Hikal Limited (524735) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '22 Earnings Conference Call of Hikal Limited. 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. Anish Swadi, Animal Health and Business Transformation from Hikal Limited. Thank you, and over to you, Mr. Anish.

Thank you very much. Good afternoon, and a very warm welcome to everyone present on this call. I am Anish Swadi, Senior President of Business Transformation and Animal Health. With me I have Mr. Kuldeep Jain, our Chief Financial Officer; Mr. Manoj Mehrotra, our President, Pharmaceuticals business; Mr. Vimal Kulshrestha, our President, Crop Protection business; and Strategic Growth Advisors, our Investor Relations advisors. We hope you and your family members are safe and healthy. I am pleased to interact with all of you on our Q3 '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 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 employees across the company are now 100% vaccinated for both doses. I'm going to start the call with a comment on the incident at the Surat. I would, at this point of time, like to update you all on the Surat matter where, as you are all aware, 3 of our employees have been cooperating in the investigation and since have been remanded to judicial custody. The matter is still currently under investigation and Hikal is cooperating completely with the authorities in this regard. We have appointed leading law firms and counsel to represent us in this matter. The main issue is that the tanker reported as allegedly disposing chemicals into the stream was not the same tanker that left the company's premises in Taloja. The company has provided all documentary evidence to this effect. We strongly believe that we have no culpability in regard to the incident that happened in Surat on 6th January 2022. The matter currently is sub judice and hence, we would not be able to answer any additional questions in this regard. Whenever there are any further material updates, we shall intimate the stock exchanges. Moving on to the business. Credit rating upgrade. Before we go into the details of the financial performance for the quarter and 9 months ended on 31st December 2021, we are pleased to share with all of you that our credit rating agency, ICRA, has upgraded our long-term rating on 15th December 2021, to A+ on the back of healthy growth in operating income, operational efficiencies, and a healthy pipeline of new products. Let me now take you through the financial results. Talking about our Q3 financial performance. Revenue for the quarter was at INR 515 crores, registering a year-on-year growth of 11% and a quarter-on-quarter growth of 10%. Our EBITDA came in at INR 93 crores, which is a growth of about 2% on a year-on-year basis as well as on a quarter-on-quarter basis. EBITDA margins for Q3 stood at 18.1%. Lastly, our profit after tax for the quarter stood at INR 45 crores, which translates to a growth of 12% when compared to the same period last year. The growth in the bottom line is due to a combination of factors, namely higher profits from our operations, reduced interest costs through successful negotiations with our bankers, and opting for the new tax regime. We are confident that this trend will continue to improve our bottom line further and generate strong cash flows in the coming quarters and years. Further, the 9 months' performance for the financial year projects an even better picture with our revenue standing at INR 1,440 crores for 9 months ended '22 as compared to INR 1,188 crores for 9 months ended FY '21, and this is a robust growth of 21%. On the EBITDA front, the growth stood at 31%, rising from INR 214 crores to INR 281 crores for the corresponding periods. This coupled with improved financing costs and lower tax rates due to opting for the new tax regime saw our profit after tax rising from INR 82 crores in 9 months ended FY '21 to INR 140 crores in 9 months ended FY '22, which translates into a remarkable growth of 70%. In fact, we have surpassed the annual profit after tax number of last financial year, which came in at INR 133 crores in the first 9 months of this financial year. Our balance sheet and return ratios. In addition to growing the top and bottom line, we have also been making focused efforts to strengthen our balance sheet and to increase the return ratios of the company. As a result, our debt-to-equity ratio now stands at 0.57x as compared to 0.61 at the end of the previous financial year and 0.73x for the year before that. We have also negotiated with our bankers to bring down our average borrowing cost from 6.99% in March 2021 to a blended rate of 6.11% in December 2021. On the trailing 12-month basis, our return on capital employed has now reached 18.5%, which is a consistent improvement from 16.1% in FY '21 and 12.5% in FY '20. The return on equity has also improved to 19% from 15.2% in FY '21 and 10.7% in the year preceding that. These numbers indicate a healthy condition of the business considering the nature of operations, along with the ongoing planned capacity expansions. Dividend. The company has declared an interim dividend of 60% for the financial year 2021-22. Now I'd like to hand over to our President, Pharmaceuticals, Mr. Manoj Mehrotra, to take us through the performance of the Pharmaceuticals division.

