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Hikal Ltd
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Ladies and gentlemen, good day, and welcome to the Hikal Limited Q1 FY '24 Earnings Conference Call.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.[Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Sameer Hiremath, Managing Director from Hikal Limited. Thank you, and over to you, sir.
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 FY '24 results conference call. We trust that you had the opportunity to review our comprehensive earnings release, investor presentation and the financial statement for the quarter ended 30 June 2023. These documents can be accessed on both Hikal's official websites and the stock exchanges website.I am Sameer Hiremath, Managing Director of Hikal Limited, and I will be leading the discussion and projecting the financial results. On this call with me, I have Anish Swadi, Senior President of Business Transformation Animal Health; Kuldeep Jain, our Chief Financial Officer; Manoj Mehrotra, our President Pharmaceutical Business and Strategic Growth Advisors, our Investor Relations advisers.FY '24 has started off on a challenging note due to global macroeconomic pressures and high channel inventories, leading to lower demand across both our businesses. The chemical industry is facing difficulties due to China's opening up and different market conditions, specifically in the crop protection end use markets. Muted volumes coupled with pricing headwinds and high-cost inventories on our customer site impacted top line and profitability in Q1 FY '24. For Q1 FY '24, we reported revenues of INR 388 crores and EBITDA of INR 50 crores, equivalent to a margin of 12.9%.During the quarter, we witnessed disruptive channel inventory correction across the supply chain in both the businesses. We were able to navigate through some of the market headwinds on the back of improved cost control measures and softening of certain raw material prices and improvement in product mix. We expect it will take another quarter or 2 for demand in the pharmaceutical business to return to normal. However, raw material costs are softening, which is aiding the faster recovery. Sequentially, we expect the performance to gradually pick up and operating leverage is expected to improve in the second half of the year.On the crop protection side, there is a higher buildup of channel inventory, which is adversely impacting the demand supply scenario resulting in price erosion. We expect the inventory situation to normalize towards the end of this calendar year. However, there has been softening of raw material prices, which is expected to stabilize and improve our margin profile towards the last quarter of this financial year.To navigate these difficult circumstances, we have implemented various strategic initiatives aimed at cost optimization, reducing procurement prices and automation-based productivity enhancement. These measures have facilitated operational efficiencies and will stem the macroeconomic challenges.On 22nd July 2023, the company received communication from Gujarat Pollution Control Board, directing the company to cease operations within 15 days at the Panoli site, citing technical violations pertaining to a product manufactured in early 2021 during the COVID period. The company clarified the queries laid by the Gujarat Pollution Control Board based on which the GPCB has revoked the closure direction for the initial period of 3 months, and we're hopeful of getting a permanent revocation post that. The company Panoli facility continues to operate at normal with no interruption in production activities. We are deeply committed to upholding the principle of responsible care and sustainable business practices.Given the current macroeconomic climate, we do anticipate short-term volatility. However, we are well positioned for sustainable growth over the medium to long term.Now I would like to provide an overview of our Crop Protection division performance. The Crop Protection division achieved a revenue of INR 163 crores for the quarter and an EBIT of INR 17 crores, which was 10.5%. The global crop protection industry has been going through a challenging phase over the last few quarters as distributors and end customers are destocking amongst high channel inventories. 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. However, we are witnessing softening of raw material prices, which is partially supporting the margins.We remain committed to enhance operational efficiencies and reducing costs. Based on our increased marketing efforts, we are onboarding several new customers and have a strong pipeline of products under various stages of evaluation and implementation for our global multinational clients. In order to mitigate supply chain risk, we have initiated a strategic vendor development, diversified our supplier base and implemented backward integration wherever possible. This guarantees the availability and price stability of various key starting materials and raw materials.Our Panoli multipurpose plants hit approaching completion and commissioning has begun. We are presently in the stabilization phase, and the plant is proceeding according to schedule.Within our own product segment, we are observing higher than normal inventory levels in the market and the situation is expected to improve towards the end of FY '24. The medium-term outlook for our product is positive as end user consumption continues to grow. As part of our growth strategy, we are in the process of commissioning the new plant I spoke about earlier and additionally exploring new product opportunities to further expand our business with our global customer base. On the CDMO front, we continue to receive new inquiries from both the existing and prospective new customers and have signed on a few contracts in the last quarter. This demonstrates the continued demand for our contract manufacturing and development services. We are focused on capitalizing on these opportunities and enhancing our position amongst our global customer base.Now I'd like to introduce Manoj Mehrotra, President Pharmaceuticals, who will provide an overview of the Pharmaceutical division performance. Over to you, Manoj.
