Acutaas Chemicals Limited (ACUTAAS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Ami Organics Limited Q2 FY '24 Earnings Conference Call hosted by AMBIT Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Prashant Nair from AMBIT Capital. Thank you, and over to you, sir.

Thank you, Enzo. Good morning, everyone, and welcome to the Ami Organics 2Q earnings call. We have with us Mr. Naresh Patel, Chairman and Managing Director; and Mr. Bhavin Shah, CFO of Ami Organics. I'll hand over the call to Bhavin for his opening remarks. Over to you, Bhavin.

Thank you, Prashant. Good afternoon, everyone. We are pleased to welcome you all to our earnings conference call to discuss Q2 FY '24 financials. Please note that a copy of our disclosure is available on the Investors section of our website as well as on the stock exchanges. Please do note that anything said on this call which reflects our outlook towards the future or which could be construed as forward-looking statements must be reviewed in conjunction with the risk that the company faces. The conference call is being recorded and the transcript along with the audio of the same will be made available on the website of the company and exchanges. Please also note that the audio of the conference call is the copyright material of Ami Organics and cannot be copied, rebroadcasted or attributed in press or media without specific and written consent of the company. With that, I would like to hand over the floor to our Chairman and Managing Director, Naresh Patel, for his opening statement. Over to you, sir.

Thank you, Bhavin. Good afternoon, everyone. I hope you all are doing well. A warm welcome to our Q2 FY '24 earnings call conference call. As we complete the first half of FY '24, the global economy seems to be turning the corner. Despite persistent higher levels of inflation, there are emerging signs of inflation rates cooling in the coming quarters. Traditionally, a resurgence in demand is occurring in a wave of growth, which bodes well for the global economic outlook. Even as this -- even as things seems to be swinging in the direction of the economy, geopolitical tensions continue to cast a shadow of uncertainty, subtly impacting industry trends. Turning our attention to the industry landscape. There remains a consistent over supply from China across the chemical value chain. This gap has led to a decline in raw material costs exerting downward pressure on the pricing of the finished product -- for finished goods across the industry. Even as things seems to be improving, Chinese production continues to outpace demand. That has -- we are -- that said, we are starting to see promising contraction in demand and supply gap. Consequently, there is a cautious stabilization in raw material prices. These external environments did have some impact on Ami Organics' performance for the quarter. In Q2 FY '24, we delivered INR 172 crores revenue from operations, which is 17% growth over the same period last year. While we were expecting higher growth this quarter, pricing pressure marginally scaled back the growth. In terms of margins, higher sales, lower-margin products and persistent pricing pressure throughout the quarter adversely affected our margins for the quarter. Nevertheless, with a clear order book in hand, we anticipate stronger performance in the second half of the year. I will let Bhavin discuss the numbers in detail later. Moving to the business update. Let me begin with Advance Pharmaceutical intermediate business. We faced pricing pressure that affect the business, still we were able to deliver 8% growth year-on-year. Additionally, the launch of one of our key products has been delayed by our customers, thereby impacting this quarter's growth. However, this is only deferred revenue that is expected to realize in either Q4 FY '24 or Q1 FY '25. This is again one of the reasons for lower margin for the quarter as this is a very high-margin product. One on -- sorry, on the Fermion deal, we have further extended the partnership with Fermion by adding one more Advance intermediate to our basket. We now have total 3 Advance intermediates for their product, which increases the total expected revenue considerably from the CDMO contract. For the previously signed Advance intermediates, we have already received the order and we will start shipping them out from Ankleshwar facility from Q4 FY '24. This will gradually translate to the revenue starting from Q4 FY'24. Coming to the Specialty Chemicals business. We have introduced one more product, UV Observer, for the paint industry. I believe we will see revenue from this product coming into the numbers from Q3 FY '24 onwards. For the existing products, the volume growth was good but pricing pressure continued to be there. Overall, the Specialty Chemicals business still delivered strong 72% growth in year-on-year basis. Moving on, we continue negotiations with prospective customers in the electrolyte additives business. We are hoping to convert a couple of prospects in current quarter. Turning to our acquisitions of Baba Fine Chemicals. We completed the acquisition of controlling partnership during the quarter. The firm is set to be succeeded by the newly incorporated entity, Baba Advanced Materials Limited. It is important to note that the majority of H1 FY '24 was dedicated to completing this acquisition, followed by an integration process that, to some extent, impact operation -- it has impacted operations of Baba Fine Chem. Despite these operational challenges, we are committed to preserving the company's last year's revenue, and we are poising for exponential growth in the forthcoming years. Before I conclude, I would like to highlight that in our journey towards becoming a sustainable organization, the Board of Directors have approved 16 megawatts of captive solar power plant project, entailing CapEx of somewhere around INR 65 crores to INR 70 crores. If you recall, we already announced a 5-megawatt solar power plant previously and installation work for the same has commenced. This is expected to conclude by the end of this financial year. The new 16-megawatt solar power plant is in addition to the already work-in-progress 5-megawatt solar power plant. And I believe all this will help us nullifying our electricity expenses, once operational. Broadly speaking, deferment in products launch in certain markets by customer, coupled with pricing pressure due to oversupply from China, is expected to have some impact on the numbers. And even though we are expecting to deliver robust half -- H2 FY '24. Overall, we are modifying our growth target from 22% to 25% for the full year to 18% to 22% growth from FY '24. With that, I request our CFO, Mr. Bhavin Shah, to discuss the financials with you. Over to, Bhavin. Thank you.

