Hello Sir,

Hope you are doing well.

Remember, in late 2020, Pharma API companies were the darling of the market. Most are down 40-50% from their highs and in downtrend. Their high margins of FY 20-21 didn't sustain. Some of them will soon be available at reasonable valuations on long term mean margins and that will be a good time to invest.

Aarti Drugs is a major player in the pharma API segment and has been a very lucky stock for us. We recommended Aarti Drugs to our Premium Members twice (2014 and 2018) in the past and closed with 200% gains the first time and 400% gains the second time..

Like all the other stocks, this one too is going through a phase of correction and is down 60% from the peak. We decided to look at the company again.

Below, we have shared our notes (unedited) from the Q4 FY 22 con-call transcript of Aarti Drugs. Hope you find them useful for your own investments or to add the stock to your watchlist:


Before that, in this market correction, if you are interested in investing in a Pharmaceutical company which has made an extremely complex and poisonous material from scratch (with a worldwide market potential of Rs 27,000 crore +) and is the only Indian maker, you can read about it here - LINK


Aarti Drugs - Q4 FY 22 concall transcript notes

  • The financial performance on a year-on-year basis is not exactly comparable especially in terms of realizations and margins because of elevated API margins, driven by sudden supply disruptions due to COVID-19 related lockdown during the financial year 2021.
  • Performance details -
    • Standalone business contributed approximately 90% to the consolidated revenue. Approximately, 61% of the revenue came from the domestic market, while the remaining 39% came from the export market for Q4 FY'22 for a standalone business
    • Domestic revenue grew approximately by 37% while exports grew by around 50% year-on-year for Q4 FY'22
    • API volume grew considerably by around 23%, led by healthy growth in chronic therapies especially in Anti-Diabetic segment
    • Within the API segment, the Antibiotic Therapeutic category contributed around 43%, Anti-Diabetic around 17%, Anti-Protozoal around 14%, Anti-Inflammatory around 12%, Anti-fungal around 9%, and the rest contributed around 4% to the total API sales of Q4 FY'22
    • Growth in chronic therapy is expected to outpace the growth in acute therapies, mainly driven by recently commissioned anti-diabetic capacity
    • Formulations segment performance for the quarter, the revenue stood at Rs.69 crores, growth of approximately 11% year-on-year. Formulations segment contributed around 10% to the consolidated revenue for the quarter, about 39% of the formulations revenue came from exports during the quarter
    • Specialty Chemicals and Intermediates Segment: For the quarter, revenue from operations  stood at Rs 56 crores which grew 17% on a year-on-year basis. For the FY'22, the revenue from operations stood at Rs.210.8 crores, a growth of 28% year-on-year basis
    • Niche presence in chloro sulfonation products led to this healthy growth. The growth trajectory for this business is expected to continue further, driven by recently commissioned Brownfield expansion at Tarapur facility
    • EBITDA margins were affected due to continuous upward momentum in the raw material prices and power and fuel cost, especially the coal cost.
    • Multiple headwinds such as ongoing Russia-Ukraine conflict, continuous inflation in the input cost, especially solvents which are related to the crude price, supply chain disruptions, recent China lockdowns due to spike in COVID-19 cases, etc., had an impact on margins and profitability in Q4 as well as for the entire FY'22
    • The Company is focusing to increase the revenue contribution from chronic therapies, especially from anti-diabetic products, anti-fungal products which would help the Company to regain the sustainable long-term EBITDA margin level
    • By Q2 or Q3, 18% would be too optimistic but first we will try to achieve that 16% EBITDA margin by Q2, Q3 and then from there onwards, with the introduction of this newer more intermediates, then probably we can look forward to increase it further
    • At a gross margin level, the current commissioning of chloro sulfonation plant, Brownfield expansion, that segment is more profitable for us. So, the product mix would be favorable in terms of the betterment of the gross contribution for the first quarter. Definitely, it will help more in the second quarter, because the production has just started
  • Formulations - We are undergoing our CAPEX expansion for a new oncology plant which will be commissioned in the coming three months as well as we are also increasing our full product portfolio with a good pipeline of products and expanding our market reach in terms of more international markets. The projection is to try and double our revenues in the coming three years
  • US FDA inspection - The Company has successfully completed the third-party mock audit recently for Tarapur facility. The final response will be submitted to the US FDA towards the end of H1 FY'23, most probably by the beginning of August month and the US FDA inspection is expected to be done by the end of this financial year
  • The same facility has cleared Australian TGA inspection audit recently, which will enable the Company to expand the business further in Australia as well
  • Apart from that there are a lot of indirect benefits in the terms that this facility also has EU GMP approval and CEP approvals for a few of the big products which we manufacture and we are pretty strong in. So, there are a lot of those products in European market but because of this import alert cracking that market has been little difficult. So, if import alert is cleared, even for the European market from that facility, we can achieve a lot of growth
  • Europe - For Europe, we have three good products like the Ciprofloxacin, Celecoxib, Clopidogrel from that facility. There are other products as well like Zolpidem Tartrate, which are doing quite well for us.
  • Gross margins segment wise - Spec chem is the maximum, in some cases it will be as high as 50% as well in those particular products. As far as the APIs are concerned, on an aggregate level, I would say it should be somewhere in mid-30s to late 30s targeted gross contribution whereas in formulations gross margins would be between 25% and 28%. In formulations, gross margins are quite lower on the domestic front and substantially higher on export
  • CAPEX - The Company incurred a CAPEX of Rs 145 crores during the year. The Company is planning to further invest Rs 250 crores to Rs 350 crores in FY'23
  • The Brownfield expansion of a Chloro sulfonation facility at Tarapur, we just commercialized that project in the month of May
  • There are two main Greenfield projects which are going on. One is going on in Gujarat, that is for the backward integration and intermediates space. Tarapur Greenfield project is focusing on dermatology-related API. So, both these projects will be done mostly by the end of current financial year
  • Debt - Net debt-to-equity as of March 31st 2022 stood comfortably at 0.52x
  • Can Aarti Drugs achieved revenue target of 4,500 crore by FY 26 - That is fairly doable

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Disclaimer: This is not a recommendation to buy/sell Aarti Drugs. These notes are as announced by the companies on exchanges and only for the purpose of information and education.


Best Regards,

Ekansh Mittal
Research Analyst
Web: https://www.katalystwealth.com/


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