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 INR 225 crores, EBIT of INR 10 crores and EBIT margin of 4.4%. Reason for sharp decline in pharma revenue on a sequential basis 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 profile towards second half of the financial year. Also, we expect the channel inventory situation to normalize, which implies that the worst of the price oration 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 profiles.On the API business, we are expecting recovery in demand, which is expected to improve sequentially in upcoming quarters. However, the market is experiencing intense competition and high-cost inventory in the channel pipeline, leading to pricing pressure. Despite the challenge, we have successfully maintained our market share in legacy products. We are continuously making efforts to strengthen our presence in new regions like Japan, Middle East and Latin America. Notably, our new product launches in antidiabetic therapeutic area have gained significant traction among global customers. We have a robust pipeline with 8 to 10 products under development, and our target is to launch 3 to 4 products by end of FY '24.Going forward, we will prioritize maximizing API sales by increasing our customer share of wallet, expanding in new markets where we have advantages in terms of backward integration, scale and technology.On the CDMO business, we are looking ahead with the anticipation of normalization of the CDMO industry towards end of FY '24. As we have mentioned before, CDMO is a long-term business that requires time, commitment and patience to establish strong relationships. We maintain a robust pipeline of projects in the CDMO space, and we are in advanced stages of discussion with several global innovator companies. As mentioned previously, we have 2 opportunities in Phase III of clinical trials, which are progressing as per plan and likely to get commercial in the upcoming years.As informed earlier, our API facility in Panoli had received a No Action Indicated, NAI, compliance status with 0 483 observations from the U.S. FDA. This achievement reflects our unwavering commitment to maintain the higher stand in the quality, compliance and regulatory adherence across all our manufacturing sites. These developments further reinforce our position as a leading player in the industry known for strict adherence to quality and regulatory governance.Now I would like to introduce Mr. Anish Swadi, Senior President of Business Transformation, who will provide an overview of our business strategy.
Thank you, Manoj, and good evening to everyone. First, I'd like to discuss the Animal Health business update. The development of multiple API is under a long-term agreement with one of our global innovator animal health company 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 are continuously working on our transformation journey with promising developments in our new product portfolio and focused area geographies. As part of our Project Pinnacle, we have commenced several initiatives which span from augmentation of customer centricity, benchmarking and integrating our business with our ESG principles through enhancement of efficiency in manufacturing, supply chain and operations to ensure that we have long-term sustainable growth.Maintaining our track record with global regulatory agencies, the recent U.S. FDA audit reaffirms our commitment to upholding the highest standards of quality, compliance and regulatory practices across our manufacturing sites. This approval aligns with our diversification strategy of expanding our API capabilities to cater to our global customer base.Now I would like to open the floor to Q&A.
[Operator Instructions] The first question is from the line of Viraj Mehta from Equirus Securities.
Sir, first question is, if I look at both the -- like at our 3 recent quarter, we are seeing a sequential drop in revenues of both businesses. Can you elaborate how much was volume driven, which was due to destocking and how much was realization drop in both the businesses?
Yes. So for the quarter, if you look at a quarter -- of course, if I say Y-o-Y, values have grown by, as I mentioned, 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 the volumes are down by 26%.
Okay. So that's like a steep drop. Sir second question --
I would like to make a comment on that. If you look at historically, our Q1 is always our slowest quarter because we take our annual maintenance shutdown, and this is a time every year, our Q1 is slowest, and we always have a sequential step-wise improvement quarter-on-quarter. And this year is no different. So Q4, Q1 comparison is not exactly the correct way to compare it. I think non-comparable.
Sure. Sir, my second question is regarding -- if I look at improvement in terms of what we saw this quarter, that was the case with a lot of API manufacturers, probably Q3 and Q4 of last year. But some chunk of those companies are still seeing a reasonable improvement sequentially. Can you talk a little bit about if we are seeing any green shoots or, or what's the guidance you would like to give for the whole year, because you've not alluded to that at all in your opening remarks.
See, I think there's a lot of volatility in the market. I'm not in a position to give any guidance. But as I said in the last call as well, we expect a stepwise recovery quarter-on-quarter and we stick by that. And H2 will always be better, significantly better than H1.
