Hikal Limited (524735) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Hikal Limited Q3 FY '23 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 guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that the conference is being recorded. I now hand the conference over to Mr. Sameer Hiremath, Managing Director from Hikal Limited. Thank you, and over to you, sir.

Thank you. Ladies and gentlemen, a very good afternoon to all of you, and thank you very much for joining us today for our Q3 and 9 months FY '23 Earnings Call. I am Sameer Hiremath, Managing Director of Hikal Limited. On this call, I have with me Anish Swadi, Senior Vice President of Business Transformation; Kuldeep Jain, our Chief Financial Officer; Manoj Mehrotra, our President Pharmaceutical business; Vimal Kulshrestha, our President Crop Protection Business, our Strategic Growth Advisor for investment relation advisers. I hope you had a chance to go through our earnings release investor presentation and the financial statements for the quarter. These are available on websites of Hikal as well as the stock exchanges. While the energy prices in Europe, slower growth rate across all sectors internationally, and rising inflation continue to cause macro level geopolitical issues, cost will peak in '21/'22 has steadied as raw material prices have started to decline. While we see marginal benefit of the input prices softening this quarter, due to the inventory on hand, we expect it to improve with the lag effect in the upcoming quarters. These elements, along with our proactive action and the expansion of our supplier base have helped in the stability of raw material supplies. Both our businesses face significant challenges during the first half of the fiscal year, but as we have previously indicated, we anticipate an improvement during the second half. On the back of our cost improvement programs and business excellence initiatives, we are already producing positive results, coupled with an external factor that input prices softening, we expect a quarter-on-quarter steady improvement. We have had an improvement in performance sequentially and are working towards having a stronger end to the year despite some macro level volatility caused by global uncertainty. Customers are looking to diversify their supply chain geography, which continues to offer positive table for future growth. Margins continue to be impacted as expected as outlined in the previous call, due to a steep increase in cost of raw materials, solvents and utilities. Also the rise in crude oil prices have significantly impacted energy costs. We, however, have seen some prices of key raw material softening and expect the trend to continue in the upcoming quarters, therefore marginally improving our margins and profitability. Talking about the numbers for this quarter, we recorded a revenue of INR 540 crores against INR 559 crores in the previous quarter. Our revenue for the 9-month period stood at INR 1,478 crores against INR 1,440 crores the last year. We have been able to improve EBITDA margins of 130 basis points in quarter 3 compared to quarter 2. This is due to improvement in the product mix and cost improvement initiatives. Hikal's long-term credit rating is maintained at A+ by ICRA. Also, the company has determined an interim dividend of 40%. Now I'd like to hand over to our President Pharmaceutical, Manoj Mehrotra to take us through the performance of the pharmaceutical division. Over to you, Manoj.

Thank you, Sameer. The Pharma business recorded revenues of INR 292 crores in quarter 3 FY '23 versus INR 290 crores in quarter 2 FY '23. The EBIT of the division stood at INR 26 crores which is a 9% margin in this quarter compared to 3.6% in the previous quarter. The corresponding revenue figure for the 9-month period were INR 806 crores compared to INR 822 crores last year. Our business excellence initiatives have resulted in reduction of costs, which helped in partly absorbing the impact of higher input costs. Regarding our business verticals. On the API side, over the years, we have added several new customers and taken presence in new geographies such as the Middle East and Latin America. We have a strong development pipeline and we will launch 3 to 4 new products every year. Our CDMO business continues to receive increased inquiries from existing as well as new customers. Our future pipeline for CDMO business remains robust with multiple upcoming opportunities being worked on. Our discussion with innovative animal health grows volume opportunities are progressing well. Development of processes for multiple active pharmaceutical ingredient as part of the multiyear animal health project with a leading inventor is on track and we intend to complete the plant committing in quarter 2 FY '24. FY '23 has been a year of consolidation. We now find ourselves back on track to chart a new growth drive increase. Q3 FY '23 showed improved performance, and this momentum will continue in the next quarter, helping us end the financial year on a strong note. Now I would like to hand over to our President Crop Protection, Vimal Kulshrestha, to take us through the performance of the Crop Protection Business.

