Concall AI

Aarti Drugs — Q2 FY25 earnings call

Call held 2 Nov 2024

Management summary

Aarti Drugs reported a challenging Q2 FY25 with a 6% YoY revenue decline and reduced profitability, primarily due to lower realizations and subdued demand in the API segment. While API volumes showed QoQ growth, pricing pressures persisted. The company is optimistic about H2 FY25 and FY26, driven by the ramp-up of new capacities like Specialty Chemicals at Sayakha and Salicylic Acid, despite a downward revision of long-term revenue targets.

Highlights

Standalone revenue for Q2 FY25 stood at INR 543.1 crores, a 6% decline YoY.
EBITDA for Q2 FY25 was INR 68.5 crores, with an EBITDA margin of 11.5%.
PAT for Q2 FY25 was INR 35 crores.
API segment experienced a 7-8% negative rate variance YoY in Q2 FY25, but stabilized with a -0.5% QoQ rate variance.
API segment volumes grew 8% QoQ, remaining flat YoY.
Formulation segment revenue for Q2 FY25 was INR 65.6 crores, with H1 FY25 revenue at INR 136.6 crores.
H1 FY25 capex was INR 90 crores, with a full-year FY25 capex anticipated to be around INR 200 crores.
Long-term revenue guidance revised downwards from INR 4,200-4,500 crores to INR 3,500-4,000 crores by FY27.

Concerns

Lower realization and negative rate variance in API business

Key financials

2 periods

Headline

Standalone Revenue
₹543.1 Cr
YoY -6%
EBITDA
₹68.5 Cr
EBITDA Margin
11.5%
PAT
₹35 Cr

H1

FY25 Capex
₹90 Cr

What they filed

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

₹ Cr · quarterly

Line item	Q2 FY25	Q3 FY25	Q4 FY25	Q1 FY26	Q2 FY26	Q3 FY26	Q4 FY26	Q1 FY27
Revenue	598	557	677	591	653 +9%	602 +8%	720 +6%	703 +19%
Expenses	531	495	583	516	569	547	624	605
EBITDA	67	62	93	74	84 +25%	55 −11%	96 +3%	98 +32%
Margin	11%	11%	14%	13%	13%	9%	13%	14%
Other income	1	12	2	0	0	1	1	-1
Interest	9	9	9	9	8	9	8	9
Depreciation	14	14	15	15	16	18	18	18
Profit before tax	46	51	71	51	60 +30%	29 −43%	70 −1%	69 +35%
Tax rate	24%	27%	12%	-6%	25%	-40%	21%	28%
Net profit	35	37	63	54	45 +29%	41 +11%	55 −13%	50 −7%
EPS	3.84	4.06	6.89	5.91	4.96	4.44	6.05	5.50

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.

Segment breakdown

API Business
66% Revenue Contribution-7.5% YoY Rate Variance-0.5% QoQ Rate Variance8% QoQ Volume Growth78% Utilization (Q2 FY25)
Formulation Segment
₹65.6 Cr Q2 FY25 Revenue₹136.6 Cr H1 FY25 Revenue53% Exports Contribution

Guidance & targets

Capex

Total Capex Capex · FY25 · Medium confidence ~INR 200 crores

We anticipate a total capex of roughly around INR200 crores for the full year.

— Adhish Patil, CFO and COO
CWIP Conversion to Fixed Assets Capex · by December quarter (Q3 FY25) · High confidence ~INR 300 crores

So this mostly should come by this December quarter because our Saykha plant, the big greenfield project will be going online. So once it is done, then it will get transferred to fixed assets.

— Adhish Patil, CFO and COO

Profitability

EBITDA Margin Profitability · long term · High confidence 14.5% to 15.5%

So EBITDA, our efforts will always be to reach a target of around 14.5% to 15.5% because that is what we historically used to manage.

— Adhish Patil, CFO and COO
Specialty Chemicals EBITDA Contribution Profitability · long-term · Medium confidence INR 40 crores

Nevertheless, roughly -- if you talk about potential, around -- it might have a potential of adding around INR40 crores to EBITDA in the long-term level

— Adhish Patil, CFO and COO

Revenue

Long-term Revenue Potential (API + Spec Chem) Revenue · long term (current capacity) · Medium confidence INR 2,750 crores

But I can give you one indication that with current pricing level and our current capacity, it will roughly give now a potential revenue of around INR2,750 crores on a stand-alone business, which will include both API and spec chem.

— Adhish Patil, CFO and COO
Long-term Revenue Potential Revenue · FY27 · Medium confidence INR 3,500 crores to INR 4,000 crores

Previously INR 4,200 crores to INR 4,500 crores → INR 3,500 crores to INR 4,000 crores

So we would like to revise it down because of the current API prices. So what we feel that now I think that the current potential will be anywhere between INR3,500 crores to INR4,000 crores as far as current pricing levels are concerned.

