Hikal Limited (HIKAL) Q3 FY23 Earnings Concall Transcript

Hikal Limited (NSE:HIKAL) Q3 FY23 Earnings Concall dated Feb. 02, 2023.

Corporate Participants:

Sameer Hiremath — Managing Director

Manoj Mehrotra — President, Pharmaceuticals

Vimal Kulshrestha — President, Crop Protection

Anish Swadi — Senior Vice President, Business Transformation

Kuldeep Jain — Chief Finance Officer

Analysts:

Ankit Gupta — Bamboo Capital — Analyst

Pranay Dhelia — Panchatantra Advisors, LLP — Analyst

Sajal Kapoor — Independent HNI — Analyst

Kunal Shah — Carnelian Asset Management — Analyst

Jay Bharat Trivedi — Centrum Broking Limited — Analyst

Dhwanil Desai — Turtle Capital — Analyst

Gokul Maheshwari — Awriga Capital Advisors LLP — Analyst

Rohit Nagraj — Centrum Broking — Analyst

Ashit Kothi — Individual Investor — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Hikal Limited Q3 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 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. [Operator Instructions]

I now hand the conference over to Mr. Sameer Hiremath, Managing Director from 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 Q3 and nine Months FY ’23 earnings call. I’m Sameer Hiremath, Managing Director, Hikal Limited.

On this call, I have with me Anish Swadi, Senior Vice-President of Business Transformation; Kuldeep Jain, our Chief Finance Officer; Manoj Mehrotra, President, Pharmaceutical Business; Vimal Kulshrestha, President, Crop Protection business; our Strategic Growth Advisors for Investment Relation, [Indecipherable]. I hope you had the chance to go to our earnings release, investor presentation and the financial statements for the quarter. These are available on website of Hikal as well as the stock exchanges.

While the energy crisis in Europe, slower-growth rate across all sectors, internationally and rising inflation continue to cause macro-level geopolitical issues, cost with peak in ’21 and ’22 have steadied as raw-material prices have started to decline. While we see marginal benefit of the input prices softening this quarter, due to the inventory on-hand, we expected to improve with a lag effect in the upcoming quarters. These elements, along with our proactive actions and the expansion of our supplier base has helped in the stability of raw-material supplies.

Both our businesses face significant challenges during the first-half of this fiscal year. But as we had previously indicated, we anticipate an improvement during the second-half. On the back of our cost-improvement programs and business excellence initiatives there already producing positive results, coupled with some external factors that input prices softening, we expect a quarter-on-quarter steady improvement. We have had — we have had an improvement in performance sequentially and are working towards having a stronger end to the year despite some macro-level volatility caused by global uncertainties. Customers are looking to diversify their supply-chain geographically, which continues to offer positive tailwinds for future growth.

Margins continued to be impacted as expected and outlined in the previous call due to steep increase in cost of raw materials, solvents and utilities. Although the rising crude oil prices have significantly impacted energy costs we, however, have seen some prices of some key raw-material softening and expect that trend to continue in the upcoming quarters, thereby marginally improving our margins and profitability.

Talking about the numbers for this quarter, we recorded a revenue of INR540 crores against INR559 crores in the previous quarter. Our revenue for the Nine-Month period stood at INR1,478 crores against INR1,440 crores the last year. We have been able to improve EBITDA margins by 130 basis points in quarter three compared to quarter two. This is due to improvement in the product mix and cost-improvement initiatives. Hikal long-term credit rating is maintained at A-plus by the ICRA. Also, the company has recommended an interim dividend of 40%.

Now I’d like to hand over to our President of Pharmaceuticals Manoj Mehrotra to take us through the performance of the Pharmaceuticals Division. Over to you Manoj.

Manoj Mehrotra — President, Pharmaceuticals

Thank you, Sameer. The pharma business recorded of INR292 crores in quarter three FY ’23 versus INR290 crores in quarter two FY ’23. The EBIT of the division stood at INR26 crores. This is a 9% margin in this quarter compared to 3.6% in the previous quarter. The corresponding revenue figure for the Nine-Month period stood at INR806 crores compared to INR822 crores last year. Our business excellence initiatives have resulted in reduction of costs. This has been partly absorbing the impact of higher input costs.

Regarding our business verticals, on the API side, over the years we have added several new customers and strengthened our presence in new geographies such as the Middle-East and Latin-America. We have a strong development pipeline and we will launch three to four new products every year. Our CDMO [Phonetic] business continues to receive increased inquiry from existing as well as new customer. Our future pipeline for CDMO business remains robust with multiple upcoming opportunities being worked on.

Our discussion with innovative animal health [Indecipherable] for new opportunities are progressing well. Development of processes on multiple active pharmaceutical ingredients as part of the multi-year animal health project with a leading inventor is on-track. And we intend to complete the plant commissioning in quarter two FY ’24. FY ’23 is mainly a year of consolidation. We now find ourselves back on-track to drive the new growth radically. Q3 FY ’23 show improved performance and this momentum will continue in the next quarter, helping us end of financial year on a strong note.

Now I would like to hand over to our President, Crop Protection Vimal Kulshrestha, to take us through the performance of the Crop Protection business.

