Aarti Drugs — Q1 FY26 earnings call

Call held 21 Jul 2025

Management summary

Aarti Drugs reported a solid Q1 FY26 with total revenues growing 6% YoY to INR591 crores and EBITDA increasing 12% YoY to INR74 crores, driven by improved gross margins of 36.8%. The company's greenfield project at Sayakha has commenced trial production, expected to contribute from Q3 FY26, and the Tarapur salicylic acid plant is ramping up operations despite initial challenges and price dumping from China. USFDA and UK MHRA approvals for formulation facilities position the company for growth in regulated markets, with a target of 15% CAGR volume growth for FY26 and FY27.

Highlights

  • Total revenues grew by 6% year-on-year to INR591 crores.

  • API business grew by 5% on a year-on-year basis.

  • EBITDA increased by 12% year-on-year to INR74 crores and EBITDA margins improved to 12.6%.

  • Gross profit margins improving by 130 basis points year-on-year to 36.8%.

  • Greenfield project at Sayakha Gujarat has started trial production, expected to begin contributing from Q3 FY26.

Concerns

  • Salicylic acid plant output levels still stand below 200 tonnes per month, below the 600 tonnes/month breakeven point.

  • Salicylic acid costs are being expensed out as of today, impacting current EBITDA margins.

  • Negative price variation of around minus 4% to minus 6% expected for the first half of FY26.

Key financials

  1. Revenue ₹591 Cr +6%YoY
  2. API Business Growth — +5%YoY
  3. Gross Profit Margin 36.8%
  4. EBITDA ₹74 Cr +12%YoY
  5. EBITDA Margin 12.6%
  6. Formulation Revenue ₹80 Cr +14%YoY

What they filed

Q1 FY27: revenue up 19.0%, net profit down 7.4% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue598 557 677 591 653 +9%602 +8%720 +6%703 +19%
EBITDA67 62 93 74 84 +25%55 −11%96 +3%98 +32%
Net profit35 37 63 54 45 +29%41 +11%55 −13%50 −7%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Capital allocation

high confidence
  • Capex ₹48.5 Cr this quarter · ₹150 Cr (FY26) planned Brownfield expansion from internal accruals; large greenfield projects via term loan financing from banks.
    • Capacity expansion, backward integration, finished formulation R&D
    • Safety and better GMP equipment ₹10 Cr
    During Q1 FY '26, the company incurred capex of roughly around INR48.5 crores at a consolidated level, mainly towards capacity expansion, backward integration, safety and finished formulation R&D. For FY '26, we expect capex to be in the range of INR150 crores to INR200 crores. ... whenever there is brownfield expansion, we do it from the internal accruals itself. And only for the big, bigger greenfield projects or the newer big projects, relatively big projects, we take term loan financing from banks because our cost of debt for the long term was roughly in the range of 8.3% to 8.5%...
  • Debt Net ₹597 Cr Cost 8.3%
    on a consolidated level, it is slightly below somewhere near about INR597 crores. Of which, around 56% is a long- term debt and 44% is the working capital debt. ... still we are able to manage the debt at this INR597 crores level. So we do feel that if we don't take up new capex or new capacity expansions, this debt level can further come down drastically. ... roughly translates to around 0.42 or 0.43 debt-to-equity ratio. ... cost of debt for the long term was roughly in the range of 8.3% to 8.5%...

Guidance & targets

EBITDA Margin

  • EBITDA Margin with better utilization EBITDA Margin · Q1 FY26 (potential) · High confidence above 14.5%
    with the current gross margins, what we achieved in this quarter, had we had better utilization of the capacity, then probably our EBITDA margins would have been better, I mean, almost above 14.5% even with these gross margins.

    — Adhish Patil

  • EBITDA Margin EBITDA Margin · FY27 · High confidence 15% to 16%
    That for the entire year, it should happen only in FY '27. ... But the main the annual numbers, if you look at then probably, I would suggest FY '27 would be the right year.

