Aarti Pharmalabs Limited (AARTIPHARM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Aarti Pharmalabs Limited Q3 and 9 Months FY 2025 Earnings Conference Call, hosted by Valorem Advisors. [Operator Instructions] Please note that this conference call is being recorded. I now hand the conference over to Ms. Nupur Jainkunia from Valorem Advisors. Thank you. And over to you, ma'am.

Thank you. Good evening, everyone, and a very warm welcome to you all. My name is Nupur Jainkunia from Valorem Advisors. On behalf of Aarti Pharmalabs Limited, I would like to thank you all for participating in the company's earnings call for the third quarter and 9 months of financial year 2025. Before we begin, let me mention a short cautionary statement. Some of the statements made in today's earnings 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 belief as well as assumptions made by 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 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 Mr. Rashesh Gogri, Chairman; Mrs. Hetal Gogri Gala, Vice Chairperson and Managing Director; Mr. Piyush Lakhani, Chief Financial Officer of the company. Without any further delay, I request Mr. Rashesh Gogri to start with his opening remarks. Thank you. And over to you, sir.

Good evening, everyone, and welcome to Aarti Pharmalabs' earning call for the third quarter of financial year 2025. It is a pleasure for us to speak to you today and share an overview of our recent business progress and financial highlights. I'm extremely pleased to announce a record-breaking quarterly performance. In this quarter, we have achieved highest ever quarterly profit in the company's history on a standalone, as well as consolidated basis. The performance demonstrates our execution capabilities and effectiveness of our strategic initiatives. It is a testament to the progress that we have made in the growth and we have been striving for it. Here are the highlights of consolidated financials for Q3 FY '25. The consolidated top line was INR 538 crores, which was 20% increase on Y-o-Y basis. The EBITDA was INR 129 crores as compared to INR 96 crores on the corresponding period of the previous year and it was an increase of 34% Y-o-Y. The profit after tax for the Q3 FY '25 was INR 74 crores as compared to INR 53 crores a year back, indicating a surge of 40% Y-o-Y. Now, let me present a few business highlights. The company operates 3 separate segments in pharmaceutical industry, that is Xanthine derivatives, API and Intermediates and CDMO/CMO business. Notably, all the 3 segments have done reasonably well this quarter. The Xanthine derivative recorded highest ever quarterly volume sales and it contributed to 44% of the turnover in Q3. The competition from China continues to be a headwind. In fact, the prices for the spot market are further declining by over $1 per kg. Despite this, long-term customer relationships and world-scale capacity helped us thrive in this market. And similar to last quarter, our Xanthine facilities have operated almost at full capacity in this Q3. The API and Intermediate business delivered the best quarterly revenue performance and contributed to 43% of the turnover in Q3. The sub-segment wise breakup is 48% regulated market, 40% ROW market and 12% non-reg market, which is aligned with our long-term focus towards regulated markets. The third business segment CDMO/CMO has contributed 13% of the turnover in this quarter. We are presently working with 21 customers, adding 2 customers in this quarter. The number of active projects is now 56, of which 28 projects are in the commercial stages and 28 projects are at different stages of development, both at customers' ends. Given our strong manufacturing capability and global tailwind in CDMO business, we are confident of delivering significant growth in medium to long term. Let me also appraise you about the temporary shutdown of our Vapi plant in first week of January. The unit had to be stopped. The unit has stopped operation because of the notice from the State Pollution Control Board, and the necessary steps were taken and unit was successfully restarted in about 2 weeks. With no long-term impact, we anticipate that this closure may push some of the CDMO sales, which was originally scheduled in Q4 by 1 quarter. Let me share the progress updates on key growth initiatives. Our brownfield expansion for the increase of Xanthine derivative capacity from 5,000 metric tons to 9,000 metric tons per annum is progressing as planned. As per our plan, we will be filing for the regulatory approvals, and the USDMF and CEP for the pharmaceutical market from our Tarapur Unit 3 plant in this current quarter. The greenfield project of Atali, Gujarat for CDMO/CMO and Intermediate manufacturing is progressing with minor delays and we expect Phase 1 of this Atali to be commissioned in Q1, with a ramp up expected towards the end of FY '26. The Phase 1 will have about 450 KL reactor capacity and has been specially designed to facilitate pilot to commercial scale up in the same block. As communicated previously, our solar energy project of 21 megawatt DC at Akola, Maharashtra, was commissioned in Q2 FY '25 and is operating as expected. Moreover, we have signed up with another captive solar energy project of 9 megawatt DC for our units in Gujarat. The second project is likely to get commissioned in Q2 FY '26. And once operational, both these projects combined are estimated to generate more than half of our total electricity requirement. This highlights our continuous commitment to cost optimization as well as sustainability. Lastly, we will be starting 2 solid multi-fuel boilers capable of using BioBricks as the possible fuel at 2 of our plants in Maharashtra in Q4 FY '25 in the current running quarter. These are expected to completely fulfill the steam requirement of these respective plants using this kind of fuel, and this initiative will not only result in fuel cost reduction but also lowering our carbon footprint. Thank you. Okay. In conclusion, we are hopeful to continue the growth momentum that and -- growth momentum and remain focused towards driving revenue growth, optimizing costs and enhancing operational efficiency. Given our current trajectory, we are optimistic that we may exceed our previously provided guidance of 10% to 12% of EBITDA growth for FY '25. And the business prospect look bright and we will discuss the long-term outlook in Q4 FY '25 conference call. Thank you for your continued trust and support, and we are committed to delivering strong results and creating long-term value for our investors. The moderator may now open the forum for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Prakash Kapadia from Spark PMS.