Sure. And sir, my last question is regarding gross margin. Because you said raw material prices have also gone down, is it fair to assume that our realizations will also drop, or has dropped, which -- so how does our pricing model work? Is it like per KG conversion cost, or is it a margin that we get? Because like our other expenses like electricity and personnel expenses, that has not gone down. But if the top line goes down because of realization and your RM also goes down and it is authentic conversation, it will kind of hit your EBITDA, assuming your gross margin remains constant. So if you can just talk about that a little bit, sir?
I think basically, you're right. Fixed cost is fixed. So if the volumes do increase, which we expect to start happening from second half of this year, then the EBITDA margins will start improving compared to where they are today. From a gross margin perspective, because of softening of raw material, chances are gross margins actually improving compared to the same period last year. So once the volumes do start coming back, which we're quite hopeful they will come back from H2 onwards, the operating leverage to kick in and the benefits to start accruing to EBITDA from H2 onwards.
[Operator Instructions] The next question is from the line of [ Sajal Kapur ], an independent investor.
I will ask both questions together and would appreciate the detailed response as far as possible, please. A pure-play API company is 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 a 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 the future. That's one. And secondly, both Manoj and Anish mentioned advanced discussions with global innovators in their opening remarks. So in your discussions with pharma and chemical customers, do you sense the possibility of setting up dedicated capacities for them, so something like 200 KL, 300 KL or a block itself dedicated to a single customer?
Yes. Thanks for that. So the first question was regarding margins and how we will get, whether it will be in the 20% range or close to 30% range. I think if you look at the pharma business for the new projects and the new products we're getting that closer to the 24%, 25% type of EBITDA level. But obviously, if we take a blend because of our legacy product, it may come down to 20-odd percent as a blended. So our aim is for any new project, we're targeting 24%, 25% EBITDA. And obviously, we'll strike to be even better. For the second question was regarding dedicated capacity, we've already done that with a recent client 2 years ago, we signed a major long-term contract. We have just set up a large facility for them in one of our sites, and it involves multiple products and they've also helped us for the Animal Health space, and we are seeing similar type of opportunities happen in the human health side as well and crop as well. So we have already started doing that. We've implemented one project, which is significant on the animal side, and we'll try to replicate that in our other parts of our business as well.
[Operator Instructions] Next question is from the line of Pranay Dhelia from Panchatantra Advisors LLP.
Congratulations to do well even in this troubling times. 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 had 2 or 3 good quarters and something setting us back. So when can we expect both the, 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?
Sure, I'll take the second question, and I'll hand over the debt question to my CFO to answer because I think we -- you're right, I mean, in December '21 quarter, I think we were showing and we unfortunately had a instance that set us back for a few quarters. Now more on the macro -- external environmental scenario, but that we're using this time to win lot of new business and put in a lot of operational efficiencies in the organization. So I think that we're hopeful that the second half of this year, we expect both our businesses to start firing and we get back to the FY '22 type of business that both businesses firing and we start getting the businesses to grow again and create value for our long-term investors. I'll handover to Kuldeep to answer the debt question. Kuldeep, you can answer the --
Just before the debt one, one more follow-up. We've had a top line of INR 2200 crores peak. And with the new CapEx that you've done, whatever I could make out with the asset churn you're expecting a top line of almost INR 2,500-odd crores in the near future. When do we expect to hit that target?
That happens once you leave optimal capacity. That customer capacity, as I said, takes 2 to 3 years post commissioning of the plant, which is still a couple of years away from now.Kuldeep, can you answer the debt question, please?
Yes, as for debts are concerned, we are very comfortable. And just to inform you, we have not borrowed any long-term loan during this quarter. And our debt equity is well, well within the standard norms.
Can you give me a figure, what is the long-term debt or term loan on the books and when do we start repaying that? You spoke about long term and short term loans.
Our term loans are INR 550 crores, working capital is INR 240 crores.
Okay. And when do we start repaying the term loan, the majority of it for the --
We have only started repaying some loans as we borrowed somewhere in '19, which is almost maybe in 3 years, we will be repaying fully.
And we are not looking at any new fresh debt for new CapEx that is going to be all internally funded?
No, definitely, we will certainly look forward for some debt during this year because we have a plan for almost investment of INR 200 crores this year. So it will be 50:50 from the internal accruals and 50% from the borrowings. And we have equally repayment also. So long term, total debt should not change at the end of March 2024, significantly.
And what is the cost of funds on the long term, if you could just share?
