AMI Organics Ltd (AMIORG) Q3 FY23 Earnings Concall Transcript

AMI Organics Ltd (NSE: AMIORG) Q3 FY23 Earnings Concall dated Feb. 04, 2023

Corporate Participants:

Bhavin Shah — Chief Financial Officer

Nareshkumar Patel — Chief Executive Officer

Analysts:

Tarun Shetty — Haitong Securities — Analyst

Padma Raju Mathi — SBI Life Insurance — Analyst

Sudarshan Padmanabhan — JM Financial PMS — Analyst

Chirag Lodaya — Valuequest Investment Advisors — Analyst

Kumar Saumya — Ambit Capital — Analyst

Kevin Gandhi — CapGrow Capital Advisors — Analyst

Vishal Prasad — VP Capital — Analyst

Hardick Bora — Union Mutual Fund — Analyst

Reena Shah — Elara Capital — Analyst

Gagan Thareja — ASK Investment Managers — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Haitong with company Q3 FY’23 Earnings Call of Ami Organics Limited, hosted by Haitong Securities. [Operator Instructions]

I now hand the conference over to Mr. Tarun Shetty, Pharma analyst from Haitong Securities. Thank you, and over to you.

Tarun Shetty — Haitong Securities — Analyst

Thank you. Good evening, everyone, and welcome to Ami Organics’ Q3 FY’23 results conference call. We at Haitong would like to thank the management for giving us the opportunity to host this call. Today, from the management side, we have Mr. Naresh Patel, Chairman and Managing Director; Mr. Bhavin Shah, CFO of Ami Organics. I will now hand the call over to Mr. Bhavin Shah or his opening remarks. Thank you, and over to you, sir.

Bhavin Shah — Chief Financial Officer

Thank you, Tarun. Good evening, and happy New Year, everyone. We are pleased to welcome you all to our earnings conference call to discuss Q3 FY’23 financials.

Please note that a copy of our disclosure is available on the Investors section of our website as well as on the stock exchanges. Please do note that anything said on this call, which reflects our outlook towards the future or which could be construed as forward-looking statement must be reviewed in conjunction with the risks that the company faces. This conference call is being recorded, and the transcript along with the audio of the same will be made available on the website of the company and exchanges. Please also note that the audio of the conference call is the copyright material of Ami Organics and cannot be copied, rebroadcasted or attributed in press or media without specific and written consent of the company.

With that, I would like to hand over the floor to our Chairman and Managing Director, Mr. Naresh Patel, for his opening statement. Over to you, sir.

Nareshkumar Patel — Chief Executive Officer

Thank you, Bhavin. Good evening, everyone. Welcome to our Q3 FY’23 earnings conference call. I would like to wish you a very happy New Year.

Before we dive into numbers, let me take a moment to comment on the global market and its implications on the industry in general. Towards the end of 2022, while global supply chain issues rationalized to some extent, the demand environment was impacted by inflation and resulted in mild slowdown. As we enter 2023, inflation seems to be easing across the world and gas prices have fallen to pre-war levels. The situation in China also appears to be improving with low sprout in COVID cases post the Lunar holidays. That said, even as these things are improving, we need to keep a close watch on each of them.

Coming to the industry, demand for pharmaceutical continued to be soft during the start of Q3 FY’23, but picked in the second half of the quarter. We expect the demand to gradually improve in the current quarter. On that note, let us move towards the performance highlights of Ami Organics.

The company continues its growth momentum and margin expansion path. During the quarter, our top line grew by 8% year-on-year. The slower growth was primarily due to the deeper shipments of certain goods. If you adjust them, we would be growing by 15% during the quarter. Coming to the business segment. The pharmaceutical intermediate business continues to deliver strong performance during the quarter driven by exports, whereas the specialty chemicals business was subdued during the quarter due to lower sales of top products.

Moving on to business updates. I’m pleased to inform you that during the quarter, we signed a multiyear multi-ton, multi-million euro contract with Fermion for one of their seconded products. You may recall that during one of the previous calls, there was a lot of chatter on shifting APIs from Europe to India. Even during that time, I had mentioned that shifting [indecipherable] to India is challenging. But what is happening is that European companies are reducing the stages of production and looking to over-source higher level intermediates to India. This contract is one of the similar lines and demonstrates our marketing and technical fitness, fineness of capturing and converting the opportunities in very short span of time.

Coming to import subsided [Phonetic] products. Our 2 already commercial products continue to show strong traction in the market whereas other 2 products developed this year have received trial orders. We have one more product to be commercialized in this segment, along with a healthy product pipeline for the future.

Lastly, the electrolyte additives. So far, we have sent our electorate additives to 9 customers, and one of them has already asked for the trial order, which validates our products’ quality and stability. Let me explain what I mean by product quality and stability. The product quality purity and [indecipherable] are imperative and undergo various states of sampling and validation. As very minute deviation can also affect the overall electrolyte solution and thus impacting the battery performance and may create [indecipherable] issues, therefore, the gestation period to commercialize these products is fairly long, and I believe we are at the tail end of this period. I’m confident to receiving commercial orders for these products in FY’24. The geometry of sampling is in China, Korea, Europe and India.

Now let me discuss our efforts on the specialty chemical business. On the product side, you might recall, I had mentioned during our previous call that our Jhagadia facility acquired from Gujarat Organics was using furnace oil as a fuel and we plan to change it to coal. This project has started, and it will help us to boost our margins.

Second, we have converted methyl salicylate to the flow technology and have also installed flow reactors during Q3 FY’23. This will give us a competitive edge in global markets.

Third, we are also serving towards becoming more competitive in parabens and I will update you on the same once we complete the project.

Now on the demand side, during the quarter for the overall business, we added 39 new customers. Out of this 39, majority of the customers have been added on the specialty chemicals side of the business. These are all new customers, and we expect the volume to ramp up from them in coming quarters. There are many smaller initiatives we have undertaken to ramp up the specialty chemicals business. So as all these levers starts to align themselves, I’m confident of driving strong growth with sustainable margins in the specialty chemicals business in coming financial year.