Vimal Kulshrestha — President, Crop Protection

Thank you, Manoj. Good afternoon to all the participants in this call. The Crop business recorded INR248 crores revenue in Q3 FY ’23, versus INR269 in Q2 FY ’23. The EBIT for the division was at INR27 crore at 11% margin in Q3 FY ’23 on the back of higher input cost of raw materials, solvents, NRG as against INR35 crores in Q2 FY ’23 at 13% margin. Corresponding revenue figure for the Nine-Month period stood at INR671 crores compared to INR619 crore last year. All our plants continue to operate at optimal utilization. Demand for our own products was strong in the domestic market, we are focusing on optimal product mix to improve revenues and margins going forward.

Regarding our business verticals, our own product segment, demand for existing products remain intact. From our key customers, we are also planning to complete the plant commissioning for our new fungicide by end of FY ’23 and start revenue itself by early FY ’24. We will also continue to explore new product opportunities in the business. In CDMO business. It to receive new inquiries from existing as well as new customers. We have favorable new inquiries in the pipeline. Now I would like to hand over to our Senior President of Business Transformation, Anish Swadi.

Anish Swadi — Senior Vice President, Business Transformation

Thank you. Vimal and Manoj. With our business heads having talked about their respective businesses, I would like to take you through some of our key priorities for the short term. As you may be aware over several quarters now, we have been working with a global strategic consultant and have formulated the future strategic direction for the company.

From choosing the right products to strategic partners, right technologies for the future, including enhancing our R&D and manufacturing capabilities to stay ahead of the curve these initiatives being implemented, will drive our future growth and profitability. On the cost rationalization front, our business excellence initiatives, including an in-depth capital efficiency program have started yielding positive results. We continue to work on improving our yields and solvent [Phonetic] recoveries, including backward integration and a shift to renewable energy, and biomass.

Our Animal Health business continues to be on-track. Our deep relationships with global innovators to be a partner of choice in this space. Based on our capabilities in handling complex chemistries and providing end-to-end support in developing processes for complex molecules and scale-up requirements, positions us on a very strong footing. The progress on our multiyear contract is going ahead as per plan. It is a diversified contract with multiple products in a multipurpose asset, which is expected to come on-stream in Q2 of FY ’24.

ESG is a pillar of our new strategic direction. While we have been active in the space of using clean, renewable energy, we have also embarked on a journey to create a positive environmental footprint, all the way from development to manufacturing operations. Hikal has made significant investments to facilitate the shift across all our sites. We are jointly working with our international partner to map out our baseline practices, and define a roadmap for achieving our ESG ambition of decarbonization waste and water management. In the forthcoming year, you will hear from us About a lot more initiatives that we’ve launched to fast-track our journey towards leadership and sustainability.

With this, we will now open the floor to questions and answers.

Questions and Answers:

Operator

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

Ankit Gupta — Bamboo Capital — Analyst

Yeah, thanks for the opportunity. So sir if you look at our gross margins, there has been a significant improvement hand gross margins from — on a quarter-on-quarter basis, but higher employee cost, and increase in other expenses have — has not resulted in translation to higher EBITDA margins. So if you can talk about what was the reason for that?

And apart from that, our finance cost and depreciation — depreciation has also increased during the quarter. So if can talk about that.

Sameer Hiremath — Managing Director

Sorry. I couldn’t hear you, you were not very clear. Can you please repeat the question. It is not very audible.

Ankit Gupta — Bamboo Capital — Analyst

Sure, I was asking about, we have seen a sequential improvement in our gross margins by almost more than 400 basis points. But EBITDA margins have not improved that much can be because of higher employee expenses and other expenses. So what was the reason for that?

And our finance cost has also increased — increased during the quarter. So if you can talk about the reasons for the same.

Kuldeep Jain — Chief Finance Officer

Yeah. I think the fixed cost if we look at the personnel cost, we have done a lot of recruitments for the new plants that are commissioning in the next couple of quarters, so that — those people have already been recruited because there is a lag for commissioning and training of the employees. And we’ve had some improvements in that. And due to that the personal costs has gone up. On the finance cost, our debt has gone up marginally to fund this capex and there’s also been an increase in interest rates when compared to the last year same periods. So these are the two increases that we’ve had.

But this is just one-quarter type of impact. I think on an annualized basis we had planned for this. And once the plants start delivering results from next year this will even itself out.

Ankit Gupta — Bamboo Capital — Analyst

Got it. And you know on the capex front, how much capex have we spent on the new agrochemical plant and then new veterinary API plant and how much asset turns, can we expect from both these plants?

Sameer Hiremath — Managing Director

So yeah, so I’m — I’m not giving the — we are not exact breakup of the two, but as I said last year, last call, we are doing about INR300 crores of capex this year. And the [Indecipherable] anticipating is between 1.4 to 1.5 at full utilization — at peak utilization, which should be after a couple of years.

Ankit Gupta — Bamboo Capital — Analyst

Because if we look at Sameer last year also, we did almost INR270 to 280 crore [Phonetic] of capex, which actually because of the industry and the challenges we had to face over the past three-four quarters, we haven’t seen a subsequent increase in top-line. So if you look at INR300 the in the crore of capex this year and almost INR270 crores capex last year, so we have almost spent twice INR570 crore of capex in the past two years. So all this would result in increased top-line over the next two-three years?

Sameer Hiremath — Managing Director

That’s correct. It will take two to three years for peak optimization of the capex. So let’s hope…[Technical Issues]

Ankit Gupta — Bamboo Capital — Analyst

So, let’s say INR550 crores of capex over the past — over FY ’22 and FY ’23 should result in at least INR700 to INR800 crores increase in our top-line?

