Aether Industries Limited (AETHER) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Aether Industries Limited Q3 FY '23 Earnings Conference Call hosted by HDFC Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nilesh Ghuge. Thank you, and over to you, sir.

Thank you, Michelle. Good afternoon all. On behalf of HDFC Securities, I welcome everyone to this Aether Industries conference call to discuss the results for the quarter and 9 months ended December 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 Nagariya, 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 for Q3 and 9 months FY '23. Over to you, Ravi.

Good afternoon, everyone, and thank you Nilesh for the introduction. Today on January 20, 2023, our Board has approved the results for third quarter and 9 months of fiscal year '23, which ended on December 31, 2022. And we have released the same on stock exchanges as well as updated on the website for the review. Please note that this conference call is being recorded and the 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 the copyright material of Aether and cannot be copied, rebroadcasted or attributed in press or media without specific and written consent of the company. Let me draw your attention to the fact on the 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 expectation 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 is expressed or implied. Aether Industries or its official does not take any obligation to publicly update any forward-looking statement, whether as a result of future events or otherwise. Dr. Aman will begin the call by sharing the ongoing expansions and strategy of the company. And Mr. Faiz will cover the financial highlights for the period ended review, and Mr. Rohan will talk on a high level overview of Aether's business. Now I hand over the call to Dr. Aman Desai to share the update. Over to you, Dr. Aman.

Yes. Thank you, Ravi. Good afternoon, everybody. I hope everybody is doing right. And I'm very happy to connect with everybody to discuss the performance of our company, Aether Industries for the third quarter of the current fiscal year '22-'23. We have recently launched our Site 3, which is the new greenfield manufacturing site for new products. Trial runs have already started in this month and commercial production will also begin in the current month. We will step wise start a production of 5 new advanced pharmaceutical intermediates in this new Site 3. All 5 products will be manufactured for the first time in India by Aether. We also have recently got the position of Site 3 Plus, which is a plot of land adjustment to Site 3 where we will, in the future, be launching 3 new products for agrochemicals. As a result of this position of an additional land parcel we have thereby significantly increased the size of our Site 3, which is very important. The 3 new products for agrochemicals that we will be launching in the Site 3 Plus in the future are in addition to the 5 new products which we are currently launching in the Site 3. The land parcel for the next greenfield manufacturing site, which is Site 4, has also been increased by us from 8,000 square meters to 18,000 square meters, so more than double. Documentation for the position of all the plots and amalgamation of the 2 plots is going on. Our plan, therefore, for the next 2 greenfield manufacturing site, i.e., aforementioned Site 4 in Surat, and the Site 5 in Panoli are both simultaneously advancing well and various activities are going on in this regard towards the planning, including civil construction, which is initial in nature, product collections, regulatory approval and overall design of the 2 sites. The reason for the large CapEx, of course, is primarily on the back of robust inquiries and outsourcing opportunities and our own robust pipeline of in-house molecules that we have selected ourselves, which we have been receiving as well from various customers in the CRAMS business model, and we remain confident in our ability to grab these opportunities, and work with world class corporate across the sectors in the CRAMS business models as well as continue with our own in-house pipeline of molecules that we select where we will manufacture these products for the first time in India. The growth in our CRAMS business model is also continuously on the rise in the current financial year, and the demand for the products and contract manufacturing are also increasing quarter-on-quarter. We have also recently made a few public announcements in this regard, which reflects the continuous growth. We remain upbeat and positive on the business model for future outlook. As in the last quarter, we continue to see a significant upward trend in inquiries, customer additions, previous contract renewals and actual business being translated into revenues in both these business models of CRAMS, which leads into contract and exclusive manufacturing. We added several new customers in this quarter, which are 3 in CRAMS and 7 in large scale manufacturing, a total of 10 new customers added in this quarter. R&D expenditure is significant. And for the 9 months for the current fiscal year, this stands at 7.7% of total revenues, this includes revenue plus capital expenditures. The strength of the R&D team has also increased from 164 in March of 2022 to currently 207 in December 2022, with 4 new senior scientists, including 3 PhD project leaders who have already joined us in the last quarter. Our 3 business models continue to be robust and we are seeing growth in all business models. Large scale manufacturing business model contribution will increase by the end of this fiscal year as the new products are being launched in Site 3, which are of high value and with existing high demand in the market. The pipeline in R&D remains back for future molecules. The plans to launch these molecules in the upcoming years in the new Site 4 and Site 5 greenfield manufacturing site as well as the Site 3 Plus. So with that, I will now request our CFO, Faiz Nagariya, to share the financial highlights of the quarter 3 of the current fiscal year. Faiz, over to you.