    — Adhish Patil

  • EBITDA Margin EBITDA Margin · Ongoing · High confidence 15%
    EBITDA, yes, we're targeting 15% with the optimum utilization of all these greenfield capex what we're putting in.

    — Adhish Patil

Volume Growth

  • CAGR Volume Growth Volume Growth · FY26 & FY27 · High confidence 15%
    we had roughly a CAGR growth of 15%, roughly 15% year-on-year growth for this coming 2 years. It might so happen that we can get 10% here and 20% in next year, that we cannot predict much, but roughly 15% CAGR growth in volumes we had targeted for the FY '27.

    — Adhish Patil

Value Growth

  • Value Growth Value Growth · FY27 · High confidence 15%
    Based on the prevailing prices, we expect 15% on each year.

    — Adhish Patil

  • Value Add Growth Value Growth · H2 FY26 · High confidence 10% or more
    current value add growth of 5% to 6% is what we will have in the first half, and we will try to increase it to around 10% or more in the second half of FY '26.

    — Adhish Patil

Price Variation

  • Negative Price Variation Price Variation · H1 FY26 · High confidence minus 4% to minus 6%
    And for this year, the first half, year-on-year, there can be a negative price variation of around minus 4% to minus 6%, for the first half only.

    — Adhish Patil

Capex

  • Capex Spend Capex · FY26 · High confidence INR150 crores to INR200 crores
    For FY '26, we expect capex to be in the range of INR150 crores to INR200 crores.

    — Adhish Patil

Capex Allocation

  • Capex for Growth Capex Allocation · Ongoing · Medium confidence 80% to 85%
    10% to 15%, rest all 80%, 85% would be focused for growth and not for maintenance in this.

    — Adhish Patil

Formulation Business Revenue

  • Formulation Business Revenue Formulation Business Revenue · 3 years horizon (by FY28) · High confidence INR550 crores to INR600 crores
    in 3 years horizon, we do feel that formulation business will almost double from here or it might reach to around INR550 crores to INR600 crores once the oncology also commercializes.

    — Adhish Patil

Salicylic Acid Capacity

  • Salicylic Acid Output Salicylic Acid Capacity · Very soon · High confidence 800 tonnes per month
    output levels still stand below 200 tonnes per month, and we expect to ramp up to 800 tonnes per month very soon and further expand installed capacity to approximately 1,600 metric tonnes per month.

    — Adhish Patil

  • Salicylic Acid Installed Capacity Salicylic Acid Capacity · Long term · Medium confidence 1,600 metric tonnes per month
    further expand installed capacity to approximately 1,600 metric tonnes per month.

    — Adhish Patil

Sayakha Facility Contribution

  • Financial Contribution from Sayakha Sayakha Facility Contribution · Q3 FY26 onwards · High confidence Contributing to financials
    This plant has been set up mainly for backward integration into anti-diabetic products and their intermediates and is expected to largely serve internal requirements. ... expected to begin contributing to the company's financials from the third quarter of FY '26 onwards.

    — Adhish Patil

US Market Entry

  • Commercial Supplies from Tarapur API facility (US) US Market Entry · After 9 to 12 months · Medium confidence Start commercial supplies
    probably by, I can say safely, after 9 to 12 months, probably we can start with the commercial supplies, if everything goes smooth.

    — Adhish Patil

Europe Market Share

  • Europe Market Share Europe Market Share · Next 2 years · Medium confidence 15% to 20%

    From 12% today

    in FY '24, our Europe was around 14%, and FY '25 was around 12%. So that can significantly go up so we can safely assume that after 9 to 12 months, the registered sales from our Tarapur API facility, which has been recently approved by USFDA should commence commercial sales. ... definitely, we'll try to because it can go to 20% because there are multiple things which are trying. ... definitely 15% to 20% is possible.