Thank you, Anish. Our Pharmaceutical business recorded a flat revenue at INR 268 crores in quarter 3 FY '22 due to lower offtake by several customers. The EBIT for the division came in at INR 36 crores. This translates to an EBIT margin of 13.3% in quarter 3 FY '22. This was primarily due to an increase in input costs. We are in dialogue with our customers to pass on the rise in the input prices. The process generally has a lag of a few months, which can be seen in the muted segmental profitability for the business. For 9 months FY '22, with a revenue of INR 822 crores, the division registered a growth of 8% Y-o-Y basis in terms of EBIT. The growth was at 2%, rising to INR 121 crores on Y-o-Y basis. This translates to an EBIT margin of 14.7%. On the CDMO front, we continue to receive several new inquiries from global innovative companies regarding collaborations in our CDMO business segment. We have also won an order for manufacturing 2 key starting material for a new drug from a global innovator. Additionally, we have commenced process development for several active ingredients, which are part of the multiyear animal health project with a global innovator. Our own product business also added new customers and new geographies for some of the key molecules in this past quarter. Our antidiabetic portfolio of APIs for the future is also receiving healthy traction from customers. We expect the demand to stay beyond on our own product business in the coming quarters. Now I would like to hand over to our President, Crop Protection, Mr. Vimal Kulshrestha, to take us through the performance of the Crop Protection division.

Thank you, Manoj. Good afternoon, all participants of this call. Our crop protection revenue for Q3 was at INR 246 crores, which is year-on-year growth of 27%, and 30% growth on quarter-on-quarter basis. The EBIT for the division was INR 38 crores compared to INR 31 crores in Q3 FY '21, which is a growth of 22% year-on-year basis. The EBIT margin is at 15.2% in Q3 FY '22. In 9 months FY '22, INR 619 crores revenue was recorded, registering a 45% growth on a year-on-year basis. The EBIT stood at INR 104 crores, an increase of 86% on a year-on-year basis, with margin of 16.8%. The Crop Protection business witnessed a growth on the back of higher demand from our leading CDMO customers. Several new inquiries for potential partnership in our CDMO business segment were received. We expect this momentum to continue in the next several quarters. Sale of our own products faced challenges of raw material availability. However, we expect the supply to normalize in coming months, providing a further boost to our Crop Protection business. Now I would like to hand over to Anish to take us through further updates.

Thank you, Vimal. I'd like to talk about the supply chain. In the current environment, global supply chains coupled with an unprecedented nonavailability and increase of input raw materials as well as utility prices will continue to create an obstacle for our industry going forward. Our strategy to integrate backwards and develop alternate sourcing partners is yielding results in terms of sustainability of operations. On our business transformation program. Pinnacle, our business transformation initiative, is on track to create a road map across business verticals to drive aggressively get profitable and sustainable growth over the next 5 years through a new strategic direction. We are already starting to see some of the positive impact of these Pinnacle initiatives on our business operations. We will continue to invest in developing new products, capabilities, technology, and building new capacities, considering both our businesses are seeing strong tailwinds on account of the prevailing "China plus one" sentiment. On the outlook, with the world returning to a near normal straight on the COVID front, there could be some short-term impact on the operations of our Crop Protection business due to the recent receipt of an MPCB notice. However, we are taking appropriate legal measures as advised by our counsel in the courts to remedy the situation swiftly. We have a robust growth outlook for both our businesses owing to the number of products in the pipeline and a healthy list of inquiries for new business. The rethinking of supply chains across the globe has come at the most opportune time for us and is in line with our growth ambitions. By focusing on our core strengths of creating our own processes and delivering the best-in-class process products, we are ready to take on complex chemistries, provide the right infrastructure, expertise, and support, thereby increasing our share of wallet with existing and new customers. During these difficult times, I would like to thank our customers, suppliers, tankers, as well as investors and other stakeholders for their continued support. With this, we would like to open the floor for Q&A.

[Operator Instructions] The first question is from the line of Rahul Jain from Credence Wealth.

