Hikal Limited (524735) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Hikal Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions]. Please note that this call is being recorded. 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 future performance and involve risks and uncertainties that are difficult to predict. I now hand the conference over to Mr. Sameer Hiremath, Managing Director from Hikal Limited. Thank you, and over to you, sir. on the line with us. Sir, you may proceed. [Music]

Yes. Thank you. I think there was some call drop off, so apologies for that. 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 Q1 results conference call. I'm delighted to provide you with an update on the progress made by our company. We trust you had the opportunity to review our comprehensive earnings release, the investor presentation and the financial statements for the quarter ended 30th June 2026. These documents can be accessed on both Hikal's official website and the stock exchange website. I am Sameer Hiremath, Vice Chairman and Managing Director of Hikal Limited, and I will be leading the discussion and presenting the financial results. On this call with me I have Anish Swadi, Senior President of Business Transformation and Head of Animal Health Business; Kuldeep Jain, our CFO; Manoj Mehrotra, Head of our Pharma business; Ravi Khadabadi, Head of our Crop Protection Business; and Strategic Growth Advisors, our Investor Relations advisers. Before diving into the quarterly performance, I am pleased to share that Hikal has been recently awarded EcoVadis Gold Medal Rating, achieving an overall score of 84 on 100 and a 97 percentile ranking, placing us among the top 5% of over 175,000 companies globally assessed for sustainable performance. This recognition reflects our continued focus on sustainability, operational excellence, compliance and governance. It is a strong validation of the progress we are making, a significant boost for our teams and reinforces the confidence of our customers, partners and investors in Hikal's long-term commitment to responsible and sustainable growth. Now talking about Q1 FY '27 performance. We began the year with a recovery journey as we transition from a regulatory-led disruption last year to execution-led growth. During this quarter that just ended on 30th of June, we continue to strengthen our Pharmaceuticals, Crop Protection and Animal Health business, while entering our new division on Personal Care. This was done through an execution of customer engagement, strategic investments in manufacturing, which were done in the last several years, quality upgradations, innovation and operational excellence. For Q1 FY '27, we reported revenue of INR 403 crores with an EBITDA margin of 9.2%, which was supported by improving customer ordering patterns and product mix, which continue to progress upon regulated markets and our increasing CDMO partnerships. The Pharmaceutical business delivered year-on-year growth despite the expected plant shutdown that we took in this quarter 1 of this year for the U.S. FDA remediation efforts, which are almost completed. Customer ordering patterns are normalizing, providing better demand visibility, while disciplined execution, improving product mix supported profitability, which resulted in an improvement in gross margins for the Pharma division. Our recovery is expected to strengthen through FY '27 as our U.S. FDA remediation program gets implemented and our regulatory milestones are achieved. We continue to evolve our portfolio towards niche higher-value products while maintaining strong relationships with customers across the regulated markets and entering new geographies like Japan and Latin America. Our investments remain focused on new therapeutic areas like Gastroenterology, Oncology, CNS and other specialized therapies. We also continue to expand our CDMO capabilities and strengthen customer partnerships, which are being enabled and accelerated by the recently commissioned cGMP pilot plant at our R&D center in Pune. We expect the momentum to improve with H2 of FY '27 benefiting from recovery in regulated markets and an increasing CDMO contribution, thereby increasing margins. We have been continuously dialoguing with the U.S. FDA over the last year since we got the warning letter in August 2025, and our remediation program is on track. We expect a reinspection towards the end of this financial year. Furthermore, other regulatory international bodies and major Pharma innovator clients have successfully audited and reapproved Hikal's facilities over the last 12 months, reinforcing their trust on Hikal by ensuring zero lost customer contracts. We haven't lost a single customer order in the last 12 months. Our newly commissioned pilot plant in Panoli is now operational, and this enables us to derisk from Bangalore to Panoli and also increases our DMF filing capability, which is now going to be six to seven filings per year compared to two to three filings historically. In the Crop Protection business, the industry continues to recover gradually by volume growth coming back, although the pace remains uneven across different geographies. Global channel inventories