Hikal - Pharma & Agrochem

[Mridul]

Worked on possible maximum revenue generation for the expanded capacity (pharma) at peak utilization for Bangalore plant. Getting around ~1700 cr. (Current revenue ~ 1200 cr), so at peak, 2700 cr revenue. Though utilization levels would increase gradually.

Reference -

1. Pricing taken from www.pharmacompass.com.
2. Anyone dealing in chemicals? Pricing needs to be verified from another source!

New Products - Around 1050 cr revenue can be generated from newly introduced pharma products.

PREGABALIN API
Capacity: 100 MTPA
38 US DMFs Filed
API REFERENCE PRICE - $145/kg
At full utilization ~90 cr

SITAGLIPTIN API
Capacity: 10 MTPA
API REFERENCE PRICE - $542/kg
17 API suppliers, though none filed US DMF
At full utilization ~35 cr

DONEPEZIL HYDROCHLORIDE DIHYDRATE
Capacity: 2 MTPA
API REFERENCE PRICE - ???
?? API suppliers, though ??? filed US DMF
At full utilization ~???

LACOSAMIDE API
Capacity: 20 MTPA
API REFERENCE PRICE - $758/kg
29 API suppliers, though 21 filed US DMF
At full utilization ~98cr

VALACYCLOVIR HCl
Capacity: 50 MTPA
API REFERENCE PRICE - $329/kg
33 API suppliers, though 19 filed US DMF
At full utilization ~106cr

VILDAGLIPTIN API
Capacity: 10 MTPA
API REFERENCE PRICE - $5649/kg
31 API suppliers, though 5 filed US DMF
At full utilization ~367cr

OLEMESARTAN MEDOXOMIL
Capacity: 10 MTPA
API REFERENCE PRICE - ???
?? API suppliers, though ??? filed US DMF
At full utilization ~???

QUETIAPINE FUMARATE
Capacity: 40 MTPA
API REFERENCE PRICE - $144/kg
68 API suppliers, though 46 filed US DMF
At full utilization ~37cr

MEMANTINE HCl
Capacity: 10 MTPA
API REFERENCE PRICE - $1157/kg
37 API suppliers, though 29 filed US DMF
At full utilization ~75cr

4-TRIFLUROMETHYL CINNAMIC ACID
Capacity: 10 MTPA
API REFERENCE PRICE - ???
??? API suppliers, though ??? filed US DMF
At full utilization ~???

CMMDT
Capacity: 10 MTPA
API REFERENCE PRICE - ???
??? API suppliers, though ??? filed US DMF
At full utilization ~???

TPCA.HCl
Capacity: 10 MTPA
API REFERENCE PRICE - ???
??? API suppliers, though ??? filed US DMF
At full utilization ~???

ETIRACETAM & ETIRACETAM RECEMIC
Capacity: 650 MTPA
API REFERENCE PRICE - $36/kg
58 API suppliers, though 35 filed US DMF
At full utilization ~152cr

PIRACETAM
Capacity: 650 MTPA
API REFERENCE PRICE - $13/kg
10 API suppliers, though 4 filed US DMF
At full utilization ~55cr

NEOTAME
Capacity: 50 MTPA
API REFERENCE PRICE - $32/kg
??? API suppliers, though ??? filed US DMF
At full utilization ~10cr

VENLAFAXINE HYDROCHLORIDE
Capacity: 40 MTPA
API REFERENCE PRICE - $119/kg
67 API suppliers, though 43 filed US DMF
At full utilization ~30cr

Expansion - Around 650 cr revenue can be generated from capacity expansion for old pharma products.

FLUNARIZINE
Capacity: 12.0 MTPA
API REFERENCE PRICE - $102/kg
10 API suppliers, though 1 filed US DMF
At full utilization ~7cr

LEVETIRACETAM
Capacity: 1.5 MTPA
API REFERENCE PRICE - $83/kg
58 API suppliers, though 35 filed US DMF
At full utilization ~1cr

DECOQUINATE
Capacity: 200 MTPA
API REFERENCE PRICE - $73/kg
2 API suppliers, though 2 filed US DMF
At full utilization ~184cr

GEMFIBROZIL
Capacity: 180 MTPA (reduced by 120 MTPA)
API REFERENCE PRICE - $35/kg
21 API suppliers, though 20 filed US DMF
At full utilization ~ -16 cr

TRIPROLIDINE HCL
Capacity: 4 MTPA
API REFERENCE PRICE - $418/kg
8 API suppliers, though 6 filed US DMF
At full utilization ~10cr

OXYPENTIFYLLINE
Capacity: 70 MTPA
REFERENCE PRICE - ???
At full utilization ~???

