Ladies and gentlemen, good day and welcome to Aarti Drugs Limited Q2 FY2023 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the views, opinions and expectation of the company as on date of this call. These statements are not the guarantees of future performance and involve risk and uncertainties that are difficult to predict. As a reminder, all participant lines will be in listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Adhish Patil, CFO at Aarti Drugs Limited. Thank you and over to you, sir. Thank you very much. Good afternoon, everyone. On behalf of Aarti Drugs Limited, I extend a very warm welcome to everyone joining us today to discuss our financial results for the quarter ended September 30, 2022. On this call we are joined by Mr. Harshit M Savla, Joint Managing Director, Mr. Harit P Shah, Whole Time Director of Aarti Drugs and Mr. Vishwa H Savla, Managing Director of Pinnacle Life Science Private Limited and HKA, our investor relations advisors. I hope everyone had an opportunity to go through the financial results, press release and investor presentation which have been uploaded on the stock exchanges and on our company's website. In the quarter gone by, the pace of civil construction activity for the Gujarat CapEx has picked up considerably towards the end of Q2 FY2023, which remained affected at the beginning due to monsoon season. The company is well on track to make this facility operational by the end of Q1 of FY2024. We are resolving a few scale-up issues of Tarapur brownfield capacity installed in this financial year and we expect this facility to start contributing to the top line from H2 FY2023 onwards. Apart from this, Tarapur API greenfield capacity is also expected to be completed by the end of FY2023. The total CapEx during H1 FY2023 stood at INR 77 crores and is expected to be in the range of INR 200 crores to INR 300 crores for the entire FY2023. Coming to CapEx for formulation segment. The expansion at Baddi plant is nearing completion. We are building an oral oncology manufacturing facility. The total planned CapEx including product development expenses is budgeted at INR 55 crores, out of which around INR 40 crores is done. We expect plant to commence commercial operations in March 2023. At full capacity, the plant can generate revenue of INR 200 crores. Products manufactured in this site will be majorly new age oncology drugs with patent expiry in coming few years. The business model for the unit will be a mix of contract manufacturing and own portfolio. Coming to our performance during the quarter. The company achieved a healthy top line growth in spite of geopolitical uncertainties, adverse currency movements across the globe, macroeconomic volatility and sustained inflationary pressure on some operating costs such as power and fuel expenses. This growth was led predominantly by higher realizations in API and specialty chemical segment. During Q2 FY2023, the company witnessed the highest ever realization in most of the API and specialty chemical products, along with softening of some input costs, namely power and fuel cost. We expect further moderation in the input cost going forward, which can further aid the operating margins. The company's operating costs were marginally up during the quarter due to increased power and fuel cost and one-time arrears paid to the employees and labor contractors. Finance costs also inched up higher due to higher interest rates and increased working capital requirements due to higher inventory. With respect to our performance across our segments for the quarter, API segment, the largest segment of the company in terms of revenue contribution, grew 17% year-over-year. As stated earlier, the growth was mainly driven by an increase in selling price with an 11% volume growth in exports market and marginal volume growth in domestic market. We anticipate a healthy growth for this segment along with a sustainable increase in profitability on the back of operating leverage, ongoing CapEx, backward integration and falling raw material prices. Revenue from the formulation segment stood at INR 82.5 crores for the quarter, up 9% year-over-year. The formulation segment share of the total revenue for the quarter was around 12%. The formulation segment's core focus area continued to remain exports. During the quarter, exports contributed around 44% of the total revenue. Now coming to specialty chemicals, intermediates and others. This segment continues to remain the fastest-growing segment of the company. The growth in this segment is mainly driven by capacity augmentation along with presence in niche product category of chlorosulfonation and few other contract manufacturing products. We expect the growth to remain in upward trajectory over the next few quarters for this segment. Coming to overall standalone performance for the quarter. Standalone revenues for Q2 FY2023 stood at INR 624.9 crores as against INR 511.6 crores, showing a growth of 22% on year-over-year basis. The standalone business contributed around 88% to the consolidated revenue for the quarter. Approximately 62% of the revenues came from domestic market and approximately 38% from the export market for Q2 FY2023 for the standalone business. Domestic revenue grew approximately by 19%, while exports grew by around 28% year-on-year basis for Q2 FY2023. Within the API segment, the antibiotic therapeutic category contributed around 44%, antidiabetic around 17%, antiprotozoal around 16%, anti-inflammatory around 10%, antifungal around 8%, and the rest contributed around 5% to total API sales for Q2 FY2023. Going ahead, we remain confident of continuing our growth trajectory driven by capacity expansion through a combination of brownfield and