Cost of fund is increased now, it's almost 8.5%.
8.5%?
Yes. Both together, short term and long term.
[Operator Instructions] The next question is from the line of Aman Vora, an individual investor.
I really wanted to understand better the macro scenario where we've talked about the destocking, I understood, but the competition from China, like what is happening in the market? And how aggressive are they and whether like why have realizations dropped so much?
Manoj, why don't you take the pharma part and I'll take the crop part?
The pharma realization, the revenue is not 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 overall 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 side, yes, there are some challenges because of inventories with customers. And as we mentioned previously, the second half of the year, definitely CDMO customers will also make a come back, and we'll see far better performance in the second half of the year.The second part of competition with China, yes, that competition with China remains as before. And see, ultimately, they also have to kind of utilize the capacities and make sure that they sell. But 3 or 4 products, we do compete with China, but many of our products, especially on the anti-diabetes segment or some of the [ C&S ] segment, we do not see much competition from China. So it's a mix of factors as such.
Yes. And on the crop side, I think the Chinese competition is far more severe than the pharma side because China was -- predominantly a lot of outsourcing was being done and a lot of capacity for crop is being created in China. But again, we see that kind of normalizing in the next 1 or 2 quarters. And end product demand and once the season does pick up towards Q3, we expect demand to start coming back and prices to start normalizing. I think we are a couple of quarters away, but by second half of this year, end of Q3, early Q4, we expect demand to come back and our global CDMO clients have also said the same. They have all reiterated their forecast for the second half of the year. So they gave -- offtake will start, pick up the start of volumes.
Got it. And my second question is, what is the current capacity utilization of our plants like at the company level?
Historically, it used to be about 80%, 85%. This quarter it is lower. On the pharma side, it is about 70%, 75%. On the crop side, it's slightly lower than that, but probably in the mid-60s currently. But we'll come back to the 80%, 85% level by H2 of this year.
Got it. And my third question is a little more strategic question, where in the last 3 years from that tanker issue at Mahad to a lot of issues that we faced with pollution control boards. So that like causes a little bit of like an issue for the business in the short run. So as a management, how are we strategizing to have lesser instances like this? We come out of them eventually, that is very nice. But how do we try to reduce such issues strategically?
No, I mean -- I mean, if you notice that the incident also, recent incidence in Panoli, when we went to give our explanation to the GPCB, they were convinced, and that's why they gave us a revocation before the closure notice came into play. It was related to a technical matter of 2021, which was bought up because of some other incidences from other companies with similar products. I don't want to get into details, but anyway, we convinced them -- technically convinced that there was no environmental damage and we could get the revocation. So they were convinced, but unfortunately, this is the way it's done, and we have to live with this and we have to strengthen the system which we have done significantly. That's how we could convince them that there were no issue and we got the revocation within 15 days.
[Operator Instructions] The next question is from the line of Aditi Sawant from ADM Advisors.
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?
Well, I think we also have the same outlook. I think second half of the year towards the end of Q3, early Q4, we expect a demand uptick to start. The good news is that all our products end demand is strong, and we will -- 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're facing for a couple of quarters. The China Plus One strategy is very much intact, and we continue to see new inquiries and new customers coming on board too. All of them are looking at an option to China. And we are benefiting from that, and that will only continue going forward. So I think the medium- to long-term future is still intact and still looks very bright.
[Operator Instructions] The next question is from the line of [ Aditya Nahar from Alpana Enterprises].
Sameer, my question is more long term. So if I take a 10-year sort of operating profit margin figure, we are almost at 25%, 26%. Today, we are closer to 13%, 14%. So I think 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, let it be pharma, let it be crop protection, and margins are higher than cycle. So just wanted to understand your thinking for the next 10 years? Are you okay with a 13% operating profit margin? Do you expect it to move up? And even on the PBT level, sort of we almost take 2 steps forward and 3 steps behind. So just wanted your comments for the next sort of 7, 8, 10 years? Are we okay with this? Is my thinking incorrect? Just your thoughts on this, please?
