Hikal (NSE:HIKAL) Q2 2027 Earnings Call

0:00 Ladies and gentlemen, good day, and welcome to the Q2 and H1 FY 'twenty seven Earnings Conference Call of Hikal Limited. This conference call may contain forward looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Please note that this conference is being recorded.

0:48 I now hand the conference over to Mr. Sameer Hirimat, Chairman and Managing Director from HIKAL Limited. Thank you, and over to you, sir. Thank you. Ladies and gentlemen, a very good evening and a warm welcome to all of you. We extend our gratitude to all of you for your participation in our Q2 FY 'twenty seven results conference call. We are delighted to provide you with an update on the progress made by our company. We trust that you have the opportunity to review our comprehensive earnings release, investor presentation and the financial statements for the quarter ended 09/30/2026. These documents can be accessed on both Hikal's website and the Stock Exchange's website. I am Sameer Hiremat, Chairman and Managing Director, Hikal Limited, and I'll be leading the discussion and presenting the financial results.

1:43 On this call with me, I have Anish Swadi, CEO of Animal Health and Specialty Ingredients Uldeep Jain, our Chief Financial Officer Manoj Bharatra, Head of our Pharma Business Ravi Khadwari, Head of our Crop Protection Business and Strategic Growth Advisors, our Investor Relations Advisors. I'm pleased to report our performance for Q2 and H1 FY twenty twenty seven with the Q2 revenue standing at INR434 crores with an EBITDA of crores and a margin of 10.3%. For H1 FY twenty twenty seven, revenue stood at INR837 crores with an EBITDA of INR82 crores and a margin of 9.8%. Our revenues, volume and EBITDA have grown compared to last year.

2:29 However, profitability was impacted to some extent in the year due to higher raw material prices especially in our crop protection business. Our Pharmaceutical business continued to progress supported by the recovery in our established API portfolio and sustained execution by increasing volumes in our CDMO business. In our own product portfolio, the legacy portfolio improved both sequentially and year on year. New products continue to advance with higher sales expected in H2 as production ramps up. Customer traction also strengthened across Latin America, Japan and Korea. In addition, regulatory approvals were secured in China and Brazil for two products widening market access and supporting future demand.

3:17 In the CDMO business, growth continued through contributions from our new product development pipeline for APIs and intermediates supported by strong customer relationships. I'm pleased to share that our quality remediation program in our pharma business is well on track and we have received a certificate of GMP compliance from the Swissmedic agency for our Bangalore facility recently. This certification reinforces the strength of the quality systems and the remediation programs at our Bangalore facility. It is an important step in expanding the global reach of our pharma business and creating opportunities with customers in Europe and other regulated markets. Compliance, quality and manufacturing excellence remain central to our longer term customer partnerships.

4:10 For the Crop Protection business, we continue to navigate the challenging operating environment impacted by elevated raw material energy prices as well as pricing pressure from Chinese competition. Our own product portfolio delivered a year on year growth supported by some of our legacy molecules. The CDMO business continued to focus on strengthening customer relationships and we're posting longer term programs beginning right from process development to commercial scale manufacturing in custom synthesis and commercial manufacturing. For that, I'm pleased to share, whichever shared which our stock issued release was made yesterday that we have signed a multi year contract with a European based global hydrochemical company to supply a specialized product to markets worldwide.

4:57 Commercial launch is expected towards the end of this financial year with volumes anticipated to grow progressively as regulatory approvals are secured across global markets. This CDMO contract reflects our ability to combine technical expertise, process development and manufacturing capabilities to address complex customer product requirements and support the transition from lab to commercial scale. Our Animal Health business delivered year on year growth with contribution margins improved quarter on quarter. Our business for our current products was supported by higher volumes while the new products under the CDMO pipeline progressed from lab to validation and some into the lab as well. In the Specialty Ingredients portfolio, we achieved an important milestone with the commencement of recently commenced commencement of the commercial production of our new multipurpose facility at Panoli.

5:52 Our priorities are to progress customer validation approvals, which are well underway and convert the ongoing engagements into commercial sales across key markets. With demand progressively shifting towards next generation UV filters and other complex skin care products, we believe this can become a meaningful growth contributor over the medium term. We continue to work towards the targeted U. S. FDA reinspection of our Bangalore facility and are hopeful it happens towards the end of this current financial year. Successful completion of the regulatory process is expected to support recovery in our pharma business with the regulated markets and accelerate the current new CDMO pipeline. Looking ahead, we remain confident in our growth outlook in H2 versus last year.