Before I conclude, I would like to mention that we are working on several new products and projects on pharma as well as specialty chemicals side, and we will update you as we approach certain milestones. Also, we will witness millions of dollars patented products going [indecipherable] in this year as well as coming years, and it will create an immense opportunity for the advanced pharmaceutical integrated business. We already have many of these products in our product basket and we will see them growing as the patent expiry come closer.

To conclude, I am confident of delivering stronger growth in coming quarters and for the financial year 2023. We are working hard to achieve our target of 25% growth, and I’m hopeful of achieving the same.

With that, I request our CFO, Mr. Bhavin Shah, to discuss the financial review. Over to you, Bhavin.

Bhavin Shah — Chief Financial Officer

Thank you, Naresh Bhai. Good evening, everyone. I would like to briefly touch upon the key performance highlights for the quarter ended December 31, 2022. And then we will open the floor for question and answers.

I will begin with quarterly updates. Revenue from operations for the quarter was at INR152 crores, up 7.9% as compared to INR141 crores in Q3 FY’22. The gross profit for the quarter was at INR70 crores, which was flat on Y-o-Y as well as sequential basis. The gross margin for the quarter was 46%. Lower gross margin was due to high cost of inventory and change in product movements.

EBITDA for the quarter was at INR30.8 crores, up 2.9% as compared to INR29.9 crores in Q3 FY’22. On a sequential basis, EBITDA for the quarter increased by 9.5%. EBITDA margin for the quarter were at 20.2% compared to 21.2% in Q3 FY’22 and 19.1% in Q2 FY’23. We continue to improve EBITDA margins on a sequential basis. EBITDA margins in Q1 were at 18.1%, and we have been successful in gradually improving our EBITDA margin to 20.2%, an expansion of 210 basis points. I believe we will see the improvement in EBITDA margin in Q4 as well, driven by lower freight, utility costs and impact of cost optimization programs.

Now dissecting margins further. I’m happy to report that EBITDA margins for the Pharma business has crossed 22% mark in the current quarter. But our margins on the specialty chemicals side were flat at around 10%. PAT for the quarter was at INR22.3 crores, up 14.4% on Y-o-Y basis and 17% on a sequential basis. The PAT margins for the quarter were at 14.6% as compared to 13.8% in Q3 FY’22 and 13% in Q2 FY’23. Exports for the quarter was at 66%, whereas domestic business was at 34%.

With this, I conclude my remarks and request the moderator to open the floor for a question-and-answer session. Thank you.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] We have our first question from the line of Padma Raju Mathi from SBI Life Insurance.

Padma Raju Mathi — SBI Life Insurance — Analyst

Yeah, good evening. Thank you for taking my question. Am I audible?

Nareshkumar Patel — Chief Executive Officer

Yes sir.

Padma Raju Mathi — SBI Life Insurance — Analyst

My first question is related to our segment classification. Till Q1 of this financial year, we used to classify it under 3 segments, pharma, specialty chemicals and others. In the last quarter, we started classifying others as well in pharma. Now when I see this quarter, it looks like the others is being classified under spec chem. So from here on, we are going to classify others segment in the spec chem or the pharma?

Nareshkumar Patel — Chief Executive Officer

Sir, we have now broadly 2 segment only, pharma and spec chem. So the product which fall under pharma and supply to pharma as advanced pharma intermediate will be classified under pharma intermediates and product which is coming as a specialty will go into specialty. So we clearly have a 2 segment only.

Padma Raju Mathi — SBI Life Insurance — Analyst

Sir, the reason why I was asking is when I look at our first half reported number in the presentation, and if I add up this segment number in Q3, it’s not matching to the 9 months reported numbers, segment-wise. So that’s the reason I asked. [Foreign Speech] I’ll take this offline.

My second question is related to the deferment order which you mentioned. So how should I understand this? Is it like whatever the volume offtake that was supposed to happen this quarter, that is going to happen in the next quarter. It’s because of some logistic issues? Or can you specify some color on this?

Nareshkumar Patel — Chief Executive Officer

Yes. So what happened that because we are in a chemical supply into the API manufacturers and we are having several intermediates coming from several vendors. So what happened that some of the intermediates which they have to suppose to come from China is not came in time. And their year was closing, year ending was there. So they don’t want to keep an inventory on the higher side. So that’s how they ask us to defer the

Shipment by 10 days, 20 days so that they can able to get the product in time from China and they can start the production.

Padma Raju Mathi — SBI Life Insurance — Analyst

Okay. My last question is on our gross margin side. Basically, is it fair to understand large part of the high cost inventory is liquidated in Q3 and things should get normalized from Q4?

Bhavin Shah — Chief Financial Officer

Yes. So most probably high cost inventory has been consumed. Last leg will be there in Q4. Q1 ’24 will be the clean quarter. And so the impact in Q4 will be very minimal on this account.

Padma Raju Mathi — SBI Life Insurance — Analyst

Okay. Sir, but is it fair to assume that my spec chem utilizations have come down sequentially?

Nareshkumar Patel — Chief Executive Officer

Not come down. Actually, as we are transforming ourselves from production from some batch and operational improvement to the continuous as well as some other improvement in the production side. So that’s happening. And because of that, and then also there is a specialty chemicals side is highly competitive market. So there you have to be very, very precise in terms of costing as well as supply chain and everything. So that is where we are working all around. And also, that is the reason why we have 39 new customers, which we added in specialty. These all are to reopen or we opened new windows for these specialty chemicals. So these all efforts will be giving us next quarter, this quarter and next quarter will be much more advantageous for us to improve our specialty segment as well.

Padma Raju Mathi — SBI Life Insurance — Analyst

Okay. Sir, I have more questions, I’ll join back the queue. Thank you.

Operator

Hank you. [Operator Instructions] We have our next question from the line of Sudarshan Padmanabhan from JM Financial PMS. Please go ahead.

