Hikal Limited (HIKAL) Q2 FY23 Earnings Concall Transcript

Hikal Limited (NSE:HIKAL) Q2 FY23 Earnings Concall dated Aug. 11, 2022

Corporate Participants:

Sameer Hiremath — Managing Director

Manoj Mehrotra — President-Pharmaceuticals

Vimal Kulshrestha — President-Crop Protection

Anish Swadi — Senior President-Animal Health & Business Transformation

Kuldeep Jain — Chief Finance Officer

Analysts:

Ankit Gupta — Bamboo Capital — Analyst

Viraj Mehta — Equirus PMS — Analyst

Ranvir Singh — Edelweiss Wealth Management — Analyst

Pranay Dhelia — Panchatantra Advisors LLP — Analyst

Hiten Boricha — Joindre Capital Markets — Analyst

Jayesh Parekh — JMP Capital — Analyst

Aditya Khemka — InCred Asset Management — Analyst

Rohit Nagraj — Centrum Broking — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to Hikal Limited Q1 FY ’23 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Sameer Hiremath, Managing Director, Hikal Limited. Thank you, and over to you, sir.

Sameer Hiremath — Managing Director

Thank you. Ladies and gentlemen, a very good afternoon to all of you, and thank you very much for joining us today for our Q1 FY ’23 earnings call. I am Sameer Hiremath, Managing Director, Hikal Limited. Alongside me, I have Anish Swadi, Senior President of Business Transformation and Animal Health; Kuldeep Jain, our Chief Financial Officer; Manoj Mehrotra, our President-Pharmaceutical Business; Vimal Kulshrestha, our President-Crop Protection Business and Strategic Growth Advisors, our Investor Relations advisors. We trust that you and your family are safe and well. I hope you had the chance to go through our earnings release presentation and the financial figures for the quarter. These are available on our website and the stock exchanges.

I would like to start this call with an update on the unfortunate incident which occurred at Surat’s Sachin GIDC on 6 January, 2022. This legal case is still sub-judice and as things stands, Hikal is in a very strong legal position. As a result of the Sachin GIDC incident, the MPCB had given a closure notice to the Taloja factory. We had filed a writ petition and the Hon’ble Bombay High Court has decided in company’s favor to resume operations at our Taloja site. As on date, the company operations are normalized and all plants are fully operational.

I would like to highlight that we faced several challenges in both of our businesses during the difficult quarter. We had an impact INR50 crore in revenue and INR20 crore in terms of contribution due to the disruption in operation to our Taloja plant during the quarter. In our Pharma business, we witnessed a demand slowdown on account of channel inventory reduction by our key customers. As indicated in our previous call, there will be a step wise recovery over the next three quarters. Some of the key points for this quarter gone by, supply chain is still an ongoing challenge for the sector owing to the geopolitical situations — ongoing Russia and Ukraine conflict and a lockdown in China. These factors have impacted the margins as expected and as outlined in the previous calls, resulting in steep increase in the cost of raw materials, solvent, utilities and energy.

Also, the rise in crude oil prices have significantly impacted freight and logistics costs. We are now seeing the prices of some of our key raw materials softening and we expect this trend to continue in the following months. We expect this reduction of raw material prices to partly benefit in Q2. However, the majority benefit should accrue from Q3 onwards. We continue to create alternative local supplier base to minimize supply chain disruptions in the market. We are also investing in our R&T capabilities in order to handle increase in inquiries in both our businesses. Talking about the financial numbers for this quarter — the top line stood at INR379 crore against INR457 crore in the same period last year, recording a decrease of 17% year-on-year, predominantly due to inventory correction by our pharma customers and a disruption in operations for the Crop Protection business.

The margin pressure highlighted earlier, led to a contraction EBITDA to INR23 crore, primarily due to lower sales and product mix, increased input cost of raw materials, energy and solvents. Further, under-absorption of fixed costs during the quarter also reduced the EBITDA. Lower operating profits and increased depreciation on account of asset additions and marginal increase in finance cost in view of interest rate hike resulted in a profit after tax loss of INR8.9 crore. Hikal’s long-term credit rating is maintained at A+ by ICRA. With a strong pipeline of inquiries in both our businesses and resumption of operations at our Taloja site, we expect a step wise recovery in each of the coming quarters.

Now I would like to hand over to our President, Pharmaceuticals, Manoj Mehrotra, to take us through the performance of the Pharmaceutical division.

Manoj Mehrotra — President-Pharmaceuticals

Thank you, Sameer, and good afternoon, ladies and gentlemen. I’ll start with the financial update. The pharma business experienced degrowth in revenue of 18% with INR224 crore total revenue in Q1 FY ’23 versus INR274 crore of revenue in Q1 FY ’22. This degrowth is due to the temporary demand softening for key products and channel inventory correction by customers, which will, by natural progression, correct in the upcoming quarters.

The EBIT of the division stood at a negative INR8 crore. Fall in EBIT is attributed to lower sales, significant increase in input costs coupled with lag in passing the increased costs to the customers, and lower absorption of fixed costs. On the positive side, our business excellence initiatives have resulted in reduction of costs, which has helped in partially absorbing the impact of higher input prices. On the business vertical update, on the API side, we continue to add several new customers and strengthen our presence in new geographies of LATAM and Middle East. Our new product launches in antidiabetic therapy areas have witnessed increased customer traction over last few quarters. With the softening of raw material and solvent prices, we expect sales and profitability to improve in upcoming quarters. We have about 10 products in the pipeline at various pages of development and plan to launch three to four products in FY ’23.