greenfield capacity in API and formulation segments and sustained momentum in our specialty chemical segment. The profitability and return ratios are also expected to improve in tandem owing to operating leverage and backward integration. The company will continue to explore various opportunities in terms of new therapy addition and geographic expansion. With this, we can now begin the question and answer session. Thank you. Thank you very much, sir. We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Rashmi Sancheti from Dolat Capital. Please go ahead. Yeah, thank you for the opportunity. Sorry to interrupt. If you can take the phone off speaker, please. There's a lot of disturbance coming from your end. Hello, am I audible now? Yes, ma'am. You can please proceed. Yeah. My first question is that, you know, this higher realization in the API and the specialty chemical segment, and then we are also talking about moderation in the KSM. We are still seeing the quarter-on-quarter drop in the gross margins. Any specific reason behind that? Any kind of Forex loss or any other reason, you know, for such a drop? Actually, for few of the cases, the market has been very volatile from January till date. The thing is, based on this macro situations, we had piled up inventories also. In some cases, we had purchased at a very high rate. If you see the ongoing negotiations on the raw material and selling prices for few products, we can easily see, you know, 3% to 4% better margins. Then when it comes to taking the inventory loss on the accounting part, it is coming down. That is the main reason why still we are not able to show it in the reports. Okay. There is no Forex loss element, right? Forex loss notionally is around INR 2 crore. Not much. Not much. Okay. We are in last quarter, you know, we said that, you know, from the second quarter onwards, we will be seeing improvement in the operating margin from the second quarter. I think it was more or less similar to the first quarter only. Our first half EBITDA margin is around 10.8% now. In the second half, you know, how do you see this operating margin and gross margin going forward? For the full year, you know, if you can give any direction or any guidance on it. Okay. First, the September quarter versus June quarter. In the API segments, the EBITDA margin improved from 10% to 11.2%. Though on consolidated level, as you correctly pointed out, it has remained same. The formulation segment had performed much better in the June quarter, as compared to September quarter. That is why on the consolidated level, the EBITDA margin still came the same. However, the improvement in the standalone EBITDA margin was also attributed to more efficiency in the manufacturing expenses rather than the gross contribution. So the manufacturing expense, anyways, we feel we might improve a bit further too, but the main area for us is to improve the gross contribution, and we think it will improve with the stability in the price movements. If the volatility goes away, the margins should improve considerably. Going forward, we at least expect, you know, around a couple of percent improvement going forward. It will keep improving if the scenario becomes stable. Once all the inventory losses goes away, then the margin should improve. By the end of Q4, we should try to hit the EBITDA margins of course of 15%. Okay. Got it. That is helpful. On your formulation business, you know, if I see that, in this quarter also we have done only 9% growth, despite we have done majority of the exports in the formulation business. Still, you know, it is not contributing big to the EBITDA. Any comments on that? Yeah. Vishwa, can you please answer this question? In last quarter we had a much better result. Some of our, you know, high value, high margin exports, we were not able to execute in the current quarter, so due to which, the margins were low. However, we would be able to execute those orders in the coming two quarters. On a year-on-year basis, we do expect, the margins to recover and, EBITDA margins to improve from here with good, higher margin orders. Okay. My last question is on metformin. If you could update on, you know, how the price is moving for the metformin in rest of the markets as well as in the domestic market, whether the prices are going up or it is coming down. If you can update on your additional capacity, you know, any new production from that additional capacity for metformin has started. You know, what is the current total capacity installed now and how much is the utilization there? Yeah. I will answer your second question first. Last quarter we have done very good sales for metformin. Our average capacity is around 1,150 to 1,200 tons per month. We were able to achieve somewhere around, you know, 1,000 tons per month of sale for the last quarter, that is. Okay. Regarding price movements, I will ask Harit to answer that question. Yeah. The price of Metformin, DCDA, which is a major raw material for metformin, has come down quarter to quarter. At the peak of the beginning of the year, it was around $4,000 to $4,500. Now it has come down to less than $3,000. We expect price to stabilize around this level and then price of metformin also will stabilize. These two quarters the price kept on reducing and we had a lot of inventory loss because of that, but now things are stabilized more or less. Okay. Understood. I have more questions. I'll get back in the queue. Thank you so much. Thank you. A reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The next question is from the line of Ranvir Singh from Edelweiss Wealth. Please go ahead. Hello. Sir, please proceed with your question. Yeah. Thank you. One thing, you commented, the EBITDA margin of 15%. This