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Hikal Ltd
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Ladies and gentlemen, good day, and welcome to the Hikal Limited Q4 FY '22 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 date of this call. These statements are not 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. Anish Swadi, Business Transformation. Thank you, and over to you, sir.
Ladies and gentlemen, a very good afternoon to all of you, and thank you very much for joining us today for our Q4 2022 FY Earnings Call. I am Anish Swadi, Senior President of Business Transformation and Head of the Management Committee. With me, I have Mr. Kuldeep Jain, our Chief Financial Officer; Mr. Manoj Mehrotra, our President, Pharmaceuticals business; Mr. Vimal Kulshrestha, our President of Crop Protection business and Strategic Growth Advisors, our Investor Relations advisers.
We hope you and your family members are safe and healthy. I am pleased to interact with all of you on our Q4 FY '22 earnings call. I hope you have gone through our earnings release presentation and financial results for the quarter. You can find these on the stock exchanges and on our website, too. I would like to start this call with an update on the unfortunate incident, which occurred at Sachin GIDC, Surat on 6th January 2022. Allegations were made that the tanker involved was carrying a byproduct, which allegedly came from Hikal's Taloja factory. We would like to reiterate the fact that the tanker reported as allegedly disposing chemicals into the stream was not the same tanker that left the company's premises in Taloja.
The company has provided all documentary evidence to this effect. All relevant employees of Hikal have voluntarily cooperated in the ongoing investigation. Since then, there has been a judicial recognition of the nonexistent role of Hikal and its employees in the entire incident as elucidated by the honorable Gujarat High Court in its order. As on date, none of the Hikal employees are in judicial custody and all have resumed work. This matter is still subjudice. And as things stand, Hikal is in a very strong legal position.
As a result of the Sachin GIDC incident, the MPCB had also given us a closure notice to the Taloja factory. We have provided all the relevant documents to MPCB and we are taking appropriate measures under the course of law to remedy the situation swiftly. We are confident of resolving the issue on the closure notice at the earliest, having filed a writ petition to that effect, which will be heard in the coming week once the regular bench convenes. Upon reopening the plant, we will begin executing the pending order book, which has been built up over the course of this quarter despite these testing times and only further illustrates the fact that our order book is strong.
However, owing to the nature of the business, we will have to gradually ramp up the scale of operations, which could have some short-term impact on our crop protection business. We have been transparent about the matter and have actively communicated with all our internal and external stakeholders, including customers. We appreciate the fact that they have continued to demonstrate a high level of confidence in our company. In order to ensure such an unfortunate incident does not repeat in the future, we are taking stringent and proactive steps towards further strengthening our compliance policies and standard operating procedures. We have already onboarded a reputed audit firm Mahajan & Aibara for our internal audit. We have also partnered with a reputed ESG firm and initiated focused third-party audits for our entire plant network to identify and fill in gaps for further areas of improvement. We are also working closely with our customers to ensure a best-in-class operating model.
Now I'd like to just give you an overview of our FY'22 performance. From a market perspective, we all know the latter half of FY'22 has been extremely challenging for the life sciences industry, especially due to the uncertainty arising from Ukraine, Russia war, geopolitical tensions and the reemergence of COVID cases in China. This has led to significant headwinds in the availability and pricing of key raw materials and solvents. Also, the huge rise in crude oil prices have significantly impacted freight as well as logistics costs. Despite multiple challenges and disruption, Hikal has been able to maintain, to a large extent, supply continuity and fulfilled a large majority of its customer commitments. The agility shown by Hikal team in such a challenging scenario has been very positive.
From a financial update perspective, for the year ended FY'22, Hikal has achieved a consolidated total revenue of INR 1,943 crores for the year, witnessing a total growth of 13% over the previous year. Profit before tax was INR 341 crores, a growth of 5%. Our EBITDA margin for the year came in at 17.6%. Hikal was witnessing robust growth from Q1 to Q3 of FY '22 with 21% growth for the 9 months FY'21 versus FY'22 with a 19.6% EBITDA margin, versus 18% in the corresponding year prior to that. This was on the back of industry tailwinds with supply chain management and strong business growth across both our segments. However, the global slowdown in the generics business due to channel inventory and lower demand uptake led to muted growth in the last quarter, also a lag in passing on increased prices, supply chain disruption and significant rise in input costs affected our business further.
Our balance sheet and return ratios. In addition to growing the top line and bottom line, we have also been making focused efforts to strengthen our balance sheet and to improve the return ratios of the company. As a result, our debt-to-equity ratio now stands at 0.59x as compared to 0.61x at the end of the previous financial year and 0.73x in the year before that. We have also negotiated with our bankers to bring down our average borrowing costs from 6.99% in March 2021 to a blended rate of 6.15% in March 2022. Our return on equity has also improved to 16.2% in FY'22 from 15.2% in FY'21 and 10.7% in the year preceding that. These numbers indicate a healthy condition of our business, considering the nature of operations along with the ongoing and planned capacity expansions.
On the dividend, the company has declared a final dividend of 20% of INR 0.40, and the total dividend for FY '22 is 80% or INR 1.60. Now I'd like to hand over to our President, Pharmaceuticals, Mr. Manoj Mehrotra, to take us through the performance of the Pharmaceuticals division.
