Hikal Limited (524735) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Hikal Limited Q4 FY '24 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of the 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.

Thank you. Good afternoon, ladies and gentlemen, and a warm welcome to all of you. We extend our gratitude to all of you for participating in our Q4 and FY '24 results conference call. We are pleased to provide you with an update on the progress made by our company. We trust that you have had the opportunity to review our comprehensive earnings release, investor presentation and the financial statements for the quarter and financial year ended... [Technical Difficulty]

Ladies and gentlemen, we have the management back with us. I now hand the conference over to Mr. Sameer Hiremath, Managing Director. Thank you, and over to you, sir.

Thank you. And sorry about that. So good afternoon, again, ladies and gentlemen, and welcome to Hikal's Q4 and FY '24 Results Conference Call. We are pleased to provide you with an update on the progress made by our company. We trust that you have had the opportunity to review our comprehensive earnings release, financial statements and the investor presentation for the quarter and financial year ended 24 March, '24. These documents can be accessed on Hikal's website and the stock exchange's website. I am Sameer Hiremath, Managing Director, Hikal Limited, and I will be leading the discussion for this call. On this call, I have with me Anish Swadi, our Senior President and Head of Business Transformation [indiscernible]; Kuldeep Jain, our Chief Financial Officer; Manoj Mehrotra, our Head of our Pharmaceutical business; and Strategic Growth Advisors, our Investor Relations advisers. The current operating environment was marked by inventory backlog, oversupply and heightened price competition in the crop protection industry. We expect this to start normalizing towards the end of FY '25. The pharmaceutical sector, on the other hand, is displaying signs of improvement with a better demand profile supported by stabilized raw material prices. Amid these dynamics, our strategic focus remains on gaining new customers, bolstering artificial efficiencies and optimizing costs through various business excellence initiatives. This quarter, on a sequential basis, our revenues increased by 15% to INR 514 crores; EBITDA increased by 45% to INR 94 crores, on a Y-o-Y basis EBITDA increased by 7% and EBITDA margin stood at 18.4%, an increase of 220 basis points. For the full year, FY '24, revenue stood at INR 1,785 crores, EBITDA stood at INR 267 crores, with EBITDA margins at 15%, which is an increase of 230 basis points compared to the previous year. Our Board of Directors have recommended a final dividend of 30%, along with an interim dividend 30% declared in February 2024, in which case, the total dividend for FY '24 stands at 60% of face value, which is INR 1.2 per share. For the year FY '24, our API facility in Panoli, Gujarat underwent an FDA audit, which concluded with zero 483 observations, showcasing our unwavering dedication to stringent regulatory compliance standards amidst the backdrop of increased market penetration, stabilized raw material prices and an increase in the number of inquiries in our CDMO segment. FY '24 also marked commissioning of our animal health multipurpose plant at Paloni and validation of a few products in this plant have been completed with several more currently underway. In our Pharmaceuticals business, we've observed enhancement in both margin profile and volume, reflecting the positive outcomes of our strategic efforts over the last few years. This progress is evident to the rest -- of regulatory approvals from several customers and regulatory authorities, strengthening of our customer base across 3 geographies, such as Japan, Latin America and Middle East within the API segment. In the crop protection business, the global crop protection industry continues to face significant headwinds, including subdued global demand and intense price competition. While we are flooded with near-term industry-wide challenges, we expect the market trajectory to improve in the crop protection business towards the end of this financial year. We are well positioned across our business -- both our businesses for long-term profitable and sustainable growth. For the Crop Protection business, we reported revenue of INR 177 crores for the quarter with an EBIT of INR 14 crores and EBIT margin of 7.7%. For the year ended March 31 FY '24, revenue for the crop business stood at INR 684 crores, EBIT of INR 74 crores and EBIT margin of close to 11%. The Crop Protection industry continues to be affected by the destocking situation along with overcapacity and intense price competition from China. Numerous projects are in the advanced stages of discussion with both existing innovator customers and new customers, which are expected to come on stream in the next few years and drive mid- to long-term growth. Our cost improvement initiatives have begun to yield results, which are playing a pivotal role in maintaining our margin profile. The construction of our new multipurpose facility at Panoli has been completed with the plan currently undergoing manufacturing qualifications. From our own product, destocking continues to impact demand globally, and we expect improvements towards the end of FY '25. In line with our gold strategy of commissioning a new multipurpose facility in Panoli, we are additionally actively working on new product opportunities to further improve and expand our business. Our CDMO business maintains a healthy pipeline of inquiries from both current and prospective clients. Our focus on this opportunity to work on niche molecules with better margin profiles, we are expected to strengthen our position among global innovators, driving growth in this segment in the medium term. Now I would like to hand over to -- I hand over to Manoj Mehrotra, president of our Pharmaceutical division who will provide an overview of the Pharmaceutical division performance. Over to you, Manoj.

