HIKALNSEQ2 FY24November 8, 2023

Hikal Limited

7,108words
113turns
9analyst exchanges
4executives
Management on call
Sameer Hiremath
MANAGING DIRECTOR – HIKAL LIMITED
Anish Swadi
SENIOR PRESIDENT, BUSINESS
Kuldeep Jain
CHIEF FINANCIAL OFFICER – HIKAL LIMITED
Manoj Mehrotra
HEAD, PHARMACEUTICAL
Key numbers — 40 extracted
rs,
Officer; Mr. Manoj Mehrotra, our President, Pharmaceuticals business; and Strategic Growth Advisors, our Investor Relations Advisors. I hope you have had the chance to go through our earnings release
INR 435 crore
we expect demand to improve by end of this financial year. For Q2 FY '24, our revenue stood at INR 435 crores, EBITDA stood at INR 57 crores, with EBITDA margins at 13.2%, an increase of 73 basis points on
INR 57 crore
y end of this financial year. For Q2 FY '24, our revenue stood at INR 435 crores, EBITDA stood at INR 57 crores, with EBITDA margins at 13.2%, an increase of 73 basis points on a year-on-year basis. On a se
13.2%
Y '24, our revenue stood at INR 435 crores, EBITDA stood at INR 57 crores, with EBITDA margins at 13.2%, an increase of 73 basis points on a year-on-year basis. On a sequential basis, our revenue and E
73 basis point
od at INR 435 crores, EBITDA stood at INR 57 crores, with EBITDA margins at 13.2%, an increase of 73 basis points on a year-on-year basis. On a sequential basis, our revenue and EBITDA grew by 12% and 14%, resp
12%
of 73 basis points on a year-on-year basis. On a sequential basis, our revenue and EBITDA grew by 12% and 14%, respectively. For H1 FY '24, our revenue stood at INR 823 crores, EBITDA stood at INR 10
14%
sis points on a year-on-year basis. On a sequential basis, our revenue and EBITDA grew by 12% and 14%, respectively. For H1 FY '24, our revenue stood at INR 823 crores, EBITDA stood at INR 108 crores
INR 823 crore
is, our revenue and EBITDA grew by 12% and 14%, respectively. For H1 FY '24, our revenue stood at INR 823 crores, EBITDA stood at INR 108 crores, with EBITDA margins at 13.1%, an increase of 323 basis points o
INR 108 crore
by 12% and 14%, respectively. For H1 FY '24, our revenue stood at INR 823 crores, EBITDA stood at INR 108 crores, with EBITDA margins at 13.1%, an increase of 323 basis points on a year-on-year basis. We were
13.1%
'24, our revenue stood at INR 823 crores, EBITDA stood at INR 108 crores, with EBITDA margins at 13.1%, an increase of 323 basis points on a year-on-year basis. We were able to navigate through market
323 basis point
d at INR 823 crores, EBITDA stood at INR 108 crores, with EBITDA margins at 13.1%, an increase of 323 basis points on a year-on-year basis. We were able to navigate through market headwinds on back of cost impro
INR 165 crore
th and profitability. For the Crop Protection business in the Q2 FY '24, we reported a revenue of INR 165 crores, EBIT of INR 22 crores and EBIT margin of 13.3%. For the H1 FY '24, the Crop Protection busine
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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 prices to bottom out, elevated inventory levels to subside and demand likely to pick up at the end of this financial year, resulting in improvement in operational profitability quarter-on-quarter going forward.”
Sameer Hiremath
opening
“However, though we are witnessing price stabilization in certain segments, we expect demand to improve by end of this financial year.”
Sameer Hiremath
opening
“In our Pharma business, while we had a challenging quarter from a margin perspective, we have started to see improvements in volume and expect the trend to continue in the second half of the financial year.”
Sameer Hiremath
opening
“In the own product segment, we continue to witness higher-than-normal inventory levels in the end market, which is expected to improve towards the end of this financial year and the beginning of next year.”
Manoj Mehrotra
opening
“Going forward, we prioritize maximizing API sales by increasing our customer share of wallet, investing in new markets, and expanding our market share in specific APIs, where we have advantages in terms of backward integrations, scale, and technology.”
Manoj Mehrotra
opening
“However, looking ahead, we anticipate the normalization of the CDMO industry towards end of FY '24.”
Manoj Mehrotra
opening
“We maintain a robust pipeline of project in the CDMO space and actively pursue additional opportunities that have arisen in recent quarters.”
Manoj Mehrotra
opening
“We expect comparatively better second half of the year, more so in Q4 as CDMO demand revives.”
Anish Swadi
opening
“We are on track to provide validation batches of several new products under development to our customer over a period of the next 4 to 6 quarters.”
