Aarti Pharmalabs Limited (AARTIPHARM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Aarti Pharmalabs Q2 and H1 FY '26 Earnings Conference Call hosted by Emkay Global Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shashank Krishnakumar from Emkay Global Financial Services Limited. Thank you, and over to you, sir.

Hello. Thank you. Good evening, everyone. Thank you for joining us on the 2Q and 1H FY '26 Earnings Conference Call of Aarti Pharmalabs, hosted by Emkay Global. I would like to welcome the management and thank them for giving us this opportunity to host them. We have with us today Mr. Rashesh Gogri, the Chairman; Mrs. Hetal Gogri Gala, the Vice Chairperson and Managing Director; and Mr. Piyush Lakhani, the Chief Financial Officer. Before we begin this call, I would like to point out that some statements made in this call may be forward-looking in nature, and these must be viewed in conjunction with the risks that the business faces. I shall now hand over the call to Mr. Piyush Lakhani for his opening remarks. Thank you, and over to you, sir.

Thank you, Shashank. Welcome, everyone. Good evening. Rashesh bhai would be joining us in a few moments. So allow me to read out the opening speech. Welcome to Aarti Pharmalabs earnings call for the second quarter of the financial year '25-26. Thank you for taking out time to join us today. I'll be walking you through the Q2 FY '26 performance and highlighting key developments across our businesses. Let me start with an overview of our stand-alone financials for Q2 FY '26. The top line for the quarter was INR 417 crores, which was INR 377 crores a year back, which is an increase of 11% Y-o-Y. The EBITDA stood at INR 75 crores as compared to INR 85 crores in the corresponding period of the previous year. The profit after tax for the Q2 FY '26 was INR 31 crores as compared to INR 48 crores a year back. In this quarter, PAT had an impact of Forex loss of around INR 7.4 crores. Now I'll talk about the consolidated financials for the Q2 FY '26. The top line stood at INR 418 crores as against INR 458 crores in Q2 of FY '25. The EBITDA for the quarter, that is quarter 2 FY '26 stood at INR 75 crores as compared to INR 94 crores in the Q2 of last year. The profit after tax for the quarter was INR 28 crores as compared to INR 55 crores a year back. Now let me present a few business highlights. Aarti Pharmalabs operates across 3 key verticals: Xanthine Derivatives, API and Intermediates and CDMO CMO services. The Xanthine Derivatives segment contributed 51% of our turnover in Q2. The volume split was 71% beverage customers and 29% others. In terms of geographical split, the export sales was 59% and the remaining 41% was local sales. Coming to API and Intermediates, this business stood at 39% of the turnover. The subsegment-wise breakup is 55% regulated market, 31% rest of the world, and 14% nonregulated market. The API business saw high margin pressure. Moreover, the API sales mix in this quarter was skewed towards lower-margin APIs. The third segment, CDMO CMO has contributed 10% to the revenue for this quarter. We are presently working with 21 customers. The number of active projects is now 59, of which 39 projects are in commercial stage and 20 are under different stages of development, both at customers' end -- both at customers' end. We are on track to achieve and exceed the earlier estimated sales target, which is 30% to 40% growth Y-o-Y. Let me now discuss update on the projects. We inaugurated the Atali plant in September and have started operations. Currently, we are in the process of taking trial batches of a few products for customer qualifications. More products are planned in the upcoming months. We expect the facility to be fully operational in 2 to 3 quarters, thus contributing meaningfully to the revenue from FY '27. Xanthine expansion is ongoing as planned. We are now operating around 500 metric tons per month. The incremental capacity will get operationalized in phases, and we expect to reach 9,000 metric tons per annum installed capacity by end of this financial year. Looking forward, looking ahead for the full year, we revised our EBITDA growth guidance to 8% to 12% growth Y-o-Y in FY '26. Our long-term business strategy is to target growth while maintaining financial discipline. We are confident that long-term customer relationships and strong technical capabilities will continue serving as pillars of our progress. The moderator may now open the forum for a Q&A session. Thank you.

[Operator Instructions] First question is from the line of Rahul Jain from Credence Wealth.