Sameer Hiremath — Managing Director

Over the next…

Ankit Gupta — Bamboo Capital — Analyst

Over the next two to three years, yeah. And Sameer one broader question, if we look at our company, in past three-four years or four-five years in FY ’18, we did almost INR1,300 crore kind of revenue and operating margins were around 8.5% and in FY ’22 we touched almost INR1,900 crore kind of revenue almost 40% — 35% to 40% percent kind of growth. We have seen the top line. Despite that, our margins did not increase significantly. They have remained in the range of around 18% and 19%. So when we achieved [Indecipherable] kind of top line, do you think we can reach to our ambitious target of 22% to 24% percent or even 25% kind of EBITDA margins, because in the past, we haven’t seen operating leverage kicking-in, our business and our margins haven’t increased in-line with increased that we have seen in our top-line?

Sameer Hiremath — Managing Director

Ankit, as I’ve been saying consistently in our last few calls as well, we’ve been spending the last few quarters on real product mix rationalization. And all the new products that we’re launching and the new capex that we’re doing, this has a much higher gross margin, much better EBITDA margins and much better asset turns. So the blend, as you said, we just spend INR575 crores to INR580 crores in the last two years that’s a big utilization that will result in X number which you mentioned in that. The EBITDA margin of that addition will be significantly higher than our historical EBITDA of 18% to 19%. So we anticipate the EBITDA to get to 21% to 22% over the next couple of years.

Ankit Gupta — Bamboo Capital — Analyst

Sure Sameer, thank you. That helps. Thanks a lot and wish you all the best.

Sameer Hiremath — Managing Director

Thank you.

Operator

Thank you. [Operator Instructions] Our next question is from the line of Pranay Dhelia with Panchatantra Advisors, LLP. Please go ahead, sir.

Pranay Dhelia — Panchatantra Advisors, LLP — Analyst

Hi Sameer, good evening and good evening to everybody else. We are very happy to see that we are back to all-time highest revenue. What is only concerning is margins, that you answer [Phonetic]. Just a couple of quick questions on this. What is the total debt as of now this quarter vis a vis last quarter?

Sameer Hiremath — Managing Director

Yeah, I believe, [Speech Overlap] INR800 crores debt profile at this moment.

Pranay Dhelia — Panchatantra Advisors, LLP — Analyst

I couldn’t hear you, sorry.

Sameer Hiremath — Managing Director

It is INR800 crores. Total debt, INR800 crores.

Pranay Dhelia — Panchatantra Advisors, LLP — Analyst

How much of it is long-term and short-term?

Kuldeep Jain — Chief Finance Officer

INR500 crores in the long-term, INR300 crores in the short-term.

Pranay Dhelia — Panchatantra Advisors, LLP — Analyst

Okay, and what is the cost of funding for the long-term and short-term?

Sameer Hiremath — Managing Director

We have it [Technical Issues] 8.5% half percent for long term and 7% for the short-term.

Pranay Dhelia — Panchatantra Advisors, LLP — Analyst

Okay, and when do we start repaying this debt, I believe because of the capex, we have more or less done with the addition I assume [Phonetic]. So, when does the repayment start?

Sameer Hiremath — Managing Director

Yeah, yeah we are only repaying certain loans which borrowed two-three years back. Whatever loans we have borrowed now, will have a two to six-year moratorium. So we — every year we are paying loans, repayment of the loans.

Pranay Dhelia — Panchatantra Advisors, LLP — Analyst

So it would be safe to assume this is the peak debt. We are not going to be borrowing more for further capex?

Sameer Hiremath — Managing Director

See unless we have — see more or less, yes. But unless we have some good project, we’ll go for this.

Pranay Dhelia — Panchatantra Advisors, LLP — Analyst

Okay great. And just to the Crop Protection, as well as Pharma, what has been the volume growth we’ve seen this quarter?

Kuldeep Jain — Chief Finance Officer

Yeah, one second I just have those numbers. On the volume growth — yeah, volume growth for crop protection for — the company has been about 5%. For pharma volume growth has been [Technical Issues] for crop, there has been a degrowth volume of about 18%.

Pranay Dhelia — Panchatantra Advisors, LLP — Analyst

So crop we’ve seen degrowth in volume and 18% and pharma 20% increase.

Sameer Hiremath — Managing Director

Crop increase of 20%, pharma degrowth of about 17.5%.

Pranay Dhelia — Panchatantra Advisors, LLP — Analyst

Is this primarily because of the excess stocking, with almost every company? And when do we expect this to improve?

Sameer Hiremath — Managing Director

So look we expect a couple of more quarters. I mean, at least by quarter one to quarter two of next year, we expect at least half business volumes to start coming back. And what we are doing in the meantime, this volume is — even though our volume has gone down almost more than 17% in pharma, from a value perspective it still increases our value. So we’ve been able to change the product mix. We have more high-value products, yeah.

Pranay Dhelia — Panchatantra Advisors, LLP — Analyst

And what is the capacity utilization at our manufacturing places?

Sameer Hiremath — Managing Director

About 80%.

Pranay Dhelia — Panchatantra Advisors, LLP — Analyst

Across both pharma and crop?