Thank you, Manoj. Good afternoon, all the participants in this call. The crop business recorded INR 248 crores revenue in Q3 FY '23 versus INR 269 crores in Q2 FY '23. The average for the decision was at INR 27 crores at 11% margin in Q3 FY '23 on the back of higher input cost of raw materials solvent energy as against INR 35 crore in Q2 FY '23 at 13% margin. Corresponding revenue figure for the 9-month period stood at INR 671 crores compared to INR 619 crores last year. All our plants continue to operate at optimal utilization. Demands for our own products was strong in the domestic market, we are focusing on optimal product mix to improve revenues and margins going forward. Regarding our business verticals, our own product segment, demand for existing product remain intact. From our key customers, we are also planning to complete the plant commissioning for our new fungicide by end of FY '23 and start revenue as early FY '24. We will also continue to explore new product opportunities in the business. In CDMO business, we continue to receive new inquiries from existing as well as new customers, we have several new inquiries in the pipeline. Now I would like to hand over to our Senior President of Business Transformation, Anish Swadi.

Thank you, Vimal and Manoj. With our business heads, having talked about their respective businesses. I would like to take you through some of our key priorities for the short term. As you may be aware, over several quarters now, we have been working with a global strategic consultant and have formulated the future strategic direction for the company. From choosing the right products to strategic partners, right technologies for the future, including enhancing our R&D and manufacturing capabilities to stay ahead of the curve, these initiatives being implemented will drive our future growth and profitability. On the cost rationalization front, our business excellence initiatives, including an in-depth capital efficiency program has started yielding positive results. We continue to work on improving our yields and solvent recoveries, including backward integration and a shift to renewable energy and biomass. Our Animal Health business continues to be on track. Our deep relationships with global innovators to be a partner of choice in this space. based on our capabilities in handling complex chemistries and providing end-to-end support in developing processes or complex molecules and scale-up requirements positions us on a very strong day. The progress on our multiyear contract is going ahead as per plan. It is a diversified contract with multiple products in a multipurpose asset, which is expected to come on stream in Q2 of FY '24. ESG is a pillar of our new strategic direction. While we have been active in the space of using clean renewable energy, we have also embarked on a journey to create a positive environmental footprint all the way from development through manufacturing operations. Hikal has made significant investments to facilitate this shift across all our sites. We are currently working with our international partners to map out our baseline practices and define a road map for achieving our ESG ambition of decarbonization, waste and water management. In the forthcoming year, you will hear from us about a lot more initiatives that we launched to fast track our journey towards leadership and sustainability. With this, we will now open the floor to questions and answers.

[Operator Instructions] First question is from the line of Ankit Gupta with Bamboo Capital.

So sir, if you look at our gross margins, there has been a significant improvement in our gross margins from -- on a quarter-on-quarter basis, but higher employee cost and increase in other expenses have not resulted in translation to higher EBITDA margins. So if you can talk about what was the reason for that? And a portion that our finance costs and depreciation has also increased during the quarter. So if you can talk about it.

Sorry, I couldn't hear you. You were not very clear. Can you please repeat the question? It was not very audible.

Sure. I was asking about -- we have seen a sequential improvement in our gross margins by almost more than 400 basis points but our EBITDA margins have not improved that much, primarily because of higher employee expenses and other expenses. So what was the reason for that? And finance cost has also increased during the quarter. So if you can talk about the reasons for this?

Yes. I think the fixed cost, if you look at the personnel cost, we have done a lot of recruitment for the new plants that we're commissioning in the next couple of quarters so that those people have already been recruited because there's a lag for commissioning and training of those employees, and we had some recruitment in that. Due to that, the [indiscernible] has gone up. On the finance cost, our debt has gone up marginally to fund this CapEx. And there's also been an increase in the interest rates compared to the last year same period. So these are the 2 increases that we had. But this is just a one-quarter type of impact. I think on an annualized basis, we have planned for this. And once the group plan start delivering results from next year, which will even itself out.

