Hikal Limited (524735) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q2 FY '26 Earnings Conference Call of Hikal Limited. 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 guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sameer Hiremath, Vice Chairman and Managing Director from Hikal Limited. Thank you, and over to you, sir.

Thank you. Ladies and gentlemen, good afternoon, and a warm welcome to all of you. We extend our gratitude to all of you for participating in our Q2 and H1 FY '26 results conference call. We are pleased to provide you with an update on the progress made by our company. We trust you have had the opportunity to review our comprehensive earnings release, investor presentation and the financial statements for the quarter and half year ended 30th September 2025. These documents can be accessed on both Hikal's website and the stock exchanges website. I am Sameer Hiremath, Vice Chairman and Managing Director, Hikal Limited, and I will be taking you through the discussion and presenting the financial results. On this call with me, I have Anish Swadi, our Senior President and Head of Business Transformation and Animal Health. Kuldeep Jain, our Chief Financial Officer; Manoj Mehrotra, our President and Head of the Pharmaceutical Business; Strategic Growth Advisors, our Investor Relations advisers. Talking about our Q2 FY '26 performance. If you look at the end market, the global chemical and life sciences industry is showing signs of a measured recovery. Demand visibility seems to be improving quarter-by-quarter and plant utilization across key geographies is gradually strengthening. At the same time, structural overcapacity, especially in the crop protection business in certain regions, continues to weigh on pricing and evolving trade policies, adding volatility to procurement cycles and supply chains due to the uncertainties. Despite the external challenges, Hikal's diversified portfolio and long-standing customer relationships provide us with the resilience to navigate near-term uncertainty. The consolidated revenue for the quarter 2 FY '26 stood at INR 319 crores with an EBITDA of INR 8 crores. We were able to maintain operational stability despite financials being affected by a short-term deferral of sales in our pharmaceutical business. Sales of certain orders executed towards the end of Q2 were booked in October 2025. This resulted in underabsorption of fixed costs during the quarter. For H1 FY '26, the revenue stood at INR 699 crores for the company with an EBITDA of INR 32 crores. While the first half has been impacted in our Pharmaceutical business due to regulatory developments, the underlying fundamentals of both our businesses remain strong. Despite the challenges faced in the first half of this year, we expect a strong recovery in Q3 and Q4, as mentioned in our last conference call, supported by improved demand visibility, higher capacity utilization and the commercialization of new products, which are being ramped up as we speak. The Pharmaceutical business revenue for the quarter stood at INR 190 crores with an EBIT margin of negative 9.2%. As you know, the Bangalore facility of Hikal received an OEI status earlier this year in May, followed by a warning letter in August 2025. This has delayed temporarily the offtake across both our generics and our CDMO businesses as customers conducted their own internal risk assessment. We have responded to these risk assessment with urgency and discipline, which have now been completed. Two global remediation partners have been onboarded by our company are now working alongside us to strengthen our internal quality systems to ensure our corrective actions meet the highest global standards. Our CAPA implementation is well advanced, and we remain in active dialogue with the USFDA. These steps are not only addressing the observations, but also reinforcing our system for the long term. Importantly, we are seeing continued engagement from our customers with all orders given at the beginning of the year intact and none of the customers canceling any of our businesses. We expect and we are progressing now well through resumptions of supply, which has begun from October 2026. During the quarter, we have witnessed significant traction from key global innovators for strengthening future pipeline of complex chemistry molecules, and we're getting several RFPs from new customers and existing customers as well. We have also received positive traction from several global companies from innovator companies from the CDMO business who have visited us in the last quarter, demonstrating our enhanced capabilities as we progress well towards strengthening our business relationships further. This will support enhancing our higher-margin revenue in the mid-to-long term and strategically position us in the niche CDMO segments. During the quarter, our Crop Protection segment revenue recorded sales of INR 129 crores with an EBIT of minus INR 10 crores. The margins remained under pressure due to ongoing pricing challenges stemming from oversupply in the global market. However, volumes have started to recover in the Crop division. In our CDMO business, the financial performance remains muted as innovator customers are undergoing business segment restructuring and destocking of the supply chain, which is almost completed. We also see on the customer angle, there's a strategic shift towards next-generation molecules and platforms. This presents a long-term opportunity for us for differential partnerships and co-development programs, of which we have begun doing a few in the last 6 months. To capitalize on these opportunities, we are augmenting our capabilities and increasing our prioritizing innovation through our portfolio realignment. In the near term, we anticipate a gradual recovery in the second half of this year for the Crop division with stable performance expected on a full year basis which is similar to last year. Beyond the Crop Protection business, we are also making steady progress in our Specialty Chemicals business, specifically the Personal Care division with a broader diversification strategy. We are expanding our collaboration with global customers on personal care ingredients, and we expect to commercialize 2 to 3 products in the second half of this financial year and ramp up the volume in the next financial year. This segment continues to emerge as a growth driver, and we are committed to building a differentiated portfolio that aligns with evolving consumer preferences and global regulatory standards. During the quarter 2, we also inaugurated a state-of-the-art high-potency laboratory, enhancing our capabilities in high-potency molecule development. We also commissioned a new kilo lab at our specialty chemicals site, strengthening our early-stage development and scale-up infrastructure. These investments reflect our commitment to innovation, technology and long-term growth. We reaffirm the recovery in H2 FY '26, as mentioned in the last conference call to cover the deferment gap from H1 FY '26 for sustaining demand for second half of the year. We remain committed to structural strengthening of our compliance systems, diversifying our portfolio and building a long-term partnerships with global customer base. Now I'll hand over to Kuldeep, who will provide an overview of the financial performance.