Our CDMO business continues to witness increased number of inquiries. We aim to increase the win rate percentage to fuel the profitable growth. We have received an order for validation quantities for two intermediates for a COVID drug from a global innovator company. We have also received order from a global innovator for an intermediate for a new chemical entity, which is in Phase 2b of its clinical trial. Our future pipeline for CDMO business remains robust with several new opportunities. On Animal Health, we work with several of the leading animal health companies and these relationships have been strengthened over time. We have commenced process development for a number of active ingredients that are part of the multi-year animal health project with a leading global innovator. As guided in the previous call, we intend to complete the animal health plant commissioning by the end of FY ’23 and start validating products in the following year.

On future outlook, we have a healthy pipeline of CDMO projects, which will add to the profitable growth and change in business mix in the near future. We are focusing on enhancing customer engagement through further intensifying our key account management, which will also lead to increased share of customers’ wallet. We continue to work on cost improvement programs to lower production costs and improve overall profitability. We have also started experiencing softening of prices for some of our key raw materials, which would reflect in improved profitability in the coming quarters. Our focus remains on executing our pipeline, which will result in profitable growth. We maintain that FY ’23 will be a year of consolidation where we would rebuild our business despite market pressure persisting and would deliver improved results in the second half of the year.

Now I will hand over to Vimal for the Crop Protection business update.

Vimal Kulshrestha — President-Crop Protection

Thank you, Manoj, and good afternoon, all the participants of this earnings call. The Crop business has recorded revenue degrowth of 15% year-on-year with INR155 crore total revenue in Q1 FY ’23 versus INR183 crore in Q1 FY ’22. Decrease in sales was on account of disruption in operations, which we tried to minimize by undertaking the annual preventive maintenance at the Taloja facility. The EBIT for the division was INR10 crore in Q1 FY ’23, primarily on the back of lower sales, higher input cost of raw material, solvents and energy as well as due to lower absorption of fixed costs.

Demand continues to remain strong in the domestic market, and there are also indications from our existing global customers for a higher forecast next financial year. We are also witnessing rise in inquiries from existing as well as new customers for potential collaborations. Construction of our new multipurpose plant is on track at Panoli. We expect to commission it in second half of FY ’23.

Business vertical updates for Crop Division. In own product business, demand of existing products remains intact from our key customers, and demand supply scenario remains favorable in the domestic market. We are getting good traction of new fungicides in the pipeline from customers. We are in a process of strengthening our presence in Europe and Latin America. We also continue to explore new product opportunities in the business.

Presently, we are working on five, six products and are at different stages of development. Our CDMO business continues to receive new inquiries from new and existing customers. We are intensifying our efforts to strengthen the relationship with customers in Europe, U.S. and Japan by further integrating key account management. On future plans, as our Taloja operations has resumed, efforts are focused towards covering the production loss of first quarter to best extent over the next three quarters. To ensure stable availability and better pricing of key RM, we embarked upon the strategic supplier base development, derisking the supply chain from China through backward integration.

Now I would like to hand over to Anish for overall business outlook.

Anish Swadi — Senior President-Animal Health & Business Transformation

Thank you, Vimal. As Sameer, Manoj and Vimal have talked about our business and performance over the previous quarter and upcoming business pipeline for each of the businesses, which continues to be robust, I would like to reiterate the same message and conviction. FY ’23 is going to be a year of consolidation to prepare for accelerated growth of the company. We have taken some major headwinds over the past two quarters; however, we have been resilient through it all.

During these challenging times, we remain committed and maintain transparency with all our stakeholders, which has helped us tide over these challenging times. I would like to reiterate that we have not lost a single customer or contract in any of our businesses during this period. While we have seen a dip in performance this quarter, we expect a step wise quarter-on-quarter sales improvement with expectation of a normalized sales quarter from Q3 onwards.

We are observing softening of raw material prices over time with greater strategic planning and execution, we are ensuring higher throughput and improved costs. Pressure in Q1 was expected to be high, as indicated, but we are confident of achieving an improvement in profitability quarter-on-quarter, starting Q2. Our transformation journey Pinnacle is witnessing good momentum across both businesses. With the help of our consulting partner, we have taken various initiatives across the company to make Hikal grow from ‘Good to Great’.

Over the last several quarters, we have focused our efforts on cost improvement programs to absorb some of the impacts of higher input costs. At the same time, we continue the initiatives of the strategic builds for each of our businesses for future growth. This will help reach our bold aspirations of driving profitable as well as sustainable growth as our long-term vision remains intact.

With this, we will now open the floor to the question-and-answers. Thank you.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Ankit Gupta from Bamboo Capital. Please go ahead.

Ankit Gupta — Bamboo Capital — Analyst

Yes, thanks for the opportunity.

Operator

Ankit, I request you use the handset, there is a lot of echo.

Ankit Gupta — Bamboo Capital — Analyst

Is it better now?

Operator

Yes.

Ankit Gupta — Bamboo Capital — Analyst

Yes, thanks for the opportunity. First of all, given how the kind of degrowth we have seen in the first quarter, do you think we’ll be able to at least match the revenue that we had reported in FY ’22 of around INR1,900 crore?