Sameer Hiremath — Managing Director

Yeah, maybe 80% to 85% depending on the site and that range.

Pranay Dhelia — Panchatantra Advisors, LLP — Analyst

Okay, great. That answers most of my questions. It’s just that our revenues are back to a peak EBITDA margins as you’re saying will catch-up shortly within the next quarter and we’ll be seeing EBITDA margin improvement. So we can safely assume that we’ll be back to our target as hike itself protected — projected INR200 crores of cash-in the next year, year and a half?

Sameer Hiremath — Managing Director

We are [Indecipherable] start coming back. I mean, as I mentioned, in the last every calls we’re doing a sequential improvement quarter-on-quarter. Even this quarter that better than last quarter from our margin with absolute — EBITDA absolute profit although revenues were down, we improved our product mix. We did cost optimization, and the new capex is a common stream for quarter one of next year. And quarter two, quarter three will start benefiting next year and we start moving back to our steady-state, pre-’22 margins, we start getting back to that towards from quarter two towards next year.

Pranay Dhelia — Panchatantra Advisors, LLP — Analyst

Great. So it’s just that you been out-of-the billion-dollar club for some time hopefully, the company will get there very soon.

Sameer Hiremath — Managing Director

Yes, thank you so much, Pranay.

Pranay Dhelia — Panchatantra Advisors, LLP — Analyst

Thank you. Thank you, wish you all the best.

Sameer Hiremath — Managing Director

Thank you, so much.

Operator

Our next question — before we take our next question a reminder to all participants [Operator Instructions] Our next question is from the line of Sajal Kapoor, Independent HNI. Please go ahead.

Sajal Kapoor — Independent HNI — Analyst

Yeah, hi thanks for the opportunity. Have a couple of qualitative questions please, so many new Indian CRDMO players who were previously focus purely on the human pharma domain are now scaling up there LP-CDMO in animal, as well as agrochemicals, as they have secured firm commitments and commercial contracts from global innovators. So the question is how do you see this emerging landscape from both the opportunity size as it’s becoming increasingly clear that global innovators are now looking at India as a credible source on a much bigger scale and so that should help Hikal, but also from the comparative landscape perspective because new players are adding animal and agro and custom synthesis to their domain and capability, does that not mean increased competitive intensity from these Indian players who were previously not into agro and animal CRDMO, right. So that’s one.

And secondly, Hikal has started the Pune R&D center for innovator synthesis and generic R&D about 14 years back, I think in 2009, and yet we have not seen any material traction in the LP-CDMO segment as majority of our CDMO revenues today it’s still coming from supplying those [Indecipherable] patent molecules to innovators versus some of our competitors in India, who started this segment of NCE [Phonetic] scale-up just about 7-8 years back and they have demonstrated significant traction in there NCE scale-up and commercial shipments. So why — why it took us so long to scale-up on our NCE grants? Those are my two questions. Thank you.

Sameer Hiremath — Managing Director

Yeah, so I’ll answer the second one first. I think, well, if you look at our shift which has been now, I think several new projects in MCS development and they’re getting commercialized, so. I mean why it happened in the past — I mean that also — rather than talking about the past, let’s talk about the future. I think the future is very bright. There are several new projects in both Pharma and in Crop where we’re developing products which are on patent and under for registration and on the animal side as well. So yeah the future will look very different from the last 10 years, of what do you say 14 years. And as you started up with Pune unit, it was a CRO, because all the CDMO R&D site. We’re doing contract research for FTE basis. So that was the change in business model about four-five years ago and we changed the business model of Pune. So yes, you’re right, we started in 2009, 14 years ago, but for almost 8 to 10 years, we did CRO work in Pune and the development only started four or five years ago and those projects take time as you said 7 or 8 years, but I think we’re seeing lot of light at the end-of-the tunnel and several projects are moving into clinical Phase-II and Phase-III and we’re getting some good traction on the customer side.

The second one — your first question was regarding increased competition animal and crop. I mean yes, there are a few players are looking at trying to do both, but eventually, it’s about scale and about track record. And there is — there is — we have both for over 20 years. So this there is there will be increased competition because there is increased outsourcing happening. But we are double track [Phonetic] we’ve already got deep customer relationships with our customers and with [Technical Issues] multi year project contract that we signed with have been big innovator company. So we will work with companies aside and we have this — we have all our — both our divisions are significant scale now, with a track record of almost 2030 years in both and we have BlueChip clients [Indecipherable] much more with us.

Customers also looking at a consolidated supplier base. While you may — you may have a new entrant in this space that doesn’t mean you have guaranteed business, just because you have plant. You have to have a relationships, you have to our track record from the FDA. There are some many other angles in order to get business. And Hikal has ticked the boxes and most of these and yeah, we are not the only ones in this space, but we are one of the top-tier in these two segments and the third segment is animal. And we’ll will continue to grow over some of our competitors and we show above industry growth going forward in these segments.

Sajal Kapoor — Independent HNI — Analyst

Right. So-so that’s helpful. So just to clarify, when I look at our historic gross margins and we have been hovering, let me say — pretty flat in this broad range of 45% to 50% sort of gross margins, whereas we all agree that the innovator and the scale-up margins are significantly better, but I understand that you just mentioned, we changed our strategic positioning only four-five years back so past is not the right way to look at our gross margins and future will be significantly better. So can we assume that over the next, let’s say four-five years, our gross margins will be materially better, even on a blended basis, than what we have been delivering in the past?

