Aarti Drugs expects margin improvement to continue

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Shares of Mumbai-based Aarti Drugs fell nearly 2% in trade today. On May 3, the company reported a dip in revenue and profit for the January-March quarter although the margins were the best in nine quarters.

The company’s revenue for the quarter was down 16% at ₹621 crore, while the earnings before interest, tax, depreciation, and amortisation (EBITDA) margins, at 13.8%, was the best since October-December 2021-22.

Adhish Patil, CFO of Aarti Drugs shared details on the fourth quarter performance and the way forward with CNBC-TV18.

This is the verbatim transcript of the interview.

Q: Your margins are at around 13% plus this quarter and that’s the best levels seen since Q3FY22, where you did around 14.2%. What resulted in this margin improvement and what are you guiding for?

A: The main reason for the margin improvement was the gross contribution. In the last 12 months the prices of solvents were continuously falling every month. We suffered a lot of inventory losses every quarter end. And it was in the March quarter that as far as quarter-on-quarter is concerned, the selling prices and the prices did not fall that much with respect to the previous December quarter and that is the reason why there was expansion in the gross contribution.

We feel that the gross contribution as far as the API and speciality chemical segment is concerned can improve by 1% more going forward. It is purely because of the falling trend has stopped that is the only reason why the gross contribution has improved.

Q: How are your revenues likely to grow going ahead since you have some backward integrated plans coming on stream?

A: So the salicylic plant which is a dermatology product, it has applications also in flavours and fragrances so, that plant got commissioned in the last quarter in the Q4 of FY24. Right now, we are facing some scale-up issues, but it will be resolved soon in the current quarter. By the end of first half of FY25, I think we should be able to come to the full swing production and the final production capacity of that product will be around 2000 tonne per month. It will be an input substitute product so that will definitely benefit going forward in terms of revenues.

Q: Full swing will be about ₹1,000 crore annually in terms of revenue, right?

A: For the ₹1,000 crore, there is one more project that is coming up, the intermediate project it is a part backward integration project and we have few more products that will be sold outside in terms of special chemicals and the intermediates, that is coming up in Saykha that project is almost on the verge of completion. In the current quarter, by the end of the quarter we will be starting the water trials for the same project and in Q2 the commercial production will start.

Q: API segment was down 20% this year, it was down 9% for the entire fiscal. What is resulting in this pressure do you expect it to ease in FY25? Is it because of the pricing difference, is it because of inventory buildup?

A: The entire FY24 we have seen a 7% volume growth as compared to FY23. The entire volume growth has come from the domestic market. In fact, it was to the tune of around 15 to 17% for the domestic market.

It was the export market which was really bad when it came to the entire year FY24. Almost 10% volume degrowth was observed. We attribute to mainly destocking and the higher inflationary pressures in terms of interest costs also in the foreign countries.

Q: On the other hand, your formulations business has done well. I have a two part question on that. It’s a small part of your business. But who are you supplying to right now? What are you supplying and consequently, you have also received five observations for your Baddi facility which manufactures formulations I think. So take us through both the sections your formulation business, which has seen growth, it’s a small part of your business, what’s leading to the growth, what’s the projection there and the Baddi plant?

A: So the Baddi plant is the formulation plant. It is a new plant, oncology plant, which we just completed in last financial year. So we had filed ANDA through that which triggered the US FDA inspection. So it was a first inspection mainly only the validation batches have been taken so far. The inspection observations nothing was pertain to data integrity. In fact, we spoke with the auditor during the audit and most probably they will be classified as voluntary action initiated.

As of now, the entire formation revenues are around ₹315-325 crore per annum. We hope that in the next three, or four years, we should be able to double the revenues of formulations. And that will be mainly on the count of the oncology products that will come online, maybe after two years. The financial year FY25, we may not have significant revenues from the oncology segment, because it will go in registration process.

Whereas, as of now, means last quarter itself around 60 to 63% of the business came from export business from the formulation. And mainly we are selling to different geographies like Latin America, Sundarbans in Africa also are doing well and some Southeast Asia, Asian countries. Mainly we are selling as our product to the distributors. In very few countries we are also following the model of branded generics model.

Q: What is your overall guidance for the year in terms of revenues? You said margins can improve by about 100 basis points and by when do you reach the overall peak revenue of ₹4,500 crore?

A: ₹4,500 crore might take around 3-3.5 years. For this year, because we are expecting a negative rate variance to the tune of 7%, the composite top-line growth we are expecting around 7 to 10%.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow