Aarti Pharmalabs Limited (AARTIPHARM) Earnings Call Transcript & Summary

Welcome to Aarti Pharma Labs Q1 FY '26 Earnings Conference Call hosted by Nuvama Wealth Management Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shrikant Akolkar from Nuvama Wealth Management Limited. Thank you, and over to you, sir.

Thank you, and good day, everyone. On behalf of Nuvama Wealth Management, we welcome you all to Q1 FY '26 Earnings Conference Call of Aarti Pharmalabs Limited. From the management side, we have with us Mr. Rashesh Gogri, Chairman; Mrs. Hetal Gogri Gala, Vice Chairperson and Managing Director; and Mr. Piyush Lakhani, Chief Financial Officer. I'll now hand over the conference call to Mr. Rashesh Gogri for his opening remarks. Thank you, and over to you, sir.

Yes. Good evening, everyone, and welcome to Aarti Pharma Labs earnings call for the first quarter of the financial year 2026. I appreciate you taking the time to join us today as I walk you through the performance of Q1 FY '26 and share key business developments. Let me start with an overview of our stand-alone financials for Q1 FY '26. The top line in Q1 FY '26 was INR 375 crores, which was INR 394 crores a year back. The EBITDA was INR 95 crores as compared to INR 84 crores in the corresponding period of the previous year. This is an increase of 14% Y-o-Y. The profit after tax in the Q1 FY '26 was INR 51 crores as compared to INR 47 crores a year back, which was an increase of 9% Y-o-Y basis. Even though the revenue has been slightly dipped in this quarter year-on-year, the EBITDA and the PAT have grown reasonably well. I remain confident that the underlying fundamentals and the long-term drivers of the business are intact. Now I will talk about the consolidated financials for Q1 FY '26. The top line was INR 386 crores against INR 555 crores in Q1 FY '25. The reported consolidated top line of Q1 FY '26 is not actually comparable to that of Q1 FY '25 because this does not include the proportionate share of the Ganesh Polychem turnover. Following the amendment in the subscriptions and shareholders' agreement, GPL Ganesh Polychem is a joint venture from Q1 FY '26 onwards. Accordingly, in the consolidated financials, a single line of share of profit is added following the equity method of consolidation. So basically, the consolidated turnover for Q1 FY '26 onwards will not include GPL Ganesh Polychem's contribution and hence, will look optically lower year-on-year. However, the EBITDA and the PAT will continue to include GPL's share and will be comparable year-on-year. The EBITDA was INR 95 crores as compared to INR 97 crores in Q1 FY '25. The profit after tax for the quarter was INR 50 crores as compared to INR 56 crores a year back. Additionally, for the revenue of Aarti U.S. Incorporation in the Q1 FY '26 has significantly come down, and this was communicated in past calls. This is due to limited business activities in the subsidiary, which were earlier carried out for the Aarti Industries Limited distribution business, which has shifted to the Aarti Industries subsidiary in the U.S. Now let me present the business highlights. Labs continues to operate in 3 key verticals: Xanthine Derivatives, API and Intermediates and CDMO CMO services. The Xanthine Derivative segment contributed to 50% of our turnover in Q1. The volume split was 65% beverages customers and 35% for others. In terms of geographical split, the export sales was 57% and rest of 43% was local sales. The API intermediate business stood 41% of the turnover and the subsegment-wise, the breakup is 49% regulated market, 43% in ROW market, 8 percentage in nonregulated market, which aligns with our long-term focus towards regulated market. We are continuously working towards development of new molecules with patent expiry in the next 3 to 5 years. And the number of U.S. DMFs have gone up from 53 up to 53 from 50 in last quarter and the CEPs have gone up to 35 from 31 in last quarter. Also, the number of commercial APIs now stand at 60. The third segment, CDMO CMO has contributed to 10% of the revenue in this quarter. We are presently working with 21 customers and the number of active projects are now 60, of which 33 are in commercial stages and 27 are in different stages of development, both at the customer end. Based on the current order book, we are on track to achieve our target of FY '26 CDMO sales. It is important to mention that one of our sites, which supports the Xanthine derivatives business was under extended plant annual shutdown and upgradation in this quarter. This is partially the reason for decline in our stand-alone top line. For the last couple of months, there have been a lot of geopolitical turmoil and globally, there has been a business uncertainty due to U.S. tariffs. However, the current tariff rule do not impact our pharma products and Xanthine derivatives like caffeine are under the exempt list, and I see minimum impact on our sales. Lastly, I will share the progress updates on the ongoing CapEx. Our brownfield expansion for increasing Xanthine derivatives from 5,000 metric tons per annum to 9,000 metric tons per annum is progressing as per our plan. The commissioning will be done in a phased manner across H2 FY '26. The greenfield project at Atali Gujarat is in final stages of completion. The mechanical completion of the Phase 1 has been done. The commercial production will commence towards the end of Q2 FY '26. However, it will take us until the end of FY '26 to ramp up and operate the plant at an optimal utilization. In conclusion, I remain confident in our strong fundamental strategic initiatives and dedicated team driving Aarti Pharma Labs forward. Our strategy remains firmly intact, and we are focused on navigating any near-term challenges with agility and discipline. We are well positioned to achieve our targets for the year and continue delivering the sustainable growth and our values to all our stakeholders. The moderator may now open the forum for Q&A session. Thank you.