Sameer Hiremath — Managing Director

That’s an absolutely correct statement because the CDMO business gross margins are significantly better than of the generics margins which we have historically had and our portfolio is changing. And over the next few years, we’re doing a dramatic change in-product portfolio. And we’re looking at optimizing and replacing some of the older molecules with new-generation, higher-margin products. So our [Indecipherable] has to do that. So the margin profile will undergo significant change in the next three to four years compared to where we are today.

Sajal Kapoor — Independent HNI — Analyst

Right. We all hope so and wish you guys the very best in terms of execution and as we — as we wait-and-watch. Thank you so much.

Sameer Hiremath — Managing Director

Thank you so much. Thanks.

Operator

Thank you, [Operator Instructions] Our next question is from the line of Mr. Kunal Shah with Carnelian Asset Management. Please go ahead.

Kunal Shah — Carnelian Asset Management — Analyst

Yeah, thank you for the opportunity. My question was on the Crop Protection business, right. So you mentioned about volume de-growth, whereas in the last quarter, the demand for agrochemicals continued to remain strong for both the CDMO and home product segments. So, just wanting to understand — I mean more on the Crop Protection side and also on the margin side, how should we look at that, going ahead?

That was your first question, regarding Crop Protection. The second, is also the ongoing capex at Panoli, Gujarat, right, if you can help the status of the same it would be accretive [Phonetic].

Sameer Hiremath — Managing Director

I have answered the first question. I hand it over to Vimal after I answer the second. I think there is no volume de-growth in Crop. The volume de-growth has been in Pharma. There’s been a significant volume growth, in pharma actually. So [Indecipherable] clarify that for you, yeah. And the second part of the question, Vimal, if you [Speech Overlap].

Vimal Kulshrestha — President, Crop Protection

So, I’ll answer that…

Kunal Shah — Carnelian Asset Management — Analyst

I wish [Speech Overlap], so. Levels of volume growth in the Crop but then the value growth was on there, if I understand correctly because, hello?

Sameer Hiremath — Managing Director

Yes. [Technical Issues] that was due to product mix. I mean quarter-to-quarter, I think we should look at it more from a nine-month basis. From a nine-month basis, our volume and value and growth for the business it will be a quarter to quarter…[Speech Overlap]

Kunal Shah — Carnelian Asset Management — Analyst

The number which you mentioned was for Nine-Month or for a quarter-on-quarter basis, the volume growth number, that you mentioned?

Sameer Hiremath — Managing Director

Only for the quarter, I mentioned it.

Kunal Shah — Carnelian Asset Management — Analyst

Okay, okay, okay, if you could help with the second part of the question on the capex plan?

Vimal Kulshrestha — President, Crop Protection

Yes, so for this we have completed the mechanical completion and we have started commissioning of this plant. And we start we expect to start production from Q1 of FY ’24. So revenue [Speech Overlap] yeah.

Kunal Shah — Carnelian Asset Management — Analyst

The revenue for this Panoli plant basically would start from Q1 FY ’24?

Vimal Kulshrestha — President, Crop Protection

Q1 FY ’24, yeah. And then [Speech Overlap]

Kunal Shah — Carnelian Asset Management — Analyst

And what is the amount that we have spent on it?

Vimal Kulshrestha — President, Crop Protection

So I will not be able to give you a breakup of that spent but total last year as Samir has mentioned, we spent INR300 crore capex, I mean this year.

Kunal Shah — Carnelian Asset Management — Analyst

That’s the total capex, anything for this particular plant.

Vimal Kulshrestha — President, Crop Protection

Yeah, so the split will not be able to give you.

Kunal Shah — Carnelian Asset Management — Analyst

Okay, okay, fair enough. And what is the amount of capex that is yet need to be spent in the current year or are we done completely — with that complete capex and now only maintenance capex will be there?

Vimal Kulshrestha — President, Crop Protection

[Speech Overlap] Yeah, so we will be spending INR100 crores during this quarter four.

Kunal Shah — Carnelian Asset Management — Analyst

Sorry, INR100 crores more in which particular financial year?

Vimal Kulshrestha — President, Crop Protection

No, it’s all together for the company.

Kunal Shah — Carnelian Asset Management — Analyst

So INR100 crores is yet to be spent basically is what do you mean.

Vimal Kulshrestha — President, Crop Protection

Yeah.

Kunal Shah — Carnelian Asset Management — Analyst

Okay, okay. Thank you.

Operator

Our next question is from the line of Jay Bharat Trivedi [Phonetic] with Centrum Broking Limited. Please go ahead.

Jay Bharat Trivedi — Centrum Broking Limited — Analyst

Hello. Thank you so much for the opportunity, sir. Am I audible?

Sameer Hiremath — Managing Director

Yes.

Jay Bharat Trivedi — Centrum Broking Limited — Analyst

Yeah. So my first question was regarding the raw-material prices, as you rightly said, in your initial comments that the raw-material prices have softer and the effect would be seen with the lag in next quarter. So do we have witnessed any price softening impact in current quarter as well?

Sameer Hiremath — Managing Director

Well, current quarter not much, because the inventory, it is a lag effect always. So it was marginal… Sorry.

Jay Bharat Trivedi — Centrum Broking Limited — Analyst

So the complete effect would be seen in next quarter, Q4?