A couple of questions from my end. Xanthine contributes around 45% of our revenues and caffeine prices have seen a 4%, 5% correction in the last 3 months. And in the opening remarks you alluded, there is some more downfall in the prices. So, what would you expect in the coming months? And if you could highlight some sensitivity profile as to what impact can it have on falling realizations for this segment because that's a large segment for us? And secondly, in the CDMO segment, we are seeing number of products, which are in the commercial stages increasing to around 28 from around 19 last year. Yet we've not seen any major growth in revenues from the CDMO segment. So on an annual basis, what could the contribution of CDMO be like? And I guess, this would be a higher margin business for us. So as you know, this contribution increases, what could margin trajectory be for the company as we scale up the CDMO business? Those were my 2 questions.

Yes, the Xanthine -- overall the caffeine prices, as I mentioned, have softened little bit overall for the spot market. However, there is a different profile of customers, which are offering -- where we are offering different kind of price proposal and due to which, we are able to now focus. As mentioned, we will be filing the USDMF and CEP from our Tarapur Unit 3 plant. So, we are trying to change the profile of the customer and making it more regulatory-oriented customers. And with that, we will be able to focus on higher customers who can pay higher price to us. So that way, we are trying to ensure that we are not selling more spot volumes for our customers. Secondly, the lower prices are compensated by higher quantity production also. So overall, we have seen from last year to this year a growth in overall production of our Xanthine portfolio. And with that, we are able to grow our overall absolute pie of the contribution and gross profit for this segment. For your question on CDMO, you rightly mentioned that we have increased the number of projects from 19 to 28 on the commercial side. And overall, I think the number of customers have also increased to 21 customers, with 56 current running projects that we have. And as mentioned, we see good opportunities in future for this and of course, this current year also, as earlier, we had guided that we will be increasing our top line from last year and we are hopeful that we will still be increasing because till now we have only done around INR 78 crores of sales of this CDMO segment. But we will be exiting last year's number, which was INR 170 crores. So, that will happen in the current quarter and we hope that next year, we will be able to do significantly better sales of CDMO products.

And with this scale, what could be the margin trajectory be like because I'm guessing CDMO would be a higher-margin business as compared to Xanthine. And Xanthine, if you could give some more insights into the changes, which you talked about supplying to regulated markets? What does it take to get more visibility from these kind of customers who are willing to pay us more? And what could that reduced volatility look in terms of sensitivity to our margins or this can affect margins in the Xanthine segment also? If regulated markets don't buy more from us, what could be the contribution of customers from regulated markets? If you could give some color, that will be helpful.

Yes. Basically, for Xanthine currently, we may be in spot market for 30%, 40% of our total volume currently. And with the increase in the capacity, our capacity will go up from 5,000 tonnes to 9,000 tonnes. So, we are hopeful that we will still maintain contractual or -- not contractual, but spot price number to that restricted level of 30%, 40% only, so that our better priced customer base will grow with a higher capacity. That is what is the anticipation. And currently, with the DMF and CEP filing that we are doing from second location, which is currently used for the spot market, so we will try and get these customers to validate us. And as soon as our capacities are up and running, we will be able to commercially supply these customers in future.

The next question is from the line of Rahul Jain from Credence Wealth.

Congratulations, Rashesh bhai and the team for a wonderful set of numbers. Sir, just to have a follow-up on CDMO part. So, you mentioned that your fourth quarter, you plan to exceed for the full-year numbers. So, that is quite heartening to know. At the same time, you have pushed some sales to quarter 1 of next year. So, how do we look at growth for CDMO in FY '26, given there will be some spillover of the current year to the next year? So overall, what kind of growth numbers should we look at for FY '26 for CDMO business?

Yes. As we mentioned, we will be doing the entire budgeting exercise and all guidance revision also because normally, we end up giving a yearly and a 3-yearly guidance. So once we -- on the next con call next quarter, we'll be able to guide you in more detail. But we will see significant growth in this segment. And we would like to let you know that the 2025 number will be better than 2024 numbers. So currently, we have just done INR 75 crores, INR 77 crores. And then -- so to better it, we have to do more than INR 100 crores. So, that is what we are anticipating that in current quarter, we'll be able to do significantly more than what we have done in first 3 quarters as sales.