6:39 We reiterate our full year guidance given in the last quarter for a mid teens growth in revenue and a substantial improvement in profitability. Now I'd like to invite Kulnip Jain, CFO to discuss the financial performance. Thanks Sameer and good evening everybody. For quarter two FY twenty twenty seven, our revenue reported at INR434 crore, EBITDA at INR25 crore with a margin of 10.3% and PAT at Rs. 6 crore. For H1 twenty twenty seven, our revenue stood at Rs. $8.37 crore, EBITDA at Rs. 82 crore with a margin of 9.8% and fat at INR14 crore.

7:25 Depreciation charge remained same broadly during the last year. Capital expenditures stood at INR81 crore incurred towards debottlenecking, inventory regulatory upgrades and selective capacity creations. Our capital allocation remains targeted with priority given to high turns projects aligned with our long term growth objectives. Elevated raw material prices have impacted, as Sameer has mentioned, our margins this year with key solvents and certain commodity prices increasing sharply by over 100%. Some of the raw material costs has increased by over 100%. Majority of these increases in our CDMO business, which will be passed on to the customer over the next few quarters.

8:12 Our growth initiatives continue to be financed through a combination of internal accruals and external debts. As of 09/30/2026, our debt to equity ratio stood at 0.52. Now I'd like to hand over this call to Mr. Manoj Malhotra, who is our President, Pharmaceutical, who will provide an overview on the Pharmaceutical division performance. Over to you, Manoj. Thank you, Pundit, and good evening, ladies and gentlemen. For quarter two FY twenty twenty seven, the Pharma business reported revenue of INR $2.78 crores, EBIT of INR 13 crores and an EBIT margin of 4.6%. For H1 FY twenty seven, the Pharmaceutical business reported revenue of INR $5.11 crores, EBIT of INR 20 crores and an EBIT margin of 4%.

9:02 The improvement over Q1 was led primarily by the established API portfolio, with the legacy portfolio recovering sequentially. New products continue to progress and we expect higher sales in S2. Customer traction strengthened across Latin America, Japan and Korea. During the quarter, we also secured regulatory approvals in China and Brazil for two established products, expanding market access and supporting future demand. Capacity utilization during the quarter ranged from 60% to 70% at our pharma manufacturing facilities as we consciously slowed down production to comply with stringent quality standards. This was a strong quarter in compliance. The Swiss Medic certification was received. We have completed 28 customer audits successfully.

9:48 Our remediation program with the US FDA is on track, and we expect reinspection by end of the current financial year. Our CDMO business continued to grow, supported by contributions from new products and intermediates and through deeper engagement with customers. Retentions remain strong across key accounts. The customer base includes a balanced mix of innovative companies and emerging biopharma customers across The U. S, Europe and Japan, supporting both pipeline diversification and future growth. Opportunities span process development, intermediate, custom synthesis, Feet models and high potency chemistry, with several programs at proposal or RFP stages. To conclude, we are confident that our H2 performance will be significantly better than H1.

10:37 Now I would like to invite Mr. Ravi Karwari to provide an overview of Crop Protection division's performance. Thank you, Manoj. And good evening, ladies and gentlemen. For Q2 FY 'twenty seven, the crop protection business reported revenue of 156 crores, EBIT of negative INR 2 crores and an EBIT margin of negative 1.5%. For H1 FY 'twenty seven, the crop protection business reported revenue of INR $3.26 crores, an EBIT of INR negative INR 8 crores and an EBIT margin of negative 2.5%.

11:27 Q2 was a challenging quarter. Elevated iron prices impacted our margins. Chinese competition kept global prices under severe pressure with customers buying only for immediate requirements. Our legacy portfolio remains the main growth driver with increasing volumes. In CDMO, demand was deferred to H2 and margins stayed under pressure. We are passing on majority of the price increases to the customers. On a positive note, as Sameer mentioned, we have signed a multiyear contract with a Europe based global agrochemical company to supply a specialized product to markets worldwide.

12:21 Commercial launch is expected towards the end of FY 'twenty seven with volumes anticipated to grow progressively as regulatory approvals are secured across global markets. Customer engagement in Japan has increased, including alternate supplier opportunities for existing products. Now I would like to introduce Mr. Harish Swari, CEO, Animal Health and Specialty Ingredients, who will provide an overview of our emerging businesses. Thank you. Thanks, Ravi. Good evening, everyone. Animal Health business continued to grow in revenue this quarter.

13:10 Our existing product portfolio saw an increase in volumes and our new CDMO projects are progressing well. Currently, we have three new KSMs under validation for our innovator customer and we are hopeful to commercialize this in the near future and the upcoming quarters. The business remains an important growth platform and we continue to work towards our overall ambition of growing the business to about INR400 crores by FY20. Currently have six products under development under the CDMO pipeline and over the next twelve months, we do expect to commercialize several of these. Regulatory progress is on track and a new filing completed during the quarter. We have nine process patents that have been filed from R and D over the last twelve months.