is overall EBITDA margin you are talking about or only API part you said? Secondly, in- Yeah, yeah. You can continue and we'll have another question. Yeah. Okay. Yeah. Yeah, on overall basis, but also on the API side, because almost standalone business is contributing around 88% to the total revenues. More or less it will go hand in hand. Consolidation. In this quarter, whether we have any contribution from intermediate facility, any new projects we are working on? I didn't understand your question. That intermediate facility was supposed to start contribution from this quarter. Yeah. Correct. That brownfield expansion what we had done in Tarapur for a specialty chemicals. Yeah. We are still not able to fully ramp up the capacity. Since you can say almost 30 out of 400 we have achieved. Not 30, around 60 out of 400 we have achieved. By November we will be achieving upwards of 150 out of 400 tons per month. There are few issues related to scale-up batches, but we know how to resolve them. Just that we are waiting for few equipment to come in and then we'll be ramping up the production. As far as the consumption norms are concerned, we feel that we will be surpassing our previous norms, because earlier we used to do batch manufacturing process and now we will be doing continuous manufacturing for that particular product with different ROAs. Our RMC will also become better for that product. For FY2024 perspective, can we expect meaningful revenue coming from this- This full-scale potential for this facility will be anywhere between INR 90 crore to INR 105 crore. Okay. That should be achieved by which year? Because this is a specialty chemical and we have been dealing in this, we will try our best to ramp up as soon as possible. By the end of next year, hopefully, you know, we should be occupying it by the end of next year, next financial year. How much time it will take, that we also are not very clear on that. How much income for the next entire year. Okay. Any update on that lifesciences facility you are working on? Yes. There we have taken commercial batches. We have started selling our product in the market so that the quality acceptance is there. Now we are working on the reduction of cost. There are few intermediates also on which we are working. We'll be handing over the process to a few of our exclusive job work manufacturers for that, for those intermediates, and that will help us to reduce the cost and become even more competitive. Though top line it will start contributing, but bottom line, I should say it will take at least two quarters to start contributing meaningfully. Okay. Okay, fine. If in API, in overall perspective, your commentary said that inventory purchase earlier is still, you know, with you. When that inventory is likely to adjust, so in Q4 you said that improvement will happen. This is based on the new price negotiation you have started? Yeah. If everything remains stable, by next quarter it should be over. I mean, by this next quarter means Q3. Okay. So from Q3 onwards, some improvements will start visible there. Okay, fine. That's it from my side. All the best. Thank you. Thank you. The next question is from the line of Priya Harwani from Perpetuity Ventures. Please go ahead. Hello? Yes, ma'am, please proceed. Certainly. I just wanted to cross-check the number of CapEx mentioned in the commentary. Can you repeat that? Yeah. We said that around INR 77 has been done for this year. We hope, you know, that it will go around INR 200 to INR 300 for this entire year. Because what has happened is, we have ordered lot of equipment for two of our greenfield projects. When you order, typically you give around 15% to 20% add-on. When the delivery will come in, at that time, you know, the outflow will be higher. We expect that second half, CapEx will be much higher than the H1 of the FY 2023. Got it. Thank you so much. Thank you. Thank you. A reminder to the participants, anyone who wishes to ask a question, may press star and one at this time. The next question is from the line of Parth Vasani from KK Advisors. Please go ahead. Yeah. Thank you for the opportunity. Actually I have a couple of questions. First one would be how much revenue can we expect from the recently commissioned CapEx for the entire fiscal 2023? Yeah. The thing is, you're asking how much is the total revenue potential of the existing capacities, right? Yes. Yeah. Based on the last quarter's prices, we can do upwards of INR 3,000 crore turnover even for the standalone company itself. Around upwards of INR 3,000 crore for standalone company. Then we can add another 300 for formulation. That will be a full-scale potential for existing capacities. There are more capacities which are coming up in Q4 and then Q1 of next financial year. Okay. Yeah, that was helpful. Second, I wanted to ask that, in the press release you have mentioned about the increased requirement for working capital. Can you explain the reason for the same? Yeah. The thing is, our inventory has gone up, no doubt about that. That is why we might reduce our production a little bit. Till September, you know, we haven't reduce production, even though demand for few of the antibiotics was little less in the domestic market. On the export side, we had seen good demand, but for the domestic market, the demand was little subdued. Usually monsoon season the demand is more. We kept on producing. That is the reason why the inventory was piled up a little bit. Also, because the macro factors were, you know, because of war, inflation and everything, it was quite unclear. We did not want to lose on production, so that is why we kept on producing. Now going forward, I think, by releasing for some of the products, we might bring down