Aarti Drugs Ltd. (AARTIDRUGS) Q2 FY23 Earnings Concall Transcript

Aarti Drugs Ltd. (NSE:AARTIDRUGS) Q2 FY23 Earnings Concall dated Oct. 21, 2022

Corporate Participants:

Adhish P. Patil — Chief Financial Officer

Vishwa Savla — Managing Director

Harit P. Shah — Whole-time Director

Analysts:

Rashmi Sancheti — Dolat Capital — Analyst

Ranveer Singh — Edelweiss Wealth — Analyst

Priya Harwani — Perpetuity Ventures LLP — Analyst

Parth Vasani — TK Advisors — Analyst

Priyanka Shah — Atidhan Securities — Analyst

Harsh Shah — Marcellus Investment Managers — Analyst

Niharika — Equitas Investments — Analyst

Aditi Sawant — ADM Advisors — Analyst

Isha Savla — Arya Securities — Analyst

Gagan Thareja — ESK Investment Managers — Analyst

Presentation:

Operator

Ladies and, gentlemen. Good day and welcome to Aarti Drugs Limited Q2 FY ’23 Earnings Conference Call. This conference call may contain forward-looking statements about the Company which are based on the beliefs, opinions and expectations of the Company, as on-date of this call. These statements are not the guarantees of future performance and involve risks 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. [Operator Instructions] 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.

Adhish P. Patil — Chief Financial Officer

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 Savla, Joint Managing Director; Mr. Harit Shah, Whole-Time Director of Aarti Drugs; and Mr. Vishwa Savla, Managing Director of Pinnacle Life Science Private Limited, and, [Indecipherable] our Investor Relations Advisor.

I hope everyone had an opportunity to go through the financial results, press release and investor presentation, which have been uploaded on the stock exchange 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 FY ’23, which remain 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 FY ’24. We are resolving few scale-up issues of Tarapur brownfield capacity installed in this year — this financial year and we expect this facility to start contributing to the top-line from H2 FY ’23 onwards. Apart from this, Tarapur API Greenfield capacity is also expected to be completed by the end of FY ’23. The. Total CapEx during H1 FY ’23 stood at INR77 crores and is expected to be in the range of INR200 crore to INR300 crores for the entire FY ’23.

Coming to CapEx for formulation segment, 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 INR55 crores, out of which around INR40 crores is done. We expect plant to commence commercial operations in March 2023. At full capacity the plant can generate revenue of INR200 crores. Products manufactured in this site will be majorly new-age oncologic drug 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 topline growth in-spite of geopolitical uncertainties, adverse currency movements across the globe, the 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 chemicals segment. During Q2, FY ’23, the company witnessed the highest-ever realization in most of the API and specialty chemical products, along with softening of some input costs are in power and fuel cost. We expect further moderation in input cost going-forward, which can further aid the operating margins.

The company’s operating bonds 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 cost 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. The API segment, the largest segment of the company in terms of revenue contribution grew 17% Y-o-Y. As stated earlier, the growth was mainly driven by an increased 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 up at INR82.5 crores for the quarter, up 9% Y-o-Y. The formation share of the total revenue for the quarter was around 12%. The formulation segments core focus area continued to remain exports. During the quarter exports contributed around 44% of the total revenue.

Now coming to Specialty Chemicals, Intermediates & 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 Chloro-sulphonation 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 FY ’23 stood at INR624.9 crores as against INR511.6 crores, showing a growth of 22% on Y-o-Y basis. The standalone business contributed around 88% to the consolidated revenue for the market — sorry, for the quarter. Approximately 62% of the revenues came from domestic market and approximately 38% from the export market for Q2 FY ’23 for the standalone business. Domestic revenue grew approximately by 19%, while exports grew by around 28% year-on year basis for Q2 FY ’23. Within the API segment, the antibiotic therapeutic category contributed around 44%, anti-diabetic around 17%, anti-protozoal around 16%, anti-inflammatory around 10%, anti-fungal around 8%, and the rest contributed around 5% to total API sales for Q2 FY ’23.

Going ahead, we remain confident of continuing our growth trajectory driven by capacity expansion through a combination of brownfield and greenfield CapEx in API and formulation segments and sustained momentum in our specialty chemicals segment. The profitability and the return ratios are also expected to improve in tandem moving 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.

Questions and Answers:

Operator

Thank you very much, sir. We will now begin the question-and-answer session. [Operator Instructions] 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.

Rashmi Sancheti — Dolat Capital — Analyst

Yes. Thank you for the opportunity.

Operator

I’m sorry to interrupt. If we can take the phone off speaker, please, there’s lot of disturbance coming from your end.

Rashmi Sancheti — Dolat Capital — Analyst

Hello, am I audible now?

Operator

Yes, ma’am. You can please proceed.

Rashmi Sancheti — Dolat Capital — Analyst

Yes. So my first question is that know there’s a higher realization in the API and the Specialty Chemicals segment and then we are also talking about moderation in the PSM, we are still seeing quarter-on-quarter drop in the gross margins. So any specific reason behind that, any kind of Forex loss or any other reason for such a drop?

Adhish P. Patil — Chief Financial Officer

Yes. Actually, for few of the cases, the market is very volatile from January till-date. And the thing is based on the this macro situations, we had piled up inventories also. So in some cases we had purchased at a very-high rate. If you see the ongoing negotiations, means on the raw-material and selling prices for few products, we can easily see 3% to 4% better margins. But then when it comes to taking that inventory loss on the accounting front, it is coming down. That is the main reason why still we are not able to show it in the business.

