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Hikal Ltd
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Ladies and gentlemen, good day, and welcome to Hikal Limited Q1 FY '23 Earnings Conference Call.
This conference call may contain forward-looking statements about the company, which are based on the 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.
[Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Sameer Hiremath, Managing Director, Hikal Limited. Thank you, and over to you, sir.
Thank you. Ladies and gentlemen, a very good afternoon to all of you, and thank you very much for joining us today for our Q1 FY '23 earnings call. I am Sameer Hiremath, Managing Director, Hikal Limited. Alongside 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; Vimal Kulshrestha, our President, Crop Protection Business; and Strategic Growth Advisors, our Investor Relations advisors.
We trust that you and your family are safe and well. I hope you had the chance to go through our earnings release presentation and the financial figures for the quarter. These are available on our website and the stock exchanges.
I would like to start this call with an update on the unfortunate event -- incident which occurred at Surat's Sachin GIDC on 6th January 2022. This legal case is still sub-judice and as things stands, Hikal is in a very strong legal position. As a result of the Sachin GIDC incident, the [ GPCB ] had given a closure notice to the Taloja factory. We had filed a writ petition and the Honorable Bombay High Court has decided in company's flavor to resume operations at the Taloja site. As on date, the company operations are normalized and all plants are fully operational.
I would like to [Technical Difficulty]. As indicated in our previous call, there will be a step-wise recovery over the next 3 quarters. Some of the key points for this quarter gone by. Supply chain is still an ongoing challenge for the sector owing to the geopolitical situation, ongoing Russia and Ukraine conflict and a lockdown in China. These factors have impacted the margins as expected and as outlined in the previous calls, resulting in steep increase in the cost of raw materials, solvent, utilities and energy. Also, the improved oil prices have significantly impacted freight and logistics costs.
We are now seeing the prices of some of our key raw materials softening and we expect this trend to continue in the following months. We expect this reduction of raw material prices to partly benefit in quarter 2. However, the majority benefit should accrue from quarter 3 onwards. We continue to create alternative local supplier base to minimize supply chain disruptions in the market. We are also investing in our R&D capabilities in order to handle increase in inquiry in both our businesses.
Talking about the financial numbers for this quarter. The top line stood at INR 379 crores against INR 457 crores in the same period last year, recording a decrease of 17% year-on-year, predominantly due to inventory correction by a pharma customer and a disruption in operation for the Crop Protection business. The margin pressure highlighted earlier, led to a contraction EBITDA to INR 23 crores, primarily due to lower sales and product mix, increase in cost of raw materials, energy and solvents. Further, under-absorption of fixed costs during the quarter also reduced the EBITDA.
Lower operating profits and increased depreciation on account of asset additions and marginal increase in finance cost in view of interest rate hike resulted in a profit after tax loss of INR 8.9 crores. Hikal's long term credit rating is maintained at A+ by ICRA. With a strong pipeline of inquiries in both our businesses and resumption of operations at our Taloja site, we expect a step-wise recovery in each of the coming quarters.
Now I would like to hand over to our President, Pharmaceuticals, Manoj Mehrotra, to take us through the performance of the Pharmaceutical division.
Thank you, Sameer, and good afternoon, ladies and gentlemen. I'll start with the financial update. The pharma business experienced degrowth in revenue of 18% with INR 224 crores of revenue in quarter 1 FY '23 versus INR 274 crores of revenue in Q1 FY '22. This degrowth is due to the temporary demand softening for key products and channel inventory correction by customers, which will, by natural progression, correct in the upcoming quarters. The EBIT of the division stood at a negative INR 8 crores. Fall in EBIT is attributed to lower sales, significant increase in input costs coupled with lag in passing the increased cost to the customers, and lower absorption of fixed costs.
On the positive side, our business excellence initiatives have resulted in reduction of costs, which has helped in partially absorbing the impact of higher input prices. On the business vertical update, on the API side, we continue to add several new customers and strengthen our presence in new geographies of LatAm and Middle East. Our new product launches in antidiabetic therapy areas have witnessed increased customer traction over last few quarters. With the softening of raw material and solvent prices, we expect sales and profitability to improve in upcoming quarters. We have about 10 products in the pipeline at various pages of development and plan to launch 3 to 4 products in FY '23.
