Hikal Limited (524735) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Hikal Limited Q1 FY '22 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sameer Hiremath, Joint Managing Director and CEO. Thank you, and over to you, sir.

Thank you. Good afternoon and a very warm welcome. I am Sameer Hiremath, CEO and Joint Managing Director of Hikal; and along with me, I have Anish Swadi, President of Business Development and Strategy; Mr. Kuldeep Jain, our Chief Financial Officer; and Strategic Growth Advisors, our Investor Relation advisers. We hope you and your family members are safe, healthy and are continuing to take all the precautionary measures. I'm pleased to interact with all of you on our Q1 FY '22 earnings call, which is a change from our half yearly calls. I hope you have gone through our earnings release, presentation and financial results for the quarter. You can find these on the stock exchanges and on our website, too. As an organization, we continue to follow all the necessary guidelines to safeguard our employees, as well as ensuring that manufacturing operations are not hampered due to COVID-19 reasons. Our company-wide vaccination drive has so far covered nearly 85% of our total employees, include our contract workforce, with the first dose of vaccine, while the drive for the second dose is also on track. We have instituted a special welfare program for our employees and their families who are affected by the COVID-19 pandemic. We began the previous quarter impacted from the effects of the second wave of COVID-19. While the impact was not as severe as the first wave and did not lead to complete shutdowns, it did have some impact in delayed delivery of raw materials and manpower availability. This, in combination with a temporary halt in supply of industrial oxygen in the month of May at our Taloja facility, also had an impact on the Q1 FY '22 financial performance. However, we used this opportunity to perform annual maintenance activities in order to mitigate the loss of production. We reaffirm our full support to the decision to divert the oxygen from industrial use to medical use for the greater good, as the priority is public welfare. Now let me take you through the financial performance. Talking about our Q1 performance, revenue for the quarter was INR 457 crores, registering a year-on-year growth of 29%. Our EBITDA came at INR 96 crores, which is a growth of 82% year-on-year. EBITDA margin saw an improvement of 606 basis points to 21% as compared to 14.4% in quarter 1 of last year. The improvement in EBITDA margin is due to higher volumes, favorable product mix, our business excellence initiatives and higher operating leverage. HIBEX, the business excellence initiative of the company, which has been put in place, has enhanced the company's overall performance by increasing throughput and reducing costs of our existing products. It has helped us to improve our efficiencies and meet increased market demand. The company's cost of financing has reduced due to lower rates of interest, which augurs well for the company, and we expect the benefits to continue accruing. The company has moved to the new favorable corporate tax regime. The effective tax rate will be approximately 26% as compared to 35% in the last financial year. Our pharmaceutical division registered a strong revenue growth as well as an operating profit growth for the quarter, aided by the superior product mix and higher operating leverage. The division recorded a revenue of INR 274 crores, which is higher by 28% on a Y-o-Y basis compared to Q1 of last year. The EBIT for the division came in at INR 48 crores, which is a Y-o-Y growth of 121%. This translates to an EBIT margin of almost 18% compared to 10% in quarter of last year, expansion of 730 basis points. This past quarter, we received local approvals to start producing APIs at our Panoli site. And we will also be undergoing U.S. FDA approvals and certification at this site shortly. An additional new multi-purpose production block was also commissioned at a unit -- will also be commissioned at our Unit-1 Jigani site in Bangalore in the next quarter. We have started supplies of Favipiravir API during this past quarter. Our crop protection revenue for Q1 was INR 183 crores, which is a Y-o-Y growth of 31%. The EBIT for the division was INR 32 crores, which is an increase of 89% compared to quarter 1 of last year. The EBIT margins were 17.4% for this quarter compared to 12.1% in the quarter 1 of last year. We had commercialized a new fungicide for a Japanese customer in our CDMO business last year, as highlighted in the last call. This quarter, we have successfully ramped up the production and increased volumes to our customer. Our business development team has been ramped up to capture new opportunities on the contract, manufacturing and development side. Several new opportunities have been received from new and existing customers, and our pipeline has a healthy mix of opportunities. Towards the end of July, the Raigad region experienced unprecedented and very heavy rainfall. Due to this, our Mahad site located in this region bore the brunt of severe flooding. We immediately took a safe shutdown at the site to ensure safety of our employees. We have mobilized all the necessary resources required from our various sites to assist in the cleanup, restoration and safe restart of operations at this site. We have completed most of the cleanup and the repair to the damaged equipment is ongoing. All efforts are being made to ensure safe restart of operations at the earliest. Post several hurdles faced due to the pandemic, our CapEx program is back on stream. We have commissioned additional capacity on development and launch plant in Bangalore. This is primarily for our new development pipeline in our CDMO business. We expect to complete several ongoing projects in the next few quarters of this year. We are working across our supply chain to minimize disruption caused through the pandemic. We have initiated efforts to backward integrate the key starting materials of the primary active ingredients -- and active ingredients and are collaborating with local manufacturers to reduce our dependency on China. We have taken proactive steps to develop both local and other non-China region-based suppliers. We're also partnering with European suppliers in certain specific areas for supply chain security. We have seen some success in the past quarter with our derisking strategy, and we'll continue in the next few quarters to further develop and intensify and diversify our supply base. Currently, we are experiencing cost escalation in raw material prices due to shortages. In addition, freight rates have substantially increased over the past few months due to the pandemic situation and repercussions from the Suez Canal incident in the last quarter. Hikal has successfully established a strong foothold in the pharmaceutical and crop protection business. In line with our vision, we have set a board aspiration of driving sustainable and profitable growth and moving to Hikal 2.0. As part of our transformational journey, and as I conveyed in the previous call, we have already engaged a leading global consulting firm to work along with us, which will enable us to pivot our growth in a sustainable manner. The journey forward will entail accelerating growth in our existing pharma and crop protection business as well as investing in our emerging business verticals such as animal health and biocides. We have started our journey -- transformation journey to move to -- of Hikal 2.0 in the quarter. In terms of the outlook, we stand by our projected growth in top line at a CAGR of high teens, along with improvement of approximately 100 basis point improvement EBITDA margins per annum over the next 2 to 3 years. This growth hinges on multiple drivers, starting with our ability to convert numerous new product inquiries and new projects from our top global customers into concrete business backed by a global shift in strategy of creating an alternative to China by focusing on our core strength. There is a shift in global supply chains towards a China Plus One strategy. We believe that India is likely to be a big beneficiary of this shift. The policy support from the Indian government through schemes like performance-linked incentive scheme under Atmanirbhar Bharat is likely to provide opportunities for us in the near term. There are significant tailwinds in our business and are working towards capitalizing on several of them. With this, we will now open the floor to Q&A.