Rashmi Sancheti — Dolat Capital — Analyst

Okay. And, there is no forex loss at element, right?

Adhish P. Patil — Chief Financial Officer

Forex loss notionally is around to INR2 crores. So, not much.

Rashmi Sancheti — Dolat Capital — Analyst

Not much. Okay. And so earlier in last quarter we said that from the second-quarter onwards we will be seeing improvement in the operating margin from the second-quarter but I think it was more or less similar to the first quarter only and our first-half EBITDA margin is around 10.8%. In the second-half, how do you see this operating margin and gross margin going forward? And for the full-year if you can give any direction or any guidance on it.

Adhish P. Patil — Chief Financial Officer

Okay. So, one — first, this September quarter versus June quarter in the API segment, the EBITDA margin improved from 10% to 11.2%, though on consol level as you correctly pointed out, it is given same, due to our formulation segment had performed much better in the June quarter as compared to the September quarter. That is why on the consol level, the EBITDA margins 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 experience 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.

And going forward, we at least expect around couple of percent improvement going-forward. And it will keep improving, if the scenario becomes stable, once all the inventory losses goes away, then the margin should improve. So by the end, we should try to — by the end, means, Q4 we should try to hit EBITDA margins upwards of 15%.

Rashmi Sancheti — Dolat Capital — Analyst

Okay. Got it. That is helpful. And on your formulation business, 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 it is not contributing big to the EBITDA, so any comments on that?

Adhish P. Patil — Chief Financial Officer

Yes. Vishwa, can you please answer this question?

Vishwa Savla — Managing Director

See, last quarter we had a much better EBITDA, so some of our highly-value, high-margin export we were not able to execute in the current quarter. Due to this — the margins were low, however we would be able to execute those orders in the coming two quarters. So on a year-on-year revenue, we do expect the margins to recover and EBITDA margins to improve once we execute our higher-margin orders.

Rashmi Sancheti — Dolat Capital — Analyst

Okay. My last question is on Metformin. If you could update on how the prices moving for the Metformin in rest the market as well as in the domestic markets, whether the prices are going which is coming down. And also if you can update on your additional capacity, any new production from that additional capacity for Metformin has started. What is the current total capacity installed now and how much is the utilization rate?

Adhish P. Patil — Chief Financial Officer

Yes. I will answer your second question first. So last quarter we have done very good sales for Metformin. So, our average capacity is around 1,150 to 1,200 tons per month. And we were able to achieve somewhere around 1,000 tons per month of sale for the last quarter that is. And regarding price movements, I will ask Harit Shah to answer that question.

Harit P. Shah — Whole-time Director

Yes. The price of major raw-material DCDA, which is a major raw-material for Metformin has come down quarter-to-quarter. So at the peak of the, beginning of the year, it was around $4,000 to $4,500. So now, it has come down to less than $3,000. So we expect price to stabilize around these levels. And then price of Metformin also will stabilize. So these two quarters be price keep on reducing and we had lot of inventory loss because of that, but now things are stabilized more or less.

Rashmi Sancheti — Dolat Capital — Analyst

Okay. Understood. I have more questions, I’ll get back in the queue. Thank you so much.

Operator

Thank you. [Operator Instructions] The next question is from the line of Ranveer Singh from Edelweiss Wealth, please go ahead.

Ranveer Singh — Edelweiss Wealth — Analyst

Hello.

Operator

Sir, please proceed with your question.

Ranveer Singh — Edelweiss Wealth — Analyst

Yes. Okay, starting on my questions. One thing you commented, EBITDA margin of 15%, so this overall EBITDA margin you’re talking about or only API in-part you said? And secondly any — yes, you can continue and we’ll have another question. Yes.

Adhish P. Patil — Chief Financial Officer

Okay. So on overall basis, but also on the API side because almost standalone businesses is contributing around 88% to the total revenues. So, more or less it will go hand-in-hand.

Ranveer Singh — Edelweiss Wealth — Analyst

[Speech Overlap] Yes. Fine. So in this quarter whether we have any contribution from intermediate facility, any new projects we are working on?

Adhish P. Patil — Chief Financial Officer

I didn’t understand your question.

Ranveer Singh — Edelweiss Wealth — Analyst

That new projects was supposed to intermediate facility was supposed to start contribution from…

Adhish P. Patil — Chief Financial Officer

Yes. Okay. Understood. Yes. So, correct. So that brownfield expansion what we had done in Tarapur for the Specialty Chemicals, we are still, means, not able to fully ramp-up the capacities, means you can say almost 30 tons out of 400 tons, not 30 tons around 60 tons out of 400 tons we have achieved. By the November we’ll be achieving appox of 150 tons 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 fortunately equipments to come in and then we’ll be ramping up the production.

And as far as the consumption norms are concerned, we feel that we will be surpassing our previous norms, because earlier we used to do a batch manufacturing process and now we are doing — we will be doing continuous manufacturing for that particular product with different ROEs. So our RMC will also become better for that product.

Ranveer Singh — Edelweiss Wealth — Analyst

So for FY ’24 perspective, can we expect meaningful revenue coming from this?

Adhish P. Patil — Chief Financial Officer

So this full-scale potential for this facility will be anywhere between INR90 crores to INR105 crores, like that.