Sameer Hiremath — Managing Director

Q4 onwards, and it will move on to next year even.

Jay Bharat Trivedi — Centrum Broking Limited — Analyst

Okay, thanks. And my second question would be regarding the channel inventories, in both biopharma and Crop Protection segments. Can you throw some light there?

Sameer Hiremath — Managing Director

Well, pharma, charging [Phonetic] inventories are still there, they’ve come down in the last couple of quarters. But we expect with this thing, we still think it will take one or two more quarters for the channel inventory in the pharma space to build up. On the crop side also there has been some channel inventory build-up. Again we think about one to two quarters of correction in inventory demand will be there in the crop business also. But we had very-very strong derisking which to a large extent, in the product mix optimization and increasing the number of products, we have a big basket of products, we can move around. So that’s how we are making sure that we try and maintain revenue growth and our margin improvement.

Jay Bharat Trivedi — Centrum Broking Limited — Analyst

Okay, okay thanks, that’s it from my side and all the best sir.

Sameer Hiremath — Managing Director

Thank you.

Operator

Our next question is from the line of Dhwanil Desai with Turtle Capital. Please go ahead, sir.

Dhwanil Desai — Turtle Capital — Analyst

Hi, team. Sir, my first question is on this multipurpose plant that we’re putting out for animal health — global animal health provider. So if I understand correctly that will come on-stream in Q2 FY ’24. So will there be a period for stability batches and validation and how long that will be? So when will the commercial supply start from that plant?

Sameer Hiremath — Managing Director

I’ll hand it over to our Head of Animal… Anish if you can take this?

Anish Swadi — Senior Vice President, Business Transformation

Sure. So yes, as you correctly mentioned, yes, there will be a period of validation for the products that we put through and that will take anywhere between about 11 to 12 months from the date of commissioning the plant.

Dhwanil Desai — Turtle Capital — Analyst

So the commercial supply will start from FY ’25 second-half. Is that a fair assumption?

Anish Swadi — Senior Vice President, Business Transformation

Yes, that is the correct assumption, yes.

Dhwanil Desai — Turtle Capital — Analyst

Okay, got it. And the second question is Anish, we talked about RM prices softening, but how is the trend on realization because generally what we have understood is that in lot of products, the realizations also have come down. So, will it impact our revenue growth objectives or in any manner?

Anish Swadi — Senior Vice President, Business Transformation

For the Animal Health business or for general space?

Dhwanil Desai — Turtle Capital — Analyst

No, for both Crop Protection and Pharma in general.

Anish Swadi — Senior Vice President, Business Transformation

Look. I mean, as you’ve seen that in Crop Protection basically, prices have been more or less stable. In Pharma business, you’ve seen some price has come down, especially if you look at what other companies have also reported the generic market primarily in the pharma business has been pretty shaking up. So the U.S. market has been quite severely affected and prices have come down substantially. Now with the softening of raw materials, it’s yet to be seen whether prices remained stable or even further come down. As of now, we are seeing most of the prices holding steady. But we’ll see probably by mid-to-end of next quarter, what happens to the prices.

Dhwanil Desai — Turtle Capital — Analyst

Okay, so in that context, how do we see volume growth both for Pharma and Crop Protection for FY ’24?

Anish Swadi — Senior Vice President, Business Transformation

I think for Crop Protection, I think volume growth is mixed, as of now, there are a lot of global macro uncertainties. Yes, we do have contracts in-place, but because of the uncertainties, people are reluctant to commit for the entire financial year or the calendar year. So we are seeing some changes, but for the most part, it seems to be intact. I think on the pharma business, it’s a little more volatile because of the generic market. From a CDMO perspective, it’s definitely more stable than what you see on the generic side. So it’s still a work-in progress.

Dhwanil Desai — Turtle Capital — Analyst

Okay, so are you kind of factoring in 12% to 15% percent volume growth for next year or any ballpark number around that?

Anish Swadi — Senior Vice President, Business Transformation

Yeah, well, at this point in time, we’re not giving any future forecasts. Right now we’re just trying to see what the customers are asking for, what is confirmed and then we’ll build-out a forecast. So we’ll probably have a better idea at the end of Q4.

Dhwanil Desai — Turtle Capital — Analyst

Okay, got it. Thanks, that’s it from my side.

Operator

Thank you. Our next question is from the line of Gokul Maheshwari, with Awriga Capital Advisors LLP. Please go ahead.

Gokul Maheshwari — Awriga Capital Advisors LLP — Analyst

Yes, thank you for the opportunity. So in these previous questions you answered about the gross margin profile, changing more from a directional sense from the next three to five years. In the past seven to eight years our return on capital employed have been around the mid-teens. How would this change as you are changing the business model more towards higher gross margin products, more NCE products.

Sameer Hiremath — Managing Director

No, I think the return on capital employed it will start increasing year-on-year, because the new products and the new capex that we put in place the ROC targets are much higher than the blended current ROC that the company has been doing historically. So we are looking at growing up 16%, 17%, to 18%, ROC going forward in the next couple of years.

Gokul Maheshwari — Awriga Capital Advisors LLP — Analyst

Okay, great, thank you so much. This is helpful.

Operator

Thank you. Our next question is from the line of Ankit Gupta with Bamboo Capital, please go ahead.