have largely normalized after almost two to three years of destocking, which should support fresh buying as seasonal demand improves. That said, distributors are still buying Just In Time rather than restocking and building up inventory at their end. So, the recovery in ordering is steady but cautious. Pricing, however, continues to remain under pressure due to excess supply from China, limiting opportunity for price increases despite improving demand. Additionally, the margins are impacted due to geopolitical tensions leading to increase in raw materials and energy costs. Against this backdrop, our focus remains on securing contracts, which we have onboarded a few new customers, maintaining cost discipline and investing extremely selectively in capacity debottlenecking and new capacities backed by long-term contracts and where returns are attractive. Domestic demand for our own products continues to improve, while the CDMO order visibility remains mixed with certain customer orders shifting into the second half of the year from the first half of the year. Overall, we expect a gradual volume-led recovery this year. On the Personal Care segment, which I spoke about in the last conference call, we have recently commissioned a dedicated multipurpose manufacturing line at Panoli with commercial production having recently commenced. Revenue is expected by the end of this year. This is part of our strategy to diversify into adjacent high-growth segments while leveraging our existing manufacturing process development and regulatory capabilities. The Animal Health business delivered another strong quarter, supported by strong demand from existing customers and approval of validation qualities for new projects. We continue to strengthen customer partnerships across innovators, supported by differentiated manufacturing capabilities and regulatory expertise. During the quarter, we further expanded our development pipeline with new NCEs and advanced intermediates progressing through development, validation and moving towards commercialization. On the capital allocation and balance sheet side, as mentioned in the previous calls, over the last four years, we have invested approximately INR 900 crores in capital expenditure. INR 300 crores of this was allocated towards maintenance CapEx, which is approximately INR 75 crores per year across our six sites. The balance INR 600 crores was invested in growth CapEx, comprising number one of the INR 300 crores towards an agrochemical manufacturing plant, which was subsequently part impaired in Q4 last year and is now being retooled. Retooling this asset will reduce execution timelines by nearly 12 months for our new Pharma and Animal Health portfolio, which has been signed before by long-term contracts in the CDMO space. INR 150 crores of this INR 600 crores was also invested in the last three years in a new dedicated Animal Health manufacturing site where validations were completed and revenues have started to flow in. INR 100 crores was invested of the INR 600 crores in a multipurpose manufacturing facility in Bangalore over the last three years, which have already started to generate revenue. The balance has been investing in upgrading our R&D capabilities by building up a new high-potency anticancer laboratory in Pune, a new cGMP pilot plant and also a new pilot plant in Panoli, which was commissioned last year. Over the years, despite navigating multiple external challenges, we remain focused on strengthening our core operations while strategically investing in new growth platforms. As part of this effort, Hikal today compared to where we were three, four years ago, we had a two-division type of approach. In the last three years, we have incubated successfully two emerging businesses, Animal Health and Personal Care. The Animal Health has now scaled an annual turnover of approximately over INR 100 crores last year and continues to witness strong customer traction based on the CDMO contracts that we have signed and are finalizing with our global customers, which will drive meaningful growth revenue in the next three to four years. The Personal Care front, we have recently commissioned a dedicated manufacturing line at Panoli by repurposing the part impaired asset which is enabling an efficient capital deployment. Importantly, despite undertaking significant investment over the last several years and navigating a challenging business environment, we have reduced our net debt from approximately INR 815 crores in FY '24 to INR 685 crores by end of FY '26, with our debt-to-equity ratio now being 0.53. As promised in the last conference call, I'd like to give an outlook for the next quarter and the year end for this year. We are seeing a positive momentum going forward. Our expectations from Q2 on a Y-o-Y basis, we have substantial growth in revenues and EBITDA. We believe that the momentum will accelerate even further in H2 FY '27 with full year growth expectations in the range of approximately 14% to 16% with strong growth in Pharma and a marginal growth in Crop and EBITDA growth in the range of 25% to 30%. Now I would like to hand over to Kuldeep Jain, CFO, to discuss financial performance.

