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Aarti Drugs — Q3 FY25 earnings call

Call held 30 Jan 2025

Management summary

Aarti Drugs reported a slight revenue decline in Q3 FY25, primarily due to reduced market prices and weaker demand in certain segments. However, gross profit improved, and the company achieved a significant milestone with US FDA approval for its Tarapur API plant, opening new high-margin market opportunities. Management outlined strategic initiatives including green energy adoption, greenfield project commissioning, and capacity expansions, targeting double-digit revenue growth and improved EBITDA margins in the coming years despite short-term challenges.

Highlights

Revenue for Q3 FY25 stood at INR568 crores, a 6% decline compared to INR607 crores in Q3 FY24.
Gross profit increased by 7% to INR207 crores in Q3 FY25, up from INR202 crores in the prior year.
The company received US FDA approval for its API manufacturing facility at Tarapur, enabling exports of products like Ciprofloxacin HCL and Zolpidem Tartrate to the US market.
The US FDA approved plant has a potential to generate INR70-80 crores per annum with 30%+ EBITDA margins.
Aarti Drugs entered an agreement to acquire a 26.25% equity stake in a solar power plant SPV, expected to save INR3.6 crores annually for its Gujarat plant by H1 FY26.
The Sayakha greenfield project for Specialty Chemicals is set to commence trial production in February 2025 (Q4 FY25), with operating leverage expected from Q1 FY26.
The company targets an EBITDA margin of 13-14% for FY26 and aims for 15% EBITDA margins in the next 2 years.
Total capex for FY25 is anticipated to be around INR200 crores, mainly for capacity expansion, backward integration, and new product launches.

Concerns

Quality issues and rollback of new chlorosulfonation line

Key financials

01 Revenue ₹568 Cr -6%YoY
02 Gross Profit ₹207 Cr +7%YoY

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

Formulation
₹48.6 Cr Revenue47% Export Contribution
Antidiabetic Segment (Standalone)
12% Revenue Contribution

Guidance & targets

Capacity

US FDA Plant Revenue Potential Capacity · per annum · High confidence INR70-80 crores

Now if we go to the full potential of the plant, we can reach to INR70 crores to INR80 crores per annum.

— Adhish Patil, COO & CFO
Tarapur Greenfield Project Production Ramp-up Capacity · by end of March '25 · High confidence 500+ tons per month

There had been certain teething issues in Tarapur greenfield project, which are sorted now, and we expect to ramp up the production to 500-plus tons per month by end of March '25.

— Adhish Patil, COO & CFO
Total Capacity Ramp-up Capacity · by end of FY26 · High confidence 1,600 metric tons per month

In total, we will have a sequential ramp-up of capacity of 1,600 metric tons per month by end of FY '26.

— Adhish Patil, COO & CFO
Formulation Capacity Addition Capacity · revenues from Q1 FY26 · High confidence 30% additional capacities

So we recently completed a brownfield expansion in the Formulation segment, which has added about 30% additional capacities, for which revenues will start kicking in from Q1.

— Vishwa Savla, Managing Director, Pinnacle Life Science Private Limited
Chlorosulfonation Line Capacity Capacity · currently operational · High confidence 100 tons per month

Previously 300-400 tons per month → 100 tons per month

So that -- it was some 300 to 400 tons per month. So it has been rolled back to 100 tons per month. And now it is operational at 100 tons per month as of now, but we will be again...

— Adhish Patil, COO & CFO
Chlorosulfonation Line Capacity Increase Capacity · 3-4 months · Medium confidence original planned levels (300-400 tons)

And we are taking steps to increase that capacity to the original planned levels with the older process as well. That might take some time, means 3, 4 months to come up with that capacity.

— Adhish Patil, COO & CFO

Margin

US FDA Plant EBITDA Margin Margin · long-term · High confidence 30%+

So we can at least expect 30-plus EBITDA margins coming from this facility.

— Adhish Patil, COO & CFO
EBITDA Margin Margin · FY26 · High confidence 13-14%

For FY '26, we are aiming for EBITDA margins between 13% and 14%, which highlights our commitment to maintaining financial health and enhancing operational efficiency.

— Adhish Patil, COO & CFO
EBITDA Margin Margin · in 2 years' time · Medium confidence 15%

if the situation what is there now, if it remains like that for next 2 to 3 years, we should definitely start inching towards 15% EBITDA margins, frankly speaking.

— Adhish Patil, COO & CFO

Operations

Solar Plant Commencement Operations · H1 FY26 · High confidence H1 FY26

This solar plant will give us approximately 8.9 million renewable units per annum, and it is expected to commence the operation by end of H1 FY '26.

