antibiotic expansion within next 4 months, it will be done. Then your derma capacity will come online maybe by December '22. Then another intrinsic capacity will become online maybe around February to March '23. That is the end of next financial year. And antifungal product also, [indiscernible] launch of an antifungal product also, which will take up in one of the existing facilities. And once it grows again, then we'll have a dedicated block for that. Then our cardiovascular product also, we are looking almost to double the capacity from where we are right now because they also work in this [ amount ]. So a lot of expansions are happening, small ones also and also the big ones, get into the CapEx.

Any update on the PLI side, where we are? Do you think there is some delay there?

PLI side, we opted for -- with the less -- in the PLI, there was a condition of spending around INR 70 crores, INR 80 crores of CapEx to hit that PLI. But then we had a change of process and because of which, we are able to put up the same facility in -- about INR 25-odd crores, INR 25 crores, INR 30 crores. So there was upfront saving of more than INR 50 crores. So we thought that rather than taking -- applying and getting PLI every year, about INR 8 crores to INR 12 crores per annum, yes, it was better to save upfront. So we have already gone and set up the plant. I mean, whatever we had planned, around 3/4 of that capacity is already commissioned. And the rest, 1/4, will also commission very soon. So we are -- so what I'm trying to say, instead of going for PLI, we are -- have expanded into same product but with much, much lesser CapEx, which more or less equals to the PLI which we'll be receiving in the next -- this year.

Next question is from the line of [ Bob ] from [ Falcon Investments ].

Could you explain why your -- why you continue to focus on formulations given that you're subscale even in API? There's a lot of scope for APIs going forward. So why do you -- what's the need to go into formulations?

Okay. First, so more from a strategic point of view you ask me or what? So I'd just say that the basic strength of our company does lie in manufacturing bulk products where the volumes are very high. So we are doing that. Wherever possible, where we are getting opportunities, we are doing that. And specialty chemicals and intermediates is something very similar to what we already do with much lesser regulatory framework, let me say. But the manufacturing skills that are required remains the same for chemicals and -- specialty chemicals and intermediates. So there also, we're expanding. However, the only piece which are remaining for us for vertical integration was formulations. It can be integrated on the backward side. But on the forward side, we were never integrated. So what we thought that there are a few products, very, very few products, which it's very difficult to -- the number of formulation players are concentrated, then it becomes very difficult. But the APIs where the number of formulation players are fragmented, there are 8 to 10 formulation players, then it becomes very good business case to manufacture API only. But if it is concentrated in 2 to 3 buyers, then it might be a little difficult to sell that particular API with good margins. So for this and for value addition purpose, we had to introduce formulation as a strategy. 10 years back, many of the formulation players, they used to purchase our API and give it to a third-party manufacturer or formulation manufacturer in Baddi, that is in Himachal Pradesh, and get their tablets manufactured from them. So what we thought that rather than doing that, we can offer their tablets on our own. It means we can give them a combined pricing of API plus the formulation. And that was the main, you can say, starting point of our formulation business. And slowly, slowly, we became experts. We had our own facility. Then we started registering in the export market because we saw there are few niche opportunities available with very high margins. And that is the reason why we started the formulation range. It's a business case and let us see where it takes us.

Yes. I have another question. How many APIs as a percent of revenue are you fully backward integrating?

Yes. So the top 10 APIs is contributing around 75%. Top 15 would be somewhere in the range of mid-80s. And the thing is in top 15, out of top 15, the -- in 13 of those molecules, we are the largest manufacturer in India and in a few of them, globally also. So I would say that the ones in which we are largest manufacturer, we have reached there because we are either same or more backward integrated than our competitors. So you can roughly assume that more than 80% of our revenues are backward integrated.

Completely back. So you don't import anything from China or elsewhere for 80% of your revenue.

No. See, the thing is it's a very tricky -- sorry, it's a complete -- so it's completely backward integrated because there is -- there are a lot of stages. It means we can go in minus 2, we can go in minus 4, in minus 7. But even for -- in minus 7, there might be some raw material which we might need from China. So that is always there. We can never get rid of that. But what we try to do is that we see how many manufacturers of that particular raw materials are there globally. Is there any risk of supplies for that particular raw material? If there is and if there is good margins in that product as well, then that is the time when we take a call to do backward -- go for further backward integration. And for many of the products which we are buying from China or elsewhere, we do have -- we already have developed technologies as well. It is just that we are ready with the technology, but we don't want to put a plant yet because we don't want to overinvest. Because if you do further and further backward integration, then your return on assets will go down because the sales turnaround will also go down [ to assets ].