Thank you, Sameer, and good evening, everybody, who is connected to the call. I'm sure you must have gone through our financial results for the quarter ended 30th June 2026. Q1 FY 2027 reported revenue stood at INR 403 crores and EBITDA of INR 37 crores. Our EBITDA margin stood at 9.2% and PAT at negative INR 7 crores. During the quarter, we reported INR 9 crores as an exceptional income on account of reversal of excess provision, which we made in the last year quarter 4 with regard to the new labour courts because we have done restructuring our pay scales and therefore, there is excess, a reduction in the provision which we made last year. Depreciation charges remained broadly in range during the quarter. Capital expenditure during the quarter stood at approximately INR 45 crores, focused on debottlenecking, regulatory upgrades and building new capacities. Our capital allocation remains highly targeted, prioritizing high ROI projects that are aligned with our long-term growth objectives. Our growth initiatives have been largely financed through internal accruals as of 30th June 2026, and our debt-to-equity ratio stands at 0.53 against 0.56 in March quarter. Now I would like to introduce Mr. Manoj Mehrotra, who will provide an overview of the Pharmaceutical division. Manoj, over to you.

Thank you, Kuldeep, and good evening, ladies and gentlemen. For Q1 FY '27, the Pharma business reported revenue of INR 233 crores, EBIT of INR 8 crores and an EBIT margin of 3.2%. The Pharmaceutical business continued its recovery trajectory during the quarter, supported by improving demand across both the API and CDMO businesses. We witnessed gradual normalization in customer ordering patterns and trade cycles, while our Pharma manufacturing facilities at Panoli and Bangalore operated at an average capacity utilization of nearly 80% to 85%, reflecting improving business momentum. As Sameer highlighted in his opening remarks, our focus remains on building a stronger differentiated Pharmaceutical platform. To support this, we are enhancing our product development capabilities through increased DMF filings and investments in advanced R&D infrastructure. With the commissioning of our new pilot plant, we expect to increase our DMF filing rate from two to three filings annually to around five to six filings per year, enabling faster product development and strengthening our future pipeline. We continue to focus on high-growth therapeutic segments such as CNS, Antidiabetics, Gastro And Gastroenterology, while steadily expanding into differentiated higher-value product categories of oncology, urology and anti-migraine. The Pharma generic business delivered strong year-on-year margin recovery in legacy products, driven by focused cost management initiatives, while the rest of the legacy portfolio maintained stable performance. Customer ordering patterns continue to normalize, resulting in improved demand visibility across key markets. Looking ahead, we expect to further expand our geographical presence in Latin America, Japan and Korea, while a new DMF filing program is also expected to gather momentum during FY '27 and beyond. These initiatives will support portfolio expansion, broaden our market reach and drive future growth. Our Pharma CDMO business continues to build strong momentum with expanding customer engagement across development and commercial programs in North America, Europe and Japan. We continue to strengthen our pipeline of NCEs and intermediates with around eight to nine molecules at various stages of development. Repeat campaign orders from existing innovator customers reflect the continued confidence in our capabilities. In addition, discussions with a leading Japanese innovator are progressing well, further strengthening our future growth pipeline. Our integrated cGMP pilot plant at our R&D center in Pune continues to be a key differentiator, enabling faster development, scale-up and technology transfer for innovator customers. At the same time, we continue to invest in next-generation technology platforms, including high-potency APIs, ADC linkers and payloads positioning Hikal to participate in emerging opportunities within the global Pharmaceutical and CDMO landscape. On the commercial front, we have strengthened our global business development capabilities by adding four dedicated business development professionals across Japan, North America and Europe, which will help expand our CDMO opportunity pipeline and deepen customer engagements in key markets. Overall, we remain confident that our differentiated product portfolio, expanding CDMO pipeline, strengthening technology capabilities and continued investments in innovation position the Pharmaceutical business well for sustainable long-term growth. Now I would like to invite Mr. Ravi Khadabadi, Head of our Crop Protection, to provide an overview of the Crop Protection division's performance.