Good to see the divisional heads also being there on the call. And we hope that we continue with this practice. So good to see both the Pharma and the Crop Protection division heads here on the call. Sir, with regards to Pharma, you have mentioned your initial remarks as well as in the presentation about the slow offtake by several of our customers, and also at the same time you have mentioned that there are good inquiries. The demand continues to be good, as mentioned in your presentation also. So just to understand what exactly is happening? Why this offtake has been low? Is this a temporary situation? Because of what factors it could be? And also another observation has been that for last several quarters, we have been around this INR 250 crores to INR 270 crores of top line, leave aside 1 or 2 abnormal quarters where because of the rainfall, et cetera, we had some issues a year back. But in general, we have been around this range. So going forward, how do you expect the division to do in terms of picking up the offtakes or the sales growth? That is my first question. Shall I put forth my other questions also?

Yes, please go ahead.

And sir, with regards to Agro, we have done very well in this quarter, and we have been doing reasonably well for past few quarters on the other side. So what was the volume growth in this quarter? And was there any -- because in the previous quarters, due to excessive rainfall in Mahad, we had some impact on the distribution. So is it because of some spillover? Or this is related to a good growth on the demand side and how sustainable this is? You had spoken about a long-term contract in your fourth quarter last year with regards to a new fungicide for a Japanese customer. So what's the progress on that? How big that molecule could be? And typically, have you already had some large shipments to this customer. These are my 3 questions.

Sure. So on the Pharma, I'll ask Mr. Manoj Mehrotra to take these questions, and then on Crop, Vimal will take the question.

Yes. So I'll answer the first question on the Pharma business. So just to give you a little perspective on the Pharma business and the previous year's volume and value growth. So in the year 2021, we had a robust growth of 21% revenue wise. In this year, the growth has been subdued. We have clocked around 8% growth on a YTD basis. So the number of INR 250 crores, INR 260 crores, really we see it in the context of last year. And this year the growth will definitely be muted and will not reach the number of 21% what we saw in the previous fiscal year. The reasons are primarily on this inventory correction with many of our customers, they have overstocked, and we have generally witnessed a slowdown in demand by generic customers who sell to the United States of America. I do not expect that the slowdown will continue beyond 2 quarters, and we will be back to the growing ways from the first quarter of next year. Where we are seeing definitely more robust inquiries and customer interest is on the CDMO business. The China plus one strategy, we can really see it playing around. We are getting a lot of inquiries, and we have converted a few of them. But as we all know that CDMO business takes time to build up and even if we get an order now, it will take at least 6 months to a year to at least have some revenue start kicking in. But once they come in, they are there for good, and we are very confident that the CDMO business will be profitable and grow much faster for Hikal Pharma business.

Yes. On Crop Protection, the growth is mainly on account of better product mix. On a 9-month basis, the volume growth is 10%. So NIM growth is coming based on the product mix.

And this quarter was quite good. Was it due to some spillover of the previous quarter because the previous quarter had some impact at Mahad?

No, no. There was no such impact. And the quarter growth is mainly because of the product mix change compared to FY '21, the same point.

That's helpful. And sir, with regards to this long-term contract which you had spoken about in your quarter 4 FY '21 call, whereby you had mentioned about a new fungicide. And also, along with that, if you could share some more details on new product introductions which you have done in the last 6 to 9 months and which further we expect to launch in next 1 year or so?

Yes. So currently, we have 3, 4 new CDMO inquiries. And we're also going to have, as you are aware, 2 new fungicides, our own fungicides, for which CapEx is already on. We continue to see momentum of inquiries coming on CDMO part and we will be working continuously on new products to fill our multipurpose plant CapEx.

Sir, could you share some details about the size of these products, if that could be possible?

So these products, initially, this would be around INR 100 crores and full potential of these products would be close to INR 400 crores to INR 500 crores.

The next question is from the line of Dhaval Shah from Svan Investment.

Sir, on the background of the ongoing plant closure and the Surat episode, do we see any sort of anything hitting our business in the way our dealing with the customers were going on? And also, for the plant closure notice, if we go for a stay against the order -- do we really have to shut down our plant or we can get a stay on it and then continue with the business operation. These are my 2 questions.

Right. So Dhaval, with regards to your first question, we've been very transparent with all our customers from day 1. As soon as this incident unfolded, we reached out to all our key customers and we've talked them through it. And they've had some questions, which we've answered, and we update them on a regular basis. Our customers have been very supportive of us and they're standing by us and they said any help or support that you need from our side, we are more than happy and going to provide. So customers have been very supportive and transparent and we've been very transparent with them. In the case of the notice on the Taloja plant, we are currently evaluating all the legal options. As you are probably well aware, a chemical plant cannot duck down in a short amount of period of time. So it takes time to duck down. So we're going through all the motions and we are weighing our options legally, and where we've already initiated some of those legal actions from our side.