Manoj Mehrotra — President-Pharmaceuticals

Yes, I don’t see that as an issue. I think the next three quarters, we’ll make up the lost revenue from quarter one should be well above last year’s numbers.

Ankit Gupta — Bamboo Capital — Analyst

Sure. And Sameer, given the kind of consolidation that we’ve seen in our revenues in FY ’23, what kind of growth aspirations do we have for FY ’24 and ’25, given the kind of base we’ve set now and the kind of capex we have had and with the animal health supplies will also start from FY ’25 onwards? So, what kind of growth are we aspiring for FY ’24 and ’25?

Sameer Hiremath — Managing Director

So we’re expecting going forward in the high teens, growth will accelerate into the high teens.

Ankit Gupta — Bamboo Capital — Analyst

Okay. But given we had zero growth during FY ’23, don’t you think the growth should have been higher because we have been aspiring for high-teen growth for past so many years and the kind of capex that we have taken is almost double than what we had already been doing prior to FY ’20, and we have been doing quite a bit of capex. So, don’t you think that growth should be higher for ’24 and ’25?

Sameer Hiremath — Managing Director

See, the plant should be ready by end of this year, right, by end of FY ’22, two big capex that we’re doing. So, next step will be the ramp-up of these two plants. Full utilization of plants will start from FY ’24 or ’24, ’25. So, next year, there will be growth, and the big jump will come in FY ’25 when the full utilization of these plants will start.

Ankit Gupta — Bamboo Capital — Analyst

Sure. And on the Taloja plant, is the plant operating now at normal capacity? Or how are things on that plant front?

Sameer Hiremath — Managing Director

It is operating at absolutely normal capacity. This entire quarter will have the benefit of Taloja plant full operations.

Ankit Gupta — Bamboo Capital — Analyst

And, Sameer, given how things are shaping up on both pharma and agro side, if you can talk about the kind of product launches that we have planned for FY ’23, ’24 and ’25 on both the segments?

Sameer Hiremath — Managing Director

So, I’ll hand it over to the businesses, I think they have the details. Manoj, if you can talk through.

Manoj Mehrotra — President-Pharmaceuticals

On the Pharma side, we have around 10 products in development in the pipeline in various stages. We will launch three to four API products every year going forward, starting in FY ’23. But as you know that you start a little slow, it takes two to three years for the revenues to peak. But the run rate of three to four products, APIs every year will continue.

Ankit Gupta — Bamboo Capital — Analyst

So — but out of these ten products, how many will be CDMO and how many will be under our own products?

Manoj Mehrotra — President-Pharmaceuticals

When I say products, I imply own products, which are own APIs or Hikal-owned DMFs. On the CDMO side, we talk in terms of projects. So, we will definitely have two to three projects going commercial every year. Like in the case of the Animal Health multi-year contract, what we have signed, that has ten products and every year we’ll do four to five out of those. And going forward, those will actually have ten products in FY ’25.

Ankit Gupta — Bamboo Capital — Analyst

Sure. And on agro side?

Vimal Kulshrestha — President-Crop Protection

In the agro side, we’ll be adding in our own products, three to four new products. And the CDMO side, we expect at least five to six new projects by FY ’25.

Ankit Gupta — Bamboo Capital — Analyst

Okay. And one last question is on the margin front. This year has been exception for us. So, prior to the kind of disruptions, we have seen over the past two quarters, we have maintained that we are aspiring to improve our EBITDA margins by 1% to 1.5%, 2% every year from what our base was in FY ’22 or around 19%, 19.5%. So, on the margin front, how do you see things panning out for us for FY ’24 and ’25, let’s forget about ’23, given the kind of disruptions we are seeing?

Sameer Hiremath — Managing Director

Considering FY ’22 as a base, forget FY ’23 as it’s a year consolidation. Base for FY ’22, we expect 50 to 100 basis points improvement year-on-year on the margins from FY ’24 onwards.

Ankit Gupta — Bamboo Capital — Analyst

So, let’s say, in FY ’25, can we aspire to touch 22%, 23% kind of EBITDA margins or it will be lower?

Manoj Mehrotra — President-Pharmaceuticals

Yes. I mean if you add 50 to 100 basis points over two, three years, it should work out to approximately the same number, yes.

Ankit Gupta — Bamboo Capital — Analyst

Sure. Okay. Thank you, and wish you all the best. Thank you.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Siddhartha Grover from Equirus PMS. Please go ahead.

Viraj Mehta — Equirus PMS — Analyst

Hi, this is Viraj here. Thanks a lot for elaborate answers. Just a couple of questions from my side. The COVID drug that you talked about, I mean, is the size of the drug in the range of 50 million to 100 million? Because I mean, essentially, the talk was that the Merck drug has been kind of slowed down in terms of production for all the Indian producers. Is this the same drug we are talking about?

Manoj Mehrotra — President-Pharmaceuticals

No, we are not authorized to disclose the COVID drug which is there because we have confidentiality agreement. So, at this point, our objective is to get into the supply chain of the innovator. And going forward, I’m sure this will have other indications as well. And once we start a relationship, things may change for COVID also and things may change for other indications, we have to really wait and watch.