Sir, on the API side, last year, our quarterly run rate was around INR 150 crores. And this year, that run rate has jumped to INR 170 crores, then INR 190 crores and now INR 203 crores in this current quarter. So typically, as we speak today at INR 200 crores, what kind of utilization we are working at on the API? And is there any bunching of any of the orders in 1 quarter? Or do we feel that with this INR 200 crores, the run rate could further increase going ahead? And how do you look at the growth for FY '26?

So basically...

For out Atali expansion, ramp-up will happen somewhere in probably the flag end of the next year?

Yes. See, the Atali plant, we will be utilizing for CDMO/CMO program, as well as the API -- as well as the intermediate manufacturing. And overall, the numbers of API have remained -- have been increasing, and we are seeing that we will operate at these kind of numbers or higher numbers in future. Our overall utilization would be around 75% of our capacity. However, we are going to add one more line in our new block. So, that will also get debottlenecked. So with that, we will add another 10% additional capacity. So with that, we will get growth there as well. And of course, in Atali, we have completely new site where we will have more than 58 reactors with 450 KL. So, that itself will give us a lot of boost. But primarily, that will come to Intermediate and CDMO/CMO business and not to API because API, we will only manufacture on the risk mitigation basis there.

Yes. And sir, Atali could contribute what kind of revenues from next year onwards in FY '26?

Atali...

We have 6 month revenue from Atali?

No, no, Atali will take 2 years plus to ramp up. And so we are anticipating -- those numbers, I think, we'll clarify in next call. We are just in the process of quantifying the same.

Yes. But then typically, in a pharma space for it to become commercial, we'll have to trigger on the regulatory audits and everything. So, that will happen in FY '26 primarily.

The next question is from the line of Meet Katrodiya from Niveshaay.

I have one question on the part of CDMO and CMO. So, we have an active project around 56, right? So, I want to know the molecule size, like any molecule can contribute significant like INR 100 crores, INR 200 crores going forward from a single molecule? Or every molecule is at INR 40 crores, INR 50 crores per molecule? What is the opportunity size for the CDMO going forward?

In the CDMO/CMO, we have 56 ongoing projects, out of which 28 are commercial and few projects have this kind of possibility in future. And of course, they are in the launch phase. And once they get launched, then the significant volumes can get triggered. So, we are quite hopeful that we will have those volumes. And that's why the entire new manufacturing at Atali was being set up by us -- is being set up by us to meet the customers' enhanced requirement in this segment.

Okay. Okay. So, I have read somewhere that we are targeting INR 500 crores in CDMO, so by which we are hopeful that CDMO figures will touch to INR 500 crores?

I don't want to give you any futuristic number without vetting. So, I think we'll give the guidance next quarter.

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

Congratulations for a very strong set of numbers. Sir, my first question is, I think we were aiming for 20% kind of a growth on CDMO this year and whatever slippages that will happen now because of the plant shutdown. So are we still aiming at those 15%, 20% kind of a growth? So, maybe INR 130 crores, INR 150 crores kind of a number from Q4? Or are we looking at a more like a almost same number as last year?

Number will exceed last year's number. That is what I mentioned. To what level? We will see how we are able to push the product out of how the dispatches happen from India. So it's a speculative number, but we will definitely exceed last year's number.

Got it, sir. Got it. And sir, so from your commentary, currently, we are at INR 200 crores odd run rate on API and with 75% kind of utilization and you are saying that you are putting one more reactor. So with the current capacity, API can reach INR 1,000 crores plus number. Is that a safe assumption to make? And since we will be utilizing Atali largely for Intermediates and CDMO, beyond 1 year, how should we think about growth? Are we looking for any greenfield expansion over there? How should we think about that?

Yes. Basically, this segment can be of INR 800 crores to INR 1,000 crores depending on the product mix and what we are able to produce at that site. So, that kind of capacities are available. And further, we have land there to expand further and we can actually put up additional 300, 400 KL capacity there as well. So, there is always a possibility to further increase capacity at the same site and which can be done in a 1-year time. So as we plan for that -- normally, what happens is that once we occupy around 80% of our capacity, then we do one round of expansion. And then we want to make sure that we are at 75% kind of utilization. And then we have always spare capacity available to plan newer validations and take up newer projects and stuff like that. So that's how we are planning the expansion. So we have space for that and which can last us for another 2 years, 3 years at the same site, 3 years.

Okay. And on Xanthine, sir, I think we are doing this CapEx. So in terms of ramp-up, how should we think about -- I think we are doing that in 2 phases. So when the first phase will get completed? And I think you mentioned in the last call that it will be not -- it will not take very long time to kind of fill up the capacity given the demand environment in our contracts. So, how should we think about growth on the Xanthine side and filling up of the new capacity in Phase 1 in terms of time line?