14:00 Our long term contracts with global innovators continues to be an anchor for this business. Under our Specialty Ingredients business, we have moved from plan to production this year with the commercial manufacturing commencing at our multipurpose Panoli facility. We are now focused on stabilizing the production, progressing customer validations and approvals, converting engagements into commercial deals across key markets. This opportunity supported by market trends including the rising demand for functional specialty ingredients and the transition towards next generation UV filters, which is part of our portfolio. With this, I'd like to open up the floor to Q and A. Thank you very much. We will now begin the question and answer session.

14:59 Our Our first question comes from the line of Aman Voora with Premier Capital. Please go ahead. Yes. Hi. Thanks for the opportunity. First of all, congratulations, Sameer, on taking up the role of Chairman and Managing Director. I would start with the performance in 2Q. So if I look at... First, I'll start with the pharma business. If I look at the pharma business, we reported roughly INR $2.78 crores of revenue. Y o y comparison might not make sense given the base, but if I compare it versus the second quarter financial year twenty five where we had reported $2.94 crores of revenue, We are broadly similar in terms of revenue where we were in 2Q F twenty five, but our margins that we reported are at 4.6 versus 13.7% in that quarter. So could you explain this 900 basis points of difference that we have on similar revenue? And even sequentially, if I see the margin improvement looks very tepid, it's just operating leverage that has caught up versus 1Q. So could you just help me understand the margin for the quarter?

16:25 Well, I don't have the Q2 FY 'twenty five numbers in front of me. So I can compare it to last year. But I think broadly if I have to say contribution margin also has dropped in Q2 FY 'twenty seven because of the some impact of raw material prices and product mix. That's number one. And number two, our fixed cost has increased compared to FY 2025 because of the U. S. FDA remediation expenses, which was not in FY 2025. These are the two main reasons, why the revenues are more or less the same compared to FY 2025, the margins have dropped and this that's the reason, yes. Sameer, could you quantify the fixed cost because 12 crores of EBIT versus 40 crores that is a difference of about 30 crores, 28 crores. So it's very I would high that working compared to '25, I'm sorry in front of me. I haven't done it, I would have that. We can discuss it offline.

17:20 I'm happy we can get in touch with our SGA investor advisory firm and we can share this with you. No problem. So let me frame it this way, a normalized margin, EBIT margin of the Pharma business should be in double digit. Is that understanding correct? Like should be more than 10%? I think so. Yes. Yes. So we reported 4.5 this quarter. So if you could help me understand like where are we headed going into the second half given the fact that the margins remain much below our historical levels? So I understand the guidance of EBITDA growth being 25% that you had shared last year, but if I just put in that numbers also, we have done better in the second half last year also. So could you just explain this bridge, how do we get better sequentially?

18:09 Well, half is going to be significantly better compared to first half, and that's the way HIKAL business has been even prior to FY 'twenty five, we look at historical because of the nature of our business. And this obviously this year, first half is lower compared to FY 2025 because of the slowdown in production as you're aware of. H2, expect to make a recovery compared to H1 and there's going be a significant improvement in the pharma business compared to H1 in terms of revenue. And based on the contribution as well, if you look at the contribution also we expect the EBITDA to also grow up substantially in H2 compared to H1. See the two costs that are going to remain which are elevated this year and I think it will remain till end of this year, which is the other. The USFD remediation cost, which is adding on to our fixed cost, which was not there a year and a half ago.

19:05 That will eventually go away. That is as I mentioned in the last call, it's adding almost INR 20 crores to our fixed expenses every year from an operating perspective and it's also added some CapEx. But let's look at the P and L, adding about INR20 crores. If you take that out of the way, out of the thing, then our EBITDA margins will at the end of this year, will if you remove this INR20 crores impact, our EBITDA margin for this year will be over will be closer to 1718%, if you remove this INR 20 crore. Got it. Got it. And just to understand this better, could you share a little bit more details on the CDMO contract that the agrochemical division has received?

19:54 Yes, sure. That's been a very positive development after several years we won a CDMO contract because I think the worst of this crop business is behind us. While margins are depressed due to current war situation and Middle East crisis, the signing of this contract is sort of very niche specialized activity, we've been working on it for almost three years now. We started off with process development, scale up, registration filings and now the approvals are expected to come through and commercial production will be starting by end of next quarter. So it's not a very long gestation period because a lot of work has already happened in last two, two point five years. This is a multiyear long term contract.

20:40 It is typically evergreen. This contract go on for five, ten years and beyond. Once you get approvals, they don't change. So we expect this also to be the same. It's a very long term contract. The launch will be next will be end of this year, but the realistic volumes will come next year. And we expect peak realization by calendar year 2019, early two thousand and thirty. So not too long, two point five years you can go to peak revenue from launch. It's a high margin business with a contribution margin well in excess of the contribution margin of the current crop division and even higher than the contribution margin of the company, I would say. The previous CDMO niche molecule and the EBITDA will be very in excess of the EBITDA margins of the company. So it's a very revenue and margin accretive CDMO business.