Thank you, Dr. Aman. Good afternoon, all of you, and I hope you all are doing great. I take this pleasure in presenting the quarter 3 results of the company, which have been very good for us. The company has recorded a total revenue of INR 1,705 million in Q3 of financial year '23, which has shown -- which is a growth of 16% compared to INR 1,466 million in quarter 2 of the same financial year, and it is around 11% growth with -- compared with the last year's same quarter. We are seeing growth in all the business segments in the quarter, as already informed by Dr. Aman. The company has earned a healthy EBITDA of INR 507 million, which is 29.7% of the revenues in quarter 3 of financial year '23, which has grown by 17% compared to the last quarter of financial year '23, and by 22% compared to the quarter 3 of financial year '22. The PAT of the company has been also increased because of this EBITDA and good revenues, it is INR 350 million in quarter 3 of financial year '23, which has increased by 38% as compared to the last year's quarter 3 of financial year '22, and 29% as compared to the last quarter of the current financial year. The total revenues of INR 4,833 million in the financial year -- 9 months financial year '23, which is 8% increase compared to the 9 months of last year. The CapEx for the Site 3 greenfield project is almost completed, and we are now planning for the CapEx for the Site 3 Plus, which will be around INR 600 million to INR 700 million for the launch of the 3 new products, which has been referred by Dr. Aman. This will be funded partly from under accruals and partly from the term loans from the banks. Overall, a successful quarter for Aether Industries and for the investors to be sharing for after the first 2 quarters being almost flat. Now I'll request Mr. Rohan Desai to talk on high level of overview of this business. Thank you.

Thank you Faiz for the financial highlights. In terms of the demand, we have seen a good growth in quarter 3 compared to the first half of the financial year. We are seeing strong demand for our products and expect the demand growth to continue and we are not seeing any signs of slowdown from our customers in the West. For our products, the end prices have been fairly stable across the board. On the raw material front, we are seeing the price getting stabilized, which relate to our margins going forward. As mentioned by Aman, we have been seeing a great traction from customers based out of Europe and U.S.A., especially for the CRAMS business. With the gas crisis in Europe, we are seeing significant increase in the opportunities from the CRAMS business. This is, to a certain extent, being demonstrated by our recent announcements with respect to the partnership with Polaroid Group and increase in business from our existing agrochemical customers. Coming to our 3 independent business models, in 9 months ending of financial year 2022 to '23, we have seen 50% of our total top line coming from large-scale manufacturing business model, where we anticipate good future growth due to the launch of new products in the greenfield manufacturing Site 3. 13% of our total top line comes out of contract research and manufacturing services business model and our third business model with its contract/exclusive manufacturing contributed to 35% of our total top line. 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 single business model. Our sales mix stands at: Pharma, 42%; Agro, 36%; Material Science, 5%; High Performance Photography, 6%; Coatings, 3%; and Others, including oil and gas, at 7%. Our exports stands at 70%, which includes exports to SEZ and EOU units in India, and domestic sales stands at 30%. Exports outside the geography of India accounted for 31% of our total revenues from operations. We believe that with the launch of new products, building up new capabilities, seeing the increasing demand from market clients across sectors and geographies and renewal of existing contracts, we are certain to deliver good growth in the going forward. We are excited about the growth at Aether and with the commencement of the CapEx at Site 4 and Site 5, we are confident of the new product launches, which we have in our pipeline. Thank you, and back to you, Ravi.

Thank you Rohan. We would request the moderator to open the line for question and answer.

[Operator Instructions] We have the first question from the line of Rohan Gupta from Nuvama Wealth Management.

