Aarti Pharma Labs

Stock Opportunities
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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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Aarti Pharmalabs - ( extremely bullish commentary wrt medium to long term ) -

Q4 and FY 24 results and concall highlights -

Manufacturing footprint -

Atali - New Unit under construction for CDMO, making Intermediates

Dombivali - Unit -1 - APIs, Intermediates, CDMO

VAPI - Unit -2 - APIs, Intermediates, CDMO

Tarapur - Unit -3 - Xanthine Unit
Unit -4 - APIs, CDMO
Unit -5 - Xanthine Unit
Unit - 6 - Xanthine intermediates and allied products

Segment wise revenues breakup in Q4 -

Xanthine, its derivates and allied products - 44 pc vs 50 pc YoY

API and Intermediates - 37 vs 43 pc YoY

CDMO / CMO - 19 vs 6 pc ( that’s a huge jump )

Aarti Pharma labs is the largest manufacturer of Xanthine, Caffeine ( a Xanthine derivative ) in India. Aarti Pharma’s global mkt share in Xanthine and derivatives is > 15 pc

Other Xanthine derivates are used as mild stimulants and bronchodilators ( for management of Asthma and Influenza )

Aarti Pharmalabs is a key beneficiary of China +1 wrt all its business segments

Most of the APIs that the company makes have a good degree of backward integration giving them good control over the entire value chain

Domestic : International sales breakup for FY 24 @ 56:44. Out of the total international sales, aprox 80 pc are to the regulated Mkts ( a great indicator of organisations’s compliance and quality culture )

In their CDMO business, they are currently working on 16 innovator molecules in various stages of development

Aim to grow topline by an avg of 10-15 pc for next 3 yrs

FY 24 outcomes -

Revenues - 1852 vs 1945 cr
EBITDA - 386 vs 342 cr
PAT - 216 vs 193

Net Debt / Equity @ 0.14 vs 0.13 pc
RoCE - 18 pc
RoE - 14 pc

Q4 outcomes -

Revenues - 505 vs 448 cr
EBITDA - 117 vs 80, up 47 pc ( margins @ 23 vs 17 pc )
PAT - 65 vs 42 cr, up 53 pc

Company’s API business has a greater focus towards regulated mkts. Their key therapeutic areas include - Anti-Hypertensive, Ant-Diabetic and Oncology drugs

Company is going to undertake brownfield expansion for capacity addition of the Xanthene and derivatives. Aim to take the total capacity up to 750 MT/ Month by end of FY 25. Current capacity is around 425 MT/ Month - so that’s a substantial jump

Guiding for a 10-12 pc EBITDA growth in FY 25. Management admitted that its a conservative guidance since the company did have exceptionally good q4

CMO / CDMO is likely to remain a high growth area for the company for next 2-3 yrs.Should grow @ > 30-35 CAGR for next 2-3 yrs. CMO/CDMO business is margin accretive for the company

Current capacity utilisation of the Xanthene plants @ 90 pc, hence the brownfield expansion

Company believes that the Xanthene prices have bottomed out. Should only go higher from here

FY 25 is going to be a Capex heavy year. Company may end up spending to the tune of 600 cr for the brownfield Capex for Xanthene + plus the ongoing projects projects @ Atali ( that’s a lot of Capacity addition )

Most of the company’s CMO business is concentrated on supply of KSMs ( key starting products ) / RSMs ( regulated starting materials )

Breakup of capex for FY 25 -

Aprox 300 cr for ongoing expansion @ Atali

80-90 cr for Solar power projects ( for future savings on the energy costs. Post this, 1/3rd of company’s power requirements shall be met internally )

Rest for brownfield expansion for Xanthene and other small capexes at various locations

Company is confident of achieving ideal capacity utilisation on the expanded Xanthene capacities inside 2-3 yrs !!! ( this should result in a lot of growth )

Tax rate for FY 24 for the company was 28 pc. Should be around of 25 pc for FY 25

Disc: holding, biased, not SEBI registered, not a buy / sell recommendation

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Hello,

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(Numbers in Lakhs)

