Aarti Pharmalabs Limited (AARTIPHARM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Aarti Pharmalabs Limited Q2 and H1 FY 2025 Earnings Conference Call hosted by Valorem Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anuj Sonpal from Valorem Advisors. Thank you, and over to you, sir.

Thank you. Good evening, everyone, and a very warm welcome to you all. My name is Anuj Sonpal from Valorem Advisors. On behalf of Aarti Pharmalabs, I would like to thank you for participating in the company's earnings conference call for the second quarter and first half of financial year 2025. Before we begin, let me mention a short cautionary statement. Some of the statements made in today's earnings conference call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's earnings conference call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. Let me now introduce you to the management participating with us in today's earnings call and hand it over to them for opening remarks. We have with us today Mr. Rashesh Gogri, Chairman; Mrs. Hetal Gogri Gala, Vice Chairperson and Managing Director; Mr. Piyush Lakhani, Chief Financial Officer. Without any further delay, I request Mr. Rashesh Gogri to start with his opening remarks. Thank you, and over to you, sir.

Yes. Good evening, everyone, and thank you for joining us on our post result earnings call for the quarter and the half year ended September 30, 2024. Our results have been uploaded on our website, and I hope you would have got a chance to go through them. Let me provide you with the business highlights. The company operates in 3 distinct areas within the pharmaceutical industry. First is Xanthine derivatives, API intermediates, and CDMO/CMO business. The Xanthine derivative segment contributed 45% of the turnover in Q2. And this market is still witnessing strong competition from China. However, our long-term partnership with the global giants and our position as a dominant Indian player helped us maintain strong position in this segment globally. For Q2, our Xanthine delivery derivatives facilities have operated almost at the full capacity. The API and intermediate business contributed 51% of the turnover in Q2. This subsegment breakup of this segment is 43% regulated market, 46% ROW market and 10% nonregulated market. The third segment, CDMO/CMO has contributed 3% of the turnover in the quarter. We are presently working with 19 customers on 55 projects. Out of which 28 projects are in the commercial stage at the customers and the 27 are at the different stages of development at the customer's end. This highlights our presence in late-phase projects. Typically, the orders in these segments are multistage products for which lead time is very long. CDMO/CMO segment does not have a uniform sales across every quarter because of these lead times. And there are a few high-value orders for which the delivery is schedule later in this year. It is likely that the revenue realization of this order in hand might get extended beyond current financial year. However, in medium to long term, we have no doubt about long-term prospects of this CDMO/CMO business. Given our strong R&D focus on robust scale-up and manufacturing capabilities we should be able to deliver strong growth in this segment. Let me now share the key financial highlights. Consolidated financials for H1 FY '25, I'm pleased to announce that in H1 FY '25, consolidated top line was INR 1,014 crores, which was 13% higher Y-o-Y basis. For the H1 FY '25, the consolidated EBITDA from the operations was INR 197 crores as compared to INR 174 crores in corresponding period of the previous year. That is an increase of 13% Y-o-Y. The consolidated PAT for the H1 FY '25 was INR 110 crores, 11% higher year-on-year. I will now share the progress update on the key expansion projects. We have announced the capacity expansion of Xanthine derivatives in Q4 of last financial year to achieve a total capacity of 9,000 metric tons per annum. Till now, we have been majorly focusing on non-pharma application of Xanthine derivatives. But going forward, we plan to target the pharmaceutical market also for which we are -- we shall file for the regulatory approval for U.S. and Europe market in this year. The expansion of semi commercial production U.S. FDA Intermediate unit at Vapi has been completed and currently undergoing the trial production. With this expansion, we have bridged the cap of small and medium batch size and we'll be able to offer gram scale to ton scale that has CDMO/CMO business. The solar energy project at Akola in Maharashtra has been commissioned successfully towards the end of Q2 FY '25. And we foresee the projects to deliver good savings in terms of our energy costs in the second half of this financial year. The green field project at Atali for CDMO/CMO and intermediate manufacturing is progressing well, and we expect the commissioning of the site to happen by Q4 FY '25. Overall, we are optimistic about the future prospects, and we maintain our guidance to achieve the EBITDA growth of approximately 10% to 12% in FY '25 and long term goal of about 15% annual growth in the next 3 years. I will now request moderator to open the forum for Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Dhaval Shah from Girik Capital.