Sudarshan Padmanabhan — JM Financial PMS — Analyst

Yeah, thank you for taking my question. Sir, my first question is to understand a little bit more about this Fermion contract, a long-term contract. I mean, we are really pleased to know that it’s for a patented product, and it’s a multi-year or multi-ton product. But just to understand, I mean, from here, I mean, the kind of run rate that we are running at, and I’m not talking about the fourth quarter or the next quarter, with this contract coming in, I mean, what is the kind of run rate that we should look at, say, in FY’24 and beyond?

Nareshkumar Patel — Chief Executive Officer

So this contract, the numbers, I can’t say because the counterparty is also a listed company. So we both are bound with several bindings. So the thing is that this is a long term, this is a very brand-new launch product and having exclusivity with them for next 10 years. So 10 years, they will remain as a sole supplier in the world. And the demand is increasing every year gradually at very exponentially, I can say, for 30%, 40%, 50% kind of things, and they want to expand their production capacity as well. And that is the reason why they signed a contract with Ami Organics for long-term supply. And these will be gradual. So this year will be the year for validations and qualifications and regulation site master files CMS [Phonetic] JVs through the year. So for them this year is a financial year ’23. So from our Q4 2024, it will be for us starting our commercial demand. And then gradually, it will be increased and it will be matured by ’25 on a top line.

Sudarshan Padmanabhan — JM Financial PMS — Analyst

And I would assume that because of our scale, this should be fairly meaningful. I mean, if I’m looking at it from the JPO [Phonetic] perspective.

Nareshkumar Patel — Chief Executive Officer

Yes, it will be very meaningful association with them.

Sudarshan Padmanabhan — JM Financial PMS — Analyst

And now coming on to the chemical side. I mean, this pro chemistry that is largely done and that would basically start probably by the fourth quarter, that is methyl salicylate. I mean just trying to understand given that there is going to be a huge jump in volume. I mean, when do we see the actual numbers kicking in? Because this year, the capacity is underutilized and this high fixed cost can easily be absorbed by just the scale up of this one product over the next few quarters.

Nareshkumar Patel — Chief Executive Officer

You rightly say that if it will be scaled up, then it will be much more operational viability there. And that is where we are working and so to increase the scale [indecipherable] we introduced the Flow reactors and also that we can enhance our capability, our production capacity with the minimal operational expenses. And that is where we are now finishing everything, samples went to every vendor and we will see that in the next two to three quarters, it will be ramped up gradually 2% to 3% or in terms of EBITDA and everything.

Sudarshan Padmanabhan — JM Financial PMS — Analyst

And one final question from my side on the electrolyte part. I mean we have supplied samples to 9 and 1 person has started. So I mean, how do we see this business? Because, I mean, when we look at electrolyte opportunity as such, I mean it is niche, but it’s growing substantially. And also on the LIPF side, I mean, I would understand that here again, the demand eventually would be outstepping supply and we should be in stronger steel. So on the scale-up part, I mean, what are the time lines over here? And how do we see in the next 2 to 3 years, this portion of the business scaling up both in sales and profitability.

Nareshkumar Patel — Chief Executive Officer

First of all, always I’m saying on my call that our projections and our plannings are excluding electrolyte, so electrolyte is an only whenever it is maturing, it is adding into our top line and everything. So this is where we were in a phase of almost ending in the qualification area, and as per our customers’ comment, it will be commercialized by Q1 or Q2 of FY’24.

Sudarshan Padmanabhan — JM Financial PMS — Analyst

And would it be meaningful or it will be gradual?

Nareshkumar Patel — Chief Executive Officer

It will be gradual. Definitely, customers will also not immediately transfer all weightage from China to India. But then it will be mature, it will be equivalent size of our current existing. So it will be a, for us, is a very sizable business in terms of revenue and all. And that’s why the capacity rampation is also we are planning in a such a way when the full demand will come, we will be ready for that as well.

Sudarshan Padmanabhan — JM Financial PMS — Analyst

Sure sir. Thanks a lot. i have more questions, I’ll join back the queue.

Operator

Thank you. We have our next question from the line of Chirag Lodaya from Valuequest. Please go ahead.

Chirag Lodaya — Valuequest Investment Advisors — Analyst

Yeah, thank you for the opportunity. Sir, first on overall top line, I just wanted to understand, given the deferment you have seen in this quarter, and we are seeing positive momentum in spec chem side. What kind of growth one should expect in FY’23 and FY’24?

Nareshkumar Patel — Chief Executive Officer

See, FY’23, as we say that we are expecting and we are trying for the CAGR 25%, and that is where we are right now in line with that. Only thing is that everything goes well, there is no any issues in that because we have a very good order book also in our hand. In FY’24, similarly, we will be remaining expectation of CAGR of 25% because forward contracts what we had done, that will be helping us in pharma, helping us to boost the business and as well as some originators who were not buying from us some of our product, they had also started buying from us. So that will be adding more revenue in that. So our budget and everything is planning with that. ’24 will also remain as CAGR 25%.

Chirag Lodaya — Valuequest Investment Advisors — Analyst

Sir, just one clarification here. For 25% growth, ask rate for Q4 is pretty high. Will we be able to deliver that kind of growth? It could be almost upwards of 45%.

Nareshkumar Patel — Chief Executive Officer

See, current the pharmaceutical situation is sluggish, but thing is that some contracts which we signed this year in Q3 will definitely help us to grow in the revenue side. 24%, 25% is what we can see right now because we always have had some committed demand from several intermediates in several APIs for the originators.

Chirag Lodaya — Valuequest Investment Advisors — Analyst

Right, right. And in terms of profitability, you mentioned 2 to 3 kind of percent Q-on-Q improvement we can see on spec chem side and pharma intermediate in this quarter, you have already run 22% margins. Coming to FY’24, what kind of margins one should expect in API intermediate business, I mean pharma intermediate business?