[Operator Instructions] The first question is from the line of Rohit Nagraj from Emkay Global Financial Services.

So the first question is, sequentially, we have seen a dip in both our crop protection as well as pharma business. So have there been any postponement of orders because of the logistical issues or the export orders? And will that effect come in subsequent quarters?

To answer your question, I mean there has been no deferment of orders. Our first half is always a smaller half as compared to the second half of the year historically, and there is no impact of any delay of any orders. It will all pick up in the second half of the year.

Sir, the second question is in terms of your molecule development. So how are we currently placed? And what is the time line for the next 2, 3 years in terms of commercialization of molecules across both crop protection and pharma segment?

Sorry to interrupt, Mr. Nagraj, but there's a disturbance coming from your line. Request you to mute your line while the management answers your question.

Well, we have several products under development. And if you look at our crop protection business, we have 7 to 8 products under development at any given time, and our pharma business has a little bit more, about 10 to 12 products under development. Apart from this, we also have our own generic pipeline of own products, which we are developing. In the crop side, we are launching 3 new molecules this year. And on the pharma side, we'll be launching around 4 new products this year, which will be a mix of own products and CDMO.

Right. Understood. That was very helpful. Just 1 last clarification on the 10-year multiproduct deal. Any further update on this deal?

Thanks. So yes, the contract was signed as was made aware to the -- in our last call as well. And we've already started the work on the project, and the project is moving as per the time lines. Everything is on track.

The next question is from the line of Dhaval Shah from Girik Capital.

Sir, first question is any input cost -- input raw material inflation is not visible in our margins. So has that been completely passed on? Or it's the operating leverage which is covering it up?

Well, there are 2 reasons for that. One is that we -- there's a pass-through cost on most of our raw materials with our customers, which have -- which was also asked, I think, in the last investor call. So there is a very little impact to us on the margins. Secondly, wherever there is an impact on our costing, we have improved our operational leverage and operational efficiency. Our raw material prices have definitely increased in the pandemic, and there's a big issue right now also with shortages due to logistics and freight charges, but we're able to mitigate that to a large extent.

Okay. Which raw material, any specific where there is a large increase, if you can quantify?