Sir, a couple of things. First on the gross margin side. So both gross margins and EBITDA margins have fallen sharply quarter-on-quarter as well as year-on-year, and I'm talking about stand-alone margins only. So the gross margins are down by roughly around 5% year-on-year compared to the last year September '24 quarter. So I understand that you have given reasons in your presentation as well as your inaugural speech with regards to issues on the API and intermediates business. But when we look at the segment-wise sales also Xanthine is better compared to last year. And in fact, overall API sales are much lower than last year and CDMO sales are higher than last year. So how do we understand this margin fall? If you could share some more details about and what is the sustainable gross margin we should look ahead for?

Yes, Rahul. So basically, if you see, we have still maintained our CDMO CMO top line guidance. And actually, we have stated today that we are going to exceed it. And now we have 2 quarters left. So in these 2 quarters, we have to deliver the product and exceed our guidance. And for that, we have had to use our facilities to produce these products for these projects, which are in the intermediate stage. So they have taken up some capacity, which has resulted in largely the slow -- a little bit lower impact on the overall EBITDA number. But that impact will get rounded up in the coming couple of quarters basically. So as you know that we have fungible plants, which are being used for the CDMO business as well as the intermediate business. And that's where the capacity gets utilized depending on the priorities and the profitabilities of the projects. And of course, CDMO projects get priority over sometimes the intermediate business. So that is one reason for the overall slowness that you have seen. Of course, second reason that we have stated that last year, we had a couple of products which were launched in last year. So we had huge sales of these products with good margins and which, of course, we're in a second year of genericization, there are more players who have entered the market. And of course, the margins always come under pressure. So till now, we have never had such large launch of these kind of products in past, which could hamper our overall margin percentage. But that has happened in, last year we had good launch and this year, of course, this is the second year. So that's where the impact has come. So overall, that's what grossly summarizes the overall changes in the number that you are seeing in the results. And also this quarter, we had, of course, non-EBITDA based, I think foreign exchange loss was also one of the components, which, of course, had an impact. I think overall...

Sorry, go ahead, sir, sorry.

Yes, yes. Yes, you were saying something.

No, sorry. You were saying something, overall.

Yes. Overall, I think the EBITDA number -- overall EBITDA margins, we normally like to give overall guidance on growth only, absolute number. So because percentage point depends on which market I am pushing which product and it can vary a little bit up and down. So I'm not too much worried about the overall percentage EBITDA over top line.

Sure. And sir, with regards to the overall API business, so when we look at the full year this year, last year, we have done around INR 770 crores sales. And in the previous call, you had guided for growth on that sale for the full year. So as we speak today with some -- and with your comments...

Yes. Basically, in this quarter, we had a lot of intermediate manufacturing, which suck up the overall capacities for CDMO, which will get freed up in the last -- this coming quarters, so which will result in higher API overall number going forward.

I hope that answers your question, Mr. Vinay?

Rahul? Anyway. I think he has dropped, so we can take someone else.

Yes. Next question is from Ahmed from Unifi Capital.

Yes. My first question is on the Xanthine business. What was the current -- I mean capacity production in current quarter, which is quarter 2 of '26? And compared to that, what was the production last year? And a parallel question to this is with the new brownfield expansion, while expanding the capacity, will the volumes be impacted for the Q3 and Q4? Or you think the volumes would expand from the current quarter's numbers?

See, we are not sharing the absolute production numbers. We are just giving the overall revenue number quarter-wise. So we are not giving the pointed numbers this quarter. So I wouldn't like to share the data for confidentiality reasons. However, we are operating at a higher level now. And with the debottleneckings that I was -- earlier I had guided that the capacity will get debottlenecked. And actually, our expansions that we have done is we are taking care that we are not impacting the current running capacity, even though they are brownfield expansion. So actually, we are getting capacity released and we are doing higher and higher capacities than the earlier months.

Second question was on the CDMO business. We have seen some changes in the commercial projects in first half of 2026 from the under-development projects. Does that give you any contractual visibility for next year? And it seems management is confident about the current year's guidance. Can you give some sense of new projects? And how do you see the visibility for FY '27?