Yes. In the first half, we will be able to do phase -- first phase of Xanthine and the second phase will happen in the second half of next financial year, whereby we will reach this 9,000 metric ton capacity for Xanthine. And in the subsequent year, we are hopeful that in FY '27, we'll be able to achieve 90% of the capacity utilization of this overall capacity that we are going to put up. So basically, in next financial year and a year after that, we will achieve the 90%.

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

Congratulations on a good set of numbers. Most of my questions have been answered. One question, sir, on API margin profile. It looks to me that our APIs are slightly differentiated and the margin seems like 20%. It's my guess. It's like 20% plus kind of margin. So is that a fair assumption? And do you see any risk to the margin? I mean, currency depreciation, maybe import prices going up, do you see any risk to the API margin?

Yes. So basically, we are doing -- almost 50% of our sales happens to the export market, and that is across segment. Also, our APIs basically are targeted towards regulated and semi-regulated market where the change from us to some other supplier become not very, very easy. And then we are in this niche product portfolio, which are anti-cancer and steroids, which are not offered by many. So, all these factors put together allow us to operate at a reasonable margin in this segment as opposed to the other API pure-play manufacturers. And we are backward integrated also in case of this -- most of the APIs. Almost 70% of our portfolio is backward integrated where we have our own intermediate manufacturing happening internally. So regulated wise, we are insulated from any China-related issues and stuff like that. So, that's how we have a robust model for API business. And we are hopeful that we will be able to grow this with the newer anti-cancer and general block products that we have, which are going to get launched in next year. And we are quite hopeful of this.

Okay. Okay, sir. And other question, sir, is I mean, we -- I think we supply to these tall manufacturers in Europe who eventually supply to innovators. And I think one of the accounts has scaled up very, very well to, I think, $25 million. I mean, do you see that account, let's say, scaling to $50 million in 2 years, 3 years and then maybe some other tall manufacturers going to $25 million in 2 years, 3 years? Existing accounts scaling up and new accounts coming up to level of $25 million in 2 years, 3 years? Directionally, sir, I mean, I don't want to guide us directionally.

No, no, I think those numbers that you have needs some verification because those numbers are not correct numbers that you have mentioned. We have several projects at several stage of development, and we have invested almost a significant amount in new facilities. So, you please understand what kind of growth prospects that we are seeing that we are investing almost INR 300 crores to INR 400 crores for a new project. So it's an exciting business area where we have successfully delivered and customers have come back to give us more projects. And we work with direct innovators as well and we work with the partners of innovators. But of course, innovator would know what our value is with their partners also. So in a way, it is a very close-knit supply chain. And once the innovators understand our value, we can, of course, move up because we have internal capabilities of doing API as well in-house. And we are doing a few of API products -- projects also with some of the innovators, some midsized innovators.

Okay. Sir, final question is on this Atali INR 375 crores CapEx.

The next question is from the line of Ankur Bhadekar from ULJK Financial Services.

So, a couple of questions from my side. So the first question is regarding the Vapi plant, which was shut down due to pollution issues. I just wanted to understand the quantum of impact on the numbers going forward, say, in Q4. Like if you could just give some light on that part?

Yes. Basically, there is no material impact. So the impact is going to be lower than 5% of the turnover and 2% of the profit. So, that's why we have not given the number on stock exchange. So it's going to be a minor impact. Only what is going to happen is that it is going to delay certain shipments, production and everything. So, we don't see significant impact overall company-wide, but there is an impact. And -- and -- but however, I would like to reassure that we have convinced the authorities that everything was fully compliant. And now we have successfully been able to get this revocation within record time because otherwise, they take too much time for revocation as well. So that shows that overall, we focus on compliance and make sure that we are very careful on these kind of situations in future as well.

Okay. So, my second question was -- so like in the CDMO segment, how much growth has come from the commercial molecules and how much is from the development phase molecules, if you could give any ballpark number?

Yes. Basically, commercial, it will be difficult for -- because growth -- overall growth will come from commercial only. The smaller projects, whatever that we are running may not contribute significantly because they are in early phases and the quantity required would be smaller value. So, that's why mostly the growth is coming from the projects, which are getting commercialized, yes.

Right. So lastly, currently, your gross margins on a standalone....

The next question is from the line of [ Aryan Bansal ] from Hillview Global.

Congrats for a good set of numbers. Sir, I wanted to know that how are we differentiating our CDMO offering from another CDMO companies in India, particularly for innovators?

