ACUTAAS — earnings call

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Prepared remarks

DIRECTOR, AMI ORGANICS LIMITED · MR. BHAVIN SHAH – CHIEF FINANCIAL OFFICER, AMI

MR. BHAVIN SHAH – CHIEF FINANCIAL OFFICER, AMI

Moderator · Conference Operator

MR. TARUN SHETTY – PHARMA ANALYST, HAITONG SECURITIES Ami Organics Limited February 4, 2023

Ladies and gentlemen, good day and welcome to the Haitong Meet the Company Q3 FY23 Earnings Call of Ami Organics Limited hosted by Haitong Securities.

As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes.

Should you need assistance during the conference call, please signal an operator by pressing “*” then “0” on your touchtone phone.

I now hand the conference over to Mr. Tarun Shetty - Pharma Analyst from Haitong Securities.

Thank you and over to you.

Tarun Shetty

Thank you.

Good evening, everyone, and welcome to Ami Organics Q3 FY23 Business 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 would now hand the call over to Mr. Bhavin Shah for the opening remarks.

Thank you, and over to you, sir.

Bhavin Shah

Thank you, Tarun.

Good evening, and Happy New Year everyone.

We are pleased to welcome

Questions and answers

Moderator · Conference Operator

Thank you very much.

We will now begin the question-and-answer session.

We have a first question from the line of Padma Raju Mathi from SBI Life Insurance.

Please go ahead.

Padma Raju Mathi

Sir, my first question is related to our segments classification.

Till Q1 of this financial year, we used to classify it under 3 segments, pharma, Speciality Chemicals and others.

In the last quarter, we started classifying other segments in pharma.

Now, when I see, this quarter looks like the other is being classified under Spec Chem.

So, from here on we are going to classify other segments in the Spec Chem or the pharma?

Bhavin Shah

Sir, we have now broadly 2 segments only, Pharma and Spec Chem.

So, the product which fall under pharma and supplied to pharma as advanced pharma intermediate will classify it under pharma intermediates and product which is coming as a Speciality will go into Speciality.

So, we clearly have 2 segments only.

Padma Raju Mathi

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 segmental number in Q3, it's not matching to the 9 months reported numbers segment wise.

So, that's the reason I asked.

Anyway, I will take this offline.

Ami Organics Limited February 4, 2023 So, 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?

Naresh Patel

So, what happened that because we are in chemical supplying to the API manufacturers and they are having several intermediates coming from several vendors.

So, what happened that some of the intermediates which they have supposed to come from China did not come in time.

So, their year ending was there.

So, they don't want to keep an inventory on a higher side.

So, that's how they ask us to defer the shipment by 10 days, 20 days so that they can be able to get the product in time from China and they can start the production.

Padma Raju Mathi

Sir, 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

Yes.

So, most probably, high-cost inventory has been consumed.

The 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

But is it fair to assume that my Spec Chem utilizations have come down sequentially?

Naresh Patel

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 happening and then also the Speciality chemical 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 had 39 new customers, which we added in Speciality.

We opened a new window for these Speciality chemicals.

So, due to these efforts, this quarter and next quarter will be much more advantageous for us to improve our Speciality segment as well.

Moderator · Conference Operator

We have a next question from the line of Sudarshan Padmanabhan from JM Financial PMS.

Please go ahead.

Sudarshan Padmanabhan

Sir, my first question is to understand a little bit more about this, fermion contract, a long-term contract.

We're really pleased to know that it's for a patented product and it's a multi-year, multi- ton product.

But just to understand from here, I mean, the kind of run rate that we are running at and I'm not talking about say fourth quarter or the next quarter, this contract coming in, I mean, what is the kind of run rate that we should look at say in FY24 and beyond?

Naresh Patel

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 very brand-new launch product and having exclusivity with them for the next 10 years.

So, 10 years, they will remain as a sole supplier in the world.

And the demand is increasing every gradually very exponentially I can say for 30%, 40%, 50% kind of things, and they want to expand their production capacity as well.

Ami Organics Limited February 4, 2023 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 regulations site master file DMF changing year.

So, for them this year is a financial year ’23.

So, from Q4 2024, it will be for us starting our commercial demand.

And then gradually, it will be increased and it will mature by 25 on a top line.

Sudarshan Padmanabhan

And I would assume that because of our scale this should be fairly meaningful, I mean, if I'm looking at it from a J curve perspective?