Thank you, Manoj, and good evening, ladies and gentlemen. I'm Ravi Khadabadi, the Head of the Crop Protection business. For Q1 FY '27, the Crop Protection business reported a revenue of INR 170 crores with an EBIT of negative INR 6 crores. Q1 FY '27 was a mixed quarter for the business. Our own product segment delivered sequential growth, supported by improving domestic demand and higher sales volumes. However, margins remained under pressure due to elevated raw material and fuel costs arising from geopolitical developments in the Middle East, along with continued pricing pressure from China. In our CDMO business, export demand remains subdued with certain customer orders deferred to subsequent quarters owing to inventory buildup at the customer end. The broader Agrochemical industry continues to recover gradually. Global channel inventories have largely normalized after two years of destocking, supporting fresh buying from across key markets. However, customer ordering continues to remain need-based, while surplus supply from China continues to keep pricing under pressure. As a result, the current recovery is being driven primarily by volumes rather than pricing. Operationally, we remain focused on improving efficiencies and strengthening our manufacturing capabilities. During the quarter, we expanded existing product lines, established in-house liquid formulation capabilities and continued initiatives around automation, backward integration, solvent recovery, yield improvement and maximizing asset utilization to enhance cost competitiveness. Looking ahead, we expect domestic demand for our own products to remain healthy, while CDMO volumes are expected to improve as deferred customer orders are executed in the second half. We expect Q2 to be better than Q1, supported by the Indian Kharif season with further improvement in Q3 driven by the Rabi season and Latin American demand. While margins may remain under pressure in the near term due to raw material costs and Chinese competition, we expect gradual improvement as volumes recover and operating leverage strengthens. Overall, we continue to view FY '27 as a recovery year for the Crop Protection business, led by volume normalization, improving demand fundamentals and disciplined execution. Thank you. Now I would like to introduce Mr. Anish Swadi, Senior President of Business Transformation, who will provide an overview of our business strategy. Over to you, Anish.

Thanks Ravi, this is Manoj Mehrotra, some correction in my data. The Q1 capacity utilization was close to 55% to 60%, considering the shutdowns, which we had in the quarter 1. Sorry for that. Yes, Anish, you can take over. Thanks, Manoj.

For the Animal Health business in Q1 FY '27, we continue to deliver a resilient performance, supported by improving customer demand, portfolio expansion and commercialization of some of the new molecules we had in the pipeline. We did witness in the existing pipeline healthy volume growth across the API and the Intermediates segment. We continue to strengthen our customer partnership across several innovators supported by differentiated manufacturing and regulatory capabilities. We've had some repeat NCE campaign supplies for a leading innovator, which are currently underway and which reflect continued customer confidence in our execution capabilities. Beyond our existing commercial portfolio, we continue to witness encouraging traction across customer engagements and new molecule opportunities. Several programs are progressing through various stages of development and validation and finally will end up at commercialization, providing a strong visibility for future growth. In parallel, discussions on a strategic partnership with several Japanese companies are progressing well and could further strengthen our position in this segment. Together, these ongoing engagements provide us the confidence in the long-term growth trajectory of our business. The business continues to scale steadily, and we still remain confident of growing this business to INR 400 crores plus by FY '30, as indicated earlier, making it an increasingly meaningful contributor to our overall portfolio. Our customer engagement continues to strengthen with long-term contracts in place with leading global innovators. We currently have a mix of molecules at various stages from development to commercialization, of which several have been validated and several are in the pipeline. Commercial production is underway for some of these molecules, providing a strong base foundation of growth. During Q1 '27, we also completed the U.S. EPA and Canada PMRA regulatory filings for a particular molecule. To support future growth, we also continue to invest in flexible manufacturing capacities and capabilities across the company. Our retool manufacturing facility originally built for the Crop Protection business is being converted into a multipurpose Pharma and Animal Health contract development and manufacturing facility. This will enhance our ability to support both our existing customers as well as our new customers with their new product commercial pipeline. Given the specialized nature of this business and our differentiated manufacturing capabilities, Animal Health represents one of the higher growth margin growth platforms within our portfolio. Overall, it remains a strategic growth pillar of Hikal, supported by strong customer partnerships and a healthy commercial pipeline. Now I would like to open the floor to Q&A.

[Operator Instructions] The first question is from the line of Aman Bora from [Indiscernible].

So I'll just start with where Anish left. So congratulations on the ramp-up in the Animal Health vertical and in record time. When we talk about the business, INR 400 crores of top line by F '30, what is, and you mentioned that the margin profile of the business is better than that we report for the Pharma division. But could you help us understand what kind of margins do we expect out of this business?

Yes. So the margin profile that we expect once we reach that operational leverage will be 20% plus EBITDA margins for the Animal Health business.

Okay. Got that. Got that. And second is on the Crop Protection side. So what is, so we've last almost, and this is not only for Hikal, but for the industry, too. It's almost been two years of first tepid volumes, then tepid pricing now. So what would it take for the industry or for Hikal specifically to get back on trajectory in this business? And how do you look at, I understand F '27 would be a year of recovery and all of those things. But how do you look at this business on a three-year basis? What should we expect out of this business over three years?