Great set of numbers and a very positive commentary on the future outlook. So 2 questions from my side. So first on the API Intermediates division. Can you share your thoughts with respect to the outlook on the API industry, your numbers suggest the business environment seems to be improving and we are able to combine the Chinese competitor -- competition also quite strongly. And secondly, the CDMO business, as you mentioned in your initial commentary that the revenue recognition might get spilled over to FY '26. So taking lead from last quarter's call regarding a 25% growth on FY '24 base. So how would you revise your guidance for the current year on the CDMO front. These are my 2 questions.

Yes. Thank you. So API and intermediate business, as such, we have had good financial year this year. And I think we are seeing the new products and partnerships of our customers with whom our API is linked for the final formulation getting commercialized for the coming period. With that we see despite pricing pressure overall growth in the overall business for us. And in case of CDMO/CMO, as I mentioned, that these results quarterly will vary from 1 quarter to the other quarter and due to long lead time and long gestation, certain products have lead time of almost 7, 8 months, and it can get up and down by a couple of months here and there and due to which we may have a deadline of 1 year, which can get spilled over and stuff like that. But overall, I think we should look at this business as a strong business for us. We have a great pipeline. And as you would have seen, we more than 55 -- we have 55 projects with which 19 customers are, and we are hopeful to add many more in the second half of this year. And with that, our conviction is very good for this business growth. I think overall, the number that we had earlier mentioned about the 25% growth, we are pushing our team to get that growth. But however, this shift by 1 or 2 months can change that number by 5% to 7% also on the lower side.

Yes. Just reconfirming the CDMO number last year was [indiscernible] right?

Last year was INR 167 crores.

INR 167 crores. Okay. Okay. And sir, this lead time change is because of some more steps being given to us in terms of the entire...

Exactly, exactly. So what has happened in certain projects, we have been doing the RSM production also and the GMP production also. So there are 5, 7 stages. And then there are multiple products ultimately culminating into 2 or 3 GMP steps. So basically, we end up doing almost 7, 8 stages in single, single stream. So that's why -- but however, overall, for us, it's a great value addition to do multiple stages, it gives us a lot of control. And for the customer, they don't have to go to different suppliers to get their KSM and get their GMP material. So Overall, it's a very positive side for the company because our engagement with the customer is not only for the GMP but also for the KSM.

Okay. Last question on the API side, you mentioned the customers' product has been commercialized in the market, and that's where we are seeing this volume growth coming in. Is my understanding correct?

Yes, yes, yes. So we have had -- in the general APIs as well as the specialized APIs, several approvals that have come through in this year and for which we are seeing strong potential, strong growth over. So our number for regulated and semi-regulated markets have improved significantly over last year. And overall number, we are not as much modern because the non-reg market overall profitability is anyway lower. So the idea is to increase more engagement with the customers on the regulated side and semi-regulatory side. We also had a Brazilian inspection authority and visa inspection which was cleared by the company with 0 observation. So that is also -- we have more than 11 product approved for the Brazilian market.

The next question is from the line of Dhwanil Desai from Turtle Capital.

My first question is, sir, on the gross margin side. So I think despite lower contribution from CDMO, our gross margin on standalone has improved significantly on a Q-o-Q basis. So is it largely because of the higher API contribution or anything else that we need to read into this number?

Yes. I think overall, on a stand-alone basis, I think for the first half and also for the current quarter, I think we have improved our gross, 21%. Yes, 21% has become 23% EBITDA margin. And at a gross level, it has come to 55%. So I think it is because of the better product mix and overall more regulated focus that we have had in this current quarter.

Okay. Got it. Sir, second question on Xanthine. So if you can talk a bit about how things are shaping up in the market in terms of demand, supply, any changes in the pricing competitive intensity since we have a large CapEx coming up on that? And how are we progressing in terms of kinds of customers for the upcoming capacity that we have on the Xanthine side?

Yes. In Xanthine as you know, we have announced 9,000 metric ton CapEx, and I think it is going to be in 2 phases. So I think the first phase will get operationalized much faster. And then second phase. So there are 2 facilities which we are upgrading for achieving this capacity. So I think in the 2 phase, we will have more capacities faster in the medium. So more capacities will come from the current level and then further, it will enhance to the 73 tonnes per month capacity. Overall, I think the market is divided. I think if you consider there are 3 distinct segments of the market. And -- so the spot market is quite brutal, but whereas the pharmaceutical market as well as the large consumer market where we -- all the suppliers have a long-term understanding remains intact, and that's what we have mentioned on my opening remarks also that we are quite confident of our participation more and more towards this market. And we are confident of protecting our overall margins for the caffeine business. And as I already mentioned, that we have operated the plant at near full capacity for this current quarter.