— Adhish Patil, COO & CFO
Sayakha Greenfield Project Trial Production Operations · Q4 FY25 · High confidence February 2025

Now coming back to API segment, the greenfield project at Sayakha, Gujarat for Specialty Chemicals, which is also related to the backward integration, will commence trial production in this quarter, most probably in the month of February itself.

— Adhish Patil, COO & CFO
Greenfield Products (Sayakha) Sales Results Operations · by Q1 FY26 · High confidence start seeing results

So, you can greenfield products will start this quarter itself actually. So let's say, by Q1, you can start seeing the results of those sales in the financials.

— Adhish Patil, COO & CFO

Savings

Solar Plant Annual Saving Savings · full year · High confidence INR3.6 crores

This can result to a full year annual saving of around INR3.6 crores for our Gujarat plant.

— Adhish Patil, COO & CFO

Capex

Total Capex Capex · full year FY25 · High confidence around INR200 crores

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

— Adhish Patil, COO & CFO

Revenue

Long-term Revenue Growth Revenue · coming years · Medium confidence strong double-digit growth

We are optimistic that our ability to achieve strong double-digit growth in revenues in the coming years.

— Adhish Patil, COO & CFO
Consolidated Revenue Revenue · in 3 years' time · Medium confidence roughly around INR4,000 crores

So the revenue guidance, what we had given, obviously, we revised it down in last quarter because of the fallen prices to say, roughly around INR4,000 crores of revenue on a consol basis is still achievable in 3 years' time.

— Adhish Patil, COO & CFO
Value Growth Revenue · next year (FY26) · High confidence 15%

Okay. So essentially, then we are looking at, let's say, 15%, 20% volume growth and 2%, 3% negative rate variance, then you're looking at 15% value growth over the next year.

— Adhish Patil, COO & CFO

Volume

Volume Growth Volume · next year (FY26) · High confidence 15% to 20%

Yes. So volume growth, we will definitely try for 15% to 20%, no doubt about that.

— Adhish Patil, COO & CFO

Pricing

Negative Rate Variance (Price Decline) Pricing · entire yearly basis FY26 · Medium confidence 2% to 3%

But so let's say, 6% and for half year, so probably 3% -- 2% to 3% on entire yearly basis, there might be a negative rate variance for FY '26.

— Adhish Patil, COO & CFO

Growth

Formulation Segment Growth Growth · next coming quarter · High confidence flattish growth

Yes. So in the very short term in the next coming quarter, we are expecting a flattish growth.

— Vishwa Savla, Managing Director, Pinnacle Life Science Private Limited
Formulation Segment Growth Growth · next financial year · Medium confidence good growth, especially in the export segment

But over the next for the next financial year, we have pressed up our capacities. So we recently completed a brownfield expansion in the Formulation segment, which has added about 30% additional capacities, for which revenues will start kicking in from Q1.

— Vishwa Savla, Managing Director, Pinnacle Life Science Private Limited

Product Launch

New Oncology Products Product Launch · soon · High confidence 5 products

So we have -- in the Oncology segment, we have 5 products where we are either filed or will be filing very soon in the US as well as Europe.

— Vishwa Savla, Managing Director, Pinnacle Life Science Private Limited
New Antidiabetic Products Product Launch · next 1.5 years · High confidence 6 or 7 products

We have about 6 or 7 products in that category that we will be launching over the next 1.5 years' time.

— Vishwa Savla, Managing Director, Pinnacle Life Science Private Limited

Risks & concerns

Quality issues and rollback of new chlorosulfonation line
high

Newer chlorosulfonation line had quality issues with raw materials, leading to a rollback to the old process and reduced capacity from 300-400 tons to 100 tons per month.

Management acknowledged
API pricing pressures and raw material volatility
medium

API pricing pressures driven by fluctuating raw materials, heightened competition and regulatory demands in global markets.

Management acknowledged
Weaker demand in Formulation and Antibiotics API segments
medium

Revenue decline mainly due to reduced market prices and weaker demand in Formulation segment and Antibiotics API segment.

Management acknowledged
Negative price variance in Antibiotic segment
medium

Mainly observed in the antibiotic segment, specifically ofloxacin, where the price decline was more than other products.

Management acknowledged
Teething issues in Tarapur greenfield project
low

Certain teething issues in Tarapur greenfield project, which are sorted now, and production is expected to ramp up.

Management acknowledged

Q&A highlights

3 direct

US FDA approval impact on revenue and margins Direct

So our current US FDA plant has two main production lines... if we go to the full potential of the plant, we can reach to INR70 crores to INR80 crores per annum... we can at least expect 30-plus EBITDA margins coming from this facility.