Naresh Patel

Yes, it will be a very meaningful association with them.

Sudarshan Padmanabhan

And coming on to the chemical side, I mean, this flow chemistry that is largely done and that should basically start probably by the fourth quarter, this 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 of this one product for the next few quarters?

Naresh Patel

You rightly said that if it will be scaled up, much more operational viability is there and that is where we are working.

And so to increase the scale up, we did introduce the flow reactors and also that we can enhance our capability, production capacity with the minimal operational expenses.

And that is where we are now finishing everything, samples went to every vendors and we will see that in the next 2 to 3 quarters, it will be ramped up gradually 2% to 3% in terms of EBITDA and everything.

Sudarshan Padmanabhan

And 1 final question from my side is on the electrolyte part.

I mean we have supplied samples to 9 customers and one 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 outstripping supply and we should be in a stronger state.

So, on the scale up part, I mean, what are the timelines 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 profitably?

Naresh Patel

Thank you, sir.

First of all, always I'm saying that our projections and our plannings are excluding electrolytes.

So, electrolyte whenever it is maturing it is added into the our top line and everything.

So, 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 FY24.

Sudarshan Padmanabhan

And would it be meaningful or it will be gradual?

Naresh Patel

It will be gradual definitely.

Customer will also not immediately transfer all weightage from China to India.

But when it will mature, it 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 such a way that when the full demand will come, we will be ready for that as well.

Ami Organics Limited February 4, 2023

Moderator · Conference Operator

We have our next question from the line of Chirag Lodaya from Valuequest.

Please go ahead.

Chirag Lodaya

Sir, first on overall top line, I just wanted to understand given the deferment we have seen in this quarter and we are seeing positive momentum in Spec Chem side, what kind of growth one should expect in FY23 and FY24.

Naresh Patel

See FY23, as we say is that we are expecting and we are trying for the CAGR 25%.

And that is where we are right now in line with that.

The only thing is that everything goes well, there is no issues in that because we have a very good order book also in our hand.

In FY24, similarly, we will remain in expectation of CAGR of 25%.

Because forward contracts what we had done that will be helping us in pharma, will helping us to boost the business and as well as some originators who were not buying from us some of our products, they had also started buying from us.

So, that will be adding more revenue in that.

So, our budget and everything is planned in such a way ‘24 will also remain as CAGR 25.

Chirag Lodaya

Sir, just one more clarification here.

For 25% growth the ask rate for Q4 is pretty high.

Will you be able to deliver that kind of growth?

It could be almost upwards of 45%.

Naresh Patel

See, the current pharmaceutical situation is sluggish, but the thing is that some contracts which we signed this year in Q3 will definitely help us to grow in revenue side.

The 24%, 25% is what we can see right now because we already got some committed demand from several intermediates in several APIs for the originators.

Chirag Lodaya

And in terms of profitability, you mentioned 2%, 3% kind of Q-o-Q improvement we can see on Spec Chem side and pharma intermediate, in this quarter you have already done 22% margins.

Coming to FY24, what kind of margins one should expect in API intermediate business, I mean pharma intermediate business?

Bhavin Shah

So, Chirag, as we have mentioned in earlier call also, that FY21 was best year for us.

We have achieved around 23%, 24% kind of margin in pharma.

So, our first endeavor is to reach there.

With regard to Spec Chem, we are gradually improving and our effort would be to improve by 1%, 1.5% every quarter.

So, this is what we are trying to look at for ‘23- ‘24 for pharma.

Chirag Lodaya

That's quite encouraging.

And just lastly on the overall working capital situation, if you can help us understand what would be the working capital days at the end of the quarter?

Bhavin Shah

123 days currently.

Naresh Patel

It is improved by 13 days.

Chirag Lodaya

And what to expect in coming next 3 to 6 months?

Ami Organics Limited February 4, 2023

Bhavin Shah

So, our aim is to bring it to 100 days.

So, that will be the aim.

And again, in next 1 year, it should be between 90 to 100 days.

So, the base will be 90.

That is our target to bring there.

Moderator · Conference Operator

We have our next question from the line of Kumar Saumya from Ambit Capital.

Please go ahead.

Kumar Saumya

Sir, my question is on the other expense side.

We have seen 9% Q-on-Q in other expense.

And in the notes we found you have mentioned that there is Rs.

27 million one-time shortfall fees for the insurance gain.

Could you please throw some light on that.