Our CDMO business continues to witness increased number of inquiries. We aim to increase the win rate percentage to fuel the profitable growth. We have received an order for validation quantities for 2 intermediates for a COVID drug from a global innovator company. We have also received order from a global innovator for an intermediate for a new chemical entity, which is in Phase IIb of its clinical trial. Our future pipeline for CDMO business remains robust with several new opportunities.
On Animal Health, we worked with several of the leading animal health companies and these relationships have been strengthened over time. We have commenced process development for a number of active ingredients that are part of the multiyear animal health project with a leading global innovator. As guided in the previous call, we intend to complete the animal health plant commencing by the end of FY '23 and start validating products in the following year.
The future outlook, we have a healthy pipeline of CDMO projects, which will add to the profitable growth and gain in business mix in the near future. We are focusing on enhancing customer engagement through further intensifying our key account management, which will also lead to increased share of customers' volume. We continue to work on cost improvement programs to lower production costs and improve overall profitability. We have also started experiencing softening of prices for some of our key raw materials, which would reflect an improved profitability in the coming quarters. Our focus remains on executing our pipeline, which will result in profitable growth.
We mentioned that FY '23 will be a year of consolidation where we would rebuilt our business despite market pressure constraints and would deliver improved results in the second half of the year.
Now I will hand over to Vimal for the Crop Protection business update.
Thank you, Manoj, and good afternoon, all the participants of this earning call. The Crop business has recorded revenue degrowth of 15% year-on-year with INR 155 crore total revenue in Q1 FY '23 versus INR 183 crore in Q1 FY '22. Decrease in sales on account of disruption in operations, which we tried to minimize by undertaking the annual preventive maintenance at Taloja facility. The EBIT for the division was INR 10 crore in Q1 FY '23, primarily on the back of lower sales, higher input cost of raw material, solvents, energy as well as lower absorption of fixed costs.
Demand continues to remain strong in the domestic market, and there are also indications from our existing global customers for a higher forecast next financial year. We are also witnessing rising inquiries from existing as well as new customers for potential collaborations. Construction of our new multipurpose plant is on track at Panoli. We expect to commission it in second half of FY '23.
Business vertical updates for Crop division. In own product business, demand of existing products remain intact from our key customers, and demand supply scenario remains favorable in the domestic market. We are getting good traction of new fungicides in the pipeline from customers. We are in a process of strengthening our presence in Europe and Latin America. We also continue to explore new product opportunities in the business. Presently, we are working on 5, 6 products and are at different stages of development.
In CDMO business, our CDMO business continue to receive new inquiries from new and existing customers. We are intensifying our efforts to strengthen the relationship with customers in Europe, U.S. and Japan by further integrating key account management. Our future plans, as our Taloja operations has resumed, efforts are focused towards covering the production loss of first quarter to best extent over the next 3 quarters. To ensure stable availability and better pricing of [ CRM ], we embarked upon the strategic supplier base development, derisking the supply chain from China through backward integration.
Now I would like to hand over to Anish for overall business outlook.
Thank you, Vimal. As Sameer, Manoj and Vimal have talked about our business and performance over the previous quarter and upcoming business pipeline for each of the businesses, which continues to be robust, I would like to reiterate the same message and conviction. FY '23 is going to be a year of consolidation to prepare for accelerated growth for the company. We have taken some major headwinds over the past 2 quarters; however, we have been resilient through it all. During these challenging times, we remain committed and maintain transparency with all our stakeholders, which has helped us tide over these challenging times.
I would like to reiterate that we have not lost a single customer or contract in any of our businesses during this period. While we have seen a dip in performance this quarter, we expect a step-wise quarter-on-quarter sales improvement with expectation of a normalized sales quarter from Q3 onwards. We are observing softening of raw material prices over time with greater strategic planning and execution, we are ensuring higher throughput and improved costs. Pressure in Q1 was expected to be high, as indicated, but we are confident of achieving an improvement in profitability quarter-on-quarter, starting Q2.