Thank you, sir. Good afternoon, everyone. I would like to briefly touch upon the key performance highlights for the quarter and half year ended September 30, 2023, and then we will open the floor for question and answer. I'll begin with quarterly updates. Revenue from operations for the quarter was at INR 172 crores, up 7.3% as compared to INR 147 crores in Q2 FY '23. The gross profit for the quarter was at INR 71 crores, which was flat when compared to the same period last year. The gross margin for the quarter was at 41%. There are a few reasons for lower gross margin. Let me discuss them in detail. Starting with inventory, we had some high-cost inventory, coupled with lower finished good price, and there is a pressure on gross margin. I would like to highlight that this impact was particularly for this quarter and we will see our margins going back to previous levels from Q3 onwards as raw material prices have now stabilized. Another reason of lower gross margin was also our product mix. If you notice, majority of sales for the quarter was to the domestic market, which is always 2% to 3% lower business. Also, if you see Specialty Chemicals business, which is low-margin business, has grown strongly during Q2, which also contributed to lower gross margin for the quarter. Moving on to EBITDA. For the quarter, was at INR 25 crores, down 11.8% as compared to INR 28 crores in Q2 FY '23. EBITDA margins for the quarter were at 14.4% compared to 19.1% in Q2 FY '23. The degrowth in EBITDA margin was driven by gross margin as well as higher employee cost due to annual increment, ESOP cost and hiring of employees for Ankleshwar factory. There was also one-off costs due to machinery breakdown during the quarter and this has led to a pressure on EBITDA for the quarter. PAT for the quarter was negative INR 17 crores. Please note that JV with Ami Oncotheranostics was fully impaired on the ground that it would take significant time to generate revenue due to its inherent long-term nature of its research activity and uncertain success rate, which resulted in negative PAT for the quarter. Adjusting for the impairment PAT for the quarter Q2 FY '24 would be at INR 14.7 crores. Moving on to H1 FY '24 update. Revenue from operation for H1 FY '24 was at INR 326 crores, up 7.3% (sic) [ 17.3% ] as compared to INR 278 crore in Q2 FY '23. Gross profit for H1 FY '24 was at INR 144 crores, up 7.3% on Y-o-Y basis. The gross margin for H1 FY '24 was at 44.3%. EBITDA for H1 FY '24 was at INR 59 crores, up 15.2% as compared to INR 51 crores in H1 FY '23. EBITDA margin for H1 FY '24 were at 18%. PAT for H1 FY '24 was at INR 5 crores, whereas adjusting the exceptional item PAT for H1 FY '24 is INR 37 crores. Export for the quarter was at 54%, whereas domestic business was at 46%. Coming to the balance sheet, we have cash and cash equivalent of around INR 104 crores on consolidated basis as of September 30, 2023. CapEx outlay for H1 FY '24 was INR 105 crores. We are on the track to operationalize block 1 in Ankleshwar unit from early part Q4 2024, and we hope to update CapEx of remaining 2 block by end of Q4 FY '24. Therefore, from FY '25, we are expecting the full Ankleshwar block to come online. Coming to working capital for half year, improvement in debtor days and better payable cycle helped ease our working capital, leading to net working capital days of 100 days, an improvement of 16 days over March 31, 2023. Overall, as Naresh-bhai mentioned, we have a strong order book for H2 FY '24. And therefore, we should be -- we should see strong recovery on sequential basis in coming quarters. With this, I conclude my remarks and request moderator to open the floor for a question-and-answer session. Thank you.

[Operator Instructions] The first question is from the line of Sudarshan Padmanabhan from JM Financial PMS.

Sir, my question is to understand a bit more of what is happening in the industry. You had mentioned on the presentation and as you have talked about, the downward pricing pressure, China coming and dumping the prices, in your expectations, do you see this to be more transitional in nature? Or does it change something beyond in the transition for the next couple of quarters? Just want your opinion on that.

