AARTI DRUGS

LIMITED
Aarti Drugs Limited is a pharmaceutical company offering active
Q2 FY23
pharmaceutical ingredients (APIs) in a range of therapeutic
categories, such as anti-inflammatory, cardio protectant, antifungals,
antibiotic, antidiabetic, sedative and vitamins.
 - INDUSTRY AND MARKET OVERVIEW

 World’s largest provider of generic medicines; the country’s generic drugs account for 20% of global generic drug
exports (in terms of volumes). Indian drugs are exported to more than 200 countries in the world, with the US as the key
market.
 Exports, including bulk drugs, intermediates, drug formulations, biologicals, AYUSH & herbal products and surgical
products, reached US $16.28 billion in FY20.
 As of October 2020, India exported pharmaceuticals worth US$13.87 billion in FY21.

• The pharmaceutical industry in India has been growing rapidly in recent years, and
the active pharmaceutical ingredient (API) sector has played a significant role in this
growth.
• India is a major producer of APIs, which are the raw materials used to manufacture
pharmaceutical drugs. In recent years, the demand for APIs has increased due to the
growing global demand for generic drugs, which are often produced using APIs from
India.
• The Indian government has also taken steps to support the growth of the API
industry, such as providing financial incentives to encourage domestic production.
• As a result, the Indian API industry has seen strong growth in recent years and is
expected to continue to grow in the future.
- INDUSTRY AND MARKET POTENTIAL
KEY SEGMENTS : FACTORS LEADING TO GROWTH :

• Rs. 15,000 crores Production-Linked Incentive (PLI) Scheme for Enhancing India’s
Manufacturing Capabilities
• 100% FDI in the pharmaceutical sector under automatic route
• Rising domestic population & Higher Insurance Coverage penetration
• Artificial intelligence will help the pharmaceutical industry to design new and automated
algorithms which will help to achieve faster, precise, accurate, and repeatable results
• Quality services at marginal costs compared to US, Europe, and South Asia
• Expertise in low-cost generic patented drugs and a movement towards end-to-end
manufacturing
• Focus to develop new complex generic drugs, supplemented by the New Drugs and Clinical
Trial Rules, 2019 and the Atal Innovation Mission
- COMPANY OVERVIEW
Leadership in API Manufacturing
▪ Leading API producer of 50+ molecules for antibiotics, antiprotozoal, anti-inflammatory, antidiabetic & anti-fungal, etc.
Largest producer of Largest producer of API ▪ 9 manufacturing units
▪ Contributes ~80% revenues
Metronidazole Metronidazole in ▪ Installed capacity of 40,040 MTPA
Benzoate in the world India

▪ Diversified into formulation through a wholly owned subsidiary Pinnacle Life Science Pvt. Ltd. in 2014
▪ Adopted flexible manufacturing approach with combination of in-house manufacturing as well as outsourcing model supported
Formulation by strong inhouse R&D
Largest producer of Largest producer of
▪ Manufacturing plant at Baddi, Himachal Pradesh is WHO – GMP approved
Ketoconazole in the Tinidazole in the ▪ Installed capacity of 3 billion units tablets and 300 million units capsules
world world

▪ 2 manufacturing units; 2 more facilities coming up (currently under greenfield capex )

Speciality Chemicals
▪ Being backward integrated, supply intermediates of anti-biotics, anti-fungal, anti-inflammatory and cardiovascular to the API
One of the leading
Largest producer of manufacturers
producers of ▪ Manufacturer of specialty chemicals in Benzene & Chloro-sulphonic chemistry ▪ Installed capacity of 8,880 MTPA
Nimesulide in the
Metformin in the
world.
world

4%
5% API
Largest producer in
Fluoroquinolones 12%
Formulation
group in the world

Speciality Chemicals
 Focus on growing the contribution from lifestyle &
chronic therapeutic areas, reducing share from acute Intermediates &
therapies Segment Revenue 79% Others
 - FINANCIAL OVERVIEW
Company Sector/ Comment/Observation ₹ crore FINANCIAL TREND
Industry Revenue Profit

2,499.97
2,162.57
1,812.04
PE Ratio 20.12 34.96 The Company’s PE Ratio is less than its peers indicating the