  • Company reported almost 8x increase in other income in standalone P&L i.e 120 (2023) to 1100 (2024) (in Lakhs)
    as dividend income

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  • Export incentive benefit of 3200

  • Company added vehicles worth 200 Lakhs
    396 to 585 (in Lakhs)

  • Recently added R&D products under intangible assets worth 1800 Lakhs

  • Almost 10000 in CWIP

  • Interesting holding by the company - (Dilesh Roadlines Private Limited 464,550 1,239.40)

  • Company is stocking raw materials, 1128 (2024) from 132 (2023)

  • Anushakti Enterprise Private Limited holds 3.28% of the company, (Could not get any info on this)

  • 25% increase in director renumerations, fairly higher than PAT growth

  • Xanthine capacity increase proposed from 5,000 to 9,000 MTPA through brownfield expansion and debottlenecking projects.

Disclosure: Not a buy/sell recommendation

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Since it’s my second post on ValuePickr apologies if I get anything wrong

I’m a newbie in this sector but after going through various yt videos and articles I’ve gained a good knowledge about this Sector( Not in detail Just the basics). So after understanding the sector I looked for good companies at reasonable prices and then I found Aarti Pharma Labs. Gone through their concall and Investor Presentation and gained a lot of information about their business. All things are good as well as the financials. But the thing that is concerning me is the valuation. The Current PE is around 24x(less than the industry average) and they are expecting a growth rate of 15% in the coming 3 years, based on that if we calculate their PEG ratio it’s coming to 1.66 which is then overvalued. I am confused how to value the business? Kindly Guide about the valuations and also the sector, if there are tailwinds or not

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Following reply by @basumallick on similar question may help.

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Are you calculating based on sales or volume guidance? If you notice margins have been increasing quarter to quarter. Ultimately this operating leverage with result in an increased PAT and EPS which will change the PEG ratio calculation.

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Management has guided for 50% gross margins so it will probably sustain in this range.

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Investor Presentation
https://www.bseindia.com/xml-data/corpfiling/AttachLive/abb5aacd-3fd1-478d-b77e-874b53afaccc.pdf

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Q1 2025 Concall Highlights:
Opening Remarks:
Xanthine derivates contributed 54% in Q1 2025 revenue. See strong potential from segment.
Regulated market 55%, Rest of World 35 %, Non Regulated market 10%.o
CDMO/CMO is lower, fluctuation is part of business as products are multi stage. RD centre have good pipeline.
Revenue growth 21% YoY.
EBIDTA growth 14% YoY.
PAT growth 18% YoY.

Expansion:
Xanthine Expansion will complete in Beginning of FY2026. Total capacity will from 5000 to 9000 MTA. CAPEX of 150 cr.
Atali project will complete in Q4 2025.Focused on CDMO/CMO. CAPEX of 375 cr.
Vapi will be operationalized in Q2 2025. Volume will be 30/40 KL. It will not add much revenue but accelerate pipeline.
Solar power plant at Maharashtra is expected to available in this quarter, will be 1/3 of power requirement. CAPEX of 90 cr.

CDMO/CMO:
Increased projects from 40 to 53.
Seeing Large traction to India from China.
Among three business verticals, CDMO/CMO has highest margins.
27 commercial projects, half of them are at still at early stage, potential will grow significantly.
All are patented projects. They are only intermediates.
50/50 projects are under development/commercialize.
170 cr in FY2024, Guidance given was 25 to 30% in CDMO/CMO. It will be not quarter to quarter increase.
Do not see any capacity constrain.

Pollution Control Notice:
Received in Dombivali site (filed to exchange) which was resolved in 7 days, and get 30 to 35 days to approval. Now it is under operational. It was impacted many company in this region. As it was only 2% revenue, it does not materialize.

Bio secure act of US:
Bio secure act of US forcing innovators to move away from China and Aarti Pharmalab is benefiting from that.
Added two more customers. And more projects from existing customers.