No, I'd say that basic chemicals and some solvents have gone up because crude oil prices have gone up, but mostly the transportation prices have really gone up. Freight costs have really increased. You must have seen newspaper articles on this as well. There's a huge increase. Especially in the last 2-3 months, freight rates have gone up exponentially. But we have a pass-through with clauses with our customers. So we don't take much of the hit, so we...

So pass-through is with each new PO which is made, so if that's a new price or how is it the pass-through? Because...

Annual price, and then we have a reconciliation clause, and there we have -- if there's a runaway price increase, then we can take it up with the customer and we can adjust it in every PO, yes?

Okay. So second question is on the Favipiravir contribution, if you can share?

Yes, we did do some Favi sales in the first quarter. It's about 2% of our Pharmaceutical division revenue right now. It's a small product, a niche product. But we are just doing whatever best we can to help with the cost for COVID.

Okay. And sir, the CapEx incurred? And what is the amount which would be capitalized in the current year?

Yes, I'll hand that over to my CFO. Kuldeep, if you can take that call, please?

As we discussed in the last meeting as well, capitalization will be close to INR 300 crores for the entire year, which INR 75 crores has already been done in the quarter 1.

Okay. 70 -- sorry, how much you said, sir, 70?

INR 75 crores we have already done, capitalization in the quarter 1.

Okay. Okay. And next year, you are yet to give any guidance on the CapEx, right?

No. So we started our CapEx about 2 years ago. We had to put in place a CapEx plan of about INR 300 crores, which is getting completed by end of this year. But we -- also, in the meantime, we've acquired significant new contracts, one of which is a 10-year contract. And apart from that, we're also acquiring some new big contracts, which we are working with our customers, for which we need even more capacity. So we're looking at this, but we expect to put in a fresh rate of CapEx for the next 2 years, which we will start putting the CapEx, hitting the ground maybe in the next few quarters, which should be another INR 250 crores over the next 2 years. But this will start once the INR 300 crore CapEx is over. We will start that next cycle.

Okay. So INR 250 crores over '23 and '24?

Yes. Yes, that's correct. FY '23 to FY '24, yes.

Got it. With the same sort of capital metrics in terms of the turnover -- asset turnover margins?

Yes, we have had very strict guides and norms in our company, and we don't do anything if we're not hitting those norms. We try to do even better, but actually, that's a bare minimum that we try to achieve.

The next question is from the line of Viraj Mehta from Equirus PMS.

Yes. Great numbers, Mr. Hiremath. Sir, just a couple of questions. First one, if I look at our gross margins, they are at a 16-quarter high. Just wanted to understand, in your view, are these roughly 50% gross margin sustainable number?

Sorry, can you repeat that? I couldn't hear the last part of what you said.

So these kind of gross margins, in your view, are these sustainable in a slightly longer term?

We've given guidance for what we expect the margins to be. I mean quarter-to-quarter, they could be a little up and down depending on the product mix, but we had a favorable product mix for sure in quarter 1. But whatever guidance we gave, 100 basis points improvement in margin year-on-year, I think we stick to that, yes?

Right. And can you talk a little bit -- just my last question. Can you talk a little bit about the scale-up in Pregabalin? And how has that worked out? And what's the scale we kind of see in that product? And how have been the spreads in Pregabalinand Thiabendazole?

How are the -- what -- sorry, I couldn't hear you, you're not very clear.

Scale up in Pregabalin and Thiabendazole.

Well, Thiabendazole is, volumes are growing every year. I mean there's a marginal growth in Thiabendazole volumes every year because it's a very old and mature product. So -- but the volumes are growing in low single digits for Thiabendazole. But Pregabalin, we commercialized a few years ago. We've already seen a significant ramp up in the last financial year. For this financial year, we expect even a steeper rise in volumes, and we are getting approvals in new markets like the Japanese market just opened up a few months ago. We are the primary supplier in Japan to almost all the companies there. Europe volumes are increasing. We're getting some new approvals in the United States. So we are seeing a lot of interest in Pregabalin, and we've got a very strong cost position, and we have a very strong -- good technology on that. So we see this becoming a very large molecule for us in the next 1 to 2 years.

The next question is from the line of Sandeep from East Lane Capital.

Sameer, I have 2 questions. One is, if you could just talk a little bit about Hikal 2.0. How different would it be from current Hikal in terms of technologies, manufacturing infrastructure, the kind of products you can do, just a broad sort of 3- to 4-year outlook? How different will the organization look in the medium to long term?