Thank you, sir, thank you very much for your question. It's really -- I would like to speak on that. See basically, Chinese -- in model of Ami Organics business, it's not that much great impact of Chinese competitors. But the problem here will be that our product competitors got cheaper raw material, and that has quoted in a lower price to the customers. So domestic, where the spot business are there based on the current price. Whereas we have the long-term -- at least 1 or 2 quarter stocks was there. That has impacted us to get the orders at a lower price compared to our cost. So that is how the -- our top line is compromised with that. This happened in last quarter and before that quarter. But now we understand that, and also we already informed the customer the same thing. And from here onwards, we see that it will not be impacted us longly to us, and we will be recovering in our positioning in the market with our own margins as well as price. So we are reducing our inventory in terms of domestic requirement.

Sure, sir. Sir, in terms of gross margin impact, you said there has been a mix impact and high cost inventory. Two things here, sir, how much of high-cost inventory are we still left with? And how do we see the recovery? I mean, should it be sharp recovery back to the 48%? Or would it be more gradual over the next couple of quarters?

So high-cost inventory is not related to the quote like that but it is not -- it is related to the spot business as well as the short-term only. So it will be -- very drastically will go back to 48% in next couple of quarters. So that is already in line and it is implemented like that.

Sure, sir. And finally, before I join the queue, on the Fermion contract. I mean, now that we have signed a newer product, I mean, we are expanding our relationship here. So how do we see the launches and the scale up happening, say, in FY '25 and beyond? And are we also looking at more such contracts with Fermion or even with, say, other clients which we want to forge in? Give more visibility to us.

Yes. So in our business plan and whatever the relationships we have with the innovators, out of them one is Fermion. And we have already -- you can see also in last 1 year, we have signed 3 contracts with them for multiple supply of different intermediates, and it is ongoing and we are expecting a few more in the pipeline. And in that sense, only our new project, which is we are establishing in Ankleshwar, we are supposed to -- we are going to be inaugurating mid of December of this facility. And once it will be ready, then we have another few contacts with other client as well in the pipeline in the discussion, it will be also coming to the -- in the basket.

Sure, sir. One final question, if I may speak to. Now that Baba Fine Chems is in and basically the advance material alliances is also going to be formed. Sir, on this exciting platform of electronics, I mean, how do we see the shape up happening here? Here I'm talking about more so from 2, 3 years perspective.

See Baba Fine Chem is a strategic acquisition. This is in 2 ways, the niche market, very strong position in the market in photo-resistant chemicals as well as it can be also helpful for us, for our other electronic chemical business where we can use Baba Fine Chem technology. So it's a both way, we have acquired Baba Fine Chem. So it has a strong position. It has a multiple product which is already developed in the system. And yet not commercialized. So with this joint venture, we will be trying to promote this molecule in rest of the world market, and this is how we are targeting to grow the business in Baba Fine Chem in semiconductor business.

The next question is from the line of [ Mr. Dhara ] from...

Yes, am I audible?

Yes, [ Dhara ], you are audible.

Sir, I have one question on where is this pricing pressure specifically on our Advance intermediate portfolio? If you could throw some more light, where are we facing problems here?

See the pharma, our main business is only in the Advance intermediates for pharma applications. And it has -- overall pricing pressure was somewhere around from 30% to 10% based on the commodity, or it is a very -- say, it's from n -10 to n - 1 like that. So overall, it has been our EBITDA margin pressure of somewhere around 6% to 7% on total because of the long-term -- the long-term supply contract is also related with the key raw material price variation. So that has also impacted on a current price of the raw material and that has revised the purchase order. So this is how it was happened like that.

Okay. And what would be the margins for both the segments, Pharma intermediate and Specialty Chemicals for this quarter?

Bhavin?

So Specialty, it was 9.5%, and Pharma, it is 11.21%.

Sorry for the Pharma intermediates?

11.21 -- 11.25%.

The next question is from the line of [ Karthik Iyer ], who is an individual investor.

Am I audible?

Yes, sir you are audible.

I just wanted to know the jump in the cost of RM and the change in work in progress is -- because it's gone up maybe 2x, 2.5x Q-o-Q and Y-o-Y. So is that because of the acquisition of Baba Fine Chem? or is it just pricing pressure and -- from China and headwinds that you experienced this quarter?

So [ Karthik ], we didn't exactly get your question that you are mentioning 2.5x means?

No, because if you look at your cost of materials consumed, right, it's gone up to about INR 150 crores from INR 71 crores and INR 58 crores Q-o-Q and Y-o-Y.

RM.

Yes. So RM, when we compare on Q-o-Q basis, so it is moved from INR 78 crores to INR 100 crores. So this was -- as we explained mainly, this is mainly due to change in the product mix, higher sales of our low-margin specialty product. There is a pricing pressure in the pharma. So cumulatively change in product mix, higher sales of specialty and there is a pricing pressure. This has changed our raw material cost.