Okay. So just for my understanding, so once they give you a notice, you have to first shut down and then if you can get a stay, then you can restart the plant? How does it work?

It happens parallelly. So we're doing it both ways. So you basically establish your legal options and then you can initiate a safe shutdown.

The next question is from the line of Shravan Vohra from Premier Capital.

So my question was a little similar to the previous 1 that post these issues in the last 1, 1.5 months, are we seeing like any change in our interaction for future contracts with customers? Or any issues on the customer pipeline side?

Yes. So Shravan, we haven't seen anything. As I mentioned earlier, we've informed all our customers very transparently. In the last 4 to 5 weeks, we've had an ongoing dialogue with the customers. Any and every question that they've had, to the best of our ability, we've answered that. Again, they've been extremely supportive. In fact, many of our customers said that our relationships with you and your company have been for over 15 to 20 years. We know the standards that you keep. And this is unfortunate. And please keep us aware of any developments that do happen. So we are in consistent dialogue with our customers. No customer has retracted or canceled any orders as of now.

Right, right. And second is on the Pharma business side. So we spoke about this in the last quarter also that we have a pass-through clause and we are trying to negotiate with a lag. So like any time line, like how much more time will it take for that to reflect in margins or how that could work?

Yes. It's Anish, I'll answer this question. Yes, it takes around 6 months to kind of implement the pass-through costs, because we can't be doing this kind of discussion with customers every month. So you will definitely see some improvement next quarter onwards. That is January onwards, where these pass-through costs will be implemented based on the historical buying price which prevailed in the previous 6 months.

Right, right. And just one question on the planned closure notice that we received. So we've been talking that most of our sites are fungible, like we can produce products at other sites also. So is there any way we can cover up, not the entire production loss, but to some extent if we are able to cover up?

So while most of our plants are fungible, currently, we are running full, which is why we're putting CapEx in the ground, right? So that's a good problem to have. On the flip side, we are looking at how we can potentially, if we do have some kind of shutdown, we mitigate those losses from a business perspective. Obviously, it doesn't happen overnight, but we do have contingency plans in which we will also consider taking our annual maintenance shutdown earlier rather than later, which we usually do in the month of April, after March 31. And that would then allow us to run our plants through. So we're looking at various contingency factors to best serve the business.

Right. So on the CapEx, you mentioned we are raising some capital from IFC. So any thoughts on that? Any update on that capital raise?

So what we are doing is, we're getting a loan and NCD from IFC, and this is something that has been in process for several months. Right now, we have provided to IFC all the documentation and they are now undergoing their internal processes. And this is for the CapEx plans of the company, both Pharma and Crop divisions. And this is long-term sustainable CapEx. So this is a very long-term loan. It is not equity, just to correct. So it's not equity.

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

Just a question I had around the Taloja plant. I just want to understand why our plants are not -- whether they are zero liquid discharge or not? And if not, then what do you think about that? Is that something which is required and, I mean, overall thoughts around that. And also, do we have zero liquid discharge in our Pharma plants? So that's the question.

So our plant, Taloja plant, specifically, it is not zero liquid discharge. So we are allowed to a discharge, which goes to CETP, and we are well within. So we are complying as per the condition. Now this particular closure is due to the Surat incident, because of which it has been given to us, and since the Surat incident, it is sub judice, so we would like not to diverge more detail around it.

No. But is that allowed not to have zero liquid discharge, and what is the industry practice around this? And I mean, do we have something like that in Pharma plants as well, because that is a mandate, right, in getting a pharma US FDA approvals.

Yes, the pharma plant in Bangalore are zero liquid discharge, and so there are no affluents which go out. So we have the necessary equipment to treat all the affluents inside. But again, having said that, it varies from state to state and the historical and whether it is in an approved industrial area. So there are provincial or state level laws which govern it. So in Taloja, it happened to be we have the necessary permissions. But in Bangalore, we have always set up like a zero liquid discharge plant for pharma.

Just to add to what Manoj has mentioned. So Taloja plant is in MIDC area and there they have the common affluent treatment plant. So there it is, industries are allowed to give affluent to common affluent treatment plant after doing the pretreatment.

