HIKALNSEQ1 FY24August 14, 2023

Hikal Limited

6,775words
98turns
15analyst exchanges
4executives
Management on call
Sameer Hiremath
MANAGING DIRECTOR,
Anish Swadi
SENIOR PRESIDENT, BUSINESS TRANSFORMATION & ANIMAL HEALTH
Kuldeep Jain
CHIEF FINANCIAL OFFICER
Manoj Mehrotra
PRESIDENT, PHARMACEUTICAL BUSINESS
Key numbers — 40 extracted
388 crore
ustomer side impacted top line and profitability in Q1 FY24. For Q1 FY24, we reported revenues of 388 crores and EBITDA of 50 crores, equivalent to a margin of 12.9%. During the quarter, we witnessed disru
50 crore
line and profitability in Q1 FY24. For Q1 FY24, we reported revenues of 388 crores and EBITDA of 50 crores, equivalent to a margin of 12.9%. During the quarter, we witnessed disruptive channel inventory
12.9%
or Q1 FY24, we reported revenues of 388 crores and EBITDA of 50 crores, equivalent to a margin of 12.9%. During the quarter, we witnessed disruptive channel inventory correction across the supply chain
163 crore
w of our Crop Protection Division performance: The Crop Protection Division achieved a revenue of 163 crores for the quarter and an EBIT of 17 crores which was at 10.5%. The global crop protection industry
17 crore
e: The Crop Protection Division achieved a revenue of 163 crores for the quarter and an EBIT of 17 crores which was at 10.5%. The global crop protection industry has been going through a challenging pha
10.5%
n Division achieved a revenue of 163 crores for the quarter and an EBIT of 17 crores which was at 10.5%. The global crop protection industry has been going through a challenging phase for the last few
rs,
he CDMO front, we continue to receive new enquiries from both existing and prospective new customers, and I’ve signed on a few contracts in the last quarter. This demonstrates the continued demand for
Rs.225 crore
talk about the financials of the pharma business first. The pharma business reported revenue of Rs.225 crore, EBIT of Rs.10 crores and EBIT margin of 4.4%. Reason for sharp decline in pharma revenue on sequ
Rs.10 crore
als of the pharma business first. The pharma business reported revenue of Rs.225 crore, EBIT of Rs.10 crores and EBIT margin of 4.4%. Reason for sharp decline in pharma revenue on sequential basis was on a
4.4%
. The pharma business reported revenue of Rs.225 crore, EBIT of Rs.10 crores and EBIT margin of 4.4%. Reason for sharp decline in pharma revenue on sequential basis was on account of reduced demand
2.4%
, if you look at a quarter Y-o-Y, values have grown by as I mentioned too, revenues have grown by 2.4%, volumes have dropped by almost 13% for the quarter compared to the last quarter. If you look at
13%
ues have grown by as I mentioned too, revenues have grown by 2.4%, volumes have dropped by almost 13% for the quarter compared to the last quarter. If you look at it sequentially, the revenues are do
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Guidance — 20 items
Sameer Hiremath
opening
“I am Sameer Hiremath – Managing Director, Hikal Limited, and I will be leading the discussion and presenting the financial results.”
Sameer Hiremath
opening
“We expect it will take another quarter or two for demand in the pharmaceutical business to return to normal.”
Sameer Hiremath
opening
“Sequentially, we expect the performance to gradually pick up and operating leverage is expected to improve in the second half of the year.”
Sameer Hiremath
opening
“We expect the inventory situation to normalize towards the end of this calendar year.”
Sameer Hiremath
opening
“Given the current macroeconomic climate, we do anticipate short term volatility.”
Sameer Hiremath
opening
“The medium-term outlook for our product is positive as end user consumption continues to grow.”
Manoj Mehrotra
opening
“Also, we expect the channel inventory situation to normalize, which implies that the worst of the price erosion is likely behind us.”
Manoj Mehrotra
opening
“We have a robust pipeline with 8 to 10 products under development, and our target is to launch 3 to 4 products by the end of FY24.”
Manoj Mehrotra
opening
“Going forward, we’ll prioritize maximizing API sales by increasing our customer share of wallet, expanding new markets, where we have advantages in terms of backward integration, scale and technology.”
Anish Swadi
opening
“We are on track to provide the validation batches of the products which are under development to our customer during the next few quarters.”
Risks & concerns — 11 flagged
To navigate these difficult circumstances, we have implemented various strategic initiatives aimed at cost optimization, reducing procurement prices, and automation-based productivity enhancement.
— Sameer Hiremath
Additionally, the market is witnessing pricing pressure given the high base of the previous year and aggressive price competition we are seeing from Chinese exporters.
— Sameer Hiremath
In order to mitigate supply chain risk, we have initiated strategic vendor development, diversified our supplier base and implemented backward integration wherever possible.