Okay. How much CapEx have we done for the year? And how much is left for the balance of the year?

So till now, we have done around INR 104 crores of CapEx and another INR 100 crores is left. INR 100 crores, INR 110 crores will be coming by year-end.

Okay. And sir, has there been any traction with regards to the electrolyte business? And where do we stand on that?

Electrolyte business is -- we are now in a good position. In this quarter, we will be going to begin our production. We already placed an order for the raw materials. And we are looking for supply start from Q4. Once we do start beginning our production, we will announce on the exchanges and then supply also we will announce on that. So we are all -- all the audits and everything is finished by the customers. And now we are -- we got a green light to go ahead for the production. So first trial orders are -- is already confirmed, but production will be start once we get the raw material in our warehouse.

Okay. And Ankleshwar will start ramping up from March, I assume? Would that be a...

No. No, Ankleshwar will be inaugurated by December mid, and it will be ramping up by January. So first we will start with products, which is qualifying -- it is the validations of the facility. So we will start production by January for the validation batches. And then full fledged it will be start by Q1. But Q4 will start contributing some revenues from Ankleshwar.

The next question is from the line of Rikin Shah from Omkara Capital.

So I just wanted to ask like in the last 3 months, what impacted the base business of Advance intermediates so drastically? I know you expanded on the RM pressure. But did we lose market share by any chance in some of the products?

No. Thank you, Mr. Rikin, you -- if we lose the market share, then we will not be growing. So to avoid the losing the market shares, we're compromise on the top line and this is how we maintain the market shares. The volume is already there. Only we -- to remain in the market leader, we have to compromise on the top line. And that is the reason why this is a base -- the raw material prices, you can see a little bit higher.

Okay. Got it. My second question is in terms of the UV Observer product, which you have mentioned, can you please give some details into the size, nature of the product and margin profile? Like how different is the margin profile from your paraben and salicylic acid?

So this UV Observers are paint -- it's not in the paint -- the regular paint, which we are used in the household. It's used in the painting for the metallic paint, which is for the automobile. And it is a new product which is developed by Swiss scientists and we have a collaboration with them. So this application is used by worldwide automobile, and they have a very good presence. These scientists are well known in this industry. So we had finished the validation batches, and we already supplied few quantities them for distribution. Once it will be approved by everywhere, we will be expecting somewhere around 600 to 1,000 metric ton of the business of this. And it will be -- the margin is, which is what we are seeing in the Speciality Chemicals segment of 19%, 18% [indiscernible].

Okay. In terms of your Fermion contract, your basket of products has increased. So if -- I mean, I know you cannot comment in terms of value. But if in percentage terms with 2 molecules, you had x amount of value. So with the 3 products coming in, how much would the percentage of value would have increased?

By -- it will be increased, but exact number I can't discuss because both are listed company, and it is a part of the contract. So I can't disclose the numbers. But definitely, it will be higher than what we have today.

Yes. So percentage-wise, if you can share?

I have not actually worked on that. So I'm sorry about that.

Sure, sir. So in the electrolyte business, sir, you mentioned about Q4 being the start of the supply. So I think what I'm trying to understand is we are way past the LOI mode in electrolytes. Is that what you alluded to?

I didn't get your question. Can you repeat that, please?

I meant that the LOI was signed much before. And now the execution will start. Is that what you said earlier for electrolytes?

Yes, LOIs, we have signed so many LOIs, but LOIs is not valued so that's why we don't disclose it. So once it will be valued, some affirmative or valued quantity or something like, then we disclose that. So now we are in stage of converting these LOI into the firm contract. So that is where -- before converting into firm contract the customer has visited and audited our facility, in last 3 months, 2.5 months we were having lot of inspection in the facility and it went well. So now we are -- we got a green light to go ahead for the production. So that's how we ordered the raw material from the supplier. And once it will be in our warehouse, we'll start the production.

So this is a trial -- first trial production, is what you're saying?

Yes.

Okay. And sir, the Fermion contract in the presentation, you have mentioned it will start from Q4 FY '24. So just how would that scale up gradually if you're contracted for, like, let's say, 100 tonnes, for example, so then how do you scale from Q4 FY '24 onwards?

So the first is the qualification in Q4, where we do some validation batches, which will be used by Fermion to make further synthesis and then find a formulation. And so my -- once this approval will come from the final regulatory authorities, then we will ramp up in, say, FY '25 will be the year where we will have the all qualification stage everywhere. And then FY '25 half -- second half, it will be fully ramp up.

Okay. Full utilization in that part in the second half of FY '25?

Yes, yes.

