Aarti Drugs Limited (524348) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Q4 FY '22 Earnings Conference Call of Aarti Drugs Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Adhish Patil, Chief Financial Officer. Thank you, and over to you, sir.

Good evening, everyone, and thank you for joining us today to discuss our financial results for the quarter and financial year ended March 31, 2022. Before I take you through the performance highlights, let me remind you that as communicated in the earlier earnings call, the financial performance on a year-on-year basis is not exactly stable, especially in terms of realizations and margins because of elevated API margins driven by sudden supply disruptions due to COVID-19 related lockdown during the financial year 2021. The company reported a resilient set of performance with improved product mix, even though the entire group continued to face unparalleled challenges in the business [indiscernible]. I will now take you through segment-wise performance. First, we will discuss stand-alone business performance. Standalone revenues for quarter 4 FY '22 stood at INR [ 642.1 ] crores as against INR 452.9 crores, a healthy growth of 42% year-on-year. Standalone business contributed approximately 90% to the consolidated revenue. Approximately 61% of the revenue came from the domestic market, while the remaining 39% came from the export market for Q4 FY '22 for a standalone business. Domestic revenue grew approximately by 37%, while exports grew by around 50% year-on-year for Q4 FY '22. API volumes grew considerably by around 23% led by healthy growth in chronic therapies, especially in antidiabetic segment. Within the API segment, the antibiotic therapeutic category contributed around 43%, antidiabetic around 17%, antiprotozoal around 14%, anti-inflammatory around 12%, antifungal around 9%, and the rest contributed around 4% to the total API sales of Q4 FY '22. Going forward, the growth in chronic therapies is expected to outpace the growth in acute therapies, mainly driven by recently commissioned antidiabetic capacity. Formulation segment performance, for the quarter, the revenue for formulations stood at INR 69 crores, growth of approximately [indiscernible] year-on-year. Formulation segment contributed around 10% to the consolidated revenue for the quarter. About 39% of the formulation revenue came from exports during the quarter. Exports continues to be a key focus area for the formulation [Audio Gap]. Now we'll discuss specialty chemicals and intermediates segment performance. For the quarter, revenue from operations for specialty chemicals and intermediates stood at INR 56 crores, which grew 17% on a year-on-year basis. For the FY '22, the revenue from operations stood at INR 210.8 crores, a growth of 28% year-on-year basis. The company's strong chemistry skills along with a niche presence in chloro-sulphonation products led to this healthy growth. The growth trajectory for this business is expected to continue further, driven [indiscernible] recently commissioned brownfield expansion at Tarapur facility. On a consolidated basis, [indiscernible] FY '22 revenue stood at INR 2,500 crores, a growth of 16% year-on-year basis. [Audio Gap] the company posted robust revenue growth of 39% in Q4 FY '22, which was [indiscernible] a 46% year-on-year growth in API business, along with 17% in specialty chemicals, intermediates and others. EBITDA and PAT grew by 9% and 7%, respectively. EBITDA margins were affected due to continuous [indiscernible] in raw material prices and power and fuel cost, especially the coal cost. The company's overall product mix, especially in API products, improved considerably along with improved operating leverage, which helped the company to partially offset the impact of higher raw material [indiscernible]. However, multiple headwinds such as ongoing Russia-Ukraine conflict, continuous inflation in the input cost, especially solvents, which are related to the crude price, supply chain disruptions, recent China lockdowns due to spike in COVID-19 cases, et cetera, had an impact on margins and profitability in Q4 as well as for the entire FY '22. The company is closely monitoring the evolving geopolitical events. The company has undertaken multiple price hikes during the quarter to partially offset the impact. However, these price hikes were not sufficient as the velocity and volatility of increasing input cost due to the reasons just mentioned, remained very high. The company expects [ stabilization ] in the margin once the input prices stabilize, which we expect by the end of Q2 FY '23. The company is also focusing to increase the revenue contribution from [indiscernible] therapies, especially from antidiabetic products, antifungal products, which would help the company to regain the sustainable long-term EBITDA margin levels. Coming to the important update in the USFDA inspection for Tarapur import facility. The company has successfully completed the third-party mock audit recently. The audit was carried out by the USFDA consultants, who are the ex USFDA inspectors [indiscernible]. The final response will be submitted to the USFDA towards the end of H1 FY '23, most probably by the beginning of August month. And the USFDA inspection is expected to be done by the end of this financial year. The company remains confident of the positive outcome. Apart from this, the same facility has cleared Australian TGA inspection audit recently, which will enable the company to expand the business further in Australia as well. The company incurred a CapEx of INR 145 crores during the year. The company's plan is to further invest INR 250 crores to INR 350 crores in FY '23 after witnessing sluggish construction activity in H1 FY '22 owing to prolonged monsoon. The pace has picked up in H2 FY '22. For the Gujarat project, the civil construction activity has picked up the momentum, which is expected to operationalize towards the end of current financial year. Expansion for Tarapur brownfield specialty chemical has come in successfully. The scale-up batches have been undertaken since the start of the current month. For Tarapur greenfield API facility, boiler and 0 liquid discharge treatment plants would be operational by this month end, and the company is planning to scale up the production by the end of FY '23. Net debt to equity as of March 31, 2022, stood comfortably at 0.52x. The working capital cycle, however, got elongated as the company strategically increased the raw material inventory owing to high inflationary nature in the raw material and probable disruptions in the supply chain. There is some increase in the finished good inventory as well due to anticipated pickup from the customer in quarter 1 FY '23. As a company policy of rewarding [ shareholders ], the company has paid INR 81 crores in FY '22 in the form of dividend and share buyback. The company remains committed to create the value for the shareholders by enhancing the strategic value proposition through capacity augmentation, cost rationalization, backward integration, strong focus on R&D and optimal capital allocation. With this, we can now begin the question-and-answer session. Thank you.