Thank you, Sameer, and good afternoon, ladies and gentlemen. On the financials for the pharma business for Q4 FY '24, Pharma business reported revenue of INR 338 crores, EBITDA of INR 54 crores and EBIT margin of 15.9%. For the full fiscal year '24, Pharma business reported revenue of INR 1,100 crores, EBITDA of INR 93 crores and EBIT margin of 8.5%. Operating profits have increased sequentially reported by better product mix. On a year-on-year basis, the stabilization of raw material prices combined with a diverse set of initiatives aimed at improving cost efficiency and optimizing operational costs have resulted in enhanced margins. On our business verticals for the API business, our API business is showing promising traction both Q-o-Q and Y-o-Y basis. Regulatory filing for our business expansion projects in multiple regions have commenced promising to fuel our growth in the future. We maintain a strong pipeline with 8 to 9 products in development, and we are progressing according to plan to launch 2 to 3 products annually. Our market share in the legacy product portfolio is steadily increasing. In the CDMO vertical, in quarter 4 FY '24, the destocking situation continues to impact our CDMO business with an expectation for industry normalization towards the end of H1 FY '25. Continuous discussion with our existing innovator customers and a healthy flow of inquiries indicate an increasing interest in expanding their business with us. Our CDMO business has exhibited a positive trend in the food ingredient segment with 2 products currently in production, which will reach their full potential in the next 2 years. Two of our KSMs in Phase III of clinical trials with innovators is progressing well and will reach full potential in 2026 or 2027. On the overall pharma business, our API business demonstrates promising traction, expanding its presence across geographies with anticipated regulatory approvals for new products poised to drive growth. We maintain a robust pipeline of projects within the CDMO space and actively pursuing additional opportunities that has surfaced in recent quarters. Several customer audits have been lined in the rest of 2024. Enhanced operating leverage within this segment is forecasted to lead to improved profitability. Now I would hand over to Mr. Anish Swadi, who will provide an overview of our business strategy.

Thank you, Manoj, and good afternoon, everyone. First, I'd like to discuss a few points on the Animal Health business. The development of multiple APIs for an animal health innovator company is progressing well under the long-term agreement that we signed. Our new multipurpose plant for the Animal Health business is operational. We have completed 4 product validations with several products undergoing validation for registrations and eventual commercialization in the quarters to come. . Our extensive networks and strong relationships with global innovators position us as the preferred partner in this industry, and we are gaining traction with them. Providing comprehensive support and process development and complex molecule synthesis has established us as a reliable and competitive player in the Animal Health business. Despite some of the short-term challenges overall, we anticipate the long term to be fruitful. Our company's transformation project, Project Pinnacle is beginning to yield results propelling us closer to our goals towards prospering sustainable growth across all our businesses. Encouraging momentum is evident in the supply chain derisking strategy, developing differentiated competency, the acquisition of new customers globally and the building of a distinctive technology platform. As we navigate through the next stage of our strategic evolution, notable advancements have been realized through the incorporation of sustainable practices in our defined ESG framework. Looking ahead, we are executing our clear future strategy and road map aimed at making a positive environmental impact to our operations. Staying true to our values and embracing innovation, we are poised not only to thrive in the marketplace, but also contribute meaningfully to a sustainable and profitable future for all. Now I would like to open the floor for Q&A.