Yes. I understand. So when you actually say you're backward integrated for 80% of the revenues, what do you really mean? Like what's your internal definition of...

What I really mean is it is all relating to the competition. That will be the other way of looking at it is as compared to our competition, how much we are backward integrated.

So what you are saying is, even the top manufacturer for these APIs would only be as backward integrated as you are.

Yes. Or less.

Is that what your point is?

Correct. Correct. Either I'm backward integrated or they will be less backward integrated than us.

Okay. So in terms of pricing, you won't lose out because of the level of integration.

If you -- definitely, yes, correct.

[Operator Instructions] The next question is from the line of Surajit Pal from BOB Capital Markets.

I have only one question. It's about gliptin. What percentage of the revenue coming from gliptin, if you can quantify that?

Yes. So as of now, since we just launched, it is like negligible to our revenues. In a couple of years, the contribution will become meaningful. So as of now, it is just like a launch. So in API, typically, there is a -- for a local market, there's a gestation period of almost a year. And for export markets, it can take anywhere between 18 months to 36 months, depending upon what kind of markets you are supplying it to. In ROW market, it will be less. But in the semi-regulated and regulated markets, it will be more.

My doubt is that because recently, what we are hearing from the formulators in India, gliptin is gradually and slowly losing the market share to the new generation of molecules. As -- they say that metformin has always been a gold standard. For metformin, the second line of treatment is basically gliptin. And those gliptin is losing market share to the dapagliflozin kind of new generation molecule. And gliptin is mainly used as one of those combination products in diabetic treatment. So in that case, if you go by the IPM data also, gliptin is losing market share and losing the value. So I was just wondering is that how prudent it is to get into gliptin and increase capacity impact.

Yes. So this thing is the -- right now, it's a good information for us, no doubt. So right now, where we have put gliptins into a multipurpose facility, so we always have the option to -- if any problem happens for gliptin, then you always have the option to convert that facility into something else. But as of now, gliptins is still way, way ahead of the next-generation molecules in terms of API sales, I would say, not formulation but the API sales. So still, it will take a lot of time for other molecules to catch up to gliptins.

Our next question is from the line of [ Gagan Thareja ] from ASK Investment Managers.

Yes. Am I audible?

Yes. Just a little low, but you're audible.

Yes. A couple of questions. One is, what's your dependence on China for your KSMs and intermediates by value?

So that would be -- it's still less than 20% of our raw material purchases.

Okay. And I mean, going into the future, do you expect this to stabilize at these levels? Or is there an intention to bring it down?

Right now, there is no business case to do so. There is one product, though. Yes, I would name the -- there is one product where we are seeing a business case, and we're already working on that. But in the rest of that scenario, as of now, the thing is if the supplies are stable, and there are more number of suppliers in China, then it doesn't make sense to put up capacity right now. But wherever we see there is a problem, there are only 2 players, something like that. If you see any risk of supply, then we decide to do further backward integration.

But apart from China, where is do you source your KSMs and intermediates?

Europe and Middle East.

Okay. So are they entirely outsourced? Or do you also have some in-house KSMs and intermediates?

We do a lot of in-house for a lot of products. We have like in minus 5, minus 7 stages. So we do a lot of -- we manufacture a lot of products in-house. In fact, I was talking earlier that in more than 80% of the cases, we will be either more or as backward integrated as our competitor. And that is the reason why our cost of production is low. I mean, apart from volume and economics of scale, the second most important factor is backward integration in this business, and that we have continuously done for our top 13 products.

Right. Just on the same topic, while I understand you indicated that December on, there is a softening in input prices, they are largely crude derivatives, as I understand. And given the current crude price scenario, do you see the softening sustaining? Or do you feel that it's a small or a temporary dip, and then after, the prices move back up again?

Is Harit available on the call?

Last year, whenever raw material prices went up, it was nothing to do with crude. So it was mainly demand-supply mismatch and some of the plants that closed in U.S. and China due to pollution and other things. So crude definitely will have some impact. But the price increase in last year in many of the commodity chemicals was not due to crude but some other factor, demand-and-supply mismatch, so -- which is not tapering off basically.