Yes. Actually, I think the number of projects which are getting into the commercialized space is a good thing, and we have actually shifted almost 7, 8 products there and which have resulted in basically launches which have -- or approvals which have come in this last couple of quarters, so which is really encouraging. And now that variability of whether that project will pass the approval of FDA and EDQM and other agencies away. And we are likely to see good potential sales of these products. And what happens is that once you are into this approved list from the Phase II, Phase III, and you are plugged in as a source, long-term visibility gets created. Of course, first couple of years, there will be a little bit of uncertainty related to launch and how much market share or how much big the brand becomes. But once the brand sales stabilizes, then we have really good visibility going ahead of these kind of products -- projects that we do.

And just on the API business, there was, of course, Rahul asking questions earlier, right? So we have seen some weakness in first half of '26 compared to last year. We had a very strong last year. Can you give some outlook for the API business in second half of 2026, considering Atali CapEx is already on. So will you be able to utilize that? Or how do you see the trajectory of API business in second half? And I think we had 2, 3 very good products, a couple on hyper-intensive side and I think one on the respiratory side. So do you see those products again coming back with high volumes or will the growth will be driven by new launches?

I think we have a portfolio -- see, API business that we say comprises of API and intermediate business, both together. So as I have explained earlier, we are selling commercial APIs, largely, so APIs that we do are general APIs, lifestyle APIs. We are also doing this [ thyroidal ] APIs and we are also doing anticancer based APIs. And we have been focusing more on lifestyle and anticancer APIs of late and have done lot of IND as well as the filings for the new projects. And this will get launched next -- every year we will have few launches, this kind of projects. And as these launches double edged sword, so when you launch the product, you get a bump and you know if the second year is not as large as that year and other products don't support, then you will see a little bit of dip. So if you see last year, we saw good jump earlier year on the API business. But this year, earlier projections were there that the customers would buy, but, of course, there is a lot of competition and I think people have stocked up a bit and the prices have also come little bit under, now for these few products, couple of products that have launched, which now I think, of course, our regular product which has been recognized for many years, so we will have to await for the new launches and we have new launches and new products which will get factored. So we will improve on our first half performance in second half for the API business.

I have 2 more questions. I'll join back in the queue.

Yes.

Next question is from Ankit Gupta from Bamboo Capital.

So sir, my first question was on the Atali project. I think that started in the first week of September. So how should we -- since it's a large project, CapEx of around INR 450 crores. So how should we see its cost, either on the employee cost, other expenses and finance cost and depreciation hitting our quarterly numbers in coming 2 quarters? And hopefully, the ramp-up starts from Q4, so it should start getting negated.

Yes. Basically, see, Atali project has close to 440 KL of capacity, which will get added and out of which, almost commercialized was capacities of almost 340 KL. And we have actually had trial batches of the projects, some of the CDMO project also, which eventually we wanted to strengthen our sites manufacturing ability for future. So that activity has already been started. We had audits as well. And so we are taking all the necessary steps to qualify the facility for future. And also, we will transfer more and more intermediates also at the current site to fill up the capacity. So I think Q4, of course, we will do that. And then next year also a couple of quarters, we will still have to do the activity and then the ramp-up will come. So that's what will happen. Of course, the expenses for that particular part of the block that we have commercialized, we'll have to start expensing it out. And it will start hitting the P&L also. So we -- I think in next quarter results, we will have a fair bit of clarity about the number. Of course, we know the estimate, but we will give you more clarity then.

Well, so Atali, we should see substantial increase in contribution happening only from Q3 of next year is after all the validations plus qualifications are done. Is that the right understanding? Or we should start seeing a jump from Q1 itself?

Next -- no, no. The jump will be overall this year to next year, there will be a jump overall in the intermediate business plus the CDMO CMO business, which this site is going to support. And yes, so that's what will happen. And as we were seeing from last year to this year, we have anyway given a much higher forecast. So our current Vapi site was excessively used for the CDMO projects, which we want now Atali also to be utilized and both the sites can then support the intermediate as well as the CDMO business.

And sir, secondly, on your guidance of exceeding 30%, 40% growth, which will happen -- which is expected for this year. So we have seen the number of commercial projects also going up from -- like on a quarter-on-quarter basis, we have seen a jump in that. Some of our innovator partners have also got approval during the last quarter. So given how things are on the CMO CDMO side, how should we -- overall, you have been talking about reaching targeting INR 1,000 crore revenue in the coming 2 to 3 years. So given how things stand currently and with Atali also coming in, for '27 on the CMO CDMO side, should we see a substantial jump in numbers even compared to the growth that we are seeing this year?