Yes. Basically, we are late phase and strong manufacturing-backed organization. So what we are good at doing, basically, is providing manufacturing services and partner with the innovators for long-term supply security of their advanced intermediates as well as the KSM, RSM, APIs long term. So, that is the differentiation that we have. We have strong chemistry skill sets and engineering skill sets, which allow us to operate different kind of difficult-to-do reactions and difficult-to-do solvent recoveries, difficult-to-do catalyst recoveries and stuff like that. And then we have a manufacturing setup, which has good volume availability so that we are able to scale up quickly as against some other suppliers, which may not have this kind of volumes to offer to them. Also, we are -- we can do backward integrated work also. So we can do 4, 5, 6 stages in-house. So, we are able to give a proposal to innovators that we will try to do maximum steps in India only and having least dependency on China. So, these are the differentiating factors that we would have over others.

Okay, sir. And can you tell me that how much of our CDMO business is in form of innovators, like, is from innovators?

The entire number is going to innovators only directly or indirectly.

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

Congratulations for very good numbers. Sir, my first question is on the Xanthine side. So if I look at the 9 months data, the export business has grown at almost 15%. And this is despite you mentioning that there was a price reduction in Q3 by $1, $2 and you are already operating at full utilization. So, you can correct me if I'm wrong, but is it fair to assume that the export business is mostly long-term contract business for you, and that is why you are able to grow the revenue despite the price correction which you are seeing in the market. Is that a fair assumption?

See, we have long-term partnership with our large customers, and that is allowing us a stable business. And we are able to grow our volume with our offerings that we have with them. Also, we did increase in -- last year, our capacity was 4,000 tonnes, which we increased to 5,000 tonnes. So basically, there was an increase there also. So that 20% increase -- 20%, 25% increase has happened, so which allows us to operate at that level. And further, in first half also, further, we will enhance this capacity. So with that, we are slowly, slowly doing the debottlenecking and having more products and offering to customers, which are more regulatory focused in future. So with our CEP filing and USDMF filing, we will be able to penetrate in those markets from our Tarapur Unit 3 plant as well in future.

Sure. And sir, 2 more questions. So second is on -- actually on the API side. So if I just see the revenue breakup for 9 months FY '25 and compare it with 9 month FY '24, so most of the growth which is coming is from the rest of the world markets and the regulated market share is actually reducing. So if you can broadly explain us how are the margins different in both the markets? And is there some kind of risk that because you are focusing more on the top line, there might be some margin compression because of this change in the revenue structure going ahead?

Yes. I think largely the regulated market business is steady. And there could be one quarter where the business, we may have shipments in ROW and one quarter we may have shipments. But the price points in both the markets are similar only, the regulated and ROW market. Because ROW market is largely Brazil and Russia and China, where the prices are, in fact, sometimes better than the U.S. and European prices. So in a way, to differentiate between both may not be a good idea. I think non-reg should be the lowest, and that's what we are focusing on and trying to put everything to the regulated market itself. And we have had good launches in last couple of years, and we have a good pipeline of products which will get commercialized in the next 2 years to 3 years in future. And we have built up capacity to cater to the customers for these products.

Sure, sir. That was helpful. Just one last quick bookkeeping question. Just a bookkeeping question, if you can. It won't take more than a minute. So sir, you had mentioned in the past that the asset turn from Atali will be around 1.25x initially from INR 400 crores CapEx. But I think to the previous participant, you mentioned almost 400 -- on a INR 400 crores CapEx, INR 900 crores revenue. So are you budgeting increased asset turn from the Atali project now?

No, no. That was for the Tarapur Unit 4 asset that up to what level we can do on API side. So, I think those numbers have been mixed up, but we will be at that 1x plus asset turn on Atali. So, 1 to 1.25 asset turn in Atali once we occupy significant capacity.

The next question is from the line of Ajay Surya from Niveshaay.

Sir, my question is on API, Intermediates. Sir, our share of revenue, if I look around then from FY '23, it has gone from like 37% to now in 9 months, like 46% for API and Intermediates. So sir, I wanted to understand like, with from our Atali CapEx being completed and post 1, 2 years of commercialization. As a company, how do we see the share of this segment going forward? Like do we see this share to increase to like maybe 60-odd percent where we can have maybe incremental margin as well? So, just wanted to know your thoughts on that.

Yes. Basically, as you know, we are operating in 3 business segments, API, Intermediate segment, Xanthine segment as well as CDMO/CMO segment. And we are seeing, as mentioned in Xanthine segment also, we are increasing the capacity almost by 1.8x of what is current capacity is available. In API, Intermediate also, API, we have current facility where we are further expanding. And in Intermediate and CDMO/CMO, use common facility where I have fungibility of changing the product mix overall. So overall, we see good growth in everything and this percentage revenue mix will ultimately depend on how much we are able to crack project in CDMO/CMO. Of course, Xanthine derivative will remain steady in terms of absolute percentage. It would be -- but as API, Intermediates and CDMO/CMO grow, overall, the Xanthine number as a percentage point will reduce. And the profit margin profile of API, Intermediates and CDMO/CMO -- of course, CDMO/CMO being a little bit higher, but not very, very different, 5 percentage point difference between both, since we are doing multi-stages in CDMO/CMO as well as API, Intermediates. So, that's how -- this percentage differences may not mean too much. Overall, we will see a good growth in future the way in which we have invested in the newer facilities and as they come on stream and as the patent expiry happens in future of these generic products that we have in our portfolio. We see good potential going forward.