1,567.12
stock being undervalued and could be a good opportunity for

1,244.68
investors

PB Ratio 3.98 4.27 The PB ratio is a valuation measure that compares a company's

280.41

205.04
141.41
market capitalization to its book value. A lower PB ratio

89.75
82.3
suggests that the stock may be trading at a discount to its peers

Dividend Yield 0.22% 0.91% The company’s net debt to equity is 0.52 for FY22. Company
has planned capex predominantly to be funded through
FY 2 0 1 8 FY 2 0 1 9 FY 2 0 2 0 FY 2 0 2 1 FY 2 0 2 2

internal accruals and minimal debt • The revenue of the company has grown at a
steady rate of 15% over the last 4 years. The
Revenue Growth (5 years) 15.83% p.a 7.71% p.a The company has grown exponentially after Covid- 19 due
to increase in demand of API and intermediates and overall revenue for FY22 has increased by 15.60 %
increase in manufacturing activity. The market share has also • The 4 year average profit sees an increase,
increased from 0.62 % to 0.87% However during FY22 the profits has decreased
26.88% due to decrease in the operating margin
Net Income Growth (5 20.18% p.a 3.93% p.a The operating margins of the company due to its value
of the company which stands at 13.76% for
chain of backward integration has helped them to
years) generate higher profits than its peers
FY22 as compared to 20.58% for FY21

Current Ratio 144.23% 171.09%

EPS 22.07 The company has a good EPS as compared to its peers

ROCE 22.92% The company has delivered a return of 22.92% in FY22

& 5 year avg of 23.86%

ROE(TTM) 21.3% The company has good return on equity : 3 years –

26.1%
- COMPETITIVE ADVANTAGE & GROWTH
Core Competencies & Strengths
• Known brand in API space : Reliable in terms of
quality and timely deliveries. Honouring
commitments in changing market conditions.
• Process improvement R&D, cost leadership : The
company has strong foundation and sound setup
• Phase-Wise Capex to mitigate debt trap risks : Newer
capacities established since last two years will help
grow top-line.
• Green field projects : Sufficient land parcels in
industrial zones in Maharashtra and Gujarat to take
care of green field projects in next 3 to 4 years
• Demonstrated manufacturing excellence for 3+
decades
• Fully integrated facilities – lower outside dependence
for sourcing raw materials
Growth Facilitators
• High R&D costs
• Long gestation period
• Time consuming approval procedures
• Demands large variety and small batch size orders
• Highly complex manufacturing
• Stringent quality & compliance requirements in
developed markets
• Highly competitive industry
• Higher capex requirements to adhere to ever
rising quality, environmental & regulatory
requirements
 - FY 23 Q2 & H1 RESULT ANALYSIS
• The YoY% Quarter Revenue has increased by 19% and
Half yearly at 13%.
• The EBITDA Margin has decreased from 12.7% in Q2
FY22 to 10.8% in Q2 FY23. The same is seen in half
yearly results
• The PAT has also decreased from 7.3% during Q2 FY22
to 5.6% in Q2 FY23, this is mainly due to the decrease in
operational margin.
• The segment distribution in revenue is the same where
80% revenue is contributed by API.
• The Margins have been decreasing since FY22 and the
same trend is seen in the first 2 quarters of FY23.
- Capex to drive the next leg of growth

Capex of Rs. 600 crores underway [starting from FY22 for the next 4-5 years]

Brownfield Capacity, Expansion, Backward Integration & De-bottlenecking

Full ramp-up of existing capacity and New Capacity post Rs. 600 crores capex
Revenue potential: Rs. 4,200 – 4,500 crores with higher margin profile in next 5-
6 years
- INVESTMENT DECISION

• The Pharmaceuticals industry is rapidly growing industry, Hence the API industry has experienced significant growth in
recent years, and it is expected to continue growing in the coming years driven by factors such as increasing demand for
pharmaceutical products, favorable government policies, increasing exports, strong research and development, and
technological advancements.
• The Company’s major revenue (80%) is from API segment and are the Largest producers in the world of some the API’s,
the company’s management has setup goals and plans to introduce new API modules for further growth.
• The Company has High ROE, PE, Revenue and Net Income growth as compared to industry standards. It also has
comparatively good EPS as compared to its peers.
• The stock is good for long term investment as it has potential to grow in the rapidly growing industry. However the
operating margins and overall profit is seen to be declining during FY22 and the same is seen during Q1 & Q2 FY23.
• Hence the stock must be in one’s watchlist and must follow the progress in the near future until the end of FY23 and wait
for the margins to be improved during the forthcoming quarters.