Thank you, Anish, and good afternoon, ladies and gentlemen. On the financial side, the Pharma business has experienced muted revenue growth, 6.6% with INR 1,130 crores total revenue in FY'22, versus INR 1,060 crores in FY'21.
EBIT of the division was at INR 151 crores at 13.4% margin in FY'22. This muted trend was primarily due to: One, overstocking with customers; two, pass through underweight; three, rise in input cost of raw materials, solvents, utility and freight costs. On price pass-through, we are in discussion with customers, the impact of which we will see in the upcoming fiscal year. As we all know, we have two verticals within the Pharma business, API and CDMO. On the API business, over the years, we have added several new customers and strengthened presence in new geographies like Latin America and Japan.
Our new product launches in anti-diabetic have been witnessing increased traction from customers. We have 10-plus products in development pipeline and are planning to launch 4 to 5 products in FY'23. CDMO side, our CDMO business has witnessed increased traction with 20% increase in overall inquiries with increase in win rate as well. We have converted two opportunities this year, two KSMs for new drugs with global innovator and one intermediate opportunity with another innovator. Several customers have done plant visits in FY'22. Our future pipeline for CDMO business remains robust with working going on in multiple upcoming opportunities.
On the Animal Health side. Our Animal Health business continues to witness growth on back of existing relationship with majority of key age companies. We have also commenced process development work for several active ingredients, which are part of the multiyear Animal Health project with the global innovator. We plan to finish the commissioning of plant by FY'23 and start revenue accrual from FY'24.
While our business pipeline continues to be strong, we have also undertaken multiple initiatives to improve our margins to ensure right raw material availability and pricing of key RM, we are working on One, strategic vendor relationship with long-term contracts; two, derisking supply chain from China; and three, backward integration and [indiscernible]. In addition to this, we are working on multiple manufacturing excellence or cost improvement programs to improve yield and solvent recovery for our key products. With all these initiatives we foresee future pressures to persist in FY'23. Q1 will face more pressure followed by gradual uptake starting in quarter 2 FY'23. With that, I invite our President of Crop Protection business, Vimal Kulshrestha.
Thank you, Manoj. Good afternoon, all participants in the earnings call. The crop business has recorded revenue growth of 23% year-on-year basis with INR 813 crores total revenue in FY'22 versus INR 661 crores in FY'21. The EBIT of division was at INR 116 crores at 14.3% margin in FY'22. The revenue growth was mainly achieved on the back of higher demand from our leading CDMO customers, new contracts with key U.S. and Japanese customers. Sales of our products slowed down due to raw material availability issues.
In crop business, we have 2 business verticals. In own products, demand from our existing product remains intact from our key customers. We are also planning to complete the planned commissioning of our new fungicide by end of third quarter of current calendar year and we start revenue April by end of FY'23. We are planning to launch one more fungicide with a combined potential of INR 400 crores to INR 500 crores. We'll also continue to explore new product opportunities in the business, and 5 to 6 products are under development as well. In CDMO business -- our CDMO business continue to receive inquiries from all new customers, several new customers have done plant visits in FY'22. We are increasing efforts to build and strengthen relationships with our U.S. and Japanese customers.
To ensure a stable availability and pricing of key raw materials, we are working on developing strategic vendor relationship with long-term contracts and derisking supply chain from China. We are also planning to initiate manufacturing excellence programs to lower production costs and improve margins. Now I hand over to Anish for future outlook.
Great. Thank you, Vimal and Manoj. Since our business heads have now talked about our respective businesses, I would like to take you through some of our other key priorities we are working on as part of Project Pinnacle. As you already know, we are undergoing a transformation of our business from good to great, while continuing to drive profitable growth. We have also onboarded a global consultant to help us identify the right strategic direction for choosing the suitable products, partners, technologies for the future while bolstering our R&D and manufacturing capabilities. Some of the key focus areas for this financial year will be compliance.
As I have mentioned earlier in my address as well, we are taking stringent steps towards strengthening our compliance policies, derisking, separating the operating model of both our businesses, stricter vendor due diligences and revamp of vendor contracts; third-party audits of all our plants; and process improvements to enhance checks and balances. We are making every effort and endeavor to ensure the company is not involved in any such incident ever again.
Cost improvements. We are taking targeted actions to ensure our bottom line improvement by price pass-through on long-term contracts, manufacturing excellence programs, which is cost improvement programs for priority products to improve yield and solvent recoveries, strategic vendor relationships for key raw materials, backward integration and a shift to renewable energy and biomass.
Customers. Customer centricity remains key for Hikal. We will continue to fulfill our commitments and deliver best-in-class quality products. Our continued focus will be to increase share with existing customers while adding new customers and strengthening presence in newer geographies such as Latin America and Japan.
Capacity utilization and expansion. We are working on improving our asset utilization with a clear focus on reduction in cycle time and change over time. We will continue to selectively invest in growth opportunities for the businesses to ensure that we are investing in right opportunities, offering long-term returns to the business.
