Hikal Limited (524735) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Hikal Limited Q2 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 the date of this call. These statements are not the guarantee 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, Managing Director. Thank you and over to you, sir.

Good afternoon, and a very warm welcome. I am Sameer Hiremath, Managing Director; and along with me, I have Mr. Anish Swadi, Senior President Business Transformation; Kuldeep Jain, our Chief Financial Officer and Strategic Growth Advisors. We hope you and your family members are safe and healthy. I am pleased to interact with all of you on our Q2 FY '22 earnings call. 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 part of our continued efforts to fight the pandemic, our employees across the company are 100% vaccinated for their first dose and over 75% have been vaccinated for their second doses. We expect to have all our employees to be vaccinated over the next few months. From an industry perspective, outsourcing for both pharma and crop protection industries continues to evolve from a largely cost arbitral strategy to strategic supply chain security and reliability. Post COVID-19, innovator and generic companies are looking to further diversify their supply chain, internal supplier and geographical concentration. Due to these factors, Indian company's life cycle offer an attractive brand of a strong quality and regulatory track record, capability of handling complex chemistry, excellent customer support and cost competitiveness, we have an opportunity to capitalize on a greater share on the outsourcing. Hikal's existing own product portfolio has also seen volume growth over the last few quarters, which is expected to continue going forward. In terms of new products, we have a healthy pipeline and continue to see a strong traction for our customers in both our businesses to support the future growth plans. Now let me take you through the financial performance. Revenue for the quarter was INR 469 crores, registering a year-on-year growth of 26%. Our EBITDA came back to INR 91 crores, which is a growth of 30%. EBITDA margin saw an improvement of 60 basis points to 19.4% as compared to 18.8% in quarter 2 of last year. Lastly, our PAT for the quarter stood at INR 44 crores, which is a marked improvement of 63% from INR 27 crores for the same period last year. Similarly, the corresponding figures for H1 FY '22 have shown remand promise. When our revenue standing at -- with our revenue standing at INR 926 crores for the first half as compared to INR 725 crores for H1 of last year, registering a growth of 28%. On the EBITDA front, the growth stood at 53%, rising from INR 122 crores to INR 187 crores for the corresponding period. While the margin improved tax rate due to reduce tax regime and improving finance costs led to substantial increase in profit after tax with a growth of 125% rising from INR 42 crores in H1 FY '21 to INR 95 crores in H1 FY '22. The company's cost of financing has also reduced as a result of efficient working capital utilization and successful renegotiation of lower rates of interest, which augurs well for our company and the benefits will continue to improve going forward. Our Pharmaceutical division maintained similar revenue levels for the quarter as last year at INR 280 crores, the Q2 revenue for the division was flat as compared to the same period last year. The EBIT for the division came at INR 37 crores, which translated to an EBIT margin of 13.4%. For H1 FY '22, with the revenue of INR 554 crores, the division registered a growth of 12% year-on-year. In terms of EBIT, the growth was at 20%, paging to INR 86 crores on a year-on-year basis. This charges an EBIT margin of 15.5%. This quarter, we received -- last quarter in Q2, we received a manufacturing license for production of APIs at Panoli site. This is in line with our strategy to diversify our manufacturing footprint by having 2 independent sites to manufacture APIs. Over the next several months, we have been validating several APIs for launch in the next financial year from our Panoli site. Our crop protection revenue for Q2 was INR 190 crores, which is a year-on-year growth of 105%. The EBIT for the division was INR 34 crores compared to INR 8 crores in Q2 FY '21, which is a growth of 35% year-on-year. The EBIT margin is 18% in Q2 FY '20 compared to 8.5% in Q2 FY '21. In H1 FY '20, INR 372 crores revenues were recorded, registering a 61% growth on a year-on-year basis. The average stood at INR 66 crores, an increase of 167% on a year-on-year basis with margins of 17.7%. During the last quarter, historic rainfall in the Raigad district region had a severe impact on our Mahad operations, leading to the shutdown of our Mahad facility for almost a month. This led to a loss in sales and profitability for the division. Relentless efforts by our team from all our sites helped in restarting our operations in a staggered manner, and we were able to return to normal operations in due course. Despite the challenges faced by the flooding, our Crop Protection division did well to recover last quarter. Global supply chain challenges, coupled with steep increase in input raw material prices continue to pose a challenge for our industry going forward. We were hit by the disruption in logistics in the past few months and more recent we are experiencing an unprecedent increase and non-availability of input raw materials. We have put in significant efforts over the past 2 years on developing alternate sourcing partners and backward integration of certain raw materials. While this would help us in the medium term, we do expect total disruption in the short and near term. Over the next several months, we do expect the situation to normalize. We have commissioned new capacity for our pharma CDMO business in a unit to facility in Bangalore. This is primarily for our development pipeline in our CDMO business. CapEx investments for multipurpose facilities is on track across both our businesses for new products to be launched in a staggered manner over the next several quarters. We expect to complete several ongoing revenue and infrastructure projects by the second half of this year and going into next financial year. We are undergoing a transformation of our business from good to great while continuing to drive profitable growth. As I informed you on our last quarterly call, we have onboarded a global consultant to help us identify the right strategic direction for choosing suitable products, partners and technology for the future while bolstering our R&D and manufacturing capabilities. In addition to this, our business external initiatives continue to benefit the organization by increasing operational efficiencies. Our transformation exercise is underway, and we expect to reap the benefits over the next several quarters. We are receiving traction in our animal health business, post the signing of a long-term contract several months ago. We believe firmly that the journey forward will entail further accelerated growth for existing as well as emerging businesses. While the number of products in the pipeline and the customer inquiries have increased, a healthy list of leads and inquiries for new businesses, the company is well positioned to capitalize on the opportunities in hand and those which we will talk going forward. This door hinges on multiple drivers, starting with our bid to convert numerous inquiries, which are increasing quarter-on-quarter for the top global players into concrete businesses backed by a global shipping strategy of creating an alternative to China. By focusing on our core strength of developing our own processes and technology and delivering the best-in-class products, thereby becoming a partner of choice for our customers. In terms of our outlook for the year, we stand by our initial projected growth in top line at a CAGR of high teens, along with an improvement of 50 basis points to 100 basis points improvement in EBITDA margins per annum over the next 2 to 3 years going forward. The growth trajectory, along with new opportunities, strong customer relationships and new technologies, which [ catenise ] our progress towards our bold aspiration. With this, we will now open the floor to a few question and answer. Thank you.