Thank you, Sameer, and good evening, everybody. Let me now take you through the financial performance of Hikal for Q2 and H1 FY 2026 and share key updates on our financial trajectory, capital allocation priorities and balance sheet strength. For quarter 2 FY 2026, our consolidated revenue stood at INR 319 crores. EBITDA for the quarter stood at INR 8 crores, translating to a margin of 2.6%. Lower-than-expected sales have resulted in under absorption of fixed cost during the quarter. For the half year FY 2026, consolidated revenue reached INR 699 crores and EBITDA for the same period was INR 32 crores with a margin of 4.6%. Finance cost for the quarter 2 FY 2026 was at INR 15 crores, with a reduction of 13% and 20% on a Y-o-Y basis. Depreciation remained in line with last quarter. Capital expenditure during the first half year stood at INR 65 crores, focused on debottlenecking, regulatory upgrades and expanding CDMO capacities. We are maintaining our full year CapEx guidance of INR 200 crores with a continued emphasis on disciplined capital allocations towards high ROI projects aligned with our long-term growth strategy. Our balance sheet remains healthy with an improved debt equity ratio of 0.55 versus 0.59 at the start of the year, driven by the improved debt profile and repayment during the first half of the year. Now I would like to hand over to Manoj, who will provide an overview on the Pharmaceutical division performance. Manoj, over to you.