In terms of outlook for next year, we expect FY'23 to be a year of necessary slowdown and consolidation to prepare us for future accelerated growth. We expect market headwinds to continue, but we are confident that the strong measures taken will help us navigate these turbulent situations. Pressure in Q1 will remain high, higher than that of Q4, but we are confident of improving quarter-on-quarter starting Q2. The growth trajectory along with new opportunities, strong customer relationships and new technologies will catalyze the future of our business towards our bold aspirations.
Finally, we are a company that has been in business for over 34 years. We have faced multiple headwinds and been through several ups and downs in our journey. However, we have always navigated through these tough times without compromising on our core values and ethics. Our business has been and continues to be built on long-term relationships. The past 6 months has been challenging. However, I am confident that we will come -- as we come out of this, we will be a more nimble, flexible and resilient company. We are eternally grateful to all our colleagues who have risen to the occasion and all our stakeholders who have supported us during the difficult times. While the short- to medium-term outlook is cloudy, the longer-term growth and profitability story is very much intact. Thank you all for your time and support. With this, we will now open the floor to questions now.
[Operator Instructions] The first question is from the line of Rahul Jain from Credence Wealth.
Just to understand the last call, we remember the commentary with regards to the growth and demand outlook was quite buoyant. At the same time, the commentary with regards to input cost was bearish and you had tension, it takes some time to pass on the cost to the consumers. So just to understand on the growth part and the demand side and the sales revenue part. What has changed in the last, say, 2, 3 months, thereby our commentary has changed from a strong demand outlook or bouyant demand outlook. So something where you seem to be more cautious or talking about the next year being a very challenging year.
Sure. I would -- what I would do is I'll hand this over to Vimal for the Crop Protection, and then Manoj can talk about the Pharma division.
Yes. So demand is strong. We are getting customer inquiries, and we are confident that we would continue to get inquiries in our CDMO space and own products also. The challenge has been in quarter 4 of supply chain. So there was a lot of supply chain disruption after the Russia and Ukraine war, crude has gone up sharply. Energy has almost become double, prices were -- raw material prices has increased almost 40% to 60%, solvent prices have increased. So that is what has created the issue. One is raw material availability and second on the pricing issue, which has put pressure on the margin. We expect a lag in passing this price, passing the cost impact in the price, and we are confident that from Q2, we'll be able to pass on this in the prices. Over to Manoj for Pharma.
Yes. So I'll address this question in two parts. Number one is on the demand side. So demand, since we have two distinct segments. On the CDMO side, we are seeing increasing demand with more number of inquiries coming, more number of customers willing to work with Hikal. But as we know that CDMO side, demand takes some time to ramp up, but we are seeing very, very positive signals from our customers on the demand side on CDMO. On the API side, since our raw material costs have gone up, and we have been in discussions with various customers for increase in selling prices, that actually subdued the demand in the short term because everybody wants to kind of go back or liquidate the inventory first.
So there definitely is a short-term impact. And since we are in B2B business, it takes some time for customers to take suitable decisions as well. And we would also not like really sell at very low prices and build up inventory at customers end. So it's better to be a little slow and steady and make sure that the past cost is passed on over a period of time. But that usually takes around 2 to 3 quarters, I would say. And we don't want to -- we want to retain all our existing customers. Because in the long run, it is the same customers who will give us the margins.
On the CDMO side, although we have contracts for pass-through costs but they always have a lag effect, we can't do month-by-month pass-through cost, there is always either 3 months or the 6 months window where the customers discuss. It's mostly 6 months, and it takes some time for us to pass-through, also the energy costs have been just shooting through the roof and not showing any respite whether it is fuel, whether it's coal, whether it is biomass briquettes and that is causing a lot of pressure. So overall, the cost side, there is pressure. It will take, I'd say, Q3 onwards, Q2 onwards, you will definitely see better margins from the Pharma business. But long-term demand remains good. All our products and relationships with customers stand steady. We will continue to add new customers on CDMO side as well as on the generic API side.
Further discussion, see our margins on the Pharma side are already below the averages for last 3 quarters. And this quarter, we have had one of the worst margins on the Pharma side and both agro side. So do we expect this to continue, say, for another quarter? And quarter 2 onwards, will we see a sharp increment or a gradual increment? And when do we expect to get back to our normal margins?
Right. So I'll take the former question. Manoj, you can take the question, but I'll just answer the -- on the overall perspective of the company. I think it's very difficult for us to give guidance in terms of margin at this period of time because things are very uncertain and things are very fluid. I think Q1, overall for the company, as we look at it, will certainly be more subdued than Q4. But as Manoj and Vimal have both mentioned, on Q2 onwards, you'll start seeing an improvement going forward.
So it will be a stepwise approach. Q1 will probably bottom out and then you'll have an improvement in Q2, and then you'll see an increase in Q3 and Q4 going forward. As to when you'll see us get back to it, we are hopeful that next financial year, you'll see us getting back to it, but there are a lot of external circumstances that are beyond our control and we do expect and we are hopeful that they will solve themselves in a short amount of period. So that's why it's a little -- we're a little cautious in terms of giving guidance at this period of time.
So I agree with Anish that Q1 will see a bottoming out of the margin. Q2 onwards the uptake will start. Now how long will it take to reach the previous margins? It is a little difficult to forecast at this stage because we all know that supply chains across the world are very much disrupted. And on top of it, this energy costs have really put a pressure on our costs.