Xanthine derivatives:
Revenue from 180 cr. To 210 cr, due to more volumes.
China aggression continue.
Prices are falling by 15 to 20% from last year, and raw material also falling. Able to maintain overall margin. Expect to stabilize price or move up, unless raw material prices fall down further.

• Gross Margin reduced due to CDMO/CMO lost contribution. It depends on number of stages. Q to Q will be up and down in margins due to CDMO/CMO.
• Gross Margin for Aarti Pharmalabs should be look at standalone, because consolidated number have trading business, which will be stopped at end of this quarter hopefully.
Last year was 200cr in revenue, margin was 1 or 2%. No impact on margin.
• Pricing pressure is there in API segment.
• Utilization at 85% and new projects will add 30 to 35%.

Concall Audio:

D: Invested and reviewing

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Updated disclosure: Exited today completely as stock not able to cross 20 & 50 DMA. I find another high growing opportunity. Not a recommendation at all.

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Aarti Pharmalabs -

Q1 FY 25 results and Concall highlights -

Revenues - 555 vs 458 cr
EBITDA - 96 vs 85 cr, up 14 pc ( margins @ 17 vs 19 pc )
PAT - 55 vs 47 cr, up 18 pc

Revenue breakup in Q1 -

Xanthene derivatives - 54 pc ( seeing strong demand and sales in this segment despite the Chinese competition )

API + Intermediates - 44 pc ( 55 pc of this came from regulated mkts and the rest from RoW / unregulated mkts )

CDMO / CMO - 2 pc ( in Q4, it was 19 pc. This business generally picks up in Q3,Q4 ). Currently the company has 27 commercial projects and 26 projects are in various stages of development. Confident of growing this business by 25-30 pc in FY 25

Expect to complete the Xanthene brownfield capex by Q1 FY 26

Atali expansion ( for manufacturing of APIs + Intermediates + CDMO ) is expected to be completed by end of Q4 FY 25

Expansion of intermediates manufacturing facility at Vapi is expected to be completed by Q2 FY 25

Solar power plant that the company is in the process of setting up is likely to be commissioned by Q3. This will cater to 1/3rd of company’s needs and help reduce manufacturing costs

Company is seeing greater traction / enquiries for their CMO / CDMO work and are also seeing a shift away from China

Company’s Gross Margin profile generally fluctuates between 50-52 pc

Company’s CMO/CDMO projects are currently small. Expect project sizes to become bigger as the business scales up over medium term. All of company CMO / CDMO projects relate to patented molecules ( early stage and late stage intermediates )

LY the company did 175 cr of CMO/CDMO business. Expect to take it to > 220 cr this FY

Company agreed that the bio-secure act passed in US will act as an added tailwind for the company’s business

Lower GMs in Q1 is due to lower CMO/CDMO sales in Q1. As CMO/CDMO business picks up, gross margins should improve

Company is seeing greater traction / enquiries for their CMO / CDMO work and are also seeing a shift away from China

Company’s Gross Margin profile generally fluctuates between 50-52 pc

Company’s CMO/CDMO projects are currently small. Expect project sizes to become bigger as the business scales up over medium term. All of company CMO / CDMO projects relate to patented molecules ( early stage and late stage intermediates )

LY the company did 175 cr of CMO/CDMO business. Expect to take it to > 220 cr this FY

Company agreed that the bio-secure act passed in US will act as an added tailwind for the company’s business

Lower GMs in Q1 is due to lower CMO/CDMO sales in Q1. As CMO/CDMO business picks up, gross margins should improve

My Hunch - company may outperform its guidance on CMO/CDMO business and hence on overall company level margins. CMO/CDMO business is seeing a lot of tail winds for the Indian players

Disc: holding, biased, not SEBI registered, not a buy/sell recommendation

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Results are quite lukewarm. CDO/CDMO business has been slipping down further and not sure if management will be able to scale that up. It’s not an easy business and very few in India have been able to establish presence in this space.

Only bright spot was margins that picked up this quarter but still doesn’t compensate for flat topline.

Disc- Small quantities received from Aarti Industries merger. Keeping for tracking purpose as I’m also interested in their CDO/CDMO play.

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Good Summary

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