Viraj Mehta — Equirus PMS — Analyst

Absolutely. Thanks a lot. And for the large capex that we have done, Sameer, what’s the kind of top line? Earlier we were talking about close to INR3,000 crore post the whole capex is over. Is that still the same number that we think we can do on the current capacity that we have?

Sameer Hiremath — Managing Director

Currently, I mean, we’re investing about INR300 crore to INR400 crore of capex every year, right? So, asset turn of about 1.5 for the new capex. If our baseline last year is INR2,000 crore and you do our asset turn of 1.5 of the new capex, it adds up to about INR3,000-plus crore.

Viraj Mehta — Equirus PMS — Analyst

So, is the current capacity base revenue only INR2,000 crore, that’s the max we can do? Because I thought we were running at a slightly lower utilization.

Sameer Hiremath — Managing Director

Maybe little bit of tweaking and little bit operational excellence improvements, 10%, 15% we can do. So, debottleneck exercises, 10% to 15%, but the capex that will start kicking in from end of this year will give us the benefits from next year and FY ’25 and FY ’26 will be the peak realization.

Viraj Mehta — Equirus PMS — Analyst

Okay. And if we sir, look at the commentary of some of the other large agrochemical players, at least they are indicating that the amount of inquiries that they are seeing is close to 1.5 to 2 times of last year and last year itself was a 2 times over the year before. So, is that the kind of traction we are also seeing?

Vimal Kulshrestha — President-Crop Protection

Yes. So, we are also seeing the same traction, and we are also getting good inquiries from our existing customers as well as from new customers.

Viraj Mehta — Equirus PMS — Analyst

Right. And with the energy prices in the West being significantly higher, do you think some of these large MNC companies who have plants in Europe might look at shifting some of the lower-end products because we are now just far more cost competitive even in conversion costs compared to them? Earlier we were competitive in terms of manpower cost, but now even conversion cost seems to be far lower for us compared to Europeans.

Vimal Kulshrestha — President-Crop Protection

Yes, absolutely, we expect so. We expect that some of this capacity will shift to India.

Viraj Mehta — Equirus PMS — Analyst

Thank you. Thank you so much, and best of luck for the future.

Vimal Kulshrestha — President-Crop Protection

Thank you.

Operator

Thank you. Our next question is from the line of Ranvir Singh from Edelweiss. Please go ahead.

Ranvir Singh — Edelweiss Wealth Management — Analyst

Yes, thanks for taking my question. Sir, just on Taloja facility, last month, we received that court’s order and things are now operational. But we say customer demand is intact, then why that will take three quarters to normalize revenue level?

Vimal Kulshrestha — President-Crop Protection

See, that is on the basis of capacity available in the plant. So, you can increase, I mean, some production in one quarter. So, you cannot make up all the loss in one quarter. I hope this clarifies your question.

Ranvir Singh — Edelweiss Wealth Management — Analyst

Okay. So, the past loss would be covered in subsequent quarter, and then we will have additional sales, that’s what you are saying.

Vimal Kulshrestha — President-Crop Protection

Yes.

Ranvir Singh — Edelweiss Wealth Management — Analyst

And like the guidance you are giving, for FY ’23, we are expecting to end up at flattish revenue, right?

Sameer Hiremath — Managing Director

Compared to last year, yes. It’s a year of consolidation.

Ranvir Singh — Edelweiss Wealth Management — Analyst

So, for INR1,900 crore kind of revenue, the rest of three quarters should have above INR500 crore kind of sales. So, additional INR100 crore and maybe because this year is staggered, so the last quarter should have some higher run rate than historically we have been receiving. So, what will drive that?

Sameer Hiremath — Managing Director

Your first question was whether we’re going to achieve last year’s number, right? Is that your first question?

Ranvir Singh — Edelweiss Wealth Management — Analyst

Yes, that is the question.

Sameer Hiremath — Managing Director

We’ll achieve it in a staggard manner back on regular run rate by Q3 and Q4. So, step wise, Q2 is better than Q1, Q3 is better than Q2, and so on and so forth. Also, one is that we’re only talking about the crops business. So, the pharma also has witnessed a slowdown in Q1, and that slowdown is now reducing. The channel inventory has already been eaten up. So, we expect sales to start normalizing by end of Q2 itself and the full benefit will come from Q3 and Q4. So, put these two together and the Taloja plant and agro operations running at full steam, we see the plant back on track, this is back on track from next quarter onwards. So, we will see huge improvement this quarter as well.

Ranvir Singh — Edelweiss Wealth Management — Analyst

Okay. And the contribution of Panoli will start from first quarter FY ’24 moving forward?

Sameer Hiremath — Managing Director

Yes, FY ’24 first quarter, that’s right.

Ranvir Singh — Edelweiss Wealth Management — Analyst

Okay. Yes, that’s it from my side. All the best. Thank you.

Sameer Hiremath — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Pranay Dhelia from Panchatantra Advisors LLP. Please go ahead.

Pranay Dhelia — Panchatantra Advisors LLP — Analyst

Good to hear you, Mr. Sameer. Great to see you back and I hope that these obstacles are only temporary for Hikal and for the shareholder family. A couple of quick questions. How much of current debt do we carry on our books?

Sameer Hiremath — Managing Director

Yes, Kuldeep. Our CFO can answer that, Kuldeep can answer that.