Okay, sir. And one last question, and I'll come back in the queue. Is that, in general, what we are hearing from a lot of CDMO players is that due to this Bio-secure Act, a lot of traction in terms of the business development and project awards. So for us, are we seeing any significant changes in terms of the either the order value or the kind of number of molecules that are customer is willing to now work with us on that. Any qualitative color on that because of this change in that environment?

Essentially, I think first, if you take up the entire CDMO/CMO, the way in which the business progress is that first, is the engagement with the customer, then it follows with the customer visit, then RFP process, then there will be audit process and then there will be an initial ordering and then you will get commercial. So these are, I think, 5, 6 stages, the way in which the entire CDMO/CMO business progresses. And I think we have seen more engagement with the customers. We have seen more visits. We have seen more RFPs coming to us because of the engagement. And I think all these things have started slowing, and I think it will culminate into more better project letting added for us in future.

The next question is from the line of Ankit Gupta from Bamboo Capital.

My question was on the CDMO/CMO side. So, as you were saying that we have started doing more steps for one more reactions that starting from KSM kind of steps. So does it mean that our margins in the CDMO/CMO segment will increase further given the more reaction steps involved in the products now?

Basically, you can think of us like we are with services company.

Yes. Basically, I think the margins will improve as we do more and more stages and as we move more nearer to the final API manufacturing for the CDMO/CMO segment. So I think the margins regulatory starting material to key starting metal to regulatory starting material to GMP to API keep on increasing. As the number of steps also increased and also the complexity and the regulatory requirement increases overall. But of course, the margin profile is dependent on the occupancy and the number of stages that we do. So there could be some project which is in KSM where we end up being multiple stages where the margins can be higher, but it can be lower for the GMP also if it is only 1 or 2 stages. But overall, I think given our understanding of regulatory requirements and also our U.S. FDA compliance facilities with the GMP compliance, I think we have stated to do more GMP steps also in API as well in future for the end consumers.

And sir, on the -- on the Atali side, like when is the Atali expected to start operations and given when we need to do validation batches and get approvals from regulatory authorities like U.S. FDA. So like when can we expect Atali to start contributing to growth on API and CMO/CDMO side?

Yes. I think any greenfield side like Atali, I think we will have to give a year for it to stabilize in 2025, '26 would be a year of getting all the facility started. So it will be not a single day. We can start everything. It will be a phased manner, we have to transfer the projects from other sites as they become -- growing the size and all that process also takes time. So overall, I think 12 to 18 months once we start, I think, next year and then a half year prior after that, we'll see Atali site getting fully operationalized and utilized from today, it can be 24 months.

The next question is from the line of Deep Gandhi from ithought PMS.

The first question I had a follow-up to the previous participant answer. So can you give us some quantification about how much of our Xanthine revenue comes from the spot market and how much comes from the long term?

For the Xanthine?

Yes.

We are not giving this split currently.

Okay. So my next question is about the CDMO. So we have guided for around 25%, 30% growth. It might not happen this year, but even for say next year the current products where you have already started shipments. Are those products sufficient to achieve those targets? Or are you also expecting some new products shipment to start for the numbers to be achieved?

Yes. I think next year, we will have current few overflow projects plus newer projects also for which we already have visibility because I think CDMO/CMO market, there is always a 9 to 12 months visibility that we have for the projects, how they are going to shape up if there are bigger projects. We have great conviction that we will grow the segment going forward.

Sure. And sir, next question is on the API side. So if you can broadly explain us what kind of -- what are our top therapies, top 3 therapies in the API, the revenue contribution from those therapy and also a related question, what would be our revenue contribution from the top 3 customers in API segment?

Yes. I think we have anti-hypertensive steroids, corticosteroids as CNS products, I think these 3 categories are top 3 categories in which we operate. And I think top 3 customer where we may not have too much concentration of the customer. I think top 3 customer would constitute to around 20%. Yes, of the API. Yes. the 20%, 25% of the -- even less probably. So we will have to get back to you with those numbers. But I think it's -- the customer concentration is not much.

The next question is from the line of Harshal from Rashi Fincorp.

I just wanted to ask this CDMO/CMO business, will it like stabilize annually can we see revenue growth in the future?