Ranveer Singh — Edelweiss Wealth — Analyst

Okay. That should be achieved by which year?

Adhish P. Patil — Chief Financial Officer

So, because it’s a specialty chemical and we have been dealing in this, we will try our best to ramp-up as soon as possible. So by the end of next year, hopefully, we should be occupying it by the end of next year — next financial year. But how much time it will take, we also are not very clear on that, means, how much will come for the next entire year.

Ranveer Singh — Edelweiss Wealth — Analyst

Okay and any update on the Gliptin facility we are working on?

Adhish P. Patil — Chief Financial Officer

Yes. So there we have taken commercial batches. We have started selling our product in the market, so that the quality acceptance is there. And now we are working on the reduction of cost and there are few intermediates also on which we are working. So we’ll be handing over to process to appeal for exclusive job manufacturers for that, for those intermediate and that will help us to reduce the cost and become even more competitive. So though top-line, it will start contributing but bottom-line, I should say, it will take at least two quarters to start contributing meaningfully.

Ranveer Singh — Edelweiss Wealth — Analyst

Okay. Fine. If in API, in overall perspective, your commentary said that, inventory purchased earlier is just still with you. So when that inventory is likely to exhaust? So in FY — in Q4 you said that improvement will happen, so this is based on the new price negotiation you haven’t started.

Adhish P. Patil — Chief Financial Officer

So, if everything remains stable by next quarter it should be over. By this — next quarter means Q3.

Ranveer Singh — Edelweiss Wealth — Analyst

Okay. So from Q3 onwards some improvements would start visible there. Okay, fine. That’s it from my side and all the best.

Adhish P. Patil — Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from the line of Priya Harwani from Perpetuity Ventures, please go ahead.

Priya Harwani — Perpetuity Ventures LLP — Analyst

Hello.

Operator

Yes, ma’am, please proceed.

Priya Harwani — Perpetuity Ventures LLP — Analyst

…opportunity. So I just wanted to cross-check the number of CapEx mentioned in the comments. So can you repeat that?

Operator

We said that around INR77 crore has been done for this year and what we hope that it will go around INR200 crore to INR300 crore for this entire year. Because, what has happened is we have ordered lot of equipment for two of our greenfield projects, so when you order typically you give around 15% to 20% advance, but when the delivery will come in, at that time, [Indecipherable] will be higher. So we expected second-half CapEx will be much higher than the first-half of the FY ’23.

Priya Harwani — Perpetuity Ventures LLP — Analyst

Got it, sir. Thank you so much,

Adhish P. Patil — Chief Financial Officer

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Parth Vasani from TK Advisors, please go ahead.

Parth Vasani — TK Advisors — Analyst

Yes. 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 the CapEx for the entire year of FY ’23?

Adhish P. Patil — Chief Financial Officer

Yes. The thing is based on — so you are asking how much is a total revenue potential of the existing capacity, right?

Parth Vasani — TK Advisors — Analyst

Yes.

Adhish P. Patil — Chief Financial Officer

Yes. So, we haven’t — so based on the last quarter’s prices, we can do approx of INR3,000 turnover. Even for the standalone company itself. Yes, so around on appox of INR3,000 crores for standalone company and then we can add another INR300 crores for formulation. So that will be a full-scale potential for existing capacity but then there are more capacities which are coming up in Q4 and then Q1 of next financial year.

Parth Vasani — TK Advisors — Analyst

Okay. Yes, that was helpful. Second, I wanted to ask that in the press release you have mentioned about the increased requirement for working capital. So can you explain the reason for the same?

Adhish P. Patil — Chief Financial Officer

Yes. So the thing is our inventory has gone up, no doubt about that, so that is why we have reduced our probably — we might reduce our production a little bit but till September we have gone — we didn’t reduce on the production, even though demand for few of the antibiotics was little less on the domestic market, on the export side we have seen good demand, but for the domestic market demand was little subdued. And usually monsoon season, the demand is more. So we kept on producing, so that is the reason why the inventory was piled up a little bit. And also because the macro factors that where — because of this war scenario and everything, it was quite unclear, so we did not want to lose on production. So that is why we kept on producing. But now going forward, I think, by reducing — at some of the — for some of the products, we might bring down the inventory and then the working capital will be freed up again.

Parth Vasani — TK Advisors — Analyst

Okay. Got it. Yes, that was it from my side. Thank you very much.

Operator

Thank you. [Operator Instructions] The next question is from the line of Rashmi Sancheti from Dolat Capital, please go-ahead.

Rashmi Sancheti — Dolat Capital — Analyst

Yes. Thanks for the follow-up. Just one question on gliptins, which have started last year, last quarter, quarter four, where are we in terms of both Teneligliptin and Vildagliptin and have we started any exports for the gliptins?

Adhish P. Patil — Chief Financial Officer

Harit Shah, would you like to answer this question?

Harit P. Shah — Whole-time Director

Yes. Teneligliptin we are more or less quite this production is stable, our cost-efficiency has improved and we are working on making intermediate ourselves. So we are already going to get market — we are improving our market share in domestic market and export for this product is not the substantial. So, but we are concentrating getting more-and-more Indian market by another one or two quarters.

And about Vildagliptin, we have just started export marketing and started submitting samples and validation batches, et-cetera. So more only another two quarters, Vildagliptin we’ll be able to export more volumes. Yes.