— Sameer Hiremath
Reason for sharp decline in pharma revenue on sequential basis was on account of reduced demand from CDMO customers on account of higher channel inventory.
— Manoj Mehrotra
However, the market is experiencing intense competition and high costs inventory in the channel pipeline, leading to pricing pressure.
— Manoj Mehrotra
Despite the challenge, we have successfully maintained our market share in legacy products.
— Manoj Mehrotra
Pure play API companies doing complex CDMO and handling difficult chemistry are making 30% EBITDA margins in India.
— Sajal Kapoor
Do you think Hikal can get near such margins in future and if the answer is 20%, or 22%, kind of range being more sustainable operating margins because of the kind of molecules we have, there will always be a China based competition and pricing pressure.
— Sajal Kapoor
The good news is that all our products end demand is strong and from a medium to long term perspective, this business will continue to grow it’s just a little bit of short-term pressure that we are facing for a couple of quarters.
— Sameer Hiremath
Four or five years looks like only we think there’s a premium to the product, but the margins say another story that was my concern.
— Aditya Nahar
It’s currently very difficult to say because of the volatility in the market, after Q2 we will have Q2 conference call we will be formally in a better position to answer that question, currently it’s difficult to talk about that.
— Sameer Hiremath
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Q&A — 15 exchanges
Q
Sir, first question is, if I look at both the, after three decent quarter there is a sequential drop in revenues of both the businesses, can you elaborate how much was volume driven which was due to destocking and how much was realization drop in both the businesses?
Sameer Hiremath
Yes, so for the quarter, if you look at a quarter Y-o-Y, values have grown by as I mentioned too, revenues have grown by 2.4%, volumes have dropped by almost 13% for the quarter compared to the last quarter. If you look at it sequentially, the revenues are down by 29% and volumes are down by 26%. Okay. So, that’s like a very steep drop. I would like to make a comment on that. If you look at historically, our quarter one is always our slowest quarter because we take our annual maintenance shutdowns. And this is a time every year our quarter one is our slowest and we always have a sequential ste
Q
I will ask both questions together and would appreciate the detailed response as far as possible, please. Pure play API companies doing complex CDMO and handling difficult chemistry are making 30% EBITDA margins in India. Do you think Hikal can get near such margins in future and if the answer is 20%, or 22%, kind of range being more sustainable operating margins because of the kind of molecules we have, there will always be a China based competition and pricing pressure. That’s one, in terms of margins, so 30% possible or not, or whether we believe that 20%-22% is the best we could do in futu
Sameer Hiremath
Thanks for that. So, the first question was regarding margins and how we will get, whether you will be in the 20% range or will be closer to the 30% range. If you look at the pharma business for the new projects and the new products, we’re getting closer to the 24%-25% up of EBITDA level, my obviously particular blend because of a legacy for us it may come down to 20% odd as a blended. So, our aim is for any new project, we’re targeting 24%- 25% EBITDA. And obviously, we’ll strive for even better. For the second question was regarding dedicated capacity. We’ve already done that, with a recent
Q
A couple of questions, one is on the debt front, what is the current debt figure that we have, the repayment schedule and are we on track of it and secondly, last couple of years we’ve always seen something or the other which has held our company back where, we’ve had two or three good quarters and something setting us back. So, when can we expect both you could say avenues to fire together, and we see good value being created for stakeholders like us over a good period of time, rather than just getting it in spurts?
Sameer Hiremath
Sure, I take the second question and I’ll hand over the debt question to my CFO to answer. So, you’re right, till December’21 quarter we were showing and unfortunate incident that set us back a few quarters are now from a macro external environmental scenario, but we are using this time to win lot of new business and put in a lot of operational efficiencies in the organization. So, we are quite hopeful that for the second half of this year, we expect both our businesses to start firing and we get back to the FY22 type of business where our both businesses are firing, and we start getting the b
Q
I really wanted to understand better the macro scenario where we have talked about the destocking. I understood, but the competition from China like what is happening in the market and how aggressive are they and why have realizations dropped so much?
Sameer Hiremath
Manoj while you take the pharma part and then I’ll take the crop. The pharma realization, the revenue has dropped more I’ll say because of inventory with our CDMO customers, if we really see the split between API and CDMO, API is constantly recovering. And if you see the gross margin of Q1 and gross margin over all of last year, we are definitely better. And I’m sure as we go along in the year, the gross margins of API business will continue to grow, and volumes will also come back. CDMO yes, there are some challenges because of inventory with customers. And as we mentioned previously, the sec
Q
Sir, as we understand from other agrochemical industry players, that industry should start to see revival from starting 2024. So, what is your outlook for the next 12 to 36 months and what is the update on China plus one strategy?