[Operator Instructions] First question is from the line of Rohit Nagraj from Emkay Global.

And congrats on a decent set of numbers despite the challenging environment during the quarter. So the first question is you lost revenues because of Mahad plant shut down, is there any possibility of recovering there in subsequent quarter? And because of the non-availability of some of the raw materials, do we further expect that the revenues for the next Q3 and Q4 may get impacted?

Yes. Thanks for the question. Your first question was regarding the Mahad facility impact and whether we will be able to make it up. Well, efforts are underway to ramp up capacity. We are trying to make up to the best extent possible, but there is going to be some impact because the shutdown, as you know, was almost a month. So we will try to minimize the impact for the remaining 2 quarters. And the second question, I think you asked was regarding what is the impact of raw materials on the future prospect of the business. Well, raw material prices are going up, input prices have risen and they've risen quite dramatically. We are passing -- trying to pass on the benefits, the pricing basis to our customers although there's a lag effect in many cases. But there are efforts underway. There's a lot of uncertainty in the market today and not only in pricing but also in terms of availability. And -- but we are quite hopeful that with the mitigation plan that we've put in place over the last several years, we'll be able to ride the storm and be able to minimize the negative impact of the exclusives. But it is a challenging time and raw material shortages, energy costs are all increasing and input prices are increasing.

So the second question is on Hikal 2.0. So last time, you had indicated about the initiative. So any tangible and material benefits that have accrued over the last 1 year? And how are we seeing the benefits accruing maybe over the next 1 year or 2 years' time frame?

I will take you over to our transformation head, Anish Swadi. Anish, you want to take that?

Yes. Thanks, Sameer. Yes, so we have just started this exercise a few months ago. It's not been on for a full year. It's only been a few months since we started. And we're starting with the strategies of both the business to redefine and to validate what our current strategies are in place. I think the tangible benefits will happen over a period of time as we implement some of the initiatives that have been recommended by the teams. So that will happen over the next several quarters. It's starting off slowly and then ramping up as we implement it. Our business takes a long time to implement several changes, whether it's regulatory, whether it's manufacturing. But certainly, the initial impact has been positive, and we do expect the benefits to accrue over a period of time.

