Aarti Pharmalabs Limited (AARTIPHARM) Earnings Call Transcript & Summary

Congratulations on a great set of numbers. Sir, just to understand on Xanthine. So typically, this quarter, we have reported INR 305 crores of revenue. And given our capacity ramp-up will further ramp it up, the new expanded capacity, which will further ramp up in terms of the utilization. So this year -- and of course, you mentioned that there is a slight decline in the prices, but at the same time, the prices are above the pre-war levels. So how should we look at the sales for Xanthine this year? Can we look at this INR 300 crores and say maybe some decline in the prices being mitigated by your increasing production? So can we expect this year to be somewhere around INR 1,100 crores plus or minus INR 50 crores of sales from Xanthine?

I think we have to wait and see how the prices normalizes. And I think that will have a bearing on overall pricing. But I think it will be a range between INR 900 crores to INR 1,100 crores. In that range, I think anywhere it can land INR 900 crores to INR 1,000 crores, right?

So can you specify what kind of price increase are already happening in the industry as such? Maybe you may refrain from saying for us, but overall, what is the price increase which the industry has?

The price increase is coupled with the raw material cost increase also. So overall margins per se will have an impact -- marginal impact. But I think overall, if you see, we have also done the mix change. So we are selling more towards the Cola customers than the regular customers because as our new facility is ending, we have a higher commitment to give more volumes to these customers. And as the new capacity comes, it will be more on the spot pricing. So that's how the mix has evolved in the current quarter.

And sir, with regards to the block, which you're talking about CDMO we are planning to do a CapEx. So with that CapEx and the CapEx which is getting -- which has got completed in the Phase 1 as well as getting completed in this current year, those capacities are built to reach our stated goal of around INR 1,000 crores of revenues by FY '29?

We have to see when we reach it, but '29 or '30. But in terms of the current new block that we propose to put and the existing current block and of course, the manufacturing that we will have at Vapi, I think these things will be sufficient to -- sufficient capacity will be there to meet that aspiration with the current block. And in the current block also, currently, we have only approved 400 kL, but we have capacity to increase that by another 200 kL and that will depend on the new projects getting matured. So we are going to keep that readiness on the civil construction part of the project and that also has been sanctioned by the Board. However, the equipment, 405 kL only we are putting up, but the additional 200 kL equipment can be put up at a very short notice.

Okay. And my understanding was the one dedicated block which you already announced now. There was one more dedicated block which you were planning, probably waiting for some approval.

That is what we have announced. That's what we have announced. Last quarter, I did mention about -- we are thinking about this and that got approved by the Board. And yes, so we have a few good CDMO projects, which have very promising future potential.

So I'm talking about 2 dedicated blocks separately. So we are putting up one, right?

Yes, yes. But we already have another 400 kL multipurpose capacity also available. And the current block that we are putting up, we have currently approved for 405 kL, but we can still go up additional 200 kL. So existing 450 kL plus this 600 kL additional, we can go up to, so which will be very large capacity.

Okay. Okay.

It's a jump of rather than dividing into a smaller block, we are putting up a bigger block.

[Operator Instructions] The next question is from the line of Sajal Kapoor from Antifragile Thinking.

I've got two questions. One is beyond the revenue growth, how has the complexity and value of CDMO segment changed over the years? And how is that progression reflected in the gross margins of CDMO segment?

Yes. Good question. I think since we started the CDMO journey 5.5 years ago, meaningful CDMO journey, I think we have grown almost 10x in that period. And initially, we started with ISO product supply, regulated starting material supply, KSM supply and then we have moved to GMP supply. And we have always been restricting ourselves to smaller molecules. And now we have also backed certain projects where we are supplying API for initial tox batches and also for the initial clinical batches. In terms of chemistry skill sets, as I mentioned last time also, we have approved R&D lab, which can -- equipment in our research and development center where we can look at peptides and oligonucleotides. And that is adding additional capabilities in near future to the -- what company can do. Apart from that, we are also doing more and more green chemistry, flow chemistry and stuff like that. So overall, where we were, I think, 5.5 years ago and where we are today is completely different. We are a much more mature company and we are operating all the manufacturing sites, which are all approved by the large innovators. 2 sites are U.S. FDA approved for Intermediate manufacturing as well. And I think overall, we are able to build a good name in the CDMO market where people have started recognizing what Aarti is capable of doing. And with the recent hiring of CSO and then the team, new R&D team also has helped us in overall pushing that agenda.