Sameer Hiremath
Well, we also have the same outlook, second half of this year towards the end of Q3 early Q4 we expect our demand uptick to start. The good news is that all our products end demand is strong and from a medium to long term perspective, this business will continue to grow it’s just a little bit of short-term pressure that we are facing for a couple of quarters. The China plus one strategy is very much intact, and we continue to see new enquiries and new customers coming on board all of them are looking at second option to China. And we are benefiting from that and that will only continue going f
Q
My question is more long term. So, if I take a 10-year sort of operating profit margin figure, you are almost at 25%-26%, today we are closer to 13%-14%. 10 years is a long enough time to sort of look at the company, we have sort of got stuck with a deteriorating operating profit margin profile, whereas our competition on a general level across the board, where it be pharma and the crop protection and as margins are higher than Hikal. So, just wanted to understand your thinking for the next 10 years, are you okay with that 13% operating profit margin, do you expect it to move up. And even on a
Sameer Hiremath
If you look at, I don’t think it’s been 12% to 13%, it’s been there right now, but if you look at till one year ago it was more than 18%-19% margins. We feel comfortable to get the business back to the 19% to 20% margin levels over the next couple of years, which will come back. And we have delivered on that, and actually no reason why with our new contracts and new product mix. Also, a lot of the legacy products we are phasing them out or were replacing them with newer generation products. Our dependency on our old contracts and our old products is coming down year-on-year. And the new margin
Q
I would like to ask a question on the animal health side. What is the status update on the CAPEX?
Sameer Hiremath
Anish, can you take that? So, right now we’ve invested the capital expenditure into the plant, the plant has been built, we are undergoing commissioning, and we have started validation of the product portfolio. So, that’s where we are currently.
Q
I just pretty much had two questions. My first question is, do you think you can reach last year’s top line at least this year considering that there are so many macro headwinds, and stuff like that and we started on a, I know Q1 is seasonally bad. But do you think we can at least reach to 2200 top line this year as well. And secondly you mentioned that our plant utilization was around 70% to 75% for pharma and 65% for crop protection, but you said if your Panoli plant is going to start which has already started, and you’re on the stabilization phase and everything, once that comes into operat
Sameer Hiremath
No, the reason why the utilization is low in quarter one is because of inventory destocking and lower volumes currently, as I mentioned. We expect the volume uptick to start from quarter three onwards. So, the utilization levels of the existing assets will go back to the 80% odd level, which is where we were historically. The new capacities on the animal health and the crop side in our sites which are undergoing commissioning will also start adding to our revenues and our margins from Q3-Q4 onwards. So, that obviously will be a ramp up, but the existing assets which are running at 65% to 75% u
Q
Yes, just a follow up on the CAPEX, Sameer, If you could elaborate how much of CAPEX has already been done in the past two years and how much of it is still lined up and subsequently, the phase of commissioning, as you said probably Q3, Q4 onwards you will see phases of commissioning and gross block being added. So, how much of it is less and how much more you foresee in the future?
Sameer Hiremath
Kuldeep, you want to answer that? Yes. So, we have almost capital WIP as on 30th June close to 400-460 crore. So, large part of these two CAPEX which Anish, Sameer mentioned is already over. The trial quantity will start from quarter three, quarter four. So, that’s why the CAPEX expenditure cash flow is concerned. The large part is already done, we expect another 100 crores-120 crore in next three quarters. You just mentioned some time back that your 200 crore CAPEX lined up for which you need 100 crores of debt and 100 crores in internal? Perfectly all right, we have already done in the first
Q
Just continuing the same previous question, can you give some breakup out of this 460 and additional 100 towards which segment animal how much, other units how much and what is the benchmark, which we need to monitor for performance at some asset down or payback or IRR or something for your benchmark when you started the project if you can share, which we can keep monitoring. Thank you.
Sameer Hiremath
Out of the 460 odd crores about 320 to 330 crores on the crop side and about 140 crores is on the pharma side, that is the breakup of the 460 crores. For the asset turn perspective is where we view, how to monitor this. If you look at the asset turn, the expected asset turnover of about 1.3 to 1.4 depending on the type of asset at peak utilization.
Q
Just one question I have for you and Sammer or maybe Anish can answer. It’s a longer term, so question is, what kind of Hikal five to seven years out would you be truly disappointed to see based on what you aspire to create as on today. So, for example, if your average consolidated margins on a sustainable basis are lower than 25%, and your sales are below 6000 crores by 2030, would you be disappointed?
Sameer Hiremath
Our targets are significantly higher than that. We believe that we can do a bit better than what you’re saying. We are definitely will be disappointed if we don’t achieve that.