Yes, yes. We have already -- I have told the guidance, which we earlier as mentioned, it was 25% plus. But it can roll over to next year, and we have already told that it can come back lower than the earlier number because of certain projects getting forward to next year according to the current situation. But we are, I think, fairly confident about the stronger growth next year and years to come for this segment.

The next question is from the line of Tushar Vasuja from Yogya Capital.

Yes. I have a couple of questions. The first one is that you mentioned that you are expanding your Xanthine capacity of 5,000 tonnes per anum to 9,000 tonnes per annum. So what will be the peak revenue potential once you hit the 9,000 mark?

So I think with the 9,000 metric ton capacity, I think we can reach $100 million to $125 million in revenue for this segment.

Okay, sir. And sir, what's the current asset turn for Xanthine?

Current asset turn, we are not providing this information. But asset turn will improve with -- because this being a brownfield project, overall, we see improvement in overall asset turn.

Okay, sir. And sir, on previous calls, you mentioned that this entire CapEx will cost around INR 150 crores. So does this include the land cost or not?

Yes. We are taking smaller land parcels, basically, which are brownfield, these are land parcels which are near our current site, so adjacent parcels. So I think overall land component in this may not be more than, I think, INR 10 crores overall.

So this INR 150 crores is inclusive of land.

Inclusive of land.

Sir. a bit of a broader question in terms of Xanthine. So was the entire capacity in the world right now? And how much of it is in China?

I think total world capacity operational would be around 40,000, 50,000. I think around 50,000 plus or minus 10,000 tonnes currently. 40,000 to 50,000 tonnes and out of which I think that China would have 70% of the capacity operational. 70%, 75% capacity. We have 15% capacity here and 12% to 15%. And then I think balance is in Europe, another 8%, 10%.

Okay, sir. And sir, out of the 70%, 75% Chinese capacity, how much do you reckon get exported? What is the internal consumption of China for this.

I think internal consumption numbers, we may not have, but I think out of which my gut feeling is around 70% should get exported -- 70%, 75% of the 75%. 50%, 55% of the total capacity from China, global gets exported.

Okay. And sir, last question. How much of the pricing reduced for Xanthine and its raw materials since the peak and how far away are they from the lowest they have ever been?

I think -- so how many years you want me to go back because I have seen Xanthine for the last 20 years. Of course, the lowest prices that I have seen, it went down to $6 in past. Yes. So currently, of course, they are much better than their -- those numbers.

Let say in the last 3, 2 years.

The last 3, 4 years, the prices have been much higher. They have been more than double of that number.

[Operator Instructions] The next question is from the line of Nitesh Dutt from Burman Capital.

First question, we are -- in H1, we are at INR 190 crore EBITDA. So to achieve the 10% to 12% growth guidance, we would need to have roughly INR 230 crore EBITDA in H2. So just checking if we are on track for that guidance, especially considering that CDMO/CMO, some part of it might get pushed out in the next year?

Yes, we are on track. That's why we reaffirmed the our growth numbers in my speech.

Second question, CapEx for H2 and FY '26. And also related to it, when do you expect the incremental Xanthine capacity to get operational?

The incrementals Xanthine capacity will get operational by end of next fiscal. So we will have, I think, the entire project should complete by Q3 of next financial year. And of course, it may take another 6, 8 months to completely or 2, 3 quarters for us to completely operationalize. So we will -- I think the project is divided in 2 phases and I think this final sales will get over by Q3. And then we will have 2, 3 quarters for operating the capacity to a significant level. And I think overall, we have invested...

In H1, we have invested INR 170 crores on tangible assets. And I think in H2, we might spend addition INR 250 crores, INR 250-plus crores.

And for next year also, we will have another first half, we will do another INR 150 crores spends.

H1 of FY '26, another INR 150 crores, is that right?

Yes.

Understood.

No change in the overall plan of spending INR 550 crores, INR 600 crores.

The next question is from the line of Dhwanil Desai from Turtle Capital.

Sir, one question on CapEx. So once we are done with this Atali and Xanthine expansion, how do we at our CapEx? And would we first prefer to kind of stabilize and ramp up the capacity before doing next leg of CapEx? How will extend.