Our next question is from the line of Dhruv Bhimrajka from Monarch AIF.

Sir, my question is that in your 4Q '21 press release, you had mentioned about the new long-term contract of a fungicide with a U.S.-based crop protection company. So any update on that long-term contract, sir?

That process is ongoing, that's under execution. It's on track. There's no change since the last board meeting. It's undergoing.

Okay. So as and when it happens, that will be around. So it is under the agreement stage right now is what we can assume?

No, it's signed. It's already signed. Execution is underway.

And also, sir, in your latest press, in your 1Q '22 press release, you had mentioned about emerging business verticals such as animal health and Biocide, so can you please explain what is this biocides because I am new for this company. So I just wanted to understand the biocide business?

Hi, this is Anish. So the Biocide business lies under the Specialty Chemicals umbrella. The beauty of the Biocide business is that basically we utilize our own crop protection assets to manufacture these products. So we have several biocides that go into various aspects. So for example, we have biocides that goes into the paint industry that can also be used as crop protection products. So they are multi-purpose reuse products. We've been in the Biocide business for several years. However, now we've got a strategic plan to accelerate the growth of that Biocide business. There are supply chain constraints coming out from China, and we think this is a good advantage, a good place for us to take advantage of and utilize our chemistry skills as well as our customer outreach to grow this type of business.

[Operator Instructions] The next question is from the line of Ranvir Singh from Sunidhi Securities.

Sir, on CapEx side, what CapEx you have spent in first half and what is planned for second half or for next year also if you could give?

I will hand it over to my CFO. Kuldeep, if you can take that question, please. Thank you.

Sure. Thank you. So for us in the first half, we have capitalized almost INR 127 crores expenditure, and we expect almost INR 175 crores in the next H2..

And for FY '23 sir?

FY '23, we are accruing close to INR 300 crores.

Okay. And any target for debt reduction for next 2 or 3 years?

No, we are into the CapEx expenditure more, so we cannot really look at that target. But we're trying to maintain our CapEx to be in same ratio. Also, our interest costs are coming down. And the equity is also coming down.

Okay. And just I missed your comment on Mahad facility. So this has the resumed operations now?

Yes, it did resume. It shut for almost a month and we resume the operation site.

The next question is from the line of Ashish Thakur from Motilal Oswal AMC.

So can you quantify the impact of logistics and higher energy consumption? So what was the cost impact in this quarter?

Logistics impact on this quarter was around INR 2 crores was the impact for this quarter, and energy consumption was around close to INR 2.5 crores to INR 5 crores.

This energy consumption, this could get addressed over the next 2 quarters because some of the companies were mentioning that these costs could normalize over the next 2 quarters?

Yes, we are hoping that let us see it's a wait and watch. Again, many of our contracts, as I mentioned earlier, the pass-through to our customers. So there could be a lag effect so to normalize the pricing as well.

On this pass-through contract, are the customers willing to take the impact -- the full impact in one go or you're passing it all in a staggered manner?

I mean it depends more or less a staggered manner, everybody's input costs are going up. So we have to share the pain sometimes with our customers and share the benefits also. It's a partnership model.

So one last question on this -- a question on this CapEx around INR 400 crores to INR 500 crores CapEx that we have lined up over the next 2 years or so. Any asset since you guys are working on what's in your mind?

Sorry, can you repeat that? I couldn't hear you.

So roughly around INR 300 crores to INR 400 crores in CapEx that you will be spending over the next 24 months. Is there any asset guidance that you'd like to give to the investors?

Yes. We've been maintaining an asset turn ratio of about 1.5:1, and we will maintain that.

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

I have 2 questions. The first question is more on the medium term. If you look at your pharmaceutical CDMO business, it is about $60 million. So given the opportunity, given the pipeline you see, what is the potential for this business? The largest players, DB is at about $373 million, $380 million today. So from $60 million, where can we be in 3 to 4 years? And what are the requirements for us to really scale this business?