Thank you, Kuldeep, and good afternoon, ladies and gentlemen. Let me now walk you through the performance of our Pharmaceutical business. In Q2 FY '26, our Pharmaceutical segment recorded a revenue of INR 190 crores and EBIT of minus INR 17 crores. There have been disruptions in customer offtake patterns, which were influenced by the recent USFDA official action indicated status at our Bangalore facility, followed by warning letter in August '25. Most customers have completed their risk assessment, and we have resumed deliveries, which will ramp up significantly in H2 FY '26. Following the USFDA inspection, our Bangalore facility received an OAI classification and a subsequent warning letter dated August 22. We are actively addressing these observations through a structured time-bound remediation program. In collaboration with global CGMT consultants, we are implementing corrective and preventive actions that align with international regulatory standards. The remediation plan is on track for completion by December 2025. Our API business continued to penetrate across key markets, supported by our established portfolio and expanding market share in select molecules. This has further reduced our dependence on regulated markets and improved our resilience navigating through volatility in trade policies and uncertainties driven by U.S. tariffs. Our development pipelines remain robust with 8 to 9 molecules currently under development are progressing well. We are on course to launch 2 to 3 new products annually, consistent with our medium-term strategy. As part of our risk mitigation efforts, we are progressing towards dual-site validation for all critical APIs. In our CDMO business, the business continues to benefit from the structural momentum driven by positive global outsourcing landscape. We are observing a sharp uptake in early-stage RFPs, particularly in high-value small molecule and advanced intermediates. This demand is being driven by global innovators and emerging biotech firms who are looking to diversify their development and manufacturing away from single region dependencies. While commercial scale-up time lines remain staggered, the quality and volume of engagements have significantly improved. Several projects are now transitioning from early development to pilot scale. In the food and nutraceutical ingredients space, we are on track to scale operations and expect to reach peak output within the next 18 to 24 months. Our portfolio expansion efforts in this segment are progressing well. Additionally, key starting materials produced from global innovators have advanced into Phase III clinical trial with commercial launch anticipated in FY '27. To support this momentum, we are investing in pilot scale capacity enhancement at our R&D center in Pune. We have also inaugurated a new high-potent active pharma ingredient lab, which enables us to enter the rapidly growing segments such as oncology API market. Our R&D is now fully equipped to offer a broader suite of services to our innovative partners. Looking ahead, we expect API volumes to improve, supported by regulatory approvals across geographies and deeper penetration into semi-regulated markets. In CDMO segment, the pipeline is strong and diversified with increasing engagement in both volume and technical complexity. Our near-term focus is to resolve outstanding points with the USFDA and restore full compliance. Over the medium to long term, we remain focused on developing new APIs for global markets and converting CDMO opportunities into sustainable business growth. Now I would hand over to Anish, who will provide an overview of our business strategy.

Thanks, Manoj. First, I'd like to discuss the Animal Health business. We are seeing continued progress in our Animal Health business. Most molecules under the long-term supply agreement are now being delivered at small commercial volumes as registrations have started to come through across global markets. At the same time, I'm pleased to tell you that we have been awarded new development contracts for 2 molecules from global innovators. Additionally, we have submitted proposals for 2 new RFPs from global -- different global innovators for their on-patent proprietary products. Our recent enhancement in the technology platform with HPAPI capabilities on the pharmaceutical business will also enable us to further diversify our offerings in the animal health and enter into niche segments. We have built a strong long-lasting partnerships with innovators across the U.S. and Europe and are increasingly positioned as more than just a manufacturing partner. We are now being recognized for our diverse innovation, complex synthesis capabilities, regulatory, compliance and agility. We are also expanding into Tier 2 innovators, biotech customers and our own product portfolio selling into key geographies, which will further diversify and strengthen the Animal Health division as a long-term growth driver. Now I would like to open the floor to Q&A.

[Operator Instructions] The first question is from the line of Henil Bagadia from Equicorp.

I've got a few questions. So on the pharma and crop care both sides, so a large part of our revenue actually come from the legacy and new molecules, which have very low margins. So as investors, how should we look at the mix, I mean, what is the mix right now between the legacy and the new molecules that you've launched in the last 3, 4 years, which do enjoy healthy margins? And how should we see the mix in FY '27, FY '28 as the project starts actually picking up.

Yes. So if you look at our total margin profile, the mix between CDMO and own and I would categorize CDMO to be a pretty high-margin business. So our current CDMO business is about 50% of our revenue today and our own business is also close to 50%. In that 50% from the own molecule, which is our generic API business, only we have a few commodity low-margin products, but we have a market leadership and volumes-based business. So that is -- that covers our fixed cost to a very large extent with volume, that's a volume play. But we're launching several new generic APIs, which is in the new generation in the antidiabetic portfolio, which have started to come into play from next year onwards as they go off patent. And those will be a higher-margin generic player. So even though we have generic, there will be a segmentation between the generic space, we have 2, 3 molecules which have medium to low margin, I would not say very low margin, but still reasonable margins because if you look at the fixed cost required is very low for this product because already the plants are fully depreciated, and they're running at very high throughput for those molecules. So the EBITDA of those products, even though the contribution margin may be low, the EBITDA on those commodity products is pretty reasonable. On the other hand, the generics new portfolio, which is being launched, and we've got many products being launched every year, we are seeing that the new generics will contribute to almost 50% of our revenue going forward. And while legacy will remain between 40% to 45% of our business. The CDMO business, which is where we're very excited about, which has now become almost 50% of our total business is in the ramp-up mode. Products which are in the development have moved into validation, as Anish mentioned and Manoj mentioned. We have 8 to 9 exciting projects in the different stages of ramp-up. And these will start driving up revenues and significant margin uptick in the Pharmaceutical division in the next 2 to 3 years.

