Aether Industries Limited (AETHER) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Aether Industries Limited Q2 FY '23 Earnings Conference Call hosted by HDFC Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nilesh Ghuge from HDFC Securities. Thank you, and over to you.

Thank you, Yashashri. Good afternoon all. On behalf of HDFC Securities, I welcome everyone to the Aether Industries Conference Call to discuss the results for the quarter ended September 2022. From Aether Industries, we have with us today Dr. Aman Desai, Promoter and Whole-Time Director; Mr. Rohan Desai, Promoter and Whole-Time Director; and Mr. Faiz Nagaria, Chief Financial Officer. Without further ado, I will now hand over the floor to Mr. Ravi Bhojani, Lead Investor Relations at Aether Industries. To begin with the earnings call, today. Over to you, Ravi.

Good afternoon, everyone and thank you, Nilesh for a brief introduction. I would like to take this opportunity and wish everyone here a very happy and a prosperous New Year. On November 11, 2022, our Board has approved the results for second quarter and half year of fiscal year '23 ended on September 30, '22, and we have released the same to the stock exchange as well as updated on the website. Please note that this conference call is being recorded and a transcript of the same will be made available on the website of Aether and exchanges. Please also note that the audio of the conference call is copyright material of Aether Industries Limited and cannot be copied, rebroadcasted or attributed in any press or media without specific and written consent of the company. Let me draw your attention to the fact that on this call, our discussion will include certain forward-looking statements, which are predictions, projections or other estimates about future events. These estimates reflect management's current expectations on future performance of the company. Please note that these estimates involve several risks and uncertainties that could cause our actual results to differ materially from what expressed or implied. Aether Industries or its operation does not undertake any obligation to publicly update any forward-looking statement, whether as a result of or future event or otherwise. So Dr. Aman will begin the discussion by sharing on the ongoing expansion and strategy of the company going forward, then Mr. Faiz will cover the financial highlights for the period under review, and Mr. Rohan will talk on high-level overview of Aether's business. Now I hand over the call to Dr. Aman Desai to share updates. Over to Dr. Aman.

Thank you, Ravi. Good afternoon, everybody. I hope everybody is doing well, and I'm happy to connect with you all to discuss the performance of our company for the second quarter of the current fiscal year '22/'23. In this quarter, we have fully completed the CapEx of our newly expanded R&D center, and it was inaugurated in October 11, 2022, by Padma Vibhushan Professor, Dr. Manmohan Sharma, Ex-UDCT Director. CapEx on our upcoming greenfield production site 3 is going as per plan, and civil construction was fully completed in the second quarter, and the installation of the reactors has also started in the second quarter. We expect the production lines to be live by the end of this calendar year '22, i.e., December '22 to January '23, where we'll begin stepwise the production of 5 new advanced intermediates, which are pharmaceutical applications in our large scale manufacturing site #3 and lead 5 advanced pharmaceutical intermediates will be made by us for the first time in India. Our plans towards the next 2 greenfield manufacturing sites, that is Site 4 in Surat and Site 5 in Panoli are also advancing well, and various activities are going on towards the planning, initial civil construction, product selection, regulatory approval and the overall design of these new further additional greenfield production sites. I think one of the most important highlights of this past quarter has been the growth of the business models of CRAMS and exclusive/contractual manufacturing, which have shown significant and promising growth. We are continuing to see an upward -- significantly upward trend in the inquiries, customer additions, previous contract renewals and actual business being translated into revenues in these 2 business models of CRAMS and contract/exclusive manufacturing. This is evident in our growth numbers for these 2 business models where the CRAMS business model has grown 69% year-on-year and the contract/exclusive manufacturing business model has grown 112% year-on-year. The R&D expenditure for the first half of the financial year stood at 8.7% of the total revenues, which is significant and includes revenue plus capital percentages. The strength of the R&D team has also increased significantly from 164 in March '22 to 193 in September '22, with 4 new senior scientists, including 3 PhD project leaders having already joined or joining in this current month. Our 16 megawatt solar power plant was commissioned in the second quarter and has already shown 85% output in the initial month itself, which is now helping us to save on electrical load, electricity load, and we will thereby set up 24,000 tonnes of carbon dioxide per annum. This has also helped us reduce our net debt and save cash outflow and add to our PAT as well. Our 3 business models continue to be robust, and we are seeing growth in all the 3 business models. The large scale manufacturing business model contribution will increase by the end of the current fiscal year '23 as the upward mentioned new products are being launched in the upcoming greenfield manufacturing site 3, which are of high value and have a significantly higher demand in the current market scenario already. Also, the pipeline is packed in R&D for future molecules with plans to launch these molecules in all 3 business models in the upcoming years in the site 4 and site 5 greenfield manufacturing sites. So with this very high-level overview, I will now request our CFO, Faiz Nagaria, to share the financial highlights of the second quarter of FY '23. Faiz?