21:33 It's a very positive thing. Got it. And any understanding of the quantum of the molecule as it can be on peak utilization in calendar year 2019? So it's a I think we should look at margins rather than this thing. I think it be about INR 50 crores to 75 crores per year, but very high margin business. Got it. Got it. It. Yes. Just last one from me. So just to understand where the business is headed. So last year, second half, our EBITDA margin was about 18.5%. Safe to assume that second half F 'twenty seven will be at least be able to make that kind of EBITDA margin? 18.5%?

22:20 I think second half. See, the issue is that the war situation is maybe having some impact. If the war situation normalizes, we should be able to achieve that. But otherwise, it may be in that range, maybe 100 basis points here and there, not more than that, yes. Our next question comes from the line of Rohit Sina with Sunneadi Securities. Yes. Thank you for taking my question, sir. So one question is on the remediation cost. Just I think I missed out. I just wanted to understand how much cost there was for the first half and is the cost still recurring for the second half also?

23:14 Yes, annual estimate which is given in the last quarterly call is expected to be about INR 20 crores. It may vary a little bit up and down quarter to quarter, but annualized impact is about INR 20 crores. You can divide that by not exactly by four quarters, but it will be up and down in that range, every quarter, yes. Got it. Got it. And sir, because of this U. S. FDA issue, we have been bit of some of the pharma revenues. If you could help us understand if that would not have been happened, what sort of revenue size we would be doing on a quarterly basis as of now given some of the new customers who already are in talk with us for the business?

24:00 And or in other way, once we get this clearance, what sort of quarterly pharma revenue should be added back to our size? Yes. See, once the clearance comes, immediately the sales will not start from day two, but it will start ramping up. On an annualized basis, we expect this impact to be positive about INR150 crores. Like to like, if you take the base level today and if FDA comes back or if you take twelve months hence from today, then we'll be at 150 crores positive on revenue. That's a top line estimate and our contribution will be about 45% to 46% contribution on that business. Got it. Got it. And sir, on the Personal Care segment, if you could help us understand how much development we have done as of now and what sort of revenue we could expect in the second half with, I guess, the margins would be better than what we are doing on a console basis as of now?

25:08 Yes. So just to talk to you about the Personal Care, the strategy behind Personal Care is fold, very similar to our other businesses. What we've done is we've developed a small portfolio of products that we think is niche for the market that we've seen a potential gap in the market. So we've developed that. Those products have been currently undergoing validation in the plant. So they should only be ready in the next couple of months. Post that, we're going to go out and test the market. We already have some indications, but we're going to commercially ramp up that portfolio. The second broader aspect of this business that we're focusing on is contract manufacturing, where we've actually started some time ago. So we've aggressively gone after several of the anchor customers that we want to bring on board to offer services. And that's going to be very similar to the methodology that we use in crop protection and pharmaceuticals, more on the pharma lines because of the kind of products we're going after, where we're going to offer CDMO services like early stage development to commercial validation.

26:18 And obviously, a lot of those products require global regulatory approvals. So that's going to be what majority of the business is going to end up, think, in the next four years, the target is that majority of the business is going to be CDMO rather than an own product portfolio. The own products are more to get a flavor of the market, to establish ourselves, to get our name out there, that this is what we do, this is what we can do in terms of chemistry and in terms of quality and compliance. Okay. Okay. And one last question before I rejoin the queue. In this new contract, as you said that it would be a global contract, So that customer has business in India as well. I mean, this our sales would be for India as well as export both or it would be purely for the export market?

27:12 It's a very niche molecule, it's a specialized molecule. So mostly it is in the export market because the prices are on the higher side. There will be some India sales, but the majority will be in the global markets. It's a regulated global market. Got it. Got it. Thank you, and best of luck, and happy to all of sir. You too. Thank you. Thank you. Our next question comes from the line of Henil Bhagatia with Equicorp. Please go ahead. Thank you for the opportunity, sir. I hope I'm audible. You are audible, sir. You may proceed. Sir, actually, I am starting with the academic division with the... With respect to the new order that we've actually got. So if we give some more understanding, is it in line with the CRM activity we actually plan? Because we actually had some plans to have actually a research platform and do something that that people are actually clear, actually doing in pharma to try to replicate that in the Aggregant side. Is that the first step towards this particular initiative that we have?