Okay, sir. And lastly, sir, now that Baba Fine Chem is integrated, so now what do we see? I mean, we have the long-term guidance of taking it to INR 200 crores. But just sort of a myopic question, for H2 of this year, are we seeing any scale-up over there?

This year is the consolidation and integration year where we do all the integrations, transferring our system there, digitalization and all and also customer approvals because there is management changes. So customers need to have to also give some approvals for management changes and all. So that's the reason why this year is a little bit on a muted side. But from next year, it will be ramp up very exponentially.

The next question is from the line of Nilesh Ghuge from HDFC Securities.

Sir, firstly, congratulations for signing one more contract in CDMO for Fermion. And sir, if I look at the chemical business performance in first half of FY '24, so it has shown very robust performance. This quarter also if I knock off your subsidiary performance, the Y-o-Y growth was 32%, 1Q, it was 25% Y-o-Y. So do you think that this kind of growth will sustain for next few quarters in chemical business, excluding the subsidiary performance?

Yes. So you are -- know much better than me, you are an analyst and economist. When the base is small, the growth is very high. You can see that when the base is becoming sizable, the growth will be reduced. In any way, we are targeting to at least 2.5x our Specialty segment in next couple of years, and that is where we are marching towards that. And you can see also the performance is coming in Speciality Chemicals, and now every segment is recognizing and approving us. We are having some big numbers in under negotiations with big buyers, if it will be happen in next couple of weeks or maybe in -- we will make an announcement then you can see that, yes, it will be really a good move in Speciality Chemicals as well.

Okay. And sir, you have reduced your revenue growth target for this year to -- from 2022 -- 25% to about 20 -- in the range of a 20%. So is it only because of the Advance intermediate? Or the -- also the because of the, you can say, the muted performance in your subsidiary company?

No. So thanks, thanks this question you draw here. It's really important for me to tell to everyone. This is nothing to do with anything about our projections or our growth or our volume. This is really because of the top line erosion. This is not -- see at the end of the day, your revenue growth is based on the top line. And this is where the price is muted -- it's eroded on the sell side. So that is the reason why these target is revised. Our volume will be definitely grow at 20%, 25%. And it will remain like that. It will be only because of the value of the sales is eroded. That is the reason we revised the number. It maybe go up if the situation will go from the -- right size then it will be go up as well.

Okay. Sir, in your opening commentary, you did mention that the volume growth was very strong in FY '24 first half. But the prices -- because of the prices, there is a decline in top line. But can you quantify to some extent how much was the volume driven growth and how much deep impact because of the realization?

Do you have that? Okay, it's not -- right now, it's not on my hand, but I can give you one on one that as well whenever you are free.

Okay, sir. And just one last question to Bhavin. Sir, last quarter, our exports were about 39% of our top line. And I believe, in last quarter, that number exclude this -- the export bit from the Baba Fine Chemicals. Now you have restated your numbers for the previous quarter. So if you could help me out and get the exports for the last quarter, it will be of a great help, Bhavin.

So exports last quarter, without Baba was 37%. So again, I need to work with Baba. So I can come back to you with that number separately.

The next question is from the line of Jason Soans from IDBI Capital.

Sir my first question, just want to know that -- I mean, of course, majority of our business would be contracted for our Advance Pharmaceutical intermediates. So -- but just as a percentage, how much is contracted? Or do we do some kind of spot business as well?

Yes. Thanks, thanks. So our most of the export business is contracted and the domestic business is fully spot business. So -- and not only that some of the new molecules, which we are working with in export as well is spot like. So our regular business like we have business with Angelini and Fermion and all, and Medichem, these all are the contract signed, but with the relation with the price of the raw material.

Okay. So as a percentage, how much would it be, I mean, roughly?

It will be somewhere around 40 -- 30%, 40%. 40% is the revenue of the advance...

30% would be spot.

30% to 40% depends on the product mix.

Yes, 30% would be spot of the Advance Pharmaceutical intermediates, right? And 60% contract?

No, no. 40% is contract and around 50% is spot.

Okay, of the Advance Pharmaceutical intermediates. Okay. Okay. Sure. And sir, just would want to know so of this business, how much is exposed to the Chinese competitors? Of course, we know that the Chinese also are very large players in intermediates as well. So how much of your portfolio is basically exposed to Chinese competitors? As you have mentioned that you're facing price erosion due to pricing pressures. So how much of this is exposed to Chinese competitors?

[Foreign Language] sorry, there is no Chinese competitor issue. It's our local competitor who knows what price we are selling from the data available in the export, which is a very bad thing. And then they don't have a contract, they have a spot price. So that's -- based on that, they quite on a reduction in the price of our customer. They were qualified -- so customer is using as a platform to negotiate with us.

