Aarti Pharma Labs

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A few good key takeaways from the call of Aarti Pharma - (Q4 - FY24)

The company operates in 3 segments:

  1. Xyethene derivatives (44% of Q4 revenue)

  2. API and Intermediates (37.6% of Q4 revenue)

  3. CDMO/CMO (18.4% of Q4 revenue)

Q4 FY24 saw highest highest-ever quarterly net profit

Consolidated revenue grew 23% QoQ and 47% YoY in Q4

For FY25, expect revenue growth of 10-12%

Major expansion plans:

Brownfield expansion of Xyethene capacity from 5,000 to 9,000 MT (capex ~Rs. 130-180 cr)

New API/Intermediates plant at Atali (capex ~Rs. 375 cr)

Setting up solar power plant (capex ~Rs. 80-90 cr) Total capex for FY25 expected at ~Rs. 600 cr

CDMO/CMO business is seeing strong growth, working with 16 innovators on 40 projects currently

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Capex:

  • Total capex for FY25 expected to be around 600 crores.
  • Major projects include Atali greenfield project in Gujarat costing around 300 crores.
  • Additional capex for expanding Xanthine capacity at Tarapur and intangible asset development.

Xanthine Derivatives:

  • Xanthine capacity utilization currently at 90%.
  • De bottlenecking project to increase capacity from 5000 to 9000 metric Tons.
  • Price decline of 20-25% impacting topline, while volume growth around 12-15%.

CDMO/CMO Segment:

  • Working with 16 customers on 40 projects, with 21 commercial projects.
  • Added 12 new projects in the year.
  • Expecting growth in this segment due to expansion of manufacturing facilities and regulatory focus.
  • Majority of products in Key Starting Material (KSM) and Regulated Starting Material (RSM).
  • Quarter-to-quarter fluctuations expected due to multi-stage products and campaign-based orders.
  • Focus on reducing customer dependence on China for KSM/RSM.

Margins:

  • Record margins achieved in Q4 FY24.
  • Gross margins at 55% for standalone entity and 50% on a consolidated basis.
  • CDMO business contributing significantly to margin improvement.
  • Expectation to maintain close to 50% gross margin annually.

Revenue Growth:

  • Expect EBITDA growth of 10-12% in FY25.
  • Moderately conservative guidance given due to market volatility.
  • Topline growth in Xanthine segment dependent on pricing metrics and capacity utilization.
  • Sustainability of revenue growth in CDMO segment due to expansion and new projects.

Expansion Projects:

  • Brownfield expansion of Xanthine capacity to be completed by end of FY25.
  • Atali project progressing as per plan, commissioning expected in Q4 FY25.
  • Semi-commercial block at USFDA intermediate manufacturing site in Vapi to become operational in current quarter.
  • Setting up solar power plant in Akola to fulfill 1/3 of power requirement and reduce manufacturing costs. It may add to margins.

Financials:

  • Highest EBITDA and net profit recorded in Q4 FY24.
  • Consolidated EBITDA and PAT growth on Q-o-Q and Y-o-Y basis.
  • Standalone EBITDA and PAT growth in Q4 FY24 and FY25.
  • Return on capital employed improved to 18% in FY24.

Outlook:

  • Expecting EBITDA growth of 10-12% in FY25, aiming for around 15% annual growth in the next two years.
  • Focus on business expansion, sustainability, self-reliance, and customer needs.
  • Optimistic about future growth potential, especially in CDMO/CMO segment.

Spinoff from Aarti Industries in 2023, now it can show results.
Ease of pricing pressure in US. Pharma sector is under valued not participated in Bull market since 2015.
Huge Opportunity for CDMO/CMO for small companies. Regulatory cost in developed countries are making drug delivery extremely costly, which turn give rise to Indian Pharma players due to good track record in pharma industry.
Leader in Xanthine.
Recent rally after result indicates valuation comfort. Any further surprise in earning can totally re rate the stock due to sector offers value.

Disclosure: Invested. Notes from screener.

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Hi,
Given the current PE of 25 and expected growth of 10-12%.
The company valuation is not fair but slightly on higher side.
PEG ~ 2

Disclosure: Not invested.

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With due respect, I don’t think that is the right way to analyze growth rate because the company has three different business verticals, with different respective growth plans. If we look at their CDMO business as an example, that is expected to grow between 30 and 35%, this is something that the management hinted in their latest conference call.(They might be conservative in giving this) So judging the growth story of the company solely on the basis of PE multiple would not be the right way.

In my opinion the company is poised for growth in the medium to long term, with their gross block almost increasing by 60%-65% between FY24 and FY26. The company also talks about the CDMO/ CMO business having an average asset turn of 1.3-1.6x, with 19 projects in the development phrase.
To sum up I feel. Capex Plans>> Projects pipeline>> better margin profile will help the company do well in the medium term.
Disclosure: I am invested in the company since FY22

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Im creating a research report on corporate governance on this company, can someone help me improve my understanding so far.

Hetal Gogri is appointed as MD along with Narenda Salvi
Mr Rashesh and Mr Rajendra Gogri (Who seems to be the most capable ones serving as MD in Aarti Industries) are appointed as Non Ex Directors,

Apart from Narenda Salvi, MD doesn’t seem to have any Pharma experience though she has an IIM Ahmedabad degree with Engineering background.

Moreover, During Concall Mr Rashesh was giving most of the answers while the MD was passed on with softball questions.

Lastly, regarding renumeration it was quite normal compared to peers KMP salary to Median employee wages

Please help me improve my understand!
Thanks

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