Yes. So as you know, company operates in 3 segments. So API and intermediate out of the API site is at Tarapur. In Tarapur, we have space for brownfield expansion for the API capacity. And I think we see in future good demand of anticancer products as well as the API. So we are already on trying both to further debottleneck these capacities and put up some capacity there, whereas Atali will largely concentrate on a mix of intermediate as well as the CDMO/CMO. And in this segment, it's a large project with 80 acres space. I think we are just starting Phase I. I think that project will have multiple phases. So with the Phase I, we will have 60 reactors are operationalized with the 450-plus KL capacity. And I think there, we have hoped to do add every year 1 or 2 blocks of 250, 300 KL going forward depending on the need of the customer and how we are ramping up our CDMO/CMO business. And in case of Xanthine, I think we will be fully operationalizing the 9,000, I think, in further, which we don't foresee any immediate action for next few years. We will keep on considering our reviewing our strategy of caffeine then if there need be, we could think about any future expenditure. But currently, I don't feel there would be any need for that particular segment.

Okay. Got it, sir. And one more question, sir, slightly longer-term question. But this 15% target on EBITDA growth for next 3 years. So if I look at segment-wise, every segment need to grow at much faster than that. And I don't know about the API part, but at least Xanthine and CDMO. And CDMO is a much better margin segment, and you are focusing more on API on the regulated market. So I'm unable to get this, how we will not kind of surpass the numbers that we are projecting, 15%. I'm not able to add up on that.

I think next few years, I think 2, 3, 4 years, the numbers we want to be a bit cautious on whatever we give the outlook. So I think this is an outlook that we are pretty sure that we should be able to achieve with the current business plan that we have and surpass it in future. As you rightly mentioned that if we add up the number, the number can look bigger, but we don't want to over commit and underachieve.

The next question is from the line of Advaid, who's an Investor.

Just one question from my side. I mean, I was looking at the inventory days, and the absolute value of inventory, it has significantly increased, which, to an extent, has also weighed on your working capital. Is this something that is characteristic for this industry? Or is this specific to this quarter? You just highlight that, that will be helpful.

Yes, I think as we earlier mentioned that CDMO/CMO certain projects, which have long gestation and I think it is a result of that we have a significant inventory because we have a sizable order, which will get dispatch in 1 quarter. So that inventory can come down in that quarter. So that is the reason that we have this inventory built up. But, I think looking at overall characteristic of CDMO/CMO business in future also and our appetite of doing multistage synthesis, I think we will have this inventory fluctuating to higher number and lower number. And once we have every quarter stabilized number, I think then we will stabilize some inventory. But the numbers will remain high. Looking at our overall appetite for this multistage synthesis where we do the regulator starting material also GMP also and sometimes we will end up doing API also. So with that, we have that situation.

And our own APIs as well.

And our own API also...

Intermediates in-house.

Just one last question. If you could just give us a view of the gross margin profile by segment that will just be helpful.

I think that information currently we are not sharing.

The next question is from the line of Neha from Abakkus.

On the Xanthine part, I wanted to understand that how does average realization have changed versus last quarter in the spot market and the contract market?

I think we are not giving absolute numbers of these. But I think overall, the spot market has come down as we compare to last year. I think both the market -- spot market has come down more than the contracted market. And I think we have also reduced our raw material costs. So I think that's how we are able to protect our margins in this segment. So that is what I can tell about the Xanthine. We are not dwelling over absolute numbers of either of the segments.

We are continuously working on cost improvements. That will also come like with bio gas or better efficient boiler and with solar power plant, we will have the cost reduced in coming quarters that will also help.

Okay. And in terms of volume growth, if we can speak about for the current quarter for Xanthine?

Yes. I think volume growth, current quarter, I think we had a little bit of muted deliveries for one customer. But barring that, I think overall, the production did happen at rated capacity. And I think that will continue to happen as we have announced the future expansion, I think currently, we are fully utilizing our capacity. And I think there could be 1 month of higher inventory. But I think overall, we are quite confident of pushing the entire production out in the market of Xanthine.

Okay. And also on the CDMO front. In H1 FY '25, we have almost done about INR 50 Cr for the CDMO and we are -- although they have reduced our overall guidance for CDMO business from 25%, let's say about 20%. So in that case, about INR 50 Cr can come in H2 FY '25. Is that understanding, correct?

Yes. So we are not dwelling on absolute number here. You can get to those numbers, yourself. But I think we will have significant deliveries happening in H2 and anyway, from whatever our earlier guidance and today's discussion that we had, I think those kind of numbers are possible.

Okay. And sir, when you mentioned about the lead time being higher, does it mean that since there are various steps involved in a particular step, it took more time and that's why that is the overall time line for the project.