Q
Just wanted to understand, we were talking about this 3000-crore kind of aspirational revenue number, let’s say in next two years. So, how much is going to come from the existing asset and for other, what is the potential for the existing gross block and what would be the potential for the new gross block?
Sameer Hiremath
Well existing business, 3000 crore is couple of years still. From the current gross block that we have if we improve our utilizations and change in product mix we should be getting closer to about 2400-2500 crore. So, the new capacity were 500 to 600 crores additional. Okay. So, the new capacity would be then not more than 1.1 time, 1.2 times that is what you’re saying? No, you’re talking about the next two to three years, because peak utilization will still take three to four years for the new capacity. Okay. So, basically, you’re saying in two years with existing and the new gross block, we
Q
Sir, I have two questions. First is, how are we seeing your pricing in the US market end market panning out?
Sameer Hiremath
Okay. Manoj, you want to take that? The US generic market from a pharma perspective is definitely improving and that improves more on the margin side and as I mentioned earlier, because of lower raw material prices. But competition remains intense for US the generic market and that is the reason we are going to other markets also now like Japan, or southeast Asia, Latin America. The object is diversifying your geography portfolio and come to a gross margin of 45% to 50% on a API. Okay, sir understood. And the second question is, can you highlight on your generic business? This was mostly on a
Q
Sir just wanted to check on the raw material price, how has it been trending over the period and do we see it bottoming out?
Sameer Hiremath
Yes, raw material prices has come down but not as much as finished good prices. But there has been some benefit of raw material prices. They have already come down, whether they’ve come down to the bottoming out, only time will tell, but they are already quite low, and we don’t expect raw material prices to go down significantly below where they are today. So, raw material prices are more or less near the lowest, if not the lowest levels right now. So, this raw material pricing will now happen, and on the margins going forward, will we be able to…? Yes, because there will be some margin expans
Q
Thank you. Thank you, everyone for joining our quarterly earnings call and for your continued interest in our company. We appreciate your support as we navigate through the challenges of the global business environment. We are well positioned to benefit from the significant opportunities considering the current shift in the global supply chain and the diverse capability built over the period of the past three decades. We are optimistic that the journey of longer-term sustainable growth and improvement in profitability is still very much intact. As we conclude this call, we want to assure you t
Management
Speaking time
Sameer Hiremath
30
Moderator
17
Pranay Dhelia
10
Kuldeep Jain
9
Amar
5
Manoj Mehrotra
4
Viraj Mehta
4
Aman Vora
3
Aditi Sawant
3
Pradyumna Singhania
3
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Opening remarks
Sameer Hiremath
Thank you. Good evening ladies and gentlemen, and a very warm welcome to all of you. We extend our gratitude to all of the participants for attending our Q1 FY24 Results Conference Call. We trust that you have had the opportunity to view our comprehensive Earnings Release, Investor Presentation, and The Financial Statements for the quarter ended 30th June 2023. These documents can be accessed on both Hikal’s official website and the stock exchanges websites. I am Sameer Hiremath – Managing Director, 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 Animal Health, Kuldeep Jain – our Chief Financial Officer, Manoj Mehrotra – our President (Pharmaceutical Business) and Strategic Growth Advisors – our Investor Relations Advisors. FY24 has started off on a challenging note due to global macro-economic pressures and high channel inventories, leading to lower dema
Manoj Mehrotra
Thank you Sameer and good evening, ladies and gentlemen. I will talk about the financials of the pharma business first. The pharma business reported revenue of Rs.225 crore, EBIT of Rs.10 crores and EBIT margin of 4.4%. Reason for sharp decline in pharma revenue on sequential basis was on account of reduced demand from CDMO customers on account of higher channel inventory. We have witnessed softening of raw material prices which is expected to improve the margin profiles towards the second half of the financial year. Also, we expect the channel inventory situation to normalize, which implies that the worst of the price erosion is likely behind us. In addition to focusing on top line growth, we are also committed to enhancing profitability. We are implementing a variety of measures to enhance cost effectiveness and optimize operational procedures backed by a healthy pipeline of products with better margin profile. On the API business, we are expecting recovery in demand which is expecte
Anish Swadi
Thank you, Manoj and good evening to everyone. First, I would like to discuss the Animal Health business update: The development of multiple APIs under a long-term agreement with one of our global innovator animal health companies, is proceeding as planned. Our new multipurpose facility for animal health is on track and is currently undergoing commissioning. We are on track to provide the validation batches of the products which are under development to our customer during the next few quarters. These validation batches will act as a first step towards commercialization of the product portfolio. We are also in discussions with several new global innovator customers to provide manufacturing and R&D solutions to them for their current and future portfolio needs in the animal health space. Overall, to summarize, the long-term prospects will continue to outweigh the short-term challenges. We’re continuously working on our transformation journey with promising developments in our new produc
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