Kuldeep Jain — Chief Finance Officer

Yes. We have INR680 crore net debt today, I mean by 30 June.

Pranay Dhelia — Panchatantra Advisors LLP — Analyst

That’s all term loan?

Kuldeep Jain — Chief Finance Officer

No. Say, 50% is term loan and 50% is the working capital loans. So, INR400 crore, INR300 crore net debt.

Pranay Dhelia — Panchatantra Advisors LLP — Analyst

Just one sec INR400 crore and INR300 crore right now. Secondly, we’ve seen a sharp increase in interest costs. What I can make out is from the last call, you had guided that your debt equity ratio was 0.59 and cost of funds was 6.15%. How much has that changed?

Kuldeep Jain — Chief Finance Officer

It has changed in the first quarter, it has changed minutely, just 18 basis points, but we expect to increase by Q2, Q3 more.

Pranay Dhelia — Panchatantra Advisors LLP — Analyst

By only 18 basis points change and your interest cost has gone up substantially by almost 50%. So, if your cost of funds has not increased so much, how can your interest cost grow so much?

Kuldeep Jain — Chief Finance Officer

It includes some re-evaluation loss of the notional re-evaluation loss of the loans which we have taken in the foreign currencies.

Pranay Dhelia — Panchatantra Advisors LLP — Analyst

But that is not mentioned in your notes to accounts. It would have been prudent to mention it so that we can judge. It’s sending very wrong signal to shareholders. We’re thinking that your cost of funds has shot up all of a sudden in spite of your credit rating being maintained. Mr. Sameer, on the second question, looking at the steep fall in share price, can we expect the promoters to do some creeping or the company to announce some buyback to rest the concern amongst the shareholders?

Sameer Hiremath — Managing Director

I can’t give any comment on that.

Pranay Dhelia — Panchatantra Advisors LLP — Analyst

Best of luck for the future and I hope that whatever has transpired has transpired and you do achieve whatever you set out on.

Sameer Hiremath — Managing Director

Thank you very much. Thank you.

Operator

Thank you. Our next question is from the line of Hiten Boricha from Joindre Capital. Please go ahead.

Hiten Boricha — Joindre Capital Markets — Analyst

Hi sir. Good morning. Thank you for the opportunity. Hello. Am I audible?

Operator

Yes, you’re audible. Please go ahead.

Hiten Boricha — Joindre Capital Markets — Analyst

Yes. So, my first question is, can you quantify the production loss which has happened in Taloja plant in revenue and in EBITDA, which happened in this quarter? What would be the quantification for that?

Sameer Hiremath — Managing Director

The revenue loss was around INR50 crore for the quarter, and that has impacted the contribution by close to INR20 crore.

Hiten Boricha — Joindre Capital Markets — Analyst

INR50 crore in revenue and INR20 crore in EBITDA, right?

Sameer Hiremath — Managing Director

That’s right, EBIT.

Hiten Boricha — Joindre Capital Markets — Analyst

EBIT, yes. Okay. Sir, my next question is on this revenue guidance you have given that we will definitely do INR1,900, INR1,950 crore kind of revenue in this year itself. So, we are expecting like INR500 crore kind of normal revenue from next quarter itself, from Q2 itself. So, just wanted to understand this on the margin perspective, are we expecting double-digit kind of margin from next quarter itself, let’s say, 10% around?

Sameer Hiremath — Managing Director

Yes. From the margin perspective, definitely double-digit margin, and there’s a step wise increase in revenues to get towards the run rate of INR500-plus crore per quarter. Average for three quarters will be above INR500 crore.

Hiten Boricha — Joindre Capital Markets — Analyst

Okay. So we will do 10% kind of margin from next quarter itself, right?

Sameer Hiremath — Managing Director

The idea is to do better than that, yes.

Hiten Boricha — Joindre Capital Markets — Analyst

Okay, And sir, my last question is on the Taloja plant which is going to start you mentioned it will be starting in second half, right?

Sameer Hiremath — Managing Director

No, it’s already started from early July.

Hiten Boricha — Joindre Capital Markets — Analyst

Early July? My question is on the MPP plant, sorry, Panoli plant.

Sameer Hiremath — Managing Director

Panoli plant is starting by end of this year.

Hiten Boricha — Joindre Capital Markets — Analyst

End of this year. And what kind of revenue we are expecting from that plant, sir?

Sameer Hiremath — Managing Director

When at peak, it will be about INR200, INR300 crore, about INR300 crore at peak after three years of commissioning.

Hiten Boricha — Joindre Capital Markets — Analyst

So the peak revenue number will come in FY ’25, if I’m not wrong, right?

Sameer Hiremath — Managing Director

FY ’26.

Hiten Boricha — Joindre Capital Markets — Analyst

FY ’26.

Sameer Hiremath — Managing Director

Because it takes time to have some revalidation, approvals. It’s a multi-purpose plant, there’s multiple products in that plant.

Hiten Boricha — Joindre Capital Markets — Analyst

So the margins for these products will be similar to the company’s current margin? Or it will be lower as funding of the capex is also done by the partner itself so?

Sameer Hiremath — Managing Director

See, as I’ve been mentioning on all the previous calls, any new project that we take, the margin profile is significantly higher than our historical margins. Historical EBITDA margin is about 18% to 19%. All the new projects and new product selection is done with a higher margin profile, well in excess of 20%, so that is one. The asset turnover itself also, for the new projects, are closer towards 1.5. These are the basis of selection of new molecules and new projects.

