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  • CMP : 239.6 Chg : 2.46 (1.04%)
  • Target : 290.0 (0.0%)
  • Target Period : 12-18 Month
Result Update

16 Aug 2022

Multiple headwinds continue to stress; FY24 outlook cautious but upbeat…

About The Stock

Hikal is predominantly a B2B player that provides intermediates and active ingredients to global pharmaceutical, animal health, crop protection and specialty chemical companies.

  • Pharma & crop protection are 58% & 42% of operating revenue, respectively. Pharma business is currently divided into 50:50 ratio of APIs, CDMO. Animal health business accounts for 20-25% of CDMO business
  • In crop protection, 69% revenues are derived from CDMO while remaining is from proprietary products, specialty chemicals & specialty biocides
  • One of the largest suppliers of Gabapentin API (CNS) and in crop protection, one of the largest suppliers of Thiabendazole (TBZ)
Q1FY23

Muted quarter amid headwinds in pharma and crop protection.

  • Revenues declined 17% YoY to ₹ 379 crore
  • EBITDA was at ₹ 23 crore, down 76% YoY with margins at 6%
  • Loss of ₹ 9 crore in this quarter vs. profit of ₹ 50 crore in Q1FY22
What should Investors do?

Hikal’s share price grew by ~2x over past three years

  • Downgraded from BUY to HOLD due to the adoption of cautious stance in the backdrop of near to mid-term headwinds as we wait for improvement in macro environment in both demand and supply side to improve before taking a directional call.
Target Price and Valuation

Valued at ₹ 290 i.e. 20x FY24E EPS of ₹ 14.4.

Key Triggers for future price performance
  • Capex progress in both pharma and crop protection
  • Margin improvement on the back of several cost rationalisation & efficiency improvement measures undertaken during the pandemic
  • Continuum in crop protection growth rate
  • Received manufacturing license for the production of APIs at Panoli site, to resume post validations over the next quarters
  • Raw material challenges expected to continue in the next few months
Alternate Stock Idea:

Apart from Hikal, in our healthcare coverage we like Laurus.

  • Laurus Labs operates in the segment of generic APIs & FDFs (formulations), custom synthesis and biotechnology
  • BUY with target price of ₹ 675

Particulars

Particulars (₹ crore) Amount
Market Capitalization 2,953.9
Debt (FY22) 675.0
Cash (FY22) 49.0
EV 4,209.0
52 week H/L (₹) 456.8/218.0
Equity Capital 24.7
Face Value (₹) 2.0

Price Chart

Recent Events & Key Risks

  • Operationalization for Taloja unit
  • Key Risk: (i) Better than expected demand offtake (ii) Input availability cost challenges persisting for increased duration

Research Analyst

Siddhant Khandekar
siddhant.khandekar@icicisecurities.com

Result Update
ICICI Securities – Retail Equity Research

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Revenues 1,589.6 1,507.3 1,720.4 1,942.7 13.9 1,881.6 2,166.4 5.6
EBITDA 298.1 273.2 322.9 340.6 11.9 212.2 389.5 6.9
EBITDA Margins (%) 18.8 18.1 18.8 17.5 - 11.3 18.0 -
Adjusted PAT 103.1 99.8 133.2 160.5 18.8 47.2 177.8 5.3
EPS (|) 8.4 8.1 10.8 13.0 - 3.8 14.4 -
PE (x) 34.8 35.9 26.9 22.3 - 75.9 20.1 -
EV to EBITDA (x) 14.1 15.2 12.9 12.3 - 20.2 10.6 -
Price to book (x) 4.7 4.4 3.8 3.4 - 3.3 2.9 -
RoE (%) 13.6 12.2 14.3 15.0 - 4.3 14.2 -
RoCE (%) 14.3 12.8 15.1 13.6 - 5.6 13.8 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Q1FY23 Results: Washout quarter amid multiple headwinds

