Aarti Drugs Limited (524348) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Q1 FY '27 Earnings Conference Call of Aarti Drugs Limited. [Operator Instructions] Before we begin, a brief disclaimer. This conference call contains 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 the guarantees of future performance and involve risks and uncertainties that are difficult to predict. I now hand the conference over to Mr. Adhish Patil, COO and CFO from Aarti Drugs Limited. Thank you, and over to you, Mr. Patil.

Good morning, everyone, and thank you for joining us today for Aarti Drugs Q1 FY '27 earnings discussion. Joining me today are Mr. Harshit Savla, Joint Managing Director; Mr. Harit Shah, Whole-Time Director; Mr. Vishwa Savla, Managing Director of Pinnacle Life Science Private Limited; along with our investor relations advisors, SGA. We hope you have had the opportunity to go through our financial results and investor presentation for the quarter ended 30th June 2026, which have been uploaded with the stock exchanges and are also available on our website. Before discussing our quarterly performance, let me begin by providing some perspective on the operating environment during the quarter. The first quarter of FY '27 continued to be influenced by a dynamic global landscape. Geopolitical development, particularly the ongoing conflict in West Asia remained an important factor affecting international trade, logistics and supply chains. The industry also continued to witness elevated freight cost on certain routes, longer procurement cycles in a few regions and increased volatility in raw material prices. At the same time, these developments created a favorable pricing environment across several API products. As availability tightened in certain markets and customers prioritized supply reliability, API prices witnessed an upward movement across the industry. This translated into significantly better realizations for us during the quarter. While such disruptions can often create uncertainty, they also reinforce the importance of being a dependable and integrated manufacturing partner. Customers today are increasingly looking beyond just pricing. They are placing greater emphasis on supply security, manufacturing consistency and long-term partnerships. These are areas where Aarti Drugs has built strong capabilities over several years, and we believe this positions us well to capitalize on evolving market opportunities. What is particularly encouraging is that despite this challenging external environment, our operations remained completely stable throughout the quarter. We did not experience any production disruptions, material shortages or supply-related interruptions. All our manufacturing facilities continue to operate efficiently, enabling us to meet customer commitments across both domestic and international markets without any significant delays. This operational resilience is a direct outcome of the investments we have made over the years in strengthening our manufacturing footprint, expanding our backward integration capabilities and maintaining disciplined inventory and procurement practices. Moving to our business performance. I'm pleased to share that we delivered a strong start to the financial year. Our performance during the quarter was driven by a healthy combination of improved API realizations and volume growth across key products. Demand remained healthy across API and Spec Chem portfolio, supported by strong consumption across key therapeutic categories and continued traction in both domestic and international markets. Our exports business continued to perform well as customers increasingly sought reliable and compliant suppliers capable of ensuring uninterrupted deliveries. We also witnessed steady demand across our domestic formulations business. Equally important, our focus on cost optimization and manufacturing efficiencies continued to yield positive results, and we witnessed improvement in EBITDA margins in Q1 FY '27. This margin expansion came despite continued pressure from higher raw material prices and elevated freight cost, highlighting the resilience of our operating models. Our regulatory track record also continues to strenghten our competetive position. Our manufacturing facilities continue to hold approvals from leading global regulatory authorities, including the USFDA and U.K. regulatory agencies. These approvals not only validate our quality systems and manufacturing standards but also enable us to strengthen our presence in regulated markets over the long term. Another area where we continue to make steady progress is our manufacturing expansion strategy. During Q1 FY '27, our Sayakha facility continued its planned ramp-up and operated at nearly 65% utilization. This facility remains as an important strategic investment for us. Beyond adding manufacturing capacity, Sayakha strengthens our backward integration capabilities, enhances supply chain reliability and provides us with greater control over key intermediates, especially for the antidiabetic segment. Once resolved and as utilization levels continue to improve, we expect the facility to contribute further towards operational efficiency and long-term margin improvement and. Alongside Sayakha, we are continuing to invest in expanding our formulation business. Our brownfield expansion at the Baddi facility in the adjacent land parcel is progressing as planned. Once completed, this project is expected to nearly double our oral solid dosage manufacturing capacity. This expansion is aligned with our long-term strategy of strengthening our formulations business, increasing manufacturing flexibility and creating additional capacity to support future growth opportunities across both regulated domestic and export markets. Overall, our capital expenditure philosophy remains disciplined and growth oriented. Every investment that we undertake is guided by clear focus of enhancing competitiveness, improving operational efficiency, supporting backward integration and creating long-term shareholder value. We remain confident that these investments will provide a strong foundation for sustainable growth for the coming years. Coming to the consolidated financial highlights. Q1 FY '27 revenue stood at INR 703.6 crores compared to INR 590.8 crores in Q1 FY '26, reflecting a growth of 19% year-on-year. EBITDA stood at INR 96.9 crores versus INR 74.7 crores in Q1 FY '26, a growth of 30% year-on-year. EBITDA margin stood at 13.8%, an expansion of 120 basis points year-on-year. PBT stood at INR 69.2 crores as against INR 51.1 crores, a growth of 35% year-on-year. PBT margin stood at 9.9% an expansion of 120 basis points year-on-year. PAT stood at INR 50.1 crores as compared to INR 54 crores in Q1 FY '26. Q1 FY '26 PAT includes a principal tax refund of INR 15 crores. Excluding this, the growth impact would be 29% year-on-year. With respect to the standalone business highlights in Q1 FY '27, revenue stood at INR 627.6 crores versus INR 521.3 crores in Q1 FY '26, a growth of 20% year-on-year. Standalone business contributed around 89% to the consolidated revenue. 68% of the standalone revenue came from the domestic market and 32% from the exports market. Domestic revenue grew 25% year-on-year, and export revenue grew 12% year-on-year. Within the API business, the antibiotic Therapeutic category contributed 35%, antiprotozoal around 18.5%, anti-inflammatory 11.9%, antidiabetic 18.2%, antifungal 10.2%, and the rest contributed around 6.1% to the total API sales. Coming to Formulation segment highlights. Revenue from Formulations stood at INR 81.6 crore compared to INR 75.8 crore in Q1 FY '26, up 8% year-on-year. Exports contributed around 74% to this revenue. With that, I did now like to open the floor for questions.