[Operator Instructions] The first question is from the line of Ankush Mahajan from Axis Securities.

Sir, I just want to understand the CapEx. Last year, our CapEx is INR 145 crores. Can I get the breakup of this CapEx for -- in terms of the therapies? And what is another CapEx that we are looking for next year?

See, the main projects which are going on, one is already -- has been started: the brownfield expansion of a chloro-sulphonation facility at Tarapur. We just commenced with that project in the month of May. Then there are 2 main greenfield projects which are going on. One is going on in Gujarat. That is for the backward integration and intermediate space. So Tarapur greenfield project is focusing on dermatology-related API. So both these projects will [indiscernible] end, but mostly by the end of current financial year. And that is where the majority of the CapEx will be going. And a very small portion, say, INR 40 crores to INR 50 crores of the CapEx will be utilized for general brownfield expense [indiscernible] GMP enhancement and some bit for the maintenance CapEx.

So we can say this year INR 250 crores to INR 350 crore CapEx, it will go for this brownfield expansion and other expenses.

Yes, apart from that -- say, INR 40 crores to INR 50 crores of brownfield and maintenance CapEx, apart from that, the major CapEx is for the same projects which we have highlighted before, that INR 500 crores to INR 600 crores CapEx which we had. So it is going for the same projects, mainly for the greenfield projects: one at Tarapur and one at Gujarat.

Sir, if we see that we already invested INR 145 crores, and we were looking some 5x turnover on CapEx. But this year, this -- were incremental sales are on the lower part. How do you see the scenario next time the -- my second question is related to the gross margins, about the raw material prices. How do you see the increase in raw material prices going onwards? I mean to say when we can expect that things could get stable?

Okay. To answer the first question related to CapEx. See, the brownfield expansions which we are doing, they are definitely giving that 5x asset -- revenues to asset turnover. But for the greenfield one, it is somewhere in the region of 2 to 2.5x. And other question regarding the raw material prices, I would like Harit to answer your question.

Yes. It's very difficult to give any guidance on raw material because due to current...

No, I'm just trying to understand how things are taking shape and what's your view on it?

It's very difficult to give any view. But looks like inflation is at top. And everybody -- all governments are trying to control inflation. So demand may come down overall on commodity cycle -- commodities. And we expect price to come down by another 3 to 4 months, but not at the original level. But it will come down. Yes, we expect price to come down.

The next question is from the line of Rashmi Sancheti from Dolat Capital.

So Adhish, one question again on gross margin front. So with this kind of pressure, are we -- I mean, can we believe that our operating margin can be sustained at around 12%? Or you believe that there is a scope of improvement with the brownfield capacity coming in play, I mean, with the better product mix?