And on the CapEx front, how much CapEx have we spent on the new agrochemical plant and the new veterinary API plant? And how much asset tons can we expect from both these plants?

So yes, so I'm not giving -- they're not giving the exact breakup of the 2. But as I said last year -- last call, we need about INR 300 crores of CapEx this year. And the asset cost that we're anticipating is between 1.4 to 1.5, a full utilization and peak utilization, which should be after a couple of years.

Sure. Because if you look at, Sameer, last year also, we did almost INR 280 crores CapEx INR 270 crores to INR 280 crores of CapEx. It's actually because of the industry and the challenges we had to face over the past 2 to 3, 4 quarters. We haven't seen a subsequent increase in the top line. So if you look at INR 300 crores of CapEx this year and almost INR 270 crores of CapEx last year. So we have almost spent INR 570 crores of CapEx in the past 2 years. So all this could present an increased top line over the next 2, 3 years?

That's correct. It will take 2 to 3 years for peak optimization of the CapEx.

So let's say, INR 550 crores of CapEx over the past -- over FY '22 and FY '23 should result in at least INR 700 crores to INR 800 crores increase in our top line.

Over the next...

Over the next 2, 3 years?

Yes.

And so one broader question. If you look at our company, in past 3, 4 years, 4, 5 years, in FY '18, we did almost INR 1,300 crores kind of revenue and our operating margins were around 8.5%. And in FY '22, it's almost INR 1,900 crores kind of revenue almost 40% -- 35%, 40% kind of growth you have seen on the top line. Despite that our margins did not increase significantly. They have remained in the range of around 18%, 19%. So when we achieved INR 2,800 crores, INR 3,000 crores kind of top line, do you think we can reach to our ambitious target of 22%, 24% or even 25% kind of EBITDA margins. Because in the past, we haven't seen operating leverage kicking in, in our business. and our margins haven't increased in line with the increase that we have seen in our top line.

Ankit, I mean, as I've been saying consistently in our last few calls as well, we've been expecting the last few quarters on real product mix rationalization. And all the new products that we're launching and the new CapEx that we are doing with a much higher gross margin, much better EBITDA margin and a much better asset terms. So the blend, as you said, we should spend INR 575 crores, INR 580 crores in the last 2 years. That's a peak utilization that will result in X number which you mentioned and that the EBITDA margin of that [indiscernible] will be significantly higher than historical EBITDA of 18%, 19%. So we anticipate the EBITDA to get to 21%, 22% in the next couple of years.

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

We are very happy to see that we are back to all-time highest revenue. What is only concerning is margins that you answer -- just a couple of quick questions on this. What is our total debt as of now this quarter vis-a-vis last quarter? .

Yes, Kuldeep, [indiscernible].

[indiscernible]

I couldn't hear you, sorry.

It's INR 800 crores, total debt.

INR 800 crores. How much of it is long term and short term?

It prove INR 500 crores in the long term, INR 300 crores in short term.

Okay. And what is the cost of funding for long term and short term?

We have stopped funding 8.5% for a long term and 7% for the short term.

Okay. And when do we start repaying this debt because of the belief -- because of the CapEx, we are more or less done with the -- this is a peak debt I would assume. So when does the repayment start?

Yes, yes. So we are only repaying certain loans, which we borrowed 2, 3 years back. Whatever loan we have borrowed now will have a 2 plus 6-year [indiscernible]. Yes, every year, we are paying loans -- [indiscernible] loans.

So it will be safe to assume this is the peak tech. We are not going to be borrowing more for further CapEx?

See, unless we have been more or less, yes. But unless we had some good projects, we'll go for this.

Okay. Great. And just to the crop protection as well as pharma, what has been the volume growth we've seen this quarter?

Yes, one second. I just had those numbers. On the volume growth. Yes. Volume growth for crop protection for the company has been about 5%. For Pharma, volume growth has been about 20%. For crop, there's been a deviated volume of about 18%.