Okay. And this price increase, I mean, obviously, is a consequence of the input price materials going up. I understand that one bit of it, which you experienced, is coming because of the disruptions in supply. But are these disruptions in supply, especially from China, of a temporary nature? Or do you think that because of the policy or regulatory changes in China, some bit of the input cost increase is sticky and will stay because the cost of production itself would have gone up on a permanent basis?

Yes. Cost of product -- cost of producing chemicals and intermediates in China has definitely gone up because many of their plants, they have to move to remote places from the cities where they were earlier. So definitely, there was supply -- this price will be definitely the issue. Whatever -- yes.

Right. And -- but this should not benefit your margins as material prices soften because it's just an absolute amount -- increment of inputs which you are passing on, right? And therefore, as that shift sort of remains stable, it -- I mean, as it stabilizes and the volatility goes out, your margins should remain in a stable way and not sort of move up is what I'm trying to understand.

Yes. Can you please ask the question in a more concise manner? Because I was not able to be pinpoint.

So my question is simply this that if, let's say, your selling price was INR 100 for a particular API and your input price was INR 60, input price went up from INR 60 to INR 70, there's a difference of INR 10, which you pass on. So INR 100 goes to INR 110, input of INR 60 goes to INR 70. So in absolute terms, you passed on the INR 10. But in percentage terms, margins will actually come down, right?

Yes. That's a basic question. The thing is in short term, what you say is correct in short term, like month-to-month basis. But now most of the companies, they are evaluated -- even bankers also evaluate the company based on margin trends typically, gross margin trends typically. So right -- so in short term, maybe people look at that. But on a year-to-year basis, in longer run, people try to revert back to margins. Then so -- then what you'll see is we will add INR 1 more to return the margins as well, something like that. But in short term, I mean, we are not investing longer than this.

Right. And you've got new capacities coming onstream throughout the next 12 months. What could be the OpEx related to that new capacity?

It's difficult for me to pin it like that. Difficult, difficult. It's -- I don't have numbers, the exact numbers that -- exactly how much OpEx will go up. But typically, what we have seen that -- I mean, it's based on the historical numbers, historical trends, this thing has happened quite often in between. Let's say, last 10 years, it must have happened 3, 4 times when big capacity does come up. What happens is our earlier capacities, they also keep on getting more and more utilized. So more or less, it averages out. That is what we are talking about.

So what you're saying is that as you expect your existing assets more, it absorbs the impact of the additional cost, and the margin remains stable.

Yes. Yes. Correct. Yes.

And what's the utilization on your existing capacities?

Right now, for the last quarter, it was somewhere in early 70s.

Okay. So you have some more room to expect them? Do you think that you can...

I think that we continuously -- I mean, it's a part of our maintenance, what we call maintenance CapEx. But it is actually maintenance plus debottlenecking CapEx. So we continuously try to keep on increasing capacities into existing plants as well. And we have successfully done it in last year for one of our antifungal products, one of our antibiotic product. And this coming year, we are planning to do in one of our cardiovascular products as well. So we continuously do that for brownfield expansions as well. So that also helps us in having more margins in that plant, which subsidizes the cost of additional OpEx because of the newer CapEx -- or new plants.

Okay. And in your presentation, you mentioned INR 600 crore CapEx with a sales potential of INR 1,200 crores over 5 to 6 years. What's the base of reference here over which you're saying this -- adding these 5 to 6 years?

So the thing is typically, we were assuming some capacity utilization in 4 to 5 years versus 4 to 5 years once the capacity is online. And by next December '22 or you can say by the end of next financial year, most of this capacity will be online, most but not all of it. But at least 70% of it will be online.

By December of '22.

December '22 or March '23. One by December '22, one by March '23.

And the presentation also indicates that there is room to improve margins. So what's the cost levers? Or is it simply a sales mix-related margin expansion? If you could sort of help us understand the attribution on both the sides.

One is the backward integration program, the greenfield CapEx which we are doing. So one is the backward integration. That will help us. Another is having more and more sales in the semi-regulated and regulated markets. We are consistently trying to take over -- get more market share in those kind of markets where the selling prices are higher and the margins are higher. And another is what we are trying to do is something what we have done -- already done in products like metronidazole, wherein now more than 95% of the India's production is our company's position. And the rest is under China. So we want to achieve that level of market consolidation because once that happens, then the margins become much more stable. So something like that...