Got it, sir. And sir, my next question is on CDMO. Sir, you mentioned that for this year as well, we are expecting to exceed the numbers for FY '24. I mean, I wanted to understand with the spillover and all this, like how do we see the growth in FY '26 with our capacities and all, like the inquiries and the significant traction we are seeing from customers, with the product pipeline also getting more commercial on the CDMO? How do we see the growth for FY '26?

Yes, we are in the process of making budget. And I think once we firm it up and once we have the next con call with the complete set of this year gone by, we'll be able to -- but we see good significant growth possibilities and good traction in this business segment. And we have also a sizable order book on this business segment already for next financial year.

Okay. And sir, one last...

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

So, we have delivered around 24% EBITDA margin at standalone level, which is 200 basis points to 300 basis points higher compared to previous 2 quarters, even though CDMO contribution was at 13% or so. So, what drove the margin expansion? It primarily seems to be from increased contribution of APIs. And is the 24% pace sustainable for future quarters now?

Yes. I think overall, this quarter, we had significant CDMO/CMO sales. As you know, in the previous 2 quarters, those numbers were not as much. Also, our solar energy project also got activated. And so we did some savings there also. We had overall INR 7 crores dividend income, which got accrued in this quarter. So all these factors put together, we got a record quarter results in this quarter. And we are hopeful that we are able to replicate this kind of performance in future quarters as well. But of course, we can't have a certain linearity. There will be ups and downs. But overall, I think we will see a growth going and that -- so whatever the earlier guidance of 15% over 3 years. So, we are working on those lines, and we are hopeful that all our strategies are working well, as I mentioned in my opening remarks. So with that, we will have good growth possibility.

Got it. Sir, second question is on API front. So, we have seen really good growth. In the first 9 months, we have seen 27% growth on Y-o-Y basis. Just want to understand what is driving this from a demand side? And also, you mentioned that you can potentially increase capacities in Tarapur, and you have a good pipeline of products. So it will be helpful if you just give some flavor around what kind of pipeline do you have? What visibility, et cetera, do you see? And how do you see API business specifically ramping up over next couple of years, 2 years to 3 years?

So typically, what has happened is the expansion that we did in Tarapur API side where we added a Block 5 currently is running at full capacity, and that is the reason why we are able to see this kind of a growth. And also, as Rashesh mentioned earlier, we are adding one more finish line in that particular block to be able to cater to additional product line. And the last block that we added, we wanted to have a large volume product from our existing product portfolio to be shifted to run as a more or less kind of a dedicated production. So, that has given us some benefit, definitely. And overall in API and Intermediates, there is a very exciting product pipeline, which is getting genericized in next couple of years and up to -- we are targeting various products up to 20, 30 genericization. So both -- what we do is we are present in key Intermediates, which is like N minus 2 where we supply to all the regulated API and formulation manufacturers of India. And then we are also present in some of those APIs as well. So, we are looking at a good growth opportunity there. As the product becomes generic, we will be present for the launch. And typically, since we are backward integrated, in fact, we start from maybe N minus 4, N minus 5, in some cases, even further back end. We are a very good choice for our customers for their regulatory support and every -- to reduce the dependency from China. So, that's where we have positioned ourselves, and we feel that we will be able to grow in steadily in API and Intermediates space.

The next question is from the line of Divesh from Finterest Capital.

Congrats on a good set of numbers, sir. Sir, my first question is on the API front. So, which molecules are the most -- which molecules are getting the most revenue in the API front, sir?

So, we have not yet given that information because we manufacture 50 molecules and we have 100 Intermediates in our portfolio. So the spread is very good and it is very difficult to comment on.

Yes. So, we have some anti-hypertensive and several products, which are large products in our portfolio already.

Okay. Okay, sir. Sir, my second question is on Ganesh Polychem. Sir, in your previous call, you have mentioned that this subsidiary will be transferred to Aarti Industries. So what's the update on it, sir?

No, we have not mentioned about this subsidiary getting shifted to Aarti. See, what we did mention was that there was some trading activity business, which was ongoing with Aarti Industries and Aarti USA Incorporation. And Aarti USA Incorporation was earlier jointly doing pharma and chemical business in erstwhile Aarti Industries, where Aarti Industries was 100% owner of Aarti USA. But when we split the business, Aarti USA Incorporation ownership, we took in Aarti Pharma because we had some licenses and business investment from that entity. And Aarti Industries till now had been using Aarti USA incorporation. But now they have incorporated one subsidiary in USA. So the entire trading business will get shifted there. So instead of doing -- using Aarti USA Incorporation, which was a stop-gap arrangement, from next financial year, mostly Aarti Industries will use their own 100% subsidiary to do the distribution in USA.