Yes, if you look at our -- I mean, I don't think it's been 12% to 13%. It's been there right now. But if you look at since 1 year ago, it was more like 18%, 19% margins. We feel comfortable to take the business back to the 19% to 20% margin levels over the next couple of years, which we should come back. And we have delivered on that and I see no reason why with our new contract and new product mix. Also a lot of the legacy products, we are phasing them out or we're replacing them with newer generation products. Our dependency on our old contracts, our old products is coming down year-on-year. And the new margin products that we're launching and the new contract that we've acquired despite having certain challenges that we face with the external environment and customers reaffirming the experience in Hikal and believing in Hikal as being a long-term sustainable company shows that we will continue to grow and improve our margins going forward. And this is the plan. I have not even talked about 10 years, I'm talking about next 4 to 5 years, they will see a significant uptick in margins and the operating leverage kicking in as volumes increase, and we'll be able to compete with our competitors and be at the same levels as over the next few years.
I appreciate that Sameer. It's just you passed basically at the FDA audit, you lost very few customers, if any, at all. It's just that, that doesn't reflect in your margins. So I mean, everything is fine but the margins. That was my question, I mean I appreciate that for 4 or 5 years, looks like only we think there's a premium to the product, but the margins say another story. That was my concern, so. Sameer, best of luck.
[Operator Instructions] The next question is from the line of [ Yash Mehta from AB Capital ].
I would like to ask a question. On the Animal Health side, what is the status update on the CapEx?
Anish, can you take that?
Yes. So we have -- we are -- right now, we've invested the capital expenditure into the plant. The plant has been built. We are undergoing commissioning, and we've started validation of the product portfolio. So that's where we are currently.
All right. That's all from my side.
[Operator Instructions] The next question is from the line of Pradyumna Singhania from Rashi Fincorp.
Yes. I just pretty much have 2 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 -- I know Q1 is seasonally bad, but do you think we can at least reach a INR 2200 crores 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 I think you said that your Panoli plant is going to start, which has already started only on the stabilization phase and everything. Once that comes into operation, wouldn't that get an overall utilization lower?
No. The reason why the utilization is low in Q1 is because of inventory destocking at lower volumes currently, as I mentioned. We expect the volume uptick to start from Q3 onwards. So the utilization levels of the existing assets will go back to the 80-odd percent level, which is where we have been 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 revenue and our margins from Q3, Q4 onwards. So that obviously will be a ramp-up, but the existing assets, which are running at a 65% to 75% utilization will go towards the 80%, 85% level in the next couple of quarters.
Okay. So basically, you're also stating that sequentially you're going to do better. Do you mean quarter-on-quarter or year-on-year sequentially?
I mean, quarter-on-quarter.
Okay. Okay. All right. So can you also mention the fact that you think you can reach last year's revenue levels this year?
I think it's currently very difficult to say because of the volatility in the market. Actually, after Q2 -- Q2 conference call, we'll be probably in a better position to answer that question. Currently, it's difficult to talk about that.
The next question is from the line of Pranay Dhelia from Panchatantra Advisors LLP.
Yes. Just a follow-up on the CapEx one, Sameer, if you could elaborate how much of CapEx has already been done in the past 2 years and how much of it has been lined up? And subsequently, the phase of commissioning, as you said, probably Q3, Q4 onwards, you see phases of commissioning and gross block being added. So how much of it is left and how much more you foresee in the future?
Kuldeep, you want to answer that?
Yes. So we have almost capital WIP as on 30th June close to INR 400 crore, INR 460 crores. So a large part of these 2 CapEx, which Sameer mentioned is already over. So only the trial quantity, the dilution quantity will start from the Q3, Q4. So as far as the CapEx expenditure cash flow is concerned, the large part is already done. We expect another INR 100 crores in the next -- INR 100 crores, INR 120 crores in next 3 quarters.
You just mentioned some time back that you have INR 200 crores of CapEx lined up for which you need INR 100 crores of debt and INR 100 crores internally.
Perfectly right. We have already done in the first quarter.
Okay. Great. Fine. How much -- in which phases do you see this getting implemented and coming into play, wherein there's large revenues to the company?
So as I mentioned, the large part of the CapEx is already done, it's only grounded. The validation quantities will start from the Q3, Q4, and it will come into the play.
Okay. Fine. Sameer, again, wishing you all the best and hope we have continued growth for shareholders now rather than growth in phases. That's what's been alluding at for some time now.
The next question is from the line of [ Nitin Gandhi ] from Finquest Advisors Private Limited.
Just continuing the same previous question. Can you give some breakup of how much out of this INR 460 crores and additional INR 100 crores, towards which segment, Animal how much, other units how much? And what is the benchmark which we need to monitor for performance, some asset and/or payback or IRR or something before your benchmark when you started the project, if you can share, which we can keep monitoring?