No, that's very interesting. And secondly, some of the larger Indian CDMOs reports about 85% gross margins in the Development segment. And when the molecule goes commercial, they report 70%, 75% gross margins in commercial manufacturing, depending upon how many steps, what complexity, et cetera. So question is, as Aarti CDMO business scales from 7% of revenue today towards more like INR 1,000 crores whenever we get there and beyond, how should we think about the structural opportunity for consolidated gross margins? Because we have got 3 segments, right? Xanthine is probably the lowest gross margins, and we have got APIs and then finally, the CDMO segment, which to my mind is the highest gross margin.

Yes. So overall, I think 85% and 75% margins, of course, those who are doing very early-stage work, but the -- it is more -- gross margins are high, but it's more research work. So where we have to do -- put up a lot of R&D efforts, whereas we specialize on the manufacturing side. And we come -- and if you see the way in which we have been able to increase our commercial portfolio is quite rapid. You don't see many companies doing 37 commercial projects within such a short span. So that's where since we get into the projects during Phase II, Phase III changeover and then the commercialization of the products, if they happen, we straight away have the commercial sales -- and this our manufacturing specialization helps the innovator to bring down the cost from the early stage suppliers that they have for the clinical batches. So that is what our specialization is. So we don't expect to do 70%, 75%. 75% gross margin currently, unless we move up in the Peptide segment and Oligonucleotide segment where it is very complex and more research-driven going forward. But in small molecules, I think we are reasonably at 60%, 65% gross margin on the commercial side, 60%. Whereas on the early side, we also have a little bit higher margins in some projects, but we do limited stuff there overall.

No, that's very helpful. I think even with 60%, 65% gross margins on optimal utilization, the EBITDA margins can be easily north of 30%. Again, it depends on the utilization level and how fixed costs are covered. But I think 60%, 65% on a sustainable basis is a very healthy gross margin.

Yes. But one thing, overall, we have 3 business segments. And in combined, we are pushing all the businesses to grow significantly. And as I have mentioned in earlier that we want all the businesses to grow beyond INR 1,000 crores. So looking at that, I think Xanthine, as I mentioned, will reach that number sooner. CDMO/CMO has few years. And also, I think API also will take a couple of years to reach there. So with all the 3 segments breaching that, I think we expect CDMO/CMO segment to go beyond 25%, 30% overall percentage of the company's sales going forward.

The next question is from the line of Kenil Mehta from AMC.

Sir, on the CDMO side, given our aggressive growth ambitions and CapEx, could you elaborate on the talent acquisition strategy driving this expansion, specifically on what have you made across your R&D scientific leadership team and global sales and business development team over the last few years? And what is the pedigree or domain expertise these hires bring in for Aarti Pharma?

Yes. As I mentioned earlier during this current year, we have built a CXO model on the tech side. So we have a Chief Scientific Officer, we have a CTO, we have a COO who operate our manufacturing assets for API and the intermediates as well as the CDMO/CMO segment and the R&D segment. So we have right people hired. And of course, below which also we have built a team. So we have a dedicated R&D teams, which have expertise in small molecules. Now we have also had a few people on the oligonucleotides and peptides and also we have very good team on the scale-up side and process intensification. So these 3 are very important in terms of R&D. We run 3 R&D centers. We have an innovation center in Nerul, which is largely for the innovators where we have more than 100 scientists sitting there. We have an API R&D center in Dombivali, which we operate. And then we have a scale-up and the process intensification R&D center in Vapi. So all these 3 R&D centers combined, we have more than 250 scientists working in our organization. So we have quite healthy pool of scientists and very good team. In terms of BD team, also we are trying to enhance our BD team. We have geographically distributed BD for CDMO/CMO. And we have people assigned towards different regions. So we have a European lead, and we have a U.S. lead Japan -- U.S. and Japan lead. So they work cohesively, and we also have a project management team, which supports them so that they only engage mostly in the BD work. So I think we have a good structure that is working well for us.