GABAPENTINE
Capacity: 1300 MTPA
REFERENCE PRICE - $55/kg
43 API suppliers, though 27 filed US DMF
At full utilization ~464cr

CINNARIZENE
Capacity: 15 MTPA
REFERENCE PRICE - $22-35/kg
At full utilization ~2-4cr

P- BENZYLOXY ANILINE HCL 40 MTPA…price???
ACEBUTALOL - HCL 15 MTPA…price???
BURPROPION HCL 25 MTPA…price???

[harshb232]

Prices of API have wide variance according to the market they are provided for.

[spatel]

Hiteshbhai’s (@hitesh2710) comment from other Hikal thread here (@Administrator - need to close new posts in one of the two thread to avoid confusion going forward).

---

hikal q4 results are out and seem quite good. Results file is too big so cant attach it here.

Operating profit has shown good growth but net profit is affected due to higher taxes during the current quarter whereas there was very low tax payment during q4 fy 17.

Good growth in both agrochem and pharma space and good segmental profits in both.

I got a message from a friend that they are also going to conduct a concall post this quarter results.

---

[shyamutty]

Hikal Ltd Board recommends 1:2 Bonus Issue and Final Dividend of Rs. 0.50

Confused with 2 threads of Hikal, request @manish962 @hitesh2710 to kindly merge/close http://forum.valuepickr.com/t/hikal-ltd-kalyani-group-co-on-verge-of-growth/ with this one.

[khs]

9b74dba4-4e8d-443a-9c2c-ac1e7f1fce13.pdf

Concall invite

[harshitgoel]

Q4FY18 Concall notes.

Mangement Commentary

• Company has 5 manufacturing plants - Mahad, Taloja, Panoli, Jigani 1 and Jigani 2
• One R&D Unit at Pune.
• Mahad plant was established in 1991, it was 1st plant of Hikal.
• 15-20% growth over next 2-3 years. Current margins maintainable.
• Going forward will focus on new geographies like Russia and Latin America.
• Credit ratings upgraded last year, expecting another rating upgrade this year.

Crop Protection

• 70% contract manufacturing for Global Innovators and 30% proprietary.
• Crop protection is majorly export.
• 3 manufacturing plants - Mahad, Taloja and Panoli.
• Contract Manufacturing:- 9-10 products (less than half 3 years back)
  Own Products:- 5-6 own products.
• Not more than 15% from one single product.

Pharmaceuticals

• 50% contract manufacturing and 50% Generic.
• Contract Manufacturing:- 5-6 products
  Own Products:- 8-9 own products.
• Of the exports 55% is USA, 30% Europe and 15% Rest of the world.
• 3 manufacturing sites Panoli, Jigani 1 and Jigani 2.
• Panoli was USFDA approved in 2012 and EU approved in 2014. Jigani 1 received USFDA approval last year.
• Going forward will file 4-5 DMFs every year.
• 40% repeat customers in Pharma.

Q&A
Q: What is driving growth in Crop Protection Segment?
A: Inventory cycle improving for the industry. Demand is good from customers specially in Q3 and Q4. Launched a molecule in early 2017 which gained traction during the year. Companies shutting in China due to environmental issues benefitting Indian companies.

Q: How is increase in raw materials price affecting?
A: We pass on 100% increase in price to customers. 35-40% of our raw material is imported from China.

Q: Capex going forward?
A: Rs. 250 cr. capex for next 2 years. Rs. 150 cr will be growth capex. 50:50 internal accruals and debt. Capex will be majorly for pharma and some capex for crop protection.

Other points from Q&A

• 3-4% of sales in R&D every year to be maintained.
• Tax rate going forward will be 32-33%.
• Have environmental clearance for all the sites.
• Expect margins to improve in Pharma due to new product launches.
• Biocides have good potential to grow in domestic market. Currently most of the biocides in country is imported from China.
• 70% capacity utilisation in both Pharma & Crop Protection.
• Phase 2 products:- 4-5 and 2 products in early Phase 3.
• Nature of business is such that H2 (half year) is better than H1. H1 H2 ratio is 40:60.
• Rs. 3.5 cr one time expense in Q4.
• Panoli and Jigani plants are large sites. Can easily expand 50-60% in these sites if needed. Going forward the capex will be on brownfield expansion.
• New products will be launched in late FY19 and FY20. Currently new products form 15-20% of sales. Going forward will like to see it at 25%.

