Management Speak: Hikal (Unrated) - At an Inflection point
Hikal is a unique business model with strong presence across pharmaceutical (pharma) and agrochemicals (agchem) sectors, further diversified across Custom Synthesis (CS) and generic API. While CS has been a primary driver in the agchem segment, pharma has been largely driven by generic APIs. Hikal has seen steady recovery over FY14-18 post muted FY09-13 with FY18 marking an inflection point having reported 28%/13% Revenue/PAT growth, respectively. Strong R&D capabilities coupled with investments in creating a compliant manufacturing infrastructure and long-standing client relationships have given Hikal a competitive edge in CS and API businesses. Strong momentum across the pharma and agchem segments makes the management optimistic on Hikal’s near term growth outlook. The company is positive on delivering sustained revenue growth of 15-20% per annum and expects profitability to improve (20%+ EBITDA margins) over next 2-3 years. The stock currently trades at 24x FY18 EPS and 10.2x EV/EBITDA; we do not have a rating on the stock.
Pharma: healthy volumes drive growth: Hikal’s pharma business posted healthy 12.2% revenue CAGR over FY14-18 (24% in FY18) driven by 1) Strong volume growth in legacy products (Gabapentin) and 2) new product launches in niche categories. Hikal plans to file 4-6 DMFs with novel processes every year. As per management, Hikal’s adoption of a novel process for synthesis of Pregabalin via the enzymatic route would significantly contribute to the company’s growth over next two years.
Agrochemicals - new product launches to drive growth: Hikal’s agchem business posted 11.5% CAGR over FY14-18 and 33.9% growth in FY18 (flat industry growth), driven by innovative products launches. Management believes a revival in the global agchem industry will further boost Hikal’s revenue growth. Moreover, new product launches and strategic diversification into speciality chemicals and biocides will also help expand margins by 100-150bps to 20%+ over FY19-20E.
Growth platform in place: Despite a challenging business environment (pricing erosion and currency volatility) across both verticals, Hikal continued to incur Rs3.8bn capex during FY14-18), which has begun to yield results. While the launch of niche APIs like Pregabalin will drive growth in pharma, prospects in agchem CS are poised to look up once the global industry recovers. The resulting improvement in profitability will enable Hikal to fund its proposed Rs2.5bn capex (over two years) through internal accruals and steadily improve return ratios.
Hikal is engaged in selling and producing crop protection and pharmaceutical products. As of Mar 31 2005, Co.'s principal products comprised of thiabendazole, meta chloro aniline, isoproturon and gabapentin.
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