Our transformation journey Pinnacle is witnessing good momentum across both businesses. With the help of our consulting partners, we have taken various initiatives across the company to make Hikal grow from good to great. Over the last several quarters, we have focused our efforts on cost improvement programs to absorb some of the impacts of higher input costs. At the same time, we continue the initiatives of the strategic builds for each of our businesses for future growth. This will help reach our bold aspirations of driving profitable as well as sustainable growth as our long-term vision remains intact.
With this, we will now open the floor to the question and answers. Thank you.
[Operator Instructions] Our first question is from the line of Ankit Gupta from Bamboo Capital.
So...
Request you to use the handset, there's a lot of echo.
Sure. Is it better now?
Yes.
First of all, given how the kind of degrowth we have seen in the first quarter, do you think we'll be able to at least match the revenue that we had reported in FY '22 of around INR 1,900 crores?
Yes, I don't see that as an issue. I think the next 3 quarters, we'll make that -- make up the lost revenue from quarter 1, which should be well within -- well above last year's numbers.
Sure. And Sameer, given the kind of consolidation that we've seen in our revenues in FY '23, what kind of growth aspirations do we have for FY '24 and '25, given the kind of base we've set now and the kind of CapEx we have had and with the animal health supplies will also start from FY '25 onwards? So what kind of growth are we aspiring for '24 and '25?
So we're expecting going forward in the high teens, growth will accelerate into the high teens.
Okay. But given we had 0 growth during FY '23, don't you think the growth should have been higher because we have been aspiring for high-teen growth for past so many years and the kind of CapEx that we have taken is also pretty -- almost double than what we had already been doing in -- prior to FY '20, and we have been doing quite a bit of CapEx. So don't you think that growth should be higher for '24 and '25?
See, the plant should be ready by end of this year, right, by end of [ FY '23 ], the 2 big CapEx that we're doing. So next step will be the ramp-up of these 2 plants. Full utilization of plants will start from FY '24 or '24-'25. So next year, there will be growth, and the big jump will come in FY '25 when the full utilization of these plants will start.
Sure, sure. And on the Taloja plant, is the plant operating now at normal capacity? Or how are things on that plant?
Operating at absolutely normal capacity. This entire quarter will have the benefit of Taloja plant full operations.
Sure, sure. And, Sameer, given how things are shaping up on both pharma and agro side, if you can talk about the kind of product launches that we have planned for '23, '24 and '25 on both the segments?
So I think, over to the businesses, I think they have the details. Manoj, if you can talk...
On the Pharma side, we have around 10 products in development in the pipeline in various stages. We will launch 3 to 4 API products every year going forward, starting in FY '23. But as you know that you start a little slow, it takes 2 to 3 years for the revenues to build. But the run rate of 3 to 4 products, APIs every year will continue.
But out of these 10 products, how many will be CDMO and how many will be under our own products?
When I say products, I imply own products, which are own APIs or Hikal-owned [ DMA ]. On the CDMO side, we talk in terms of projects. So we will definitely have 2 to 3 projects going commercial every year. Like in the case of the animal health multiyear contract, what we have signed, that has [Technical Difficulty] product and earlier we used to do 4 to 5 out of those. And going forward, those will -- actually have 10 products in FY '25.
Sure, sure. And on agro side?
In the agro side, we'll be adding in our own products, 3 to 4 new products. And the CDMO side, we expect at least 5 to 6 new projects by FY '25.
Okay. Okay. Okay. And one last question is on the margin front. This year has been exception for us. So prior to the kind of disruptions we have seen over the past 2 quarters, we have maintained that we are aspiring to improve our EBITDA margins by 1% to 1.5%, 2% every year from what our base was in FY '22 or around 19%, 19.5%. So on the margin front, how do you see things panning out for us for FY '24 and '25, let's forget about '23, given the kind of disruptions we are seeing?
[Technical Difficulty] FY '22 as a base -- forget FY '23 as it's a year consolidation. Base for FY '22, we expect 50 to 100 basis points improvement year-on-year on the margins.
So let's say, from FY '25, can we aspire to touch 22%, 23% kind of EBITDA margins or it will be lower?
Yes. I mean if you add 50 to 100 basis points over [Technical Difficulty] should work to approximately the same number, yes.