    — Adhish Patil

Oncology R&D

  • Oncology Products R&D Completion Oncology R&D · by December 2026 · High confidence 10 oncology products
    What we expect is that by December of next year, that is December 2026, by that time, most of the R&D would be done for at least 10 oncology products, and we've been filing the dossier for approvals.

    — Adhish Patil

Oncology Sales

  • Commercial Sales of Oncology Products Oncology Sales · 6-7 months after Dec 2026 · Medium confidence Start commercial sales
    And from there, it might take around 6, 7 months for the approval, and then the commercial sales of the oncology product will start.

    — Adhish Patil

Tax Rate

  • Effective Tax Rate Tax Rate · FY27 onwards · High confidence 25%
    So next financial year, that is FY '27 onwards, it will be at 25% only.

    — Adhish Patil

  • Tax Rebate Tax Rate · FY26 · Medium confidence around INR30 crores
    probably we might around INR30 crores of tax rebate we might get. So that much provision, we might do this for the entire year.

    — Adhish Patil

Product Mix

  • Spec Chem and Intermediate Percentage Product Mix · 3 to 4 years horizon · Medium confidence 15%

    From 8% today

    So what Spec Chem and Intermediate percentage might go up from that 8% to, let's say, 15% in 3 to 4 years horizon.

    — Adhish Patil

What to watch in Q2 FY26

Salicylic Acid Plant Capacity Utilization

Very soon / Next 2 quarters
Current Below 200 tonnes per month
Target 800 tonnes per month

Why it matters

Reaching breakeven and higher utilization is crucial for improving overall EBITDA margins and reducing current losses from this plant.

output levels still stand below 200 tonnes per month, and we expect to ramp up to 800 tonnes per month very soon

Risks & concerns

  • Salicylic Acid Price Dumping by China

    medium

    China has reduced salicylic acid prices by 6-7% from Jan-Jul, creating an entry barrier for Indian manufacturers; company is pursuing anti-dumping duties.

    Management acknowledged

  • Initial Startup Issues at Tarapur Salicylic Acid Plant

    low

    The plant faced initial startup issues, impacting cost reduction efficiencies and smooth production, with costs currently being expensed.

    Management addressed

  • Negative Price Variation in H1 FY26

    low

    A negative price variation of 4-6% is expected for the first half of FY26, though it is expected to normalize in H2.

    Management acknowledged

Q&A highlights

7 direct
Gross Margin vs. EBITDA Margin Discrepancy Direct
with the current gross margins, what we achieved in this quarter, had we had better utilization of the capacity, then probably our EBITDA margins would have been better, I mean, almost above 14.5% even with these gross margins.

Explains current margin performance and highlights the potential for EBITDA margin expansion with improved capacity utilization.

Asked by Dhwanil Desai

Salicylic Acid Plant Breakeven and Profitability Direct
if we reach at around 800 tonnes per month kind of capacity, we can still break even, even with the current pricing. ... when you go to till 1,500, 1,600 tonnes per month, we will be even better.

Clarifies the current underperformance of the salicylic acid plant and outlines the volume targets required for breakeven and future profitability.

Asked by Dhwanil Desai

US Market Entry Timeline for Tarapur API Facility Direct
probably by, I can say safely, after 9 to 12 months, probably we can start with the commercial supplies, if everything goes smooth.

Provides a specific timeline for the commencement of commercial sales in the significant US market following recent USFDA approval.

Asked by Dhwanil Desai

FY26/FY27 Volume and Value Growth Guidance Direct
we had roughly a CAGR growth of 15%, roughly 15% year-on-year growth for this coming 2 years. ... this year, the first half, year-on-year, there can be a negative price variation of around minus 4% to minus 6%, for the first half only. And from the second half onwards, negative price variation will go away.

Sets clear expectations for top-line growth, distinguishing between volume and value, and addressing near-term pricing pressures.

Asked by AM Lodha

Formulation Business Long-Term Revenue Target Direct
in 3 years horizon, we do feel that formulation business will almost double from here or it might reach to around INR550 crores to INR600 crores once the oncology also commercializes.