Bhavin Shah — Chief Financial Officer

Yes. So Chirag, as we have mentioned in earlier call also that FY’21 was our best year for us, we have achieved around 23%, 24% kind of margin in pharma. So our first endeavor to reach this, with regard to spec chem, we are gradually improving and our effort would be to improve by 1%, 1.5% every quarter. So initial, what we are trying to look at is 23%, 24% for pharma.

Chirag Lodaya — Valuequest Investment Advisors — Analyst

Got it. That’s quite encouraging. And just last one, overall working capital situation. If you can help us understand what will be the working capital days at the end of the quarter?

Bhavin Shah — Chief Financial Officer

Pardon.

Chirag Lodaya — Valuequest Investment Advisors — Analyst

Working capital days at the end of the quarter.

Bhavin Shah — Chief Financial Officer

Yes. 123 days currently.

Chirag Lodaya — Valuequest Investment Advisors — Analyst

It is improved by 13 days.

Bhavin Shah — Chief Financial Officer

Yes.

Chirag Lodaya — Valuequest Investment Advisors — Analyst

Okay. And what do you expect in coming next 3 to 6 months?

Bhavin Shah — Chief Financial Officer

So our aim is to bring it to 100 days. So that will be the in, again, in the next 1 year, it should be between 90 to 100 days. So base will be 90. That is our target to bring there.

Chirag Lodaya — Valuequest Investment Advisors — Analyst

Right. Thank you, sir, and all the best.

Nareshkumar Patel — Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions] We have our next question from the line of Kumar Saumya from Ambit Capital. Please go ahead.

Kumar Saumya — Ambit Capital — Analyst

Yeah, hi sir, good evening. Sir, question is on the other expense side. So we have seen a 9% Q-on-Q decline in other expense. And in the notes to account, you have mentioned that there is 27 million onetime shortfall fees for the insurance gain. So could you please throw some light on that? What is the take sir —

Bhavin Shah — Chief Financial Officer

Okay. So in 2021, we have some small stock fire, and that we explained in the insurance, and that was we see the claim on that and the shortfall of 245 lakhs, something like. So that will be in other expenses like that, which is your book as —

Kumar Saumya — Ambit Capital — Analyst

This is recognized in the third quarter?

Bhavin Shah — Chief Financial Officer

Because we received the claim in third quarter. It was in February 2021.

Kumar Saumya — Ambit Capital — Analyst

Okay. And on the financial expense side, gross, we have seen substantial increase Q-on-Q. If you could throw some light on that.

Bhavin Shah — Chief Financial Officer

So pardon sir, we are unable to hear you.

Kumar Saumya — Ambit Capital — Analyst

Sir, on the financial expenses, the interest cost that we have recorded this quarter. So there is substantial increase Q-on-Q.

Bhavin Shah — Chief Financial Officer

So here, we have an arbitrage of getting finance at a lower rate, and we have keep investment at a higher rate. We are getting EPC at a lower rate. So we have utilized that and so consequently, my other income growth is also on the higher side again there.

Kumar Saumya — Ambit Capital — Analyst

Okay sir. Thank you.

Operator

Thank you. We have our next question from the line of Kevin Gandhi from CapGrow Capital Advisors.

Kevin Gandhi — CapGrow Capital Advisors — Analyst

Hi. Sir, I was not able to understand the deferred shipments, if you can please explain again. So that was the first question.

And second question is that the EBITDA margin on the spec chem segment, that has quite reduced based on the Q-o-Q. So like what is the exact reason for that? So yes, 2 questions.

Nareshkumar Patel — Chief Executive Officer

Okay. The deeper in the sense that the shipment, which is planned in December is deferred by 10, 15 days, so it will be go now in January. So that is how it is deferred system from us. So that’s why the sale is not booked in Q3 which will be happening in Q4. Whereas in a spec chem margin, it is stable and it is flat in Q2 and Q3. In fact, we improved our margin as we announced quarter-on-quarter, we improved our EBITDA margin. And that is you can see also from the results. Q1 was 18%, Q2 was 19% and Q3 was 20.5%. And this will continue, as I said, that every quarter will be improved 1%, 1.5% in EBITDA margin, and we will go up to the 21% EBITDA margin. And then onwards, we’ll start because during that period, it will be our spec chem has also now started contributing to the margin. And then later on, it will go beyond that.

Kevin Gandhi — CapGrow Capital Advisors — Analyst

Okay. And sir, like how should be the impact of the flow chemistry assets? Like how much steel will be increased? And if each and every molecule of the spec chem is transferred to flow chemistry, what shall be the exact financial impact, if you can give some color on that?

Nareshkumar Patel — Chief Executive Officer

See, yield improvement and all is like a confidential matter, but definitely the flow continuous production will help you in terms of operational efficiency as well as in terms of better quality, lesser effluent generations, data safety. So these are all including that, and that will help us to make our margins better because you have to spend all these areas for handling this kind of paste or everything. So that will help in overall helping our margin. So that is how flow chemistry will help you. What’s the second question?

Kevin Gandhi — CapGrow Capital Advisors — Analyst

Volume.

Nareshkumar Patel — Chief Executive Officer

So volume, batch to batch, you have to have a downtime which can be ordered in flow reactors, and that will give you the larger production in a shorter time.

Kevin Gandhi — CapGrow Capital Advisors — Analyst

Okay sir. Thank you.

Operator

Thank you. [Operator Instructions] We have our next question from the line of Vishal Prasad from VP Capital. Please go ahead.

Vishal Prasad — VP Capital — Analyst

Hi good afternoon. In the past, we have talked about our partnership with a firm who is helping us with opportunities in the electrolyte additives. Could you talk about, I mean, what is the kind of relationship that we have with that firm? And what other things are they trying to help us with?

Nareshkumar Patel — Chief Executive Officer

Okay. The firm is based in Israel and that called ARZ, and they are our marketing partner worldwide. So our job is to make it and their job is to sell the product worldwide. And it is on a commission basis and revenue will be direct invoicing by Ami to the customer. So it is association between both of us. They will exclusively supply or represent Ami Organics worldwide.