[Operator Instructions] The first question comes from Rahul Jain with Credence Wealth.

So given the top line degrowth sir and also the scenario, we have delivered some good set of numbers. So just to understand, sir, you mentioned about 2 things on the impact of sales and also one is the Ganesh Polychem numbers, which are not included in the sales. So what amount of -- because in stand-alone sales, I think the plant shutdown has impacted the sales. So what is the impact in terms of sales with regard to this plant shutdown?

The plant shutdown sales impact would be around INR 5 crores to INR 20 crores...

Okay. And sir, when I look at this intermediate sales, that has come down on a year-on-year basis from about INR 170 crores to INR 150 crores currently. And in fact, in the previous quarter, we were averaging around INR 200 crores for last 2 quarters prior to the June quarter or in fact, even the earlier quarter, we were around INR 190 crores. So this quarter it's down to around INR 155 crores. So do we read anything into this?

No, if you see in this quarter, we have had higher inventory because the shipments were a little impacted towards the end of the quarter due to unavailability of shipping space. And I think that would have some impact of some amount of sales. But overall, API business, we have been able to have good pace, whereas in intermediate business, it shares the asset with the CDMO CMO. So there, we are progressing more with the CDMO projects in the current quarter. So the intermediate sales is a little bit on a lower side purposefully.

Sure. With regards to margins, our margins are -- gross margins are at the highest level for this quarter around 57% which around 51% in the previous quarter and even the year on a year-on-year basis, it is up from 48%. So typically now, how do we look at the gross margins going ahead? And if you could understand that there is some impact on Ganesh poly side, what would be -- and this I'm talking about stand-alone, sir. I'm not talking on the consolidated.

Yes. I think in terms of margin, of course, this year was a higher margin because this inventory had an impact. And overall, the products that we have sold were more into regulated market and beverages and export market. So that has yielded us better pricing than the lower-priced market. So on the benzene segment. So overall, I think it is the product mix that we have played and which has yielded in better margin.

There is one addition to this also. Earlier, there has been some disclosure change in the financials that we have published. Earlier, some of the consumables that we were -- we normally consume in the plant were getting clubbed in the cost of materials. So now because these are consumables like filter cloths and walls and those engineering items as we say. So these -- from this quarter onwards and including the previous earlier quarters also, we have now shown it as under other expenses. So there has been -- so now the cost of material consumed consists of only our raw material, packing material and fuel. So these consumables, engineering consumables that we are saying are now clubbed under other expenses.

Okay. Last question. Sir, with regards to the guidance, you have maintained guidance both on CDMO growth and also on the EBITDA growth. Given the current quarter has been almost flattish on EBITDA on consol basis. And if we need to maintain this 12% to 15% guidance, then the next 3 quarters, the kind of growth in EBITDA will be around 15% to 20%, if we want to meet our guidance of 12% to 15%. So -- and given the expenses of new plant coming in, Atali and also in and probably they're not contributing much to the revenue, what gives us this confidence that we will achieve this EBITDA growth?

Yes. See, basically, the EBITDA guidance that we had given was on a stand-alone basis. So this time anyway, we have a stand-alone basis EBITDA increase of almost 14% Y-o-Y. And looking at overall, the quarters are going to be not linear in the performance of EBITDA or top line because of the nature of business, the CDMO, CMO turnover may get -- top line and bottom line may get consolidated in particular quarter, which may result into a bump. So I think overall, we have to look at a few quarters and then see how overall growth trajectory is to really consider because there will be certain quarters where due to multiple stages of processing that we are doing, we may end up doing more earlier stages processing and the invoicing may happen in the later quarters, which may impact the top line and the bottom line.

The next question comes from Ajas Lakhani from Unifi...

Sir, just a clarification on the. Sir, you mentioned that INR 15 crores to INR 20 crores on account of plant shutdown. So just wanted to understand that ex of that, has there been any impact of pricing, volume seasonality, if you can expand?

