Hikal Ltd Management Discussions.

Business Transformation

In a little over three decades, Hikal has successfully established a strong foothold in multiple businesses- Pharmaceutical, Crop Protection, Animal Health, Food Ingredients and Speciality Chemicals. With continued emphasis on Research and Technology, Sustainability and People; we have consistently innovated and achieved a significant stronghold with our global customers. Our distinctive advantage In price, quality and sustainable supply has enabled us in becoming the primary supplier for key molecules across multiple geographies.

Our passion for quality and relentless drive to provide sustainable solutions to our customers has earned us the coveted reputation of being the leader in Safety, Health and Environment.

The companys impeccable track record in regulatory compliance is well recognised by the industry. This provides Hikal an edge in securing new and marquee customers on a global scale. We are committed to drive value for our shareholders with a continued focus on sustainable cash flows via deep long-term partnerships with our customers. This requires razor sharp focus on Quality, Delivery, Innovation, EHS and People as we build our brand globally.

In line with this vision, we have set a Bold Aspiration of driving profitable growth and transforming our business to go from ‘Good to Great. The current market dynamics provide a great opportunity for Hikal to double down on existing capabilities and invest in select future opportunities with long-term growth prospects.

Increased momentum on outsourcing and supply chain diversification (China-plus-one strategy) are opening new avenues for end suppliers. India is uniquely positioned to capture most of this diversification away from China with the outsourcing market expected to grow at 10% CAGR over next five years (up from 6% in 2017-2020). A rapidly evolving competitive landscape is paving the way for industry consolidation. Hikal is uniquely positioned to capture this tide with its unique and diverse product offering, asset quality and delivery track record.

The journey forward will entail accelerating growth in our existing pharma and crop protection business, as well as investing in our emerging business verticals such as animal health and biocides. To achieve the next phase of growth, we have a set upon a 2-year transformation journey encompassing all aspects of our core businesses: Pharma, Crop Protection and Animal Health.

As part of the "Pinnacle Program", Hikal plans to realign its strategic priorities and strengthen operational and R&D capabilities to achieve multi-fold growth in revenues and profitability.

The management is committed to driving this transformation with the right partnerships and the team has already started on this journey with key initiatives being kicked off in the Pharma business in June 2021. In addition to organic growth, Hikal has the balance sheet strength and appetite to follow through on its ambition via inorganic opportunities in strategic areas to develop a strong and global footprint.

Along with our scale aspiration, we also endeavor to become a cost leader in our key products.

We continue to focus on operational excellence and will launch several initiatives in the near future to further enhance manufacturing excellence. The program also covers a complete X-ray of multiple areas of business such as manufacturing, R&D, people, overheads, and others to identify consistent and sustainable cost saving potential. We are also leveraging technology to integrate automation in our facilities to improve our safety standards and target higher quality and efficiency.

We are implementing a wide range of initiatives across five key levers to reach the "Pinnacle"

Differentiated Position

We continue to pursue a best-in-cost and best-in-class position on technology, innovation & key capabilities. Our innovation efforts are pivoted on customer value addition, where we critically examine customer demands for potential collaboration opportunities. As we continue on this journey of cost and process improvement, we remain committed in our endeavor to develop cost effective products through sustainable processes.

Sustainability has been a key priority for Hikal and we have always strived to have best-in-class EHS standards. As part of the transformation, we are reinventing our EHS strategy to EHS 2.0, which will broaden the scope to include all critically relevant ESG parameters. As a part of the shift, we will focus on 10 immediate priority areas. Waste management, conservation measures enunciate our commitment towards a clean environment. Our company policies place employee and community health and safety at its core and this has been further strengthened in these uncertain times.

Our management recognises importance of a governance structure and envisages the highest level of transparency, accountability and integrity in its dealings with all the stakeholders.

Diversified Product Portfolio

We believe our next level of growth will originate from new launches backed by our strong R&T team. Our R&T team is the core driver for our future growth. Our focus is to continue investing in R&T to develop differentiated as well as an innovative speciality product portfolio. We will also evaluate opportunities in more niche/complex molecules as well as new product types (peptides etc.) which will add to growth in both topline as well as bottom-line. With a robust future product portfolio in alignment with our customer product roadmap, we will bolster our ability to reach scale with our key customers.