Sure. And secondly, sir, under growth path. As far as the topline is concerned, are we more confident on the top line competitive margin given also, Anish, that we have done or as for the results, the capitalization is roughly around INR 170 crores, INR 180 crores in terms of the fixed assets addition. But at the same time, in terms of the cash flow amount being spent, we have almost spent roughly around INR 150 crores each in the 2 years, FY'20, FY'21 and further about INR 270 crores in FY'22. So just to understand when do we see the benefits of CapEx setting in and thereby the top line growth being much better.
Right. So again, reiterating the point of guidance at this point in time, it's a little challenging for us to give you both revenue guidance and margin guidance. But certainly, the assets that we put on ground, all the CapEx that we have, we are finishing off the CapEx whatever spending we're finishing off because they're mostly backed by contracts and/or products that we have in the pipeline. But given the current situation that we have with the raw material and input costs, it's very challenging to say that when we're going to start the operations of those plants for production. But we are hopeful as both the businesses have indicated that on Q2 onwards -- at the end of Q2 onwards, you'll see a resurrection in terms of the business, and you'll start to see that growth and profitability come through.
So just the last thing, the CapEx capitalization. So if you could -- what amount has been -- what amount of CapEx will you expect in the current year? And what amount of capitalization do you expect for the current year to be down on the CapEx side?
Yes. Sure, I'll take [indiscernible] this question. See, we are expecting INR 250 crores to INR 275 crores cash flow for this year, and the capitalization will be close to INR 400 crores in the current financial year.
Okay. So that means, if I just get 2 years FY'22 and FY'23, the total capitalization will be roughly about INR 560 crores, INR 580 crores. Is that correct?
INR 600 crores.
And then in terms of the assets, how do we look at this CapEx as a turn for FY'24 and FY'25?
Yes. Typically, as we mentioned earlier, in terms of Pharma business, it takes typically 18 months to 24 months to put it to commercialization. And in case of the Crop Protection, it takes typically 6 to 9 months after completion of the project.
Sure. Sorry, just pardon me for this last one. So what is the CapEx schedule in terms of the commissions being started in this year? That's the last one.
Yes. So for the crop CapEx, we expect to start -- expect to commission in Q3 FY'23, and we expect accrual of revenue from Q4 of -- or end of the year of FY'23.
The next question is from the line of Ankit Gupta from Bambu Capital.
Taking forward this question on CapEx INR 600 crores we will be capitalizing in FY'23. So one thing I wanted to understand, Anish, let's forget about FY'23. FY'23 we do understand the kind of challenges we are facing. But let's say, over FY'25, INR 600 crores CapEx being -- incoming in the stream line. And given, let's say, 1, 1.5 years of streamlining, do we think that now this INR 600 crores CapEx can give us additional INR 1,000 crores kind of revenue, and we reached our top line of say around INR 3,000 crores by FY'25. I'm not even talking about FY'23, but I'm talking about FY'25.
Yes. So a very valid question. I mean I think by '24, '25, we definitely expect us to be operating somewhere near close to peak levels. As we've indicated in the past, peak levels are about 1.5x, right? So to answer your question, whatever we have coming on stream now, we expect to deliver revenues worth 1.5x of what we have to be in the ground, right?
To reach at least INR 3,000 crores by FY '25.
I'm sorry, you were inaudible at the time. Can you please repeat that?
Yes. So we can at least touch INR 3,000 crores revenue by FY'25?
That should be possible.
Then also, the kind of commentary you guys have given earlier. Of course, we do understand that first half of next year will be challenging. But on the margin side, let's say when you touch INR 3000 crores revenue, what kind of margin improvement do we see in our base margin of around 19%, 20% that we have been reporting for the past year or 2. From there, what kind of margins can we see in FY'25 when we hit peak revenue and hopefully, all this headwind that we are facing currently are also behind us.
So look, when we look at the future margins of the business, I mean, look, up to the 9 months ended this financial -- last financial year, we were at a very, very healthy run rate, right, as you could see from 19%. So we were actually a little ahead of what our targets were. And had we continued, had we not had external challenges like the current environment, we would have certainly delivered on our growth and exceeded it. I think if you look at the longer-term vision, we certainly see about 20% margins. from where we are and renew our consolidated growth, as we've indicated in the past. The current situation, given where we are with the external challenges that we have, it's very difficult to tell. But the long-term picture, the long-term horizon for both businesses are very much intact. We're very positive about it. which is why we're still investing in it. And most of the investments are going back on the basis of our customer commitments.
Earlier, you have always guided over the past year the we will be at least 1%, 1.5% kind of margin improvement as compared to a base margin of 19%, 20% over the next few years. So let's forget about FY'23, but let's say from FY'24 onwards, can we start seeing that improvement from our base levels of 19%, 20% in FY'24, FY'25 every year?
Yes, we should. And I had always indicated 50 to 100 basis points on an annual basis, but yes we should. That's what we are working towards. Absolutely.
And on the CapEx side, given the kind of headwinds that you are facing currently, what are our CapEx plan for FY'23 and '24?