Naresh Patel

So, in 2021, we had some small stock fire and that we had claimed in the insurance and that we received claim on that and shortfall of Rs.

245 lakhs or something like that.

So, that will be in other expenses like that which we have booked as expenses.

Bhavin Shah

This is recognized in the third quarter.

Naresh Patel

Because we received the claim in the third quarter.

It happened in February 2021.

Kumar Saumya

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

Bhavin Shah

So, here we have arbitrage of getting finance at a lower rate and we have kept investment at a higher rate.

We are getting EPC at a lower rate.

So, we have utilized that.

And so consequently, my other income was also on the higher side against that.

Moderator · Conference Operator

We have a next question from the line of Kevin Gandhi from CapGrow Capital Advisors.

Please go ahead.

Kevin Gandhi

Sir, I was not able to understand the deferred shipment part.

If you can please explain again.

So, that was my first question.

And the second question is that the EBITDA margin on the Spec Chem segment, that is quite reduced based on the Q-o-Q.

So, like what is the exact reason for that?

So, yes, 2 questions.

Naresh Patel

Deferred in the sense that the shipment which is planned in December is deferred by 10-15 days.

So, it will be going in January.

So, that is how it is a deferred shipment from us.

So, that's why the sales is not booked in Q3, which will be happening in Q4. Whereas in Spec Chem margin it is stable and it is flat in Q2 and Q3. In fact, we improved our margin as we announced that quarter-on-quarter we improved our EBITDA margin and that is you can see also from the result, Q1 was 18%, Q2 was 19% and Q3 was 20.2%, And this has continued as I say that every quarter, it will improve 1%, 1.5% in EBITDA margin and will go up to our ’21 EBITDA margin.

And then onwards we will start because during that period our Spec Chem has also now started contributing into the margin.

And then later on it will go beyond that.

Ami Organics Limited February 4, 2023

Kevin Gandhi

And sir, like, how should be the impact of the flow chemistry assessed, like how much yield will be increased?

And if each and every molecule of the Spec Chem is transferred to the flow chemistry, what shall be the exact financial impact if you can give some color on that?

Naresh Patel

See, yield improvement and all is like confidential matter, but definitely continuous production will help you in terms of operational efficiency as well as in terms of better-quality effluent generation, better safety.

So, these are all included in that and that will help us to make our margins better because you have to spend all this area for handling this kind of waste or everything.

So, that will help in your margin.

So, that is how flow chemistry will help you.

And in terms of volume, batch to batch you have to have a downtime which can be avoided in flow reactors and that will give you larger production in a shorter time.

Moderator · Conference Operator

We have a next question from the line of Vishal Prasad from VP Capital.

Please go ahead.

Vishal Prasad

Sir, in the past, we have talked about our partnership with a firm who is helping us with opportunities in electrolyte additives.

Could you talk about what is the kind of relationship that we have with that firm and what other things are they trying to help us with?

Naresh Patel

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 an association between both of us.

They will exclusively supply or represent Ami Organics worldwide.

Vishal Prasad

So, actually, in the area of electrolytes or is there something else that we are working with them?

Naresh Patel

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

Vishal Prasad

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

Naresh Patel

No, 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 Inteva, Taro, Wavelength, and some other small share on medicine and all.

So, there they are represent 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 grabbed it in 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 2022, where they are our exclusive electrolyte marketing partner worldwide.

Vishal Prasad

Got it.

So, what I find, sir, we have a very strong R&D organization it seems, I mean we’ve got in pharma and Speciality 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 Ami Organics Limited February 4, 2023 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, would be great.

Naresh Patel

See, basically, Ami Organics right from beginning always says 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 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 the R&D center is having 130 people working inside.

They are all PhDs, they are master of science, they are bachelor of science, they are BTech, they are people from the process engineering, they are 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 Speciality chemicals and also our team working for converting the batch processing and batch chemistries into the flow chemistries.

So, these are a bundle of people who are continuously working.

We are adding numbers in the R&D as well.

And we are recruiting time to time people from big pharma and big chemical companies, people from Teva, people from Glenmark, people from Macloeds, 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 think 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 and all.

Vishal Prasad

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?

Naresh Patel

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

Vishal Prasad

So, from $1.2 billion to $2 billion, so additional $800 million, we would like to capture 25% of that $200 million.

Naresh Patel

Yes.

Vishal Prasad

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?