So I'll take that question. So the problem is that the Crop industry, the end customers are also not doing very well. And as you know, the end customers, which are five or six big players contribute to almost 80% of the total global market by value. So if they don't do well, then there's a lot of pressure put on their suppliers. And innovation is also not exactly accelerating in the Crop Protection side. So we are expecting very marginal growth in the Crop division. That's why we've allied, we've diversified into allied businesses. We are not investing significant amount of new capital in the Crop business. We are managing the Crop business with what we have with very strict capital allocation and financial discipline to ensure a healthy cash flows for the business while being focusing on operational discipline. We're onboarding a few new customers, but it is projects are taking time to materialize. And the margins that on a new CDMO contracts are lower than what they were maybe three, four years ago because of the competitive nature and the pressures being faced by our end customers in the end market. So that's how we see the Crop business. We see marginal growth, single digits to mid- to high single-digit growth going forward.

Right. Got that. Just continuing a couple of more questions from my side. So as I hear your commentary and think about Hikal, we are positioning more like I think five, six years back, we were seen more as a chemical company or maybe a decade back. Now if I think about next five years, we are positioning ourselves more as a Pharma company, right? Is my understanding correct?

Yes. I think if you look at us maybe five, six years ago, we were a chemical company. Then by '23, we became like a Pharma and a Crop two-division company. And in the last three to four years, we've incubated two very exciting businesses. One is the Animal Health business, which is already ramping up quite nicely. And the Personal Care business, which is somewhere in between Crop and Pharma. So it is, now we've built up a new asset in our repurposed multipurpose plant in Panoli to run the first line, manufacturing line for personal care. And so yes, as a percentage of our total revenue, while we were known mostly as a chemical company, right, maybe seven, eight years ago or 10 years ago, and maybe like a two division company maybe five years ago. If you look at our business going forward in the next two to three years, we will be more into a four-division type of approach where Pharma and allied Pharma, human, nonhuman Pharma and even the skin care like Personal Care, which is like Pharma will be almost 70% to 80% of our total business with Crop division coming up about 30% of our total business.

Got that. And so for the Personal Care part of the portfolio, any guidance or any thoughts you can share on the next three years, near term and maybe three years, how that business can look like? What could the margins be like? What should we expect there?

I'm sorry, can you repeat that question? I couldn't hear you.

I'm just, because Personal Care would now be another growth driver other than Animal Health. Any thoughts you can share on what that business could be in the next three years, maybe near term or three years as you want to share? And what the margin profile of that business could look like?

So I think if you take this year, we're just launching this year, I would say. It is a launch of it very small volumes. But as we grow in the next three years post next year, post this year, we expect to cross about INR 200 crores of revenue in the business.

Okay. And margins would be like between 15% and 20%. Is that a safe assumption?

Over 20% EBITDA.

Right. Got that. Got that. And just one last question from me. Sameer. First of all, thanks a lot for sharing your guidance in a very turmoil geopolitical environment. When we talk about, so I think your guidance was 15% to 16% top line growth on F '26 base and about 30% EBITDA growth. And we are talking about flattish top line for Crop this year. So the growth would be Animal Health and Pharma led this year because Personal Care would be low volumes. So when we are talking about, say, better than that growth in Pharma, shouldn't our margins be better? Because if I just put your guidance to work, we are talking about between 14% and 15% EBITDA margins for F '27. If Pharma does better than Crop, which is generally a better margin business, and we are ramping up Animal Health also, shouldn't our EBITDA growth and margins be better than that?

You're absolutely right. This is a transition year where the FDA remediation costs are still hitting our fixed cost numbers, so depressing EBITDA. Once the FDA remediation goes away by end of this year, next year onwards, the EBITDA will start improving even more substantially. Since the remediation cost has been pretty substantial, which is hitting our fixed cost number. So there will be growth in EBITDA margins compared to last year, but the real meaningful numbers will be in FY '28 and beyond.

[Operator Instructions] The next question is from the line of Rohit Sinha from Sunidhi Securities.

Just wanted to know as our U.S. FDA final clearance is, I think, due by end of this year. And you are stating that two, three contracts are in process. So how we will be looking at the addition of incremental revenue in FY '28 post this U.S. FDA clearance?