Vishal Prasad — VP Capital — Analyst

In the area of electrolytes or is there something that we are working with them?

Nareshkumar Patel — Chief Executive Officer

No, only in electrolytes worldwide, whereas they are our partner since last 14 years in Israel.

Vishal Prasad — VP Capital — Analyst

Okay. When you say 14 years, it means we have been making these electrolyte additives in the past as well, is it?

Nareshkumar Patel — Chief Executive Officer

No, no, no. Sorry, my answer is confusing for you, and I apologize for that. So ARZ is based in Israel. They are the commission agent for us for pharmaceutical supply in Israel like [indecipherable] and [indecipherable] and some of the smaller [indecipherable] medicine and all. So there they are representing Ami Organics for our pharma sales. And because we have a long-term relation and ARZ has offices in China, in Europe and in Israel, so they figure it out, they find out this opportunity and they came to us, if we can grab it or not. And we grab it in a time and then we supply to ARZ’s network in China and then later on with ARZ network in Europe and in Korea. So this is how we make a separate agreement for our electrolyte in 1022, where they are our exclusive electrolyte marketing partner worldwide.

Vishal Prasad — VP Capital — Analyst

Okay. Got it. So what I find, sir, we have a very strong R&D organization at [indecipherable] pharma and specialty chemical, and then this opportunity came to us. And we were able to come up with a product. So if you could help us understand our R&D organization, what kind of people we have, what kind of incentives they get. And in future, what kind of people we are going to recruit, which will help us grow in other areas, that would be great.

Nareshkumar Patel — Chief Executive Officer

See, basically, Ami Organics right from beginning always is that we are a chemistry-driven company and our foundation was made on R&D only. And we are saying that whatever the chemistry we are strongly holding, the application of that chemistry either in pharmaceutical or in agro or in electrolyte or in OSAD or electronic chemical or in cosmetics or in pigments, so these are the applications of our chemistry. So we have a very strong R&D base and R&D center which is having 130 people working inside. They are all PhDs. They are master of science, they are bachelor of science, they are [indeciphierable], they are people from the process engineering, people from the analytical doctorate. So these are the people who are handling the projects, we are having a team distributed very well. The people working on new chemical entity intermediates, people working on generic products, people working on spot basis demand, people working on specialty chemicals and also a team working for converting the batch processing and batch chemistries into the few flow chemistries. So these are a number of people who are continuously working. We are adding numbers in R&D as well. And we are recruiting time to time the people from big pharma and big chemical companies, people from Teva, people from Glenmark, people from [indecipherable], people from Dr. Reddy’s, Mylan. So these are the people who joined us and they are happy with us in terms of liberty and the democracy we have given to them that will help them to clean themselves and come up with a non-infringing innovative route of synthesis which make us to file new patents and new route of synthesis to avoid any conflict in terms of IP&L.

Vishal Prasad — VP Capital — Analyst

Okay. So these electrolytes, I mean, in the past, you have mentioned that by 2028, the worldwide market would be closer to $2 billion, and we would like to capture at least 10% of that. So if we talk 2023, so right now, I mean, what would be the market size of these 2 electrolytes that we have?

Nareshkumar Patel — Chief Executive Officer

Based on the reports on what we have and the market intel, it will be $1.2 billion somewhere around.

Vishal Prasad — VP Capital — Analyst

Okay. So from USD1.2 billion to USD2 billion, so additional $800 million, we would like to capture 25% of that $200 million.

Nareshkumar Patel — Chief Executive Officer

Yes.

Vishal Prasad — VP Capital — Analyst

Okay. And last question, sir. I mean there are very few organizations in India who are working on continuous flow reactors, and we are one of them. So I mean, could you help me understand what kind of benefits we as an organization are trying to get out of that continuous flow process. And going forward, I mean, is it very difficult to get in this area or any company based out of India can get into it if they invest time and money?

Nareshkumar Patel — Chief Executive Officer

It’s like a flow reactor is nothing but a small reactor against your big batch reactor. So you are [indecipherable] in such a way that microgram or milligram or a gram level, you are making the same reactions what we are doing at large scale. So in a batch reactor, you dump everything and then you wait for complete cooking, whereas here, you just have a pushing the reactant, which is already [indecipherable] push them out from the reactor and continuously new raw material get inside and they cook it and then they go out. So it’s like pushing kind of things where you make the product on a spot and then you go out from the reactor. It is a completely engineering and technology-driven sector, where you need to have a thorough knowledge of the reaction kinetics, chemical reaction kinetics and some other thermodynamics and other parameters. And based on that, you can develop in a lab and then from scaling up from lab to the pilot and pilot to plant.

Vishal Prasad — VP Capital — Analyst

Okay. And my last question, sir. So what kind of CapEx we would be looking at once we decide to ramp up 2 electrolytes?

Nareshkumar Patel — Chief Executive Officer

That is still yet not finalized because currently, we are good to go with our current capacity, and we are waiting for the green signal from our busy buyer. And once they will give us some time for meanwhile, we can get continuously from our existing capacity. And then we will put, we already acquired a land for that. Now we are just waiting for the green signal and then we will put up the, it’s our own technology and our design of the process and all. So that will be easy for us to scale up and put up a plant as quick as possible.

Vishal Prasad — VP Capital — Analyst

Thank you and all the best sir.

Nareshkumar Patel — Chief Executive Officer

Thank you.

Operator

Thank you. We have our next question from the line of Hardick Bora from Union Mutual Fund. Please go ahead.

Hardick Bora — Union Mutual Fund — Analyst

Hi, thank you. Am I audible?

Operator

Yes you’re.

Nareshkumar Patel — Chief Executive Officer

Yes, sir.

Hardick Bora — Union Mutual Fund — Analyst

Naresh Bhai, congratulations on this deal with Fermion, I wanted to understand that we had given this INR190 crores of capital expenditure guidance for 2 years. Does that take care of our capability to serve in this particular contract? Or will we have to do some more capacity expansion?