Congratulations on a good pickup in the current quarterly results. Sir, a few questions from my side. I'll restrict myself at 2 initially. So one is that you mentioned in your opening comment that you are seeing a good traction in CRAMS business, especially from Europe when they are struggling with the energy crisis. So how do you see that the customers are approaching you? Are they looking for the replacement or they are looking as an alternative for you for the high cost, which in energy which they are experiencing right now? And you have also mentioned that you do not see any kind of slowdown in European customers' demand while we see that the European market are going through some recessionary pressure. So why you think that it is not impacting our business. So that is the first set of questions.

Aman, would you like to take it up?

Yes. So in terms of traction in CRAMS vis-a-vis the energy crisis in Europe, we have actually seen an increased level of -- as I mentioned in the last quarter as well, we are seeing increased inquiries come in. These are a mix of the customers trying to shut down some of their facilities or reduce the production and the energy consumption in their facilities are optimized -- the energy consumption in their facilities and partner with other partners worldwide, including Aether in India for picking up some of these opportunities. In addition to the -- so in terms of the existing processes that are happening in these customers, we are seeing a rollout of these processes towards partners like Aether. And in terms of newer opportunities and newer pipeline and newer launch molecules of these various multinational customers that we are working with at the highest level across the industry spectrum, the decision to partner versus manufacture in-house is much more now biased towards the decision to partner with people in -- with reliable partners in India where we are already a trusted partner in their [ type of frame ] for the last many years now. And so -- so that's what's happening. In terms of the recession happening in Europe versus that not affecting us at Aether, we are not seeing any effects of the recession in our demand and the inquiries and the sales and the revenues. The pharmaceutical global industry was in a light slowdown over the last couple of quarters that have actually picked up now, including inquiries from Europe has picked up in the pharma industry and the agro and the oil and gas and the material sciences sectors that we engage in various customers. These are innovative customers who have launches rolling off and pipeline, which is back, and that has the current recession in Europe has made no difference in that pipeline and the launch programs that these customers have. So hopefully, I answered your question, Rohan.

Yes, Aman. And just a second question is on the gross margin expansion. So if I heard you rightly, you mentioned that definitely the end product pricing scenario still remain very stable where the customer pricing demands are holding on while the raw material prices are experiencing and they are softening. So that leads to gross margin expansion. Am I right? So do we see the margin expanding over the next 1 or 2 quarters?

I will take that question, Rohan, for you. So the drop -- if the raw material prices are reducing, the end product prices will not reduce to that extent. So you'll see some expansion, which will happen, but the correction of the prices will also happen at the same time on the selling side. So we -- if you see our positioning on all the products, we have not increased the prices on very high levels as such also. So it will not affect the gross margins, rather the gross margins will improve to a certain extent. So you are right. But it will be at a certain extent level only.

Okay. Sir, just last from my side. And that is basically commissioning of a third unit. So how we are placed in terms of ramping up that facility. And in terms of the customer acquisition or the product approval from the customer, so how quickly you see that the ramp-up of the new unit can happen? And what can be the revenue potential?

I'll take that question also Rohan, again. The full commissioning, all the streams of that Site 3 would be online by March end. That's what we are targeting for. And the revenue potential at maturity from this Site 3 would be close to around INR 400 crores, that is INR 4,000 million.

And in what time frame you think that the full potential will be achieved in what time period?

2 years' time.

[Operator Instructions] We have the next question from the line of Ranvir Singh from Edelweiss Wealth Management.

Ranvir from Nuvama Wealth. So question is related to the EBITDA. I see on Q-on-Q basis we have some INR 27 crores of incremental sales. And the EBITDA has been INR 10 crore incremental EBITDA we had in this quarter. I see that most of revenue has gone up in contract manufacturing or local manufacturing side. I think INR 20 crores kind of revenue has gone up there. So just wanted to understand that later the EBITDA margin wisely varies between larger scale manufacturing and exclusive manufacturing or it is similar to that.

The margins varies with -- it is different between the large scale manufacturing and the CRAMS business model. Contract/exclusive manufacturing and the large scale manufacturing has the same -- almost same EBITDA margins at the moment.