No, there has been no impact on any of these things. Basically, as we have disclosed the product sales mix that we have done, we have done more sales to export as well as the beverages market in the current quarter. And that has resulted in better performance in this current quarter.

Understood. And sir, just could you also call out in the API business, we understand the quarterly volatility and you mentioned that there was a shipping space impact and you had higher inventory. How do you expect the full year ramp-up to be for this segment?

Yes. In the API business also, we are looking at reasonable growth, I think, going forward. So it will be -- EBITDA growth will be at least more than 10%.

Okay. Okay. And sir, I mean, we understand that there's a shift on the gross margin front. But like-to-like, if one were to compare it to the previous quarter in the old format, where were gross margins today?

For the stand-alone, so the impact of this change in the cost of material consumed has been given for the earlier quarters also. So now it is like-to-like if you compare what we have published.

On the Okay. And sir, in Ganesh Poly, when do we expect to breakeven? When will it start contributing to the bottom line? And what are the key challenges today we are facing?

No, -- in Ganesh Polychem, last year, we had a good EBITDA of around INR 60 crores. And this year, we took a shutdown -- plant shutdown to modify and do some modification at our plant. So post that, I think we have restarted our plant in July. And I think the current quarter, we will reach to normalcy of volume and demand.

Okay. And finally, sir, CDMO has started off to a good start, and we thought that this is more of a second half story. So could you comment a little bit on what's driving CDMO?

As mentioned in my opening remarks, we have already -- I have already told that we have order book of the guidance that we have issued 35% to 40% growth. So we are quite confident about achieving the same.

The next question comes from Ankit Gupta with Bamboo Capital.

Sir, you highlighted about the reason for declining revenue on the Xanthine part. But on the API front, sir, last year, we had seen a very good growth because of the expansions we had done prior to last year. So we have seen almost a growth of around 42%. And I think there were some -- we still had some room on the capacity available for growth in the API segment. So given how the first quarter has panned out, do you think we can still grow at least 10%, 15% on the base of almost INR 770 crores of API in FY '25 for this year, financial year '26?

Yes, yes. See, what has happened is that last year, last quarter, we pushed a lot of sales. So we could achieve very higher sales on the last year, last quarter. Whereas in this quarter, we were constrained by shipping space availability and also that resulted in the inventory stock increase in particularly API. And of course, basis on every year, first quarter, normally, the API sales are higher because as the start of the year, customers may like to cover some volume. So I think there's some seasonality also to it.

Okay. So at least like FY '25...

As I mentioned, we will be able to grow this...

Sure, sure. Okay. Okay. And sir, on the Zen part, we have the new capacities coming in additional capacity of 4,000 tonnes coming in, let's say, in the second half. So for this segment, we have had a very good volume growth for the past 2, 3 years, but because of the fall in realizations, the overall revenue has actually remained in the range of around INR 780 crores, INR 800 crores. So how do you see this Xanthine segment panning out for us over the next 2 years, '26 and '27, '27, we'll have the full year benefit of the expansion coming in. So do you think the additional capacity we can utilize at least 70%, 80% next year? And for this year, how do you see growth for this segment?

Yes, yes. Overall, I think 2 years down the line, we are looking at INR 1,000 crores plus top line for this segment. we are quite confident with the increased capacity, we will be able to achieve the 2, 3 years -- in 2, 3 years' time, optimized capacity utilization.

So at least FY '27 yes, you were saying something.

No, no, that's it.

So at least FY '27, we should be able to reach INR 1,000 crores of revenue from Xanthine?

No, in '27 or '28 in one of the years. Of course, it depends on the raw material prices, final price and all that. So we have given 3 years we will have the capacity utilization of 80% to 90%, which 50% of sales going to beverages and regulated customers. So that's what is the target. So ultimately, out of 9,000, we may optimally utilize 7,500 to 8,000 out of which 50% will go to the beverages and export customers.

And that will be a better margin plus more regular sales kind of business for us?

Yes, the products are different. So the product for beverages is a different product and the product for API pharma requirement is different.

And sir, any comments on the pricing, how the Xanthine prices are currently? Have we seen the prices bottoming out? And has there been any increase in the pricing for the Xanthine products?

No, I think prices are stable on spot market also. Yes, we are seeing stable pricing. We have not seen any further drop of pricing. And overall, I think raw material costs have also come down. So overall, -- that is what has resulted in the pricing pressure in past. But now I think everything is stable.