[Operator Instructions] We have our first question from the line of Payal Shah from [indiscernible] Securities.

I have a few questions. Firstly, what is your view on U.S. Biosecure Act and how it will benefit our business?

Yes. I think the U.S. Biosecure Act is being tabled in the U.S. Senate. And the initial signs are very promising. It will take some time, but we're seeing a nice number of inquiries from U.S. pharmaceutical companies, and I think it's going to benefit companies like Hikal in the medium to long term. It is a very positive for companies like us.

Okay, sir. Sir, my next question is how aggressive is China with relation to crop protection business and does the same hold true for our pharma business?

Well, I feel aggressive on the crop protection side where there's a lot of overcapacity in the crop side, and there is very low prices being offered. So there is severe competition coming out of China. While we don't have the same impact on the pharma side, because pharma, you are bound by regulatory authorities like the FDA and the GMP. So the barriers to entry exist. So we don't foresee the same level of competition in China and the over capacity exists in the crop business, not as much on the pharma side.

Okay. And my last question is, where do we see both our businesses here in the next 3 years?

I mean we expect them to both grow, I think the medium- to long-term forecast are both very promising. Not only the 2 business, even the Animal Health business will come to operating size in the next 2, 3 years and we expect these businesses to all start growing and coming back to pre-COVID type of levels in the next 2 to 3 years.

[Operator Instructions] We have our next question from the line of Sajal Kapoor, an Individual Investor.

I have a couple of questions. Some companies in your peer group have seen molecules migrate from China to India. So they've definitely started demonstrating their commitment in specific cases. Have you witnessed the shifting of any molecules or at least the clinical stage projects from China? Or -- are we still in the RFQ and discussion stage?

Inquiries have come, and they're very serious about moving. Some have started to move. More on the entries here, you're right, on the clinical phase, I think they are moving supply chains away from China and we are benefiting from that. Some are resulting into projects and they are in the R&D stage already, and even more RFQs are moving in. It's taking time, but it's happening.

Sure. That's helpful. And Sameer, you guided -- also guided for 15% compounded growth over the medium term. But if I look at Slide 15, that confirms the reality, right? I mean our sales grown below 5%. And more importantly, our CDMO share in pharma, the percentage mix has actually gone worse over the 4 years. So that's Slide 16, by the way. So how do you read -- how should one read into this?

No, I think that's because actually, our API business has grown faster than our CDMO business, because there are many projects in the CDMO side, which are on the NCE level. But once they can launch that percentage will go up. If you look at FY '20 versus FY '24, yes, as the percentage has come down. But overall, it will go up. It will come back -- once they ramp up these molecules get launched, as Manoj mentioned, we have a couple of products in Phase III, and they get launched up that the percentage of the CDMO will increase. And we will come back to that 50-50 type of mix where we were historically 3, 4 years ago.

Right, right. And then -- and an average investor reading Slide 6 and 7 will get the impression that the worst is over and the recovery has started sequentially as we are comparing Q3 and Q4 data there, right? However, our H2 is always better than H1. And within H2, the Q4 is typically better. Likewise, when Q1 FY '25 numbers will be published, we'll find that the sequential recovery is not happening because our Q1 is always lower than Q4, right? So I think the whole point I'm trying to make here is that is it even worth sequentially comparing our lumpy business. So Slide 6 and 7, I think it may be misleading.

No, besides quarter margins always are lower quarter because we take our annual shutdown also during the quarter. [indiscernible]. So I think you should start comparing from Q2 onwards, yes, when the full production is back on stream. So from Q2 to Q4, if we noted, our business continuously improves. And -- it is [indiscernible] . I mean historically, from Q2 to Q4, we are growing H2 volume bigger than H1. And that's how our business has been driven.