Yes. Thank you, Dr. Aman. Good afternoon, all of you, and I hope you had our great New Year celebrations. The company has recorded a total revenue of INR 1,466 million in quarter 2 of financial year '23, leading to a total revenue of INR 3,127 million in half year of financial year '23, which has led to an increase of 6% in return revenues of half year to half year. The EBITDA remained almost flat half year after year from INR 912 million in half year 2 to INR 918 million in half year '23 thereby resulting in an EBITDA margin of 29.4% in half year '23. The PAT has increased from INR 575 million in half year '22 to 578 million in half year '23 being almost flat. Revenue for quarter 2 of financial year '23 grew by 1.5% year-on-year compared to the quarter 2 of FY '22 from INR 1,445 million to INR 1,466 million, but showed a drop by 11.8% compared to Q1 of FY '23, which was annuitized and well informed by the company in the last quarter also to the slowdown in the pharmaceutical industry. The company earned an EBITDA of INR 433 million in Q2 of FY '23, which was down by 0.8% compared to Q2 of FY '22 and down by 10.9% compared to Q1 of FY '23. The PAT of the company has been INR 272 million in quarter 2 of FY '23, which has increased by 8% compared to Q2 of FY '22, and increased by 11.1%, in line with the -- with the drop of revenues compared to Q1 of FY '23. As mentioned earlier by Dr. Aman initially, we have the solar power plant, which has -- which was commissioned and operational from July '22. The plant is running at 85% efficiency already. And the efficiency is going to increase as the quarter of July-September was rainy season, and now the season will give more output. This has helped us reduce our tax net and save cash outflow and also add to the PAT. The use of IPO fund is done for the CapEx for the greenfield project 3, repayment of loans from the bank and various working capital requirements. IPO expenses, except the ASBA and syndicate commissions have been also paid off. We have utilized the funds as per the object clause of the IPO wherein we utilized the funds from the date of IPO till 30th September as the table given below. Funding capital -- CapEx, the total requirement was INR 1,630 million, out of which we already drawn INR 310 million and remaining is INR 1,320 million. The funding for the capital requirements of the company, the total requirement was INR 1,650 million, from that we have already used INR 600 million and INR 1,050 million is to be used now. For the repayment of the loans of the bank, we already done that when the IPO was done in June, and so that this figure is unchanged and we have just reproduced for the ease of the investors and analysts. The GCP was INR 1,276 million on that, we have used INR 960 million and INR 316 million is excess. Now I will request Mr. Rohan Desai to talk on high-level overview of Aether's business. Thank you.