The next question is from the line of Siddhant Maheshwari from Multi-Act.

Sir, my question is somewhat similar to a previous question. I know it might be a little early to comment, assuming that company will be able to shift production from Taloja to a different unit, not entirely, maybe part of the amount. In that case, will there be any decline in sales? Or can we expect more or less same level of sales and earnings estimates, let's say, for next 2 years down the line?

So I'll take this question. So there could be some short-term impact because of this closure notice. Now Taloja unit, if you see, the revenue from Taloja unit is INR 260 crores on an annualized basis. And based on that, that impact will come. So suppose if it is for 15 days' closure, accordingly impact will come.

Okay. And sir, could you please confirm what are the current capacity utilizations in different units?

So across the company, I would say the current capacity utilization is anywhere between 80% to 85%. It's almost full, which is why we are also going into CapEx.

Okay. So sir, when we say 80% to 85% capacity utilization, then, I mean, do you really think we will be able to shift Taloja requirement to other units like when we are already operating at high capacity utilization?

That's what I had said earlier in the comments that while we're evaluating options that we can, maybe we can make an intermediate in another plant. So far, we are still continuing as we are to reduce the impact from the MPCB closure, we're tackling that right now, and we are confident that we should be able to solve that process moving ahead.

Okay. Sir, I just have 1 last question. If you can give us some idea that what has been the thought process behind borrowing money from IFC compared to, let's say, bank funding or any other domestic funding. Is there any specific interest cost benefit and how difficult it has been to get funding from IFC. I mean some broad answer on this?

So look, as most of you know, IFC is part of the World Bank and it's a premier funding and financial institution. The funding that we are going for and that we've discussed is part of our sustainability initiatives as a company. So it's been a very rigorous process. I would say it's far more challenging than going to a regular financial institution because you have to present to them your project plans based on sustainability, the initiatives that you're undertaking and where you see yourselves as a company nearly 3 to 5 years from now. Plus the benefit one gets from funding through IFC, number one is the sustainability or the ESG angle to it. So as a company, ESG is one of our main strategy objectives, and IFC is funding some of the green energy initiatives that we also have to become a fully sustainable company. So definitely going to IFC is more challenging than going to a regular financial institution, but they also provide finer rates as well and long-term funding for some of the programs that we have in place, which match well with us. So it's been quite a rigorous 6-month process and almost at the end right now.

Okay. Sir, just one small question. What actions company has already taken so far to resolve the issues in Taloja plant. I know it might be a little early to say. Just this is the last question from me.

Yes. So again, like you said, it's a little early to tell that, but we've initiated appropriate legal measures as advised by our legal counsel for the matter. And again, we're going to the courts to help remedy the situation, so we can't comment any further since it is sub judice right now.

The next question is from the line of Rahul from Raj Finance.

I just have 1 question. Is there a way that we can process the waste in our facility? Is the management trying to do that going forward?

So we have various processes where waste is, I mean, either it is inside processed or it is given to the outside processor. So it depends on product to product and kind of waste that is produced. But yes, just to tell you that we are doing a lot of improvement internally to improve on efficiencies of the product and reducing the waste.

Okay. But is there a way where we can process the entire waste at 100% going forward?

So as of now we do not have any such plan. So as I mentioned in my answer to previous question that as of now, I mean, we are connected with MIDC's CETP. And there the discharge is as per approved by MPCB.

The next question is from the line of Rohan Bajaj from UMG Securities.

So again, on the similar line, sir, is it possible to share the MPCB order. I believe, it's a public document. So if you could just share that kind of the document.

Yes. So we got cleared the MPCB document. So unless you can get it directly from the MPBC, that can be shared. And again, the matter is sub judice, so we can't share any documentation at this period of time.

Okay. Sir, also one more thing, just wanted to understand what the procedural documentation is required. So we believe the time after receipt of the notice and the clarification that was given to the exchange, there was some sort of delay. So just wanted to understand if we can expect a better level of clarity and all on such trend.

We gave it within 24 hours of receiving it.

The next question is from the line of Rohit Nagraj from Emkay Global.

Sir, first question is on the Pinnacle initiative. So given that it's a growth initiative and probably it would also have an element of maybe improving the operating efficiency, digitization, et cetera, what is the kind of benefit in terms of margins that we expect over the next maybe 3 to 5 years? I think that's a 5-year project, so what are the tangible benefits you are expecting from this initiative?