Okay, okay. Okay, sir. Okay. So sir, so just to simplify, just is my understanding correct, I mean, you did mention in the call before, so pricing pressure was 10% to 30%. That's led to an EBITDA decline of 6% to 7%. So whatever your long-term contracts are, due to the prevalent spot prices which are reduced, they have been renegotiated and hence, there's a pressure on margins. Is that right? That should be right, right?

Yes. So in the next quarter, it will be already discussed during this 1, 1.5 months. And it has recovered everything in that sense.

Okay, okay. Okay, sir. So okay, fine. Sure. And sir, just one thing. I mean, just want to mention, your Ankleshwar capacity is around, I believe, you have invested around INR 190 crores, close to that with an asset turn target of around 3 to 3.5. Now I just wanted to know in term of breakup, this Ankleshwar facility you had acquired from Gujarat Organics. Now I just wanted to ask you, just to clarify, I understand the certain portion is allotted to the Fermion block. And there is a certain portion probably we will be doing Specialty Chemicals as well. So could you just give me a break up as to what, what can come -- I mean, what revenue can you generate and in what segment, what are you looking? What's the total plan for the Ankleshwar capacity?

So Ankleshwar it is not for Specialty, first of all. It is only for Pharma. And there are 3 bocks, out of that 33% capacity we have relocated to Fermion, which is already booked, fully booked. And we have 66% capacity free for us, which will be fulfilling our future demand till to FY '27.

Okay. And that's totally for API, right, for the Advance Pharma business?

Yes. This Ankleshwar full facility is only for Pharma.

Only for Pharma, okay. Okay, sure. Sure, sir. And just one last thing, just want to confirm you said, your business in terms is 40% is contract and 50% to 60% spot in your Advance Pharma intermediates, right?

Yes. This is a product mix. We have a lot of products. So it's varying. So this quarter is like this, next quarter maybe changed.

The next question is from the line of Dharmil Shah from Marcellus Investment Managers.

So firstly, on the Fermion contract, I believe we are -- we would be supplying 3 intermediates to Fermion, one we are already. And if you could just give some time lines on the other 2 intermediate products? When could we start commercially supplying these 2 remaining intermediates?

So we are going to start validations of other 2 intermediates in Ankleshwar facility in December 2nd part. And it can be supplied for validations to Fermion in Q4 FY '24.

Okay. So both the 2 intermediates or just the second one?

Both. It is a program like that. So it will be validations, then commercial supply would be starting H2 FY '25.

Got it. Got it. And as far as your domestic business is concerned, you mentioned there were some price cuts by the domestic competitors. But just wanted to understand more on that. I mean, your customers would have named in the business filing, right? Then how would they switch to immediately your peers?

Sir, it's very simple. It's a buyer and seller -- it's a reference price is used to negotiate. That's it.

Yes, so just wanted to understand, were any lock in, in domestic business we are present in? Or is it purely based on price...?

We know that we are part of the DMF, but we don't know who is other part of the DMF, right? So they use the reference price. And we -- what we have done is that we have not lost the business. We had -- though we compromise a little bit in the margin, but we get the business. That is what we have done in last quarter.

Okay. Got it. Okay, and few bookkeeping questions for Bhavin-bhai. So...

Can you speak a little bit loud because we are not able to hear you properly?

Sure, yes. Is this any better? So Bhavin-bhai, if you can explain how have we accounted for the Baba Fine Chem acquisition, I can see some INR 35 crore goodwill acquisition. But how much is the corresponding asset increase? If you can just explain it line by line?

No, I didn't exactly got your question. How did we account -- if you can speak loud that will be...

How did you account for the Baba Fine Chem acquisition? So there is still goodwill increase in the balance sheet. And how much would be the corresponding asset increases?

See, so if you see for Baba Fine Chem, our investment value is around INR 68 crores. And after getting that real asset from there, our goodwill is around INR 54 crores.

Okay. Got it. So asset increases would be around INR 68 crores, right?

Yes.

And if you can just give break up for this INR 68 crores, what would be the ket assets?

He is saying what would be the...?

Sir, we are not able to hear you properly. Can you speak loudly because it's very, very, very deep voice is coming.

I was just asking what would the breakup of this INR 68 crores?

Yes. So see, we have paid INR 68 crore as an investment value, and there is a corresponding goodwill of INR 56 crores. And see, after removing asset and liability from their existing balance sheet, this goodwill has been created. So it includes fixed assets, it includes some of the debtors over there, minus creditors and other liabilities.

Okay. Understood. And lastly, what is our revenue recognition policy for the export business? Do we recognize once we ship the products from here? Or do we recognize on the date when the customer receives your products?

No see, primarily, we completely follow IndAS 115. And it will depend FOB, CIF, Incoterms. So when we pass on the liability, at that point in time, we recognize this according to IndAS.