Rashmi Sancheti — Dolat Capital — Analyst

Okay. And Sir, if at all an update on the specialty greenfield plant, where are we currently, are you on track to start the production at the end of FY ’23?

Adhish P. Patil — Chief Financial Officer

For the greenfield plant of specialty chemicals, that is for backward integration, which we are doing in the Gujarat, the estimated start, commissioning of the production is — commissioning of the equipment and style should be taken in the — towards the end of first quarter of FY ’24. That is the June quarter.

Rashmi Sancheti — Dolat Capital — Analyst

Okay. Thank you. That’s it from my side.

Adhish P. Patil — Chief Financial Officer

Yes. And the Tatapur greenfield one, we are expecting to start by March.

Rashmi Sancheti — Dolat Capital — Analyst

So Tarapur greenfield one, the closest…

Adhish P. Patil — Chief Financial Officer

[Speech Overlap] No. There are two, so are three. There are two greenfield projects which are going on, one is specialty chemicals at Gujarat, that is the greenfield. There is a second Dharma project greenfield project which is going on in Tarapur and the third was the brownfield expansion of specialty chemicals in Tarapur, which is already done.

Rashmi Sancheti — Dolat Capital — Analyst

Okay. And the specialty chemical the Chloro-sulphonation one and the entire especially chemical, that is in Gujarat, which you are saying.

Adhish P. Patil — Chief Financial Officer

So the Chloro — so there were little changes there. So the Chloro-sulphonation one which we were planning to start at Gujarat. So it was a 10 times scale-up from our existing batch manufacturing process. So initially what we have done, we have done a brownfield expansion in Tarapur itself with five times scale-up, not the ten times, five times scale-up. The ultimate plan is to shift the entire production to Gujarat. But the current Gujarat expansion which is going on, that is more on other intermediates, not the Chloro-sulphonation.

Rashmi Sancheti — Dolat Capital — Analyst

But maybe after one year or something, this Chloro-sulphonation which the — where you have started the brownfield will get shifted to ultimately to the Gujarat greenfield specialty chemicals plants, right?

Adhish P. Patil — Chief Financial Officer

Yes. And that will be the second site. The current greenfield site which is going on, that is different and this will be the additional greenfield site, which we’ll putting in Gujarat.

Rashmi Sancheti — Dolat Capital — Analyst

Understood. That would be the new lines, basically.

Adhish P. Patil — Chief Financial Officer

Yes.

Rashmi Sancheti — Dolat Capital — Analyst

Okay. Thank you for the clarity. That’s it from my side.

Operator

Thank you. [Operator Instructions] The next question is from the line of Priyanka Shah from Atidhan Securities, please go ahead.

Priyanka Shah — Atidhan Securities — Analyst

Hi. Thank you, sir for the opportunity. I have couple of questions. Sir, can you bifurcate CapEx for API and specialty chemicals for FY ’23, for INR200 crore to INR300 crore CapEx?

Adhish P. Patil — Chief Financial Officer

Okay. So, on a broader scale, some of it say around INR40 crore, INR50 crore would be the brownfield and your maintenance-related CapEx, but the majority of it can be — it is almost fifty-fifty at Tatapur greenfield and Gujarat greenfield projects.

Priyanka Shah — Atidhan Securities — Analyst

Okay, sir. And what is the current capacity utilization for API and specialty chemicals?

Adhish P. Patil — Chief Financial Officer

So current would be somewhere in the mid 70s only.

Priyanka Shah — Atidhan Securities — Analyst

Okay. Thank you so much, sir.

Adhish P. Patil — Chief Financial Officer

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Ranveer Singh from Edelweiss Wealth, please go-ahead.

Ranveer Singh — Edelweiss Wealth — Analyst

Well, thank you for the follow-up.

Operator

Sir, can you take the phone off speaker, please? Your audio is bit muffled.

Ranveer Singh — Edelweiss Wealth — Analyst

Yes. Hello, is it better now? Yes.

Operator

Yes.

Ranveer Singh — Edelweiss Wealth — Analyst

Thank you follow-up. Just on the CapEx side, you said in first-half, how much CapEx we have spent and how much remains to be spend in second-half of FY ’23.

Adhish P. Patil — Chief Financial Officer

Yes. So the first-half we have done almost INR77 crore. By the end-of-the year we expect it to remain between INR200 crore to INR300 crore. Now the reason we’re giving such a broad range is because if it might just go in April, so that is why I’m giving you a range of INR200 crores to INR300 crores. For the entire year.

Ranveer Singh — Edelweiss Wealth — Analyst

For the entire year. Okay. So of that INR600 crores total CapEx, we are midway by FY — how in FY ’23?

Adhish P. Patil — Chief Financial Officer

Yes. So that two greenfield project with almost INR350 crores kind of CapEx, that will be completed by you can say June of 2023, June month of 2023. Most of the CapEx which is like INR350 crores assigned to these two Greenfield projects will be completed.

Ranveer Singh — Edelweiss Wealth — Analyst

And the remaining would be in ’24?

Adhish P. Patil — Chief Financial Officer

Yes. So, it will start in — yes, correct, in FY ’24.

Ranveer Singh — Edelweiss Wealth — Analyst

By end of FY ’24. Yes. Okay. And there in backward integration side, right now because for last few quarters, we have been talking that we are working more on integration, backward Integration side, so any new development you could highlight that we have achieved in this first-half of FY ’23 on integration plant?