Yes. So I mean, Hikal 2.0 is something that we've been working on for the last year or so and then we've formalized it through global consulting that we brought on board in the last quarter. But the whole emphasis on Hikal 2.0 is having global leadership and becoming a global company in the fine capital space, catering to the pharmaceutical industry, crop protection industry and creating 2 -- if not 2, at least 1 new vertical of animal health and taking it to the next level. And that's really about how we're accelerating our growth in margins and also achieving revenue growth, which is far in excess of what we've been doing historically. It's based on 5 key strategic pillars. One is manufacturing excellence to set up large flexible manufacturing assets with high levels of digitization Industry 4.0. The second is to work on complex chemistries and new technologies. The third is to derisk our supply chain and to digitize our supply chain. The fourth is to become from a strong in EHS, which we think Hikal is already a strong player on EHS, to become a leader in value creation to ESG and sustainability. And the fifth is to improve our customer reach and become more customer-centric for approach to key account management. Along with this, we're looking at digitization across the value chain in our company. And we're also looking at opportunities for partnerships, alliances and even potential M&A going forward. So it's based on 7 pillars in which we're looking at our growth strategy of Hikal 2.0 over the next 5 years.

Understood. And can you talk about -- you have mentioned this year, how many products you would be launching, but just a funnel for crop protection and pharmaceutical both on the CDMO side, how do you see that developing? How many are in Phase III, Phase II? Or these are more products, which will be getting genericized and you will be working with the innovators? Just a flavor of that would be very useful.

Yes. So if you look at our crop protection side, we are currently having about 5 to 6 products under development or under launch at any given time and that's the kind of pipeline that we're looking at. And we're actually seeing that number increase year-on-year. And this year, we'll be launching 3 of those products, all of those ones under development. On the pharma side, we have about 7 to 8 products in the CDMO side and 3 to 4 APIs under development. And we, again, expect to launch almost 50% of that in this year and the next year as well. So the pipeline is pretty healthy we're looking at. We've also strengthened our R&D center in Pune. We've got new labs, and we have increased the manpower in our scientific strength. And we're seeing increased traction in number of RFPs and inquiries increasing. So this number will start moving upwards. As part of Hikal 2.0 initiative, the idea is to increase this number dramatically upwards over the next few years.

And if I may ask 1 last question. Just the opportunity you see in Sitagliptin, that's a large volume product. You have clean chemistry enzymatic processes there. What kind of an opportunity it could be? Is it a very large, exciting opportunity?

When it goes off patent after a few more years, so I think it is going to be a competitive molecule. But we expect to be like what we've done in Pregabalin, get kind of a leadership position in the product because we've got a good traction. We've already got customer approvals. Again, we've got approvals in Europe, and Japan also has approved us as a supplier. So -- and we're talking to many other customers. So it could be a pretty significant molecule. It's still 3 to 4 years from expiry, but we're doing a lot of work. And the process is very unique, and we have an enzymatic green process. So we believe that we are quite hopeful that it can be a big molecule for us. But time will tell, but we are working towards it. Yes.

The next question is from the line of Mitul Mehta from Lucky Investments.

Congratulations on a great set of numbers and great execution. Sir, I wanted to know from you, within your crop protection and pharma, as to top 5 products and top 10 products contribution, is it possible for you to quantify that number so that we can get some understanding?

One minute, I am looking at [ one thing ]. I have the numbers for the top 10 customers. I can give you that. In our pharma division, our top 10 customers contribute to around 70% of our revenue, but they have multiple products each. In our crop protection division, our top 10 customers contribute, again, to 75% of our revenue, slightly higher than the pharma, but it is with multiple products. No single customer in either pharma or the crop business contributes to more than 10% of our business. And no single product, apart from gabapentin, contributes to more than 7% or 8% of our total business.

Okay. Great. Sir, if you recall, in our previous quarter 4 conference call, you did alluded to the fact that incrementally, our gross margins for new products will be in excess of 60% or closer to 60%. So is it the reason that's the -- reason why our gross margins are looking far more bigger today than what they were used to before, if you could just throw light on that?

Well, new products -- as I've been saying in the last several conference calls, new product contribution and gross margin is higher than the old legacy molecules. And as new products come end of summer, which have come in, in quarter 4 and more have come in quarter 1 because there's a favorable product mix. There is definitely improvement in gross margin, which is likely to sustain going forward as we launch more and more new molecules. So yes, you're right, I don't know the number is 60%, but it's definitely in excess of 50%, yes.