Ami Organics Limited February 4, 2023

Naresh Patel

It's like a flow reactor is nothing but a small reactor against your big batch reactor.

So, you are just making your reaction 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 would dump everything and then you wait for complete cooking, whereas here, you just have a pushing the reactant, which is already reactive, 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

And one last question, sir.

So, what kind of CAPEX we would be looking at once we decide to ramp up to electrolytes?

Naresh Patel

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 major 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.

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.

Moderator · Conference Operator

We have our next question from the line of Hardick Bora from Union Mutual Fund.

Please go ahead.

Hardick Bora

Naresh, congratulations on this deal with Fermion, I wanted to understand that we had given this Rs.

190 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?

Naresh Patel

No. This will definitely cater this contract.

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

And in terms of not asking on margins for this contract, but we've historically made 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.

Naresh Patel

Yes.

Hardick Bora

Naresh, 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.

So, I think we've been talking about the possibility of growing by 23%, 25% year-on-year, which would have meant Rs.

620 crore of Ami Organics Limited February 4, 2023 revenue for 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 your opinion on that?

Naresh Patel

What done not right is not there.

But yes, what we need to do 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.

Only 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 didn’t 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 be helping us for our projections.

And that is what we are reflecting in our numbers also.

You can see similarly; we will continue like that.

Moderator · Conference Operator

We have our next question from the line of Reena Shah from Elara Capital.

Please go ahead.

Reena Shah

I wanted to know what is your utilization in pharma and Spec Chem for this current quarter?

Naresh Patel

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

Reena Shah

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?

Naresh Patel

See, if I continue with the batch processes, my utilization will go up, but I had transferred 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 this flat line, but it is not a flat line.

If we don't have a flow reactor, it will go to 72 in pharma, and it will be 40, 45 in Speciality.

Reena Shah

And sir, you have talked about improvement in paraben 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?

Naresh Patel

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

Reena Shah

And what is your CAPEX done so far?

And what is your FY23 target and FY24 target CAPEX?

Naresh Patel

Bhavin will give the answer.

Bhavin Shah

So, CAPEX done so far is Rs.

62 crore.

For FY24, we will have another CAPEX of, say, Rs.

200 crore.

Ami Organics Limited February 4, 2023

Reena Shah

So, how this funding will be, this Rs.

200 crore is on a higher side.

Rs.

200 crore, can you give some bifurcation on this CAPEX?

Naresh Patel

So, '23, '24 cumulatively is Rs.

200 crore.

And out of that, each year will be Rs.

100 crore and that mainly internal accruals as well as from IPO fund and rest will be from the debt if needed.

Reena Shah

Sir, do you have any target debt to equity ratio in your mind?

Naresh Patel

For the time being, we are very conservative on debt.

So, we are still not in a process of getting the debt.

But if required, then we can go for it.

Moderator · Conference Operator

We have a question from the line of Gagan Thareja from ASK Investment Managers.

Please go ahead.

Gagan Thareja

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?

Naresh Patel

Full year of FY23. Quarter 4, if I do 25%, then it will not be 25% for full year.

Gagan Thareja

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%.

Naresh Patel

Very strong.

Gagan Thareja

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.

Naresh Patel

Sorry to interrupt you here, but if you see in my past commentary also, our business is like Q1 is lower than Q2, Q2 is lower than Q3, 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

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?

Naresh Patel

Yes, theoretically, it's right.

Gagan Thareja

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 if one looks from that perspective, your Q4 purchase cost or input Ami Organics Limited February 4, 2023 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 margin should improve substantially in Q4.

Naresh Patel

Yes, I'm agreeing with you, sir.

Gagan Thareja

And on the Fermion deal, I think you indicated that commercial supplies will start only in Q4 of FY'24.

Is that correct?

Naresh Patel

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

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

Naresh Patel

No.

Gagan Thareja

It will be small.

Naresh Patel

Yes, because it's a validation batch.

So, only 3 batches will go there.

Gagan Thareja

Right, sir.

And when you indicate or guide for FY24 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?

Naresh Patel

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 visibility in terms of rolling forecast as well as the long-term contract.

Gagan Thareja

All right.

And would the margins on Fermion, because it's a patented molecule 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?

Naresh Patel

This is not innovated by us.

It's a CMO kind of work where you cannot expect very high margin.

But definitely, operating leverage will come when the volume will be higher at the commercial side.