28:16 Yes, secondly sir. Yes, please go ahead. So secondly, with respect to the molecule, as you said, it's specialized and it's got a specialized application too. So with respect to the sourcing, do we... At peak sourcing, do we expect to be in the top two or the top three supplier list for that particular customer? And is it like a patented molecule, or is it like an off patent? Because from what I understand is in CDMO as long as the product is in patent, the players don't mind paying money. But once the product nears the patent expiry, think so the negotiations happen and I think so the margins also take a tie for the CDMO players. Okay. So I'll answer. They're both two very good questions. And I'll go to the first one. This is part of our strategy to get involved with the customers early on in the development. So as I mentioned earlier on in this call, we got involved almost three years ago with this project.

29:06 And the first part of the project was to develop the process and the chemistry, provide samples, then scale up the molecule and help them with registration materials. So our technical center in Pune, which is absolutely state of the art and some of the investors did visit in the last quarter and invite all the shareholders to come and visit at any time they like, has been a very instrumental part in acquiring this business and developing a very robust, scalable cost competitive business. This molecule is a niche molecule. By that I mean, it is not on it is something called proprietary off patent. By proprietary off patent, it means even though it goes off patent, because of the niche formulation technology that is applied on the niche application, there is very limited competition in these products.

29:54 These are niche molecules. So even though it has gone off patent, the prices have already been we are focused on pricing post patent expiry because it's one of patent a couple of years ago and there is limited competition. So we are using our technical competency from our R and D center. And a very important part is also the backward integrating into the key starting material, which was being sourced by the competition out of Europe. We will be fully self sufficient in the supply chain also. So that will also help us keep cost of goods and our margins within control. So margins are protected in this contract and the customer has already given us a roadmap for pricing expectations going forward and that has been baked into our projections, which I've just spoken about.

30:41 The other part was the second question, may you repeat that, please? So with respect to the capacity utilization, if we give some more understanding how how much of the capacity utilization will get increased because of this particular molecule. And I... Actually, the second part was with respect to the research platform. Actually, we actually plan to have a research platform. I think so you did allude, we have actually worked with the customer for one to three years. So this is a completely new customer, right? It's not a part of our existing customers that we are serving as a company. It's a completely new customer. And it is a niche customer with very focus on this segment of the crop protection business. And there's a gap in the market which this customer is filling and they're looking for high quality players and we are this is one of many projects that we expect to win from this customer before their preferred supplier and become the number one supplier in this product and other molecules as well.

31:40 That is our aim to build a basket of products with this customer. So with respect to the other molecules that we would probably be doing with this customer and also a few other customers, How do you actually see the utilization of agrochem division actually increasing over the next eighteen to twenty four months? Yes. So the strategy in agrochemical is twofold. One is to increase the capacity utilization, which has remained depressed and low because of market conditions over the last couple of years. And B, we are also replacing some of the low value commodity products and with higher margin CDMO business. So our CDMO business as a percentage of our crop business is increasing year on year and that's a far more lucrative EBITDA accretive business, which will be helping the margins of the crop business grow well in excess of 17%, 18% going forward.

32:31 Okay. So So with respect to the Pharma division, think we are expecting an FDA visit probably towards the end of the year. If you could give some understanding how many DMS could be filed once the FDA completes the inspection or the DMS will be filed next year for the new products because because of the restrictions that we have had. And I think in the last call, you did a... You that we plan to report six to seven DMS per annum. So how much from the filing to, mean, to commercial revenues, what kind of lag do we actually see out there? Because it actually differs from product to product, the specialty product takes more time, the mid specialty products takes less time. Historically, we were doing about two products or three products from our Bangalore facility. Obviously, of the FDA warning letter, current new approvals are not being given to us in Bangalore.

33:22 So we've changed our strategy last year, just even before the FDA warning letter, we constructed a new pilot plant in our Panoli site a year ago and DMF filings on this financial year have started in Panoli. So we expect to file our four products from our Panoli site this year. If Bangalore does come back, we expect to ramp this up to six to seven products, currently it's about four products. And we are hopeful for the FDA to come back and we are getting ready for the inspection and we can't predict when they will come, but we are working towards getting ready for an inspection towards the end of this financial year. So apart from the INR150 crores bump in revenue that you said, the increase in revenue that will come once the one year is ready, what kind of additional utilization revenues do you see with these new additional DMS? Because as I did say, the second part of my question was specialty...

34:13 For some specialty pharma ingredients, I think so. The DMS take a little time from DMS to the actual commercial revenues. For the mid specialty range, it is little less. So what kind of lag do we actually see for the revenues to grow in? But the MF findings have been going on for the last several years. So typically, takes between three to five years from the MF filing to launch depending on the state of the product, is it already expired, is it your expiry, so on and all is very early on. So we think a horizon between three and five years is what we do from a EMA filing. Also very important to understand, we have some approval spending with the FDA from our Bangalore facility for CDMO business. Once the FDA comes and these file these material validation quantities have already been supplied to the customer and the customer has already done this filing, but it is on hold with the FDA because they're waiting for us to clear the reinspection.