[Mahesh]

Attached is link to detailed 15-pages Research Note on Hikal Ltd.

http://www.scribd.com/doc/109449715

Hikal Ltd., being a Baba Kalyani (Bharat Forge fame) Group company, who, alongwith Hiremath Family, owns 73.52 % equity stake in the company, needs a closer look by any prudent fund manager because of it being on verge of commencement of a significant growth phase starting Q4FY13 when major molecules of the company begin commercial production.

An Exclusive Supplier Relationship with Syngenta (for Thiabendazole), Bayer (for Fenamidone) & BASF (for Initium) as also World Leadership status in Gabapentin Molecule make the company hard to ignore, especially, at a time when its decade old efforts & upfront investments made, are likely to begin yielding pronounced results.

Current Market-Cap of just INR 697 cr. which is even lower than its current Net Fixed Asset base at INR 714.87 cr. with FY14e Revenues of INR 1040 cr. at 27 % + EBITDA margins make the company an interesting Investment Opportunity at current juncture.

Views are Invited from fellow members on this promising Research-driven Company.

Rgds.

Contents of this Note :

Key Investment Arguments In Favour & Against Hikal Ltd.

( Hikal Ltd. - Mcap â Rs. 697 cr. with FY14e Revenues of Rs. 1040 cr. ) Page 2-3

Why it Deserves to be a Part of One's Core Portfolio

Management Overview ( Baba Kalyani Group with Distinguished Management Team ) Business Model Explained ( Co. Sitting on Verge of Significant Growth Phase Commencing FY14 ) Evolution of the Company ( From Asset Building to Signing Exclusive MNC Innovator Relationships to Commercialisation & Delivery ) AI Segment ( Exclusive Supplier to Syngenta, Bayer & BASF ) API Segment ( World's Largest Supplier of Gabapentin ) CRAMS Segment ( Complements AI & API Segments ) Margin Focus ( 10 Years' Avg. EBITDA Margins at 27.64 % ) Minority Shareholders' Wealth Creation Track Record - 12 Years ( Consistent High Dividend Payment with Two Bonus Issues ) Peer Comparison ( Divis Lab, PI Ind, & Shasun ) Conclusion ( A Knowledge-driven Life Sciences Company on Verge of Significant Rerating )

Page 4-6 Page 7-7 Page 7-8 Page 9-9 Page 9-10 Page 10-10 Page 11-11 Page 11-12 Page 13-14 Page 14-15

[Mahesh]

Posting below only key Investment Arguments in Favour & Against Hikal but members are advised to refer entire research note via scribd link attached to assess the company in a proper way.

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Key Investment Arguments In Favour of Hikal Ltd. :

• Baba Kalyani (Bharat Forge fame) group company who, alongwith Hiremath family owns 73.52 % equity in the company.

• Highly competent and distinguished management team as well as Board of Advisors - most of whom are PhDs and distinguished personalities in their respective field - including ex-CEO of Aventis, Mr. Kannan Unni, ex-Head of Bayer, Dr. Wolfgang Walter, Padma Shri Prof. Goverdhan Mehta, etc.

• Exclusive supplier-relationship with Syngenta (for Thiabendazole), Bayer (for Fenamidone) and BASF (for Initium)

• World’s Largest Producer of Gabapentin molecule enjoying 45 % of world marketshare

• Strong IPR-building focus which is evident from 6 Process Patents already under company’s portfolio in addition to 4 Process Patents filed for approval

• Batch Quantities of AI Initium and API Venlafaxine supplied in FY12 received approval )- commercial production of which to commence from Q4FY13

• Panoli Plant received USFDA approval in September’2012 which is expected to provide significant boost to non-Gabapentin business starting FY14

• Exceptional focus on high margin products which is evident from last 10 years’ average EBITDA margins at 27.64% )- one of the best in the industry.