Correction. There, the subsidiary name is Aarti USA, not Ganesh.

Yes. Ganesh is a joint operation company, 50-50 joint venture between Aarti Pharmalabs and the Bandodkar family and which operates a manufacturing facility at Dombivali and Vapi. So, that's a different entity.

The next question is from the line of Shubham Jain from NV Alpha Fund.

I just wanted a clarification on the CDMO capacity that we've put. We have done a CapEx of about INR 350 crores, correct?

Yes.

And what is the revenue that we can get out of this? Is the 1.2x asset turn on the whole INR 350 crores or only on the plant and machinery?

Yes, no. So basically, we have -- in longer term, we will be able to get that kind of number from that. But in future also, we'll add more blocks. So, current investment that we have done there includes the infrastructure investment that we have done there and which is in excess of 1.25 to -- so that kind of a number, which includes the admin, QC, pollution control, pollution, warehouse and roads, all that. But manufacturing blocks as we add more and more, there, the asset turn could be in that proportion that 1.25. But we will add more blocks there. Basically, this is just the first block. We have capacity to add more than 10 blocks there. So in future, we will have more investment. And these kind of blocks will be done at much significantly lower investment and much quicker also. We will be able to put a block within a year there.

Got it. And the 450 KL currently can do a revenue of about INR 200 crores, INR 300 crores?

Yes, yes.

Okay. So it's 1x asset turn right now, but given we'll do brownfield for 10 more blocks, it can be much better.

Yes, yes. And it also depends on the product profile and how many stages where we are doing, but this is possible. Yes.

Got it. And on the API front, right, like you mentioned that this seems to be a steady sort of run rate that we hope to achieve going forward. Just wanted to understand what are the top 3, 4 therapies that we're doing? And how much of this delta from last year to this year is driven by volume versus pricing, given we've inched up our regulated market share in the business?

Currently, we have 3 large categories, anti-hypertensive, steroids and anti-cancer that we operate in. And of course, anti-hypertensive is a large business area that we have, which has grown, and we had a few successful launches in that segment, one significant successful launch in that segment, which has given us a lot of growth. We also operate in CNS therapeutic areas. So, these are large 4 therapeutic segment that Aarti Pharma operates on. And overall, I think we are -- and these are mostly lifestyle kind of APIs. And that's why we are able to have sustained market on these products. Also, overall top line and the prices always fall. So, you have to make it up because in a generic market, I have never seen prices go up even in rupee terms, except the product become extremely genericized and you are at the rock bottom and then you have to pass on the raw material in this. But in our set of products, I think there is constant R&D and savings that you have to do. And that's what we end up doing in our products to remain a significant player in these products. So, that's a constant innovation and cost-saving exercise that we end up doing every couple of years in each of the products.

Understood. And what kind of pipeline do we have for....

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

Sir, I wanted to understand regarding the consol minus standalone EBITDA, so which basically comes from the additional subsidiary business and maybe the Ganesh Polychem. So, just wanted to understand that the kind of growth that we have seen in the current quarter versus last quarter. So EBITDA -- that additional EBITDA this quarter is about INR 14 crores versus INR 9 crores. So, just wanted to understand that more in a granular manner?

Piyush, can you hit on that?

Can you repeat the question? So, you are saying that the consol EBITDA compared to standalone is higher by INR 14 crores. Is that the question?

Yes, INR 129 and INR 105.

At INR 14 crores. It was INR 9 crores for last quarter. Yes.

Yes. So basically, it has come from Ganesh. So, Ganesh has contributed about -- so Ganesh, we consolidated 50% of their EBITDA and their EBITDA was about...

This quarter was in excess of INR 25 crores total. Yes, Neha, we will get back to you with the numbers.

INR 13 crores, yes. So basically, most of it -- so 15% of the EBITDA share that we have got from Ganesh comes to INR 13 crores. So, that basically explains the increase in the EBITDA on a consol basis as compared to the standalone basis.

Understood. So going forward, do we see it as a sustainable number? Or how should we look at this number?

Yes. Ganesh has traditionally been operating at INR 15 crores to INR 20 crores EBITDA every quarter. And I think largely that number should continue on a 100% basis. And then depending on how as we are consolidating, we can add 50% of that in our EBITDA. So, that number will be around INR 8 crores, INR 10 crores every quarter, every quarter.

Understood, sir. And also regarding the...

Let her ask one question.

Yes. Sir, just wanted to understand on the CDMO part, so since we have shifted -- some orders got shifted to next year. So, do we expect to see higher growth for FY '26? Let's say, we are guiding for about 25% to 30% growth for FY '25 initially. Do we expect 25% or similar kind of growth in FY '26 from CDMO business?