the inventory and then the working capital will be freed up again. Okay. Got it. Yeah, that was it from my side. Thank you very much. Thank you. Thank you. A reminder to the participants, anyone who wishes to ask a question, may press star and one at this time. The next question is from the line of Rashmi Sancheti from Dolat Capital. Please go ahead. Yeah, thanks for the follow-up. Just one question on gliptins, you know, which we have started last year, last quarter four. Where are we in terms of both teneligliptin and vildagliptin, and have you started any exports for the gliptins? Harit, I would like to answer this question. Teneligliptin, we are more or less quite. This production is stable. Our cost efficiency has improved, and we are working on making intermediate ourselves. We are already going to get market. We are improving our market share in domestic market and export for this product is not substantial. We are concentrating, we are getting more and more Indian market by another one or two quarters. About vildagliptin, we have just started selling, exporting, marketing and started submitting samples and validation batches, et cetera. Most only another two quarters, vildagliptin will be able to export more volumes. Sir, if you all can update on, you know, on the specialty chemical greenfield plant, where are we currently? Are we on track to start the production at the end of FY2023? For the greenfield plant of specialty chemicals, that is for backward integration, which we are doing in Gujarat, the estimated start commissioning of the production is commissioning of the equipment and the trials will be taken towards the end of first quarter of FY2024. That is the June quarter. Okay. Okay. Thank you. That's it from my side. The Tarapur greenfield one we are expecting to start by March. Tarapur greenfield one, the chlorosulfonation. No. Chlorosulf- No, there are two. There are three. There are two greenfield projects which are going on. One is specialty chemicals at Gujarat. That is a greenfield. There is a second derma project greenfield project which is going on in Tarapur. The third was the brownfield expansion of specialty chemicals in Tarapur. Correct. Which is already done. Okay. The specialty chemical, the chlorosulfonation one and the entire specialty chemical that is in Gujarat only? There were little changes there. The chlorosulfonation one which we were planning to start at Gujarat, it was a 10 x scale-up from our existing batch manufacturing process. Initially what we had done, we have done a brownfield expansion in Tarapur itself with 5 x scale-up. Not the 10 x, 5 x scale-up. The ultimate plan is to shift the entire production to Gujarat. The current Gujarat expansion which is going on, that is more on other intermediates. Okay. Not the chlorosulfonation. Maybe after one year or something, this chlorosulfonation where you have started the brownfield will get shifted ultimately to the Gujarat greenfield specialty chemical plant, right? That, yeah. That will be the second site. The current greenfield site which is going on, that is different. This will be the additional greenfield site which we'll be putting in Gujarat. Understood. That would be the new lines basically. Yes. Okay. Thank you for the clarity. That's it from my side. Okay. Thank you. Thank you. A reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The next question is from the line of Priyanka Shah from Antique Securities. Please go ahead. Hello. Thank you, sir, for the opportunity. I have couple of questions. Sir, can you bifurcate CapEx for API and specialty chemicals for FY2023, INR 41 crore to INR 300 crore CapEx? On a broader scale, some of it, say around 40 to 50 would be the brownfield and your maintenance related CapEx. But the majority of it can be, I mean, it is almost 50-50 at Tarapur greenfield and Gujarat greenfield projects. Okay, sir. What is the current capacity utilization for API and specialty chemicals? Current could be somewhere in mid-70s only. Okay. Thank you so much, sir. Thank you. Thank you. A reminder to the participants, anyone who wishes to ask a question may press star and one. The next question is from the line of Ranvir Singh from Edelweiss Wealth. Please go ahead. Yeah. Thank you for follow-up. Sir, can you take the phone off speaker, please? Your audio is a bit muffled. Yeah. Hello. It's better now? Yeah. Thank you for follow-up. Just on CapEx side, you said in first half how much CapEx we have spent and how much remains to be spent in H2 of FY2023? Yes. The first half, we have done almost 77. Okay. By the end of the year, we expect it to remain between INR 200 crore to INR 300 crore. Now, the reason we are giving such a broad range is because it's, you know, it might just go in April. That is why I'm giving a range of INR 200 crore to INR 300 crore. For the entire year? For the entire year. For entire year. Okay. Of that INR 600 crore total CapEx, we are midway by FY half in FY 2023. Yes. That two greenfield projects with almost, you know, INR 350 crores kind of CapEx that will be completed by, you can say, June of 2023. June quarter of June month of 2020. Most of the main CapEx, which is like INR 350 crores, are assigned to these two greenfield projects, will be completed. The remaining would be in 2024. Continuing. Yeah. Yeah, it will start in, yeah. Correct. In FY2024. By end of FY2024. Yeah. Okay. On the intermediate or backward integration side, right now because for the last few, you know, quarters we have been talking that we are working more on, integration, backward integration side. Any new development you could highlight that we have achieved in this first half of FY2023 on integration front? That plant will be completed by around May or