• Company has made heavy upfront investment in building assets and forging strong relationships with global innovators over last decade - fruits of which likely to accrue from FY14 onwards as heavy CAPEX phase got concluded in FY11 and commercial production of major molecules to commence from Q4FY13

• Consolidated Tangible Net _**Fixed Asset base at **INR

714.87** cr.**_ (including CWP of 75 cr.) )- higher than current market-cap of INR 697 cr. - a Rare thing for such a high caliber company

• Asset Utilisation to significantly improve starting Q4FY13 as delivery of signed contracts begin

• PAT to get significant boost going forward as all forward covers and derivative contracts meant for hedging (80% of revenue comes from exports) expire in October’2012 post which PAT margin will improve considerably

• Valuations compelling at 0.99 x FY12 Net Fixed Asset base; 1 x FY12 Sales; 8.7 x FY12 EPS (without forex loss) and 15.1 x FY12 EPS (with forex loss); 1.52 x FY12 Book Value

• If we extrapolate further, company trading at MCAP/FY14e EBITDA ratio of just 2.5 and MCAP/FY14e Sales of 0.68 with FY14e Price/B.V. of just 1.16 which signifies gross undervaluation for a company like Hikal which is on the verge of entering growth phase starting FY14.

Key Investment Arguments Against Hikal Ltd. :

• **Product & Client Concentration. **Company’s 76% revenue comes from just 3 molecules, viz., API Gabapentin and AIs Thiabendazole and Fenamidone wherein AIs are supplied to largely single client.

However, this product and client concentration risk gets largely nullified by Hikal’s dominant world leadership status in Gabapentin business (45 % world marketshare) and proprietary nature of molecules (AIs) to respective clients (Syngenta and Bayer) wherein Hikal is the exclusive supplier.

• High Debt. As at FY12, debt on books of Hikal is to the tune of ~INR 550 crores. It is worthwhile to note here the reasons of such high debt on books :

(a) API, AI and CRAMS business model requires significant upfront investment for building assets and winning trust of global innovators so as to win preferred or exclusive supplier- relationship with them. Time-frame involved for upfront investments is normally 8-10 years post which there is significant improvement in asset utilisation. [ For Detailed Explanation of Business Model Refer Page 7-8 of this Research Note ]

(b) Hikal has spent last decade doing upfront investment for future growth which is evident from large Net Fixed Tangible Asset base at INR 714.87 cr. (including CWP of 75 cr.) – 500 crores of which were spent in last 5 years. Since asset utilisation is low in initial phase and company went for debt-funded capex, its debt has increased proportionately.

© Company acquired Marsing & Co. in 2004 that didn’t materialise as expected which resulted in one time write-off of the acquisition in FY10.

(d) Since 80% of company’s sales are from exports, it took forward covers and derivative contracts for hedging 30% of its future exports because of which there were significant forex losses booked in P&L as INR depreciated sharply. These contracts expire in October’2012 post which management expects significant improvement in PAT.

Owing to reasons stated above, debt as at FY12 stands at ~550 crores. However, since CAPEX phase is already concluded in FY11 and no substantial CAPEX is planned till FY15, there is unlikely to be much addition in debt going forward. Also, since forward covers and derivative contracts expire in October’2012, pressure on profitability will significantly ease up starting Q4FY13.

With current EBITDA at 180 cr.+ and FY14e EBITDA at 250 cr.+ in addition to low equity base of just 16.4 crores (1.64 crore shares) with 73.52% promoter holding, servicing debt should not be a problem for Hikal.

• Low Liquidity in Company’s stock because of 73.52 % promoters’ shareholding and another 13.02 % held by International Finance Corporation and Reliance Capital (acquired in 2008 & 2006 respectively at INR 464 and INR 360). Hence, effective free public float is just 13.46 %.

Posted above only key Investment Arguments in Favour & Against Hikal but members are advised to refer entire research note via scribd link attached to assess the company in a proper way.

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http://www.scribd.com/doc/109449715/

[subashnayak_19_]

Hi Mahesh,

We have already a thread on Hikal @ http://www.valuepickr.com/forum/untested-worth-a-look/290103709

Please move your discussion to that thread.

[Mahesh]

sure Subhash…was unaware…will do that

[prasadmaddali20]

Hi Mahesh,

Any updates on HIKAL??? Seems nothing much changed for the company and no improvement in the financials… any change in your take?

[Mahesh]

Hi Sandeep,

The improvement was only expected in FY14 and we need to wait for two more qrtrs. for that…Forex issues are concerning and going forward how management manages that will be key monitorable…

However, make one thing clear in mind, if you are into this co., you need to be in it for a long time atleast 2-3 years…its a co. to keep in one’s portfolio but don’t overexpose to it…

Providing a link below to latest presentation by the co. :

http://www.hikal.com/investors/pdf/hikal%20investor%20presentation%20june%202013.pdf Link: http://www.hikal.com/investors/pdf/hikal%20investor%20presentation%20june%202013.pdf

[shenbal]

HikalInvestorPresentationQ3FY18.pdf

Latest investor presentation by the company. Any update on the business model and financial statements is highly appreciated.