Out of the INR 460-odd crores, about INR 320 crore to INR 330 crores on the crop side and about INR 140 crores is on the pharma side. That's a breakup of the INR 460 crores. From the asset turn perspective is where we view how to monitor this. If you look at the asset turns, we expect an asset turn of about 1.3 to 1.4, depending on the type of asset at peak utilization.
The next question is from the line of Sajal Kapur, an Independent Investor.
Just one question I have for you, Sameer, or maybe Anish can answer. It's a longer term, so the question is what kind of cycle 5 to 7 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 INR 6,000 crores by 2030. Would you be disappointed?
I think our targets are significantly higher than that. I think we believe that we can do a bit better than what you are saying. Yes, definitely we'll be disappointed if we don't achieve that.
The next question is from the line of Amar from AlfAccurate Advisors.
Just wanted to understand, like we were talking about this INR 3,000 crores kind of an aspirational revenue number, let's say, in next 2 years. So how much it is going to come from the existing asset? And for rather, what is the potential for the existing gross block? And what would be the potential for the new gross block?
Well, existing business, I think INR 3,000 crores in a couple of years [Indiscernible] from the current gross block that we have, if we improve our utilization and also some change in product mix, we should be getting closer to about INR 2400 crores, INR 2500 crores. And the aim is new capacity of INR 500 crore to INR 600 crores additional.
Okay. So the new capacity would be then not more than 1.1x, 1.2x. That is what you're saying?
No, you're talking about the next 2 to 3 years because peak utilization will just take 3 to 4 years for the new capacity mostly.
So basically, you are saying in 2 years with existing and the new gross block, we can reach to something around INR 3,100 crores, INR 3,200 crores kind of a turnover?
I don't want to give any number a number of years. I think the INR 3,000 crores is a few more years from now.
Okay. And let's say, when you're talking about the improvement in the product mix, right, so what should be the potential EBITDA margin for the existing gross block?
So historically, we were running our business of 18% to 19%, and we expect our current gross block to go back to that level. And the new projects which will come on stream for next year will be higher than that. So the blended will go above that, yes.
Okay. So when you say higher than that, that would be in the range of 24% to 25% bracket, correct?
22% to 24%, 23% in that range: 22%, 23%, 24%, yes.
[Operator Instructions] The next question is from the line of Aditi Sawant from ADM Advisors.
So I have 2 questions --
Sorry to interrupt. Ma'am, can you speak a bit louder? We are unable to hear you.
So my first question is how are you feeling the sizing in the U.S. end markets panning out?
Okay. Manoj, you want to take that?
Yes, the U.S. generic market from a pharma perspective is definitely improving and that is more on the margin side, as I mentioned earlier because of lower raw material guidance, but competition remains intense for the U.S. generic market. And that's the reason we are looking at other markets also now like Latin America. The objective is diversified in our geography portfolio and come to our gross margin of 45% to 50% on API business.
Okay, sir. Understood. And the second question is can you highlight no generic business?
This was mostly on the generic business, what I mentioned. CDMO business is totally driven contractual kind of business, which has different dynamics of a long-term relationship with the customer.
[Operator Instructions] The next question is from the line of Pankaj Jain from Mahaveer Investments.
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?
Yes. So raw material prices have come down, but not as much as finished goods prices, but there have been some benefit of raw material prices. I think they have already come down. Whether they've come down [Technical Difficulty] I think that only time will tell, but they're already quite low, and we don't expect raw material prices to go down significantly below where they are today. So I think raw material prices are more or less the lowest if not the lowest levels right now.
So this raw material pricing going down, will have benefits on the margins going forward? Will we be able to benefit from it?
Yes, because there will be some margin expansion in Q3, Q4 because there's a lag effect as we have raw material and older inventories, it takes time to convert to finished goods and sales. So it takes 3 to 4 months, there's a lag always. So from the end of Q2, early Q3, we should start getting some benefits from raw materials as our margins improve.
Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Hiremath for his closing comments.
Thank you. Thank you, everyone, for joining our quarterly earnings call and for the 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 3 decades. We are optimistic that the journey of longer-term sustainable growth and improvement in the profitability is still very much intact.As we conclude this call, we want to assure you that we are here to address any further questions or concerns. Please feel free to reach out to any of our Investor Relations partners, strategic growth advisers. And once again, thank you for your participation and support. Have a very good evening. Thank you.
Thank you. Ladies and gentlemen, on behalf of Hikal Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.