So you're right. I mean there is a lot of potential to grow the CDMO business, and we are seeing a lot of new inquiries coming in the CDMO business. So I am quite confident of going this aggressively. It takes time to acquire a customer, a customer tries you on one project and the project takes time to ramp up. We mentioned company -- question was also bigger than 10, 15 years from an inflection point to change. We are on our journey. We expect the business to grow over 2x to 3x over the next 2 years as we go ahead.

Understood. The second question is that if we look at your margins for pharmaceuticals and which is like 50-50 CDMO and own products at this point in time. Again, margins are subpar when we compare you to some of the more scale players. What could be the reason for that? And how do we see the margin trajectory going forward? I understand the current quarter because of logistics, raw material, et cetera. And if we take that aside, what are the right margins for this business? Is it that you have to take the technology from your MNC partners and that's why the margins are lower? Or some of the products like gabapentin, you have 35% market share, but not reflected in margins. So just how to think about margins in the medium term?

Distressing our product portfolio by launching new products over the next few years, every year with launching new molecules at a much higher margin ratio. So while some of the current historical margins are due to the older products and to the competition. But going forward, as we take on any new molecule and we launched them, the margin profile is very different. We are in excess of what we have. So the margins will start improving year-on-year. I think this H1, a lot of the impact was due to the input prices going up. That was a logistics cost. So otherwise, I think margins will start once things stabilize, we are quite optimistic that margins will start going up on the pharma business.

And last question is, is the crop protection margin generally lower than pharma margin or nothing like that its product to product?

Well, it depends on those products you choose and what profile. I mean if you have -- generally pharma is higher than crop but it crop also is high in certain cases. It's a case to case basis. I don't think I can generalize. We if you do niche products in crop, which we are doing, a lot of our molecules are in each side, we have a good margin on the commodity products in crop. And that's why we have a margin of the top business.

The next question is from the line of Ankur Periwal from Axis Capital.

Sir, first question on the global consultant and wherein you are trying to identify growth opportunities. So part 2 to the question. One, are we -- or is this consultancy arrangement largely to restructure or improve the efficiency of the current business segment? Or it is also expanding into adjacencies and maybe a newer segment from a growth perspective?

Yes. So the strategic exercise or the transformation exercise that we're taking is across the company. It's looking at ESG, which is a core strategy of ours. We're looking at key account management. We're looking at how to be the best in class when it comes to manufacturing, R&D and also looking at new diversified strategic areas for our business. So it's across various aspects of the company. It's not only focusing on a particular segment of business. We are evaluating new areas based on new technologies that we can incorporate or inculcate within the company and how to pivot from there and build on those new verticals. So it's not a restructuring, but it's a transformation because we already have a very strong base build. Now how do we pivot from the current base into the next [ end ].

Sure. And if I look at our pharma revenues or even the crop protection revenues over the last maybe 3 years, more or less, we have been in a tight band. So just want to take your thoughts on the product ramp-up or the revenue ramp-up for the product, whether the growth will be largely led by the new product launches as well as the CDMO opportunity? Or is there a like-to-like growth delta in the products as well? And if you may add on to the overall growth potential that we are looking at in these 2 segments?

So the -- on the product side, look, we have an existing large base volume business, and this business is growing as well. The key to this business, we are finding is that over a period of time that we will have -- we have established ourselves as a global leader in most of the products that we manufacture and we are margin accretive. I think the incremental or the delta margin will come from new products that we've got in the pipeline under both the businesses. We are launching several products in the next several quarters. We have a strategy to launch at least 2 to 3 new products in the Crop Protection business and 3 to 4 in the pharma business. And we also have a healthy pipeline of CDMO projects in both our businesses. So with these new products coming on stream, the margin profile will increase with delta there, and that's why we give out future guidance of increasing our EBITDA margins over 50 basis points to 100 basis points. I'd also like to say in addition to that, it's just because we do have an old base of products, we're also increasing the margin efficiency wherever possible there. We'll work on processes continuously. We have cost improvement programs across the company for some of the larger, older volume products that we do have. And since we have established ourselves, we are keen to maintain that leadership position, and we will maintain that leadership position in those older molecules, which are actually coming back and still increasing in terms of volume.