So what does -- last year, in FY '22, our large scale manufacturing was 67% of revenue. Now this has come down to 50% of revenue. So that CRAMS/exclusive manufacturing is going up, but our EBITDA margin has been flattish on 29%. So that you wanted to understand going forward also. I believe this ratio is going to be like this or if you could guide here that how the proportion of different segment is going to be in next 2 years? And how the EBITDA -- what kind of EBITDA we could expect due to the change in product mix?

So thank you, Ranvir, that's a great point. So we were -- in the first 2 quarters, we -- as the prices of the -- went into uptrend, we were taking a hit in the large-scale manufacturing business model. And the CRAMS business model was intact, and it was increasing, hence the EBITDA margins was in the flattish zone. Now that the raw material prices and the trend is improving and coming back to the original level, we will see the EBITDA margins go to the north of 30% from the next quarter onwards.

Nice. So there will be improvement due to this product mix only. So assuming that the cost element, which has gone up significantly during first quarter, if it remains at this level, then still we will have that 1% improvement in real that's what you're...

Yes. So as the large scale manufacturer -- all the raw materials are getting back to its normal level. The large-scale manufacturing business model EBITDA margins will come back again to its normal zone, which will improve the margins -- overall margins of the company also.

Specifically, energy side of -- for the cost. So energy cost, I believe, remains at the firm level. So -- or what is your expectations going forward?

It will come -- energy cost is already -- we have -- we are suffering with the energy costs since the last 9 months or more, I believe so. And so it has already been incorporated into the costing of all the products as we speak. So if there is an improvement in the energy cost, you will see still better improvement in the margins.

We have the next question from the line of Amey Chalke from 3P Investment.

First question I have is basically on Site 3. You have said that there would be 5 products which would get commercialized through this Site from March onwards. Is it possible for you to give some color on the end market of these products, whether we -- where the market is already established and is basically maybe manufacturing, which happening from the older supplier to U.S. or are these newer products where it will ramp up slowly over a period of time. The nature of the end market product if you can explain. And similarly, I also wanted to understand the -- our segment called large scale manufacturing in the CRAMS side. Also, what is the mix over here in this segment? I understand we supply to the innovators. But are these products where the patents have already expired the -- these are natural cycle products or these are the new -- in all products which have just been launched over the last few years? If you can explain a bit more on it.

Sorry, I can take the first question, Amey, for you. There is Site 3 and the 5 products and their applications and the markets -- end markets and the customers. And Aman can talk more on the contract/exclusive manufacturing on the later stage. So Site 3 will be completely online by March end. There will be 5 products. The applications would be in the pharmaceutical segment of chemical industry and applications would be Carbamazepine, Oxcarbazepine, Ambroxol intermediate and Dolutegravir intermediate, respectively. These are the 5 intermediates which goes into these 4 products. The total market known and being imported into India for these 5 products is INR 1,200 crores, that is INR 12,000 million. And the customer fairly -- our Indian pharmaceutical company, the big company out in India. And then to a certain aspect, there are companies in Europe also and in Japan also for this pharmaceutical intermediates, which we are planning to sell. We have zero gestation period as of today because most of the companies have completed the validation of -- taken the validation quantities and have already -- we have also commercialized 2 products in the last 2 quarters out of these 5 products. And we are already selling that product from the Site 2. So Site 3 will not have much gestation period on the existing customers and the new customers will also have already audited our sites earlier and they are an existing customer for us. So we will not have any issues on the gestation period for these 5 products. Did I answer all your questions, Amey?

Yes. Just one supplementary question to this. So when you said Dolutegravir, so I assume that it would go to the -- the end market would be the tender business, right? Or you think it will also go to the regulated market.

No. So we do not -- we are not manufacturing APIs. We are manufacturing intermediate which goes into APIs. So it would be a regulated market and ROW market, both. So the customers would apply for that.

Demand would be driven by -- it is irrespective of the market basically...

Yes, the demand will be driven by our customers.

We have the next question from the line of Noel Vaz from Union Bank.

I just wanted to know what exactly is the state of the working capital as of presence? How many -- at what working capital data we currently stand at as at quarter, in the sense that, at the end of 2Q?

