HIKAL LIMITED 1 www.careratings.com CARE EQUITY RESEARCH Independent Equity Research HIKAL LIMITED PHARMACEUTICALS BSE Scrip Code: 524735 Wide product range across pharmaceuticals and agri chemicals Hikal Limited (Hikal) offers products across two segments: pharmaceuticals and agri-chemicals. The company offers variety of APIs for custom manufacturing. Hikal offers herbicides, insecticides and fungicides in the agri-chemical business and is among the biggest producers of ‗thiabendazole‘ in the world. The company also manufactures the agri-chemical intermediates such as ‗meta chloro aniline‘ and ‗mono chloro acetone‘. A wide product portfolio across two segments mitigates the risk of slowdown in any one particular segment. Also the company has been shifting its product mix towards the higher margin pharma products from the relatively lower margin agri chemicals business over a period of time. Bright outlook due to buoyancy in pharma sector but New Drug pricing policy is a concern CARE Research believes buoyancy in Indian Pharma sector to remain intact but the industry may face pricing pressure from the New Drug pricing policy. The global crop protection sector is also set to witness robust growth along with opportunities for companies in India as the cost pressures on global companies increases. Key concerns • Exchange rate volatility risk • Stiff competition from other Asian countries for manufacture of API‘s • Seasonal nature of the agro chemical industry Valuations Hikal is currently trading at trailing P/E and EV/EBITDA multiples of 13.2x and 8.3x, respectively. CMP Rs. 285.50 1 14 Feb 2012
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HIKAL LIMITED
1 www.careratings.com
CARE
EQUITY
RESEARCH
Independent Equity Research
HIKAL LIMITED PHARMACEUTICALS
BSE Scrip Code: 524735
Wide product range across pharmaceuticals and agri chemicals
Hikal Limited (Hikal) offers products across two segments:
pharmaceuticals and agri-chemicals. The company offers variety
of APIs for custom manufacturing. Hikal offers herbicides,
insecticides and fungicides in the agri-chemical business and is
among the biggest producers of ‗thiabendazole‘ in the world. The
company also manufactures the agri-chemical intermediates such
as ‗meta chloro aniline‘ and ‗mono chloro acetone‘. A wide
product portfolio across two segments mitigates the risk of
slowdown in any one particular segment. Also the company has
been shifting its product mix towards the higher margin pharma
products from the relatively lower margin agri chemicals business
over a period of time.
Bright outlook due to buoyancy in pharma sector but New Drug
pricing policy is a concern
CARE Research believes buoyancy in Indian Pharma sector to
remain intact but the industry may face pricing pressure from the
New Drug pricing policy. The global crop protection sector is
also set to witness robust growth along with opportunities for
companies in India as the cost pressures on global companies
increases.
Key concerns
• Exchange rate volatility risk
• Stiff competition from other Asian countries for manufacture
of API‘s
• Seasonal nature of the agro chemical industry
Valuations
Hikal is currently trading at trailing P/E and EV/EBITDA
multiples of 13.2x and 8.3x, respectively.
CMP Rs. 285.50 1
14 Feb 2012
HIKAL LIMITED
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Background
Incorporated in 1988 with equity participation of the two promoters — Hiremaths and the Kalyani group Hikal, is
engaged in Research and Development (R & D), manufacturing of various chemical intermediates, speciality
chemicals, active pharma ingredients for the Pharmaceutical and Agrochemical industries. The areas in which Hikal
specializes are: Discovery Research Support, Process Development, analytical method development and custom
manufacturing of key intermediaries and Active Pharmaceutical Ingredients (APIs). The company operates through
two segments: Pharmaceuticals and Agrochemicals. The company has two subsidiaries: 1) Acoris Research Limited:
A 100% subsidiary of the company engaged in Contract Research activities. Acoris has setup a R&D facility for
carrying out process development, custom synthesis, analytical development & fermentation. 2) Hikal International
BV: A 100% subsidiary engaged in trading activities and based in Netherlands.
Operations
Taloja Site: It is a fully integrated plant which produces active ingredient – Thiabendazole. Construction of a new
multi-purpose plant was completed and validated in FY 11 and the second production campaign of an 'on patent
active ingredient' was successfully commercialized. Pilot production of six molecules intended for commercial
production at different Hikal sites was successfully completed. Of these molecules, one was a pharma intermediate
and the remaining five were for the crop protection industry.