June in 2023. That is the first quarter of next financial year. After that, we will start you know utilizing the production from that intermediate facility. This is related to which product? This will be broadly related to anti-diabetic and other products, antiprotozoals. Okay. Projects are under that PLI scheme. What is development there for DCDA? No. DCDA, we are not going with as of now. DCDA, that we are not doing. We are including that. Okay, that project has been canceled, you know. No, actually DCDA project we never announced. PLI scheme there was another project for antiprotozoal. That, we are doing it, but we are not going for PLI scheme. Means, reason being the CapEx which we had committed earlier that got reduced substantially, means almost 50%. We approached government that whether it will be okay for them, but they said that we have to do the committed CapEx to be eligible to get that benefit. We decided that rather than spending that much we will spend less upfront and still implement the capacity. But we are doing that project, but we are not going in, means we are giving up that PLI benefit because we are getting everything upfront in CapEx. Okay, thanks. The API related to creams that dermatology segment, I think that was import substitution. Have you seen any competition there or pricing because we are a little delayed there, so No. As of now, there is no substantial domestic competition for that. The only competition will be from China. Okay. Thank you, Adhish. Thank you. The next question is from the line of Harsh from Marcellus. Please go ahead. Yeah, hello sir. With the chlorosulfonation project moving to Tarapur, what exactly greenfield expansion are we doing in Gujarat facility? Yeah. Greenfield that is, you know, we are doing few special, I mean, sort of, yeah, intermediate, you can say, on specialty side. It is also will serve as a backward integration for our other main products. Okay. Chlorosulfonation, we'll be putting in the second site of Gujarat. Okay. For the current Gujarat facility, how much are we doing the CapEx? That will be roughly around, you know, INR 150 crore to INR 200 crore. This facility is likely to commence production in Q1 FY2024. Correct. By the end of that year. By the end of that quarter. Okay. Okay. Yeah. That's it from my end. Thank you. Okay. Thank you. A reminder to the participants, anyone who wishes to ask a question may press star and one. The next question is from the line of Niharika from Equitas Investments. Please go ahead. Hello. Hi, good afternoon. I think you mentioned that volume growth has been flat in domestic market and I think some 10% to 11% growth in export market. With all the API CapEx that is coming into picture, how are we planning to like ramp up? Like, where are we seeing the market for it, export or domestic? Because I see the domestic is still flat. Yeah. The CapEx also which we have planned, that is for additional products. There will be I mean, right now. Basically the market will be new for that. For the current, I mean you can say 25% underutilized capacity for few of the existing API products. We have the visibility I mean domestic market will pick up. One is that. Secondly, there are a lot of small export geographies you can say. For each product a bit of it is left out. Also, we are having a lot of European focus and we feel, to update on that, recently, I mean in this week itself, one of the facilities of Tarapur, the E-22 facility, we just had an EDQM inspection, that is the European authority. It was quite good. The report will come out in few days, and then probably we'll give a press release on that as well. European markets, and there are a lot of other geographies where we can increase the sales. Okay. For the new greenfield Tarapur facility, are we also going for any U.S. FDA approval, the new facility which is coming in? Are we also planning to go for, apart from? No. The greenfield, no. For the existing antidiabetic facility, which we will be expanding further in next year, there we are planning to get an U.S. FDA approval, and that is a dedicated plant. The current one was a multipurpose plant. Okay. On the Gujarat greenfield, you said that it is majorly for backward integration. It ideally would just reduce my operating costs. Basically this is 100% for captive consumption or are we also going to sell it to outside parties as well? It is both. It is a mix of both. The thing is, the entire CapEx plan which we had, that INR 500 crore to INR 550 crore, the external revenue potential was somewhere between INR 1,500 crore to INR 1,600 crore. Sorry, the actual revenue potential from those plants, but the external revenue potential was only around INR 200 crore. The rest was the captive part. Percentage wise, if I see, so some 60, 20% would be captive and rest would be or. Okay. If you are asking only of the Gujarat facility. Yeah, yeah. Yeah. Yes, what you say is correct. Okay, sir. My last question would be on inventory. Inventory is still on a very higher side, and is it majorly the finished goods that is held up in our stock or is it also the raw materials? Because I think raw materials were shedding off in last quarter as well. This INR 500-odd crore inventory, does it constitute majorly of finished goods or? Yeah. What has happened that in last quarter our production was very high. In fact, we had a 10% volume growth in terms of production as well, for the last quarter. Whatever raw material inventory pileup was there. By the end of last quarter, we have now converted it to finished goods. Now, it will start selling that. Are you taking inventory loss on the finished goods that is in the stock or are we, will we be able to make any margins on this? Because I think this