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 Q1 FY 23 con-call transcript of Aarti Drugs. Hope you find them useful for your own investments or to add the stock to your watch list:


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Aarti Drugs - Q1 FY 23 concall transcript notes

  • Standalone business contributed ~ 86% to the consolidated revenue; ~ 64% of the standalone sales came from the domestic market while the remaining 36% came from the exports market for Q1 FY 23
  • Domestic sales grew ~ 3% while exports grew by around 23% year-on-year
  • There is no volume growth in Q1, only the exports has some small around 2% to 3% kind of a volume growth but mainly all the growth is because of the higher selling rates what we charged in Q1


  • API business -
    • Within the API segment the antibiotic therapeutic category contributed 46%, anti-diabetic 13%, anti-protozoal 19%, anti-inflammatory 10%, anti-fungal 9%, and the rest contributed around 4% to total API sales
    • Demand in API business witnessed lower than anticipated traction as the off-take by the customers remained lower on account of inventory re-calibration at the customers’ level due to high API prices
    • The company has undertaken multiple price hikes since the beginning of FY 23 and as a result the company witnessed the highest ever realizations for most of its products in Q1 FY 23 when compared to previous 4 quarters
    • In the wake of series of sharp price hikes across almost all our products the demand was subdued for the quarter for the same reason


  • Specialty Chemicals and Intermediates -
    • For the quarter, revenue from operations stood at Rs 56.8 Crores which grew 21% on year-on-year basis
    • Specialty chemical has a better gross margin, EBITDA margin
    • Tarapur Brownfield - roughly around 90 to 100 Crores revenue potential is what we expect from that facility at a full scale level


  • Formulations -
    • For the quarter revenue for formulation stood at Rs 85 Crores as against Rs 86.5 Crores year-on-year basis. Formulation segment contributed approximately 14% to the consolidated revenue for the quarter. Approximately 50% of the revenue came from exports during the quarter. Exports continue to be the key focus area for formulations segment
    • Basically last year same quarter sales were higher because of more of domestic tender execution especially some of the COVID related products were also in higher sales at that time however it has been our constant focus to shift from the domestic to more value-added sales and due to that although there is not a growth in revenues but there is a substantial growth in profitability
    • EBITDA margins year-on-year has grown from 6.7% to now 15% EBITDA in this particular quarter and the PBT margins have also gone up from around 5.8% to around 14%
    • Earlier we used to do a lot of toll manufacturing sales which has much lower profitability
    • Our sales expectations for the remaining quarters are more or less in line with our current quarter sales, but at the same time we have a CAPEX project going on which is in the final stages and due to be completed in the next one quarter and which will start adding sales from the next financial year
    • Once it starts in the next in about one-and-a-half to two years is to reach revenues of about 200 to 250 Crores from the new facility


  • Margin Impact -
    • Margin and profitability continued to remain affected as sustained inflationary pressure impacted raw material cost, crude, power and coal cost coupled with sharp depreciation in the currency
    • There is an impact of approximately 4 Crores due to FOREX movements and Rs 8 Crores due to only rate increase in power and coal cost
    • The company expects normalized margin levels, once the input price volatility stabilizes which is expected from second half of FY 23 onwards
    • We are already witnessing softening in some of the raw materials and some other input costs although they are still much higher than long-term averages
    • What we have realized is that the kind of product profile we have and the kind of efficiencies we have, our competitors and the level of backward integration, 15% to 16% EBITDA margin is fairly easy means it is not something very optimistic. So definitely this scenario is transitory in nature and it would not sustain for long


  • Raw material procurement -
    • Right now still approximately our imports and indigenous purchases like 50:50 and as I said that around 15% to 18% of the raw materials are available only in China rest can be procured from rest of the world


  • CAPEX -
    • The Company incurred a capex of Rs 35 Crores during the quarter and planning to invest around 250 to 350 Crores for the entire FY 23
    • The civil construction activity for Gujarat capacity remains well on track; however, heavy monsoons have slowed down the pace temporarily
    • Tarapur Specialty Chemicals Brownfield capacity for which we had taken scale-up batches in the last quarter has now been ramped up and the optimization process is ongoing at the plant level. The company expects a meaningful contribution from this facility from second half of FY 23 onwards
    • For Tarapur Greenfield API facility boiler and zero liquid discharge treatment plants have been operationalized from May 2022 and commissioning of the main plant is expected by the end of FY 23


  • Debt -
    • As of today the total debt figure on a consolidated basis is around 541 Crores out of which around 187 Crores is long term and rest is the short-term for working capital
    • what we were expecting at the peak debt-to-equity can go around 0.7 or something 0.7, 0.75, and 0.78 and then again from there it should start coming down with each quarter because of the additional profit


  • Competition from China -
    • The stiffest competition from China was in the decade of 2001 to 2010 after that from 2011 to 2020 what we had seen that we had become very competitive against China means I am talking even before pre-COVID levels and then towards the end of 2020 decade the Chinese government had started implementing very strictly all the pollution norms and everything, so their opex has also gone up


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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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