Right now for FY'24, we haven't gotten any CapEx because it all depends on where we are today. But as Kuldeep, our CFO had mentioned is that we're completing all the CapEx that we had backed by the customer contracts that we had initiated last year on the top side for the Crop division and for the Pharma division, we have the Animal Health CapEx that we are undertaking this year. and a slight expansion in R&D based on the inquiries or the number of inquiries we've had and that we need to cater to. So we have to invest in that. So we expect that it's only CapEx that we need to do. Obviously, it's focusing on what's absolutely necessary at that time and what's backed by customer commitments. What's good to have is something that where, at this point in time deferring probably until the second half of this financial year.
How much will that amount be for FY'23? How much CapEx will be left where we have commitments from customers or commitment from companies?
So about INR 250 crores to INR 270 crores as Kuldeep our CFO had mentioned.
Sure. Last question on the Pharma side. FY'19, we ended summer with revenues of around INR 940 crores -- INR 939 crores or INR 940 crores. And this year we are ending with INR 1,130 crores. So, it's a single digit kind of revenue growth that we have seen over the past 3 years in Pharma. So if you can highlight about what kind of challenges we have faced on the Pharma side despite most of the API company running in in past year or two. So what has been the reason of such slow growth in Pharma side? And leave apart FY'23 how much growth do we see in Pharma segment during FY'24 and '25?
As you... go ahead.
Yes. So on the Pharma side, if you see, typically, the revenue growth has been 10% to 12%, if you see overall CAGR of 5 years, it will be more in the range of 13%, 14%. And yes, in between, we had a little slowdown in 1 year. And that's why maybe this 2-year period is dropping. But over an extended 5-year period, we have close to 13%, 14%. What we are looking at for the future is adding more new products on the API side. As I mentioned, we are launching several new products on the anti-diabetic segment.
And number two is we are looking at building new relationships on the CDMO side where we offer our development and manufacturing services. And the third vertical is the Animal Health business, which we believe has got very good potential. There are limited number of players out here, and we believe Hikal is in a very good cost position and strategic position. to ensure that we get to capture more of the annual health market. So we will be in all the 3 segments. And I think the growth will always be in that range. I'll say, close to 12% to 15% going forward.
From my side, '24 when you say also, we expect the Pharma segment to grew at 12% to 15%.
Yes, that's [ better ] FY'23, we'll have to wait and watch as we explained on the various issues, but growing future, definitely, we will go back to our going weight with these 3 initiatives I mentioned on APIs, on CDMO business and Animal Health business. We are very bullish on CDMO and Animal Health because it is upper alley. We have done several of such projects. It is -- customers like to work with us in those segments. And we have made a success of it in the past, and we'll do more so in future in these two segments.
So the last question on the gliptin side. We have been very hopeful that gliptin is -- like 2,3 years back we were very confident that gliptin as a segment on the Pharma side will scale or we'll see some -- at least few molecules coming out of this gliptin segment, which can contribute INR 50 crore to INR 100 crore of additional revenue for molecules. So if you can talk about how has this segment or gliptin as a segment built up for us? And how much is it contributing to our revenues per annum.
The gliptins are just -- In the anti-diabetic side, there are two segments, one are gliptins and gliflozins. They are both coming out of patents now actually, let's say, something like Sitagliptin FY'24 will be the real year where we will see significant commercial sales. As of now, we have provided development quantities and seeding quantities to various customers and they can launch only once the patent expires in various markets which we will start seeing good commercial sales in FY'24 onwards, on the full anti-diabetic segment.
The next question is from the line of Dhwanil Desai from Turtle Capital..
So Anish the first question is. I think if we go back to our earlier calls, I think we were aspiring to grow anywhere between 15% to 20% year-on-year. And barring FY'23, if we -- I understand that the commentary continues. And only Pharma segment grew by 12% to 15%, Crop Protection has to grow at much faster rate. So how do we correlate these 2 things together?
So I think basically, based on what the current situation is we've been a little more conservative. But we certainly feel that both divisions can grow at 15%, right? Given the current situation, as we said, it's very, very difficult for us to give guidance post FY'23. But if you look at the comparison between the Crop business and the Pharma business, Crop can scale up much faster than that of Pharma because of the regulations and because of the validation and the time taken to actually get to commercial.
Being or originating as a crop company 32 or 34 years ago, we know this business inside out. We see the massive demand in terms of both our product pipeline and the commercial that we have currently in process. So we certainly see Crop being more of a hockey stick approach, but Pharma is taking its time because of all the regulations, the different markets that they're entering. Both businesses will continue to grow at 15%, and that's how we are confident of. When is a bit of a challenge to say right now, given where we are today with the external forces that we have.
Okay. Okay. Second question, Anish, on a slightly direct question, but I mean the change in commentary on demand side, I understand RM pressure and everything is there for everybody. but in span of these 3 months, the change in commentary is quite significant. So is it because have we lost any significant customers or contract, which is leading us to kind of taper down our growth aspiration for FY'23?
So we've lost not a single customer, neither have we lost a single contract. Our customers have stood by us during this difficult period of time and they are still with us. In fact, we are in discussions with our existing customers on how to increase volumes as we go forward. So our customers are very much with us. The demand has come off, like in the Pharma business, as Manoj has alluded to, the demand on the generic side has come up because there has been a lot of inventory -- there's been a lot of pipeline in the inventory.