Risks & concerns — 4 flagged
To navigate the impact of market headwinds, we've implemented a range of strategic initiatives aimed at cost improvement, optimizing our supply chain, streamlining procurement, digitization and enhancing productivity through automation.
— Sameer Hiremath
So we're spreading our business and the customer reliance is going down, and we're managing our risk with the reliance of products and customers coming down.
— Sameer Hiremath
Going forward, because they are in clinical stage it's very difficult to predict how will be the scale up.
— Manoj Mehrotra
And sir, in the Crop Protection, given that it's been a year-over-year basis almost 39%, 40% decline.
— Ankeet Pandya
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Q&A — 9 exchanges
Q
Has the number of CDMO customer audits changed meaningfully over the last 3 years? And can you share some numbers, like how many annual audits Hikal was getting 3 years ago versus today, please?
Sameer Hiremath
Manoj, you want to take that? Yes. So in our CDMO business, we are regularly audited and visited by various customers. I don't have an exact number at this point of time, but we have seen several new customers who have come in the last one year. There was a gap during the COVID period. But in 2023, several new customers have come and visited us and audited us. But as we mentioned, the CDMO business is a long-term business, and it takes time to scale up. Yes, Manoj, I was interested in, let's say, 2019, before COVID, you were getting x number of audits annually. Where is that number today, ball
Q
Just a couple of observations on the numbers. This quarter, ROE has been even below the cost of capital, whereas our margins on the Crop Protection as well as on the API are well below the industry average. Now being long-term investors, we've been expecting the margins to improve, and that's what the commentary has been in the past. But they just refuse to tick away. At this time, I would say as a long-term investor, at least some way or the other, we need some answers, how do we expect improvement on these counts?
Sameer Hiremath
So, I think the sales have been depressed on the Crop side. If you look at, the sales have come down quite considerably. And the product mix on the Pharma side has been predominantly on the generics versus the CDMO. So that was the reason why the margins have been subdued. We expect H2 and the new products which are kicking in and all the CDMO part to come back from Q3-Q4. And as I have been saying, we expect quarter-on-quarter improvement. And towards the end of the year, we'll get back towards steady state. Product mix change will bring in a significant change in the margins going forward. A
Q
Sameer, one question that we as investors are not able to understand is, if you look at last commentary of last year, 1.5 years -- 1 year actually, of not only you but multiple players across the segment talking about inventory destocking and prices going down. But the point is that most of those players also saw significant uptick when the prices went up, and also the growth was higher in volume and inventory stocking was happening, right? Like almost all-on an average, agrochemical exporters or API exporters, revenue went up between 50% and 70%. But our revenues also didn't grow. Like our re
Sameer Hiremath
No. Actually, if you look at our crop revenue from FY '22 to FY '23, there was a significant upside. So we had benefited from that upside between FY '22 and FY '23. If you look at our sales in FY '22, our crop sales grew from INR660 crores in FY '22 to INR900 crores between FY '21 to FY '23. So we grew almost INR300 crores on the top line in those 2 years. So there was a significant uptick, as you said, during the good years of the crop business. We did benefit significantly from that. No, no, I meant as an overall company. Our revenues, Sameer, went up by like INR400 crores in 3 years. And if
Q
I have 2 questions. The first is how is a new business acquisition happening? Are you winning any new contracts?
Sameer Hiremath
Sorry, can you repeat that question? I couldn't hear you. What was it? Yes, sure. How is the new business acquisition happening? Are you winning any new contracts? Yes. I think the number of new inquiries have increased tremendously. We have several new inquiries and resulting in a large number of projects which are under development. And the customer traction has increased, the number of audits, as Manoj mentioned, has gone up at 50%. Same thing on the crop side. A lot of that is resulting in new inquiries coming in, but also onboarding new customers from new geographies. So we're spreading o
Q
Sir, to the previous participant, you answered that will be -- you should expect significant uptick in the margins. Can you please give us a ballpark number where we should expect the EBITDA margin for H2 and obviously for FY '25 also.
Sameer Hiremath
Actually, because of the volatility, we are not giving any forward-looking statements right now. I'm not giving any estimates. Sorry, I won't be able give to give you any numbers right now. Okay. If we like keep the volatility part, volatility thing aside for a while and depend on the -- as you said that the CDMO proportion would increase in H2. So accordingly, that should add like 2-3% of EBITDA? Can we go by that figure? I'm not going to give you numbers per se. I'm not giving any forward statements. It's a very volatile environment.
Q
Are you seeing any traction from European, U.S. companies’ vis-a-vis Chinese political situation?
Sameer Hiremath
Yes. I think the American companies are moving faster away from China than the European companies and because there's a political decision taken to get out of China and move away as much as possible. Europeans are doing it, but not as fast as the Americans. And the company will start to benefit in both segment, Crop, and Pharma. There is a lot of customer interest and customer inquiries and a lot of delegations of companies coming and visiting Indian suppliers for new businesses and new opportunities.