Yes. So I'll take this question. The working capital cycle stands as it was on the 6 months only. There is a slight increase because of the sales which we have done -- because of the quarter sales. And the working capital cycle will be contracted. We are working on it. And the raw materials for the new products have been purchased. So again, raw materials have been increased. And we are hopeful that this will be controlled by margin, and we will be able to bring it down to a certain stable level.

We have the next question from the line of Yash Shah from Investec.

Sir, my first question is regarding our CRAMS business segment. We've added about 7 new customers in this segment this quarter. My question was, do we expect in the coming quarter since we are seeing increase in traction, do we expect the -- expect to add the similar number of customers in the coming quarter as well? And do we have any kind of internal target when it comes to adding newer customers throughout the year? So that will be my first question, sir.

Yes, the 7 new customers who were in the large scale manufacturing model. In the CRAMS, we have 3 new customers. It's not -- so the new customers are important. But also additional projects from existing customers is, I would say, even more important than CRAMS business because once it establish a relationship at the highest levels with innovator customers across the industry spectrum, they have a bad pipeline of launched molecules coming off, and our endeavor is to basically make sure we deliver steps on the first project, so that the next project coming off the launch pad of these customers come to us. And so that's usually a more focus area for us as compared to new customers. But yes, considering all these scenarios, global -- scenarios happening globally in terms of the energy issues and other issues and India being the preferred destination, we do expect to be adding additional customers in the coming quarter as well. We added 3 in the last quarter. I'm guessing we'll be able to add same number or more in the next quarters to come as well.

All right. And sir, are we seeing any kind of inventory pile up in terms of CRAMs on the customer side?

No, I think we haven't seen that effect yet in the CRAMS area. It's usually for the large scale manufacturing only. Because especially, the CRAMS is all pipeline molecules and there are fixed timelines of launch for these customers, and that doesn't deviate because 100 different factors are involved in the launch as compared to just supply of critical materials from us.

And sir, now coming to the business, the end user business segments. Now from the last couple of quarters, we were seeing pressure in the pharma segment, and which was very well covered by the agro. Now we are seeing revival in the pharma, but at the same time, agro, we are seeing inventory pile up on the agro side. So what has been your experience on the ground at this point of time? Are you witnessing strong demand from both the segments? Or how is it working out for you?

I will take that question, Yash. We are seeing comparatively very strong demand on the agro and the pharma side, both -- we do not have many products on agro side. We have only 4 products on agro side as of today. So our answer would be limited to that, but we are seeing a good demand on the agro side till now.

Sir, 1 last question, then I'll come back in the queue. Sir, the new 3 products, which we are going to launch about total 5 products, will the application be in pharma itself? And I might have missed it, what is the revenue potential of these 3 products? Is it INR 400 crores, which you mentioned? Or can you please provide some clarity on the same?

Yes. So these 3 are all intermediates for agrochemicals and the revenue potential for these 3 molecules which are coming into India is around -- in the range of INR 540 crores per annum.

And what will be the market share will we be targeting in the near term, say, 2 years? And when do we expect it to be commercialized?

Yes. So we should be able to target INR 200 crores plus market share based on the current capacities which we are designing.

Okay. And when will this be commercialized, sir, as soon as Site 3 is commercialized?

Site 3 will be commercialized in March, and this would come in, I believe so in the -- Aman, correct me if I'm wrong, March -- next March, right?

Correct. Yes.

Got it. So we are looking at incremental INR 200 crores or starting next March over a period of 2 years, right?

We will be ramping up these molecules also in the existing site. So you will see it much more faster than 2 years. We typically consider the 3 products in the 18-month period.

And sir, one last question on my side. You've launched 1 more product this quarter. Is it part of the 5 new products which we had said because we have already commercialized 2 out of those 5. So the 1 new product, is it part of that 5 or incremental to it?

It is part of the 5.

Okay. So that means 3 or is it 2?

It is totally now 3.

Okay. So we've commercialized 3 products now.

Yes.

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

So my first question was on the 5 products that are coming in the Site 3. Could you share some color on whether these end molecules are actually innovator products and whether you were working with the companies or the intermediate manufacturers through the research stage of it? And have they come into the manufacturing stage from the CRAMS side of the business?