Sure. So Rohit, you're absolutely right, Pinnacle is a growth initiative. And one of the main reasons for undertaking Pinnacle was to get operational efficiency. So we definitely expect several benefits to arise not only from operations, but also from supply chain and business development. So all combined, we expect at least 50 to 75 basis point increase on an annual basis when it comes to EBITDA margin. And this would be spread across various segments of the business. So it will be through supply chain, long-term contracts, it will be through business development. It will be through efficiencies on the operations side. So all that combined would yield to some of these benefits.

Right, sir, got it. And we expect this benefit coming from FY '23 or '22?

So although these initiatives are ongoing, the first objective of Pinnacle is to identify some of those benefits within the verticals that we have. So we've identified some of the key products, the 3 supply chain issues, how to streamline them, how to get better pricing, whether it comes to buying in bulk, whether it comes to signing long-term contracts, or whether it's finding also alternative vendors. So a lot of these initiatives that have been identified, and it takes anywhere between 6 to 9 months, given the regulatory situation, in order to capitalize on these initiatives. We also have instituted a key account management system, which is also using benefits in terms of the business side. We are getting additional inquiries from most of our customers, the product pipeline of both our businesses is quite healthy at this period of time. And we're also investing in capital expenditure at this time to meet those new product pipeline deliveries.

Got it. Second question again, part of what is happening on the, again, Taloja shutdown issue. Now in terms of maintenance shutdown, normally what is the number of days you take maintenance shutdown if we were able to coincide that with the current issue? And second question to that, since this particular issue has cropped up, although it is fungible, whether the customers again will need to go in for any validation, certifications, or audits before we start supplying through this facility.

Yes. So to answer your first question, the normal shutdown requirement is 3 to 4 weeks, so that we'll be taking, and we'll be doing all shutdown activities and maintenance activity. And to answer your second question that since these products have been old, so we do not think any revalidation would be required by the customers. So as and when we start, we will again start supplying it immediately.

Got it, sir. That's very helpful. Sir, one more question on the long-term contract arrangement on both the businesses. So generally, how much percentage of our revenue is coming from long-term contracts on an annual basis from both Pharma and Crop Protection segments?

For Pharma, it is close to 50%, which is on long-term contracts with global customers.

And for Crop, it is around 65% to 70%.

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

So a couple of questions. One, if you could talk about environment compliance in general; post this incident, any sector-wide or industry-wide steps being taken by the regulatory authorities like GPCB and MPCB on which you can comment up on the share?

I'm sorry, could you repeat that question, please?

Yes. So I'm interested in, is there any major steps being taken by GPCB or MPCB post this incident, which has an implication for the chemical sector in general. Maybe in terms of implementation and all. For example, I mean, we are getting news flow that the waste disposal of materials, that is getting restricted or vetted a lot. And then there is some strict audit for compliance being done. So I mean with that context in mind, is there any industry-wide development you are seeing?

So as of now, as a company, we are not seeing that, any industry-wide changes right now. But whenever there is an incident, whether it's related to this or prior incidents, the industry associations always do get together and see what changes can be made, if at all, right? Again, we are not, at this point in time, seeing any industry-wide changes or regulation changes there.

Okay. Okay. And sir, if we're talking about us. I mean, is there any specific steps we are planning to take from the compliance point of view? I'm not sure, for example, if we already have it in place, but say, for example, some companies would like to do GPS tracking of vendor vehicles in such kind of supply chain. So what are your thoughts on that? Or any steps in that direction?

So look, we have quite robust systems in place. Obviously, post this incident, each of the businesses, each of the divisions have gone through each of their SOPs to ensure that there are no gaps in the system. Again, as a company where we have, I would say, close to, as a whole, 75% of our company's customers being global, we are audited very, very frequently by all our customers. So that's a secondary nature of also checking all compliances as well. And we also have internal audits that we do. So again, but nonetheless, we have robust processes in place and we are looking at areas in which there potentially could be gaps and revisiting them. So for example, we have a doer and a checker system. Now we have a doer, a checker, and a final checker system as well that we've implemented just to be on the safe side, err on caution. And we continuously do that. Wherever recommendations are given by either our customers and all regulatory authorities, we always take that into account and effect those changes.