— Adhish Patil, CFO and COO
Sales Growth Revenue · FY25 · Medium confidence flattish

The sales should be flattish because... this FY '25 might look flattish by the end of the entire FY '25 versus FY '24.

— Adhish Patil, CFO and COO
Sales Growth Revenue · FY26 · Medium confidence turnaround story

So FY '26 should be a turnaround story because of our Salicylic Acid plant once is streamlined because of the steaming issue.

— Adhish Patil, CFO and COO

Capacity

Salicylic Acid Production Capacity · by end of current quarter (Q3 FY25) · Medium confidence 300-plus tons per month

From 100 tons per month today

Currently, we are producing roughly around 100 tons per month... we expect to ramp up the production to 300-plus tons per month by the end of the current quarter.

— Adhish Patil, CFO and COO
Salicylic Acid Total Capacity Capacity · throughout FY '25 and FY '26 (phased manner) · High confidence 1,800 metric tons per month

In total, we have capacity of 1,800 metric tons per month, which will ramp up in a phased manner throughout FY '25 and FY '26.

— Adhish Patil, CFO and COO
Anti-diarrheal Production Capacity · in a month's time (Q3 FY25) · High confidence online

Anti-diarrheal will come online in a month's time.

— Adhish Patil, CFO and COO
Metformin Capacity (Short Term) Capacity · very short term · Medium confidence 1,700 to 1,800 tons per month

From 1,350 to 1,400 tons per month today

So right now, we do have a capacity of around 1,350 to 1,400 tons per month in between. So the plan was to scale it up to 1,700 to 1,800 in a very short term.

— Adhish Patil, CFO and COO
Metformin Capacity (Long Term) Capacity · long term · Medium confidence 3,000 tons per month

So once you get that land parcel, frankly speaking, we have visibility of around 3,000 tons per month.

— Adhish Patil, CFO and COO

Market Potential

Salicylic Acid Market Potential Market Potential · long term · Medium confidence INR 275 crores to INR 300 crores

So the sales potential with the reduced prices would be anywhere between INR275 crores to INR300 crores market potential is there for Salicylic Acid.

— Adhish Patil, CFO and COO

Order Book

Formulation Business Order Book Order Book · current · High confidence >$12 million

but we have a very strong order book of around more than $12 million for the formulation business.

— Adhish Patil, CFO and COO

Risks & concerns

Lower realization and negative rate variance in API business
high

API segment experienced a 7-8% YoY negative rate variance in Q2 FY25, impacting revenue and profitability.

Management acknowledged
Deeper market demand in API business
medium

Lacklustre demand in H1 FY25, particularly in export markets, due to overstocking and macro conditions like elections.

Management acknowledged
Teething issues with Salicylic Acid production ramp-up
medium

Current production is around 100 tons/month, facing challenges in ramping up to the target of 300+ tons/month by Q3 FY25.

Management acknowledged
Impact of underutilized new capacities on PBT
medium

INR 5.5 crores impact on PBT in Q2 FY25 due to inability to absorb increased overheads from lower production at new facilities like Salicylic Acid and Derma.

Management acknowledged
US FDA 7 observations from surprise audit
medium

7 observations received during a September audit; response submitted, but no immediate financial impact expected in the first 6 months.

Management acknowledged
Delay in land parcel acquisition for Metformin expansion
low

Governmental reasons have delayed acquiring an adjoining land parcel, which impacts the ability to scale up Metformin capacity quickly.

Management acknowledged

Q&A highlights

3 direct

Negative rate variance in API segment Direct

Y-o-Y basis, we have seen around 7%, 8% negative rate variance for the quarter 2. For the quarter 1, it was a little higher. But now as quarter-on-quarter, the rate variance is hardly 0.5% at a composite level.

Quantifies the pricing pressure impacting revenue and profitability, indicating stabilization QoQ but continued YoY decline.

Asked by Rashmi Shetty

Revised long-term sales guidance Direct

Even in the earlier calls, we have guided for INR4,200 crores to INR4,500 crores of sales in the next 3 years' time... So we would like to revise it down because of the current API prices. So what we feel that now I think that the current potential will be anywhere between INR3,500 crores to INR4,000 crores as far as current pricing levels are concerned.

Reveals a significant downward revision of long-term revenue targets, signaling a more cautious outlook due to persistent API pricing challenges.

Asked by Raaj

US FDA audit status and financial impact Direct

We got 7 observations, but we see we are quite confident about the observation... Now we have already submitted the response within 15 working days... The financial impact for the first 6 months might be a little difficult. However, it will help us at the company level as well to improve our image in the export market, especially the European market.

Provides an update on a critical regulatory event, its potential impact on export markets (Europe first, then US), and the timeline for financial benefits, while acknowledging no immediate financial upside.

Asked by Chirag Dagli

3 min read 6 chapters

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.

This is an AI-generated summary of a publicly available earnings call transcript.

View original transcript