Kalpit, I will take that question. No, these are all generic APIs. The end market is the generic API, this molecule where it goes. And they are mostly manufactured in India, Europe and Japan. The APIs are manufactured over there. And so it's not innovative association molecules because these all 5 products belong to large scale manufacturing business model.

And my second question was on the 3 new molecules on the agrochem side because if my understanding is correct there, you have customers on the CRAMS side in agrochem, right? So are these molecules being converted from that pipeline?

No. This -- all 3 are also large-scale manufacturing business model where the imports are happening since last 3 years or more, and they are also generic molecules.

So sir, just one follow-up on this was that if -- so could you share some color on what helps in the conversion of these molecules for you with the customers the most. So there must be some existing manufacturing from Europe and Japan you mentioned, right? So are we better than those guys on costs front? And have we been doing this on a small scale for some of these guys? Not really, right? So could you share some color on what are the critical parameters for the customer that we're able to sort of pitch them...

Our competition is usually China. And so usually the customer who wants the product, these are all products which are manufactured for the first time in India, again. And usually the customer looks at Indian manufacturer, that's the biggest advantage what they see. The second is obviously the cost component where you should be comparable to China's price. The third is the QEHS, quality, environment, health and safety, which we demonstrate to our customers and they audit us quite regularly, which gives them confidence. And the fourth one is they do not want Chinese manufacturers or Chinese stores now active when there is an Indian source out in India, manufacturing the same products at the same prices. So that's the major advantage. And what is the advantage for Aether is the technical competencies of chemistries and technologies under which this product is developed. And then we use automation and other niches on chemistries and technologies where we improve the yields and productivity, which gives us an added advantage as compared to our competitor.

If I may ask one more question, if it's okay. So if on the R&D side, we're doing significant spending, which is actually great, right? And so around about when I look at the numbers, so the split is about 13% CRAMS. So let's say, 13% of the revenues is actually from the R&D side and 7% -- or around 7.7% of the expenses are going right in R&D. So could you share some breakup on the R&D expenses in terms of what is being channeled into the customer side and what is being channeled into the large-scale manufacturing piece in terms of developing capabilities for new molecules on the large-scale side versus what goes into working with the customer?

So R&D expenditure, actually, we do not bifurcate between the CRAMS and the large scale manufacturing, because we have given the R&D work to various [ entities ] who are handling the R&D for various products. We have given some large scale manufacturing products also and some CRAMS also. So that way bifurcation is not done by us. But very less percent of the portion is towards CRAMS because CRAMS basically is a joint partnership with the world innovators. So mainly the expenses which are done are towards LSM and very less portion is towards CRAMS portion.

If I may add, the CRAMS activities are the costs or the expenses or the raw material costs are repaid by the customers and they are built to the customers. So we will not see a huge amount of overlap between the CRAMS and the large scale manufacturing. R&D is mainly done for a large scale manufacturing business model or contract/exclusive manufacturing business model only.

We have the next question from the line of Rohit Nagraj from Centrum Broking Limited.

Congrats on good set of numbers. First question is in terms of our overall CapEx for the next couple of years, I mean, FY '23, '24. So as I understand that Site 3 we had a CapEx of INR 190 crores with a revenue potential of INR 400 crores. Site 3 Plus, we just mentioned about INR 60 crores, INR 70 crores of CapEx, INR 200 crores of revenue potential. What could be the CapEx for maybe Site 4 and Site 5? And what will be the annual CapEx for, say, FY '23 and '24?

So I'll take this question. So as you mentioned rightly, the Site 3 CapEx is INR 190 crores. So of course, the financial year '23 when we end the total CapEx will be the Site 3 that is INR 190 crores, plus the R&D ramp-up, which we did for the R&D ramp-up and the pilot plant ramp-up, which will be added and the solar power plant which we have commissioned. So it will be around -- plus some portions of CapEx being done in the current location of Site 2 also. So it will come to a north of around INR 275 crores. And for the next year, as we have rightly mentioned, Site 3 Plus will be started and it is a project which will be costing around INR 60 crores to INR 70 crores. Plus, we are also going to break ground in the Site 4 and Site 5 together, wherein we will have some CapEx which will come up. So next year also we expect the CapEx to be around INR 150 crores to INR 200 crores.