This question explored the financial upside of a major regulatory approval, providing specific revenue and margin potential for a high-value segment.

Asked by Ankit Gupta

Discrepancy between historical and current EBITDA margins despite similar gross margins Direct

Yes. It's an interesting question and nice observation actually. So yes, what you say is correct. We had last year, since the beginning of the year itself, we start this current year FY '25, we started with the greenfield project of salicylic acid. And frankly speaking, it caused quite a bit of drag as far as profitability is concerned.

The analyst challenged management on operational efficiency and profitability, leading to an explanation of the drag from new facilities and plans for process optimization.

Asked by Dhwanil Desai

Operational issues and rollback of the chlorosulfonation line Direct

So we were planning to have that 300, 400 tons per month capacity with a different continuous process. However, what we have seen is that in that -- because of that new process, the quality of that particular raw material is causing lower rates in the derivatives. So because of that, the acceptability in the market of that product may not be high with that -- the newer process. So that is the reason why we have taken a call to roll back that process to the old one...

This question revealed significant operational challenges with a new production line, including quality issues and a subsequent rollback, impacting planned capacity and margins.

Asked by Rashmi Shetty

3 min read 6 chapters

Detailed narrative

US FDA Approval and Market Expansion

Aarti Drugs announced the successful US FDA approval for its API manufacturing facility at plot number E22, Tarapur, Maharashtra. This approval enables the company to export API products such as Ciprofloxacin HCL, Zolpidem Tartrate, and Celecoxib to the US market. Management estimates this plant has a potential to generate INR70-80 crores in annual revenue with EBITDA margins exceeding 30%, significantly higher than current company averages. While initial sales to the US market are expected to flow in FY27 due to gestation periods, European markets are anticipated to open faster.

Green Energy and ESG Initiatives

The company is advancing its commitment to green energy by acquiring a 26.25% equity stake in a solar power plant Special Purpose Vehicle (SPV). This initiative aims to provide approximately 8.9 million renewable units per annum, leading to an estimated annual saving of INR3.6 crores for its Gujarat plant by H1 FY26. This project is also expected to reduce carbon dioxide emissions by around 1,000 tons. Furthermore, Aarti Drugs achieved an EcoVadis assessment score of 69, placing it in the 89th percentile globally and securing a silver medal for its overall ESG performance.

Q3 FY25 Financial Performance and Margin Outlook

For Q3 FY25, Aarti Drugs reported a revenue of INR568 crores, a 6% decline from INR607 crores in Q3 FY24, primarily due to reduced market prices and weaker demand in the Formulation and Antibiotics API segments. Despite this, gross profit increased by 7% to INR207 crores. The Formulation segment contributed INR48.6 crores to revenue, with 47% from exports. Management is optimistic about achieving double-digit revenue growth in the coming years and targets an EBITDA margin of 13-14% for FY26, with a long-term goal of 15% EBITDA margins within two years, driven by backward integration and capacity utilization.

Greenfield Projects and Capacity Expansion

The greenfield project at Sayakha, Gujarat, focused on Specialty Chemicals and backward integration, is slated to begin trial production in February 2025 (Q4 FY25), with operating leverage expected from the subsequent quarter (Q1 FY26). The Tarapur greenfield project is ramping up production to over 500 tons per month by March 2025, aiming for a total capacity of 1,600 metric tons per month by the end of FY26. The company incurred INR136 crores in capex during 9M FY25 and anticipates a total capex of around INR200 crores for the full FY25, funded through internal accruals and term loans.

Formulation Segment Growth and Product Pipeline

The Formulation segment is expected to see flattish growth in the immediate next quarter but strong growth in the next financial year, particularly in exports. A brownfield expansion in the Formulation segment has added 30% additional capacities, with revenues from these additions expected to kick in from Q1 FY26. The company plans to launch 5 oncology products in the US and Europe soon, and 6-7 new antidiabetic products (including DPP-4 inhibitors and SGLT2s) over the next 1.5 years, broadening its market reach and product diversity.

Operational Challenges and Chlorosulfonation Line Adjustment

Management disclosed that a newer chlorosulfonation line, initially planned for 300-400 tons per month with a continuous process, faced quality issues with raw materials, leading to lower derivative rates and market unacceptability. Consequently, the company rolled back to the old batch process, with current operational capacity at 100 tons per month. All losses from the quality issues have been curtailed, and steps are being taken to increase capacity back to the original planned levels using the older, reliable process within 3-4 months.

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

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