Thank you, Faiz, for the financial highlights. We are certainly committed to make these numbers look better in the quarters to come. Aether has shown stable revenues in Q2 in spite of the volatility in demand and sustained the margins. The good news is that the raw material prices are now getting stabilized. We are also seeing the demand coming back, and we are foreseeing growth opportunities due to China Plus One and Europe Plus One company-wide mandates. We are also seeing a lot of inquiries coming from Europe, especially for the contract/exclusive manufacturing due to ongoing energy crisis. Coming to our 3 independent business models in half year of financial year 2022/'23, we have seen 52% of our total top line coming out from large-scale manufacturing business models, which has shown a decline primarily due to the down trend in the global pharmaceutical industry. We, however, anticipate good future growth in this business model due to the launch of 5 products in the upcoming greenfield manufacturing site within this fiscal year. 13% of our total top line comes out of contract, research and manufacturing services, which has shown 69% growth in the half year of financial year 2022/'23 as compared to financial year -- half year financial year 2021/'22. And our third business model that is contract/exclusive manufacturing, which has contributed to 33% of our total top line has shown a growth of 112% in half year 2022/'23 as compared to half year 2021/'22. Our endeavor is to achieve balance between large-scale manufacturing business model, CRAMS and contract/exclusive manufacturing so that we are not dependent on any business model. Our sales mix stands at pharmaceutical 46%, Agro 33%, Material Science 6%, high-performance photography 6%, Coatings 4%; and others, including oil and gas as 5%. Our export stands at 29%, which includes exports to SEZ and EOU units in India and domestic sales stands at 51%. Exports outside the geography of India accounted for 36% of our total revenue from operations. We believe that with the launch of new products, building up the new capacity, seeing the increasing demand in the current quarter and renewal of the existing contracts, we are certain to deliver good growth in the coming quarters. Thank you, and back to you, Ravi.

Thank you, Rohan. We would request the moderator to open the line for question-answer now.

[Operator Instructions] We have a question from the line of Rohit Nagraj from Centrum Broking.

Yes. Okay. The first question is in terms of large scale manufacturing, you indicated that the business was impacted due to a down trend in global pharma. So have there been any postponements or cancellations of orders, which we have experienced during Q2? And anything similar that we have experienced in the first half of for the ongoing Q3?

Yes. So there is -- I'll take the question, Rohit. Thank you for this question. There was no cancellation of any contracts or any orders. There were postponements of few domestic orders, which were paused and the deliveries were made to be done in the Q3 of this current fiscal year, and we have restarted that shipments already.

Right. Got it. And just by looking at the first half performance of this year and compare it with last year and in the second half of last year. So more or less, our revenues were similar for first half of FY '22 and FY '23. So is there any seasonality factor, which is there for first half and second half and probably our second half revenues could be different than first half?

There is no seasonality in Aether's product. The only problem was the laggard demand of the pharmaceutical industry, except for that we did not face any issues and we do not have any seasonal products.

All right. And one last question. In terms of the raw material prices and energy prices, have we seen any impact during Q2? And how they are behaving in Q3? So are there any high-cost inventories, which are still left and that will have some impact on the margins in Q3 or we are completely safe from that time?

So Q2 faced the inventory -- higher inventory levels, which we had already mentioned in the last earnings call that we will be flushing out this inventory in Q2. And in Q3, there will be a very small impact of this inventory because we could not flush out the whole inventory because of the laggard in the demand. But we are in -- we have done our analysis -- internal analysis, and we see a good -- better Q3 and Q4.

[Operator Instructions] We have our next question from the line of Nilesh Ghuge from HDFC Securities.

This question is to Aman. Aman, can you elaborate on the opportunity in CRAMS owing to current ongoing crisis in Europe? And second thing, in our last interaction during con call post 1Q results, you did mention that you're planning to increase your CRAMS revenue share going ahead on the background that you recently commissioned your R&D center. So what are the chances that the CRAMS revenue will be -- the revenue from CRAMS revenue to go up significantly over the next couple of years?