Second question is from the current Sites 1 and 2, is there any untapped revenue potential which still exists? Or incrementally, our entire revenue stream will be coming from Site 3 and Site 3 Plus.

I will take the question. Site 1 is the CRAMS and the -- and host the world's biggest partnered plant. So the CRAMS has a very good potential. We have 55 [ fume hoods ] over there, and we are expanding constantly in terms of the team which we have, which is currently growing every quarter. So we see a good potential increasing in Site 1. As far as Site 2, we are approximately at a manufacturing capacities of 70%. Faiz, correct me if I'm wrong. And we are looking at -- if we can realign the production and the productivity and the demand comes back on all the products, we can look at going to 80% to 85% capacity utilization. So 15% increase can happen in the Site 2 also. Rohit, does that answer your question?

Right. So effectively, the current revenues have a potential of going up by another 15%, largely, that should be the equation, correct?

Yes. You can think in that way, yes.

And just one last clarification on the pharma side. So the pharma intermediates that we are manufacturing, are there any inventories in the global system? Or we see that the demand for our Pharma intermediates has more or less normalized and shall start going from, say, this quarter onwards?

Yes. So we have struggled quite a bit in large scale manufacturing since Q1, Q2. So the struggle is -- we are seeing a good revival on all of our molecules and a lot of inquiries are coming on each of the molecules. So we're not seeing any raggedness now on all the molecules which we are manufacturing in the pharmaceutical space.

We have the next question from the line of Sabyasachi Mukerji from Centrum PMS.

So few questions from my side. Firstly, can you share the volume data -- volume or the realization data for this quarter?

Volume means, you are talking about the [indiscernible]...

No. So I think in quarter 1, you have shared the realization as INR 1,800 per kg. The similar data for 2Q and 3Q, if you can share?

Yes. It is at the north of around INR 1,900 in the 9 months, totally.

Okay. 1,900 for 9 months? And if possible, quarter 3? What is the number? For quarter 3, what was the number?

Quarter 3 is around INR 1,825.

INR 1,825, right?

Yes.

So the Site 3 is -- the revenue potential is INR 400 crores, and the installed capacity is 3,500 metric tons. Am I right?

[indiscernible]

So no, my question is, so let's say, 3,500 metric tons of capacity and probably we reach around 75%, 80% kind of optimum utilization levels and that translates to somewhere around 2,500 to 2,800 metric tons of peak production capacity. And if I do the math, generating INR 400 crores of peak revenue, the realization rupees per kg comes to somewhere around INR 1,400 to INR 1,450, which is lower than the current trend. But if I recall correctly, in the past few quarters as well as in the various management introductions, it was said that these 5 molecules should be having a very high realization compared to whatever we have currently. So where is the disconnect, if you can please throw some light?

So we always operate on the conservative estimates of year 2012 when the prices were at the lowest on all the molecules. Second, you're not going to reach 3,500 tonnes capacities because it is a complex molecule. So you have a design capacities, which are there, which are still not explored, right? So once you stabilize the production coming up in quarter 1 of the next financial year, we will be able to tell you what is the actual capacities of this which we can achieve. So designing is a different part because there is no other manufacturer in India, so it's not straightforward designing where you're designing a automobile line and saying that 100 units will be produced on a daily basis. It's not so straightforward. Although lines are quite complicated, and there are several steps on production. So going -- I understand where you're going through Mr. Mukerji, but that's not the right way of calculating the capacities for a specialty chemicals company.

I get that point. Hence, I kind of mentioned that you will probably reach a 75% or 80% of the rated capacity and not of obviously 3,500 tonnes. But let me ask or rephrase the question. So this INR 400 crores of revenue that you have a conservative target of, what kind of blended realization in the rupees per kg that you are factoring in for these 5 molecules?

It would be INR 2,500 plus per kilo.