Okay. Got it. Got it. And lastly, if I see the inventory days have almost increased from 100 days to 145 days. Any possible reason why is this the case?

So see, inventory we have now stock up inventory specifically for Fermion contract. So there is a strategic inventory buildup for the upcoming supply to Fermion. So that's why this -- you can see rise in the inventory days.

Got it. So this 145 days would not come down significantly or would remain same for coming quarters?

Right. So strategically, we need to because validations can be start in on time and it has to be -- otherwise, you will miss the qualification window in the authorities. This window is open for a very short time. So we have to be ready for everything.

The next question is from the line of Nirali Gopani from Unique PMS.

So Naresh-bhai, most of my questions have been answered. Just a question on this write-off that we have taken. So why a sudden decision to write off? And just a little bit of more background will be helpful.

See, thanks for asking this question. In the early stage of evaluation, we had one-off investments we have done in a drug discovery platform and Ami Organics came in the existence in partnership with Photolitec. The focus of this JV was to work -- focus of the JV is to work on -- sorry, I'm sorry, I got some call back side. So focus of the JV was to work on small oncotherapeutics. And it was done very well. We -- the JV has done good in PET scan and it moves to Phase II now, 1 molecule and one is Phase I. But our main focus is in our chemistry area and this drug discovery is not cup of tea of Ami Organics. And once we seen that, okay, it's moving very sluggishly, so we decided not to have more carryover of this investment. And during the public offering also, we said that we have considered this company as just a side investment. And so we decided to focus more on our current chemistry and our the investments, which we are focusing more to grow that. We decided to write off this investment.

The next question is from the line of Kalpit Narvekar from EFG Asset Management.

So my first question was on inventory levels. So some of the API manufacturers commented that there is elevated inventory levels, are you seeing that in your customers?

So Kalpit, as I already answered earlier that our inventory levels for the current quarter is on the higher side,because there's a specific buildup of inventory for upcoming Fermion contracts. So I -- yes?

Sorry, I mean, are you seeing elevated inventory levels at your customers' side?

No, I didn't get you exactly.

So the customers who you sell the Pharma intermediates to, right, are those customers having elevated inventory levels? Are they having high inventory on their end?

That we didn't know that actually...

It could lead to some sluggishness in the demand, maybe?

No, no, no. If demand is a issue, then we should not be have a top line incremental. Demand is not an issue for us from our customers. Yes, there is a request of price negotiation but demand is still there.

Understood. And my second question is on -- so on your manufacturing cost versus the manufacturing cost of Chinese suppliers what is the difference in some of the key molecules that you require?

I'm extremely sorry, I couldn't able to hear you properly. I think there might be something -- can you speak little bit loudly...

Can you hear me now?

Yes.

Yes, sorry, sorry for that. Sir, my question is basically, what is your manufacturing cost difference versus Chinese suppliers in some of your key molecules?

Okay. You have the manufacturing cost, our technology and our approvals, these all is 3 factors which is making us different than the Chinese manufacturer. Most of the products, which is our -- contributing around our top 10 products, which is contributing our revenue, we are dominating against China. And that is a cumulative of our production capability, our documentation and approvals and, above all, is our positioning in the DMF as well.

Understood, sir. And one more follow-up on this, right? In your top 10 products -- like top 5 molecules, are you seeing a lot of Chinese supplier coming into the market? And can you talk a little bit about near-term trends on this? Is it improving in the last month or so? Or is it getting worse?

So our top 5 product is mainly trazodone, dolutegravir, rivaroxaban, and entacapone. So there, we all are consistently we are performing at a growth, and it's still in the same situation. So we don't see any issues in the final product. But there are some pressure maybe from the raw material side because raw materials are common and maybe some competitor or Indian competitor may be using this raw material as a cost, and it will be impacting on our final product price.

The next question is from the line of Nilesh Ghuge from HDFC Securities.

Sir just one follow-up on Baba Fine Chemicals. So as you said that in next 4, 5 years, our top line may go to INR 200 crores to INR 250 crores. But looking at the current assets and the current chemistries, so when do you expect that our revenue will go to normalize level of FY '23, in maybe for second half of FY '24? Or it will take more quarters to reach to that level, at least FY '23 level?

So FY '24 will be better than FY '23 level -- sorry, FY '25 will be better than FY '23 level. FY '24 will be the muted one. FY '25 will be better than FY '24.

The next question is from the line of [ Suraj Navandar from Prithvi Finmart ].

Sir, are we in talks with our customers for the rest of the 66% capacity that we have at Ankleshwar facility?

Yes, we have some pipeline discussions with other customers for exclusive manufacturing for them.

When can we see any concrete agreements regarding that capacity?