For crop, we seen a degrowth in volume 18% and pharma 20% increase?

Crop increase of 20%, Pharma degrowth of about 20.5%.

Is this primarily because of the excess stocking with almost every company? When do we expect this to improve?

So we expect a couple of more quarters. I mean I think by quarter 1 to quarter 2 of next year, we expect the pharma business volumes to start coming back. And what we are doing in the meantime is -- this volume is -- even though our volume has gone down downwards at more than 17% in pharma. From a value perspective, we still increase our value. So we've been able to change the product mix. [indiscernible] high margin, high value product. Yes.

And what is the capacity utilization at our manufacturing places?

About 80%.

Across both pharma and crop?

Yes. Probably 80% to 85% depending on the site in that range.

Okay. Great. By the answers of most of my question is that our revenues are back to a peak, our EBITDA margin, as you are seeing will catch up shortly within the next quarter, and we'll be seeing EBITDA margin improvement. So we can safely assume that we'll be back to our target as Hikal has protected -- projected INR 200 crores of cash in the next year, 1.5 years?

We are starting to start coming back. I mean, as I mentioned in the last February call, we did a sequential improvement quarter-on-quarter. Even this quarter, it was better than last quarter from our margin and absolute -- EBITDA absolute profit. Although revenues were down, we include our product mix within cost optimization. And the new CapEx have come on stream from quarter 1 of next year and quarter 2, quarter 3, we start benefiting next year. And we'll start moving back to a steady state pre-'22 margins, we start getting back to that towards from quarter 2 onwards early next year.

Great. So it's just that we've been out of the $1 billion club for some time. I hope to our company re get there very soon.

Yes. Thank you so much.

Our next question -- [Operator Instructions] Our next question is from the line of Sajal Kapoor, Independent H&I.

I have a couple of qualitative questions, please. So many new Indian CDMO players, who are previously focused purely on the human pharma domain, are now scaling up there and see CDMO in animal as well as agrochemicals as they have secured firm commitments and commercial contracts from global innovators. So the question is how do you see the emerging landscape from both the opportunity side as it's becoming increasingly clear that global innovators are now looking at India as a credible source on a much bigger scale, so that should help Hikal. But also from the competitive landscape perspective, because if new players are adding animal and agro and custom synthesis and to their domain and capability, does that not mean increased competitive intensity from these Indian players who were previously not into agro and animal CDMO, right? So that's one. And secondly, Hikal started the Pune R&D center for innovator synthesis and generic R&D about 14 years back, I think in 2009, and yet we have not seen any material traction in the anti-CDMO segment as majority of our CDMO revenues today is still come from supplying those off patent molecules to innovators versus some of our competitors in India started this segment of NCE scale up just about 7, 8 years back, and they have demonstrated significant traction in their NCE scale-up and commercial shipments. So why it took us so long to scale up on our NCE grams? Those are my 2 questions.

Yes. So I'll answer the second one first. I think Well, if you look at our shift, which has made now, I think there are several new projects in NCEs development and they're getting commercialized. So I mean, why it happened in the past, I think that also rather than talking about the past talk about the future. I think the future is very bright. There's several new projects in NCE, both pharma and in crop whether developing products, which are on factoring funder for registration and on the animal side as well. So the future will look very different from the last 10 years or you say 14 years. And if you started up, in Pune, it was a CRO because not a CDMO R&D side. We were doing contract research for FTE basis. So that was the change in business model about 4, 5 years ago, we will change the business model of Pune. So yes, you're right, we started in 2008, '09, 14 years ago. But for almost 8 to 10 years, we did CRO work in Pune and the development only started 4, 5 years ago. And those projects take time, as we said, 7, 8 years, but I think we're seeing a lot of light at the end of the tunnel and several projects are moving into silicon Phase 2, and Phase 3 and we're getting some good traction on the customer side. This was second one. Your first question was regarding increased competition animal and crop. I mean, yes, there are a few players we're looking at trying to do both. But eventually, it's about scale and about track record. And there is -- we have both for over 20 years. So there will be increased competition because we increase outsourcing happening, but we have to have a track. We've got the deep customer relationships with our customers and have been proven with our multiyear project contract at this time with a big innovative country. So we will work with companies of side, and we have -- we have all our -- both our divisions have a significant scale now with a track record of almost 20, 30 years of goods. And we have blue chip clients and customers believe much more with us. Customers are also looking at concerning a supplier base. While you may have your new entrant in this space that doesn't mean you guarantee business just because you have a plan. You have to have a relationship, you have to have a track record for the FDA. You have to have so many other angles in order to get review. You have to have -- fix the boxes in most of these. And yes, we're not the only ones in this space, but we are one of the top tier in these 2 segments and the third segment in animal. And we continue to grow as some of our competitors, and we show above industry growth going forward in this segment.