INR 2,500 per kilo. Okay. And may I know the reason behind such high number compared to your existing product line? Because you said that these 5 intermediates will go into APIs, which are generic in nature and not something which is innovative molecules, right? So the pricing power remains not so great compared to an innovative molecule, I believe.

Right. So we are again talking about INR 2,500 as a conservative number. And these are based on the import statistics, which we are seeing since the last 10 years.

Second question on the Site 4 that you spoke about, I believe last few calls you had a target of completing the Site 4 CapEx by December '23 with the estimated CapEx of, I think, INR 240 crores, INR 250 crores. Are we on track? Or is it getting a bit delayed?

It was delayed because we amalgamated 2 units together, right? If you see the earlier communication on the Site 4 was only 8,000 square meters. Now it is approximately 18,000 square meters. So we have opportunity to buy the adjacent land an amalgamate and do the application for the whole parcel offline instead of going for 2 applications with the Pollution Control Board, and -- because if you have 2 applications, you will have to have 2 pollution control setup and everything which is double in nature. So we are slightly delayed over the whole process, but it is a very good advantage on the longer term. And in the meantime...

Mr. Mukerji, I would request you to kindly rejoin the queue, please. We have the next question from the line of Rohit from Progressive Shares.

Aman and team, congrats on the award for BW Disrupt 40 under 40 by Business World. Sir, I have a few questions. Firstly, on Polaroid, this INR 120 crore for 3 years, what sort of EBITDA margins can be expected?

Thank you for the kind wishes first of all. And Polaroid, business is purely in the CRAMS business model, and we expect 60% to 70% EBITDA margins in that.

And in addition to this, the 3 molecules, what is the time line by when do you think you will be launching the rest of the 3 molecules from the 5 which we earlier spoke about?

We're looking towards the end of March, that is next March, where we will be launching this molecule. However, we look at seeing the opportunity of launching the -- any of these 3 molecules in the existing site also, if there is a possibility.

So that can help you pull the margins to around 33%, 35% kind of a range in next 2, 3 years? Is it possible?

Theoretically possible, yes, but we'll have to see.

And in addition to Polaroid, are there any more strategic acquisitions that you're looking at in U.K., U.S.

First of all, it's not an acquisition, right? It is a collaboration and announcement of a partnership on research and development and scale up, and that has been finished and that continues to be one of our privileged customers for the CRAMS business. Along that line, we have several customers and we are currently working on trying to enable a few similar announcements in the near future as well.

With China opening up, and I know that the prices and the competition that we have with China and we try to always be 1 up with the prices. Do you think that the opening up of China would lead to increase or a decrease in the average selling prices going forward?

It will not affect in a negative way for Aether. So the pricing of all the molecules are already at its best. So it is not related to the China opening up its border because of the COVID thing. So I don't see any changes in the pricing structure.

My last question is related to any development or milestone work that you have done, which is related to chlorination or organosilicon or anything that is related to oil and gas segment?

So chlorination, we are currently working on 2 molecules in the R&D, which are complex molecules. One is showing significant progress, and that's going to go into the agrochemical sector. On organosilicon, still on the paper stage, exploring significantly on the paper. Actually tying up with one of our European CRAMS customers in a significant way for their contract research and product manufacturing requirements on organosilicon chemistry, and we are hoping to finalize contract in the coming few months with that particular customer and that is on organosilicon chemistry and that will translate this business that is currently in the CRAMS business model into the contract with exclusive manufacturing business model in the coming quarters. That's on organosilicon chemistry. And the last question, I believe, was oil and gas. We continue to work with numerous topmost innovators in the oil and gas sector in Europe and U.S. with existing contracts and existing significant projects for all these customers, and that's a significant portion of our CRAMS business model right now, which we are hoping and fully expecting to translate into the exclusive manufacturing business models in the months and years to come.

Aman and Faiz, if you can share some numbers, I think like what sort of revenue can we expect from these new initiatives? Or is it like INR 100 crore kind of an uptick in the business or INR 150 crore or more than that?

I think we've refrained from doing such numbers for the forward-looking things. Suffice to say that we are quite upbeat and quite positive about these interactions that we are having and we should see significant growth and revenues from these areas in the months and years to come.

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

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

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