Okay. Okay. And sir, just last one question. In fact, just wanted to understand, and this could be more generic in nature like, for example, what is our backup plan for fulfilling pending orders from Taloja. And why I'm calling it generic, because incidents can be of different nature, there could be some plant level accident or so. I mean those kind of eventualities, how the company plans to do supply for those orders? And do the orders, for example, which are coming from Taloja, do they have any penalty clause or something if we are not fulfilling that, which we have to fulfill out. Yes.

Yes. So as we mentioned earlier in our speech that we would be utilizing this time to take maintenance of the plant, which we normally take in the month of April. So that after that we are able to continuously service our customer and do the business. And -- what was your second question. Can you repeat again?

It's like -- so I mean, my -- yes.

No penalty from customers, sorry. No penalty.

Yes. And this is the general nature of contracts which you have or are there specific orders where we have some penalty. And if you can talk about the contract in general?

Yes, there's no penalty.

Okay. Okay, that's something.

And as a general principle, just to add to what Vimal said, most customers do have some safety stock, as we do see, right, which is on the high seas or which is at the customer's warehouse. So we work very closely with our customers to ensure that there is some safety stock with us. We've also been extremely transparent with our customers since the notice that was received at Taloja. We've informed all of them, so they can also plan their supply chains as well.

The next question is from the line of Nitin from [indiscernible] Capital.

So I have 2 questions. The first question is, when we had this con call in Q4 financial year '19, you mentioned that the capacity utilization was around 75%, 80%. Now it is 80%, 85% utilization, which is not highly distinct. You had mentioned at that time also about the CapEx of INR 350 crores with a [indiscernible] of 1.5 to 2 in the next 2 years. So what is the status of that CapEx? It has been 3 years now and looks like the thinking line remains the same. Can you please comment on this?

So look, in FY '19, we had growth, right? Our revenues have grown, our capacities have grown. So a lot of the CapEx has come on stream and a significant amount of that CapEx is still CWIP, right, which is our CapEx that we're doing in our [indiscernible]. In terms of the capacity utilization. Capacity utilization also depends on product mix. Some products require additional steps, but could give you the same amount of revenue but maybe a higher gross margin. So capacity utilization depends on the kind of products and the product mix that you have. However, if you look at our numbers from '19 to where we are now, we've grown considerably. We've seen that our profit after tax has also surpassed what we did in the full financial year last year in the first 9 months of this year. So the company has been growing.

I see. Okay. My second question is -- I don't want to argue or discuss about that. But my second question is about Hikal had an impeccable record with 5 U.S. FDA inspections in the last 15 years, and it cleared all successfully. But suddenly, in the last 2 years, we noticed that there is a constant deterioration in the operational practices. For the flood issue at the plant, not notified to the exchanges. Then recently, a severe Sachin GIDC gas leak incident happened, and now this pollution notice. So what is wrong with Hikal? Are we taking too many short cuts these days? What is the thinking of the management? And are we sensitive about the repercussions of this issue with respect to our client relationships. Many of them are, of course, global MNC companies and they may have zero tolerance policies.

Yes. So to answer your question, look, corporate compliance has always been at the top of our and continues to be at the top of our minds. It's a priority for us. To give you an example, we start every management committee with an EHS briefing, or Environmental Health and Safety briefing. We have always been at the peak of having the best corporate compliance and operational compliance from that perspective. The flood issue, yes, was beyond our control in terms of the floods that we had, and yes it did take us longer to report to the stock exchange. However, we corrected that shortly thereafter. And you can see from the incidents post that, that we reported all well in the stipulated time period. In terms of our customers, our customers are who pays our bills. And our customers are absolutely supportive, and we have always been transparent with our customers, and they always come to audit us. While U.S. FDA might come once in 3 years, each of our assets get audited at least several times in a 12-month period. So we are very, very close in terms of operational working with our customers, and we continue to do that. The Sachin GIDC incident is an unfortunate incident, in which we have been booked. And again, as per my opening statement, we are working towards remaining comprehensive there. That's all I can say at this period of time.

The next question is from the line of Pranay Dhelia from Panchatantra Advisors.

Yes. First of all, many congratulations on a good set of numbers. [indiscernible] in this call yet. We continue to grow, which is very good as a stakeholder. I've been part of this company for 5 years, and I hope to continue to be a part for another 5 years. We are doing all the right things, and I'm sure these unfortunate incidents will also pass away. So my questions are primarily on the business front. How much has the dependence on China reduced for raw materials over the past? Because you see China, as such, the supply from there has been very volatile. So would want to know the continuity of our Pharma operations and other raw material sources from China.