Adhish P. Patil — Chief Financial Officer

Yes. So that plant completed by around May or June in 2023. That is a first-quarter of next financial year. So after that we’ll start utilizing the production from that intermediate facility.

Ranveer Singh — Edelweiss Wealth — Analyst

And this is related to which product?

Adhish P. Patil — Chief Financial Officer

This will be broadly related to anti-diabetic and other products, antiprotozoal.

Ranveer Singh — Edelweiss Wealth — Analyst

Okay. And projects are under that PLI scheme, so what is the development there for DCDA?

Adhish P. Patil — Chief Financial Officer

No. So, DCDA, we are not going ahead as of now. DCDA currently we are not doing. We are holding that.

Ranveer Singh — Edelweiss Wealth — Analyst

Okay so that project has been cancelled?

Adhish P. Patil — Chief Financial Officer

No, actually DCDA project we never announced. PLI scheme, there was another project for antiprotozoal, that — so we are doing it, but we are not going for PLI scheme, reason being the CapEx which we are committed earlier that got reduced substantially, it was almost by 50%. And we approached government that whether it will be okay for them, but they said that you have to do with the committed CapEx to be eligible to get that benefit. So we decided that rather than spending that much, you will spread 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, because are getting everything upfront in CapEx.

Ranveer Singh — Edelweiss Wealth — Analyst

Okay. And the API related to asking the dermatology segment, I think that was import substitute. So, have you seen any competition there or pricing, because we are a little delayed so?

Adhish P. Patil — Chief Financial Officer

No. As of now there is no substantial domestic competition for that, so the only competition will be from China.

Ranveer Singh — Edelweiss Wealth — Analyst

Okay. Thank you, all.

Operator

Thank you. The next question is from the line of Harsh from Marcellus, please go-ahead.

Harsh Shah — Marcellus Investment Managers — Analyst

Yes. Hello, sir. With that chloro-fluoro project moving to Tarapur, what exactly greenfield expansion are we doing in Gujarat facility?

Adhish P. Patil — Chief Financial Officer

Yes. So greenfield, that is — we are doing few special, sort of, intermediate, you can say, on specialty side and it is also will serve as a backward integration for our other main products.

Harsh Shah — Marcellus Investment Managers — Analyst

Okay. And…

Adhish P. Patil — Chief Financial Officer

Chloro-sulphonation we’ll be putting in the second site of Gujarat. Yes.

Harsh Shah — Marcellus Investment Managers — Analyst

Okay. And for the current Gujarat facility, how much are we doing the CapEx?

Adhish P. Patil — Chief Financial Officer

So that would be roughly be around INR150 crores to INR200 crores.

Harsh Shah — Marcellus Investment Managers — Analyst

Okay. And this facility is likely to commence production in Q1 FY ’24.

Adhish P. Patil — Chief Financial Officer

Correct, by the end of that, yes. By the end of that quarter.

Harsh Shah — Marcellus Investment Managers — Analyst

Okay. That’s it from my side. Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Niharika from Equitas Investments, please go-ahead.

Niharika — Equitas Investments — Analyst

Hello. Hi, good afternoon. So, I think you mentioned that volume growth has been flat in domestic market and I think some 10% to 11% growth in export market. So with all the API CapEx that is coming into picture, how are we planning to ramp-up? How are we — where are we seeing a market for it, export or domestic? Because I see the domestic is still flat.

Adhish P. Patil — Chief Financial Officer

Yes. So the CapEx also which we have planned, that is for additional products. So they will be — right now. So basically the market will be new for that and for the current, you can say 20% to 25% under utilized capacity for few of the existing API product. We have the visibility, domestic market will pick-up, one is that. And secondly, there are lot of small export geographies, you can say, for each product, a bit of it is left out and also we are having lot of European-focused. So, to update on that, recently in this week itself, one of the facilities of Tarapur, the E22 facility we just had an EDQM inspection, which is the European authority. It was quite good. So the report will come out in few days and then probably we’ll give operation release on that as well. So European markets and there are lot of other geographies where we can [Indecipherable].

Niharika — Equitas Investments — Analyst

Okay. And for the new greenfield Tarapur facility, are we also going for US-FDA approval, the new facility which is coming? Are we also planning to go for — apply for…

Adhish P. Patil — Chief Financial Officer

The greenfield, no, but for our existing anti-diabetic facility,which we will be expanding further in next year, there we are planning to get an USFDA approval. And that is a dedicated plant. The current one was our multi-purpose plant.

Niharika — Equitas Investments — Analyst

Okay. And on the Gujarat greenfield, you said that it is majorly for backward integration, so it ideally would just reduce my operating costs and add to basically this is 100% for captive consumption or are we also going to sell it to outside parties as well?

Adhish P. Patil — Chief Financial Officer

It is both, it is a mix of both. So the thing is the entire CapEx plan which we had, of that INR500 crore, INR550 crores, the external revenue potential was from somewhere between INR1,500 crores to INR1,600 crores but — I’m sorry, the actual revenue potential from those clients, but the external revenue potential was only around INR1,200 crores, so rest was the captive part.

Niharika — Equitas Investments — Analyst

Okay. And, sir, 200 — so percentage-wise if I see so, some 60%, 70% would be there and rest would be.

Adhish P. Patil — Chief Financial Officer

Okay, so if you’re asking only of the Gujarat facility.