is by using the high priced raw materials. So, as of now, for the finished goods, there was no inventory loss. Because we follow that FIFO method for raw material costing, the higher value raw materials has been accounted in this September quarter. As you correctly say, that you know, the newer stock will have little less RMC because of the falling raw material prices. There will be some impact in December quarter as well because of. Yeah. Okay. Okay. Thank you. That was it from my side. Thank you. Thank you. The next question is from the line of Aditi Sawant from ADM Advisors. Please go ahead. Thank you so much for the opportunity. I have one question. Of the total exports in formulation, can you please share how much is for developed markets and how much is for emerging markets? Yeah. Vishwa Savla, can you please answer this? Yeah. As of now, majority of it is for emerging markets because in our regulated markets we are yet to receive our approval and registration. Since the last two years or 2.5 years, we've been majorly focusing on regulated markets. Most of our regulated market filings are either in pipeline or under approval stage. As of now, majority of the revenue is coming from emerging markets. Okay. Thank you. That was it. That's it from my side, and all the best for the upcoming quarters. Thank you. Thank you. A reminder to the participants, anyone who wishes to ask a question, may press star and one at this time. The next question is from the line of Esha Sawla from Arya Securities. Please go ahead. Hi. Thank you for the opportunity. I just wanted to ask a few questions. First of all, I would like to understand that we've witnessed highest ever prices for API products. My question is that do we expect the realizations to fall as the input costs have started to come off? Yeah, it will happen slowly because yeah, that is true. Because most of the time API prices follow the input prices. Because across the board, slowly the raw material prices will start going down, the API prices will come off slowly. Okay. And what kind of timeline do you expect to have in mind? It will depend on how much I mean order book you have piled up. But, typically one to two months, you can say. Understand. Secondly, how much is the current differential between domestic and export API prices? Okay. Again, product to product it is different, but definitely the export prices are high. In some cases it is a lot higher than the domestic, I think. There also in exports also, it depends on which geographies we are selling. The Indian subcontinent like Pakistan, Bangladesh, and so on, there, the prices will be very low in few emerging markets of Southeast Asia. Otherwise in other geographies the prices are much higher than the domestic market. Okay. It's very difficult for me to quantify. I'm not able to quantify that. Got it. The next question I just wanted to check that are we planning to diversify specialty chemical business away from our chlorosulfonation products with the ongoing CapEx? We are definitely doing more on the specialty chemical side. Other than chlorosulfonation also, we are, you know, expanding in other lines as well. We are also doing few contract manufacturing projects with our MNCs in this field. The Gujarat facility will also, you know, add new products in the specialty chemicals line. All right. This is very helpful. Thank you for answering all my questions. Thank you. Thank you. you. The next question is from the line of Gagan Thareja from ASK Investment Managers. Please go ahead. Yeah. Good afternoon. Mr. Thareja, if you can speak a little louder. Yeah. Is this better? Yes. Can you hear me now? Yeah. The first question is on the margins. You know, throughout the last 12, 15 months, not just Aarti but all API companies have struggled with margin contraction. The reasons given out largely centered around high input prices and difficulty in passing the input prices on completely. Also, there were freight and utility price increases. Now RM prices are softening and you yourself indicated that in a couple of months finished good prices will also sort of fall in line. I mean, if that is the case then, you know, what are your levers for margin expansion? You're saying that you probably intend to exit the final quarter of this year at 15%. How will that, you know, happen if your output prices also fall in line with input? Actually, as I was explaining earlier, you correctly pointed out that utility prices have also gone up. I mean, apart from gross contribution, other major impact which API players are facing as compared to last financial year, especially for the first half that is because of the coal prices. The prices have more than doubled and they have remained like that for a long period. We hope that to come down. What has happened indirectly because of this very high coal prices, now the power rates have also gone up because of thermal power stations, because they also rely on coal. There also because of that also manufacturing utility costs have gone up quite considerably for manufacturing companies, I will say. As far as this gross contribution is concerned, as I was explaining, you know, the negotiations which are happening, say if you take any particular month, the margin looks higher. The problem is, you know, in the uncertain scenario of last nine months, what has happened is we end up booking a lot of raw material at a higher price, you know. The sales order comes, you can say more or less it is paid out every month. Sometimes there is a problem, you know, in terms of you might end up booking the high price raw material and then the prices start falling in. Once this volatility goes away even then, you know, even if what we are trying to point out is that even if volatility goes away, the margin should expand once all these inventory losses are taken care of. Are you saying that, you know, the expansion from 10% margin to a 15% margin that's, you know, very significant. 