Nareshkumar Patel — Chief Executive Officer

No, no. This will definitely cater this contract as well as we have [indecipherable]. So this contract is from our new capacity, which we are building in Ankleshwar, but currently, it will be supported by our Unit 1 in Surat, later on it will be transferred to our Ankleshwar facility.

Hardick Bora — Union Mutual Fund — Analyst

Got it. So okay, understood. And in terms of not asking on margins for this contract, but we’ve historically made a return on equity, return on capital employed of about 25%. That will not get diluted while in this contract. Those economics will continue for us.

Nareshkumar Patel — Chief Executive Officer

Yes.

Hardick Bora — Union Mutual Fund — Analyst

Good. Just one more question on the revenue, how it has come so far in these 9 months, even if I take into account the deferred revenue of 15 days, we would have probably grown in the 9 months at about 16% as opposed to 15% reported. I think we’ve been talking about the possibility of growing by 23%, 25% year-on-year, which would have meant INR620 crores of revenue from the full year. It seems that we will miss that. So just in retrospect, can you tell us what has probably not gone right, what needs to be right for us to continue growing at this pace going forward? Just sir your opinion on that?

Nareshkumar Patel — Chief Executive Officer

What done not right is not there. But yes, what need to do that, that we had done it. We have done it in terms of product development, qualification at the end of the customers waiting for the orders, long-term contracts with them, supply contracts with them. nly thing is that because we are in a chemical side and there are several chemical used for the API. If some of the API manufacturer, we can get the other product in time, that will be the differing in the supply. Otherwise, we have a long visibility, long discussions with the customers, and that will helping us for our projections. And that is what we are reflecting in our numbers also. You can see similarly, we will be continue like that.

Hardick Bora — Union Mutual Fund — Analyst

Got it, Naresh Bhai. All the best to you. That’s all from my side.

Nareshkumar Patel — Chief Executive Officer

Thank you.

Operator

Thank you. We have our next question from the line of Reena Shah from Elara Capital. Please go ahead.

Reena Shah — Elara Capital — Analyst

Hi sir, thank you for the opportunity. I wanted to know what is your utilization in pharma and spec chem for this current quarter?

Nareshkumar Patel — Chief Executive Officer

For pharma, it will be somewhere around between 60 to 64 whereas in specialty it will be 35 to 40 between that.

Reena Shah — Elara Capital — Analyst

Okay. Sir, this utilization seems to have remained similar for quite a long period of time. So just wanted to understand what is it restricting your utilization to be in the similar range? And when can we see a meaningful increase in this?

Nareshkumar Patel — Chief Executive Officer

See if I continue with the batch processes, my utilization will go up, but I transfer several processes from batch to continuous. So this has given us a leverage of releasing 6% to 7% of the utilization. So that is the reason why you are seeing the flat line, but it is not a flat line. If we don’t have a flow reactor, it will be go to 72 in pharma, and it will be 40, 45 in specialty.

Reena Shah — Elara Capital — Analyst

Okay. Okay. And sir, you have talked about improvement in [indecipherable] margins you are looking at. So can you just give us some thought on how this can be done? And what is the road ahead for this?

Nareshkumar Patel — Chief Executive Officer

Ma’am this is slightly confidential because if I disclose this and my competitors will also start doing like that.

Bhavin Shah — Chief Financial Officer

Okay. Okay. And what is your capex done so far? And what is your FY ’23 target and FY ’24 target levels?

Nareshkumar Patel — Chief Executive Officer

Bhavin will give the answer.

Bhavin Shah — Chief Financial Officer

So capex done so far is INR62 crores. For FY ’24, we will have another capex of, say, INR200 crores.

Reena Shah — Elara Capital — Analyst

Okay. So how this funding will be, it’s INR1,200 crores since very on a higher side. INR200 crores, can you give some bifurcation on this capex?

Bhavin Shah — Chief Financial Officer

No, no. Okay. So ’23, ’24 cumulatively is INR200 crores. And out of that, each year will be INR100 crores and that mainly internal recruits as well as from IPO fund and rest will be from the debt if needed.

Reena Shah — Elara Capital — Analyst

Okay. Sir, do you have any target debt to equity ratio, right?

Bhavin Shah — Chief Financial Officer

For the time being, we are very conservative debt. So we are still not in a process of getting the debt. But if required, then we can go it —

Reena Shah — Elara Capital — Analyst

Okay. And — that’s it from my side as of now. Thanks.

Operator

Hank you. [Operator Instructions] We have a question from the line of Gagan Thareja from ASK Investment Managers. Please go ahead.

Gagan Thareja — ASK Investment Managers — Analyst

Good evening, sir.Hope I am audible?

Operator

Sir, you’re not very clear. Can you come close to the handset please.

Gagan Thareja — ASK Investment Managers — Analyst

Yeah, is it better now? Can you hear me?

Operator

We can. Please ask your question.

Gagan Thareja — ASK Investment Managers — Analyst

Sir, the first question is, I mean, it’s more a clarification than a question. When you say you maintain 25% sales growth guidance, are you talking for the full year of FY’23? Or are you talking about quarter 4 of FY’23?

Nareshkumar Patel — Chief Executive Officer

So full year of FY’23. Quarter 4, if I do 25%, then it will not be 25% for full year.

Gagan Thareja — ASK Investment Managers — Analyst

So I mean, as one previous participant asked, to be able to do 25% for the full year, fourth quarter will have to be very strong at more than 40% —

Nareshkumar Patel — Chief Executive Officer

Very strong.

Gagan Thareja — ASK Investment Managers — Analyst

Yes. There is some slippage, which will benefit you because you indicated there is a deferment of sales from Q3 to Q4. But even adjusted for that, you will require north of 35-odd percent sort of a growth. So —

Nareshkumar Patel — Chief Executive Officer

Sorry to interrupt you, but if you see in my past commentary also, our business is like Q1 is lower than Q2, Q2 is lower than Q2, and Q3 is lower than Q4. So that is the reason why our Q4 is always higher than the Q3 and Q2 and Q1. And this is what we have in our hands.