So there have been instances where there was extension because of these kind of projects, there have been some projects which have been a little bit pushed down. So I think it is, I think, 2 such issues, which have overall impacted the numbers on the CDMO/CMO side.

And sir, certain projects being pushed on as in like they are being delayed.

The have been delayed by 1 or 2 quarters by the customer because of overall their inventory management and whatever -- for the commercially running products basically.

The next question is from the line of Rupesh Tatia from Intelsense Capital.

I understand you don't want to give gross margin by segment, but can you maybe rank them between 1, 2, 3 which is the highest gross margin which is the lowest gross margin between our 3 divisions.

Yes. So highest would be CDMO/CMO then API and then Xanthine. And overall gross margin this time was 67% -- 65% gross margin. So they range between 40% to I think 65% -- 35% to 65%.

No, not 35%.

Across all the segments.

Yes, 35% to 65%.

Okay. Okay, sir. And then for other question in CDMO is all of our CDMO projects are the innovators -- innovative products basically products, which are under statement or under development? Or is there some generic CDMO also there?

No, no, we are working with 19 customers and the projects that we do, almost 90% of them are with the innovator. So we have, I think, a couple of 1 or 2 generic very small value.

Sorry, I didn't get that ma'am, sorry.

Yes, yes. No, no. So we have largely innovator work that we do.

And maybe can you tell me how many of them are like Phase III and how many are commercial, some rough idea?

So we have 28% -- 28 of them, which have been commercial projects out and 27 are developmental projects. So we are working on 55 projects with 19 customers.

Sir, my question is with 28 projects, our commercial revenue is actually very small. So is it like we are we have like a second source supplier in the innovative products for these the commercial products.

So if you would see in last couple of years, we have built up the pipeline. And with this pipeline, the innovator doesn't make the product every year. They have alternate year production and stuff like that. First year, they will take initial validation work and then they will give certain quantity. And then the third campaign, they will give us more quantity. So we are in that progress of the cycle of management of the supplier by the innovator. So once we are fully onboarded, I think we expect a more stable revenue from these -- each and every projects that we have.

So maybe the other way to ask is, build in-house?

Yes. Let me just add. The way in which we classify is that 28 projects are commercially so the project products have been launched commercially by the customers in the market. Whereas 27 projects are in various phases, Phase 2, 3 -- Phase 1, 2, 3 of the clinical phase. So in the 28 projects that we are doing, we also -- we have certain projects where we have just entered, we have certain projects where we have supplied validation quantities. We have certain projects where we have done only 1x supply and certain projects, we have supplied in 1 year, 1 year, there was a break and now it's the third time that customer would buy. So there are several such examples of how this business operates.

So the other way to ask this question, sir, is out of these 28 commercial molecules of projects in how many we are the single source supplier?

No, we may not be single sources of any of them. So innovators are quite -- they have a supply chain strategy, and they never have single source.

And then maybe one final question is in this commercial plus development. But can you give some idea about the total revenue potential of end customers in the projects. Is it like $1 billion combined, each project is like $50 million? Or is there like some molecules which can go on and become very, very large.

Yes. So with the current visibility that we have and the numbers that we have from the customers, I think there is potential of these projects becoming quite large also in a few cases. Absolute number can vary, but I think range could be $25 million to $50 million also possible if the product gets matured, and we are able to satisfy the customers' need and service the customer in a proper way. Those kind of potential projects are also there in our pipeline.

The next question is from the line of Deep Gandhi, from ithought PMS.

Sir, my question is again on the Xanthine. So you mentioned that once you reach the full utilization for 9,000 tonnes, the potential revenue could be around INR 1,000 crores or $125 million. So sir, currently, when you are at, say full utilization with 5,000 tonnes capacity, you're already doing INR 800 crores. And if I assume even 20% drop in realizations from here, the revenue should be around INR 1,200 crores. So I'm not able to understand this mismatch and if you can explain are you expecting even higher drop in realizations than 20%? Or what's the mismatch here?

Yes. I think those numbers are all speculative numbers. So I think the number range I would like widen from $100 million to $150 million. Anything can happen with the 9,000 metric tonnes. It can go higher also.

The next question is from the line of Nitesh Dutt with Burman Capital.