[Operator Instructions] We have the next question from the line of Siddhartha Grover from Equirus PMS.
This is Viraj here. Just a couple of questions from my side. The COVID drug that you talked about, I mean, is it -- I mean, is the size of the drug in the range of [ 50 million to 100 million ]? Because I mean, essentially, the talk was that, that drug has been -- I mean the Merck drug has been kind of slowed down in terms of production for all the Indian producers. Is this the same drug we are talking about?
No, we are not authorized to disclose the COVID drug which is there because there we have confidentiality agreement. So at this point, our objective is to get into the supply chain of the innovator. And going forward, I'm sure this will have other indications as well. So -- and once we start a relationship, in the case for COVID also and in the case for other indications, we have to really wait and watch.
Absolutely. And for the large CapEx that we have done, Sameer, what's the kind of top line? Earlier we were talking about close to INR 3,000 crore post the whole CapEx is over. Is that still the same number that we think we can do on the current capacity that we have?
Currently, I mean, we're investing about INR 300 crores to INR 400 crores of CapEx every year, right? So asset turn of about 1.5 for the new CapEx, with our baseline last year is INR 2,000 crore and you do our asset turn of 1.5 of the new CapEx, it adds up to about INR 3,000 crore-plus.
So is the current capacity base revenue only INR 2,000 crores, that's the max we can do? I thought you were running at a slightly lower utilization.
Maybe little bit of tweaking and little bit operational excellence improvements, 10%, 15% we can do. So we've already exercised it, 10% to 15%, but the CapEx that will start kicking in from end of this year will give us the benefits from next year and FY '25 and FY '26 will be the peak realization.
Okay. And if you, sir, look at the commentary of some of the other large agrochemical players, we are seeing -- I mean, at least they are indicating that the amount of inquiries that they are seeing is close to 1.5 to 2x of last year and last year itself was a 2x over the year before. So is that the kind of traction we are also seeing?
Yes, yes. So we are also seeing the same traction, and we are also getting good inquiries from our existing customers as well as from new customers.
Right. And with the energy prices in the West being significantly higher, do you think some of these large MNC companies who have plants in Europe might look at shifting some of the lower-end products because we are now just far more cost competitive even in conversion costs compared to them? Earlier we were competitive in terms of manpower cost, but now even conversion cost seems to be far lower for us compared to Europeans.
Yes. Absolutely, we expect so. We expect that some of this capacity will shift to India.
Our next question is from the line of [ Ranvir Singh ] from Edelweiss.
Sir, just on Taloja facility, last month, we received that court's order and things are now operational. But when customers -- we retain customer demand is intact, then why that will take 3 quarters to normalize revenue level?
See that is on the basis of capacity available in the plant. So you can increase, I mean, some production in some -- one quarter. So you cannot make up all the loss in one quarter. I hope this clarifies your question.
Okay. So the past loss would be covered in second quarter, and then we will have additional sales, that's what you are saying.
Yes, yes.
And like the guidance you are giving, for FY '23, we are expecting to end up at flattish revenue, right?
Compared to last year, yes. It's a year of consolidation.
So for INR 1,900 crore kind of revenue, the rest of 3 quarters should have about INR 500 crore kind of sales. So additional INR 100 crore and maybe because this year is staggered, so end of quarter -- the last quarter should have some higher run rate than historically we have been receiving. So what will drive that?
Your first question was whether we're going to achieve last year's number, right? Is that your first question?
Yes, yes, that is the question.
We achieve the [indiscernible] on regular run rate by quarter 3, quarter 4. So step-wise, quarter 2 is better than quarter 1, quarter 3 is better than quarter 2, 3, 2 and so on and so forth. So one is that you're only talking about the crops business. So the pharma also has witnessed a slowdown in quarter 1. And that slowdown is now reducing. The channel inventory has already been eaten up. So we expect sales to start normalizing by end of quarter 2 itself and the full benefit will come from quarter 3 and quarter 4. So put these 2 together and the Taloja plant and agro operations running at full steam, we see the plant back on track -- this is back on track from next quarter onwards. So we see huge improvement this quarter as well.
Okay. And the contribution of Panoli will start from FY '24 -- first quarter FY '24 moving forward?
