Aarti Pharmalabs Q2 FY26 Update

Aarti Pharmalabs’ performance dipped this quarter YoY, but it did improve its performance over the June 2025 quarter. The performance was largely due to:

• Dip in API Margins: Due to API sales being skewed towards lower margin API sales, resulting in lesser revenues and profits. API and intermediates vertical saw its share dropping from 51.2% to 39.4% when compared quarterly YoY.
• Customers are building up inventory for APIs, resulting in higher sales in the previous quarters, resulting in a lag in new orders.
• Intermediate space is being utilised for CDMO, with CDMO being prioritised.
• Foreign Exchange loss of INR 7.4 crores. The company has nearly USD 24 million term loan outstanding. In addition, working capital loans are also in USD. Over the quarter, the rupee devalued vis a vis dollar, and hence it had a significant impact on the profits.

Management Comments on the performance:

“The API business saw high margin pressure. Moreover, the API sales mix in this quarter was skewed towards lower margin APIs.”

“Yes, basically in this quarter, we had a lot of intermediate manufacturing, which suck up the overall capacities for CDMO, which will get freed up in the last, this coming quarter. So, which will result in higher API overall number going forward.”

We look at two major factors that help Aarti enhance its value in the medium term.

The Aarti Atali plant is now operational and is likely to ramp up in the next two quarters. It will produce Intermediaries and CDMO. Full capacity of 440 KL, Expected increases:

• CDMO revenues to increase by 30-40%. Aarti is working with 21 customers with 59 active projects, of which 39 projects are in the commercial stage, and 20 are under different stages of development.
• Enhance backward integration with expanded intermediate capacity. This also shields API/intermediate vertical revenue losses when its capacity is used for CDMO

“we have fungible plants which are being used for the CDMO business as well as the intermediate business. And that is where the capacity gets utilized depending on the priorities and the profitability of the projects.And of course, CDMO projects get priority over sometimes the intermediate business.”

• The plant can be scaled up to 8-10 times the current capacity in blocks of 200-300 KL.

On the question of previous estimates of INR 1,000 crores from the CDMO (50%-60% CAGR) in the next 2-3 years, the management said:

“One year here or there, but ultimately the numbers we will achieve and the numbers that we have targeted, we have mentioned earlier in our calls….So, I don’t want to give any commitment. But I think longer term, we see growth, and there is a pathway really to achieve that number with the existing running projects that we have. And of course, anything additional projects that we get will also support us overall”

While not very confident, the management also did not rule out such numbers in near term future. Does bode well for the growth of the company.

Capacity enhanced from 5,000 to 6,000 MTPA by debottlenecking on the manufacturing line. The capacity is expected to increase to 9,000 MTPA installed by the end of FY26. However, the management does not expect to fill it up completely.

With this expansion, the market share is expected to rise to 25%. As per the management, “We are taking up overall from the market share perspective also almost 25%... further grow and hold up, that is going to be quite a task.”

Global Market Share in Xanthine: The enhanced capacity is expected to land Aarti is Global market share in Xanthine of around 20-25%. This is big from just one company and will make it a big and reliable producer. The price sensitivity is also likely to reduce as the company increases it share.

• CDMO Industry Overall: Industry tailwinds for the CDMO space in India, with an expected CAGR of around 15%. India offers lower costs and a diversification strategy away from China. With relevant talent available CDMO industry is on a high growth trajectory.
• Aarti boasts of Research scientists with a low attrition rate who have helped the company file 58 patents for over 220 products. With nearly 5% of the revenue from API+Int &CDMO in FY25 spent on R&D, this should yield good revenues in the long run. However, the company did not get any new customers in H1, FY26. The management did say what they are doing to enhance the customer base for CDMO.

Rashesh Gogri:..…we have started an office in Europe. So, we have a representative in Europe which is promoting Aarti Pharmalabs’ CDMO activity in Europe. And now we plan to put one person exclusively for the CDMO BD in North America….. Of course, we keep on attending all the trade shows…..And we are trying to take also overall analytics help to keep a tab on the new launches.

• Increased ROE and ROCE over the past four years. ROE increased from 8.81% to 13.68%. ROCE went from 11.46% to 17.23%. The company has been making good use of the capital.
• Stock price down significantly post Q2 results, and is now available at a much lower price.