Sure. That's helpful. And if I may just squeeze in one more. With this growth opportunity across CDMO as well as the new product segment, Will it also change the working capital profile of the company. Historically, we have been having a slightly higher inventory days. We saw some reduction last year. But is that reduction sustainable or will probably bounce back to the same 150 odd days on the inventory side?

Yes. So in terms of the [ inventory ] update, it is same. But in terms of the absolute value, it will increase with the provision of the business.

So sir, when you say same, it is 150 days or 110 odd days in last year?

It's 110 days currently, we will try to maintain at 110 days..

Our next question is from the line of Aditya Khemka from InCred AMC.

A question on other expenses. So you mentioned that power and fuel costs are going up, and it is impacting cost of operations. But if I look at your other expenses for the first quarter and the second quarter, the numbers seem to have gone up year-over-year by 30% to 35% between the top quarters. And generally, power and fuel is half of other expenses, broadly speaking. So would you -- so assuming that your power expenses have also gone up 30%, 35% year-over-year. How much of this is driven by volume in terms of volume of production? And how much is the tariff increase that you are paying?

See our total expenditure -- over 60% is towards the volume and the balance is -- because since last year, we were having a pandemic, these are not really comparable.

I understand volumes cannot be comparable, but in terms of tariffs?

In terms of?

Tariff cost, cost of power?

Yes, cost of power certainly has gone up. So this is a -- 50% was the volume and 40% towards the cost.

40% just towards the cost, okay. And if I look at your crop protection business, in that business, basically, we saw a very rough patch in previous years. And now for the last 3, 4 years, we have therein the INR 600 crores to INR 700 crores sort of top line range. And I understand you are launching new products, but I want to understand the base business better. So whatever growth we have seen this first half of FY '22, how much is it driven by pricing? And how much of it is driven by volume? Any color on that?

Well, if you look at our revenue for the first half, our crop business revenues grew by over 60% in terms of value terms compared to last year because the last second quarter was actually not a profitable quarter. There was a pandemic, and we had some other issues in fact. With that, in spite of having the Mahad flood issue, we have been able to increase volumes by 29% compared to the last half year. So the value is going faster than volume. We are launching -- we have launched higher value, higher margin products, and we are very cognizant of the fact comprising a volume margins. So we have our value is overtaking our volume increase.

Got it. So one question on this. What is the nature of the business here. So you may launch higher-value products, but are these products where you have limited competition or no competitors unless more competitors were to emerge, could there be pricing pressure on these kind of high-value products?

Well, almost 70%, 75% of our crop protection business is in customer manufacturing compared to 50% on the pharma side. So the customer manufacturing space on the crop side, we have long-term contracts for on-patent molecules. Now on patent, there is no competition. Even if it goes off patent, 80% of the crop protection industry, 80% to 85% of crop protection industry is on patent of proprietary off patent. That this there is no competition, even when close of generics. -- because our customers have innovative formulations if they are patent. So the competition is very limited. If competition do come in, we see the big 5 of these 6 agro companies that we work with are able to retain maximum market share, unlike the pharma industry, where the damages make very big dent. In the crop industry, generic contribute to less than 20% of the total crop segment and that is expected to remain as the innovator companies in the crop business will defend their market share and then for even when they go off patent.

And this less than 20% you are saying is in terms of volume?

In terms of value, volume is much higher generic value volume will be much higher. I am talking in terms of value.

Understood. So generally, when a generic launches product after it goes off patent, what is the kind of price discount they offer?

It differs from case to case. We have a very few generic products as we compete on the crop side. We are mostly on the innovator side, on patent side of proprietary of. But there is some pricing pressure, but it's not as deep as the pharma business, where there's a drastic fall. Crop is far more gradual because there is less competition on the generic side. And there are only 2, 3 large players in the global scale that could participate in any generic portfolio.

Got you. Sorry, I will depart with one more question. Mahad as a site has seen several bouts and episodes of flooding and several blacks on events -- And our Crop Protection business seems to be heavily reliant on that site. How do we manage this risk of natural disaster as a company?

