HDFC Securities Pick of the Week 14th Dec'25: Aarti Pharmalabs Ltd

HDFC Securities has selected Aarti Pharmalabs Ltd. (NSE: AARTIPHARM)—a manufacturer of generic APIs, Xanthine derivatives, and CDMO/CMO services—as its Pick of the Week. The brokerage recommends buying the stock in the ₹733–751 range and adding on declines in the ₹645–653 band. HDFC Securities has assigned a base case fair value of ₹814 and a bull case fair value of ₹868 over a 2–3 quarter time horizon, supported by capacity expansion, improving business mix, and rising contribution from high-margin CDMO operations.

Q2FY26 Result: Weak Quarter, Recovery Expected in H2FY26

Aarti Pharmalabs reported softer operating performance in Q2FY26, largely due to price pressure in the API segment and an unfavourable product mix. Management, however, expects a meaningful improvement in the second half of FY26.

• Revenue: ₹418 crore, down 8.7% YoY, up 8.3% QoQ
• EBITDA: ₹75 crore, down 20.3% YoY; EBITDA margin at 17.8%
• Net Profit (PAT): ₹27.9 crore, down 48.8% YoY, impacted by forex loss of ₹7.4 crore
• Geographic Mix (H1FY26): ~60% international markets, ~40% domestic

The API business faced margin pressure due to lower-margin product sales, while intermediate capacities were temporarily diverted toward CDMO requirements.

Strategic Growth Drivers and Key Strengths

1. Leadership in Xanthine Derivatives

   • Aarti Pharmalabs is among the largest Indian manufacturers of Xanthine derivatives, including caffeine, with a global market share of 15–20%.
   • Capacity was increased by 1,000 MTPA, taking total capacity to 6,000 MTPA, with plans to scale up to 9,000 MTPA by Q4FY26.
   • Post expansion, the company targets 20–25% global market share, with capacity utilisation expected to reach ~80% over three years.

2. Expanding CDMO Business with Strong Visibility

   • CDMO contributes ~10–13% of revenue and continues to scale rapidly.
   • As of Sep-2025, the company is working with 21 customers across 59 active projects, including 39 commercial and 20 development-stage projects.
   • Around 7–8 molecules are expected to move into commercialisation, supporting medium-term revenue visibility.
   • The Atali facility, commissioned recently, is expected to meaningfully contribute from FY27 and free up intermediate capacity.

3. Broad API Portfolio and Regulatory Strength

   • The company has 60 commercialised APIs and 11 under development, with approvals across oncology, anti-diabetic, anti-hypertension, and respiratory therapies.
   • Regulatory credentials include 56 US DMFs and 35 CEPs, with accreditations from US FDA, EU GMP, EDQM, and COFEPRIS.
   • Aarti Pharmalabs is a specialised player in High-Potent APIs (HP APIs) used in oncology and critical therapies.

4. Margin Normalisation Expected

   • API margins were impacted in H1FY26 due to product mix and pricing pressure.
   • With intermediate production shifting to the Atali unit, management expects margin normalization in H2FY26.
   • CDMO, being structurally higher margin, is expected to drive overall profitability over the medium term.

Valuation & Recommendation

HDFC Securities’ Estimates:

• Base Case Fair Value: ₹814
• Bull Case Fair Value: ₹868
• Time Horizon: 2–3 quarters

Recommendation:

Buy in the ₹733–751 range and add on dips at ₹645–653.

Growth from capacity expansion in Xanthine derivatives, improving CDMO contribution, and stabilisation in the API segment underpin the valuation outlook.

Risks & Considerations

• API Price Volatility: Continued pricing pressure could impact margins.
• Working Capital Intensity: High inventory days may strain cash flows.
• Regulatory Risk: Dependence on regulated markets exposes the company to compliance-related risks.
• CDMO Ramp-up: Delays in commercialisation of CDMO projects may affect growth visibility.
• Currency Fluctuations: High export exposure increases earnings sensitivity to forex movements.

HDFC Securities’ View

Aarti Pharmalabs combines a strong position in Xanthine derivatives, a diversified API portfolio, and a rapidly scaling CDMO platform. While near-term performance was affected by API pricing pressure, upcoming capacity additions and increasing CDMO revenues are expected to support recovery. The stock offers a medium-term opportunity for investors seeking exposure to pharmaceutical manufacturing, regulated markets, and contract development services.