Okay. Are you asking for the first quarter of coming financial year or...

No. So -- yes. So the quarter 4, I think we reported around 12% operating margin. So I'm asking regarding that, that is this kind of margin we'll be able to sustain? Because I think you all mentioned that till another 2 quarters there is a likelihood of seeing high raw material prices pressure. So are we going to sustain this? Or there is a scope of improvement in the overall operating margin?

Understood. For the next 2 quarters...

Yes.

API, the stand-alone margins were -- EBITDA margins were around 13.2% for March quarter. We believe that at overheads level also we can easily improve around 0.5% to 1%. But apart from that, at a gross margin level, definitely the current commissioning of chloro-sulphonation plant, brownfield expansion, that segment is more profitable for us. So the product mix would be favorable in terms of betterment of the gross contribution for the first quarter. Definitely, it will help more in the second quarter because the production has just started. And as far as the price hikes are concerned. So we were doing the analysis. Means, in the March quarter, if we see, we definitely have taken price hikes. About 85% of our products have maximum prices in the March quarter if you compare all the 4 quarters of this year. And even in the March quarter itself, if we compare 3 months, January, February and March, then around -- approximately around 50% of the finished goods were having higher prices in the month of March. So definitely, price hikes will also help us regain some of the gross contribution. So -- but then -- because the situation is so dynamic, it's -- though it will become better, but then it is not that easy to forecast as of now.

Okay. Okay. So I understand that there is still uncertainty regarding that. But whatever growth that we have seen in API segment during this quarter, around 45%, 46%, that is all because of the price hikes? Or there are new products, that is anti -- gliptin products and all have been commercialized or have started supplying?

Okay. The gliptin -- means, we've launched those products, but they are not yet significantly impacting our turnover as of now. But we expect them starting to do that in coming future. However -- what was your other question?

So basically, wanted to understand that all the growth which is coming in the API is mainly because of the price hike only.

Okay. So in the domestic market, we recorded a growth of around 36% to 37% in value terms, out of which 50% of the growth was due to volumes. Whereas, in export, where we recorded a growth of around 50% in the last quarter, around 30% or 32% of the growth is because of the volumes. And rest, 18%, 19%, is because of the [indiscernible].

The next question is from the line of Rahul Jha from Bay Capital.

Hello?

Sir, please proceed with your question.

So in last year's presentation, you had said that you have around 1,500-plus employees. In this year presentation, you are saying we have around 1,000 employees. So around 500 employees less. But your employee expenses are higher for the year. So what is the disconnect there?

I think there might be some mistake. We will -- there might be some mistake in it. We'll get it corrected.

Okay.

We haven't reduced the workforce actually.

Yes. So -- but this year's presentation has around 1,000 employees. So 500 employees less. So I think the...

Yes. There is some typo error in that. We'll get it corrected. Thank you for pointing out.

Okay. Second, on the -- like the capacity. So you have done some -- around INR 150 crores of CapEx, but your install capacity has increased by just about 0.5%, even less than 1%.

So most of the -- this capacity was in -- means, capacity as in the cash outlook was in capital WIP. That is the reason why the capacity enhancement was not seen to that extent. But now in the month of May, we have come up with chloro-sulphonation capacity. And in the last quarter of this financial, we will come up with 2 more capacities. So that is the point when you will see the [ enhancement. ]

The next question is from the line of Ranvir Singh from Sunidhi Securities.

Our question relates to that USFDA inspection we are awaiting on Tarapur facility. So if successful, what kind of scope we can expect from this facility?

So there are a couple of indirect benefits as well other than the fact that a couple of products -- our ANDs are still active. So for those products some commercial [indiscernible] can be started. Definitely, in the beginning, it will be slow. Then it can pick up. But apart from that, there are a lot of indirect benefits in the terms that facility also has a new GMP approval and CEP approvals for a few of the big products which we manufacture and we are pretty strong in. So there is a lot of [ demand ] of those products in European market. But because of this import alert, tracking that market has been a little difficult. So if importer alert is cleared, even for the European market from that facility we can achieve a lot of growth.

Can you highlight the number of products currently we can -- readily we can start supplying for U.S. or Europe, if...

So there are 2 -- yes, for Europe. Okay. For Europe, we have products like -- we have 3 good products like ciprofloxacin, celecoxib and clopidogrel from that facility. There are other products as well like Zolpidem Tartrate, which are doing quite well for us.