On the CDMO side, I definitely see the demand to be buoyant and it's all about us executing the demand. The challenge there has been is that the input costs have gone significantly higher. And for us to be in business, we need to make money as well. So we are working with our customers, taking into account that these are long-term relationships that we will work with our customers to ensure that it's a win-win situation for both of us. But we have not lost a single customer and/or a single contract.
Okay. That's very helpful. So again, coming back to the margin side of it, I think we have been guiding, as you said 50 to 100 bps margin improvement every year as the growth comes back. Now we have -- we are undertaking this transformation program of quite a big initiative that we've been talking about. So this 50 to 100 bps was before even the transformation program that you had undertaken, right? So I mean, is there any positive rub-off impact of that, which can kind of improve the potential of margin improvement going forward?
So we certainly see. I mean a lot of the programs that we've taken, actually, we would have been worse off had we not undertaken the programs and had our global partner not been with us because a lot of those initiatives had started late last financial year. So if we were to compare and we do compare this internally, had we continued the way we were in terms of our programs versus what the value add has been from our external partners, it's significant -- it's significant improvement. So the raw material costs, the input costs have been so substantially higher than what we had predicted.
But some of those cost improvement programs that we've undertaken has helped to actually save us money, otherwise, the impact would have been even worse. I think going forward, getting on board cost improvement programs also looks at strategic supply chain, right? So we've also developed strategic suppliers to derisk ourselves from the Chinese supply chain. So that takes time, right? So we have various programs, which will eventually on stream, I would estimate probably in the next half of this financial year, which will actually lead to supply chain derisking and eventually increase in terms of margin.
Okay. And last question is basically with respect to our...
We'll move on to the next question from the line of Shravan from Premier Capital.
So I needed a little more color on our Animal Health contract. It's been like a year since you got that contract. So any color you can give on the kind of CapEx we are incurring specifically for that large client that we are working with? And also the kind of potential we see revenue potential over the next 3 years, probably?
Yes. So Shravan, basically, as we had indicated in the past calls as well, since the very confidential contract, we're not disclosing the amount of investment that we're putting in. However, in this case, our customer is contributing to 50% of the capital expenditure that we are putting into the plant, which shows their long-term commitment. It is a tenure contract. It is multiple products in the contract itself. So it's a diversified contract. The asset turnover ratios of the revenue is going to be more in line -- more or less in line of what we are doing today, which is 1.5x what the asset that we're putting in.
It is a substantial asset that we are building. And this is just the first phase of the products that we have in the pipeline. So there is -- this is wave 1 and wave 2. There's also wave 3 and wave 4 that will potentially come down the line. The Animal Health business as Manoj eluded to is a very strong potential for us. We are seeing a lot of traction in there, not only from this customer, but also from other customers that are now looking at rationalizing their supply chains and their product portfolios. So we definitely do expect good things for the Animal Health business in the years to come.
Right, And on previous calls, when you spoke about this animal contract and the kind of CapEx that we are doing, we clearly said that the kind of the CapEx that we are doing is typically for products that have better gross margins than currently that we have. So all those things hold like the kind of the products that would come on stream later part of this year and FY'24. The margin profile of those products will be significantly better.
I would say they're incrementally better than what we have right now. Obviously, it takes time to go to full potential, but we do estimate that the products to be about 45% contribution margins on those Animal Health products.
Right. Just two more questions. One is, we are seeing this somber demand environment but we've mentioned in our press release that H2 we see the Animal Health -- the Crop Protection CapEx coming on stream. So that would add to incremental revenues in H2. We would see that only in the latter part of Q3 or Q4, right?
Yes. Since the plant comes on stream towards the end of quarter 3, when you fire up the plant, you validate the product and then you start selling, you'll really see some part of revenue coming in this financial year to the end of quarter 4.
Right. And like -- this is like my own thing that I wanted to share with you that if you see year-on-year, our expenses in such a challenging environment, our expenses have actually gone up. So employee expenses are up 30%, while our other expenses are up 10%, 12%. So in this challenging environment, should be following -- should we be following a much more stringent control on our expenses as our margins are down about 800, 900 basis points Y-o-Y. So shouldn't we be a little more aggressive on cost control?
You're actually right. I mean firstly, our margins are down 800, 900 basis points only when you compare Q4. But for the first 9 months of the year, the margins were up and the growth was there. But there is something definitely that we have been looking at very closely. We have looked at every cost that we have. We have stripped out whatever is not necessary. Again, we had invested for future growth. When you have a plant that's coming on stream, you need to hire because the hiring process itself takes anywhere between 4 to 6 months to get people onboard or good people on board. And these are complex multipurpose operational plants that we have. We've also hired for future growth. So we are putting a handbrake on a lot of costs. We are rationalizing costs. But the key here is while we do that, the focus is on improving margins and growing our business because you can only cut costs so much. But to your point, it's absolutely at the forefront of our current financial governance that we have right now.