500 basis points? API already we are 11.2 right now. Correct. It would still mean another 400 basis points. Yeah. Yes. Is that all down to simply the lead and lag between, you know, are you holding out higher cost inventory and RM prices pushing down and therefore you're booking inventory loss? Is that the only reason why your margins have sort of, you know? If I look at the longer term trend for Aarti, the four, five year average margins would be around the 15% mark. If I go back further into the past, probably still higher. Do you think, I mean, if one keeps that sort of a perspective in mind, I understand, you know, short term there is volatility and there are business cycles. If it hits you so much and so badly, actually how- There is one more factor regarding ammonia related products. I think Harish Shah will be better able to explain to you that. Harit. Overall, because of gas shortage, Russia-Ukraine war, the price of ammonia is almost three times of one year back. We don't see any correction in immediate future because of supplies of gas from Russia. Fertilizer plants across Europe almost are affected. They would rather put their energy into electricity than making fertilizer, you know. That's the scene. Otherwise, all other chemical prices are coming down, except one or two stray cases, but overall situation looks good now. I see. The same products are available at much cheaper rates in China. The Chinese manufacturers, which is our main competition in a lot of products, they are having that price advantage in terms of raw material rates. That is also one of the reason for some few products our margins squeezed. Okay. You know, I would have thought normally that, you know, whatever you indicated on ammonia prices and utility, you know, you essentially just pass on the absolute cost increase. You don't get to retain the same percentage margin, right? If your costs have gone up by, let's say, on a base of 100 by 20, you pass on 20, you don't pass on the margin on that, right? If that is the case, then. What you say is correct, absolutely correct in terms of short-term because in short term means within a year, API players look only at the, you can say, the value addition per kg. In longer run, things you know when we close down the financial year, when we see the returns you know and then ultimately for any business and or any competitors as well, margins are very important. That is the time when margins again start you know getting back to normal. Are you saying that the current markets? What I'm trying to say is, very roughly, suppose we are making INR 200 crore on a INR 2,000 crore product, then, you know, and a INR 100 crore product, even INR 20 crore is okay for you. Basically, margins are important, what I'm trying to say. Yes. Otherwise, what will happen, you know? Even for a INR 10,000 crore product, if API players start expecting only INR 200 crore, then margins will go for a toss. Ultimately it will come back to margins in longer run. Are you seeing the, you know, your competitors sort of also not, you know, trying to break the market up for volumes and therefore, you know, your expectation that pricing needs to? It might happen because if suddenly demand goes down on which everyone was expecting higher, you can say, demand, and everyone has produced lot of quantities, and suddenly the demand goes down, everyone is losing. Okay. In your assessment is the inventory in the supply chain, I mean, I don't know how one gets a handle on that. We don't have any ways to do that. Would you believe that the inventory situation in the channel is normal and therefore, you know, such issues may not arise going ahead? Based on the feedback which we get from the market, I think the orders should start coming back between half year and later in the year. Overall, pharma surgical demand was less in first two quarters, and there were a lot of inventory. Now inventory things are back to normal, but we expect demand to go up. People have started moving out and COVID-related issues are no more there. We expect demand to go back to normal before COVID levels, at least. Okay. You know, I mean, if you look at the Chinese situation, there's a new Omicron variant, and there's another set of rolling lockdowns happening in China again. You know, you sort of are saying that things are stable going ahead and there's scope for margin improvement. But if things are the way they are in China, the supply chain will probably get disrupted once more. There's already, as you indicated, a gas and ammonia disruption they started. Do you really see any stability in the supply chain coming in the next two quarters? Because I would have thought, you know, we are up for another wave of difficult Chinese supply chain. What you say is correct. We feel that, see, if any additional negative impact comes up in terms of macro factors, then definitely situation might remain same because that is the exact reason why, you know, the margins are lower even now. Last year, last financial year also, the margins were quite low during the first half of the year. Then in December quarter, the margins had gone up to 14% to 15% in December 2021. Then again, this war thing happened and again it got squeezed down. The thing is, if further negative factors happen, then definitely no one can help. Assuming that things will stabilize here on, because we have seen some correction in the raw material prices also. If we assume that, things will stabilize, then definitely our margins should start