It will be come when it will mature, sir. We are talking with them. We are in process of qualifying our samples and everything. So once it would be went through it, then we will announce on that. But we are working on that.

No, no, I was just asking for a very rough time line 4 to 6 months, maybe 6 to 8 months. Like any ballpark time line which you can give.

Sir, our ballpark is not on the contract basis, but we are targeting to complete fully -- operating full capacity by FY '27.

Okay, okay. And sir just last question. How big is the opportunity in our new product that we have launched UV Observer? How big is the opportunity over there?

It will be equivalent size of current base of the Gujarat Organics.

The next question is from the line of Gagan Thareja from ASK Investment Managers.

Sir, the first question is on the impact of the delay in the launch of product from one of your customers. Can you enumerate on what was the impact for the quarter and by how much has the delay -- how has the product been delayed?

Thank you very much, Gagan-ji, this question is -- I knew that this question -- okay. The think that one of the -- we were one of the product which is going to be off patent by '26. And one of our first to filing generic player with whom we are working, we have qualified -- he had qualified us since 10 years back. We started supplying this molecule expecting that they will get the approval in several geographies. But the originator sued them and they won one territory but they lose second territory. And because of this, they lose the battle, we -- the flow which has to be go has to be retarded, and it will be postponed by next year. So by FY '25, it will be again in a full phase. So these 2 (sic) [ 3 ] quarters, Q3 -- Q2, Q3 and Q4, we have a little bit on a muted side of the sale of that product.

Is it possible to tell what -- which product is this?

I can tell you but I'm not allowed to do that because we have some long-term supply agreement with them. It is a very good product for us and important product for us.

Is it in the anticoagulant that area?

Yes.

Okay. All right. And secondly, I think you also mentioned that there was an impact of machinery breakdown. How much was the impact of this machinery breakdown on outside quarter-on-quarter...?

See, it is this machinery breakdown in terms of waste management area. Because of this breakdown, we should -- we have to -- other than -- we have an approval from government of Gujarat Pollution Control Board that if we have a breakdown, we can dispose it the common effluent treatment plant. So that some quantity, we have to treat at outside territories. So because of that, some cost -- incremental cost is impacted on the balance.

All right. And lastly if I look at your Q1 numbers, I mean, when you reported Q1 last quarter and now when you are reporting Q1, there's the restatement for Baba Fine Chemicals [indiscernible]. Can you give the contribution of Baba Fine Chemicals, the top line and net profits in both Q1 and Q2?

Yes. So see, for Baba, Q1 top line was INR 11 crores and for Q2, it is INR 9 crores.

And net profit?

So for Baba Fine Chem, net profit is around INR 14 crores?

Sorry, can you repeat the number?

INR 1-4 crores.

For 1H?

Yes.

Yes.

INR 14 crores net profit on INR 20 crores top line?

Yes.

Okay. Also, if I look -- if I adjust for the exceptional that you have reported in this quarter and look at your effective tax rate, it seems high, both for second quarter and for 1H. Have I understood it correctly? Has the tax rate gone up for you? And if so, what is the reason for that?

See, tax rate remains the same. This is for standalone or for consol?

I'm saying consol, and I'm saying if you keep the nonrecurring fees...

Yes, Gagan, please.

So I'm saying if you adjust for the write-off that you have taken, right, and just look at the recurring profit without the write-off, and you look at the tax rate both for the quarter and for 1H, it seems that the tax rate is higher year-on-year. And I'm just trying to understand have I got it correct? And if so, then what is the reason for the higher tax rate?

Gagan, tax rate is same. We'll not get any deduction for this write-off. On consol basis, if you are saying that, there is a different tax rate for Baba.

Okay. What is the tax rate for Baba? And...

It is currently a partnership firm. So it will be done basis on the -- applicable rate for partnership. This is on a little higher side.

Okay, okay. All right. Get it, sir. And is it possible to understand the impact on the top line -- I mean, breakdown of the top line growth in terms of volume growth and what has been the price impact on the top line? Just to understand volume versus value how it has been...?

In a broader way, it is a 6% to -- between 6% to 7% on the EBITDA margin. On a detailed breakdown, we can provide you one-on-one when we meet.

Ladies and gentlemen, due to time constraints, we will not be taking any further questions. I would now hand the conference over to the management for the closing remarks. Over to you, sir.

Thank you, AMBIT team, for hosting our conference call. Thank you, everyone, for your questions, and we hope we have been able to answer most of your queries. If we have missed out on any of your questions, kindly reach out to our IR adviser, E&Y, and we will get back to you off-line. Thank you very much, and have a good day. And Happy Diwali and Happy New Year for -- to everyone. Thank you very much.

Thank you so much, sir. On behalf of AMBIT Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.