Well, I don't think there have been several blacks on events. There's this one event, but that's impacted once in 50 years. So I would not like to put that down to anything to do with our site, it has impacted the entire region. That being said, our Mahad business contributes to less than 20% of our total crop protection business. We are derisking our other sites, we are expanding capacity of Panoli site. So Mahad will remain an important part of our crop business, but we have options at Taloja and in Panoli. And we also putting in new measures in case such a disaster does take place in the future, we have safety measures in place to prevent any such disaster taking place on our sites.

[Operator Instructions] The next question is from the line of Pranay Dhelia from Panchatantra Advisors.

Just a few quick questions on what was the capacity utilization in this quarter?

You have one more question or is it -- I will answer both [ together ].

One is on the capacity utilization. And the second is on the debt, if you can give me details of the debt outstanding?

Sure. On the capacity, I'll take it, and debt, I will hand over to our CFO. Capacity, we have around 85% utilization of capacity. And debt Kuldeep, if you can please answer the question related to debt?

Sure, So our debt as for 30th September remains INR 629 crores, which was INR 616 crores as of March. This includes primarily INR 225 crores for the working capital and INR 400 crores for the long-term loans.

Can you give me a breakup of the capacity utilization in terms of pharma and crop protection, both, please?

They are both in the 80% to 90% range. I mean [ Mala ] plant -- that's the reason we're going for new CapEx because we are running out of capacity as to putting in place they're running between 80% and 90%.

And the domestic and export breakup of our sales?

Domestic and export is about 70%/40%, 70% and 40% is domestic. The domestic business is also deemed export.

Pharma and crop both?

Crop is slightly lower in terms of domestic is about less than 20%. Pharma slightly higher because a lot of our customers are in India, which formulate, but those have taken a deep export sale for domestic sales.

Okay. That would be from my side. Thank you once again. And many congratulations. We will definitely touch better in the quarters to come.

Thank you.

Our next question is from the line of Anubhav Sahu from MC Research.

Well, my question is mainly with respect to your major CapEx cycles. So we mentioned around INR 180 crore, you would be spending in H2 and I think INR 300 crore for next year. So my first question is like how long and how big is the CapEx cycle's going to be? And if you can elaborate various milestones for that?

Yes. So -- you are right, we are spending about INR 175 crores in the remaining part of this year. And as mentioned, we are spending around INR 300 crores next financial year. Now it takes typically 12 to 18 months to launch on the pharma side to start realizing the potential of the CapEx. On the crop side, you can start realizing this faster. But that's the typical -- So if we are during the CapEx of this year versus the end of this year, beside start by end of next year and then gradually ramp up over the next year or so. So the benefits will start coming in from FY '24 onwards, the big benefits which are coming.

Okay. And like if you could categorize in terms of both pharma and crop protection, how is the incremental capacity would be after the end of this CapEx cycle?

By the end of this year, the pharma and crop protection will be around INR 60 crores to INR 40 crores, INR 60 crores pharma and INR 40 crores, and we expect that to move towards a 50-50 split by the end of FY '23. In '22, we expect to put in more CapEx on the crop side as we are acquiring new crop protection projects. The pharma will be more or less completed this cycle by end of this financial year, and then next year will be investing all on the crop side. So if you take a 2-year average, it moved towards a 50-50 split this year and next year.

Okay. That's on the sales side. So what I meant is like because of your investment for next year, I mean, including this year for [ 600 CR ] kind of investment you are looking at. So what is the incremental capacity which we will be having for the -- both for crop production and pharma?

Well, these are multipurpose large plants being put in. We will add an asset tone of typically 1.5:1. So if you put in 300, 300 every year, so you multiply that by 1.5%, that's the relegation potential on the capex, which will take a few years post commencing of the plant to realize.

Okay. Okay. And my last is that for next fiscal year, do I understand that for fiscal year '24 you made the benefit will accrue to us, but for fiscal year '23, how do we see the incremental capital additional for us?

Well, most of the CapEx is underway, half has been done until now, half has been done by end of this year. So FY '23 will be the other validity in the product by launching the molecule, it takes time to do the filings. So there be some impact on FY '23, there's a big and bigger impact will come on FY '24 onwards. And then our capacity will go up continuously.

The next question is from the line of [ Nilesh Joshi from Freedman Capital ].

To one of the questions on CDMO business, which is currently, as we said, about $60 million, you said that you would like to grow the business by 2x to 3x over the next 2 years. Is that correct understanding?