Right. Got it. And just one last question. So if I just look at the Crop Protection business, Pharma business till Q3 also we were facing a lot of pressure, Q2 and Q3. But the sequential drop that we see in the crop protection business, can you just highlight a little more whether like the lockdown in China did that lead to us not being able to meet some demand because of the supply chain issues? Or like because of the lockdown, could we source some of the materials or they went up so high because the sequential fall in Crop Protection margins is quite a lot. Pharma is down, but were facing some issues in Q3 also. Just if you could highlight a little more on Crop Protection business? Because when we spoke last on 10 February or when we had the last call, at that time the scenario of the Crop Protection business wasn't that bad. So I understand the war and everything and that is taking place post that only. But I really -- if you could just highlight a little more on what actually transpired in the crop protection business for such a sharp sequential decline?
Yes. Anish I will take this call. So as I mentioned to you in my speech that there has been supply chain disruption, which we faced and those disruptions are, one, is the availability of raw materials and other is the price. The way there was sharp increase in crude prices, energy also has almost become double. And there were issue of -- I mean passing the cost to the price and the availability of raw material. And that has impacted between Q3 and Q4.
The next question is from the line of Piyush Jain from Hansraj Virendra Capital.
My question is on the Pharmaceuticals segment...
Mr. Jain, sorry to interrupt you, the audio is not clear from your line. Please use the handset mode?
Is it better now?
Yes, sir.
Sir, my question is on the Pharmaceutical segment. As we are talking about the good growth coming in for the next couple of years, can you throw some light, if you look at our DMF filings for the last 3 years been 1 API for at least for FY'20, '21 and '22. So can you just throw some light how the given pipeline is evolving on the development side? And where do you see the most of the growth would be coming from the existing approved products or it would be some new development projects which you would be working on?
Do you mind repeating the question? I think your audio was not very clear towards the beginning.
So my question is on the product pipeline on the Pharmaceutical segment. So if you look at our DMF filing for last 2, 3 years, it's been 1 API for each year. And as you are bullish on the growth, which would be coming in the pharmaceutical segment, so is that you are expecting from the district products? Or are you having a new product in the pipeline, which you are working and that is going to drive the growth in the pharmaceutical segment?
Answer this question. So first is this -- our DMF filing has been more than 1 per year. If you see the average has been 2 to 3 per year. And that is the philosophy where Hikal works on that we'll file less number of DMFs, but we will ensure that the DMFs are commercialized, and we have a good cost process. Now on the cost -- on the future growth, it will be a mix of getting more customers for existing products and increasing market share as well as getting into commercializing the new DMFs. As you know that what DMF we filed today is actually a 3- to 4-year process to really commercialize. So it takes a while. So from a current cabal of 2 to 3 DMFs, we'll actually now will accelerate growth to 4 to 5 DMFs per year. And that's the reason we are investing more in R&D in the last 1 to 2 years, and we'll continue to do that. And as I mentioned, that it will always be a combination of old plus new.
Okay. And sir, second question is on the CDMO pipeline. So I think if you look at the sales break up in the pharmaceutical segment. So if it's something from FY'20 to FY'22, it has gone significantly down from 54% of the sales to 44% of the sales. So can you like -- is that due to that some projects has been dropped off from the pipeline? Or how this pipeline looks like in the coming 2, 3 years are we adding some late-stage projects or how this pipeline is going to evolve in the coming time?
The CDMO projects are always dependent on the forecast from customers. And there are years when the customer goes in for inventory correction which was in the last year, I'd say where the customers wanted inventory corrections because they had built up excess inventory during the pandemic. So that correction are taking place at this point of time. But at least the base business will be back to where it was, I'll say, in the next -- Q2 onwards. Now on the new product pipeline, yes, we are -- as we mentioned in our opening statement, several new customers are being added as we speak. Many of them are coming for audits and discussions with us now since the pandemic is getting better, I will say.
On-site visits have restarted, and we are confident of adding several customers going forward. As we have mentioned previously that all customers are looking for alternatives beyond China or what we call the China plus one strategy. And that is playing out in the CDMO segment, which we are seeing very clearly. We have seen several new RFPs coming towards us and our conversion ratios have also increased in the CDMO segment. And that is -- the same logic applies on the Animal Health segment where several big pharma companies have animal health businesses, and they also want to partner with the new companies in India. So overall, I'll say a very healthy pipeline of CDMO projects.
Sir, the new order inquiry, which you mentioned, is it largely the Phase I, Phase II, Phase III molecules or already commercialized where they want to just...
I'll say Phase III and -- or to be commercialized. Phase I, Phase II come with their own risk. We have a few of them. But what we are referring or I'm discussing now are more in Phase III and getting on the way to commercialization now. In fact, two cases where we are signed that's already a commercial product. and we are doing a scale up or validation quantity at this point of time.
The next question is from the line of Pankaj Jain from [ Mahavir ] Investments.
Sir, actually just going through your collateral and yearly outlook throughout the call, I understand that there are some short-term challenges that the company is facing currently. But can you please elaborate or throw some light on how do you see the long-term prospect shaping up, maybe longer-term view and especially with the initiatives, which we have taken and also the transformational program, which we have undertaken. If you can just give us a long-term view on how the company will be shaping up?
This is the operator, sir we are not able to hear you?
Are you able to hear me now?
Yes, Mr. Jain, we are able to hear you. We are not able to or the management. One moment.
Mr. Mehrotra, am I audible?
Yes, I can hear, but I thought it's more of a company point of view question. Anish should answer that.