Yes, FY '24 first quarter, that's right.
The next question is from the line of Pranay Dhelia from Panchatantra Advisors LLP.
A couple of quick ones -- questions. How much of current debt do we carry on our books?
Yes, Kuldeep, my CFO can answer that.
We have INR 680 crore net debt today.
That's all term loan?
No, no. Say, 50% in term loan and 50% in the working capital loans. So INR 400 crore, INR 300 crore net debt.
Secondly, we've seen a sharp increase in interest costs. What I can make out is from the last call, you had guided that your debt equity ratio was 0.59 and cost of funds was 6.15. How much has that changed?
It has changed in the first quarter, it has changed minutely, just 18 basis points, but we expect to increase by quarter 2, quarter 3 more.
By only 18 basis points change and your interest cost has gone up substantially by almost 50%. So if your cost of funds has not increased so much, how can your interest cost grow so much?
It includes some reevaluation loss of the notional reevaluation loss of the loans which we have taken in the foreign currencies.
But that is not mentioned in your [indiscernible] accounts. It would have been prudent to mention it so that we can judge. It's sending very wrong signal to shareholders. You're thinking that you're [indiscernible] and we'll shut up all of a sudden in spite of our credit rating being maintained. And secondly, on the valuation part, Mr. Hiremath, was that after looking at the fall in share price? Are the promoters considering any creeping acquisition to rest the value of the company? Hello? Am I audible?
Yes, sir. It seems we have lost the management line. Pranay, we would request you to please be on the line while we reconnect them. [Operator Instructions]
Yes. Mr. Sameer, on the second question, looking at the steep fall in share price, do we -- can we expect the promoters to do some creeping over the company to announce some buyback to rest the concern amongst the shareholders?
Pranay, I can't give any comment on that, yes.
The next question is from the line of Hiten Boricha from Joindre Capital.
Hello. am I audible?
Yes, you're audible.
So my first question is, can you quantify the production loss which has happened in Taloja plant in revenue and EBITDA, which happened in this quarter? What would be the quantification for that?
The revenue loss was around INR 50 crore for the quarter, and that has impacted the contribution by close to INR 20 crores.
INR 50 crores in revenue and INR 20 crores in EBITDA, right?
That's right -- EBIT, EBIT.
EBIT, yes. Okay. Okay. Okay. Sir, my next question is on this revenue guidance you have given [ that ] we will definitely do INR 1,900 crore, INR 1,950 crore kind of revenue in this year itself. So we are expecting like INR 500 crore kind of normal revenue from next quarter itself, from Q2 itself. I just wanted to understand this on the margin perspective, are we expecting double-digit kind of margin from next quarter itself, let's say, 10% around?
From the margin perspective, definitely double-digit margin, and there's a step-wise increase in revenues to get towards the run rate of INR 500 crore plus per quarter. Average for 3 quarters will be above INR 500 crore.
Okay. Okay. So there will be 10% kind of margin from next quarter itself, right?
I guess, we'll do better than that, yes.
Okay. Okay. Okay. And sir, my last question is on the Taloja plant which [Technical Difficulty], you mentioned it will be starting in second half, right?
No, no, it's already started from early July.
Early July? My question is on the MPP plant -- sorry, Panoli plant...
Panoli plant is starting by end of this year.
End of this year? And what kind of revenue we are expecting from that plant, sir?
When at peak, it will be about INR 200 crores to INR 300 crores -- about INR 300 crores at peak after 3 years of commissioning.
So the peak revenue number will come in FY '25, if I'm not wrong, right?
FY '26.
FY '26.
Because [ it will have some ] reevaluation, approvals. But the product -- it's a multi-process plant, so there's multiple products in that plant.
So the margins for these products will be similar to the company's current margin? Or it will be lower as funding of the CapEx is also done by the partner itself so?
See, as I've been mentioning on all the previous calls, any new project that we take, the margin profile is significantly higher than our historical margins. Historical EBITDA margin is about 18% to 19%. All the new projects and new product selection is done with a higher margin profile, well in excess of 20%. Asset turnover itself also, for the new projects, are closer towards 1.5. These are the basis of selection of new molecules and new projects.