Let me go by 2x to 3x over the next 4 to 5 years. I don't think it was 3 years. It will go rapidly, but it will take about 4 to 5 years to get there.

And then do we have enough capacity in place for that?

So for investing, this is part of the capacity we're investing in towards the CDMO business in quarter 2, the CapEx that we have capitalized for the new CDMO plants that they have built. And the balance CapEx that we also doing, a lot of it is towards the CDMO business that we're putting in sales. This is all multicrops assets. So we can do CDMO...

By next year?

Some of it is coming towards the end of next year, but the benefits will start accruing from FY '24 almost. It takes about 12 months to start both filing and validation batches, putting them on the filing, it takes about 12 months after the positioning of the plant.

The second question is on the animal health care, which we signed a JV agreement. When do we -- I mean, what is the status, if you can spend some more details on to it?

Well, on the animal health care part, the project is in 2 parts. First is the R&D development of the molecule, which is currently underway and is progressing very nicely on track. And now we are moving into the second phase of the project, we are beginning to starting to design the plant and we will be target [ cuse up ] plant in the next financial year.

So it would come in operation in FY '24?

That's correct. This is a long-term project. It's a long-term contract, as you know, we have signed. The first phase is to develop the molecules and develop the technology from scratch, which we are doing. And the second thing is to build and start manufacturing on a commercial scale.

Our understanding was that these molecules are already existing and probably the JV partner would have provided the processes to manufacture it. So?

Only for a few on that, but majority of them have to be developed by us. It's a large...

It will come under not CDMO, but it will be something similar to grams, right?

Yes, you are right.

The third is on the Mahad, that 1 month loss of production. Can you quantify what kind of expenditure we would have incurred to restart the operation? And has it been gone through P&L in Q2? Or did it come under Q3?

The expenditures all being -- as we said, we're putting an insurance claim, and that's under discussion with the insurance agency. So we are well covered for the insurance. And as and when we approve the insurance, then we will account it in our results here.

But it would -- will you be able to quantify how much that could have been approximately?

We are under discussions with the insurance company. So I don't think I'll be in a position to talk about that right now..

And the last is on the other expenses since it has gone up substantially in Q2 over Q1. any cost towards commissioning of this CDMO would have been accounted in this quarter, Q2?

No volume mostly due to energy and logistics increases. That's the main reason.

So that you said we should start recovering from Q3 of the lag effect?

No, no. It makes a part of the logistics and energy, there's a lag effect but you can't recover all of it, we will recover part of it.

The next question is from the line of Ishmohit Arora from SOIC Ltd.

So I had a question. Basically, in terms of our CapEx stands just trying to get my own understanding right. So this year, we had a CapEx stand of INR 300 crores. And even next year, we will have a CapEx tin of INR 300 crores. And in FY '24, we will also have the 10-year contract for the animal CDMO getting in. Is that -- is the understanding correct?

That's correct.

And sir, second question was if our long-term guide for going the Pharma business is like 2 to 3 things. And even the animal CDMO business is basically top line of INR 500 crores -- And then pharma -- I mean agro have mentioned that we'll grow the revenues by almost 2x to 3x. Over the next 3 to 5 years, are we looking at agro basically doubling or tripling its top line?

Looking at growing the business substantially, yes, and it's part of our transformation strategy.

And sir, one last question. Since first half of the year, we had a gross margin of close to 61%. So the impact of input cost raw material isn't that visible. So do we expect to maintain our gross margins in the second half of the year?

Well, input cost is definitely a concern. And that's why we still remain by our guidance of 50 basis points to 100 basis points EBITDA for the full year compared to the last financial year. So there could be some marginal ups and downs on the margin for the quarter 3 and quarter 4 because our margins of 6 months was 20.2% EBITDA and 100 basis points over 3 basis points over last year is 19.3% to 19.8%. So we remain in that range of guidance.

The next question is from the line of Sameer Dosani from Carnelian Capital.

Just to clarify one thing. So we have CapEx of INR 175 crores in H2 and INR 300 crores of CapEx in FY '23. We also have INR 250 crores of cash on working, which is sitting in the balance sheet. So do we expect INR 475 crore plus INR 250 to some commission in FY '23 and benefits of this will improve in FY '24. Is that what we are on?