Hiten Boricha — Joindre Capital Markets — Analyst

Okay. 1.5, yes. Okay, sir. I’ll get back in the queue, sir. Thank you.

Sameer Hiremath — Managing Director

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Jayesh Parekh from JMP Capital. Please go ahead.

Jayesh Parekh — JMP Capital — Analyst

Good morning to everyone. My question is for Sameer bhai. Sameer bhai, kindly take my question in the right spirit. If you see last nine to ten years block of Hikal, in terms of revenue, we have just grown from INR700 crore, INR800 crore to INR1,900 crore. And in terms of operating margin, we have never crossed 20% operating margin in last five, six years. Only in 2012, ’13, we were 26%, 28% and then we have never seen those kind of margin. And my second point was that cash from our operation has just gone up from INR150 crore to about INR290 crore for March 2022. So, my humble request is that at least, if not last 10 years, but in last five years, the chemical sector in India has performed very well, when you see our peers into crop science business as well as pharmaceutical business. So, can we find out what exactly is wrong with our beautiful organization with such a beautiful plant, that we are not able to grow in line with what is happening in the industry?

Sameer Hiremath — Managing Director

Well, it’s a very valid question. And we are even more concerned than you are about this point. So, we’ve done several things. We relooked at our entire operating model. We’ve got a transformation program that we started last year called Pinnacle. We are looking at growing our business faster in line with our peers to improve our margins, also in line with our peers. So, all the new projects that I mentioned to the earlier speakers is for a much higher margin profile and winning the larger contracts. We’re putting in significant steel in the ground and investing. So, I think, yes, in the last five years, maybe we have not grown as fast as our competitors, but you will see, in the next five years, we are going to catch up and we’ll be playing in the same level as the top two, three in each of our fields. So, the idea is to grow and accelerate growth in the next three to five years, significantly and the historical growth will be a thing of the past. And there is a lot of opportunities also today, yes.

Jayesh Parekh — JMP Capital — Analyst

Yes. Thank you so much, Sameer bhai and my best wishes. Thank you.

Sameer Hiremath — Managing Director

Thank you.

Operator

Thank you. Our next question is from the line of Aditya Khemka from InCred Asset Management. Please go ahead.

Aditya Khemka — InCred Asset Management — Analyst

Yes, hi. Thanks for the opportunity. Sir, if I look at your Taloja plant closure, so just I’m a bit confused, does the Taloja plant only contribute to Crop Protection business or does it contribute to the Pharmaceutical business as well?

Sameer Hiremath — Managing Director

Only the Crop Protection business.

Aditya Khemka — InCred Asset Management — Analyst

Okay. So then — when it comes to the — and previously, you had said that Taloja contributes 15% of revenue. So, was that 15% of total revenue or 15% from the Crop Protection revenue?

Sameer Hiremath — Managing Director

15% of total company Hikal revenue.

Aditya Khemka — InCred Asset Management — Analyst

15% of Hikal revenue. So, that would be roughly 30% of Crop Protection revenue.

Sameer Hiremath — Managing Director

Yes.

Aditya Khemka — InCred Asset Management — Analyst

Yes. I mean, given the broadness of the crop revenue.

Sameer Hiremath — Managing Director

Yes, 30%, 35%.

Aditya Khemka — InCred Asset Management — Analyst

Yeah. Okay, got it. That’s — understood. And now on the Taloja plant itself, so given that we have not been able to supply our customers for one entire quarter, and obviously, they must have consumed the inventory that would have been lying with them, I would have thought that in the second quarter, we would run the plant double shift and sort of fill up their inventory as well as provide them enough material to continue supply this quarter. But from your statements, what I understand is, we are going to restock the inventory not immediately in one quarter, but over the next two, three quarters in a slowish manner. Could you sort of help me understand why that is the path we have taken?

Vimal Kulshrestha — President-Crop Protection

I’m Vimal Kulshrestha. So, this plant is a continuous plant, it as such, runs in three shifts. And based on the capacity available in each quarter, we will make up the loss of Q1. So, it is not possible to be done in one quarter.

Aditya Khemka — InCred Asset Management — Analyst

Understood. That helps. It’s a continuous plant, I was not aware of it.

Vimal Kulshrestha — President-Crop Protection

It’s a continuous plant.

Aditya Khemka — InCred Asset Management — Analyst

Okay. Got it. So, yes, in that case, it will just totally make sense. Second question on the pharma side. So, we understand the decline in the Crop Protection business is largely now due to the Taloja closure and therefore, should normalize when Taloja normalizes, which you are saying this happened. But on the pharma side, you’re basically saying that the customers have some inventory and that inventory is basically getting depleted as they are not taking up fresh stock and then with the depletion of inventory, get more orders. Could you help us with the product concentration on the pharma side? Our largest product, what percentage of revenue does it account for? And this question is for FY ’22. And then for that product, what is the situation in Q1 FY ’23?

Manoj Mehrotra — President-Pharmaceuticals

So, our largest product is around 30%. And…

Aditya Khemka — InCred Asset Management — Analyst

30, as in three-zero or one-three?