And what will be the contest in 2 years back and now as the CDMO has scaled up?

Yes. So the entire lab of CDMO, we started 3 years back, and we have set up this entire 100 chemists only for the innovative work that we continue to do at our Nerul labs.

The next question is from the line of Shubham Aggarwal from Burman Capital.

Sir, my first question is on the prices trend of Xanthine. So sir, there have been 3 different effects that are playing out. One is that Chinese rebates have been eliminated going forward from April 2026. Second is what we also understand is that is basis the input provided by one of your Chinese players through their RHP that there have been production quota cuts in China in the domestic market. And the last is that there have been rise in the cost of the raw materials that you are consuming. So sir, let's say, pre-involution duty, your prices where is. Can you just help us understand where they are as of now? And how many of these factors in your assessment will be temporary in nature versus structural in nature?

Yes. I think the involution duty currently looks like permanent structural change, at least for the near term. So for next few years, I don't see that to change significantly. And in terms of raw material increases and that is temporary and that is basically tied up with the West Asia crisis, whereas the quota tightening up of Chinese manufacturers that has been done by the government is to ensure on the competition, which was all the companies were bleeding in China. So they wanted to prevent it. And I think that is structurally improving the overall Xanthine business margins overall for us. And I think with the capacity that we have now, we will have the second largest capacity in the world of the Xanthine. I think we -- for each and every consumer, we expect to be in -- we expect to have a wallet share in their overall requirement being the very large Indian source that we are. And with that, the growth that we have projected that currently we are operating close to 6,000 tonnes, and we are anticipated to go to 9,500 tonnes in next couple of years.

So sir, let's say, if the prices have increased by any amount here, would you characterize 50% of it like in structural nature and 50% temporary? Or would it be even higher temporary increase just in your fiscal?

I think very difficult to put that number, but I think we can go by 50-50.

Understood. Understood. And sir, I just heard that you were saying that we are expecting INR 900 crores to INR 1,000 crores of revenue in Xanthine. And what I understand [indiscernible] INR 305 crores this quarter. So remaining INR 700 crores in next few quarters. So all in all, would you like expect a step decline in Xanthine revenues in the next couple of quarters just because pricing temporary will reverse? Or would you expect to maintain this quarterly run rate going ahead?

I think this quarter was exceptional in terms of the top line. And overall, in response to the West Asia crisis, the prices of raw material had almost practically increased by 50% to 100%. I think they have -- in end of June and July, they have come to a little bit of reasonable level from 100% down to 25% to 50% level. So there is already a change and which will reflect on overall pricing because largely, we have price pass-through deals for the large customers. And for the spot market also, it reflects overall pricing to come down. So with that coming in, I think the top line is anyone's guess where we will land. So we are just giving a broad range.

Understood, sir. Sir, just one last question on CDMO. So sir, we have like put up a INR 150 crore dedicated CapEx for some of our molecules. Sir, I just wanted to understand this dedicated CDMO block. Is it like referenced by a customer booking your capacity in advance for one of the molecules they might be in commercializing stages? Or is it more to do with your own visibility basis a few of your molecules? So like is it for one customer, one molecule basis for near term? Or is it fungible between at least 1 to 2 projects basis different durations of time?

Yes. I think this block is going to be used as a dedicated block for manufacturing of a few projects. I think 3 to 4 projects will be done in this block for multiple customers. And a little bit of flexibility we will have in between because of skewed nature when they would like to take certain quantities and when they may not like to take. But I think we have quite a good visibility of where what kind of requirement combined can go with those projects that we have and current capacity that we have would be multipurpose and inefficient and insufficient to meet that number, not inefficient, but basically over -- because for each and every reactor, we have multiple sets of flexibility that we create, which need not be there for this dedicated block. So rather than creating additional multipurpose, we decided to create a block which encompasses the changes due to dedicated nature that we are only going to do a few stages in that -- those dedicated reactors. So which makes the CapEx a little bit more efficient. And the process also optimizes a bit because we take care of the need of the process and tweak the machinery accordingly. So that's the advantage that we have.

