Aarti Drugs’ Q1 profit before tax rose 35%, but almost all of the growth came from price. Realizations rose 16–17% year-on-year while volumes grew just 3.5%, helped by raw-material shortages linked to the West Asia conflict.
Management says prices have already started easing. The question for the next few quarters is whether the capacity the company has spent ₹600 cr building can take over from price. Our notes from the presentation and the concall are below, but before that:
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₹600 cr capex done, RoCE at 11.5%. Aarti Drugs’ real test starts now
Q1 FY27 in numbers (consolidated)
- The PAT decline is a tax effect. Q1 FY26 included a ₹15 cr tax refund. Excluding it, PAT grew about 29%.
- EBITDA was reduced by a one-time item. It absorbed a ₹2 cr write-off of old capital work-in-progress. Without it, the margin is about 14.1%.
- Quarter-on-quarter, the business was flat. Revenue was down 2% and EBITDA was unchanged, so part of the price benefit had already shown up in Q4.
The growth was mostly price, and price is turning
- Overall, volumes grew 3.5% while realizations rose 16–17%.
- Metformin, the company’s main anti-diabetic API, is priced 15–20% above pre-war levels. Prices peaked in March–April and have eased slightly since.
- Management was direct about this: once the war eases and raw-material costs fall, selling prices will come down too.
- Volumes were held back because drug makers buying the APIs cut purchases when prices spiked. Management expects volume to recover once their inventories run down.
The longer view explains why this price rise matters so much. Over FY24–FY26, Aarti’s prices fell 18%, 13% and 3%, roughly 31% in total, even as volumes grew 7–11% a year. As a result:
- Revenue barely moved, from ₹2,489 cr in FY22 to ₹2,565 cr in FY26.
- RoCE fell from 20.5% to 11.5%.
Where the revenue came from
- Revenue mix: API was 72.5% of revenue, formulations 12.3%, specialty chemicals 11.7% and intermediates 3.5%.
- Specialty chemicals were the standout. Sales were about ₹82 cr, up roughly 149%, almost entirely from the new Sayakha plant.
- Formulations grew only 8%, to ₹81.6 cr, with 74% from exports.
- Domestic outgrew exports (standalone). Domestic sales grew 25% and exports 12%. Exports were 32% of standalone revenue, against about 38% for FY26.
Sayakha: the structural piece
The Sayakha plant makes methylamines, which are key inputs for metformin.
- Utilization is ramping. It reached about 65% in Q1, up from 30% in Q3 FY26 and 40% in Q4.
- Output: about 3,500 tonnes in the quarter. Management said this specialty chemicals run-rate should hold for the next three quarters.
- Captive use is still low. In the June quarter, 60–70% of these intermediates were still bought from outside. Management expects 80–90% to be made in-house by the December quarter.
- Expected benefit: about 1 percentage point of gross margin at peak. Because the plant replaces purchases, most of this shows up in margins rather than revenue.
Salicylic acid: still a drag
- The Tarapur salicylic acid plant produced only 67 tonnes in the whole quarter.
- After Aarti launched this capacity, Chinese producers cut prices sharply. The anti-dumping duty the company was counting on has been delayed by about a year.
- Plan B is a new 350–400 TPM (tonnes per month) plant for salicylic acid derivatives (methyl salicylate and similar products), which are now more profitable. Trial batches have produced 5–10 tonnes.
- The stated goal is breakeven at the plant, not profit.
Regulated markets: the long-term
USFDA API plant (E-22): approved after a 10-year wait. It makes 4–5 products, all currently sold to Europe. US supply hasn’t started, but samples have been sent to customers. A larger USFDA plant is planned on the adjacent plot, with more than double the capacity.
Formulations: an expansion at Baddi should nearly double tablet and capsule capacity. The company has invested ₹200 cr over two years in oncology, which has USFDA and UK approvals.
What management guided
- Volume growth: 10–15% a year over the next two years. Management said 10% is achievable even if salicylic acid doesn’t recover.
- EBITDA margin: “almost there” on 14%, and 15% “should be very easy” once the new plants’ utilization improves.
- The caveat: asked directly, management agreed the current 14% could ease in the short term as prices fall.
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Ekansh Mittal
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