Q
Sir, my first question is on the Pharma CDMO side. So, if you can talk a bit more about what kind of product pipeline we have, how many molecules, split between generic and NCE. And NCE, what stage? Some granularity and that would be very helpful.
Sameer Hiremath
Manoj, can you answer that? Yes. Yes. So we had mentioned in my opening statement that we have 2 molecules which are the Phase III, which are very promising. We have supplied some quantities in FY '23 and will supply in FY '24 also. Going forward, because they are in clinical stage it's very difficult to predict how will be the scale up. But we are -- our customers are very confident that they will make it to the market and they will definitely be big products for us. There are several others which are in Phase I, Phase II, but that is a little too early for us to predict. And so it is better
Q
Sir, first question on the gross margin front. So in the current quarter, we have reported of 51% of our gross margin versus 56.1% in Q1 FY '24. And historically, for the last around 5, 6 quarters, you have been at the range of 36% to 48% gross margin. So just wanted to get some clarity on that front. Did Q1 had so many one-offs item in the numbers? And how should we look at for the second half and on a steady-state business on the gross margin?
Sameer Hiremath
The numbers don't seem to be accurate, what you mentioned, on the gross margin side. Sorry. I didn't get you, sir. You said the number that you mentioned, don't seem to be the correct numbers that you mentioned on the gross margin. Our overall contribution margin was about 46% as a company and not 51%, what you mentioned. I guess I'll check on that. So on the next second question on the volume front, volume side, how has been the growth on volume front for both the Pharma and Crop Protection? If you look at the volume front for H1, if you look at for the Crop Protection business, the volumes h
Q
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 global business environment. Our vision is to become a sustainable company that prioritizes technology, remains dedicated to effective execution, and maintains a strong customer-centric approach, ensuring best-in-class service in all our business sectors. We are strategically positioned to leverage the substantial opportunities presented by the ongoing global shift of supply chains to India. As we conclude this call, we want to assur
Management
Speaking time
Sameer Hiremath
34
Pranay Dhelia
12
Dhwanil Desai
12
Moderator
11
Manoj Mehrotra
9
Kuldeep Jain
8
Sajal Kapoor
7
Anish Swadi
6
Viraj Mehta
4
Ankeet Pandya
4
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Opening remarks
Sameer Hiremath
Thank you very much. Ladies and gentlemen, good evening, and a warm welcome to all of you. We extend our gratitude to all of you for participating in our Q2 and H1 FY '24 Results Conference Call. I am Sameer Hiremath, Managing Director, Hikal Limited, and I will be leading the discussion and presenting the financial results. On this call, I have with me Mr. Anish Swadi, Senior President, Business Transformation; Mr. Kuldeep Jain, our Chief Financial Officer; Mr. Manoj Mehrotra, our President, Pharmaceuticals business; and Strategic Growth Advisors, our Investor Relations Advisors. I hope you have had the chance to go through our earnings release, investor presentation and the financial statement for the quarter and half year ended 30th September 2023. These are available on Hikal's official website and the stock exchanges’ website. The global chemical industry continues to experience a challenging period with prices declining across product segments, coupled with the high channel inven
Manoj Mehrotra
Thank you, Sameer, and good evening, ladies, and gentlemen. I'll start with the financials for Q2 FY '24. Pharma business reported revenue of INR 270 crores, EBIT of INR 12 crores and EBIT margin of 4.3%. For H1 FY '24 Pharma business reported revenue of INR 495 crores, EBIT of INR 22 crores and EBIT margin of 4.4%. On a sequential basis for Q2, there is revival in both revenues and EBIT, which is up 20% and 22%, respectively. We are witnessing good traction in Pharma business aided by revival of API segment. On a year-on-year basis, certain raw material prices have decreased. This, along with the implementation of a variety of measures to enhance cost optimization and operational efficiencies, has led to better profitability. In the API segment, we are witnessing a sequential revival in our API business. We have been able to successfully maintain our market share in legacy products despite competition. Our efforts to penetrate new regions like Japan, Middle East, Latin America are yie
Anish Swadi
Thank you, Manoj. I'll start off with an update to the Animal Health business. So, the development of multiple APIs under a long-term contract with an innovator Animal Health company is on track. We have completed the construction of our multipurpose Animal Health facility at Panoli, and the commissioning of the asset is currently underway. We are on track to provide validation batches of several new products under development to our customer over a period of the next 4 to 6 quarters. These validation batches will act as a first step towards registration and then towards commercialization of the products. We are currently in discussions with several additional innovator customers to provide a variety of services, ranging from R&D to manufacturing, for their current and future portfolio needs. Our extensive manufacturing networks and deep engagements with global innovators, along with niche customers, positions us as the partner of choice in this field. By offering end-to-end support an
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