Yes, Ankit, see, CDMO CMO business is a long-term business. So 1 year here or there, but ultimately, the numbers we will achieve and the numbers that we have targeted, we have mentioned earlier in our calls. It is always the launches and the strategy what innovators does. We have a few very large projects that we are doing with the innovators. And it clearly depends on their strategy, how they are positioning and how they are planning to ramp up overall because all the innovators during the start of the project and approval, anticipatory approval, they bulk up the launch quantities. And the first -- second year sometimes we have to be a little bit cautious. So I don't want to give any commitments. But I think longer-term, we see growth and there is a pathway really to achieve that number with the existing running projects that we have. And of course, anything additional will also -- projects that we get will also support us overall.

And sir, last question on the API segment. Earlier, in the previous calls, we used to talk about API achieving, see, growth of around at least 10% this year also. But given how things are currently in the first half, do you think it is possible to achieve that kind of growth for full year? Or achieving last year's number itself becomes a tall task this year?

Yes. I think there is -- we are going to see what happens on those. But I think growth will be a little bit more challenging looks like because the last year's launches on which we had earlier promises, the customers are a little bit slow with higher inventory. And of course, they have the market position, but it's just a inventory correction. Last year, they bought 1-1/2 years' inventory. And now they are saying that, okay, you wait and then the competition has also entered. So that flux has to settle. We have partnership with the customers who had early launches of these kind of products. So we will continue to have that advantage. It's just a blip on a couple of projects that, of course, but we have more range of products. So there is a product mix effect also in certain products like steroids and stuff, we -- the product mix is really changing. And newer products are getting more traction. For example, the newer salts of steroids are getting more traction. So we are also forming a strategy to commercialize and manufacture these products in much optimized way. So that will also happen in this year. So some validation batches have also taken up some capacity for that. So once we get over this, I think, again, we'll be back to the growth phase.

And sir, we had some very interesting launches on the API sides on the -- in the oncology segment in '27 and '28. So with that happening, should we be back on our path to INR 1,000 crores in API segment, let's say, in FY '28?

Yes. Actually, we are looking at debottlenecking our anticancer block as well in the second half of the -- later part of this year, early next year, which will be enabling us to further look at meeting the targets of these launches. And these are very good products that we anticipate good growth.

And that will happen in '27 and '28, right? '27 launches are there?

Yes, yes.

Next question is from Vinayak Mohta from BugleRock Capital.

So I just had a couple of questions around the CDMO side. In your presentation, you talked about some emerging work happening on the midsized peptides. Could you elaborate a little on to that? Are you working on this from scratch with an innovator or how is it? And added to this, from the products that have increased on the commercial project segment to 39, are these all products which have come up from under development projects and they are ready for commercialization? Or these are fresh commercialization opportunities that you've picked up?

Yes. I think on the peptide, we are preparing our R&D to have a look at peptides. I think we'll start with the liquid peptides, which have a little bit lower molecular weight and then eventually will go up. And currently, it will take a little bit of time for us to do commercial projects on that peptide segment. But we have started discussion with this liquid phase work, and we are trying to promote ourselves as one of the partners that innovator can do partnering with us for this segment. Coming to this CDMO launches and commercialization, we have seen changes of almost 7, 8 products have come to the commercial basket from earlier under development. And of course, we had 2 products which have dropped. So this is basically part of the CDMO business, how it works. So there will be certain products which will drop. There will be certain products that will move to commercial. And then we have to keep on increasing the overall pipeline to get a sustained growth of the business.

And sir, is it fair to assume, I mean, from a trajectory standpoint, as and when the share of CDMO will continue to improve? And as we have seen in other companies as well, CDMO would be coming at higher gross margins, thereby your EBITDA margin from a structural standpoint should be on an uptrend itself. Would that be a fair assumption to have from a longer-term perspective, not near term, anything?

Yes, CDMO business has structurally higher margins. How it impacts the overall mix is depending on how other mixes are also growing and how much is the percentage of CDMO vis-a-vis the others. So that, of course, is a math, which we will have to see how it goes.