Sir, my question is, in FY '26, our Xanthine capacities, the expansion would not be coming on stream. Similarly, Atali would not be fully ramped up. So for FY '26, which segment will do the heavy lifting in terms of volume growth, or do you expect your product mix pricing and a little bit of CDMO/CMO to drive the growth? And related to it, do you expect that FY '27 will be doing the bulk of heavy lifting in terms of achieving your 15% CAGR guidance or FY '26 can also see a similar kind of growth.

Yes, I think FY '27 would be the year where I think bulk of the capacity will get operationalized. And I think FY '26, definitely, I think, as you said, the product mix, but of course, in Phase 1 of our Xanthine will get operationalized by -- in the second half of next year and which would be utilized. And then by the end of the year, we'll have full operationalization of the Xanthine. But Atali, we expect to fill it with the intermediate operations for the generic industry also to start with so that we can utilize the capacity. But I think, as you rightly mentioned, more contribution and meaningful margins can be driven only in the '27 for that -- for these 2 expansions that we have done.

Any qualitative guidance you would have or any idea about FY '26 numbers similar to how you have separated it for FY '25.

I think we would give that guidance in Q4 call. Probably, once we have the budget and everything, it currently, of course, we have broader numbers. I think API segment with the capacity is getting utilized, I think there, we expect the growth to come because the facility, I think the expansion was done a couple of years back, and those capacities are getting occupied, and then we are also debottlenecking 1 or 2 lines to enhance the capacity. So that facility can do some increase in overall production.

The next question is from the line of Tushar Vasuja from Yogya Capital.

Thank you for the follow-up opportunity, sir. Sir, you said that you would focus more on the pharma side of Xanthine now. So how has the realization margin for pharmaceutical Xanthine as compared to beverage.

Similar or better. So in pharma side, I think we will focus on the regulated markets. And I think the overall pricing that we expect from this segment being regulated will be better.

Okay, sir. And sir, you said that you'll apply for regulatory approvals in the coming quarters. So what is the current distribution for beverages and pharma? And how will it change once you get the approvals?

See currently, we have been focusing more on beverages and spot market, but now the pharma market, eventually, we expect once we ramp up the capacity, I think 20%, 25% of our overall capacity, we want to push to the pharma segment, 20% in the regulated space and 10% in unregulated space. So with that, I think overall, it will stabilize the margin profile also.

Okay, sir. And sir, what will be the time line for you to get all the required approvals?

No. So that's why basically, we are doing the brownfield expansion at the current site. So -- as we mentioned on the call during my speech that we will file later in the current fiscal only the U.S. FDA DMF as well as the EUGMP CEP application. So I think we expect both the approvals and the triggering happen in next year.

Our next question is from the line of Advaid, who is an Investor.

Just one thing is if you could just give a perspective about what's happening from a pricing perspective versus last quarter and same quarter last year as far as Xanthine is concerned, because I think in the last con call, you had mentioned about there being pricing pressure given the supply. If you could just give us a perspective on that, that will be helpful.

I think as we have mentioned that the spot market has deteriorated because of the excess Chinese capacity. And unregulated players in China have been dumping the product in the market. So whereas overall, I think large contracts are also under pressure, but margins are intact because they definitely follow the raw material cost model. And the overall the way in which the pricing happens is largely basis costs. Of course, it's a negotiated number. But still, I think there is some logic there the range which -- the strategy that we have is that how do we go away more from spot and move towards more long-term market and regulated and which can give us stable margins, and we don't have to fight on the spot side.

Okay. And just one last question from my side. Primarily within the Xanthine segment, do you cater to the local Indian customers? Or it's primarily exports? That's the other.

Yes, we will cater to all customers. I think in India, although there is regulated market customers, there are a lot of Paracetamol, caffeine combination API formulation being manufactured in India, and getting exported worldwide in Europe as well as the U.S. market. So we will definitely target all regulated markets. There are marquee customers also in India and globally, large multinationals who also have OTC presence and across the world, and they also require regulated DMFs and CPS and stuff like that. So we will be catering to all those markets. And that catering can start in next -- the current half only. Because it's, of course, a couple of quarter qualifications, other approvals. And by that time, our capacities will also come on board. So we will be able to start supply as soon as we have the capacity.

Got it. And presently, the exports are they more than 50% as far as Xanthine is concerned specific to Xanthine segment?

Yes.

More than 50% is export.

Thank you. Ladies and gentlemen, that was the last question for today. As there are no further questions, I would now like to hand the conference over to the management for closing remarks.

Yes, I would like to thank all of you for joining our call, and Happy Diwali. Thank you.

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