Detailed Narrative
Q2 FY25 Performance and API Segment Headwinds
Aarti Drugs reported a standalone revenue of INR 543.1 crores in Q2 FY25, marking a 6% decline year-on-year from INR 577.5 crores. Profitability also saw a drop, with EBITDA at INR 68.5 crores (11.5% margin) and PAT at INR 35 crores. The primary driver for this decline was a 7-8% negative rate variance in the API segment on a YoY basis, although the QoQ rate variance stabilized at a marginal -0.5%. Despite flat YoY volumes, the API segment experienced an 8% volume growth QoQ, indicating some sequential recovery.
Greenfield Projects and Capacity Expansion Progress
The greenfield Specialty Chemicals project at Sayakha, Gujarat, is on track to commence operations in Q3 FY25, with trials expected to begin by the end of November. This project is anticipated to contribute approximately INR 40 crores to EBITDA in the long term. The Salicylic Acid plant, which started production at around 100 tons per month, is facing initial 'teething issues' but aims to ramp up to over 300 tons per month by the end of the current quarter, eventually reaching a total capacity of 1,800 metric tons per month by FY26.
Revised Long-Term Revenue and Margin Outlook
Management has revised its long-term revenue guidance downwards, now projecting INR 3,500-4,000 crores by FY27, a reduction from the previous target of INR 4,200-4,500 crores, primarily due to prevailing API pricing levels. Despite this, the company maintains its long-term EBITDA margin target of 14.5-15.5%. For FY25, sales are expected to be flattish compared to FY24, with FY26 anticipated as a 'turnaround story' driven by the streamlining of new capacities.
Metformin and Derma Facility Updates
Metformin sales are currently strong at 1,000-1,200 tons per month, against a capacity of 1,350-1,400 tons per month. Plans are in place to scale up to 1,700-1,800 tons per month in the short term, with a long-term potential of 3,000 tons per month, contingent on acquiring an adjoining land parcel. The Derma facility, which represents about INR 200 crores of capitalized capex, is currently operating suboptimally but is expected to turn profitable once production is streamlined by November.
US FDA Audit and Formulation Business Performance
A surprise US FDA audit in September resulted in 7 observations, for which Aarti Drugs has submitted a confident response within 15 working days. While no significant financial impact is expected in the immediate 6 months, a positive outcome would enhance the company's image, particularly in the European export market. The formulation business reported INR 65.6 crores in Q2 FY25 revenue and holds a strong order book of over $12 million, with two major regulatory audits (US FDA for oncology and UK MHRA for OSD) successfully completed in H1 FY25.
Capex and Underutilization Impact
The company incurred approximately INR 90 crores in capex during H1 FY25, with a full-year FY25 capex forecast of around INR 200 crores. The outstanding Capital Work-in-Progress (CWIP) of approximately INR 300 crores is expected to be commissioned by Q3 FY25, primarily from the Sayakha greenfield project. However, the underutilization of new capacities, including Salicylic Acid and Derma, led to a PBT impact of INR 5.5 crores in Q2 FY25 due to unabsorbed overheads.