Okay. So just one clarification. There are some legacy molecules like gabapentin, pregabalin or gemfibrozil or pentoxifylline where we have got a very good share. So there as the new generics starts to ramp up in utilization, we will reduce the volumes here, right? And if the plants are fungible, probably with some debottlenecking and some reactor additions, et cetera, we can probably shift most of our, I mean, own products to the new ones, right, if I'm not mistaken?

Yes. See, gabapentin is where we have market -- global market leadership. And it is still growing globally at 3% to 5% on a global basis. Being a market leader, we are not giving up that volume growth. But we reprioritize our customer mix to cater to the higher-margin customers. So for the same asset, we're relooking at our product mix. If we produce the same amount of tonnage of gaba year-on-year, the absolute margin from gabapentin will start improving. That's with our focus on products like gabapentin and pregabalin and pentoxifylline. There is no fresh CapEx being done on that. The plants are old, they're depreciated. So even though as I'm repeating myself, the EBITDA is pretty reasonable and we are getting a very large market share in those products, and we're able to retain our presence in this. And this helps us enter into many new customers and makes a hook as an anchor to enter a customer with this having this fully backward integrated approach on these key molecules.

Sir, on the new product that you said, which is mainly towards diabetes. Sir, I have 2 questions out there. Sir, if we see the 2 products that is in the DPP-4 category, which is vildagliptin and the sitagliptin parts. So there have been reports there which say once the GLP goes off patent, there will be a lot of supplies and it will probably cannibalize a huge part of the sales. And this DPP-4 used to be about $15 billion, $20 billion earlier. But right now, I mean, it's shrinking. The market is not growing. And as GLP goes off patent, it's subject to erosion on both price and market share level. So here, how do you see the opportunity as this is one of the products in our pipeline. And on the other side, we have got good products on the SGLT2 inhibitor side, which is Dapa, Cana, Empa and ertugliflozin. So there, it's got a niche on the cardio and the renal side because of which it can be used as a combi drug with the GLP-1s. The market growth was expected to be around 7%, 8%, but people are saying it's expected to even overshoot as the GLP goes offtake and in terms of the combi users. So how do you see things on both sides as both the things are in our pipeline?

Sure. I'll let -- Manoj, maybe you can answer that, take that question.

Yes. No, I think that's a good analysis. So we have both kind of molecules starting with sitagliptin. We are also into the new generation molecules like Empa, Dapa, canagliflozin. So we believe that being in all segments of all kind of treatment therapies for antidiabetic and all kind of technologies, this will really help us to ramp up this business. So we're getting ready for the future. Yes, sita, we have already there. Dapa, Empa, we are already there. We have a DMF. We already have customer seedings. Ertugliflozin has not taken off as much as Dapa and Empa. But going forward, we believe we'll have dapagliflozin, Empa and canagliflozin. We are strongly positioned in all these 3 antidiabetic more because of the building block from a chemical side is common in all of them. And our portfolio approach for antidiabetic therapy will really help us in gaining further market share in the global markets.

Okay. So on the oral anticoagulant side, we've got a product called apixaban. So Pfizer -- which Pfizer and BSF has jointly developed it. So in the recent government action, Pfizer has just reduced the price of 40%. So how does that impact the market as such because it's due for off-patent in 2028. So do you see the CDMO inquiries coming in very hot because as they reduce the price, they actually need it at low cost and they can outsource it from low-cost geographies like us. But at the same time, there are also trade barriers. So I mean, how do we see the situation?

So we have 2 molecules in that category. One is apixaban and...

Apixaban and rivaroxaban.

We have both DMF files in these 2 category -- in these 2 products. So we see good customer feelings were there. Yes, innovator, it takes time to get into the innovators, although we are in touch with them for the key starting materials. But as the pricing pressure comes on these innovators, they start looking for generic version. That, in a way, we cannot really predict, but we have to wait for the right time and be in touch with them. As and when they decide to go for a generic version, we are there in front of them to position ourselves.