Deeper Strategic Customer Partnerships

We continue to receive positive and encouraging feedback from our current customers across quality, supply reliability and compliance. We intend to deepen our engagement by working closely with our key customers to align ourselves with their strategy and develop innovative solutions for the future. We are committed to proactively boosting our engagement and making the right level of investments in tandem with our customers in our endeavor to be viewed as not just a supplier but a key strategic partner.

Inorganic Growth Opportunities

Our company has historically relied on organic opportunities to fuel growth. The last 12-18 months have seen a strong deal flow, across both the pharmaceutical and crop protection sectors. We look forward to tapping new M&A opportunities to broaden our capabilities and gain immediate access to new customers and technologies in key geographies.

Strengthen Culture of Ownership and Invest in People

Delivering on this 360-degree transformation will need a culture of excellence, customer centricity and innovation. Investing in our people will remain our top priority. As a part of this transformation journey, we will focus on further strengthening our capabilities through necessary training and hiring and live our values of ownership, empathy and business excellence.

While the COVID-19 pandemic has led to greater uncertainty all around us, we are confident that our redefined strategic roadmap coupled with our core strengths, resilience and power of execution, will help us navigate this uncertainty and remain focused on our transformation journey. We are excited about the future potential of our business and are ready to capitalise on the opportunities.

HIKAL Business Excellence {HIBEX) is an internal programme to take our business to greater heights driven by our team to make processes more robust, efficient, and transparent. It is an operational excellence initiative for all business units across the company. Operational excellence when implemented across all the business functions becomes business excellence.

HIBEX is a stepping stone towards transformation.

The objective of this programme is identifying and collectively implementing improvements and higher efficiencies across all the verticals of the organisation. The programme does not limit itself to just improving efficiencies but also helps attaining the goals set and strategies developed for each division through a systematic and measurable approach. It takes into account all business functions right from marketing manufacturing, supply chain, finance, research and development to customer feedback.

The programme is designed in such a way that every critical aspect of business is captured.

Building Excellence

HI BEX encapsulates people excellence, finance excellence and IT excellence as the primary drivers of the program. Its a continuous chain driving sustainability and delivering value across the business cycle. We are targeting each vertical and working towards improving throughput and efficiencies.

We have listed below some of the key initiatives that were implemented during the year:

Driving Capabilities

Hikal believes only people can bring in transformation. The programme thus aligns our people in this direction and trains them to raise the bar by identifying weaknesses and improving competencies. We constantly conduct sessions to improve capabilities based on the principles of Lean and Six Sigma. We have introduced capability programmes starting from White Belt,

Yellow Belt, Green Belt and Black Belt.

In one of initial sessions, we identified 45 senior executives to impart the green belt training. Green belt training is a 16-week programme with Define, Measure, Analyse, Improve and Control (DMAIC) approach. A team is trained using the combination tools of Lean and Six Sigma over each phase of the programme. Three activities - learning, applying and review - run parallelly. The tools range from being as simple as reduction of wastages to as complex as threat analysis, design of experiments, cost saving, EHS among several others.

Participants apply the tools in the projects and trainers routinely review them for accuracy over short-term (16 Weeks) and long-term (1 year) period. All the methodology which we have adopted drives the people capability from top to bottom. The implementation of the project is a bottom - up approach.

Cost and Capacity Improvement

We have worked on profitability improvement through 5/20 approach, which means 5% in variable cost reduction and 20% improvement in throughput.

By applying Lean and Six Sigma tools and techniques, we increased production by ~50% for one of our key pharmaceutical products. There is a massive demand for this product and incremental production has resulted in huge savings for the organisation.

Similarly, in the crop segment, there is ~30% improvement in throughput for one of our key products with minor investment. With improved productivity we could deliver more products based on the value stream mapping under this segment.

Efficiency/Productivity Enhancement

We are focusing on two key parameters - enhancing asset utilisation and rationalising manpower. Various steps have been taken to reduce the non-value-adding hours and increasing productivity. The HR department works in sync with the HIBEX team to understand the skill matrix or factors impacting the productivity of every employee. This helps in analysing issues, if any, and in resolving internal or external hurdles.

Through Lean QC lab assessment, we were able to enhance the efficiency of our people by 30-40% in one of our units in just one-and-a-half years. In one such case, approximately 100 employees analysed 50,000+ samples but post HIBEX the same set of people are now examining close to 80,000 samples resulting in significant savings in terms of cost and resulting in greater productivity.

R&T Excellence

For Research and Technology (R&T), we have adopted Design of Experiments (DOE).