35:12 Once the reinspection comes, those CDMO contracts will convert into commercial supply. That will be on top of the INR 150 crores that we've spoken about. Sir, lastly before I get back into the queue, so the repurpose facility that we actually had for agrochemicals to pharma, so is it expected to be on stream pretty soon or it will take some more time to get on stream? That's a very large facility. We Phase are the Phase one part. Phase one is repurposed and that is where we've begun the personal care products commercialization that Anish just spoke about. That manufacturing has just commenced a couple of months ago. The second phase, which will be for our human health CDMO and pharma animal health CDMO projects, which will be repurposed by end of next year based on the customer contracts. So that CapEx is being spent as we speak, the repurposing CapEx.

36:10 Sir, on the Animal Health side, if you could give some understanding, are we actually focusing on Animal Health side, the kind of margins actually should be a little better because in pharma, when a patent expires, there's 80% erosion on the price. Whereas in animal health, I can say it's been about just 40, 50%, and for some, it's actually around 60%. And with a lot of companies actually focusing more on pet animals versus farm animals, I think so the margins are even better for a lot of contract manufacturers. So if you could give, what is our sweet spot and are we focusing more on farm animals or or more on pet animals? And apart from the four top global organizations, are we even helping other organizations to work on the off patent molecules, which they are increasing the supply store? Yes. So I'll just run you through what we're doing.

37:00 So look, I think we're first of all, we're a little agnostic in terms of which category of species we're servicing. So we'll do small animals, we also do large animals and cattle. So that's number one. We're not focused on any particular segment. The second thing is, you're right in terms of the patent expiration and the price depreciation in Animal Health. And it also varies depending on the types of products that you have. But mostly, think you're absolutely right on that aspect. See, our focus is twofold. It's primarily on the contract manufacturing. So we start pretty early on. So we're not really too affected by the price depreciation post patent expiration, right, because ours is not truly a generic portfolio and we're not focusing on generics because that type of market is quite, I would say, competitive, right? And it's got a significant number of players, both domestic and in China, right? So we're not really competing on that.

38:00 For us, it's more on the higher value added items, things that start off early in R and D, NCE, all that work. And we're working beyond the top five global customers. We have a target list of over, I would say, 40 to 45 customers that we have reached out or shown our capabilities to in some shape, way or form. So that's really what we're doing. So thanks a lot for the opportunity. I'll actually come back with the queue and happy Diwali wishes to the entire team. Thank you. Happy Diwali. Thank you. Our next question comes from the line of Harshil Parekh with BTH Capital. Please go ahead.

38:47 Hi, sir. Thanks for the opportunity. My question is specifically related to Pharma segment. So if I look at the long term EBIT margin trajectory in pharma, we used to make around 14%, 15% EBIT till FY 'twenty two, and then our margins have been in mid single digit. So just wanted to understand, is it driven by price erosion in gabapentin molecule or there is something else? Yes. Manoj, why don't you take that? Manoj, you want to answer that question, please? Sir, the line for Manoj has I'm reconnecting with him, sir.

39:33 Okay. Could you give him a minute? Sorry about that. He's just coming to the Sure. Sure. Yeah. Maybe you'd like to repeat the question once he comes back. Just Yeah. Yeah. No worries. Hello? Oh, excuse me, sir. We have Manut, sir, who is speaking to I got disconnected. There's a question, Manuta. Can you can you please repeat it? Yeah. Yeah. I got the... No. I heard the question. I heard the question. So... Yeah. Pharma margins were higher in 2122 because of big operating leverage, which we had at that point of time. Recent parts in last one year, what we are seeing because of this US FDA, are utilizing just about 60% to 70% of our capacity because of various quality control measures what we have put in. And also in line with what we have committed to FDA, we have to take shutdowns for some of our plants to upgrade.

40:36 But once we are completing all that, I think we should get back to EBIT margins of 12% to 13%, an EBITDA of, say, 18%, 19%. This is basically a short term, I'll say, a setback in the last one year. But long term, we'll get back to our historical margins. Just a follow-up on that. Have you seen severe price erosion in our gabapentin realizations? No. What happened is raw material price increase, and then we are able to pass on very often our, I'll say, the cost also. So by and large, the contribution margin, government is lower than other molecules, but the sheer volumes makes up for it. So we still get gross margin of close to 35% or so against the overall pharma gross margin of 45%, 46%.