But sir, like we would have visibility on projects, which in itself can become INR 200 crores, INR 250 crores per molecule, like we do have some sort of those projects in pipeline.

I would not like to comment on number, but we have visibility.

The next question is from the line of [ Abhishek from Padmaja Investments ].

Am I audible, sir?

Yes sir. You are audible please go ahead.

And regarding this new CapEx, new capacity that got commissioned, do we get that facility audited by U.S. FDA or EU GMP? Like is it necessary or not?

Yes. I think see, the Atali facility that we have started, there is no mandatory requirement of U.S. FDA to get it audited. It has been already audited by our innovator customer, and they have approved the site for manufacturing. Whereas in case of Xanthine facility is largely for the food requirement that we have enhanced the current capacity that we had at the brownfield site. And that also doesn't require U.S. FDA approval. So overall, both the sites that have become operational in the last 6, 8 months don't require U.S. FDA approval as such.

Okay. Okay. Okay. And another question is on this Xanthine site, will you be allocating more capital going forward also to that division since it is a commodity and you are trying to focus more on the CDMO part, trying to understand the capital allocation as a broad strategy level.

Yes. I think with the current expansion that we have done, we will be the second highest manufacturer of Xanthine in the world. And I think we feel that this will be current good enough for us to have this capacity for next few years before we put additional capital in that. However, we will not rule out cost-saving projects and stuff like that, which have lower payback period.

And last question, sir, this is the last question. I remember your last presentation that you mentioned that 7% of the R&D expense as I said of API intermediates and CDMO revenue is the expectation. Like in that majority of it, is it allocated towards CDMO or towards the API and Intermediate one?

I think it is split between both, yes, between both.

The number looks high. So I'm trying to understand if it is towards playing a old API generics...

I think more towards CDMO.

Okay. Okay. And going forward also, we can expect the same range its towards less than 5%.

Yes, yes. More than 50% of that will be for CDMO.

[Operator Instructions] The next question is from the line of [ Pritesh Chheda from Lucky ].

Sir, my question is with respect to CDMO. So this INR 149 crores of dedicated project, which 200 kiloliter and another 200 kiloliter possible expansion. Can you tell us the ramp-up plan at least for this dedicated project? Because my guess is here, you will have some visibility on the commercials of that molecule. And overall, my guess is you guys have invested now about INR 600 crores of CapEx. So right, INR 450 crores and this INR 150 crores. So this INR 600 crores of CapEx translates into what kind of asset turnover?

Yes. So I think asset turnover will be in excess of -- I think around 1x. And in terms of overall capacity utilization, meaningful capacity utilization because this plant that we are dedicated facility that we are putting up will start in next financial year -- end of next financial year, second half of next financial year. And I think it will get reasonably occupied in 1, 1.5 years' time post that. So we expect this to meaningfully help us reach our target of INR 1,000 crores in terms of top line.

So that onetime asset turn is on the whole INR 650 crores you're saying? And correspondingly, you have INR 1,000 crore ambition. So then we need to put in some more CapEx?

We already have our Vapi site also, so which has a 600 kL capacity out of which partly is dedicated towards the CDMO. And currently, 450 kL is there, another 400. And I think the current block, we have kept another 200 kL flexibility, so which will also require additional money. But rather than building 2 blocks, we have decided to go ahead with 1 block where we can eventually ramp it up to 600 kL. But currently, we have visibility of 400 kL, but I think Civil, we are going to keep ready so that within 6 to 9 months, we can ramp up additional 200 kL also.

[Operator Instructions] The next question is from the line of Julie Mehta from 360 ONE Capital Market Private Limited.

So sir, I had one question relating to Xanthine and CDMO. So basically, given that Xanthine contributed to around 57% of revenue, while CDMO has fallen to around 7%. So we observed that margins have remained stable year-on-year. Should we expect that margin expansion to improve as CDMO revenue recovers? Or does that mean that profitability profile of Xanthine has improved enough to offset the lower CDMO contribution?