Which molecules do you see yourself getting that sort of a vision?

There are quite a few antibiotic products out there. One antifungal product is there. Then in fact, one anti-inflammatory product is also there. So there are quite a few molecules which we have been manufacturing since last 15 years.

And then when your LatAm sales goes up, as it will over a period of time, it comes with its own set of issues in terms of currency volatility and probably higher working capital, if I understand that geography in some way. So in terms of currency risk, in terms of working capital, in terms of debt to equity, how are you thinking over the next 3- to 5-year time frame, your thoughts there?

As far as currency risk is concerned, more than 95% of the business in exports, we are doing in U.S. dollars only. So that takes care of that. As far as working capital is concerned, you correctly pointed out that Latin America being the other side of the globe, it takes maximum time -- transit time. So definitely, the working capital employed risk is more for those kind of sales, but then we accordingly charge. We built that cost into our selling prices. It is taking care of that. And your last question regarding the debt-to-equity ratio, so debt to equity is whatever CapEx we are planning and whatever internal sales we'll be generating. And also, we plan to do a shareholder payout of, say, around 25% of profit after tax. So considering CapEx and the shareholder payout, both considered together, we still feel that our debt-to-equity ratio should not go at peak level beyond 0.7. That is what, as of now, we are in, in this [ value ].

Okay. So you'll take on more debt as you go. And if you could just give us an idea of what the CapEx is like?

We'll take debt. We will take a term loan debt, no doubt, for the greenfield CapEx to some extent because the cost of debt is much, much cheaper than the cost of equity for us. And historically, the last -- if you take out last 6 years, 6, 7 years, then before that, almost 30 years, we have run the company with a debt-to-equity of around 1.5 [indiscernible]. And there were absolutely no defaults in any of the -- in working capital or [ nothing ]. So we were quite comfortable. But then we realized that this is -- we have the option of reducing the debt. So we brought down -- every year, incrementally, the debt-to-equity ratio kept on going down, down, down. And now it is at 0.51. So that is -- hence I said at the peak level, it's -- we are in -- ranging around 0.7. But again, with more quarters as -- it will go by and the internal projection will add up, again, the debt-to-equity ratio should come down.

What's the gross debt? And where could it be?

Around INR 500 crores. Around INR 500 crores roughly.

And at what sort of level should it peak out, absolute debt?

Absolute debt, the thing is in this INR 500 crores also, around INR 330 crores, INR 336 crores is short-term debt only, working capital. So the long term is less than INR 120 crores.

But we will be adding to that, right?

Yes. We'll be adding long-term debt more. So -- but then there is a repayment schedule also. Almost INR 40 crores to INR 50 crores of repayment also happen every year in the long term. There's a point we'll have to cancel the debt. So we take another INR 200 crores of long-term debt. And whatever working capital required for that also we take -- around 40% to 50% of that, we fund through debt to increase the working capital. So typically, the way we will function is we will both put together this term loan and working capital debt put together. We will make sure that the debt-to-equity ratio doesn't go beyond 0.7. And when I say 0.7, I'm also considering shareholder payouts. In fact, doing that 25% shareholder payout still will be at debt to equity of 0.7.

Okay. Okay. Got it. Right. And finally, if you could just give me what's the budgeted CapEx for FY '23, '24? You've given some idea of FY '22.

As of now, the planned -- whatever we have announced in the investor presentation also, those are the greenfield projects right now, which we have announced. And apart from that, around INR 40 crores to INR 50 crores of CapEx we spend every year for enhancing GMP requirements or maintenance or debottlenecking of brownfield expansions in the existing plants. All that is covering INR 40 crores to INR 50 crores per annum. So that plan will continue. And the bigger ones, we will announce as and when we decide, that INR 550 crores of CapEx we already announced. And maybe in a year's time, we will announce further greenfield CapEx.

Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Adhish Patil for closing comments. Thank you, and over to you, sir.

Thank you, everyone, for joining us on this call and giving us more than 1 hour of your precious time. Please reach out to our IR consultant, Strategic Growth Advisors, or us directly if you have any further queries. We can now close the call. Thank you, and have a nice day.

Thank you very much.

Thank you.

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