[Operator Instructions] The next question is from the line of Jayesh Parekh from JMP Capital.
My question is for Sameer bhai. Sameer bhai, kindly take my question in the right spirit. If you see last 10 years -- 9 to 10 years drop of Hikal, in terms of revenue, we have just grown from INR 700 crore, INR 800 crore to INR 1,900 crore. And in terms of operating margin, we have never crossed 20% operating margin in last 5, 6 years. Only in 2012, '13, we were 26%, 28% and then we have never seen those kind of margin. And my second point was that our operating cash generation has just gone up -- cash from our operation has just gone up from INR 150 crore to about INR 290 crore from March 2022. So my humble request is that when in last -- at least, if not last 10 years, but in last 5 years, the chemical sector in India has performed very well, when you see our peers into crop science business as well as pharmaceutical business. So can we find out what exactly is wrong with our beautiful organization with such a beautiful plant, that we are not able to grow in line with what is happening in the industry?
Well, it's a very valid question. And we are already -- we are even more concerned than you are about this point. So we've done several things. A, we relooked at our entire operating model. We've got a transformation program that we started last year called Pinnacle. We are looking at growing our business faster in line with our peers to improve our margins, also in line with our peers. So all the new projects that I mentioned to the earlier speakers is for a much higher margin profile than within the larger contracts. We're putting in significant steel in the ground and investing. So I think, yes, in the last 5 years, maybe we have not grown as fast as our competitors, but you will see, in the next 5 years, we are going to catch up and we'll be playing in the same level as the top 2, 3 in each of our fields. So the idea is to grow and accelerate growth in the next 3 to 5 years, significantly and the historical growth will be thing of the past.
Our next question is from the line of Aditya Khemka from InCred Asset Management.
Sir, if I look at your Taloja plant closure, so just I'm a bit confused, does the Taloja plant only contribute to Crop Protection business or does it contribute to the Pharmaceutical business as well?
Only the Crop Protection business.
Okay. So then when it comes to the -- and previously, you had said that Taloja contributes 15% of revenue. So was that 15% of total revenue or 15% are from the Crop Protection revenue?
15% of total company revenue -- Hikal revenue.
15% of Hikal revenue. So that would be roughly 30% of Crop Production revenue.
Yes.
Yes. I mean, given that the [ broadness ] of the crop revenue...
Yes, 30%, 35%, yes.
Yes. Okay. Got it. Got it. That's understood. And now on the Taloja plant itself, so given that we have not been able to supply our customers for one entire quarter, and obviously, they must have consumed the inventory that would have been lying with them, I would have thought that in the second quarter, we would run the plant double shift and sort of fill up their inventory as well as provide them enough material to continue supply this quarter. But from your statements, what I understand is, we are going to restock the inventory not immediately in one quarter, but over the next 2, 3 quarters in a slowish manner. Could you sort of help me understand why that is the path we have taken?
I'm Vimal Kulshrestha. So this plant is a continuous plant, it, as such, runs in 3 shifts. And based on the capacity available in each quarter, we will make up the loss of quarter 1. It is not possible to be done in one quarter.
Understood. That helps. It's a continuous plant, I was not aware of it.
It's a continuous plant.
Okay. Got it. Got it. So yes, in that case, it will just totally make sense. Second question on the pharma side. So we understand the decline in the Crop Protection business is largely now due to the Taloja closure and therefore, should normalize when Taloja normalizes, which you are saying this happened. But on the pharma side, you're basically saying that the customers have some inventory and that inventory is basically getting depleted as they are not taking up fresh stock and then with the depletion of inventory, get more orders. What I understand is -- could you help us with the product concentration on the pharma side? Our largest product, what percentage of revenue does it account for? And this question is for FY '22. And then for that product, what is the situation in Q1 FY '23?
So our largest product is around 30%. And what -- we have seen that overall, not only this product, but other products, including the CDMO products, they had excess inventory with them, which were corrected in Q1. By the very definition of inventory, long-term demand is going to come back, and we've already started seeing positive outlook from the month of July, August. And we will get back to a normal sales in the next 3 quarters. That's what Sameer also mentioned in the past.