Yes. So we don't expect [indiscernible] in Q2?

Just to add, Sameer, because many of our -- all our innovator customers or multinationals have a fiscal year January to December so they kind of minimize inventory in December. And so January to March, they ask for more quantities. So because of our nature of our B2B business, Q4 for both pharma, crops, CDMO and ACI will always be higher. -- will be the highest quarter.

Yes. And Manoj, in the pharma, the business has done well in Q4. Actually, if you look at just Q4 Y-o-Y data for pharma vertical, the sales have grown at 10% from 300 or to 338, right, around about 10% growth in sales. But our margins have improved and our profitability has almost jumped by 50%. And I'm comparing Y-o-Y, right? So there is no sequential element here. Is this -- is this a sustainable trend going forward? Can we expect the Animal and the Human Pharma to drive the business? And as long as the agro is not kind of in a trust reversal mode and overall top line should grow by 15%. Is that a reasonable assessment? Maybe not for next year, but on a 3- to 5-year horizon?

So this Q4 definitely has seen a strong recovery because of our product mix and stabilization of raw material prices. Going forward for the full year, we may not see as strong a recovery quarter-by-quarter. But the trend is definitely positive. And I think you also mentioned a short while back that the worst is over. And again, you see H2 will be better than H1 because the nature of our business and our contracts it will be a little slow in H1, but H2 will definitely come back much stronger in my opinion.

No. So I was not comparing Q-on-Q. I was saying that year-over-year over the next 3 to 5 years, can we drive our [indiscernible]?

At 15% top line and margin growth -- top line growth, [indiscernible].

We have our next question from the line of Rishab [indiscernible], an individual investor, please go ahead.

I wanted to understand more about the CapEx guidance and the asset turns guidance for FY '25 and coming 2 to 3 years. And also, how do we plan to fund this CapEx? And what could be the incremental ROI of this CapEx?

Yes. So it is set from FY '23-FY '24-point of view, we have done the CapEx of almost INR 200 crores and equally capitalized. As far as this -- out of this, almost 55% to 60% was for the growth CapEx, the ROI, the commercial supply will start from the second half of the next last year, '25, '26. CapEx for this year is concerned, we are estimating INR 100 crores, INR 120 crores, which is primarily the debottleneck and some CapEx.

And FY '26 and '27, any CapEx guidance for that?

We are really -- as we have mentioned earlier, we are not really able to invest for the CapEx unless we have a really good strong case to invest.

Also just one thing. On the debottlenecking side, the -- like do you have a lot of debottlenecking options like low-hanging fruits in front of you, which would give very high ROI in the short term?

There are a few on -- Manoj spoke about some food ingredient products and some pharma products, which are in the NCE mode. And those are debottlenecking. A little bit on the crop side also where we're winning some new inquiries on the CDMO side. So there's no major new CapEx that we expect for the next year, unless there's a big new contract, that sort of business requirement that comes from a customer, they may not be shy at investing. And debottlenecking CapEx is never looking at right now, for 1 year.

Okay. And the asset turns, sir, just for FY '25 and coming year, asset turns?

Full utilization because it takes time to ramp up. I mean, if you look at full utilization back by 1.1% to 1.3% of the growth CapEx. That's what we are looking at .

Blended basis for FY '25 kind of asset turn?

It depends on the ramp-up. It will be in that range I mean of 1% -- 1.1% to 1.3% in the range.

We have our next question from the line of Deepak Kumar, a shareholder.

So in the last -- last quarter con call, there was a mention about some growth in the Animal Health business and some INR 200 crores to INR 300 crores odd revenue potential coming out of that -- so like out of this, how much potential do you see actually fiscal '24, '25?

I'm sorry, could you just repeat the question, it wasn't very clear.

So yes. So this is the reference to the last quarter con call, like there was some mention about the -- growth you are making in the Animal Health business -- and there was some extra revenue potential being talked about -- of about INR 200 crores, INR 300 crores. Like how much of that is you expected to flow in this fiscal?