Niharika — Equitas Investments — Analyst

Yes.

Adhish P. Patil — Chief Financial Officer

Then yes, what you say is correct.

Niharika — Equitas Investments — Analyst

Okay. And my last question would be on inventories. So 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-material? Because I think raw materials we were shedding off in last quarter as well. So this INR500-odd crores inventory, does it contribute majorly of finished goods or?

Adhish P. Patil — Chief Financial Officer

Yes. So, what has happened that in last quarter our production was very-high, in fact we had a 10% volume growth in terms of thumsup[Phonetic] production as well. So whatever raw-material inventory pile up was there, we have now — by the end of last quarter we have now converted into finished goods. But now we will start selling that.

Niharika — Equitas Investments — Analyst

But are we taking the inventory loss on the finished goods that is in the stock or are we — we will be able to make any margins on that? Because I think this is by using the high priced raw materials.

Adhish P. Patil — Chief Financial Officer

Yes. So, as of now for the finished goods, there was no inventory loss but because we followed that FEFO method, our raw-material costing, so the higher-value raw-materials have been accounted in the September quarter, but as you correctly say that the newer stock will have little lesser errancy, because of the falling raw-material prices. But then there will be some impact in the December quarter as well, because…

Niharika — Equitas Investments — Analyst

Yes. That was it from my side.

Adhish P. Patil — Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from the line of Aditi Sawant of ADM Advisors, please go ahead.

Aditi Sawant — ADM Advisors — Analyst

Thanks for the opportunity. I have one question. Of the total expense in formulation, can you please show much is for developed markets and how much is emerging markets?

Adhish P. Patil — Chief Financial Officer

Yeah. Vishwa, can you please answer?

Vishwa Savla — Managing Director

Yes. As of now majority of it is for emerging markets because in regulated markets we are yet to receive our approvals and registrations. And for last two years or two-and-a-half years, we’ve been majorly focusing on regulated market. So most of our regulated market filings are either applying or ANDA approval stage. So as of now majority of revenue was coming from emerging markets.

Aditi Sawant — ADM Advisors — Analyst

Okay. Thank you. That was helpful. That’s it from my side and all the best for the upcoming quarters.

Adhish P. Patil — Chief Financial Officer

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Isha Savla from Arya Securities, please go ahead.

Isha Savla — Arya Securities — Analyst

Hi. Thank you for the opportunity. I just wanted to ask a few questions. So first of all I would like to understand that we witnessed highest ever prices for API products. So my question is that do we expect the realizations to fall as the input costs have started to come off?

Adhish P. Patil — Chief Financial Officer

Yes, it will happen slowly, because — that is true, because most of the time API prices follows the input prices. Because across the board slowly the raw-material prices start going down. The API prices will come off slowly.

Isha Savla — Arya Securities — Analyst

Okay. What kind of time lag do you expect?

Adhish P. Patil — Chief Financial Officer

So, it will depends on how much order book you have piled up but typically one to two months we can.

Isha Savla — Arya Securities — Analyst

Understand. And secondly how much is the current differential between domestic and export API prices?

Adhish P. Patil — Chief Financial Officer

Okay. So again, product-to-product is different, but definitely the export prices are high. In some cases it is lot higher than the Domestic prices, but there also, in exports also it depends on which geographies you’re selling. So the Indian subcontinent like Pakistan, Bangladesh, so on, there the prices will be very low or few emerging markets of Southeast Asia, but otherwise in other geographies, the prices are much higher than domestic market. So, it’s very difficult for me to quantify. I’m not able to quantify that.

Isha Savla — Arya Securities — Analyst

Got it. The next question I just wanted to check that are we planning to diversify specialty chemical business away from our Chloro-sulfonation products with the ongoing CapEx?

Adhish P. Patil — Chief Financial Officer

Yes. So we are definitely doing more on the specialty chemicals side. Other than chloro-sulfonation also, we are expanding in other lengths as well. We are also doing few contract manufacturing projects, like we got inventories in this field. And the Gujarat facility will also add new product in the specialty Chemicals line.

Isha Savla — Arya Securities — Analyst

All right. This is very helpful. Thank you for answering all my questions.

Operator

Thank you. The next question is from the line of Gagan Thareja from ESK Investment Managers, please go-ahead.

Gagan Thareja — ESK Investment Managers — Analyst

Yes. Good afternoon. Am I audible?

Operator

Mr. Thareja, if you can speak a little loud?

Gagan Thareja — ESK Investment Managers — Analyst

Yes. Is this better?

Operator

Yes.

Gagan Thareja — ESK Investment Managers — Analyst

Can you hear me now?

Adhish P. Patil — Chief Financial Officer

Yes.

Gagan Thareja — ESK Investment Managers — Analyst

The first question is on the margins. Throughout the last, 12, 15 months, not just Aarti, but all API companies have struggled with volume contraction. The reasons given out largely centered around high input prices and difficulty in passing the input prices on completely. Also there are freight and utility price increases. Now the RN prices are softening and yourself indicated that in a couple of months finished good prices will also fall inline. I mean if that is the case, then what are your levers for margin expansion? You’re saying that you probably tend to exit the final quarter of this year at 15%. How in that happened if your output prices also fall inline with input?