  • Revenues de-grew 17% YoY to | 379 crore with crop protection declining 15% YoY to | 154 crore. Pharma de-grew 18%YoY to | 224 crore. EBITDA margins declined 1496 bps YoY to 6% amid 1053 bps YoY decline in gross margins. EBITDA de-grew 76% YoY to | 23 crore. Consequently, Hikal booked loss of | 9 crore in this quarter vs. profit of | 50 crore in Q1FY22. Delta vis-à-vis EBITDA was mainly due to higher interest cost and depreciation on account of assets additions
  • Q1 was expected to be a weak period but quarterly revenues and margins were significantly below our estimates. Pharma business witnessed channel inventory correction at customers’ end while crop protection was affected due to expected disruption in operations of Taloja plant. Rise in the input costs of raw materials, solvents, utilities and fuel has affected margins while focus now shifts on company’s ability to pass through these increases without much lag. We expect a step wise recovery in the upcoming quarters. Hikal continues to expand in both pharma, crop protection segments with separate focus and a calibrated approach but with strong headwinds due to the inflationary pressures and a sharp rise in input costs of raw material, energy and solvents, growth is likely to taper and margins contract in FY23

 

Q1FY23 Earnings Conference Call highlights

  • Hikal continued to see a rise in the input costs of raw materials, solvents, utilities and fuel, which has affected margins. Hikal is focused on passing through these increases in the input costs to CDMO customers with one or two quarters lag while the company is unable to pass on in pharma generics. Prices of some key raw materials is likely to soften in the upcoming months, which will improve overall margins and profitability
  • Pharmaceutical business witnessed channel inventory correction at customers’ end. Hikal expects the demand for own products business to improve in the coming quarters. The company has continued to receive several new inquiries from global innovator companies for the partnerships in the CDMO business segment and successfully secured few projects from global innovators, Hikal has received orders for validation quantities for two intermediates of a Covid drug from a global innovator company
  • Crop protection business saw disruption in operations of Taloja plant as company utilised the time effectively by undertaking annual preventive maintenance. The plant is now fully operational. Hikal is on track for building new multipurpose plant for launching new products, which is expected to come on stream by Q4FY23. On CDMO front, Hikal is receiving new inquiries from both existing and new customers
  • In terms of guidance, the company is expecting FY23 revenues to be on similar lines to FY22 while also guiding for high teen growth from FY24. EBITDA margins are likely to improve in subsequent quarters and the management has indicated at 50-100 bps improvement in FY24 margins from FY22 levels.
 
Variance Analysis:

| crore Q1FY23 Q1FY22 YoY (%) Q4FY22 QoQ (%)   Comments
Revenue 378.8 456.8 -17.1 502.4 -24.6   YoY decline due to decline in both Pharma and Crop protection
Raw Material Expenses 226.4 224.9 0.7 277.6 -18.4    
Gross Margins (%) 40.2 50.8 -1053 bps 44.7 -451 bps    
Employee Expenses 43.2 48.1 -10.1 53.6 -19.4    
Other Expenditure 86.5 88.0 -1.8 110.2 -21.5    
Operating Profit (EBITDA) 22.8 95.8 -76.2 61.0 -62.7    
EBITDA (%) 6.0 21.0 -1496 bps 12.1 -613 bps   YoY decline due to increase in input costs of raw materials, energy and solvents as well as lag in pass through of costs to customers
Interest  11.3 8.0 41.3 8.1 39.7    
Depreciation 26.5 22.6 17.5 24.2 9.4    
Other Income 3.3 3.2 2.8 0.3 1,111.1    
PBT -11.8 68.4 -117.2 29.0 -140.7    
Exceptional Items 0.0 0.0 NA 0.0 NA    
Tax  -2.9 17.9 -116.3 8.2 -135.3    
 Tax Rate (%)  24.7 26.1 -5.3 28.5 -13.1    
Reported PAT -8.9 50.5 -117.5 20.7 -142.8    
Adjusted PAT -8.9 50.5 -117.5 20.7 -142.8    
EPS (|) -0.7 4.1 -117.5 1.7 -142.8    
Key Metrics              
Pharma 224.3 274.1 -18.2 307.9 -27.2   YoY decline due to channel inventory correction at customers’ end 
Crop Protection 154.5 182.7 -15.4 194.4 -20.5   YoY decline amid disruption in operations of Taloja plant

Disclaimer

ANALYST CERTIFICATION

I/We, Siddhant Khandekar, Inter CA, Raunak Thakur, PGDM, Kush Mehta, CA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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RATING RATIONALE

ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according -to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts valuation for a stock

Buy: >15%

Hold: -5%to 15%;

Reduce: -15% to -5%;

Sell: <-15% 

Pankaj Pandey

Head – Research

pankaj.pandey@icicisecurities.com

 

 

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

 

 

research@icicidirect.com
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