Yes. So we don't get into specifics. But as we have said in the past before, Animal Health has been about 8% to 10% in historic times in the last 3 years of the pharma business. So Animal Health is still a small part of the pharma business. We've signed a new contract, which we talked about, the current products are going through validation. It will hit full commercialization and peak capacity probably in the next 2 years, 2 to 2.5 years. Once they go through the validation process, they get registered and commercial quantities will start. So when I mentioned last call, I said about the next 4 to 5 years, we're looking at a revenue potential of about maybe INR 300 crore to INR 400-odd crores depending on how the products pan out.

Okay. And 1 more thing. Like can you just -- can you share some outlook on what were in the food ingredient premium pipeline for the company -- like a broad outlook?

Manoj, go ahead.

Yes. So currently, we have 2 food ingredients with the originator customers, 1 in the U.S. and 1 in Europe. And both of them are commercial now -- and because the approval process is much faster in food ingredients. And we expect that in the year 2026 they will reach their peak revenue. .

We have our next question from the line of Dhwanil Desai from Turtle Capital.

Sir, my first question is, if I look at our company last 5-year numbers, our top line has gone from INR 1,600 crores to INR 2,000 crores. And in the same time frame, we have spent around INR 1,000 crores on CapEx. So our asset intensity of the business has gone up. So can you throw a bit light on that? And I understand that some of the CapEx is just capitalized and it's going to generate revenue going forward. But earlier, we used to do asset turns of 1.5 to 1.7x. And now we are guiding for 1.1 to 1.3x. So if you can help us understand what has changed in the last 4, 5 years?

So I think the asset turns -- have -- things have become far more expensive, I think, from a CapEx perspective, and there is competition in the market. So that's number one. Number two, 1.5 for 1.7x was only total CapEx because at that point, it wasn't the growth CapEx. What happened in the last 2 years is because we've done a lot of infrastructure upgradation also, the blended asset turn has come down. And so yes, we have built and we have done maybe INR 1,000 crores of CapEx in 5 years, but almost 30%, 40% of that is on infrastructure and maintenance CapEx. So 60% is only gone into the gross CapEx on that. And it takes a gestation period of 2, 3 years to ramp up the volumes. And the major CapEx has only happened in the last 2 years out of that INR 1,000 crores that we spoke about. So more than 50% has happened over in the last 2 years. So that will start kicking in for next financial year, some impact this year, but mostly for next year and the year to come. And this is -- it has been viewed very positively by our customers, and this CapEx will get through because customers are looking for high quality capacity as they move our supply chains away from China and they want you to have some readymade capacity available, which we are looking -- can now offer. So the charges of winning new contracts is increasing quite substantially with this.

Okay. Okay. Understood. So then coming back to last 5 years numbers, and I understand we are looking at trough in terms of the cycle. But still, our revenue has not grown at a very decent rate, while we have done a lot of CapEx. So given that we have good customer base, we have already have capacity, you are [indiscernible] shipped from China. So shouldn't we inspire more to grow at 20% plus Q1 where we are positioned today because we are guiding for 15% growth, but ingredients for higher growth seems to be in place or am I missing something?

No, the right ingredient for higher growth is there, but selling prices have also come down in the crop space because of intense competition. So there is a selling price impact, and volumes have also declined compared to where we were last year. There's been a significant volume drop now in the crop protection business. So there is free capacity. And once we start operating at higher capacity and utilization, I think there's a big ramp-up possible in the business, which should significantly improve the margin of the crop business. . [indiscernible] the capacity, which you can deploy on short notice, which we have winning contracts. So we will be able to fill it very soon.

On the agrochem side, I think last couple of calls, if I remember correctly, you were expecting recovery to start from H2, I think in this commentary you are now saying that towards the end of the financial year. So -- is it just evolving so it's actually we are thinking that the recovery will be slightly more delayed than what we thought earlier?