Adhish P. Patil — Chief Financial Officer

Actually I was explaining earlier, you correctly pointed out that utility prices have also gone up, 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. It is because of the coal prices. So the prices have more than doubled and if they have remained like that for a long period. We hope that to come down and what has happened indirectly because of this very-high coal prices now the power rates have also gone up because of thermal power station, because they also rely on coal. So there also because of that also manufacturing utility costs have gone up quite considerably for manufacturing companies, I would say.

And as far as this gross contribution is concerned, as I was explaining, the negotiations which are happening, say, if you take any particular month, the margins looks higher but the problem is in the uncertain scenario of last nine months, what has happened that you end-up booking a lot of raw-material at a higher price. And the sales order comes, you can say, more or less it is spread-out every month. So sometimes there is a problem in terms of you might end-up booking a high praise raw-material and then the prices start falling. So once this volatility goes away even then — 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.

Gagan Thareja — ESK Investment Managers — Analyst

But are you saying that the expansion from 10% margin to a 15% margin, that’s very significant…

Adhish P. Patil — Chief Financial Officer

Yes. So API already we are 11.2% right now.

Gagan Thareja — ESK Investment Managers — Analyst

Correct. But it would still mean another 400 basis-point…

Adhish P. Patil — Chief Financial Officer

Yes.

Gagan Thareja — ESK Investment Managers — Analyst

But is that all down to simply the lead and lag between you holding out higher-cost inventory and RM prices pushing down and therefore, you 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 RC, four-year, five-year average margins would be around the 15% mark and if I go back further into the past probably still higher. If one keeps that sort of a perspective in mind, I understand short-term, there is volatility and that our business [Indecipherable] If it hits you so much and so badly…

Adhish P. Patil — Chief Financial Officer

Actually there is one more factor regarding Ammonia-related product. I think, Harit Shah will be better able to explain you that.

Harit P. Shah — Whole-time Director

Yes. Overall because of gas shortage, Russian-Ukraine war, the price of ammonia is almost three times of one year back. And we don’t see any correction in the immediate future because of suppliers of gas from Russia. So fertilizer plants in across the Europe almost are affected. So they would rather put their energy into electricity than making fertilizer. So that’s the scene. But otherwise all other chemical prices are coming down. Actually one of you, one or two [Indecipherable] but overall situation looks good now.

Adhish P. Patil — Chief Financial Officer

And these same products are available at much cheaper rates in China. So the Chinese manufacturer which is our main competition has brought our products, so they are having that price advantage in terms of raw-material rates and that is also one of the reason for few products our margin getting squeezed.

Gagan Thareja — ESK Investment Managers — Analyst

Okay. I would have thought normally that whatever you indicated on ammonia prices and utility, you essentially just pass on the absolute cost increase, you don’t to retain the same percentage margin, right? So 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? See, if that will be case then…

Adhish P. Patil — Chief Financial Officer

What you say is it correct, absolutely correct in terms of short-term because in short-term means within a year, APIs look only at the, you can say, the value addition per kg, but in the longer run, when you close-down the financial year and then you see the return, then ultimately for any business, minor[Phonetic] any competitors as well margins are very important. So that is the time when margins again start getting back to normal. So what do you want to take the current markets. [Speech Overlap]

Yes. So what I’m trying to say is suppose you have make. Very roughly I’m saying, suppose you’re making INR200 on a INR2000 product, then — and INR100 rupees product, even INR20 is okay for you. So basically margins are important what I’m trying to say. Not so across — otherwise what will happen even for the INR10,000 product, if API start expecting only INR200 then margins will go for a toss. So ultimately it will come back to margins in longer run.

Gagan Thareja — ESK Investment Managers — Analyst

Okay. But are you seeing your competitors also not trying to break the market up for volumes and therefore your expectation that…

Adhish P. Patil — Chief Financial Officer

It might happen, because if suddenly demand goes down or since everyone was expecting higher, we can say, demand and everyone has produced a lot of quantities and suddenly the demand goes down, everyone is losing.

Gagan Thareja — ESK Investment Managers — Analyst

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. But would you believe that the inventory situation in the channel is normal and therefore such issues may not arise going ahead?

Adhish P. Patil — Chief Financial Officer

Based on the feedback which we get from the market, I think the order should start coming back. But Harit can better explain here.

Harit P. Shah — Whole-time Director

Yes. Overall pharma physical demand was less in first two quarters and there was lot of inventory but 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. So we expect demand to go back to normal, before COVID levels at least.

Adhish P. Patil — Chief Financial Officer

Yes.

Gagan Thareja — ESK Investment Managers — Analyst

Okay. If you look at the Chinese situation, there is a new Omnicom variant and there is an another set of rolling lockdowns happening in China again. You sort of are seeing that the things remain stable going ahead the scope for margin improvement but if things are the way they are in China the supply-chain will probably get disrupted once more. And there is already, as you indicated, a gas and ammonia disruption based out Europe. So do you really see any stability in the supply-chain coming in the next two quarters? Because I would have thought we are up for another wave of difficult Chinese supply-chain.

Adhish P. Patil — Chief Financial Officer

Yes. So what to say is correct. We feel that. If any additional negative impact comes up in terms of macro factors then definitely the situation might remind same. Because that is the exact reason why the margins are lower even now. Last financial year also, the margins were quite low during the first-half of the year and then in December quarter the margins have gone up to 14%, 15% in December ’21. And then again this war-thing happened and again it got squeezed down. So the thing is if further negative factors happened then definitely no one can help. But assuming that things will stabilize here on because we have seen some correction in the raw-material prices also. So if we assume that things will stabilize then definitely our margins start expanding.