41:28 So it remains a flagship molecule for us. It is lower than others, but it's it's still substantial. And, sir, are we backward integrated for gabapentin? Yes, we buy the starting material from China, but otherwise we do forceps within Panoli and Bangalore facilities. So we are sufficiently backward integrated and cost competitive as a result of that. I'd just like to add for Gava Pantene, our share of gabapentin of our pharma business is dropping year on year. So the focus is to move by keeping the gabapentin base business constant on the marginal growth. The focus is to add on new products, which will add to a large chunk of our portfolio, which is a higher margin business. So within the own product, the shift is happening towards niche and higher margin new molecules, which were developed over the last three, four years that are being launched as we speak.

42:23 In the diabetes portfolio, in the gastro portfolio, in the CNS portfolio, in the cardio portfolio, we have couple of molecules every year we're launching and commercializing. And oncology is a new area that we'll be launching very shortly as well. So sir, can you give me revenue contribution of gabapentin versus non gabapentin for this quarter? We don't share that breakdown, but but it that's is coming down, that information is. Fair enough, sir. Yes. Thank you. Thank you. Our next question comes from the line of Raghuram Kuchi with Best Buy Research and Advisory LLP.

43:08 Please go ahead. Sir, thanks for the opportunity. Am I audible? You are audible, sir. You may proceed. Yeah. Okay. Sir, just wanted to get clarity regarding this USFD issue. How confident are you... Like, when they come up for reinspection, how confident are you of clearing the USFD hurdle, sir? Well, we've done everything possible to get ready. Why don't you take that call? Repeat the answer here. Yes. So we have taken a lot of remediation measures. We also had a meeting, face to face meeting with USFD on June this year. They are fully satisfied with the progress what we have made. Also, you'll see that we have received several other regulatory approvals post FDA starting with Envisa of Brazil, followed by PMD of Japan.

44:01 Recently, we have got Swissmedic approval also. And if you really see, all these are especially Swissmedic are more or less equivalent to USFD in the eyes of the customer. And we are quite confident that once they come back, we'll get it cleared. And if you see, historical HIKAL has always had a good track record. So this 2025 inspection will be an aberration, and we will never get into this situation again. Okay. And sir, and once can we clear this US FDA thing and all everything is cleared, like what should what could be a potential on the partner side of the business like by FY 'thirty, can we what revenue could we target by themselves if the updating is clear?

44:53 What is the realistic? We expect growth to return and margins to improve to pre-twenty twenty four, 2025 type of levels. And we expect that double digit mid teen growth to continue year on year on a CAGR basis. So that will itself in grow the business very substantially in the next three to four years. This mid teens that you're talking only with respect to the partner business or on right, not the whole entire? Only mid Mid teens. Teens, yes, sorry. But there are projects in the pipeline, which can deliver that growth, right? Because as I mentioned earlier call...

45:42 Ajay, sorry, earlier section. There are a couple of approvals that are pending from the U. S. FDA once the reinspection happens. These are CDMO contracts. They will come into play and then there's volumes will get ramped up. They're pretty niche API and advanced intermediates for NCE products. Customer engagement continues, okay, we have a one liter at this point of time, but the customer engagement, getting new contract and developing mentality that continues because we ourselves and our customers are confident that we'll come out of it pretty soon. We had over 28 customer audits in the last quarter itself. All of them were successful.

46:28 We also have a second FDA approved site in Panoli, which is not impacted. That is where we expect to that is where we're getting market share of new molecules and new contracts that we're also onboarding. In these projects which we are part of like, can we assume that we'll be the primary source or like we have the third or fourth of end, we are likely to going forward, we may become a primary source. Is that right understanding or we are already the main supplier to them? How should we understand this? We were the main supplier because of the warning letter, we're not the main supplier now. They have a primary source in Europe, which they continue to buy from, but they wanted to move the business to us because we were far more competitive.

47:17 So once the FDA comes back, we will become the main source. Thank you, sir. And regarding this animal business, just wanted to understand when you have given this target of like INR400 crores by 05/30, is it from multiple customers or is it the main ten year agreement which we had signed earlier, like that single customer itself can generate the revenue or we have multiple customers there? Yes. So we're using a risk based approach to drive this business. We're not depending on any single customer and or product. So it's going to be multiple customers, some of which we've secured, some of which we are yet to secure. But we have obviously a pipeline and a target that we've established in order to reach for us to work towards.

48:06 So that's where the number comes from. Sir, I'm not sure that I heard it correctly properly earlier in the call. Mentioned that these are off like which are going to go off patent or you're working on NCE in the animal health? I think I heard We're it working on a diverse range of products, everything from early stage development products, advanced intermediates, NCEs and of course, lifecycle extension as well. Thank you. Our next question comes from the line of Rohit Kumar, PDM Advisors. Please go ahead. Thank you, sir, for the opportunity.