See, the order shifting that 25% may become 15% over and above last year in this year. So practically, around INR 10 crores, INR 12 crores order may get shifted. That is what we are trying. But in last minute, the number can go a little bit up or down. So overall, I think that number is not going to be significantly driving next year's number. But next year's number, independent of this, shifted number also is going to be a significantly higher number in the CDMO/CMO segment because of the way in which the pipeline is shaping up and the kind of pipeline that we have. The number will look much better.

The next question is from the line of Kumar Saurabh from Scientific Investing.

So, my first question is around Xanthine, and I joined late. Sorry if the question is repetitive. In terms of realization, do you think we have bottomed out? That is one. And we are coming up with the expansion. So, how confident we are that the new capacity will be consumed. So, how do client contracts work in the Xanthine side?

So, Xanthine business, the contracts are on an annual basis. However, as a part of continuity, we have certain customers who have been -- we are discussing about increasing their share with us, purchasing share with us. And we are very confident that a significant part of increased volume will go to contractual and the high margin business of pharma where we are applying for USDMF and European CEP, and we are targeting to cater that market, which once we acquire, we will be a very steady-state business. And we would want to reduce and keep our spot business to current numbers of 30% to 40% only.

And realizations, have we seen the worst? Or how do you see the trend?

Yes, yes. We see that now with the current cycle, the kind of prices that we are seeing have bottomed out. And the margins have bottomed out basically. So, any raw material reduction will trigger a reduction in prices. But otherwise, we see that we are operating on the spot market, not at a very high margin, thick margin.

That's great to hear. The second question is you have a lot of patents. You have applied for a lot of patents. Also as part of the INR 600 crore CapEx, I think the INR 40 crores is going in R&D. Can you give some qualitative insights in terms of where the business -- where we are investing in terms of R&D, what kind of chemistry or molecule? And how it is going to commercially impact our sales and margin numbers?

Yes. So basically, we have filed 58 patents. We are having 3 R&D centers currently. 3 R&D centers are operating for different businesses. One R&D center is exclusively for the innovators. And then we have one R&D center, which is focused towards the API business. The third R&D center does largely scale up and also the product -- raw material saving idea generation from that R&D center. So these 3 R&D centers, as you rightly mentioned, we are almost spending close to 2% to 3% of our revenue, 3% of our revenue is getting -- about 3%. I think last year, it was 6% of R&D spend overall. And this basically supports all the 3 businesses. And as you already know that we have a pipeline of products in our API line also. So, 12 new APIs are under development, and they also require constant R&D. And as I also mentioned that every second year, we also do a cost reduction exercise, which also requires R&D. So basically, the API and Intermediate business and CDMO/CMO requires constant research and development.

The next question is from the line of Yash Chandorkar from VIVOG COMMERCIAL LTD.

My all questions are answered, but just want to know, are we increasing our given guidance for this year? And how do we expect quarter 4 results?

Yes. Basically, as I already mentioned on the call that we will be able to meet our guidance and exceed our guidance number that we have mentioned earlier. And I think Q4, we are fairly optimistic. Of course, this was a record quarter. We will see how it goes. And future guidance, we will give next quarter once we have the budgeting and overall strategic review of overall businesses, then we will be able to guide you in future.

The next question is from the line of [ Milind Doshi ], an Individual Investor.

Excellent set of numbers. I think most of my questions has been answered. And on Xanthine also, I think as you have reiterated that margins have bottomed out. So, irrespective of the price direction, the margins will remain intact. Is that understanding correct?

I would like to say that the spot business prices have bottomed out. Of course, we are not operating 100% on spot business. So, that is what we have. But overall, we are fairly optimistic that we'll be able to grow the absolute number with the expanded capacity that we have. Even if there is competition, Aarti Pharmalabs is positioned in such a way that it has a global size, it has a risk mitigation strategy, which doesn't depend on China at all. And all these factors are put together, I think -- and also you might have heard that 10% additional duty was put on U.S. -- by U.S. on Chinese goods, and that will get implemented on caffeine as well. So with that, I think we are fairly hopeful that we will be able to expand our absolute number with the higher capacity that we have upcoming in next financial year.

That's great to hear. And just a little bit longer from 3- to 5-year perspective with U.S. Biosecure Act and we are hearing from a lot of companies that there are a lot of inquiries and the things are heading in the direction where after 3 years to 5 years for most of these companies, things will look much better depending how they execute. So are you also seeing the similar direction?

Yes. I think, both in terms of overall traction towards India and CDMO/CMO has increased. And overall, I think the capability that Indians have built also recently is significantly more. A lot of focus has come to this business area with the capabilities and the newer capacities getting added. And with that, I think there will be a lot of traction with the Biosecure also and also the 10% additional duty on Chinese goods. So, I think overall, India will get definitely benefited by all these factors in future.

Ladies and gentlemen, that was the last question. I would now like to hand the floor over to the management for any closing comments.

I would like to thank all the participants for joining the call. Thank you.

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