We'll reconnect the management line. One moment, please.
Okay. Okay. They have been disconnected. Actually, I'm in a different location today.
I think the transformational program is well underway. We've identified, not only have we identified several opportunities for taking out cost and bringing in more efficiency. But we've actually done, identified several strategic initiatives with customers and product pipelines, which are actually yielding results as we speak today. I mean, as you've heard from both the businesses, the pipeline has been increasing over the last 2 quarters substantially. And as Manoj has alluded to there are really live products in the pipeline, which are Phase II and Phase III and some semi commercial as well. Vimal himself in his Crop Protection business has several products in the pipeline close to about 6 right now that are underway, that are being evaluated at the proof-of-concept stage and that will soon go into semi commercial stages.
So I think overall, from a company perspective, we certainly see growth returning. These are short to midterm challenges that we feel that are more external. And I think the entire environment is being affected, like every manufacturing company, out there is being affected by the increase in terms of raw material costs as well as utilities. To be a little more specific, I'll hand it over to Vimal and he can take you through some of his views.
Yes. So in Crop Protection from CDMO customers, we are getting a lot of inquiries we are getting inquiries from the same customers for additional products, new products as well as from new customers also, especially from U.S. and Japan. In our own products, we are going to commission our 1 fungicide plant in -- at the end of this financial year. And there, we have one more product, which is under development. And we have 2, 3 more products which are on development, which are expected to come in line maybe in the next 1 to 2 years. So we see a good momentum going forward. Yes, Manoj over to you?
I sis answer on the CDMO pipeline and the DMF pipeline.
Ladies and gentleman, due to time constraint we will take one last question from the line of [indiscernible].
I hope this will be the last quarter of disappointments. I have a couple questions on financial front, can you please give the total debt figure, the term loan as well as the working capital?
Yes. So the total debt as of March '22 was INR 675 crores. Which comprised of INR 273 crores of working capital debt and INR 402 crores of long-term debt.
So what we can make out in this call is that the pessimism that you're showing for this current year is only because of the raw material cost push, you don't see any shock or any problem on the sales side, you're only concerned about the profitability. The top line does not bother you?
Yes. I mean, primarily, it's driven by raw material input costs, right? Because there have been certain circumstances in which products have become unviable to sell because in Q4 and as we see in Q1 because of these sharp, sharp increases in raw material costs and supply chain challenges. From a demand perspective, we don't see any challenges. But if the geomaterial situations and supply chain challenges and energy costs come down, then certainly, we definitely see an upside potential. But to your first statement, certainly, I think Q1, as it's shaping up is definitely more challenging than Q4. But Q1, we hope to bottom out at and then there'll be a stepwise increase as we see in Q2 through Q4 of this financial year.
Okay. And the Taloja facility, how much was it contributing to our top line? What has been disclosed by you in the previous documentary has been about, say, INR 220 crores. That's almost 10%, 12% of our total top line.
Yes, that's correct. It's increased slightly. It's about INR 260 odd-crores -- INR 260 crores to INR 280 crores is what it contributes to our top line.
So considering you're already expecting a muted quarter, this shutdown would not be impacting you?
Yes. Impacting us from what way? In addition to that, I mean, that's part of the reason why we have our muted quarter.
Okay. Okay. And lastly, I've been a shareholder for almost 7 years in the company. Prior to this, we got patted on our back saying that we had managed to derisk ourselves on raw material procurement from China and other things like Sameer had said initially, unfortunately, he is not there in the call. I hope we meet next time on our own but all of a sudden, we are seeing that there's been no specification on our raw material changing policy because it's hitting us even harder now.
So we have derisked our supply chain significantly, but it's not only China supply chain that is affecting. It's also a domestic supply chain that's gone up, right? Input costs have gone up substantially. I mean, feedstock itself, it's not available. You've seen solvent prices that have gone up about 40%. Input costs from domestic suppliers themselves have been affected. So even if you're 0 reliant on China, you still have input costs. I mean there are a lot of companies that have no reliance or very limited reliance on China. They still have significant input costs, right, increase?
Also understand that this time the...
Yes, go ahead.
This time the disruption, I think more global. It's not only restricted to China. All because of first, the COVID crises in China, now the European, Ukraine war, so it's all over.
And because of the Ukraine war do we see any less offtake in Europe or that stands as normal.
Offtake stands. Offtake stands, in fact, there are customer for us who in Ukraine who is actually resuming buying now. So offtake stands in all of the European market, but it is the input costs, which have become unpredictable.
[indiscernible]
All our customers have long-term contracts. They have government tenders and all. It's very difficult for us to really pass through the cost immediately. It takes time.
So I hope that you are also entering into some long-term contracts with your suppliers to mitigate this cost structure?
We do that, definitely, but this time, in our opinion, it has been, to some extent, force majeure as well.
Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Anish Swadi for closing comments.
So I'd just like to take this opportunity to thank everybody for joining the call. I hope we have been able to address all, if not, most of your queries. For any further information, kindly get in touch with our strategic growth advisers, who are our Investor Relations advisers. Thank you very much, and stay safe everyone.
Thank you.
Thank you.
Thank you. Ladies and gentlemen, on behalf of Hikal Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.