I recently started looking at Aarti Drugs and found this interesting. Thought of sharing my analysis here:
Disclosure: I already hold Aarti Drugs as a part of my core portfolio. This write up below is meant for discussion and is not to be construed as recommendation. Please do your due diligence.
Aarti Drugs Limited established in 1984 is a predominantly API manufacturer having a small presence (~15%) in Formulations & Speciality Chemicals.
In APIs they are present in the following Therapeutic Segments:
A. Active Pharma Ingredient (85%)
1. Antibiotics (47%)
2. Antiprotozoals (23%)
3. Anti inflammatory (12%)
4. Anti fungal (8%)
5. Anti diabetic (4%)
6. Cardio protectant & Others (6%)
C. Speciality Chemicals (3%)
D. Others (4%)
ADL’s Plants: ADL has 10 plants located across the country and the details of the plants along with the certifications are available here:
Active Pharma Ingredients:
Among the various therapeutic segments the company is already operating in, the following segments had significant capex in the last two – three years and the results of this will be visible in the #s in the next 2-3 years.
IV. Anti diabetes
V. Anti inflammatory
VI. Cardio protectant & Others
I. Antibiotics (47%)
The company is present in fluoroquinolones APIs and has developed significant research capability to develop 3rd generation fluoroquinolones. Quinolones are a broad spectrum of anti-bacterial drugs used to treat bacterial infections. 1st generation quinolones were developed in 1962, and with time we have 4th generation quinolones in the market. Higher the generation the molecule is present in, higher the margin for the company.
Note: Read the below url on Quinolone to understand more about fluoroquinolones.
2nd Generation Fluoroquinolones:
i. Constitutes 22% of revenues
ii. Recent Capacity expansion in place from 1200 to 3600 TPA
iii. Is putting up a backward integration plant and this will come up in the next one year. – Improves cost competitiveness.
iv. Current sales at 1620 TPA.
v. Global Size of this molecule - ~5000TPA
vi. Who are the other players here? –
The above 3 molecules constitute 13% of the topline.
3rd Generation Fluoroquinolones: (12%)
E. Levofloxacin – 240 T to 720T
F. Molecule1* – 720 T capacity
G. Molecule2*- 720 T capacity
Current revenues ~135cr from these 3 molecules:
i. These molecules have higher margins than 2nd generation fluoroquinolones.
ii. Company has already commissioned capacity from current to 3x.
iii. Revenue potential from these 3 molecules @ 500 crores
iv. Who are the other players here? – Have to find out
*What are the names of these new 3rd generation molecules? - to find out
II. Antiprotozoals (23%)
i. Contributes to 5% of revenues
ii. Largest producer in India
iii. Doubled Capacity for this molecule likely to come in by Q2 FY16.
iv. Currently India is importing this molecule from China. After capacity expansion, ADL aims to supply domestically.
Check the below url to understand trend of imports: https://www.zauba.com/importanalysis-metronidazole-report.html
b. Metronidazole Benzoate
i. Largest producer in the world
i. Largest producer in the world
f. Diloxanide Furoate
Incremental revenue potential after expansion to be around 50 crores
III. Anti diabetic (4%)
a. Metformin HCL
i. Currently Metformin molecule addresses 49% of global Anti diabetes market.
ii. Current Global Metformin Capacity – 30000 TPA
iii. Other Players: Wanbury(9000), USV(10,100), Harman (6000), Granules (2000) & Aarti has 1200 TPA
iv. Aarti has expanded capacity by 5x here – 7200TPA
v. This capacity can be doubled at minimal additional cost
vi. Reports put Metformin market growth at 9-14% p.a
IV Anti fungal (8%)
i. Capacity expanded by 50%, not able to quantify revenues here.
V. Anti inflammatory (12%)
b. Diclofenac Sodium
c. Diclofenac Pottasium
d. Diclofenac Diethylamine
e. Diclofenac Epolamine
f. Diclofenac Resinate
Triggers due to capacity expansion - Quantifiable:
Incremental Revenue potential due to recent capex(completed) in this segment stands at 750 crores (~400 crores from Ciproflaxin + ~350 crores from 3rd generation fluoroquinolones)
Incremental Revenues to come at higher margins:
Backward integration of plant for Ciproflaxin about to come in – in 1 year?
3rd Generation Molecules have higher margins.
Antiprotozoal expansion: Incremental revenue potential after expansion to be around 50 crores.
Incremental revenue potential after expansion to be around 150 crores.
a. Market leader Wanbury is currently in financial distress and is unable to meet the growing demand
Capacity of Ketoconazole expanded by 50%, not able to quantify revenues here.
USFDA Import Alert – Unquantifiable:
- If USFDA lifts the import alert on one of its facilities, this will throw up more avenues. – But this is an optionality.
Currently the company has been doing a topline of about ~1000 crores, and give it three years, the company must be able to add another 1000 crores. If the topline doubles, their PAT figures should grow at a much faster rate as 75% of the incremental topline is coming from high margin molecules. From here valuation is an interesting question and is left to the individual.
What could make a mockery of these numbers: - RISKS
With Chinese economy in distress, what is the likelihood of further Chinese depreciation of Yuan? – This will erode the cost competitiveness of ADL!.
Competition behaviour – For instance, in the anti-diabetes segment, Granules currently has 2000 T. This is stronger competitor(financially also). If they also decide to expand significantly, it becomes a case of lower margin business! One has to monitor this very closely. Have to understand other players in Ciproflaxin also.
Manufacturing of APIs are a capital intensive business and will need constant capital to expand further. For the next 2 year, the company says they need about 100 crores for capex. They have sufficient free cash flows to take care of this incremental capex. (Lower risk) – I call this as a risk because continuous capex requirement is always a headache to me;-)