Sure. And last question was on the CDMO segment. We are expecting to get around 35%, 40% kind of growth for this year given how the pipeline is shaping up. So can you talk about how do you see given how the pipeline is currently and we have seen significant increase in our molecules, both on under development as well as commercial stage as well as we have added new customers also over the past 2 years. There's been a significant jump in that. So '27, '28, do we see this segment continuing to grow at least 30%, 40% or even higher growth rates with new capacities that Atal coming in later half of this year?

As I have mentioned in the past, in 3, 4 years, we want all segments to grow up to 100 million or INR 1,000 crores, whichever reaches faster. So that's what the target is. So it depends on the year and how the approvals come and how our customers are doing. We have seeded the projects. So we have 60 projects which are ongoing and how the approvals are coming and how commercially the products are faring in the marketplace and how fast we are able to get approvals as additional source in the current commercial product for the regular requirement. So all these factors are in hand of our customers. We are doing hard work in terms of supplies and development work. But ultimately, we will get there because all these products are currently in the patent sales. So customer has a fair bit of idea of how the growth is and how it is going ahead.

So let's say, in FY '29, we can expect at least INR 800,000 crores of revenues from CDMO segment? That's the target.

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

My first question is, you have mentioned that by Q2 Lat project mechanical completion will be over and by Q4, the commercial revenue will start. So will 2 quarter time be sufficient to do validation and everything? And even if I assume asset turns of 1.3, 1.4x, essentially, we are looking at INR 500-odd crores kind of a revenue from the Phase 1. So from start to reaching that kind of a number, what is the time line that we are envisaging?

Yes. Basically, whatever we are going to do there is going to be earlier stages production as well as the products which will shift from our current manufacturing site to this site. So with the where we are having additional orders. So all this together will be able to fill up the plant slowly. And overall, I think we expect plant to get utilized. So we have earlier mentioned that every second year after 2 years, we'll put up additional blocks. So with this optimally getting occupied, we will put up newer facility. And of course, the top line in EBITDA -- top line, we are basically not tracking top line to that extent. We will ensure EBITDA growth due to this addition of this manufacturing...

Okay. So when we say that we will move some of the existing products for production from existing site to new site, so does it mean that the revenue generated from new site will not be incremental in nature? That is how we should look at it?

No. Overall, we have multiple sites, which ultimately feed into the CDMO business as well as the intermediate business. And I think you will see an increase in both top line. So anyway, as we have projected growth in CDMO CMO this year and next year also going forward, we expect growth to happen. So that will be driven by the additional capacities that we have put up in Atali that will help us achieve those growth targets.

And sir, our aspiration to reach, let's say, INR 1,000 crore number in a given time line. So to reach that number, do we see the visibility based on current commercial and in pipeline products to reach that number? Or do you think that we need to get many more projects to actually get to that number?

It depends on how our customers are doing and when they are getting the approval. I think anything can happen. So we are doing currently hard work of getting more customers, more projects and every year, we will add those. And I think combination of both will work towards achieving growth in future.

Okay. Okay. And lastly, if you can talk more in terms of what are the white spaces in terms of our capability on the CDMO side, which either we on our own or from the slight feedback from the customers that we are trying to develop or work upon, which can help us in the longer term. If you elaborate on 2, 3 such areas where we are spending money and effort on the CDMO side?

As mentioned in the presentation, we have given the broad capabilities that we have. So we have now also as a part of our CDMO program, we are also doing continuous manufacturing, which we have added, which we can offer for CDMO. So all these are newer offerings that we have added, we can also do cryogenic reactions. -- and hydrogen. We can do high PEP. So basically anticancer kind of finished products also. So all these capabilities have enhanced our profile and offering for the innovators.

Okay. And anything new that you think is going to be more relevant that you more futuristic, but you are spending time and effort on?

I think as in past, I think the world is moving towards peptide biologics, and I think we will like to attempt that in future going forward.

[Operator Instructions] The next question is from the line of Madhav from Fidelity.

Sir, first question on the Xanthine business. Just wanted to clarify, you said that our capacity will be going from 5,000 tonnes to 9,000 tonnes. So we're adding roughly 80% capacity. And even on the 5,000 tonnes run rate which we are at, we are tracking about INR 700 crores, INR 720 crores top line. So if the capacity here is going up by, let's say, 80%, while the peak revenue will be only INR 1,000 crores, like it can be higher, right? Like especially since we are targeting some better-priced contracts as well in like regulated markets or maybe the pharma beverages like you mentioned. So just wanted to understand like if on a fully utilized 9,000 tonne block, what could be the peak revenue potential like ballpark on current pricing maybe?