Yes. Thanks, Nilesh. Great questions. Let me answer the Europe opportunity question first. Because of these problems that have been happening in Europe, which are really unprecedented in our times. Fortunately, unfortunately, we are seeing actually a good influx of increased opportunities. Customers that we have been talking to for the longest times have actually started translating some of the discuss -- under discussion projects into actual realities, and we are seeing a significant push of inquiries, but also more interestingly, we are seeing actual conversions of inquiries into projects and revenue happening in the recent months, which has considerably increased as compared to, say, for example, the same time last year. And so we are seeing a good influx of opportunities because of the Europe crisis. And then to answer the second part of the question, yes, the R&D expansion that has happened, which is incredible in nature. This is fully operationalized since the last quarter. And we have, in fact, increased our R&D CRAMS strength from, I believe, 160 to almost 200 now and we are even further increasing. Additional project leaders have joined, 3 new project leaders that have joined PhD project leaders in the R&D, and they are already off and running on various multiple projects. If you compare the first half of this fiscal year with the first half of the last fiscal year, our CRAMS has grown by a significant 69% in terms of revenues and our exclusive contract manufacturing business model has grown by 112%, which are really significant numbers of growth for these 2 business models. And going forward, as these new group leaders and as the new assets and resources in the R&D are further translated into running projects, we do anticipate that these numbers will further increase and our CRAMS pie of the bucket and the exclusive/contract manufacturing pie of the bucket will further increase as well. And so very upbeat and optimistic on these 2 business models for very well-formed reasons. Thanks, Nilesh.

Okay. Okay. And Aman, in our annual report, you mentioned that you people are looking for the -- any acquisition, particularly in U.S. and Europe for R&D centers. So what kind of resource you are looking for? And what kind of investment you are planning to do?

Yes. So these are very preliminary discussions and very preliminary evaluations happening. In terms of areas that we would like to potentially acquire a company in would be primarily in the geographic regions of the U.S. or Europe, and they primarily be in the area of R&D, where we add to our existing set of competencies or further complement our logistic set of competencies in terms of chemistries and technologies. And so the area that we would -- are solely interested in, in terms of acquisitions is R&D capabilities in either the U.S. or Europe, which is further abetted by the presence of our global technology and business development leaders in the U.S. and Europe, namely Jim Ringer, Ray Roach, Norbert Flüggen. And in terms of the size of the acquisition, it would be small. And so anywhere in the region of, say, between $5 million to $15 million, probably on the lower end of this range. In fact, our Dr. Jim Ringer, our Business Development leader in the U.S. likes to tell a story of this two fish named [ Haggai ] and Walleye and one is smaller and one is bigger and he likes to go fishing. And many -- most times, the bigger fish has swallowed the smaller fish while he's fishing, but every now and then he comes across a small fish that has tried to swallow the big fish and has died in the process. And so the moral of the story that he tries to tell me being that we are small in your approach toward acquisitions than to start with. And so that you can -- if anything -- any problems happen then you -- the company fully survives this problem. And so the idea is to go towards R&D acquisitions, very preliminary discussions. And these acquisitions, if we do these will be small in nature to start with.

Okay. Okay. Okay. And next question is to Rohan. Rohan, can you just throw some light, you did mention that raw material prices have come off compared to last quarter. So can you throw some light on this raw material? And how do you see the raw material prices?

Yes, sir, please go ahead.

My next question is to Rohan. Rohan, in your initial comment, you did mention about the raw material prices coming off. So can you throw light on this going ahead, how do you see the raw material prices and the realization for your new products?

Yes. So overall, raw material prices, 75% of the raw materials, which are the derivatives of crude has been corrected already. There are few exceptions, which has not been corrected, but overall, the scenario of the raw materials is looking very good, and it is now in the stable zone. So we see the -- because of this and after the flushing of the inventories, we see the robust EBITDA margins of Aether coming back to the actual where it were. We will see this in the next 2 quarters -- upcoming 2 quarters, basically.

Okay. So when you say it will bounce back to if I look at the first half of FY '23, your margins were about 49% or so compared to 51% in FY '22. So do you think it will bounce back to 50% or close to 51%, or you will close the year with a 51% gross profit margins?