[Operator Instructions] First question comes from the line of Avnish Burman from Vaikarya Funds.

Adhish, I just wanted to understand how the realizations of metformin have moved, if you can just indicate something and how on a quarter-on-quarter on a Y-o-Y basis, they have moved?

Harit bhai, would you like to answer this question?

Thanks. Yes. What do you mean, sir? Demand or the price for it?

Pricing movement of metformin.

Yes, pricing movement. Yes, it has gone up by around 15%, 20% compared to before the war, 20% approximately.

Avnish, year-on-year, the growth has been quite stark in metformin. Quite high. But the major hike came during the start of the war around March and April. And even now, as Harit bhai pointed out, it is still higher than before, but it is slightly lower than what the price was in the March -- month of March and April.

Okay. Understood. And Adhish, if you can just help understand, you are backward integrating in the product, and it will obviously give you some leverage as compared to the competition. How do you plan to use this in your, let's say, ambition to take market share? Because as I understand, it's a fairly mature molecule, the global growth rate for this product would not be very, very high. But you have aspirations to grow much faster than the industry growth. So how do you -- I mean, once the backward integration is streamlined, what are the plans?

Yes. So see, as of now, our metformin capacity already is around 1400 tonnes per month. So -- and we are already utilizing it anywhere between mid-80s, we can say. So -- and we are expecting that the demand for metformin will grow quite significantly in coming future due to more and more approvals which we are getting. Already we have EDQM approval for the product and in future we are planning for USFDA as well for the metformin. So our current plan is to scale up metformin from 1,400 tonnes per month to roughly 2,200 tonnes per month out of which around 500 tonnes-550 tonnes per month would be a USFDA capacity and the rest of the capacity would be for the other market, a non-U.S.FDA market. So going forward we will require lot of support from our backward integration, which we have already done in Sayakha. And that is why we feel that the Sayakha facility will continue to be a very important area from where we want to streamline our production as soon as possible and support the growth of metformin. So metformin is already growing globally, and it's a huge market and there is a lot of potential for us to get more market share as well.

Okay. By when are you expecting to supply to U.S. market, as in when could we expect the approval to come?

Yes. So it will take -- so the U.S. DMF we have already filed. So that is not a challenge. But the thing is the facility because we are constructing a fresh roughly around 500-plus tonnes per month capacity in the same land parcel in the same location. So it will take roughly around 10 to 12 months for that capacity to come up. And immediately as it comes up, we will file for the USFDA inspection with the help of some customers.

Okay. So basically, you can't even supply -- you can't supply the API till the facility gets approval. So the API supplies also at the earliest can happen only after 12 months?

Correct. It will take at least 12 months. Currently, we have -- we do have European approval for the same facility.

And how much are you supplying to European market?