And last question on the Xanthine side. You said that you will be able to ramp up to 9,000 tons by the end of Q4. And the first 2 quarters...

The capacity will come, the capacity become 9,000 metric tons.

Okay. Understood. By Q4...

About Q1 that we will take some time to increase it. See, we have increased the capacity from 5,000 ton to 9,000 ton. And in year 1, we don't expect to fill it up. So there will be a growth. There will be a ramp-up of that. And I think in the next 2, 3 years -- because, see, we are taking up overall from the market share perspective, also almost 25% of the market share, which is very large. And now there to further grow and hold up the -- that's going to be quite a task going forward.

Yes, that was my clarification. And one last question. On the EBITDA side, you've talked about 8% to 12% growth. This is after considering all the costs from the Atali plant that will start hitting the P&L from this year on -- this quarter onwards, right?

Yes, yes. This is stand-alone guidance that we have given.

Next question is from the line of Dhwanil Desai from Turtle Capital.

Sir, my first question is on the CDMO side. If you can talk about how the -- what are the efforts that we are doing to increase the funnel? Because at least in FY '25, the total number of projects were 60 with 21 customers. And I think even at the end of H1 also, it remains the same. So if -- I understand it's a long gestation thing, and there will be a lot of things in the pipeline. But if you can highlight on what are we doing to increase our funnel for future growth, let's say, beyond 2, 3 years?

Yes. Good question. So basically, in the CDMO CMO segment, basically, we have started an office in Europe. So we have a representative in Europe, which is promoting Aarti Pharmalabs' CDMO activity in Europe. And now we plan to put one person exclusively for the CDMO BD in North America. So with this geographical ground presence, I think they will be able to meet customers and convince them. Of course, we keep on attending all the trade shows, and we are trying to take also overall analytics help to keep a tab on the new launches. And see, the segment that we want to get after is the Phase II to III when the Phase II approval comes and then it moves to Phase III clinical. So we work jointly and with the customers that we have, we are trying to increase our wallet share also with getting additional products. So these are the steps that we are taking to increase our overall reach within the CDMO industry.

Sir, second question on the API side, we talked about last year being the first year of launch and hence, better pricing and this year, some pressure on a couple of products. So when we launch a new product and most of the time for regulated markets, those products are mentioned as a source. So in that case, how does the pricing agreement work? Is it on a spot basis? Or is there a pricing formula? And once you are there in as a source, my understanding was that the pricing pressure is significantly less. So is our understanding correct? Or if you can throw some light on that?

Yes. In a genericized product, which is genericized 5 years ago, all this holds true that with the genericized product, changes unless there is a big delta doesn't happen. But when the product is launched, I think in particular market, which is a big launch, what happens is that overall, the margin -- the pharmaceutical manufacturer, they vie for this market share. And there is a lot of competition. And whoever wins this gets the lion's share of the market. So that happens. And during that, everyone thinks that we will keep significant market share and they keep stock. And then ultimately, if that doesn't happen, then they will have excessive stock, which they have to correct. So that is a standard thing. So first 2 years of the launch are volatile. And after several years, we had this kind of a mega launch of few products, which saw this kind of up, down, yes.

And sir, 2 clarifications actually. So one, we talked about 8% to 12% EBITDA growth. So that kind of, in a way, says that H2 will be INR 300-odd crores EBITDA even after the Atali cost coming in. Is that a fair understanding?

Yes. That is what we are basically targeting and we're working hard to achieve it.

And then our long-term target of 15% to 20% EBITDA growth for next 3 years, that remains intact, right?

No, no. 15% to 20% EBITDA growth is quite steep. I think that is the number that we have not stated. Overall, I think profit growth, PAT growth, or PBT growth, we can target good number. But I think EBITDA growth can't be 20% unless we get very big launches, and we are extremely lucky with certain things, yes.

Next question is from [ Prakash Kapadia ] from [ Kapadia Financial Services ].