So this is for Europe or U.S.? Or...

So same products we'll be doing for U.S. as well.

And earlier when import alert came, that time those are the 2 facilities. And one of the facility was already delisted with USFDA as per your press release and one facility had got import alert. So that's the another facility -- what is the status of that facility? Means, whether we got it again listed with...

Okay. So that facility was never intended to be a USDA facility which got inspected at that point of time. So that was the reason why we delisted that facility. However, that is a very big and important facility for us for rest of the market, which includes Latin America as well. But going forward, we are planning to get a new GMP certification for that facility. But that facility is never intended for the U.S. market. So there are no plans to convert that facility into USFDA. But for Europe, we do have that.

Okay. And for this year, we have a CapEx of INR 145 crores. You mentioned some projects, but I think some of these projects are not complete. So for up to FY '22 that INR 145 crores on what projects actually we have assigned it?

So that went in -- we had done a lot of debottlenecking. That -- so we spent in that. And a couple of greenfield projects. So that money is still lying under capital WIP. And there was one big brownfield expansion for chloro-sulphonation, which was also going on as of 31st March. But that project has now been completed. So it will be put to use in the month of May.

Yes. So just help me understand. You had...

But the major was in the greenfield.

Okay. So one was the intermediate project, which was under realized expense. So is that project complete?

So that particular project, we opted to not go for PLI, but we still have expanded the capacity for that particular product. The reason we did that was because at the time when we applied for PLI, there was a commitment of some -- around INR 70 crores to INR 80 crores for implementing that project. But then due to advancement in the technology, we were able to complete that project at a very, very nominal cost. So that is the reason we had requested government that we will implement the same projects, same capacity at a lower cost. But then they said that," No, you will have to meet the CapEx requirement," which we thought that unnecessary spending money upfront there is no point and then apply for the PLI scheme. So that is the reason why we opted to go for that CapEx without PLI. And we have already -- means, first stage of expansion for that particular product has already been done.

Okay. And so what is the success from that INR 70 crores, INR 80 crore, revenue?

Yes, API will be less than that. Correct.

And other product like this gliptin-related product you have, then some different related that you have. chloro-sulphonation, as you mentioned, gliptin-related product...

That capacity we have, means, implemented and it is already online.

The next question is from the line of Aejas Lakhani from Unifi Capital.

Am I audible?

Yes, sir, you're audible. Please proceed.

Okay. Sir, could you just repeat the amount you spent for the CapEx on the PLI? I couldn't catch that number you mentioned. What was the CapEx?

It was less. I said was it was [ less than ] INR 20 crores.

Sorry, sir? INR 20 crores, is that what you said?

No, no, much less than that. Means, we are not giving out the exact number. But it was much less than that.

Okay. Got it. So sir, my questions are the follows. The first is, could you give the broad gross margin guidance or a range for the APIs for the spec-chem and intermediate and for the formulation for the -- for Aarti Drugs as a company?

So the thing is -- guidance for the long term definitely for APIs we would like to -- right now, we have a composite gross margin for API and specialty chemicals.

Yes, sir. I'm just asking that...

API was around...

No, sir. I'm sorry to interrupt, but I'm just asking that broadly. The API basket, what is the broad gross margins that you have? What is the broad gross margins on formulation and spec-chem and intermediates? The reason I ask this is so that we get a sense of how your gross margins may move in the future.

Yes. So the spec-chem is the maximum. But then, again, since you're asking only for the gross margin, spec-chem will be much higher. And it's almost -- in some cases, it will be as high as [ 50% ] as well or higher in those particular products. As far as APIs are concerned, on an aggregate level, I would say it is in the -- it should be somewhere in mid-30s to late 30s the targeted gross contribution. Whereas, in formulation, it is slightly lower. Vishwa, would you like to answer that?

Yes, sure. So currently, formulation gross margins would be about 25%, between 25% to 28% depending on the quarter. And we do see in the coming quarters the coming of an improvement in that because our gross margins are quite lower on the domestic front and substantially higher on exports. So right now, we have about 38% to 40% export revenues, which we foresee to grow to a larger number and that will improve the overall gross margin and take it closer to early 30s.