Gagan Thareja — ASK Investment Managers — Analyst

Okay. But if the quarterly sales growth is going to be so high. It will also lead to operating leverage, which will mean that margins in Q4 should, therefore, logically also improve and improve substantially simply because you are going to get a lot of operating leverage. Would that be a right inference?

Nareshkumar Patel — Chief Executive Officer

Yes, theoretically it’s right.

Gagan Thareja — ASK Investment Managers — Analyst

Yes. I mean because also you are now in an environment where the raw material or the input prices or freight prices are also softening. You are carrying some high-cost inventory, but not a lot of it. Therefore, I mean even from if one looks from that perspective, your Q4 purchase cost or input cost should be lower, which means gross margin itself will be higher plus operating leverage kicks in. So ideally, I mean, not ideally even practically, it seems that margins should improve substantially in Q4.

Nareshkumar Patel — Chief Executive Officer

Yes, I’m riding with you, sir.

Gagan Thareja — ASK Investment Managers — Analyst

Okay. And on the Fermion deal, I think you indicated that commercial supplies will start only in Q4 of FY’24. Is that correct?

Nareshkumar Patel — Chief Executive Officer

Yes, some commercial supply we’ll do for the validation in this quarter. And then we have to have a lean period for qualification at their end. And then by Q4 of ’24, it will be started regular supply.

Gagan Thareja — ASK Investment Managers — Analyst

Right. So would the validation supplies in Q4 for Fermion contribute very meaningfully to your growth in Q4 of this year?

Nareshkumar Patel — Chief Executive Officer

No, no, no, no —

Gagan Thareja — ASK Investment Managers — Analyst

Okay. It will be small —

Nareshkumar Patel — Chief Executive Officer

Yes, because it’s a validation batch. It’s only 3 batches we project.

Gagan Thareja — ASK Investment Managers — Analyst

All right. All right. Right, sir. And when you indicate or guide for FY’24 being a year of, again, where you’ll be able to at least as of now, you are guiding for 25% growth and some improvement in margins on both your businesses. Is there a certain amount of order book visibility, which gives you assurance to guide for 25%. And also, have you built some sort of low cost inventory of input materials will give you some assurance to guide for margin improvement. Is that the case?

Nareshkumar Patel — Chief Executive Officer

It’s a combination of everything. We have a long-term contract, long-term rolling forecast from the customer as well as inventory. Last year, we’ve done that. But from the bad experience of keeping long inventory, now we have reduced the inventory stocking base because of avoiding any impact on the margin with a higher inventory cost. But we have a visibility in terms of rolling core forecast as well as the long-term contract.

Gagan Thareja — ASK Investment Managers — Analyst

All right. And would the margins on Fermion because it’s a patented molecule with, as you indicated, 10-year exclusivity, Consequently, pricing will be much higher than generic products. So would it therefore be logical to presume that margins on the Fermion contract could be sizably more than what you earn on your generic pharmaceutical intermediates?

Nareshkumar Patel — Chief Executive Officer

This is not innovated by us. It’s a CMO kind of work where you cannot expect the very high margin. But definitely, it will be operating leverage will come when it will be the volume will be higher at the commercial side, then it will be the margin which we are working in line with our a little bit better than what we are doing right now.

Gagan Thareja — ASK Investment Managers — Analyst

Okay. And on the electrolyte additive, again, commercial quantities are unlikely to happen before the to before the Q4 of FY’24. Is that what you pointed out, just trying to confirm.

Nareshkumar Patel — Chief Executive Officer

FY ’23. Q4 FY ’23 is not possible, we got to order, but we are not seeking it because we are waiting for some documentation approval at their end but in FY ’24, definitely, will be commercialized.

Gagan Thareja — ASK Investment Managers — Analyst

When in FY ’24, sir, early FY ’24 or late FY ’24 or mid of FY ’24, any time line we can thought of?

Nareshkumar Patel — Chief Executive Officer

Maybe in Q1 or maybe in Q2, I’m not giving the exact time line because each customer has different procedure for their approval and different procedure for their demands. So one customer, the biggest customer, what we have, they have placed one order for qualification. So we are going in their methodology. Some are small manufacturers, they are faster in placing orders. So if our samples, which we had floated them in last quarter can be qualified, then it can be commercializing faster than the normal procedure.

Gagan Thareja — ASK Investment Managers — Analyst

And you indicated that at full scale, the electrolyte business could have a size which is similar to what Ami is today. Is that correct assessment?

Nareshkumar Patel — Chief Executive Officer

Yes. Based on the report, right? Based on the market report and intel, this can be possible we can go up to that level.

Gagan Thareja — ASK Investment Managers — Analyst

But that would require how much market share for you to be able to achieve that aspiration?

Nareshkumar Patel — Chief Executive Officer

Current market is 1.2 billion, and it will go to 2 billion to 2.5 billion based on the report we have and I’m targeting very conservative in that market.

Gagan Thareja — ASK Investment Managers — Analyst

Okay. And any time lines over which you feel you have any reasonable clarity as to when this can be achieved?

Nareshkumar Patel — Chief Executive Officer

As I told you, it will be gradually, it will be increment. And if everything goes as per the market, till now, there is no any alarming for us and all the process and qualifications, everything went well, and there is no any dark side of any qualification. So if everything goes well, then by Q2 year ’25, it will be fully commercialized.

Gagan Thareja — ASK Investment Managers — Analyst

And do you have the capacity because if you’re saying second quarter FY’25, we would expect it to scale that be sizably, you will require the capacity for that to be there, right? So —

Nareshkumar Patel — Chief Executive Officer

Yes. So we will start building the capacity in ’23, ’24, so that it will be get full capacity in ’24, ’25.

Gagan Thareja — ASK Investment Managers — Analyst

Okay. How much time will it require for you to build the plant or the capacity?