Ankit Gupta — Bamboo Capital — Analyst

Yeah, thanks for the opportunity again. If you can Sameer talk about how many molecules on the pharma CDMO side do we do for Innovators, how many of them are commercialized, how many of them are in Phase IIA or Phase-III.

Sameer Hiremath — Managing Director

Yeah. I hand it over to Manoj. Manoj if you can this answer?

Manoj Mehrotra — President, Pharmaceuticals

Yes, see, we are bound by certain confidentiality agreements with the customer. It is very difficult for us to give a number, how many are in Phase-II, how many are in Phase-III. But by and large, our business model says that we entered into this development more in Phase-III because Hikal has got manufacturing for higher volumes. And we have several customers who are there in that segment currently. You see them going towards commercialization in 2024, 2025.

Ankit Gupta — Bamboo Capital — Analyst

Yeah, and how many are currently in the commercialization stage, like how many molecules are we manufacturing, which are already approved by [Speech Overlap].

Manoj Mehrotra — President, Pharmaceuticals

Five molecules which are already in commercial phase at this point of time. They are all [Technical Issues] starting materials and they will ramp-up as we go further.

Ankit Gupta — Bamboo Capital — Analyst

Sure, sure. And on the overall business side, given the uncertainty on the agrochem side, do we still stick to our guidance of mid-to-high teens kind of growth in FY ’24?

Sameer Hiremath — Managing Director

I think we are not giving any guidance for next year. I think we are waiting and watching. We will come back at the end-of-quarter four. There are a lot of micro global uncertainties as I said in my opening remarks, so we are waiting and watching.

Ankit Gupta — Bamboo Capital — Analyst

Sure sir, but at least on the pharma side, we are pretty confident of achieving the higher-growth numbers that we were targeting earlier because that hasn’t been impacted much compared to agrochemicals.

Sameer Hiremath — Managing Director

No actually, agrochemical hasn’t been impacted much bigger pharma. Pharma generic industry had got impacted severely this year. We expect things to start improving from quarter two onwards of next year.

Ankit Gupta — Bamboo Capital — Analyst

Sure, sure, okay, thank you, and wish you all the best.

Operator

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

Rohit Nagraj — Centrum Broking — Analyst

Yeah, thanks for the opportunity and congrats on a sequential growth in terms of operating performance. So first question in terms of the capex, so you indicated in the earlier question that till now we have invested about INR300 crores and another INR100 crores in Q4, that will be close to about INR400 crores invested during the year. What kind of asset turns are we looking at from this capex and how much part of this capex is already converted into revenues during FY ’23? Thank you.

Sameer Hiremath — Managing Director

So the total capex is going to be around INR300 crores. So it’s not going to be INR400 crores. This INR100 crores, we currently spent about INR200 odd crores for the nine months and the balance INR100 crores will be spent in the last quarter, taking our total to around INR300 crores or slightly over INR300 crores. With peak asset turn that we expect for this is between 1.4% to 1.5%, but that is two to three years after commercialization. The last — this is basically divided two major plants. One is the animal health-plan which comes on stream [Phonetic] in quarter two FY ’24 and the second part is the Crop Protection multipurpose asset which was commissioned in this quarter and commercial production will start from next quarter.

Rohit Nagraj — Centrum Broking — Analyst

Right, any guidance on capex for FY ’24?

Kuldeep Jain — Chief Finance Officer

It’s too early, right now for the budgeting process as well. So the clarity is now to complete this residual capex that we have, commision our plants and optimize our product mix and wait-and-watch on the global environment. We’re getting lot of new inquiries and looking at finalizing some major long-term contracts. And in the meantime, the debottlenecking of our current assets needs to improve asset turns of our current setup. So we’re going to wait for a quarter or so before we finalize our large capex. As of now, we want to complete over the next three to four months, all the pending capexes, so by end-of-quarter one all the capexes completed. And then we start generating revenues and improving our margins and losses that will be priority for next year. And if a major new contract comes up, then we will look at putting in new capex.

Rohit Nagraj — Centrum Broking — Analyst

All right. Yeah, just to understand a bit better in terms of the conversion of capex into assets, so normally, what will be the timeline, if let’s say, some order comes in Q1 FY ’24 in terms of executing the project and putting the steel on-the-ground and starting production?

Sameer Hiremath — Managing Director

See typically between acquiring a business, first there is a process development, then there is piloting and then there is capex. So it takes anywhere between 18 to 24 months after acquiring a contract depending on the size of the project.

Rohit Nagraj — Centrum Broking — Analyst

Right. I just wanted to ask a last question. In terms of customer acquisition any new customer acquisitions which have happened over the last three quarters in Pharma as well as Agro?

Sameer Hiremath — Managing Director

Yeah, there were actually some very exciting customer acquisitions but unfortunately, they are all bound by confidentiality, but the top Blue Chip companies in both crop and pharma that we’ve acquired customers and we’ve already got some RFPs and some projects that we started with them. And that is significant traction with new customers that we’re acquiring and there are lot of audits and customer visits taking place right now at our sites. And when we are positioned to talk more about this we will be happy to talk more about this.

Rohit Nagraj — Centrum Broking — Analyst

Sure, thank you so much for answering all the questions, and best of luck, sir.

Sameer Hiremath — Managing Director

Thank you so much.

Operator

Thank you. Our next question is from the line of Ashit Kothi, an Individual Investor. Please go ahead.