So -- but can apixaban be a star product for us because it's just $8 million, $10 million product just right now before this offpeak end.

API is small here as compared to sitagliptin and some other antidiabetics from an API perspective. But overall, the value will be high in my view. And coming to this innovator business, we have that gabapentin case study where we started supplying to the innovator right in somewhere around 2007, 2008, where we had a better process and better cost than the innovator and they came to us, similarly in gemfibrozil. So those opportunities do come, and we are rightly positioned that we will get into these opportunities as and when they come.

Lastly before I get in the queue. Sir, Hikal has been very strong in a lot of process chemistries. I mean you've got ammoxidation, fluorine chemistry, bridge chemistry and a few others, which just a handful of few CDMO players have globally. And I mean, we are one of the few who have all the processes like the likes of Lonza or probably Siegfried. So what is preventing us from getting all these high-value orders or high potent molecules? Are we late in the race? I mean, how do we understand? Because even a lot of Indian peers much larger than us, who just have 1 or 2 chemistries specialized in that, they've got very, very large orders in the last 1.5, 2 years. But I mean, for us, it's been in the commentary for the last 2, 3 years, but I mean it's not converting into very, very large orders. So how should we actually see the situation? Is it that they have taken -- I mean, some large molecule orders, which is why enough opportunity is not left on the table? Or how do we actually see the situation?

So we are in touch with various innovators, and they are in the pipeline of development. The only issue is that there's a lead time for regulatory filing, which is delaying these commercial launches. And as we mentioned in our commentary earlier that we have a few KSMs, which will go into commercialization FY '27 onwards. [indiscernible] also expire, yes.

Okay. Sir, lastly, also, if I could squeeze in one. Will the current OAI or the warning letter have an impact on any of the DMF filings or future filings we do with the USFDA?

Yes, you can file DMF, but you may not get approval till the OAI is lifted. So what we are doing, we are filing DMFs now from the Panoli site as well because we know this will take some time. Maybe we can have the reinspection of USFDA sometime in the middle of 2026 or early 2026. But there are always uncertainties and that is the reason we have developed Panoli site. Panoli site is approved by USFDA for APIs, which we passed successfully in May of 2023. So we'll have 2 sites now for API filing, number one, Bangalore, number two, Panoli. We're also expanding our Pune site more for high potent API manufacturing as well as having a pilot plant there. So in the long term, we'll get more and more derisking of various sites so that this kind of situation can be handled.

So since you said high potent API, are we trying to...

Sorry to interrupt, sir. But I may request you to rejoin the question queue for follow-up questions. [Operator Instructions] The next question is from the line of Dhaval Shah from Girik Capital.

I would like to understand regarding the footnote which talks about this INR 80 crore revenue. So was there some accounting change during the quarter which you are not aware of? Or -- so I'm seeing this for the first time in a pharma company that during the quarter, this revenue to be recognized. Can you elaborate on this?

Basically the sales because of the FDA issues that many of the orders that were in the system, the sales took place towards the end of September but the customer had asked us to hold on till this assessment was completed. So that resulted on the shares getting spilled over to the first week of October. Because of that, they were actually reversed into the September numbers. Reversals were taken in September. And all the sales subsequently happened in the first few weeks of October and have been completed.

Okay. So all of these were related to the Pharma division. So it's only the September -- so it's the entire fourth quarter sales, right, which would have happened or...

September -- end of September sales.

Only end of September. Okay. Understood. And you mentioned that none of the orders are canceled after the warning letter, right? So did I understand correctly...

That's correct. I mentioned that in the last call as well -- and I reaffirm that, there is not a single customer has canceled the orders. There's only been a deferment in the offtake. None of the POs that were in the system have been canceled as well. They just asked us to pause. They relooked at the risk assessment again in September post the warning letter. And they said, okay, now we are satisfied. From October onwards, the shipments have restarted. No, not a single cancellation.