Yes. So our endeavor would be to come back to the numbers of the H1 of the last financial year. That was when everything was good. But the only spoilsport today is the energy prices, which are there. And a few of the commodity prices are still trading at the higher levels like caustic soda lye and flakes, which also impacts the effluent treatment and other costs. Except for that, we are seeing a good scope of increase in the EBITDA and the PAT margins.

[Operator Instructions] We have our next question from the line of Rutvi from HDFC Securities.

I just had 2 questions. One being that how is the traction in terms of the high intermediates that we had announced in the facility 3, they have already been loading some production in facility 2. What kind of client response are you getting? And also, any plans for the site 4 and site 5 facility like do you have anything to add to it?

Yes. Rutvi, thank you for this question. I'll answer this question. The 5 products -- out of the 5 products we have already launched one in the last quarter. We are seeing full demand. We are manufacturing close to 12 to 14 tonnes of that product right now and practicing that out in the existing assets, and we have seen a good demand on that product. On the remaining products, we are planning to launch it in the existing facility also in the next quarter, that is quarter 3 and quarter 4, currently, so that we can practice that product also symmetrically and give the validation quantities out of the existing site. This will cut short the gestation period to a very great extent for the international clients sitting out in Europe. And for the domestic clients, we have already been approved by everybody, and we are seeing a huge incoming demand because we are having these products manufactured for the first time in India, and we are competing against China. Talking about Site 4 and Site 5, we have already submitted for the approvals for the -- with the Pollution Control Board, and we are expecting the approvals to come in a short period of time.

We have a next question from the line of Kalpit Narvekar from Allianz Global Investors.

Sir, my first question was on -- you mentioned that there was some slowdown on the pharma side. So could you add some color on which geographies are you seeing slowdown or which chemicals are you seeing the slowdown in?

So it, thank you for this question. Again, the customers are sitting out in India and sitting out in Europe. The -- what we have understood is they were holding a lot of inventory and hence the slowdown had happened. This inventory was less because of the uncertain situation and time during the COVID time, and -- for which they had increased their inventory holding period. And once the COVID went off from these respective countries, they wanted to control their inventory back to their normal levels. And so we are seeing this slowdown in all the products or various products except for 1 or 2 products, we have seen slowdown in the whole board -- across the whole board and that was the issue.

Great, sir. And my follow-up to this was, so do you see this inventory situation normalizing in a quarter? Or is there an actual impact on the end user demand of these products is essentially the end -- whatever the end medicine is going to the customer, is there some impact on that because of macro or the inventory situation will normalize by next quarter?

So the inventory situation, Kalpit, as we speak in quarter 3 is already getting normalized. We are seeing inbound inquiries and restarting of the existing orders already there. So -- and the inventory levels will -- is not a slowdown of a particular product because if you study our products are going into as a drug for curing hypertension and is used in blood thinning agent, which is used quite popularly. So it's not an uncommon product or a product which can be shifted or which can be removed totally. And hence, I don't see the product or the demand going off totally at all on the products which -- where we are in. But we are seeing this only as a temporary phenomenon, which has now already been recovering as we speak in quarter 3, and it will be -- we believe it will be out of this question in the quarter.

Sir. That's very helpful. And my second question was on the ramp-up in the new facility. So how much revenue potential do you expect on a steady-state basis when that facility completely ramps up? And how quickly do you expect that ramp up, say, fourth quarter, how much can you potentially ramp it up to -- and going forward as well?

Kalpit, I would not be giving you that number, but I'll give you just an idea. We are investing around INR 200 crores, INR 190 crores in the Site 3. And traditionally, we have done a 2x asset on this. We see a full maturity or 80% maturity to be arriving at -- in the 2 years period, 2 financial years.

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to management for closing comments. Over to you, sir.

Thank you, everyone, for joining the call. We hope that we have covered most of the questions. If you still have any further queries, please feel free to reach us. Stay safe. Have a great day ahead. Thank you.

On behalf of HDFC Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.