To start of the [ CWRP ] as on 30th September will be capitalized in the second half. That is what we are talking about INR 175 crores. And this INR 300 crore for the next year, will be capitalized.

Okay. So this INR 475 crores is including the series that is already in the balance sheet, right?

Right, right, right. You are right.

And this excludes the animal health care contract, right?

Yes, you are right.

Okay. And second clarification. So when we say CDMO business, does it include our animal health care contract or it does not?

Yes, yes.

Right? It's included, already included in this one?

Yes, it's included.

The next question is from the line of [ Manish Shen from Money Life Advisory Services ].

My first question is what kind of new opportunities are we seeing from China plus 1 strategy?

Well, we're seeing new opportunities in both our business divisions, whether it is even some of our generic products where there were the Chinese suppliers, we are seeing market share moving towards suppliers in India, including [ HI2 ]. On the CDMO side, many innovator companies were focused on China, they have decided to now focus on India outsourcing. So we think opportunity is there. On the Biocide, we again spoke about, which is part of our Specialty Chemicals business in our crop business, which is an allied business, there's a lot of opportunities to shift volumes to India. On the animal health side, a lot of the activity in manufacturers are primarily based in China. Again, one of the reasons why this contract we signed with a large multinational company was to de-risk a supply chain out of China. And we're seeing many more animal healthcare companies also talking to us with further de-risk, and we could get discussions with them for a similar type of contracts going forward. So it's not only specific to one business. It applies to all our divisions, all of them trying to gain from the China shift.

Second question is, what can we expect the contribution of new products to the overall revenue in the future?

It's around 10% currently, and we are looking at accelerating that to about 15% and overall, it could even go to 20% over the next 4 to 5 years medium term.

Next question is from the line of Ranvir Singh from Sunidhi Securities.

Sir, just on the capacity, we have commission for CDMO business at Bangalore. After this commissioning of capacity, how much total CDMO capacity has increased?

So this is a new development and launch plan that we have done. So the capacity has gone up by between 15% and 20% on a CDMO capacity.

Okay. So is it dedicated capacity --?

Sorry?

Is it dedicated capacity?

No, no. We're not dedicated capacity. All our plants are flexible and multipurpose.

And this -- if you could give some quantitative factors like in terms of number of projects currently we have in CDMO or number of clients or order book, if you should give some indication that would give more visibility on this business?

Yes. So in the pharma space, we typically have about 10 to 12 products currently in the already commercialized, 7 to eight products are in the pipeline at various stages that we are currently in scale up or in the festive discussion mode where we're launching a molecule.

And is it possible to assume value of the pipeline products and projects?

These are all on the clinical Phase II, Phase III trials. So very difficult to give you a value potential. I mean it all depends on how the molecule does in the market and what is the success rate. So it will be very difficult to give a number to this.

Okay. And on antidiabetic side, whether we'll be manufacturing items or for API?

Yes, we're very strong on the anti-diabetes portfolio and that will be our next wave of products that we're launching. They go on patent in the next 4 to 5 years, and we are getting on of traction with our customers on these molecules.

And similarly, for crop projects on CDMO also, if you could give some pipeline projects detail?

So on the crop side, we currently have about 4 products in the [ crane ] site and 2 proprietary products under development and is it increasing in the number of enquiries engaging, but which is as of today's numbers, we have got 4 products in the development in the plants, which is CDMO and 2 on the own development.

So growth would be coming through addition of new projects or this pipeline of this product itself is a high-volume products a So growth would be coming through addition of new projects or this pipeline of this product itself is a high-volume products and will grow in volume?

In crop, we launched, these are already launched products or to be launched, and the ramp-up is pretty fast unlike pharma, in the crop launches take this much faster. So we expect that to ramp up within a few years to get to large volumes.

Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Sameer Hiremath for closing comments. Thank you, and over to you, sir.

I would like to take this opportunity to thank everybody for joining the call. I hope we have been able to address all your queries. For any further information, kindly get in touch with the Strategic Growth Advisors, our Investor Relations advisors. Thank you once again. Stay safe. Goodbye.

Thank you very much. Ladies and gentlemen. On behalf of Hikal Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.