Yes, I get that. So this product, which was 30% of the pharma revenue in FY '22, in 1Q '23, did it maintain 30% contribution to top line? Or was it significantly lower?
See, our intention is to, long term, bring it down to 20%. And this year, we'll have to see whether from 30% will it go to 25% to 28% in that range. The long-term prospect, getting really down to 20% and lot of new products with higher margins, which will improve the profitability trajectory of the pharma business.
And this is your own product, not a CDMO product, right, the 30% contribution product?
That is our own product.
It is an own product. And why do you see contribution coming down? I mean, obviously, one reason would be the growth of other products and launch of new products. But in absolute terms, it seems that this product is declining, right? So any reason why the product -- I mean, again, inventory being one part, but is there an element of market share loss or competitor positioning in terms of better cost or pricing? Could you help us with that?
No. See, the long-term prospect of the product is good. We will maintain our market share. But since this is a mature product, the newer products will grow faster, and this product will have a slower growth. So on actual terms, this product will continue to grow. Maybe it will grow at 5%, 7%, but others will grow at greater than 15%. So [Technical Difficulty] weightage will come down.
Fantastic. That helps. Just one last question from my side. When we say CDMO, does it mean that our customers are innovators, and we are -- and they have patented products or innovative products which have just gone off patent or maybe off patent already? Or do we mean it's products which may be innovator or generic, but we are developing the product?
No. When we say CDMO, it means we supply to innovators. They may be patented, [ they attempt to ] patent it or new chemical entities, which are [Technical Difficulty] all also part of life cycle management for the innovator company. And they're -- either they can be APIs or they can be key drug entities. We also had to custom [indiscernible] where they work on Phase I, Phase II kind of molecules, which will get launched in FY '25 or '26 onwards. And we have a healthy pipeline of these Phase 1, Phase II kind of molecules also. In fact, we have said that we have signed the contracts. For Phase II we launched also with a global innovator company. In the next 3 to 4 years, it should get commercial interest.
Fair enough. Sir, just an observation on that. So when we look at other CDMO companies, right, which are majority CDMO contribution, their gross margin tends to be closer to 70% and EBITDA tends to be closer to 30%, at least for the CDMO segment of the business, and then they do the generic or the own product division, where, obviously, numbers are lower and therefore, what we get to see is the consol number, which is sort of the average between the CDMO and the generic. In your situation, if I assume similar numbers for CDMO, 70-30, which really doesn't seem to be the case, maybe it's even lower than that, is the generic or our own product segment in both Crop Protection and Pharma really like below 10% EBIT or EBITDA margin business that we are running?
No, no, no. What I will say that in our CDMO business, we have some life cycle management products, which may not generate this kind of high contribution margins of 70%. But the [ NPEs ] or the new development, which is happening, those will definitely have higher margins. So as of now, definitely is the [indiscernible] get higher margin. Going forward, our attempt is to get more CDMO customers, invest more out there. From a level of 50-50, we would like CDMO to contribute 60% of our revenue and margins will be higher than 60%.
[Operator Instructions] The next question is from the line of Rohit Nagraj from Centrum Broking.
Apologies for asking the question again on the historical performance. But in the last 4, 5 years, we have seen that there could be an external event and it takes some of the quarterly performance for a toss. I mean we have seen that when the Mahad flood issue, after that COVID, then last quarter was hyperinflation in cost, this quarter, inventory destocking. So what had the management taken steps in terms of not such an aggravated impact on a particular quarter on the business? And a light question to that is that during such cases of cost inflation, don't we have any mechanism to pass it on to the customers instead of taking the entire brunt ourselves over a period of time?
Yes, I think your question is in 2 parts. One is again, we've had some external events, some of them are force majeure related, I mean, the Mahad flood was. COVID was definitely force majeure, I mean it's not of our doing and Taloja also unfortunately that took place. But we've learned a lot from these events. A, we are derisking our portfolio and our plan to a large extent. So percentage contribution from a single site or a single facility on that side will come down. We're making alternative arrangements to move products around from one site to the other if and when an unfortunate event do take place in the future. So that one is expected to ensure that the impact on any external events could be minimized to a larger extent than what it is today.