Right. So that's helpful. So just to clarify, when I look at our historic gross margins. We have been hovering -- we've been pretty flat in this broad range of 45% to 50% sort of gross margins, whereas we all agree that the innovator NCE scale-up margins are significantly better. But I understand that you just mentioned we changed our strategic positioning only 4, 5 years back. So past is not the right way to look at our gross margins and future will be significantly better. So can we assume that over the next, let's say, as our gross margins will be materially better even on a blended basis than what we have been delivering in the past?

That's an absolutely correct statement because the CDMO business gross margins are significantly better than the generic margin would be historically high. And our portfolio is changing over the next few years are doing a dramatic change in product portfolio. And we're looking at optimizing and requesting some of the older policies with a new generation, high-margin products. So I'd use our current assets to do that. So the margin profile is under a significant change in the next 3 to 4 years compared to where we are today.

[Operator Instructions] Our next question is from the line of Mr. Kunal with Carnelian Asset Management.

My question was on Crop Protection business, right? So you mentioned about volume details whereas in the last quarter, demand is [indiscernible]. The demand for agro chemicals continues to remain strong for both the CDMO and Own product segment. So just wanting to understand, I mean, more on the Crop Protection side and also on the margin side, how should we look at going ahead? That was my first question putting Crop Protection? The second, also the ongoing CapEx [indiscernible], right, if you can help the status of the frame will be upgraded?

I think for the first question, I will hand it over to my -- Vimal also to answer the second. I think there is no volume degrowth in crop. The volume degrowth has been in pharma. There's been a significant volume growth in pharm actually. So that's to clarify that for you. And the second part of the question, Vimal , if you can answer that, please.

So I'll answer that...

First of all, I wish [indiscernible] so there was a volume growth in the Crop, but then the value growth was not there, if I understand correctly. Because -- hello?

Yes. That was in the product mix. I mean it's quarter-to-quarter, I think we should look at it more from a 9-month basis. From a 9-month basis, our volume and value has more growth for the crop business, significant quarter-to-quarter...

The number which you mentioned was for 9 months or for a quarter-on-quarter basis, the volume growth number, which you mentioned.

Only for the quarter I mentioned.

Okay. Okay. If you could help with the second part of the question on the CapEx front.

Yes. So this -- we have completed the mechanical completion, and we have started commissioning of this plant and we start -- we expect to start production from Q1 of FY '24. So revenue as well and...

Sir revenue for this Panoli plant basically will start from Q1 FY '24?

Q1 FY '24, yes. And then...

And where is the amount that we have spent on this?

So I'll not be able to give you a breakup of that spend. But total last year, as Sameer has mentioned, we have spent INR 300 crores CapEx. I mean this year.

That's totally CapEx. Anything specific for this particular plan?

Yes. So split, we'll not be able to give you.

Okay. Okay. Fair enough. And what is the amount of CapEx that is yet need to be spent in the current year? Or are we done completely with the complete CapEx and now only maintenance CapEx will be there.

Yes. So we will spend INR 100 crores during this quarter 4.

Sorry, INR 100 crores more for this particular financial year?

No, it's all together for the company.

INR 100 crores is yet to be spent basically what you mean?

Yes.

Our next question is from the line of Jay [indiscernible] with Centrum Broking Limited.