Hello Sir,

Hope you are doing well.

Remember, in late 2020, Pharma API companies were the darling of the market. Most are down 50-60% from their highs and in downtrend. Their high margins of FY 20-21 didn't sustain.

It seems like earnings may have bottomed out and some of them seem to be available at reasonable valuations from a 3-4 years investment perspective.

Aarti Drugs is a major player in the pharma API segment and has been a very lucky stock for us.

We have recommended Aarti Drugs to our Alpha and Alpha + 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 65% from the peak. We decided to look at the company again.

Below, we have shared our notes from the Q3 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:


Before that, some time back we released a Special situation opportunity on Triveni Engineering buy back for our Alpha + members

After a long time there was 100% acceptance ratio in small-shareholders category which resulted in gains of 25% in 4 months for the investors in tough market conditions.

To understand how buy-back opportunities work, calculations, thought process, you can read the report (free access) by Clicking HERE


Aarti Drugs - Notes from Q3 FY 23 con-call

General Points

  • The stand-alone business contributed ~92% to the consolidated revenue for the quarter
  • Around 61% of the revenue came from domestic market and 39% from the export market for Q3 FY '23 for a stand-alone business
  • Domestic revenue grew ~8%, while exports grew only by 2% year-on-year for Q3 FY '23


  • The company achieved API top line growth of 9% during the quarter
  • Within the API business, the antibiotic therapeutic category contributed ~45%, antidiabetic ~16%, antiprotozoal around 16% and anti-inflammatory around 12%, antifungal around 8%, and the rest contributed approximately 3% to the total API sales of Q3 FY '23
  • The API prices corrected for the overall industry which was mainly on the account of fall in raw material prices. The company undertook some price cuts to maintain the market share
  • All these high-cost openings, raw material and finished goods inventory is used in the December quarter's sale. Owing to API price correction, the company has taken inventory loss of approximately Rs 6 crore
  • The low-cost raw material inventory will be utilized from Q4 FY '23 onwards, which is expected to improve the gross margins going forward, provided prices don't fall further down
  • API prices compared to the pre-COVID levels? - we are also almost coming down to pre COVID level for most of the APIs
  • As far as the demand is concerned, the company is expecting volume off-take going forward, which has remained under pressure due to higher API prices and unavailability of the US dollar, in a lot of export markets, especially the emerging ones


  • Revenue from the formulations segment stood at Rs 49.9 crores for the quarter. The formulation segment's share of the total revenue for the quarter was 8%
  • The formulation segment's core focus area continued to remain exports. During the quarter, exports contributed 39% of the total formulation revenue

Specialty chemicals and Intermediates

  • Revenue growth in specialty chemicals, intermediate and others for nine months in FY '23 stood at 15% YOY basis
  • Spec-chem will be around 4% to 5% (of standalone sales, spec chem + intermediate should be around 8-9%), and that we are expecting to double right now
  • For Specialty Chemicals, the company has recently received commitments from the customers for the brownfield expansion products, as well as for a campaign-based product
  • With this committed line of orders, the company can easily double the Specialty Chemicals revenue in next 12 months
  • Please note that this revenue growth will come only from the existing brownfield facilities, and the greenfield capex for Specialty Chemicals will drive further growth in the upcoming years
  • Going forward, we can take this spec chem and intermediates to around 20%-25% of the stand-alone revenue after two years-three years
  • The margin profile of the product is also slightly higher than our conventional API products


  • The pace of construction activity for the Gujarat capex was ramped up and the construction is expected to get over within scheduled timeline
  • Tarapur greenfield capex, the construction is expected to get over by the end of Q1 FY '24 which will be mainly used for dermatology-related APIs
  • As far as Tarapur brownfield specialty chemicals capex is concerned, the company has taken scale up batches during H1 FY '23. The equipment required to fully scale up this plant are expected to arrive by April 2023
  • The total capex during nine-month FY '23 stood at INR 115 crores and is expected to be in the range of Rs 200 crore to Rs 250 crore for the entire FY '23

Balance sheet

  • The company remains frugal and leverage stands comfortably at 0.53x as of December 31st, 2022
  • Right now, our working capital debt would be around 360 crores and the long term will be around 240 crores. So definitely, the working capital debt will also go down if you bring down the inventory


  • Our revenue potential can go up to around Rs 4,500 crore, brownfield and greenfield all put together
  • The current business, once we achieve higher utilization, that can fetch us around, say, 15%-16% EBITDA margin, plus because of the higher exposure to spec chem and export formulation, our target should be to reach towards 18%



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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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