Aarti Pharma Labs

I had attended the AGM of Aarti Pharmalabs held today. Some of the points noted during the AGM are given below (mostly what is given in Q1 call, AR and presentation):

• Xanthene is used in pharma, food & beverages.
• Only non Chinese integrated facility out of China – China plus 1 strategy should work here.
• CMO/CDMO: Dedicated R&D, pilot facility, focusing on CDMO – 16 products commercialized and 12 products are under developed by innovators. 14 innovators and big pharma companies working.
• Vapi expansion – commencement from Q1FY25 – 24 reactors – max capacity of 28 KL. Vapi site – smaller batch sizes of anti cancer and life threatening diseases.
• Successful completion of capacity expansion in Xanthene from 4000 MT to 5000 MT through debottlenecking last year.
• Hydrogenation plants – to be commissioned in Q2FY24 – handling high pressure hydrogenation facility.
• Sustainability at the core embedded in our strategy
• Commitment to energy savings.
• Solar energy project launched by us.
• New greenfield capacity at Atali – Dahej and Bharuch – 80 acres of land – first phase 56 reactor – 400 KL volume – total budget of capex is 350 crore. Construction is under progress and expect commencement in FY25.
• 40 products in R&D on API/intermediate side.
• Strong pipeline of products – focused efforts on enhancing capability. Target to introduce 40 new value added products every year.
• Guidance as stated in presentation: EBITDA growth 10 – 15% FY24. 12 – 17% post that for next few years
• Atali expansion will lead to operational efficiencies and contribute to company’s long term growth.
• Strategy – xanthene – largest business segment for last year – in xanthene margin expansion over the last 2 years due to good demand and availability constraints due to China – also saw increase in demand from pharma and beverages. Softness in the prices, RM prices also some correction, new manufacturing capacities also added there. Some correction in margins. Mitigate by increasing capacities. Customers asking for increase for more and more demand. Removing Chinese imports of RM through backward integration by manufacturing own intermediates. That facility will start by later part of the year. We will have China plus 1 advantage to us. We will get the premium due to that. Customers asking to be fully independent in RM sourcing and not to be dependent on China for any RM. Debottlenecking done. Further expand by debottlenecking. Approval metrices for the product – lot of approvals required, we have many approvals, all these approvals take time. Approvals of large consumer also takes time 2 – 3 years. Smaller players – each has some advantage where they are either backward or forward integrated. We are focused largely on 4 – 5 products. Exploring how we can expand by 30 – 40% by acquiring adjacent land near our facility of through further debottlenecking. Next 1 – 1.5 years can expand capacity.
• CMO/CDMO – Expansion of Atali – 350 crore – not just for CMO/CDMO but also for intermediates. API expanded last year. This year we are expanding for commercial intermediates also. Phase 1 capacity expansion – some capital in infrastructure development and block 1, later build on more blocks there. Investing in infrastructure – warehouses, ETP, pre-spending more funds. Revenue and capex remain lower but in future with new blocks coming in revenue capex metrices will improve. CMO markets – number of customers are 14 and add more. 16 products – phase 3, launch phase and commercially available. Label expansion also happens. End usage also grows. We have such several possibilities. Have good potential. Every year add new projects with partners. Competitors – Lonza, Wuxi – we are focusing on small molecules and phase III upwards of molecules. With experience that we have of commercializing and commercially viable projects – that’s our forte and customers giving us more projects. Do – boron, lithium boron, cryogenic, hydrogenation – very difficult chemistries. With newer expansions, customers wont have to change sites – cater to the need of customers for next 10 years. Have large manufacturing site for CMO/CDMO.
• Contribution margins – CDMO/CMO – better than traditional margins in other segments. Growth – depends on launch year and how products are progressing with customers. Certain year can be blip and some year mild. But overall high growth area for the company.
• APIs – focussing on R&D. Early stage development for FTF and file ANDAs. We are in oncology and steroids facility. Command reasonable margins. Had stable margins. Largely operating in regulated and semi regulated markets. Price erosion not much there. Continue in future as well.
• CMO/CDMO – working with innovators directly or indirectly.
• R&D – 40 crore on R&D spent last year. We are now having new R&D centers. We will end up spending 10 crore more compared to last year in FY24. 3 R&D center – one is for API, one is for intermediates and one new one is for CMO/CDMO – meet their needs – innovators.
• Market share and shift from xanthene to other businesses – depends on caffeine debottlenecking – it will remain around 30 – 50% and other 50 – 70% segment over the medium to long term.
• EBITDA growth of 12 – 17% long term and this year 10 – 15%.
• We focus on bottom line and margins. Focused on multistep processes where revenue is less.
• Xanthene sales break up – Beverage – 70 – 80% and 20 – 30% pharma. Seen growth in both the segments. Global growth moderate and India growth more.
• Ganesh Polychem? This product end usage is for dialysis resin. Another product – anti leprosy drug – kept this business within Aarti Pharmalabs. Sourced some RM from Aarti Industries, some manufactured internally also, some sold from Aarti Pharmalabs. Debottleneck current facility – save our RM cost. Anticipating to complete in next 18 months.
• 100% ZLD facility at all our plants.
• With renewable assets we will be putting up – 30 – 40% energy needs will be met through these assets.

(Disclosure: Invested. Not a buy or sell recommendation)