Ashit Kothi — Individual Investor — Analyst

Good afternoon sir. Thanks for the opportunity. The reason for acquiring stakes in solar, instead of buying solar power you are buying stakes in the company who are providing solar solutions of some type[Phonetic]. That was one and second part is when are we going to become truly zero affluent Company, which should be possibly in-line with your ESG commitments.

Sameer Hiremath — Managing Director

Okay, I’ll answer the question, one part, and the solar panel, I will hand it over to my CFO who is looking after it. From a zero affluent our pharma business, already is zero affluent in Bangalore. We have already implemented that. Any new projects that we’re implementing in our Crop and our Pharma side right now are all zero affluent by recycling. So over a period of time, our water consumption per kilogram of products being produced is decreasing year-on-year. And our waste generation also decreasing year-on-year. We are monitoring this. And we have very strict targets over the next couple of years as part of our ESG initiatives that we’ve taken. So we are moving towards reducing our water — our carbon footprint and recycling of our waste to a very large extent, and it’s a work in progress.

And solar is also part of our ESG initiatives to increase our renewable energy initiative and Kuldeep from [Technical Issues], sorry?

Kuldeep Jain — Chief Finance Officer

So for the 12 Megawatts power four are from Maharastra units, which will start giving power by this month.

Ashit Kothi — Individual Investor — Analyst

So it would be replacing your existing power consumption from GEB [Phonetic].

Kuldeep Jain — Chief Finance Officer

Yes, definitely — from Maharashtra Electricity Board, definitely.

Ashit Kothi — Individual Investor — Analyst

Okay, so how much of benefits, we would be achieving in that?

Sameer Hiremath — Managing Director

The payback is very good, it is less than one year, the payback.

Ashit Kothi — Individual Investor — Analyst

Okay, Okay.

Sameer Hiremath — Managing Director

And that the cost and technically the ESG and the carbon footprint that’s also is a very big benefit, which is very positively viewed by our customers and I’m sure investors also look at that, if you look at the carbon reduction, decarbonization that we are doing.

Ashit Kothi — Individual Investor — Analyst

Okay, and just to add to my first question of zero affluent. Aero affluent would mean that, no affluence is being given to the third-parties. What was being done and what we face the problem?

Sameer Hiremath — Managing Director

Yes, yes, so our pharma side we have already moved to zero affluent. [Technical Issues] On our crop side also, we are moving towards that in a phased manner.

Kuldeep Jain — Chief Finance Officer

For the new projects.

Ashit Kothi — Individual Investor — Analyst

And for the existing one [Technical Issues]

Sameer Hiremath — Managing Director

In the existing one also there is a major waste reduction program, which have been implemented in the last 9, 10 months and this is a work-in-progress and every quarter we’re reducing our affluent reduction and very little is going out to designated [Technical Issues], it is reducing quarter-on-quarter.

Ashit Kothi — Individual Investor — Analyst

And then any update sir on the court case?

Sameer Hiremath — Managing Director

Yeah, Anish if you can take this?

Anish Swadi — Senior Vice President, Business Transformation

Yeah, so the court case is still ongoing, we won in the Gujarat High Court. We won a positive order in the Gujarat High Court, and right now it’s status quo in relation to the Surat incident.

Ashit Kothi — Individual Investor — Analyst

So [Indecipherable] does that mean sir?

Anish Swadi — Senior Vice President, Business Transformation

It means that the court cases are still going on in the background that is basically dates are being given by the courts as the matter has not come up yet.

Ashit Kothi — Individual Investor — Analyst

Okay, so it’s going to linger on for some more time.

Anish Swadi — Senior Vice President, Business Transformation

Yeah. I mean that’s the Indian judicial system as of now, right. It takes time.

Ashit Kothi — Individual Investor — Analyst

And we don’t need — we are not planning to do any provisioning for the same as a prudent major [Phonetic].

Anish Swadi — Senior Vice President, Business Transformation

Beginning with relation to what exactly.

Ashit Kothi — Individual Investor — Analyst

In case any liability arises.

Anish Swadi — Senior Vice President, Business Transformation

No, not at this time. We are very confident in terms of our case. So at this point in time, we’re not doing any provisioning.

Ashit Kothi — Individual Investor — Analyst

Right sir, thanks a lot.

Operator

Thank you. As there are no further questions, I would like to hand the conference over to Mr. Sameer Hiremath for closing comments.

Sameer Hiremath — Managing Director

Thank you. Thank you everyone for joining our quarterly earnings call and for your continued interest in the company. FY ’23 three was anticipated to be our year of consolidation while input prices have begun to soften in terms of pricing, several uncertain macro challenges are still on the horizon. However, we expect the sequential recovery to extend into quarter four. The increasing number of customer inquiries, product mix optimization, cost-improvement, and business excellence initiatives have put in a stronger position to remain competitive and win new opportunities and so as I signed on new multinational clients for long-term contracts. We want to reaffirm, all of you that the pipeline is strong and the future is bright for both our businesses. We are certain that we will hit the goals we have been aiming for over the previous quarters. With that, I would like to close this call. Should there be any further questions, please feel free to reach out to us or Investor Relations partners Strategic Growth Advisors. Stay safe. Take care. and wish you all a very good evening. Thank you very much.

Operator

[Operator Closing Remarks]