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Hikal was incorporated on July 8, 1988 as a private limited company with the name Hikal Chemicals Industries Private Limited. It was started by the Hiremath family and Surajmukhi Investments & Finance, a wholly-owned subsidiary of Kalyani Steels as the shareholders. The company got listed in 1995 and subsequently in 2000, the name was changed to Hikal. It started commercial production in 1991 at Mahad (Maharashtra) facility. Further, it started manufacturing intermediates for dyes, pharmaceuticals and agrochemicals. The plant at Taloja (Maharashtra) was built in technical collaboration with Merck and is a fully-integrated plant to produce Thiabendazole in the world.
Hikal is engaged in the manufacturing of various Chemical Intermediates, Specialty Chemicals, Active Pharmaceutical Ingredients (APIs) and Contract Research Activities. Its segments include Crop Protection and Pharmaceuticals. It offers agrochemicals, including active ingredients, such as Ammonium dithiocarbamate, Amitrole Tech, Diuron Tech, Ethion Tech, Imazalil Tech, Isoproturon Tech, Meta Chloro Aniline (MCA) and intermediates while specialty chemicalsincludes Phenyl-2-(phenylthio)-phenyl carbamate, 4-(Benzyloxy) Aniline Hydrochloride, N-Benzylpiperidine-4-carboxaldehyde, 3- Chloroaniline and 4 Aminobenzylamine. Its APIs include Gabapentin, Pregabalin, Quetiapine Fumarate, Memantine Hydrochloride, Venlafaxine Hydrochloride and Donepezil Hydrochloride. The company operates in geographical areas, including India, Europe, the United States, Canada and South East Asia. The company derived 60% revenues from Pharmaceuticals and 40% from Crop Protection Chemicals. In terms of EBIT, Pharma contributed 52% while Crop segment at 48%.
For years, the company has been dealing with marquee MNCs like Merck & Co, Bayer, Syngenta, BASF, Pfizer to name a few. With proven capabilities and management pedigree, we believe Hikal offers a compelling value proposition. It continues to expand in both Pharma and Crop Protection segments with separate focus and a calibrated approach. This augurs well in the current scenario when Chinese supply disturbances are likely to create opportunities for Indian players both in APIs and crop protection Contract Development and Manufacturing Organization(CDMO). The company has spent ~Rs 500 crore over the last five years to augment capacities. After years of volatility in growth, Hikal has been witnessing a relatively stable growth trajectory. The company has been able to pass through US FDA audits for its Bengaluru facility with zero observations five timesin a row, which indicates high level of quality and compliance levels from the company.
Hikal is engaged in manufacturing of various active ingredients, intermediates and R&D services to Global Pharmaceuticals, Animal Health, Crop Protection and Specialty Chemicals companies. The key segments include: Crop Protection and Pharmaceuticals, which accounted for 58% and 42% respectively, of operating revenues in FY18. The Pharma business currently is divided almost equally between generic Active Pharma Ingredients (APIs) and Contract Research & Manufacturing (CRAMS) businesses. Animal health business accounts for 8-10% of overall pharma revenues. In agrochem, 70% of revenues are derived from CRAMS with the remainder from proprietary products. Hikal owns five manufacturing facilities: Taloja, Mahad (Maharashtra), Panoli (Gujarat) Jigani (Karnataka) and an R&D centre in Pune. More than 70% of revenues are derived from export markets,mainly Europe, US and Japan. Hikal is one the largest supplier of Gabapentin (CNS) in Pharma and one of the biggest player in Thiabendazole (Crop Protection).
View & Valuation
For more than 50% of the overall business (Pharma CDMO + Crop Protection CDMO), the company manages to pass on fluctuationsin raw material prices. To mitigate the risk for the remaining pie, the company is planning to source from local vendors and make raw materials in-house through backward integration. Thus, it won’t be a risk for the company when it comes to significant rise in RM prices. For years, the company has been dealing with high profile MNCs like Merck & Co, Bayer, Syngenta, BASF, Pfizer to name a few. The company has spent ~Rs 500 crore over the last five years to augment capacity. After years of volatility in growth, Hikal is witnessing a relatively stable growth trajectory.
The management has guidesfor around 15% growth on the back of volume gain in existing products, new launches, new client addition and geographical expansion. Continuance of China induced opportunities will also be a major factor. We estimate revenues may grow 17% coupled with 50bps expansion over FY19-21E. The pharma segment is expected to post ~16% CAGR in FY19-21E on the back of new offerings and repeat business from CDMO players.
Crop protection is expected to post 12.5% CAGR in FY19-21E on the back of expansion of base business along with new launches on the back of new client’s addition and capacity addition. PAT is expected to see 27% CAGR led by strong revenues and lower finance costs. Hikal trades at ~14x FY21E earnings and 6.7x EV/EBITDA. The stock is not trading at cheap valuations however, strong revenues and earnings, a track record of continuous successful US FDA inspections and healthy return ratios give confidence. We have valued the stock at 17x FY21E earnings and arrive to TP of Rs 218. We recommend buy on Hikal at Rs 175 and add on dips to Rs 161 with TP of Rs 218 over the next 4 quarters.
Key Risks & Concerns
Issues raised by the US FDA and other global regulatory authorities can have a detrimental impact on the company’s revenue and profitability. Any changes in the law or regulation made by the government or regulatory authorities can substantially increase the cost of operations and reduce profitability. However, strong historical track record on compliance gives comfort on the regulatory front.
Foreign exchange risk
The company profitability is exposed to adverse movement in foreign exchange as more than 70% of the revenues are derived from exports. Hikal enjoys some natural hedge from its imports (~50% of raw materials) as well as foreign currency debt, though it still remains exposed to adverse movement in currency.
Product and Client concentration
The crop protection and pharmaceuticals business are based on loan term contracts with clients. Hikal derives ~40% of pharma revenues from Gabapentin and around 15% of crop protection revenues from Thiabendazole. Although,the company expects the dependency of single product to come down to less than 10% of total revenues in the coming years, any adverse impact on any of these products in the near term could impact future growth.
Exposed to adverse raw material price movement
Hikal’s operations remain exposed to adverse movement in raw material movement as the contracts are generally of fixed price nature with the raw material escalation clause beyond the agreed levels. The company also started backward integration in few products to keep it insulated from supply side disruptions.
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