Outlines a significant long-term growth driver for the formulation segment and its expected revenue contribution and timeline.

Asked by Majid Ahamed

Capex Allocation for Growth vs. Maintenance Direct
10% to 15%, rest all 80%, 85% would be focused for growth and not for maintenance in this.

Clarifies that the majority of the planned capital expenditure is directed towards growth initiatives, indicating strategic investment for future expansion.

Asked by Rehan Saiyyed

EBITDA Margin Target Timeline Direct
That for the entire year, it should happen only in FY '27. ... But the main the annual numbers, if you look at then probably, I would suggest FY '27 would be the right year.

Provides a realistic timeline for achieving the targeted 15-16% EBITDA margin, managing investor expectations.

Asked by Rashmi Shetty

3 min read 7 chapters

Detailed narrative

Q1 FY26 Financial Performance Overview

Aarti Drugs reported a robust Q1 FY26, with total revenues growing 6% year-on-year to INR591 crores. The API business contributed significantly, growing 5% year-on-year. Gross profit margins saw a healthy improvement of 130 basis points, reaching 36.8%, primarily due to input cost normalization. This translated into a 12% year-on-year increase in EBITDA to INR74 crores, with EBITDA margins improving to 12.6%.

Capacity Expansion & Backward Integration

The company's greenfield project at Sayakha, Gujarat, focused on backward integration for anti-diabetic products and their intermediates, has commenced trial production. This facility is expected to contribute to financials from Q3 FY26, aiming to improve profit margins and reduce input cost volatility. Additionally, the Tarapur greenfield site, producing salicylic acid, is ramping up operations, targeting 800 tonnes per month soon and eventually 1,600 tonnes per month, despite current output being below 200 tonnes/month.

Regulated Market Expansion & USFDA Approvals

Aarti Drugs achieved significant milestones with USFDA approval for its oncology facility and UK MHRA approval for its oral solid dosage (OSD) facility. These approvals are crucial for driving growth in regulated markets, with commercial supplies from the USFDA-approved Tarapur API facility expected to commence within 9-12 months. The company is also actively developing and registering new oncology dossiers globally, with 10 oncology products targeted for R&D completion by December 2026.

Formulation Business Growth & Product Mix Shift

The formulation business grew 14% year-on-year to INR80 crores in Q1 FY26, with 57% of this revenue from exports. Management projects this segment to almost double, reaching INR550-600 crores by FY28, driven by oncology and other OSD registrations. The overall product mix is expected to evolve, with Spec Chem and Intermediates potentially increasing their share from 8% to 15% within 3-4 years, while API contribution stabilizes around 70-75%.

Capital Allocation & Debt Management

Capex for Q1 FY26 stood at INR48.5 crores, with a full-year guidance of INR150-200 crores. Approximately 80-85% of this capex is allocated towards growth initiatives, including R&D for new formulations and brownfield expansions. Despite significant capex and shareholder payouts (INR80-85 crores annually), consolidated net debt remains controlled at INR597 crores, translating to a healthy debt-to-equity ratio of 0.42-0.43, well within the target range of 0.4-0.7.

Salicylic Acid Business Challenges & Strategy

The salicylic acid business faces challenges from Chinese dumping, which has led to a 6-7% price reduction from January to July, making it difficult to achieve profitability. The company is currently expensing costs from this plant, impacting current EBITDA. However, management is pursuing anti-dumping duties and believes that at higher utilization levels (1,500-1,600 tonnes/month), the plant will become profitable, with the diversified product basket helping absorb current losses.

Outlook on Margins and Growth

Management anticipates further improvement in EBITDA margins, targeting 15-16% by FY27, driven by better capacity utilization, normalized API pricing, and higher-value export opportunities. For FY26 and FY27, the company projects a 15% CAGR volume growth. While H1 FY26 is expected to see a negative price variation of 4-6%, this is forecasted to normalize in H2, leading to 10-15% value growth in the second half of FY26 and for FY27.

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