Then it will be the margin which we are working in line, a little bit better than what we are doing right now.

Ami Organics Limited February 4, 2023

Gagan Thareja

And on the electrolyte additive, again, commercial quantities are unlikely to happen before the Q4 of FY24. Is that what you pointed out?

Just trying to confirm.

Naresh Patel

Q4 FY23 is not possible, we got order, but we are not seeking it because we are waiting for some documentation approval at their end, but in FY '24, definitely it will be commercialized.

Gagan Thareja

When in FY 24, sir, early FY24 or late FY'24 or mid of FY24?

Naresh Patel

Maybe in Q1 or maybe in Q2, I'm not giving the exact timeline 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 had 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 commercialized faster than the normal procedure.

Gagan Thareja

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?

Naresh Patel

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

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

Naresh Patel

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

Gagan Thareja

And any timelines over which you feel you have any reasonable clarity as to when this can be achieved?

Naresh Patel

As I told you, gradually it will be increment.

And if everything goes as per the market, till now, there is not any alarming for us and all the process and qualifications, everything went well, and there is not any dark side of any qualification.

So, if everything goes well, then by Q2 year '25, it will be fully commercialized.

Gagan Thareja

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

Naresh Patel

Yes.

So, we will start building the capacity in '24, so that it will get full capacity in '24, '25.

Gagan Thareja

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

Ami Organics Limited February 4, 2023

Naresh Patel

Because it's a dedicated plant with dedicated equipment, it will not take longer time against the other multipurpose plant.

So, that will be within 6 to 9 months or maybe 1 year if something does not go as per planning.

It will be ready.

Gagan Thareja

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

Naresh Patel

Can't disclose that.

Gagan Thareja

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

Naresh Patel

Yes, multi-million euros.

So, definitely, it is a sizable contribution in our revenue.

Gagan Thareja

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?

Naresh Patel

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 competition 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 at a lower price and keeping us at 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

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?

Naresh Patel

Every year, 15 to 20 products are getting into the commercialization.

Out of that, because we have an application from large consumption to the small like anticancer where you have lower volume, but the value of the product is high.

And then in anticoagulant and 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 maintained with this new incoming molecules which give us good growth, like 30%, 40%, whereas our very old product give us 7% to 10% of the incremental growth annually and then 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.

Ami Organics Limited February 4, 2023

Moderator · Conference Operator

Thank you.

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

Over to you.

Tarun Shetty

Actually, I had a few more questions if the management permits.

Yes, sir, can I go ahead with questions?

Naresh Patel

Yes, Tarun, you want to ask questions?

Tarun Shetty

Yes.

Naresh Patel

Yes, please go ahead.

Tarun Shetty

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?

Naresh Patel

All are from the volume side.

Tarun Shetty

So, do you indicate pricing for each product has been flattish?

Or do you see some decline?

Naresh Patel

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

Tarun Shetty

So, any revenue contribution from your key products, trazodone, entacapone, apixaban, can you give the percentages?

Naresh Patel

So, the #1 product is contributing 22%, number 2 is 10% and number 3 is 8%, number 4 is 5%, and number 5 is 3%.

Tarun Shetty

And the products would be number 1 trazodone, second entacapone and third apixaban.

That is right?

Naresh Patel

Tarun, this time, we started a little bit conservative, we want to avoid our competitions basically.

Tarun Shetty

Not an issue.

Sir, last question from my side would be, we have heard that big pharma player 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 firm with your orders?

Naresh Patel

See, salicylic acid is our raw material.

So, it is good if someone is making salicylic acid, we can have more leverage on buying from some 2, 3 more customers.

Tarun Shetty

But they did allude to even selling the intermediate side.

So, you're not seeing any kind of competition from them, sir?

Naresh Patel

No, because we use salicylic acid to make our methyl salicylate and benzyl salicylate.

So, if they will go for forward integration, then there will be the threat for us.

Ami Organics Limited February 4, 2023

Moderator · Conference Operator

Any closing comments, sir?

Naresh Patel

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 we have missed out on any of your questions, kindly reach out our IR advisor E&Y and we will get back to you offline.

Thank you very much once again for remaining patient on your holiday.

Thank you very much.

Bhavin Shah

Thank you very much, everyone.

Moderator · Conference Operator

Thank you.

On behalf of Haitong Securities, that concludes this conference.

Thank you for joining us, and you may now disconnect your lines.

(This document has been edited to improve readability)