I think overall, if you see all the manufacturing companies, their profitability in the current quarter looks a little bit higher because of the impact of raw materials which have been procured at a lower number and sales rate we have been able to push up. So that has resulted in a little bit of higher margin for the current quarter, but that will get normalized for the products Xanthine range of products going forward. And I think in terms of CDMO also, as it moves towards the second half, I think there, we will see a ramp-up of margins in CDMO because we expect almost significant sales happening there. So I think overall, this year, we will see more stable quarters rather than more up and down opening. Yes.

Okay. And sir, regarding the CDMO decline, so was it basically because of project timing or lumpy commercial shipments or maybe there were changes in customer demand? How do we look at it? If you could throw some light on it?

No. So CDMO, we have guided -- we are continuing to hold on our guidance of 40% to 50% growth over last year. And last quarter also, we had quite significant sales of CDMO. And the current year also due to the accounting standard, we had some postponement of sales also because of the nondeliveries and stuff like that, which could have resulted in sales in this year. So looking at overall, I think we are not concerned about lower sales in this quarter. But I think over the next 3 quarters, we will build it up and we'll get that growth number.

Okay, sir. And sir, just one last question where in terms of API, where are we seeing the strongest traction kicking in, in which areas, like oncology, steroids, respiratory or hypo products, how do we look at that?

See, the company is uniquely positioned and it has the capability of doing anticancer projects. It has the capability of doing steroids and also we do more lifestyle drug projects, whereas we anticipate newer launches in anticancer happening in the coming years where the growth can come. So that's why we have taken an expansion of our Block 3, which is our anticancer block and almost the capacity will be ramped up significantly there. Whereas in case of the lifestyle products also, we are adding a few more products there, which are antidiabetic nature and which have commercialized and going forward, they will ramp up. But of course, as you know, due to the launch, there is strong pressure on the pricing. And as I mentioned in my speech that we are targeting a cost intensification and operational intensification and cost optimization exercise going forward. So that will result in positive margin and our ability to sell those products more. So all this will result in positively, I think, in next 6 months' time. And I think we will be able to grow this business also going forward.

Okay. So what kind of margins do we look for API business on a blended basis, like just approx range would also work?

So I think gross margin level, we are at around 45%, 50% gross margin.

[Operator Instructions] The next question is from the line of [ Abhishek Singh from Shrivers Capital ].

I think it was from the management side.

Management side, yes. We can take next question. I think probably we can take that last question if we have one question that we can take.

The next question is from the line of [ Ashish from Leo Capital ]. [Operator Instructions]

Sir, on the API business, what is the share of our top 5 or top 10 molecules to overall sales? Would we be supplying it to domestic international market? And what sort of global market share do we have in these molecules?

I think the top 10 products would be close to 60%, 70% of our share.

API and this is in domestic or international, sir?

International and domestic both.

Okay. And what sort of market share would we have in these top 10 molecules?

Top 10 products will be between 10% to 50%.

15%, sir?

50%. 50%.

The next question is from the line of [ Vanan Desai from Total Capital ]. [Operator Instructions]

Sir, my question is on the API side. I think you mentioned about some kind of a closure because of the debottlenecking for 6 weeks, I think. So now currently, we are at INR 160-odd crores this quarter for API revenue. So do you think that we should be able to do INR 180 crores plus with the debottlenecking behind us? And is the capacity now with debottlenecking on the steroid side? And I think we were also thinking about debottlenecking on the anticancer side. So with that in place, do we have enough capacity to go to INR 1,000 crores on API or we need more CapEx for that?

No, no. I think we won't need any more CapEx for that. I think we will be good for INR 1,000 crores plus with the current debottlenecking exercise that we have done for steroid and ongoing exercise for anticancer products that we have. And then we have the Block 5, which we have also additional line that has come up there. So with all these 3 initiatives, I think we are good for now for the requirement of -- for achieving INR 1,000 crores plus going forward.

And sir, that question on debottlenecking that if it was not there, would have crossed INR 175 crores.

Yes, yes, we should be in that range of INR 170 crores to INR 190 crores, anything in that range going forward.

Due to time constraints, we take that as the last question. I now hand the conference over to the management for closing comments.

Yes. I would like to thank all the participants for taking the time. Good evening. Thank you.

On behalf of 360 ONE Capital Markets Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.