So this year and next year, if you can just give us a road map of new product introduction in crop protection and pharma in your CDMO as well as own products?

Yes, I think I just -- somebody just asked this question before you, but I may just repeat that. We are doing 3 to -- 3 products in the crop protection side and 3 to 4 products -- 4 products on the pharma side that we're launching this year.

And subsequently in FY '23?

So about the same what we have -- every year, we go up slightly. We'll go up even more slightly probably. That has to intensify this. That's part of Hikal 2.0.

Okay. And how many such products would be there in your pipeline currently in your pharma and crop protection? I mean, at what sort of -- how many products you would be working at this juncture?

So answer is again, I mean, yes. So we currently have in the crop protection side about 5 to 6 molecules that we're currently working on, 6 products actually to be exact. And on the pharma side, we have about 11 to 12 products that we're currently under working on in the pipeline.

Right. And all of these products would be patented or they would be generic also?

They are a combination. The CDMO is more patented, the APIs are more generic -- far generic, yes.

Sameer, I have a very broad question to you since we tracked this sector for many years now. We've seen very successful wealth creation that has happened in this particular sector, be it [ BVCI ] industry, be it many other companies. Hikal, obviously, was the one which was kind of lagging behind for obvious reason, which seems to have done phenomenally well in last 12 months, and therefore, we'll continue our good work. Just a question to you. Where do you see yourself with Hikal 2.0, 3 years from now, 4 years from now? Do you believe firmly that we can build a very scalable business in both pharma and crop protection?

Yes, that's exactly what Hikal 2.0 was all about is excellence and leadership in both our pharma and crop protection business. I mean we are one of the few companies that have both the verticals. Some of our competitors are trying to do what we've done. We've been doing it well. We've got a track record, and we're really seeing traction and growth accelerating now in both the segments because we had a very good track record on compliance, EHS, ESG. And we've done a steady job. Our growth is going to intensify and going to get faster and our margins are going to get even better going forward, yes.

[ on with me? ]

Sorry to interrupt, Mr. Mehta, but I request that you rejoin the queue. The next question is from the line of Pranay Dhelia from Panchatantra Advisors.

Sir, first of all, many congratulations on the stellar numbers and being a $1 billion company. If you recollect last call, I said as a shareholder, let's look for $1 billion, and we did it much sooner than expected.

Thank you. Thank you.

And I hope that this is just the starting point that you said, and as a shareholder, will be happiest if you become a $5 billion company, which I'm sure the management will help us.

Thank you.

Sir, 2 quick questions. One is, sir, what is the total debt figure on the books? And are you looking to raise any further debt or CapEx that you are planning or the internal cash flows will be good enough?

Well, our current debt on our books has actually come down. It was INR 616 crores end of March. Now it is INR 595 crores. It has come down because our working capital has reduced considerably in the last quarter because of operating leverage and improvement in efficiencies. And that -- what was the second question?

Not the second one. The continuation of this was, do you hope to raise more debt? Or is going to be done through internal cash flow only, the CapEx that you are planning?

It's a combination of both internal and debt because our cost of debt has also come down significantly. Interest cost has come down. As you can see, our finance costs and our numbers also have come down. So everything is manageable. As business is growing, and our total debt numbers are being -- are coming down and as a percentage of...

Last call you said that you look to get debt-free by FY '23 end. So are we on track for that?

I'm sorry, I couldn't hear you. Can you repeat that?

You said -- last call, you said FY '23 end, you look to get debt-free.

Well, the debt free -- reducing our debt and make it -- it's very optimal, our debt. I think our debt is not -- no cause of concern. We have significant coverage on our debt, and it's a very manageable level. Our debt equity ratio actually has come down from 0.71 in FY '20 to 0.61 in FY '21 to 0.56 in quarter 1 of this year. So it's -- obviously, it's coming down on a continuous basis. And obviously, we'll work on bringing it down even further the next few quarters and the next few years.

And my second question, sir, how much of revenue will be further accrued from the 2 new capacities that you're looking as from Q2 FY '22?

Well, it takes you -- where we're at, it takes a year or 2 -- to 2 years or so to ramp up to full volumes, but -- because of validation and customer approvals and regulatory approvals. But once you get all that in place, we expect an asset turn of about 1.5 for the new CapEx.

So you expect 1.5x asset turnover?