Gagan Thareja — ESK Investment Managers — Analyst

To what degree are you backward integrated in your current sales and post Gujarat to what degree does that increase, if you could say…

Adhish P. Patil — Chief Financial Officer

Yes. So, after Gujarat another, you can say, 10%, 12% than our Indian counterparts in most of the cases. And that is the reason why we have an Asia where Indian manufacturers but definitely even when it comes to Chinese manufacturer, we have captured a lot of their market-share in Southeast Asian market as well but only because the few things about ammonia that has affected only Indian players and not the Chinese players. So there it is slide out of overhang, though even though or efficiencies might be at par with them or even better but then because of that. If raw-material pricing disparity, they are having some advantage over there. But in that case we are approaching government for anti-dumping duty because the Chinese manufacturers are getting undue advantage. So. Yes, let’s see how things pan-out but we are quite confident that it should improve. How fast it will improve, we should see now.

Gagan Thareja — ESK Investment Managers — Analyst

In [Indecipherable] I gather one of your peers is backward integrating into the DCDA. This is something that almost all the API manufacturers buyout of China. If that is the case, do you see this initiative on their behalf causing market ripples and there’ll be a market-share movement based out of their competence, if they get some backward integrate?

Adhish P. Patil — Chief Financial Officer

Yes, definitely it will help. Anyone who will start manufacturing DCDA, especially a Metformin player. But it’s quite tricky product and the chemistry is quite hazardous, so. Let’s see. Because a lot of people have tried that project in past as well. But haven’t gone ahead.

Gagan Thareja — ESK Investment Managers — Analyst

But you do not consider it project…

Adhish P. Patil — Chief Financial Officer

No, we will. Obviously, we have to keep an eye on that because otherwise we might have to go in-house because we ourselves will be having — we are wanting to have almost 3,000 tons per month production of Metformin. So it’s quite a lot.

Gagan Thareja — ESK Investment Managers — Analyst

Thanks. That’s all from my side. I’ll get back in the queue.

Adhish P. Patil — Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from the line of Niharika from Equitas Investments, please go-ahead.

Niharika — Equitas Investments — Analyst

Hi. Just one or two follow-up questions. I just want to understand how our long-term supply contracts structured? And also like I want to understand long-term contracts from buyer perspective as well as suppliers perspective. Basically, is there any — is it fixed or any escalation clause in contract?

Adhish P. Patil — Chief Financial Officer

Okay. Harit, would you like to answer this question?

Harit P. Shah — Whole-time Director

Sorry. I didn’t get the question here.

Niharika — Equitas Investments — Analyst

I just wanted to understand how are our long-term supply contracts structured and also how — like as a buyer and as a supplier how are you contract structure.

Harit P. Shah — Whole-time Director

Normally we have called volume contracts and the prices, due to volatile situation we have to offer quarterly pricing only and qualities are fixed, volumes are fixed but. And based on these quarterly, normal pricing decision we will change our pricing for the product for long-term contracts.

Niharika — Equitas Investments — Analyst

And is it linked to any particular commodity, say ammonia?

Harit P. Shah — Whole-time Director

Yes. So for each product has different. We are making 20 bulk drugs, more than 20 bulk drugs, but 80% of volumes comes out 20, in that each product has different different raw materials — so it’s different raw materials.

Niharika — Equitas Investments — Analyst

So we are linking it to some raw-material pricing. I’m just asking about the does the volatility that is happening around.

Harit P. Shah — Whole-time Director

Correct.

Niharika — Equitas Investments — Analyst

And also my second question is considering Aarti Drugs has like in few APIs we are the largest players in domestic and in some globally. So what kind of pricing power do we hold? Because still we are not able to pass it on fully. So why don’t we have that kind of a pricing power? Because API is a very essential item. So why haven’t we able to pass it on?

Harit P. Shah — Whole-time Director

The issue is pricing are so volatile, every month the price valuation is as there some products — as I say, 8%, 10%, so how do we control that basically? But now things are better and we expect — if the prices are stable then we will definitely go back to our normal margins.

Niharika — Equitas Investments — Analyst

Sir, I’m just trying to understand if we are — why aren’t we able to take the price hike because if there some other competitor which is taking our share or because without API, even the other same player cannot work, so then why cannot we have that kind of pricing power? Is there is some competition if you are seeing?

Adhish P. Patil — Chief Financial Officer

The thing is that we are taking price hike, so that is the reason why those September quarter selling passenger at maximum. But the thing is the price hikes, while taking the prices it needs to be a gradual process because if we suddenly increase the price, generally the formulator will get back to you, he’ll try to look for other sources and if somebody else is having inventory during that period of low-cost, then they will offer them, then you might end-up losing those orders on in that particular quarter. But next quarter again both the competitors will come at a level-playing field and then the prices will go. So these things happen on a temporary basis but like that.

Niharika — Equitas Investments — Analyst

Okay. Thank you.

Adhish P. Patil — Chief Financial Officer

Thank you.

Operator

Thank you. As there are no further questions from the participants I now hand the conference over to Mr. Adhish Patil for closing comments. Over to you, sir.

Adhish P. Patil — Chief Financial Officer

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 [Indecipherable] our investor relations advisor. Thank you.

Operator

Thank you. 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.