Manoj Mehrotra — President-Pharmaceuticals

30% is the Pharma business. And we have seen that overall, not only this product, but other products, including the CDMO products, had excess inventory with customers, which were corrected in Q1. By the very definition of inventory, long-term demand is going to come back, and we’ve already started seeing positive outlook from the month of July, August. And we will get back to normal sales in the next three quarters. That’s what Sameer also mentioned in the past.

Aditya Khemka — InCred Asset Management — Analyst

Yes, I get that. So, this product, which was 30% of the pharma revenue in FY ’22, in Q1 ’23, did it maintain 30% contribution to top line? Or was it significantly lower?

Manoj Mehrotra — President-Pharmaceuticals

So our intention is to, long-term, bring it down to 20%. And this year, we’ll have to see whether from 30% will it go to 25% to 28% in that range. The long-term prospect is getting down to 20% and launch new products with higher margins, which will improve the profitability trajectory of the pharma business.

Aditya Khemka — InCred Asset Management — Analyst

And this is your own product, not a CDMO product, right, the 30% contribution product?

Manoj Mehrotra — President-Pharmaceuticals

That is our own product.

Aditya Khemka — InCred Asset Management — Analyst

It is an own product. And why do you see contribution coming down? I mean, obviously, one reason would be the growth of other products and launch of new products. But in absolute terms, it seems that this product is declining, right? I mean, again, inventory being one part, but is there an element of market share loss or competitor positioning in terms of better cost or pricing? Could you help us with that?

Manoj Mehrotra — President-Pharmaceuticals

No. See, the long-term prospect of the product is good. We will maintain our market share. But since this is a mature product, the newer products will grow faster, and this product will have a slower growth. So, on absolute terms, this product will continue to grow. Maybe it will grow at 5%, 7%, but others will grow at greater than 15%. So, by the arithmetic itself weightage will come down.

Aditya Khemka — InCred Asset Management — Analyst

Fantastic. That helps. Just one last question from my side. When we say CDMO, does it mean that our customers are innovators, and they have patented products or innovative products which have just gone off patent or maybe off patent already? Or do we mean it’s products which may be innovator or generic, but we are developing the product?

Manoj Mehrotra — President-Pharmaceuticals

No. When we say CDMO, it means we supply to innovators. They may be patented, KSM to patented or new chemical entities, which are molecules or all also part of life cycle management for the innovator company. And either they can be APIs or they can be key starting materials. We also are into custom development, where they work on Phase 1, Phase 2 kind of molecules, which will get launched in FY ’25 or ’26 onwards. And we have a healthy pipeline of these Phase 1, Phase 2 kind of molecules also. In fact, we have said that we have signed the contracts for Phase 2b launch of a global innovator company. In the next three to four years, it should get commercially launched.

Aditya Khemka — InCred Asset Management — Analyst

Fair enough. Sir, just an observation on that. So, when we look at other CDMO companies, right, which are majority CDMO contribution, their gross margin tends to be closer to 70% and EBITDA tends to be closer to 30%, at least for the CDMO segment of the business, and then they do the generic or the own product division, where, obviously, numbers are lower and therefore, what we get to see is the console number, which is sort of the average between the CDMO and the generic. In your situation, if I assume similar numbers for CDMO, 70-30, which really doesn’t seem to be the case, maybe it’s even lower than that, is the generic or our own product segment in both Crop Protection and Pharma really like below 10% EBIT or EBITDA margin business that we are running?

Manoj Mehrotra — President-Pharmaceuticals

No. What I will say that in our CDMO business, we have some life cycle management products, which may not generate this kind of high contribution margins of 70%. But the NCEs or the new development which is happening, those will definitely have higher margins. So, as of now, definitely if the CDMO gets higher margin, going forward, our attempt is to get more CDMO customers, invest more out there. From a level of 50-50, we would like CDMO to contribute 60% of our revenue and margins will be higher than 60%.

Aditya Khemka — InCred Asset Management — Analyst

That helps. Thank you, gentlemen. And all the best.

Manoj Mehrotra — President-Pharmaceuticals

Thank you, Aditya.

Operator

Thank you. [Operator Instructions] The next question is from the line of Rohit Nagraj from Centrum Broking. Please go ahead.

Rohit Nagraj — Centrum Broking — Analyst

Yes. Thanks for the opportunity, and apologies for asking the question again on the historical performance. But in the last four to five years, we have seen that there could be an external event and it takes some of the quarterly performance for a toss. I mean we have seen that when the Mahad flood issue, after that COVID, then last quarter was hyperinflation in cost, this quarter, inventory destocking. So, what has the management taken steps in terms of not such an aggravated impact on a particular quarter on the business? And an allied question to that is that during such cases of cost inflation, don’t we have any mechanism to pass it on to the customers instead of taking the entire brunt ourselves over a period of time? Thank you.

Sameer Hiremath — Managing Director

Yes, I think your question is in two parts. One is I guess, we’ve had some external events, some of them are force majeure related, I mean, the Mahad flood was — COVID was definitely force majeure, I mean it’s not of our doing and Taloja also unfortunate event that took place. But we’ve learned a lot from these events. First, we are de-risking our portfolio and our plant to a large extent. So, percentage contribution from a single site or a single building on that side will come down. We’re making alternative arrangements to move products around from one site to the other if and when such unfortunate events do take place in the future. So, that one is expected to ensure that the impact on any external events could be minimized to a larger extent than what it is today.