Absolutely to each and every one of my customers in the world, I asked them this question, they said your guess is as good as mine. It's just an expectation that H2 is -- the early part of H2 or end of H2. It's all everybody is giving their own assumptions, but we're trying to be a little conservative and say towards the end of H2. If it happens earlier, it's great. But I don't think it's going to happen you'll to see before somewhere in the middle of H2, it's probably end of H2, yes. Because the situation in China is very fluid, but it is likely to change, everybody is expecting this. But as you noted, all [indiscernible] global innovator majors have reported negative numbers and negative growth for Q1. And the commentary also talked on the same line.

We have our next question from the line of Rohit Nagraj from Centrum Broking.

And good to see the pharma pick up during Q4. First question is, again, on the Animal Health. So your comments, Anish has said that we have sampled few products, and there have been validations which are [indiscernible] so is there any possibility of commercial supply starting maybe towards the back end of FY '25?

Yes. No. So right now we -- right now, we are under the validation phase. Once validate the product, it goes to the customer, it is anywhere between 14 to 18 months for the customer to register it and then start placing commercial supplies. So I don't think it's going to happen at the end of FY '25, but we do expect shortly thereafter that commercial quantity or commercial orders will come in. . The idea is that we validate all the products concurrently, supply them to the customer, and we're supplying them in such a way that when the last validation is done, we're hopeful for the first validation that had been done to come through on the commercial side. So the plant idle time is kept to a minimum.

Sure. That's helpful. Second question is, again, on the crop protection side. So I just wanted a little perspective from your end in terms of the domestic environment from inventory perspective, given that there have been talks that the monsoon will be normal and hopefully, things will turn positive for the sector and similar conditions from a global perspective. And a concurrent question to that, in terms of the pricing environment, whether it has bottomed out -- and obviously, once the inventories get normalized, only then the pricing will improve. Just your thoughts from talking to your customers also?

I can say more on the global environment because they're not much present in the domestic environment, but whatever I've heard on the domestic side is that there is an inventory in the system, but they expect it to again to -- there's a lot of inventory. It will come -- the monsoon is expected to be good, but I don't have much to say about the domestic market. On the global side, I think inventories, as I mentioned, is inventory -- huge amount of inventory being carried in the market. Consumption has picked up, but it will still take a few more quarters for inventory to come down to acceptable levels. And we expect that once that is happening, then orders will start picking up. On the pricing side, prices I think are not going down any further. They've already dropped bottom, this is what I've heard from all my customers, and we expect to see a marginal improvement in pricing in the quarters to come. But that will only happen once the fresh orders start coming in once the inventory gets liquidated. But I think we are 6 to 9 months away from that scenario right now.

We have our next question from the line of Viraj Mehta from DVD Capital.

Finally, on the first question in terms of gross margin. We have seen significant improvement in gross margin at more than 54%. A, can you make us understand if this is due to lower pricing and your cost of conversion remains the same. Is this due to that or better product mix? Or has the pricing of the product gone up? What is leading to this such a very nice 54% gross margin?

So, I think we have gross margin is 45%. I just want to ...

Yes, sorry. RM cost is what I meant 54% which was much higher earlier.

Right. So we have been able to -- I mean, raw material prices have come down, and we've improved operational efficiencies and product mix. It's a combination -- and prices are -- especially materials also have not come down the perspective faster than selling prices and selling prices have stabilized as well on the pharma side. Positive impact of benefit of raw material prices .

Okay. My second question is regarding when you say asset turns of 1.1 to 1.2x is this as a percentage of growth CapEx, which you said is 55%, 60% of the total CapEx? Or is this as a percentage of total CapEx. So if you do INR 1,000 crores CapEx, would you do 1.1x INR 1,000 crores or would you do 1.1x INR 600 crores?

So it's the total CapEx.

Right. Now even if I assume 17%, 18% our normalized margins for over a longer term that we do, the ROC, if you take like 2, 3, 4 years to ramp up, is very low single or mid-teens, right, only teens. So how you do a company of our stature justify that kind of low ROCE for such large CapEx over a longer period of time, Sameer that will be my last question.