DOE enhances productivity, speed of development and more importantly pinpoints the factors that could adversely affect the processes. The result of DOE is a robust process and up-cycle time.

Engineering Excellence

Through engineering excellence, we have seen savings in energy, water and reduction in breakdowns of equipment through preventive maintenance. We have been focusing on boiler efficiencies which directly relates to improving energy conservation and costs.

After implementing these tools, we have seen positive results in the efficiency of the boilers, resulting in reduction in maintenance and improvement in turnaround times of the products.

The business excellence initiatives have enabled us to create a solid platform and deliver results as we step into a larger business transformation. Going ahead, we aim to increase the number of people under the HIBEX umbrella and drive capability building across the organisation.

We will improve throughput of key products, reduce costs, secure our supply chain, ensure efficient working capital management, and build-in competencies and capabilities to aid our future growth.

At the core of transformation lies technology. We are in the era of exponential change where emerging technologies are bringing a paradigm shift in the realm of the life sciences industry.

As part of our strategy to be at the forefront in technology we have been implementing Industry 4.0 in a phased manner across all our sites. Implementation of Industrial Internet of Things (lloT) will help us reach new heights and productivity and efficiency.

We are integrating digital infrastructure across our manufacturing sites. This will enable real-time monitoring, ensuring safety, optimum utilisation of assets and improve quality control. We are building highly flexible and automated plants using industry 4.0 principles and leveraging the sophisticated technology to enhance productivity at existing plants.

lloT also provides support to product development activities through data accessibility that helps us understand the nature of the composites and further helps us in developing renewable and sustainable products. We are embracing automation, digitalisation, and analytics to enhance efficiency and improve productivity.

We have undertaken several initiatives to strengthen our Information Technology platform:

Data Analytics

loT enables to link the operating environment with the digital world. It helps in collecting and collating data from machines and equipment, which in turn gives us an understanding of the manufacturing problems in advance and derive solutions for the same.

In order to acquaint the key operating personnel involved we conducted onsite in-factory training for our shop floor staff to provide hands-on training in technology and make the best use of it. Moreover, data is of prime importance. The first step in Internet of Things (loT) is data generation from plants, utilities, ETPs and across all auxiliary operations. Data generation requires high level of instrumentation, integration and categorisation of the same. The shop floors are equipped with high-speed fibre optic network. We have also installed Edge Layer, a high-end software, to assimilate and categorise the data collected. This application helps in real-time visualisation of all the key parameters and metrics, along with exception handling (identifying any anomaly immediately). This helps in generating alerts and arresting failures leading to prevention of any undue accidents.

Going ahead we are embarking on the next phase of digitisation through cloud layer. Cutting-edge IT applications and accessing real time data anytime anywhere will require robust cloud solutions. This will aid in taking timely decisions, result in better operating performances and add to the profitability of the Company. Overall, this layer will enable to:

* Ascertaining Asset Performance

* Continuous Monitoring

* Predictive Analytics

* Machine Learning

* Process Analytics

Further to the above a greater emphasis is also laid on the IT applications and at Hikal we are augmenting our IT applications and infrastructure landscape to come up with seamless solutions. We harness the power of technology to deliver integrated solutions with efficiency.

Security

Hikal uses AVAMAR as a solution that backs up the data across all locations on a cloud server.

The backed-up data is completely encrypted and secured from any malware. The Business continuity is addressed by means of cross location data backup.

Hikal uses Palo-Alto, the next Generation Firewall as gateway security solution. This solution uses cloud-based Wildfire technology that automatically protects networks from new and customised malware across applications, including malware hidden within SSL-encrypted traffic.

Hikal uses FireEye as End point security solution. The solution uses threat intelligence and sandboxing technology to identify and protect against any potential attack. The cross-function products at gateway and end point ensures visibility of multiple threat databases and hence better control of malware threats.

Hikal uses secured VPN based access to users who are travelling or working from home.

This ensures data encryption and defined access control on granular level to prevent data leakage from Hikal servers. Other security measures taken such as system access based on 2 factor authentication, Forcepointweb proxy to enforce central IT policy compliance, OS hardening ensures that the data security is not compromised.

Going forward, we will continue investing in digital automation and electronic documentation.

We believe technology is the key enabler for better scalability, stability as well as security, and lead to transformation. We will continue to leverage technology and data analytics to boost efficiency and strengthen our proposition as a partner of choice.