Hikal: Expecting strong growth.buy INR 128. Target price INR 214.5
Growth to pick up in Going ahead: In both segments, H1 has impacted due to multiple factors like NGT order, destocking by clients, heavy flooding, annual maintenance shutdown. We believe this has impacted company sales in tune of INR 100 crores in H1FY20 respectively. We believe the worst is over in terms of performance and things to improve in terms of revenue and margins as they are expected to improve going forward. As our channel checks suggests strong traction across the segment and the company is expected to post better numbers going ahead as normalcy is back.
what went wrong: In crop protection business, the impact of large flooding has impacted in the last quarter which is likely to be normalised in this quarter. Channel checks suggests sharp improvement in crop protection business in this quarter on YoY basis.
Destocking by some clients and NGT order on taloja has also impacted volumes in Q2.
We believe things are back to normal in Q3 and would see substantial jump in Q4 onwards. Channel checks indicated good jump in agri volumes in Q3 which has been indicated by numbers of rallis limited.
Production at Mahad has now been normalised as per our understanding.With regards to flooding at the Mahad facility, the operations were temporarily disrupted for a short period, but were resumed and production has normalized. The NGT order impact for the whole of MIDC industrial area at Hikal Limited Taloja wherein water supply to all manufacturing plant in the area was curtailed by 50%, the issue is being amicably resolved and water supply is now being restored.
The company is investing INR150 crore over the next 18-24 months to add manufacturing capacities for agri division, The company has identified few new products for the division.
Strong R&D tie up: the company has strong R&D tie up with major institution like "Indian Institute of science" & Syngenta. this would give the company an edge over other players.
Pharma Segment:
The company has a strong track record of FDA clearance: The company has not faced major issue in both of its plants in Panoli & Bangalore. Recently, Panoli has been cleared with zero observations while Bangalore plant has been cleared with minor one observations. The Bangalore plant cater to only pharma while Panoli plant cater to both pharma & agri segment.
Pregabalin: Pregabalin is an anti epileptic and anti circumvent drug and has a global market share of "~5bn USD drug" . Recently lot of players have entered this market post it became off patent. (pfizer lyrica is innovator). The company is likely to see good growth in entry of new players as company is a key supplier of API in the segment. The volumes are likely to increase post debottlenecking exercise (annual maintenance ) taken in Bangalore plant. Most of the company's customers are launching both Gabapentin & Pragabalin which would drive growth for the company.
The company is currently adding facility in panoli segment with a capex of INR 150 crores which is expected to be completed by H1FY22. Post capex, the company would be able to supply API from two plants.
On the CRAMs front, the company has a healthy pipeline of new projects. The company is looking for two- three products (intermediate/advanced intermediates and APIs) from the CRAMs space to be commercialised this fiscal year.( Discussed in Concall of Q2 FY20).
The company would be doing capex of INR 200 crores in the next 18 months where it is largely done in its Panoli plant.
Growth in pharma business is likely to be driven by multiple factors as new launches and both repeat orders from CDMO customers.
The company is currently working at 80-85 % capacity utilzation on overall basis.
Over all margins to see growth as higher margin new launches and operating leverage to kick in. We believe margins to improve by at least 200 bps in the next 2 years. We have witnessed rise in gross margins in last few years as higher margin product launched in the last few years. We are expecting this trend to continue going forward.
On the valuation front, stock is quoting at attractive valuations of 10.8x & 9x FY21 & FY22e EPS of INR 12.1 and 14.3 respectively. A conservative 15x valuation would give stock target price of INR 214.5 respectively.