Okay. Got it. And in the last -- previous question, we mentioned about the reinspection. So it's been now 7, 8 months, right, since the time the OAI has been received. So what is the -- so how do we understand what is the next line of action our USFDA has to take to remove -- because the customers are not canceling the order. And in certain molecules, we are important in the global supply chain. So even the customer will be trying to help us enable and talk to USFDA. So where are we in this? And where do you see at the earliest we can get this warning letter removed?

Yes, Manoj, you can take it.

Yes. See, the warning letter was received in August 22. Usually, they wait for 6 months and they give you 6 months to complete all your CAPA. We have given them a response of the warning letter in September 11, then we gave them one more update in end of October. So we'll keep giving them update every month to kind of give them a progress on our CAPA. But before 6 months, they really don't talk to you much because it's assumed that you'll take 6 months to rectify the situation and ensure that CAPAs are implemented effectively. So I think February is the right time to really approach them. And then if they believe that we are ready and we are able to convince them, then they come for a reinspection. So we'll expect in maybe March, April, May, they should come for a reinspection.

Okay. So the peak revenues in pharma what we have done in the past. So when -- so should we expect that by June quarter or September quarter next year, we should be back at those numbers or crossing those numbers?

So the warning letter actually does not bar you from your existing business. So the existing mature approved products will continue now. Yes, there was a delay in September, which we explained because the customers do their risk assessment post the warning letter. So the volume will come back in H2 for the mature products. The new product, yes, that they will kind of come in after the reinspection. But we see a strong recovery in H2 because all these mature products, which we already have purchase orders, they will be executed now in Q3 and Q4. On an annual basis, there will be no impact. And once we clear the reinspection, then the new product sales will also start. But that's only for the U.S., which is 35% to 40% of our business. All other markets, the business continues as usual. Food product business continues as usual. It is only those specific -- a few molecules which we thought we launch early from -- for our U.S. customer. Those will be impacted for some time. Just to clarify, the mature business continues to U.S. and all over the world. New products continue to get approved in Europe, LatAm and other markets. Food business continues to go as usual.

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

I just wanted to understand, get some sense on this deferral that we had. What was the nature? I know you clarified with the previous participant, but just any more details that you can share because it's a large number of INR 80-plus crores.

So basically, these were -- this is what I just mentioned to the previous participant when I answered the same that -- because of the customers asking us to do the risk valuation, even though the orders of the system may be asked to ship they'll be asked to hold the material and the material got delayed by a week or so in shipment. It went into the first week of October. So we took a decision to reverse these sales because -- they have not -- because of the accounting technicalities and this has been accounted already from the October sales. They've all come into October sales now.

Okay. Got it. And previous quarter, we had spoken about -- and you mentioned in this press release also that we'll make up for the revenue loss in 1H in second half. Previous quarter, we had reiterated in our press release our outlook of like a double-digit growth in pharma for the year, while crop being flat. So do you think we can hold that guidance for FY '26?

We are still hoping to get to those guidance numbers. We are working towards that target still. Yes. See, Q2 has only got deferred into October. What was said in the past that is -- so Q2 -- that's only change of 1 month or 15 days of deferral of sales. There is no other long-term impact on this...

Yes. No, no, I understand that. Why I asked that was because on a full year double-digit pharma. So like first half, we've had no growth in 1Q also. So the ask rate becomes higher. So that's why I just wanted to clarify the guidance because that's what we mentioned in the 1Q press release.

Yes.

Yes. Just finally, anything you can highlight on the Animal Health side, F '27, we expect it to ramp up in terms of revenue. Anything -- any progress other than what Mr. Swadi shared in his opening comments?

Yes. No, I mean, there's nothing else to add. I mean the success of the validations, we're now supplying the pre-commercial quantities, we are waiting for all the registrations to happen so those pre-commercial go into full commercial, and that should happen over the next 1 or 2 quarters. So that's positive. As I mentioned also is that we have been awarded 2 new development contracts, which will go through the development process. These are for global innovators as well. So that's the success that we've achieved this past quarter. In addition to which we've also been shortlisted for 2 new RFPs other than the ones that we've won. So I think the development pipeline in the Animal Health business is strong, and we continue to be confident about delivering growth in that segment.

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