Rohit Nagraj — Centrum Broking — Analyst

Okay. And the second part of the question in terms of the contracts with our customers from a pricing perspective?

Sameer Hiremath — Managing Director

The contract with the customers, many of them have pass through clauses, and we are already in discussions with them, and there’s a lag effect of one to two quarters to get the benefit because discussions have already begun, and we expect the benefit to accrue in the remaining three quarters of this year.

Rohit Nagraj — Centrum Broking — Analyst

But do we get compensated for the loss of opportunity or loss of margins for previous quarters? Or is that only for the subsequent quarter that the pricing gets suggested?

Sameer Hiremath — Managing Director

It depends on a customer to customer. It’s an ongoing basis. So, it will be plus, minus, but overall is positive for the company.

Rohit Nagraj — Centrum Broking — Analyst

All right. And second question is, I understand that from FY ’20 to ’22, we have invested close to about, say, INR600 crore in capex. How much of that is reflected in our revenues of FY ’22? Just wanted to gauge in terms of how much potential opportunity that we are looking at to capitalize over the next two, three years from the INR600 crore capex? Thank you.

Sameer Hiremath — Managing Director

INR600 crore will be the investment by end of this year. And between last year and this year, will be the INR600 crore investment. So, the benefits will partially come in this year, but most of the benefit will come in from next year onwards.

Rohit Nagraj — Centrum Broking — Analyst

Right. So, just clarification, in FY ’21 also we had combined spent close to about INR250 crore, INR300 crore. The entire benefit being captured in FY ’22 numbers?

Sameer Hiremath — Managing Director

It takes about two to three years depending on the type of product to get the full benefit. There’s a ramp-up period.

Rohit Nagraj — Centrum Broking — Analyst

Right. And just one last clarification. You indicated about the revenue guidance for FY ’23, in terms of margins, given that we had additional margins for Q1, what would be our margin expectation even if we are able to catch up in the next three quarters and averaging for FY ’23?

Sameer Hiremath — Managing Director

So we’ll be in a position to give guidance after Q2 numbers.

Rohit Nagraj — Centrum Broking — Analyst

Thank you so much and best of luck, sir.

Sameer Hiremath — Managing Director

Thank you.

Operator

Thank you. The next question is a follow-up question from the line of Aditya Khemka from InCred Asset Management. Please go ahead.

Aditya Khemka — InCred Asset Management — Analyst

Hey, thanks guys for the follow-up. On the CDMO part of the business, again, this raw material cost pressure, again, if I follow the trends from larger companies, Lonza, Catalent and some of our local competitors, it seems relatively easy, when they talk at least, they say it’s relatively easy to pass on the raw material cost pressure to CDMO customers because as in our product is a very small part or a very small component of their overall product and economics. But looking at our gross margin for the last two, three quarters, it seems that our CDMO customers don’t see it the same way. So, what I want to understand is, is it just a contractual bit there, because of the contract, we have not been able to renew the price of our outputs? Or is it because our customers don’t really want to entertain thoughts of price increases, that we have not been able to pass it on?

Vimal Kulshrestha — President-Crop Protection

So, to answer your question, CDMO customers, we are able to pass on the cost impact, but with a lag effect. And that lag can be one to two quarters.

Aditya Khemka — InCred Asset Management — Analyst

And for the generic customers, as in, our own product customers?

Manoj Mehrotra — President-Pharmaceuticals

No, the generic customer, it’s the market which dictates the competitive pressures. In the pharma API or the own product business, unfortunately, we have not been able to pass on the cost increases because everyone has not increased the prices. So, there, we have to kind of absorb. But going forward, in the raw material and solvent prices, we are seeing a softening trend. Things will get better in the next three quarters.

Aditya Khemka — InCred Asset Management — Analyst

How much is [Technical Issues]

Operator

Sorry, Aditya. Your line is — audio is breaking, request you to please come in network area or use your handset properly.

Aditya Khemka — InCred Asset Management — Analyst

Yes. So, I’m saying how much raw material inventory do we carry, KSM do we carry because the spot prices of these raw materials is correcting? And if we have still got high-priced inventory, we’ll have to consume the higher-priced inventory first, right?

Manoj Mehrotra — President-Pharmaceuticals

No, you’re right. You’re right on that. But when we know that raw material price is softening, we really don’t keep much inventory.

Aditya Khemka — InCred Asset Management — Analyst

All right. So the KSMs would start to reflect from the second and third quarter itself, right?

Manoj Mehrotra — President-Pharmaceuticals

I said only towards the third quarter because many of the raw materials are imported. In case of imported, they are already in the high seas and the one to two months inventory will be there for imported raw materials. But the full impact of the softening of raw material prices will be shown in Q3 onwards.

Aditya Khemka — InCred Asset Management — Analyst

I got that. Thank you.

Operator

Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference back to the management for their closing remarks. Thank you, and over to you.

Sameer Hiremath — Managing Director

Thank you for joining the call. And I would personally like to thank all of you for your continued support to the company through these challenging times. I’m confident that the future is bright and Hikal will continue to grow sustainably in the coming years. If there is any further questions, please feel free to reach out to us or to our Investor Relations partner, Strategic Growth Advisors. Stay safe and take care. Thank you very much. Have a very good afternoon. Goodbye.

Operator

[Operator Closing Remarks]