Actually, it is not much. It is not much. Even the European market is untapped, though we are trying with the smaller players right now. The key challenge what we faced so far is that many of the European clients of metformin are also operating in the U.S. market. So they need both European as well as USFDA approval. And that is the main reason why we are going in for USFDA approval because that will open up not only our -- not only the U.S. market, but also the huge European markets for us as well.

Next question comes from the line of Parth Sodha with Trinetra Asset Managers.

I wanted to know, like, do you believe the API industry has entered a sustained recovery phase? Or is it still too early to call?

The thing is the broad scenario, we just thought that a month back that everything streamlined and everything will come back to normal. But again, things are quite volatile as of now to say anything. The thing is the antibiotic, certain Therapeutic categories, certain products, the demand of those products behave as this when the prices are lower. So for us, frankly speaking, even if prices are lower, but if they are stable, then we can definitely make handsome margins. Competing with China was never an issue for our product line at least. Obviously, you always face pressure here and there a little bit from certain players for certain products at a given point of time because of inventories as well. They also act up sometimes. But overall, what we feel is the API business the kind of product profile we are operating in, the business is quite stable. And as stable in the sense we are not that worried about Chinese competition at least.

Okay. Got it. And my second question is like with the INR 600 crores CapEx now completed, so what is the expected asset turnover and, let's say, revenue contribution over next 2 to 3 years?

Yes. So the asset turn from the Phase 1 greenfield facilities is roughly around 1.5x, roughly. About Sayakha, around 50% of the capacities are being utilized for captive consumption for our antidiabetic portfolio. So that will add to the gross margins more than the revenue itself. Having said that the Phase 2 CapEx, brownfield CapEx wjich will come in bothe these sites, Sayakha as well as G61 in Tarapur. Their asset turn will be much higher around 3, 4x because most of the common facilities, common like ETPs and et cetera, all those things are already set up and running. So all that OpEx and CapEx has already been done. So the newer Phase 2 CapEx will give higher return, but the one which we just did that will get us around 1.5x.

Next question comes from the line of Rashmi Shetty with Dolat Capital.

Adhish, you mentioned that metformin,you're constructing new lines at the Sayakha plant, right? For 500 to 550 tonnes in the U.S.

No, no. Also the metformin expansion is being done in the same Sarigam facility where we already have around 1,400 tonnes per month. So that we'll scaling up to around 1,700 tonnes per month, 1,700 to 1,800 tonnes per-- 1,700 tonnes per month, and additional 500 tonnes per month we'll putting up a USFDA block in the same location.

The same location. Okay. Then what is the update on E22 plant currently, which is already USFDA approved. How many products are we supplying currently and to which markets?

Currently, at our USFDA plant, we have 2 main production lines and 1 small product line, means the high-value products. So currently, we have around sedative, antibiotic, anti-inflammatory products which are already doing very well, and we feel that within a year's time, our capacity will fall short because the products are quite big in terms of tonnage. So we are also planning a fresh, you can say, quasi greenfield project of USFDA in the adjacent plot itself. So it will have same API number. So that will give us capacity enhacement of roughly -- it will roughly, slightly more than double our existing capacities. We will be putting up 3 more production lines to the tune of, let's say, around 10-odd tonne per month, each line, which will be a multipurpose line and from which we can cater to more products. So as of now, we have around 4, 4-5 products which are active from the current USFDA plant. But not all of them are going to U.S. market. Some of them are also going to the European market.

So majorly, all these 4 to 5 products currently we are supplying to the EU markets only, right?

Correct. Yes. So the U.S. market hasn't started yet, but the business development has already started the sample approval. We have already sent samples to the customers. So as soon as they get the approval for vendor addition, then we can start the supplies.

At your Sayakha plant. This Specialty Chemical products in your greenfield plant, Specialty Chemical products are also manufactured, right?

In Sayakha, Yes.

So your growth for the Specialty Chemical was a 149%. The sales were around INR 82 crores. So is it because of this new plant which has come up and we have supplied newer products? Basically, how should we look at it for the full year? Is it going to contribute significantly this year?

Yes. So this first quarter's performance will definitely repeat for the next 3 quarters. And in fact, we will be trying to improve it further. And the answer to your question was, yes, it is because of that Sayakha facility which we have just put up.

How many tonnes per month we have reached for this Spec Chem business in Sayakha plant?

Sayakha, for the methylamine plant, we have already reached around 65% utilization. There are a few other products where the utilization is lower. There we are trying to improve, but methylamine, the gases that we already reached around 64%, 65% in the quarter of June.

So that comes to how many tonnes per month?