expanding. Finally, to what degree are you backward integrated in your current sales and post Gujarat, to what, you know, degree does that increase, if you could based on- Yes, after Gujarat, another, you can say, 10-12% of our finished sales will be further backward integrated, you can say. Other than that, for most of the products, we are, I mean, more backward integrated than our Indian counterpart in most of the cases. That is the reason why we have an edge over Indian manufacturers. Definitely, even when it comes to Chinese manufacturers, we have captured a lot of their market share in caffeine market as well, but only because the few things about ammonia in that has affected only Indian players and not the Chinese players. There, you know, it is slightly out of our hands, even though our efficiencies might be on par with them or even better, but then because of that in raw material pricing disparity, they are having some advantage over there. In that case, we are approaching government for anti-dumping duty because the Chinese manufacturers are getting undue advantage. Yeah, let's see how things pan out. We are quite confident that it should improve. How fast it will improve, we should see now. In this sense, I gather one of your peers is backward integrating into DCDA, and this is something that, you know, almost all API manufacturers buy out of China. I mean, if that is the case, do you see, you know, sort of this initiative on their behalf, sort of causing market ripples and, there'll be a market share movement based out of, you know, their competencies which they get from backward integration? Yeah, definitely it will help anyone who starts manufacturing DCDA, especially a metformin player. It's quite tricky product and the chemistry is quite hazardous. Let's see, because a lot of people have tried that project in past as well, but haven't gone ahead. You will not consider it a project? We will. Means, obviously, we have to keep an eye on that because, otherwise we might have to go in-house because we ourselves will be having, which we are wanting to have almost 3,000 tons per month production of metformin. It's quite a lot. Thanks so much for your recommendation. Thank you. Thank you. The next question is from the line of Niharika from Equitas Investments. Please go ahead. Hi. Just one or two follow-up questions. I just want to understand how are our long-term supply contracts structured and also like I want to understand long-term contracts from buyer perspective as well as supplier perspective. Basically, is there any like is it fixed or any escalation clause before? Okay. Harit, would you like to answer this question? Sorry, I didn't get the question. Yeah. I just want to understand, how are our long-term supply contracts structured and also how like as a buyer and as a supplier, how are your contracts structured? Normally we have volume contracts and prices. Due to volatile situation, we have decided to offer quarterly pricing only, and quantities are fixed, volumes are fixed. Based on this quarterly raw material price indication, we change our pricing for finished product for long-term contracts. Is it linked to any, say, particular commodity, say ammonia? It depends. We are making 20 bulk drugs, more than 20 bulk drugs, but maybe 80% of volume comes from 20. In that each product has different raw material situation, so different raw materials. We are linking it to some raw material pricing. Yeah, some raw material. This pricing reflects the volatility that is happening. Correct. My second question is considering Aarti Drugs has like in few APIs we are the largest players in, like metformin and some globally. What kind of pricing power do we hold? Because still we are not able to pass it on fully. Why don't we have that kind of a pricing power? Because API is a very essential item. Why aren't we able to pass it on? The issue is the pricing are so volatile. You know, every month the price, variation is as high, some products is as high as 8% to 10%. How do we control that basically? Now things are better and we expect price. If prices are stable, then we know we'll definitely go back to our normal margins. Yes. I'm just trying to understand why aren't we able to like, take the price hikes? Because if there's some other competitor which is taking our share or because without API even the, like other chain player cannot work. Why cannot we have that kind of a pricing power? Is there some competition which we are seeing? The thing is we are taking price hikes, so that is the reason why these September quarters selling prices were at maximum. But the thing is, the price hikes, you know, while taking the price hikes, it needs to be a gradual process because if you suddenly increase the price, generally, I mean, the formulator will, you know, get back. He'll try to look for other sources. If someone else is having inventory during that period of low cost, then they will offer them. You might end up losing those orders then, in that particular quarter say. Next quarter again, both the competitors will come at a level playing field, and then the prices will go up. These things happen on a temporary basis. Okay. Like that. Okay. Fine. Thank you. Thank you. Thank you. As there are no further questions from the participant, I now hand the conference over to Mr. Adhish Patil for closing comments. Over to you, sir. Thank you everyone for joining us today on this earnings call. We appreciate your interest in Aarti Drugs Limited. If you have any further queries, please contact us or HKA, our investor relations available. Thank you. Thank you. Thank you, sir. Ladies and gentlemen, on behalf of Aarti Drugs Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines. Thank you.