Just to get the growth perspective, you have mentioned 8% to 12% growth. So that implies a 17% EBITDA growth in H2. So for this, given whatever has happened in H1 in the API segment, CDMO has to grow substantially over last year's base. And the last year, H2 had a fairly decent base of CDMO. So what is going to drive growth in the near term? Is it just CDMO or API also normalizing, which will get this EBITDA growth coming in, in H2? And directionally, what kind of a CDMO contribution is possible given that the Atali project will commence and be ready by the year-end, trial productions are obviously on. So next 2, 3 years, what kind of a mix should be possible from the CDMO segment? Those are my 2 questions.

Yes. See, the CDMO segment overall annual guidance we have given. And I think we have -- today on the call, we have mentioned that 30%, 40% growth guidance that we had given earlier, we'll be able to exceed that. So that means that in the second half of this year, we will have substantial sales of the CDMO, which is going to be over and above, I think, the entire last year's value also. So full year value. So that is what is going to happen. And we have orders in hand. Otherwise, we wouldn't have been able to give you such kind of certainty. And that has all been planned and that has occupied our current manufacturing blocks for this earlier stage. What we are doing is we are also doing, say, for a few projects, we are doing 8, 10 stages in-house. So if we have these kind of large orders, the plants get occupied over a period of time or over quarters for this activity. And the invoicing only happens once we sell these goods to the final customer. So that's what will accumulate the profit. And the way in which the accounting standard guidelines are there, all this, we can't take it as WIP profit in the running quarter. Secondly, I think overall, the -- we have guided that over last year, the growth will happen. And of course, we will see next year, depending on the projects that we have, what kind of further growth that we will be able to generate in our CDMO business. I think as we go to the last quarter or towards that, we'll be able to do more guidance on that. But we are sure that we will be able to grow that number in future long term. Coming to API business, API business will normalize in second quarter. So the first quarter, whatever the slowness was there, I think in the second half of this year, we will ramp it up.

And lastly, sir, you mentioned capacity remains fungible. So just wondering how easy or difficult it would have been given the kind of CDMO pipeline and the order book which we have to do some of the CDMO sales at the cost of API? Because if API was slightly more margin dilutive and not so lucrative. So we could have avoided some of that sales to get certain CDMO also or it was committed and we had to fulfill? Just trying to...

Yes, Prakashji, the CDMO sales always gets first priority. And then we look at the intermediate manufacturing. See, the API manufacturing has dedicated manufacturing blocks, and that's where we continuously do the production. It's just a question of intermediate manufacturing, how it shifts basically, because we are backward integrated in our intermediates that we manufacture for our API business. So now we are also taking steps to also qualify outside suppliers for these certain intermediates also so that in such situation, we can buy those intermediates and take a call, whichever commercial call, which makes more sense for the company in the future. So a few products, we will create an outsourced model. What has happened is that our current intermediate manufacturing capacity was quite occupied with all this. And now with the Atali coming in and with the validations getting shifted, we will see more space where we can basically through the backward integrated intermediate manufacturing as well, so which we'll see growth also.

So that should enable CDMO opportunities or further growth in CDMO if that opportunity comes?

Or intermediate will also grow.

We have a follow-up question from Ahmed Madha from Unifi Capital. Since there is no response from Mr. Ahmed, we will proceed with the next question from [ Jayesh ] from Dalal Broacha.

Sir, my first question is on the CDMO front. Since 6 molecules have moved from the development phase to the commercial phase, and you have upgraded the guidance for the CDMO business this year. Does this mean that a lot of that sales also comes in? Or is the 30% to 40%, exceeding the 30% to 40% guidance from the molecules that were approved earlier this year?

Yes, it's basically a combination of everything. So we have done commercialization with more partners also on the existing products because as I had explained to you earlier, each innovator product, there are multiple API suppliers for that innovator. And then depending on where we are plugged in as a supply chain supplier for their GMP or early-stage intermediate, it depends on that. So we have qualified ourselves with multiple API suppliers for that particular innovator's product as well. So all these things is happening simultaneously, which creates the opportunities for growth.

But then a lot of -- a much larger part would come in, in FY '27. Is that a fair understanding of the new molecules?

New molecules, as I explained, launch quantities have created the larger growth that we are going to see in this year. We have to see how the innovators continue for the coming years. Depending on the success of their product, they will do the more forecasting and they will plan next quantities with the supply chain.

But do you feel that you can grow on this pace in FY '27?