So as a company, we are still about 30% to 35% dependent on Chinese raw material supplies, because, as you know, the major feedstock comes from China. But we've had a program in place to derisk our supply chain. And in the next 2 to 3 years, we definitely expect to bring that down by about 5% to 10%, 15%. So that's where we are right now. Yes, it's unfortunate that the dependence on China still continues, but they do manufacture several key starting materials, which are not manufactured anywhere else in the world. But the flip side of that is the positivity in terms of the China plus one strategy that's being followed by our customers, which are leading to additional inquiries and additional business opportunity for us. So while we're still dependent on China, albeit far lower than what we were probably 4 to 5 years ago, which that number would have been probably closer to 50%, 55%, we have consistently brought it down. and we do have an action plan, which we are implementing to bring it down even further.

And next would be, sir, Sameer had mentioned in the previous 2 calls that freight cost is really hitting our bottom line and that. So has the freight cost come down this quarter? Or have we entered into some long-term contracts with our transporters to ensure some smooth objectivity impact?

So freight cost, unfortunately, has not come down yet. In fact, freight cost has actually gone up since the last quarter when you had the conference call.

So have you been able to pass it on to our customers or we have to bear it in our bottom line.

So most of our customers, we passed it on, but there are several like input freight costs in which we had to bear some of those increases, and there are certain customers in which we have to pay for the shipping as well.

Okay. And the last question would be, we've been doing continuous CapEx over the past 2.5 years, and that is reflected in the top line. So for FY '23 -- now there's just 1 quarter left for FY '22. So FY '23, how much of new capacity do we see being added? And how much of the top line growth will we expect from these capacities? Assuming what I can recall from 2 quarters ago or 3 quarters ago, the call we were told that the asset turnover ratio would be 1.75.

Yes. Right. So as you know that basically -- yes, as you correctly said, a lot of CapEx is being added. We expect the CapEx to come on stream majorly in second half of next financial year. We've had...

That is H2 FY '23?

That's correct. And the reason being is that there were some minor delays because of the third wave of COVID, due to some personnel not being available for the construction of the plants. But that seems to have eased out to a certain extent now. We still do have some delays. But definitely, we are going ahead with all our CapEx plans across both the divisions. And once we validate the product, as you know, in our business, it takes time. You have to spend about 3 to 6 months to validate the product, but we do expect that some of the CapEx will yield benefits in the following financial year.

So going by the numbers what I can recollect from my past notes, we're expecting a CapEx of something like INR 180 crores this year. So do we expect about INR 300-odd crores to be added to the top line?

Well, to look at the guidance, we've always said that we'll grow in the high teens, mid- to high teens. We'll continue that once the CapEx comes up on stream. We also have additional opportunities that we're putting within the CapEx that we have currently, like more profitable products as well. So we'll stand by what we look at. And also just to reiterate, we had always indicated that, that CapEx or the asset turn ratio would be somewhere around 1.5x.

Okay. And what is the volume growth in the Pharma as well as the Crop Protection division for this year and next year's projection?

So this year's projections, I'll hand over to Vimal and Manoj. Next year, we are still working through what our budgeting process, so we can't give you an idea, but this year we can surely tell.

So this year for Crop, this has been 10% volume growth, and for Pharma, Manoj can inform.

Yes, similar, 10%. Revenues have grown by 8%, and that is...

I'm concerned about the volumes sir, not revenues.

The volumes are similar, I'll say 10%, yes.

Ladies and gentlemen, due to time constraints, that was the last question for today. I would now like to hand the conference over to Mr. Anish Swadi for closing comments.

So I would like to take this opportunity to thank everybody for joining the call. With the growth opportunities on offer and the sheer quantities of inquiries that are coming in, we are very optimistic that we will end this financial year on a positive note, and we will continue the growth momentum even post that in the years to come. I hope we have been able to address all your queries. Again, I would like to reiterate my appreciation and thanks to all our customers, our suppliers, our bankers, as well as all the investors and other stakeholders for their continued support during this period. If you have any further questions, please do kindly get in touch with Strategic Growth Advisors, our Investor Relations team. Thank you once again.

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