48:53 Sir, my question is based on our H1 performance, what is your expectation for H2? Are you confident of achieving your guidance which you shared in Q1? Yes. I mean, H2 will be significantly better than H1. The reason why I'm saying that with confidence is because the pharma business, the production ramp up is taking place in Q2 Q3 and Q4. Crop protection, lot of the CDMO business was deferred to H2. These are secured contracts which we have and production is well underway and capacity is already in place. So based on these, not only will the top line grow significantly compared to H1, but also the EBITDA margins will be significantly higher than H1. And for that, we will expect I expect the management is confident that the guidance given in the last quarterly investor call will be met by the company.

49:53 Okay. Thank you, sir. That answered my question. Thank you. Our next question comes from the line of Aman Mora with Premier Capital. Please go ahead. Yes. Hi. Thanks for the opportunity again. I just wanted one clarification wherein, Sameer, you made that comment that you believe that the worst of the crop care industry is behind. Could you elaborate a bit more on that? And how do you see this business over the next two, three years? Given the fact that we've refocused some of our plans to the personal care business and generally this business has been almost three, four years of very, very weak performance.

50:40 Yes. So by worst, meant, you see eventually the customers do well, then we will do well. This is a very concentrated business where five customers contribute to almost 80% of the market by value. Even though China has a very strong presence in the generic side, by value they are small percentage, right? So these customers have started to do relatively better. Their volume growth has come back and the inventory buildup has gone out of the channel inventory. There was a lot of inventory buildup post the COVID situation. So that lasted almost two, three years and now that is over and genuine demand is there from the end market. While margins are under pressure, but at least volumes are increasing and capacity utilization is increasing.

51:30 That is what I meant by the worst is behind us. And winning these projects like the CDMO contract that we won in niche molecules, we believe that this is the outsourcing is again coming back in the CDMO space in crop. And we will be one of the few players to capitalize on that being a strong legacy company in the CDMO space in crops. Pricing continues to be a challenge, but we will use our current volume growth will help us drive efficiency in the business. Got it. That's it from me. Thank you. Thanks a lot. Thank you. Our next question comes from the line of with Equicorp. Please go ahead.

52:17 Sir, thank you for the opportunity again. So with respect to the agrochemical division, I think so the big four players globally have still... They they still have flagged the excess channel inventory and also the pricing side issues. So from when do you actually see better days actually globally coming in? And because of LME, what impact have you actually seen because due to increase in moisture and dampness, I think so Latin America is increasing in terms of the need for fungicides? Yes. I mean, there has been definitely a slowdown. It's not only because of the weather conditions, which are which have always been there in the crop business. There's El Nino effect this year, for example, the domestic crop industry has not had the best of season this year. So there are always weather impact. But what was the difference in the last three, four years which had depressed the global crop protection market was twofold.

53:11 One was very high channel inventory buildup due to COVID and post COVID. And secondly was the continuous dumping of products from China. The dumping of China has continued, but the channel inventory is getting depleted. So actual demand is coming back. Again, it's product to product dependent. We are not in those very high volume commodity products. We do some niche and medium volume products where we believe more or less, it's a big bag, but overall volumes are increasing in the crop business. With respect to one of our peers, I think we've got a few large molecules under the custom manufacturing facilities from some of the large customers.

53:56 So based on your conversations with these large customers, is... Because they've... On their calls, they've actually got on restructuring, reducing the cost, getting rid of some of the excess channel inventory, not doing some of the products, etcetera. So based on your conversations, mean, what new contracts are they looking for towards to developing or to join developing with us in the new space that they actually have been doing? I think a previous investor also asked this question. We are the change in the Hikal we are working in the CDMO space is more on this D as well. It's not only CMO. So we're getting like in pharma, we're getting involved before the product is being launched in the development in R and D. And we have a couple of NCEs in crop as well, which we're developing the process in R and D centers and eventually commercial manufacturing.

54:45 So that is the kind of conversations we're having rather than just doing a tech transfer of a molecule from Europe or from U. S. And a lot of our business is now coming out of Japan. And Japan, there's lot of innovation happening. And they're getting involved four, five years before patent before launch of the molecule. We're involved early on, and this is we're acting on the product as we speak. Okay. So thanks a lot for the opportunity, Thank and wish you all the very you. We have no further questions, ladies and gentlemen. I would now like to hand the conference over to Mr. Sameer Hirimat for closing comments. Thank you. Thank you, everyone, for joining our quarterly and H1 earnings call and for your continued interest and support.

55:31 We remain fully committed to executing our strategy with complete determination and focus. The actions we have taken over the past several quarters and years are laying a very strong foundation for long term sustainable growth. And we are confident that our progress will become increasingly visible with each passing quarter to show continuous improvement. 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 us, Investor Relations partners, strategic growth advisors. And once again, thank you for your participation, your trust in us and wishing everyone a very happy Diwali and a prosperous New Year.

56:18 Have a very good evening. Goodbye. Thank you. On behalf of Hikal Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.