Right. And the second part of the question in terms of the contracts with our customers from a pricing perspective?
The contract with the customers, many of them have [ passed through ] on this, and we are already discussing with them, and it takes -- there's a lag effect of 1 to 2 quarters to get the benefit because discussions have already begun, and we expect the benefit to accrue in the remaining 3 quarters of this year.
But do you get compensated for the loss of opportunity or loss of margins for previous quarters? Or is that only for the subsequent quarter that the pricing gets suggested?
It depends on a customer to customer. It's an ongoing basis. So it -- we'll be in touch, [ but the overall is positive for us ].
And second question is, I understand that from FY '20 to '22, we have invested close to about, say, INR 600 crores in CapEx. How much of that is reflected in our revenues of FY'22? Just wanted to gauge in terms of how much potential opportunity that we are looking at to capitalize over the next 2, 3 years from the INR 600 crore CapEx?
INR 600 crores will be the investment by end of this year.
And between last year and this year, will be the INR 600 crore investment.
So the benefits have partially recovered in this year, but most of the benefit will come in from next year onwards.
Right. So just clarification, in FY 2021 also we had combined spent close to about INR 250 crores, INR 300 crores. The entire benefit being captured in FY '22 numbers or?
It takes about 2 to 3 years depending on the type of product to get the full benefit with a ramp-up period.
Right. And just one last clarification. You indicated about the revenue guidance for FY '23, in terms of margins, given that we had additional margins for Q1, what would be our margin expectation even if we are able to catch up in the next 3 quarters and averaging for FY '23?
So we'll be in a position to give guidance after quarter 2 numbers.
The next question is a follow-up question from the line of Aditya Khemka from InCred Asset Management.
On the CDMO part of the business, again, this raw material cost pressure, again, if I follow the trends from larger companies, Lonza, Catalent and some of our local competitors, it seems really easy, when they talk at least, they say it's relatively easy to pass on the raw material cost pressure to CDMO customers because they are -- as in, our product is a very small part or a very small component of their overall product and economics. So -- but looking at our gross margin for the last 2, 3 quarters, it seems that our CDMO customers don't see it the same way. So what I want to understand is, is it just a contractual bit there, because of the contract, we have not been able to renew the price of our outputs? Or is it because our customers don't see the [Technical Difficulty] cost of price increases that we have not been able to pass it on?
So to answer your question, CDMO customers, we are able to pass on the cost impact, but with a lag effect. And that lag can be 1 to 2 quarters.
And for the generic customers, as in, our own product customers?
No, the generic customer, it's the market which dictates and the competitive pressures. So in the current -- in the pharma API or the own product business, unfortunately, we have not been able to pass on the cost increases because everyone has not increased the prices. So there, we have to kind of absorb. But going forward, in the raw material and solvent prices, we are seeing a softening trend. Things will get better in the next 3 quarters.
And sir, how much [Technical Difficulty]
Sorry, Aditya, Your line is -- audio is breaking. Request you to please come in network area or use the handset properly.
Yes. So I'm saying how much raw material inventory do we carry -- KSM do we carry because the spot prices of these raw materials is correcting? And if we have still got high-priced inventory, we'll have to consume the higher-priced inventory first, right?
No, you're right. You're right on that. But we know -- when we know that raw material price is softening, we really don't see much inventory.
All right. So these KSMs would start to reflect from the second and third quarter itself, right?
I said only towards the third quarter because many of the raw materials are imported. In case of imported, they are already in the high pace and the 1 to 2 months inventory will be there for imported raw materials. But the full impact of the softening of raw material prices will be shown in quarter 3 onwards.
Ladies and gentlemen, that was your last question for today. I now hand the conference back to the management for their closing remarks. Thank you, and over to you.
Thank you for joining the call. And I would personally like to thank all of you for your continued support to the company through these challenging times. I'm confident that the future is bright and Hikal will continue to grow sustainably in the coming years. If there's any further questions, please feel free to reach out to us or to our Investor Relations partner, Strategic Growth Advisors. Stay safe and take care. Thank you very much. Have a very good afternoon. Goodbye.
Thank you very much. Ladies and gentlemen, on behalf of Hikal Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.