Yes, Madhav. So we have guided -- see, currently, our revenue from export and beverages is 65% and 67%. And in going forward, we have guided that revenue from these beverages can go up to 50% plus. So of course, currently, we are on a higher side of that, but that will normalize with the additional capacity. Still, it will grow from current base. So that has one impact. And depending on how fast we are able to secure more pharma customers, it depends on that, and that will define the top line because the spot price and the pharma prices, of course, there is a differential also. So if we are able to capture a reasonable market of, say, 10% to 15% of our total demand in the pharma then, of course, we can expect higher top line. But if we have to offload the product in spot, then it can be a little bit on the lower side. So it all depends on how the approvals are coming through. Luckily, Xanthine and caffeine is in the annexure 2 of the list. So we are not impacted by the tariff, so which is a good thing that we have.

Okay. Sir, could you just clarify what is the pecking order for prices? Like is it beverages is the best price then pharma and then spot like that? Or is it pharma beverages in that spot?

I think pharma has best price and then I think beverages and then spot is the -- or the spot used to be higher, but now spot is lower. spot -- but it's a market where, of course, the approvals also matter and the distribution network that we have now established over a period of time, that also helps us push the product and there are certain geographies where we can enjoy some better pricing also.

Okay. So sir, just to clarify, you're saying that in the current mix that we plan to sell into pharma beverages spot, the total 9,000 tonne capacity, we expect INR 1,000 crores of top line. That's the way to think or it could be a bit higher or lower? Like is my understanding?

1000 plus, 1,000 plus. So it can be anything.

Okay. Okay. Got it. Okay. Then the second question, I just wanted to check was on the CDMO business. Did I hear that you're saying that by FY '28 or '29, this current INR 200 crores, there is potential to INR 800 crores to INR 1,000 crores. Is that right? Did I get that understanding right?

Yes, 3, 4 years.

Okay. Okay. And sir, in this -- is it from the existing commercial, the 33 molecules, we expect like very good scale up? Or is it the pipeline which makes us more sort of bullish on the segment? Like if you could -- whatever color you can share on the growth drivers, that will be helpful.

I think it's going to be effect of both. And I think we have more promising under development pipeline also. Yes. And that's why it depends on how the growth happens in the approvals once the customers get the approval. So -- and there are a variety of factors depending on the competing therapy and how they are effectively able to capture the market share.

Understood. And sir, this -- of the 27 projects in development, how many would be in Phase III or late stages of development? Could you give some sense there?

So we do more Phase II, Phase III work. So I think Phase 1 will be very limited. So yes, more Phase II, Phase III only. So Otherwise, you would have seen much higher number of projects that we would have done. But we are marketing ourselves as a manufacturing specialist, which does good manufacturing optimization and cost optimization, route of industry selection and having large capacity to match the requirement match the requirement of customers' needs in case the product hits jackpot. So all those things are giving us a good customer base.

Sir, just last question, like in case if you're able to get to this mix of, let's say, INR 1,000 crore plus top line in Xanthine, CDMO reaching, let's say, INR 800 crores to INR 1,000 crores and API growing at a reasonable pace, like how does the margin profile of the company move like from current 25%? My sense would be that the margins should improve. Is that the right way to think? Or you think margins could be stable if this business mix plays out the way we are thinking?

Yes, percentage margin, I think EBITDA should grow reasonably. I think top line is all dependent on the foreign exchange and raw material prices and all that. So top line -- and see, ultimately, we try to tag per kg margin we try to maintain in most of the products, and that's how it works. So A lot of factors are there. So I think the margin should be -- from the current level, it can go plus or minus 2%, 3%, I think.

Okay. But CDMO is probably the highest margin segment then ramping down -- is that?

Yes, yes.

The next question comes from Vivek Gautam with GS Investment.

Yes. Sorry, sir, I joined the concentrate. So if you can just -- if it is repetitive, then please excuse me. How much is the exposure we have to the U.S.? And what could be the tariff impact for our company and pharma sector in particular...

Yes. Currently, our U.S. sales would be around 8%, 10%. But I think we don't have any tariff impact currently.

Only 8% to 10%. And how come no tariff impact, sir? Basically, the pharma is exempted by the U.S. government?

Yes, yes, Pharma.

So any risk of it being a temporary sort of a thing? And CDMO is also sort of covered under that only, sir?

I think CDMO was more -- of course, we have U.S.-based customers also, but largely U.S., Europe, it's multi-geographical. So there also, I think our U.S. concentration is not very high.

Okay, sir. And what are our CapEx plans, sir? And so H2 will be much better with respect to high-margin CDMO business...