Got it, sir. That's helpful. Sir, my next question is that you've done a INR 145 crore CapEx. You mentioned 5x asset turns. How much of that should we expect from a capacity utilization in '23?

I would like to mention something that 4 to 5x asset turn is for the brownfield expansion, not for the entire CapEx.

Yes. You did the INR 145 crores as a brownfield, right?

No, no, no, no. See, in INR 145 crores, a lot of money has gone for the greenfield projects as well, which are still in capital WIP.

Okay. So how much of this could you quantify went for the brownfield and for the greenfield?

So see, very roughly, around half of it must have gone for the Greenfield and half would be for maintenance as well as brownfield. And some bit I think went for the -- I think land parcel which we procured, I believe.

Fair enough. Fair enough. So sir, also the other thing is you mentioned that there is more capacity which is coming on-stream at the end of FY '23. So are you referring to the greenfield CapEx, which is for the intermediates, of which you've already spent INR 70 crores, give or take, and the INR 250 crores which you're going to spend in this year? All of that will come on-stream in FY '23 end?

So yes. So the Tarapur facility will -- seems like it will come on stream, say, a couple of months or 3 months before the Gujarat facility. So the Tarapur facility, we are hoping that will be able to come in the trial production by last quarter of this financial year. However, the Gujarat facility we feel that by the end of this financial year, we should be able to complete the project. So maybe immediate start of the next financial year, we should be able to start the trial production.

Got it. And sir, out of the INR 70 crores that has already been incurred and INR 250 crores to INR 300 crores that you're incurring this year, how much of that block is towards Tarapur and how much is towards Gujarat in terms of Cap?

Coincidently, the allocation is almost equal for both the greenfield projects. Yes, they're both equal.

Got it. And sir, you generated about INR 70 crores of operating cash flow this year, give or take your run rate for the coming year. Based on that, given the higher amount of CapEx that you're incurring along with the dividend payouts you're doing, how much will be incremental debt? And how will you fund this CapEx really? If you could give some more color on that.

Yes. Yes. So the major reason why the operating cash flow is looking less in this financial year, one of the major reason is the fact that we have done historically highest sale in the last quarter about INR [ 697 ] crores. And typically, our data cycle link has been somewhere in 90s. So all of that has went and sat in the receivable portion. So that is the reason why suddenly the increase in receivables is more, and that is why the cash flow from operations is looking less. However, what we are foreseeing is that our debt-to-equity ratio would be some -- will go as high as 0.7 for the upcoming greenfield projects when we implement that partially through [ accrual ] and partially through [indiscernible]. But the targeted debt-to-equity number is around 0.7. And once the project start giving revenues, then it will again come down.

Got it, sir. That's helpful. And sir, you had mentioned that you have a contract with an MNC for the specialty or intermediate products. So is my understanding correct that the recently concluded brownfield expansion that you have done for which you spent about INR 70 crores, INR 75 crores, as you indicated, is also the capacities that are going to be used for this contract?

So a very small portion of that went for debottlenecking or incremental expansion of that product. Whereas, some other portion also went for a big brownfield expansion for another chloro-sulphonation product of ours. So there are 2 products involved where brownfield expansion happened.

Got it. And sir, you've mentioned the guidance -- you mentioned, I think, last call the aspired guidance of EBITDA being around 18%. So do you see that run rate being hit in probably 3Q, 4Q of this year?

So yes, the first -- the problem is that we were hoping that 17%, 18% EBITDA margin should be sustainable. However, the increase in the input cost is so high, almost -- we were doing an analysis of FY '22 versus FY '21. So the rate variance in the raw materials is as high as 25% in terms of the increase in the prices year-on-year basis for the entire year. Because of that, now we are taking hike at the prices -- at the selling end. But then the thing is, for many of the products -- formulation people they have a cap at which they can sell their products in the market. Those caps have increased by 10% or so in the year. But nevertheless, the increase -- the hike in the chemicals and the API has been more than that. So definitely, we will face some hit as far as demand is concerned. However, once the price ease off from this level, then everything should be back at normal. So in short -- so by Q2 or Q3, 18% would be a little -- or too optimistic. But first, we will try to achieve that 16% EBITDA margin by FY '23. And then, from there onwards, with the introduction of this newer product, most intermediates, then probably we can look forward to increase it further.