Mahad Site: Manufactures intermediates and herbicides for the crop protection industry. It was the initial facility set
up for the manufacturing of intermediaries for dyes, pharmaceuticals & agrochemicals. It has the capability to handle
complex chemistries and has the capability to meet the customized requirements for overseas customers.
Panoli Site: It has the capability to manufacture agrochemicals, technicals and formulations. An exclusive new multi
product intermediates has been commissioned to manufacture intermediaries for Pharmaceutical industry. These
have been validated at the plant scale and successfully passed the customer audits. To meet GMP requirements, the
existing manufacturing block and warehouse were refurbished.
Bangalore USFDA Site: It is a USFDA approved facility for manufacturing of API with fully developed onsite
infrastructure facilities. Construction and commissioning of a new multi product manufacturing block has been
completed in FY11. The company is also in the process of upgrading some of the API facilities at the Bangalore
plant.
Bangalore R&D Centre: The company has added a new synthetic lab and refurbished a kilo lab at the Bangalore
HISTORY AND BACKGROUND
HIKAL LIMITED
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RESEARCH
R&D centre. This will help to focus on improving processes of existing products as well as developing new DMFs
and processes for new products.
Pune R&D Centre: This is the Actoris Research centre and the facility conducts process development, custom
synthesis, analytical development & fermentation. This facility will help the company to get more orders in contract
manufacturing and research.
Industry Segments
35%
65%
Segment Revenue Breakup - FY11
Agro Pharma
33%
67%
Segment RevenueBreakup - FY10
Agro Pharma
Source: Company, CARE Equity Research
Hikal operates through two industry segments: pharmaceuticals and agri-chemicals. The company has strong
presence in the CRAMS segment and caters to the European and the US markets. The company earned about 69%
of total revenues from the export segment in FY11 compared to about 87% in FY10. The company has increased its
geographical distribution of products and have increased sales to the fast growing companies in the local market. It is
in line with the strategy to diversify the customer base and broaden the supplies to domestic companies who have a
growing market share in varied geographies.
Hikal: Operational Performance (Rs. Crore)
FY08 FY09 FY10 FY11
Pharma 330 371 350 337
Agro Chemicals 150 202 189 166
Total sales 479 573 539 502
FY08 FY09 FY10 FY11
Domestic 234 134 69 156
Exports 246 439 470 346
Total sales 479 573 539 502
Source: Company, CARE Equity Research
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Hikal: Peer comparison
(FY11) Units
Hikal
Limited
Granules
India
Elder
Pharma
Dishman
Pharma
Net operating income Rs. Crores 532 478 968 1,060
EBITDA Rs. Crores 119 55 179 203
PAT Rs. Crores 37 22 64 81
Growth in net operating income % -2% 2% 33% 13%
EBITDA Margin % 22.4% 11.4% 18.5% 19.1%
PAT Margin % 7.0% 5.6% 6.6% 7.7%
RoCE % 9% 10% 4% 5%
RoE % 9% 10% 10% 9%
Price/Earnings (P/E) Ratio times 12.7 7.2 10.6 5.9
Price/Book Value(P/BV) times 1.27 0.65 1.16 0.55
Enterprise Value (EV)/EBITDA times 8.3 4.87 7.3 6.5
Source: CapitalLine and CARE Equity Research
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Top line shows negative growth of 2.2% in FY11
The total operating income for the company declined by 2.2% in FY11, with total operating income for FY11
being Rs. 532 crore compared to Rs.544 crore in FY10. The reduction in sales was majorly due to de-stocking of
inventory by key customers in Europe and USA. The pharma segment sales were affected by a withdrawal of a
major customer who faced internal regulatory issues.
EBITDA margins shows marginal improvement while PAT margin declines
The EBITDA margin for the company showed marginal improvement in FY11 of about 100 bps over FY10 on
account of better cost management while the PAT margins declined by 140 bps over the same period on account
of increase in interest payments.
EPS shows de-growth of 25.7% in FY11 over FY10
Net profit for the company decreased by 26% in FY11 over FY10 on account of declining sales and high fixed
expenses. Even the EPS decreased in tandem with the Net Profit and recorded decrease of about 25.7% in FY11
over FY10 after showing growth of about 32% in FY10 over FY09.