Nareshkumar Patel — Chief Executive Officer

Because it’s a dedicated plant with a dedicated equipment, it will not take a longer time against the other multipurpose plant. So that will be within 6 to 9 months or maybe 1 year if some thing not go as per planning. It will be ready.

Gagan Thareja — ASK Investment Managers — Analyst

Right. And what could be the scale or size of the Fermion deal on an annual basis, any approximate idea?

Nareshkumar Patel — Chief Executive Officer

Can’t disclose that.

Gagan Thareja — ASK Investment Managers — Analyst

Okay. But will it be material compared to what Ami cumulative size today is, I mean as and when it comes on stream, it can very materially impact your sales growth.

Nareshkumar Patel — Chief Executive Officer

Yes, multi-million euros. So definitely, it is a sizable contribution in our revenue.

Gagan Thareja — ASK Investment Managers — Analyst

Okay. Okay. And finally, sir, if you could give us any idea of the pipeline of products in your pharmaceutical intermediates business that apart from the Fermion deal, you probably are also working on, and you indicated that a lot of products will go off-patent in the next 2 years. While it sounds optimistic and nice. It would help if you could maybe flesh that opportunity out a little more for us in terms of what’s the addressable market that you are targeting of products and over the next 2 years, how many more can come in on the current base of products?

Nareshkumar Patel — Chief Executive Officer

Sir, we have a sizable amount of product, more than 490 products are there, which is up to 2039-’40 commercialization. We had stopped disclosing the end use of the product, considering several comparison arising of more disclosure of the end use, so 10, 12 years of effort we took to make qualification and all. And that will be impacting on our sales value. So we are not able to sell them, but they are quoting it on a lower price and keeping us a pressure, so to avoid these kind of things, we decided not to disclose our end-use product. We have more than 480 products, which is already invoiced to the customer and having expiry until 2039 to ’40.

Gagan Thareja — ASK Investment Managers — Analyst

So I get that point, sir. I do not intend to ask you the chemistries or the names of the products. All I’m saying is that whatever 430 products that you have right up to 2040, are they distributed, let’s say, equally every year from here to 2040, which means over a period of —

Nareshkumar Patel — Chief Executive Officer

Every year, 15 to 20 products are getting into the commercialization. Out of that, some are, because we have an application from large [indecipherable] to the small like anticancer where you have a lot of deep volume, but the value of the product is high. And then in anti [indecipherable] antidepressant where you have a big volume, but the price of the product is not that great. So we have every year around 10 to 15, sometimes 20 or sometime 8 only. Every year, the product goes in the generic applications. So our growth is maintaining with this new incoming molecules give us a good growth, like 30%, 40%, whereas our very old product give us 7% to 10% of the incremental growth annually and then there is with the normalization of the new product. So this is how we are more confident about our growth guidance of 24%, 25% CAGR because of this kind of product pipeline, existing product and old products.

Operator

Thank you. I now hand over the call to Mr. Tarun Shetty from Haitong Securities for closing comments. Over to you.

Tarun Shetty — Haitong Securities — Analyst

Actually, I had few more questions with me if the management permits. Yes, sir, can I go to questions?

Nareshkumar Patel — Chief Executive Officer

Yes, Tarunji, you want to ask questions.

Tarun Shetty — Haitong Securities — Analyst

Yes, sir. Yes. Just a few questions on the volume and price, did you see most of the growth on the volume side or the price side on the pharmaceuticals?

Nareshkumar Patel — Chief Executive Officer

All are on the volume side.

Tarun Shetty — Haitong Securities — Analyst

Okay. Okay. So do you indicate pricing for each product has been flattish? Or do you see some decline?

Nareshkumar Patel — Chief Executive Officer

There are some prices in decline also in the old product and some are flattish.

Tarun Shetty — Haitong Securities — Analyst

Okay. Okay. So any revenue contribution from your key products Trazodone [indecipherable], can you give the percentages?

Nareshkumar Patel — Chief Executive Officer

So the number one product is contributing 22%, number two, 10% and three 8%, number four, 5%; and number five, 3%.

Tarun Shetty — Haitong Securities — Analyst

Okay. And that product would be number one 1 Trazodone [indecipherable] that is right?

Nareshkumar Patel — Chief Executive Officer

Tarun, this time, we started a little bit conservative, one-on-one looking also we can give you, but we want to avoid our competitions basically.

Tarun Shetty — Haitong Securities — Analyst

Okay, not an issue. Sir, last question on [indecipherable ], we have heard that big pharma players would be putting up major capacity on the salicylic acid side. And do you see any kind of increase in competitive intensity? Or are you informed with your orders?

Nareshkumar Patel — Chief Executive Officer

See, salicylic acid is our raw material,. So it is good if someone is looking salicylic acid, we can have more leverage on buying from some 2, 3 more customers.

Tarun Shetty — Haitong Securities — Analyst

Okay. But they did allude to even selling the intermediate side. So you’re not seeing any kind of competition from them sir?

Nareshkumar Patel — Chief Executive Officer

No, because we use salicylic acid to make our methyl salicylate and benzyl salicylatele. So if they will go for the forward indication, then there will be the trade for us.

Tarun Shetty — Haitong Securities — Analyst

Okay. Yes, that’s it from my side. Thank you.

Operator

Any closing comments, sir? Any closing comments?

Nareshkumar Patel — Chief Executive Officer

Yes. So can I do the closing remarks?

Operator

Yes, sir, please go ahead.

Nareshkumar Patel — Chief Executive Officer

Thank you. Thank you Haitong team for hosting our conference call. Thank you, everyone, for your patience, and we hope we have been able to answer most of your queries. If you have missed out on any of your questions, kindly reach out our IR adviser [ PNY ] and we will get back to you offline. Thank you very much once again for remain presence on your holiday. Thank you very much.

Bhavin Shah — Chief Financial Officer

Thank you very much, everyone.

Operator

[Operator Closing Remarks]