The stock is consolidating between 245 and 260. It has been in a nice uptrend since 2009 (on the longer term charts).

[hitesh2710]

hikal q4 results are out and seem quite good. Results file is too big so cant attach it here.

Operating profit has shown good growth but net profit is affected due to higher taxes during the current quarter whereas there was very low tax payment during q4 fy 17.

Good growth in both agrochem and pharma space and good segmental profits in both.

I got a message from a friend that they are also going to conduct a concall post this quarter results.

[Jagat]

Mr Patel, Here is the result. Bonus recommended issue of 1 bonus share for every 2

[james_kerala]

Q4 Conference call details:

[shyamutty]

Hikal Ltd Board recommends 1:2 Bonus Issue and Final Dividend of Rs. 0.50

[basumallick]

Q4 Concall Highlights (source: capital market)

• Around 70% of crop protection business and 50% of Pharma business are on Crams basis. This business is cost plus margin.
• The customer fixes an annual volume offtake from Hikal under these Crams business. Accordingly the company prepares for the sales schedule.
• Unfortunately, offtake from global customers was lesser than usually planned by them at the start of the year for the past 4 years largely due to inventory issues. Companies were busy in selling the excess inventory of herbicides and pesticides that they were carrying, demand for which got affected due to various macro issues resulting in lower demand and thus offtake.
• Hikal has been seeing these inventory clearances in H2 FY 18. As per the company, generally the crop protection businesses are seasonal in nature and have very big cycle for 3-4 years. The uptrend cycle has just begun which should last for next 3-4 years.
• The company during the adverse cycle has increased number of product offerings, penetrated with new customers and has ensured its operating capacities at around 70% of installed capacity, all the time.
• The company is very bullish for its overall Crams business Volume growth will lead to internal efficiencies and even better margins for the company.
• The rest of the business ie 30% of crop protection and 50% of Pharma are generic in nature. The company has been constantly adding new products which have resulted in better than the industry growth in this line of business.
• New products account for around 15% of total sales of the company and expect new product sales to account for around 25% of total sales in next 2-3 years.
• Company has introduced some niche products in generic pharma business which will result in higher volumes for the company in coming years.
• Similarly company is also bullish on domestic Biocides business which has strong potential. Due to regulatory requirements there is no Indian company who is in this line of business and most of the requirements is imported. Company sees enormous potential for itself in domestic market in this segment.
• Similar is enzyme catalyst segment which is also niche in nature and has limited number of competitiors. Company has an early mover advantage in this segment.
• The company files around 3-4 DMF every year. Its focus area among others is anti diabetics segment.
• It is also present in Animal health API. It is pursuing some niche opportunities in steroids. It has completed some pilot trials of Animal health product for a leading Japanese company.
• There are 3-4 molecules which have reached Phase 3 level and 3-4 molecules under Phase 2 development stage.
• It had spent more than Rs 100 crore of capex in FY 18 largely in creating additional capacities and on R&D. It plans to spend around Rs 200 crore in next couple of years for creating backward integration facilities, building further infrastructure for new capacities and on R&D. The capex will be from internal accruals and some from debt. Debt equity ratio which is around 0.8 will remain at around current level for next couple of years as well.
• The company in the past had entered into long term complex forex derivative contract and had to burn its fingers. Currently it enters forex contracts regularly on quarterly basis depending upon its quarterly exports targets. It’s a net exporter and rupee depreciation will eventually help and aid margins.
• Its net working capital days are around 150 which will come down further.
• Overall, company expects net sales CAGR growth of atleast around 15-20% for next 2-3 years. It has strong visibility on volumes, offtake from the customers, ready capacities, new product pipeline, new infrastructure for future growth and R&D activities.
• The cycle was adverse since past 3-4 years, has finally turned around for the company and it aims to maximise on it.

[shyamutty]

@hitesh2710 Aries Agro also is a maker of micro nutrients and provides crop/plant protection, this company also has good cash flows. Recently VijayKedia bought this and increased his stake in the company. Is Hikal and Aries on the same line of business (other than Hikal’s pharma business)? Does it make sense to have both Hikal and Aries in the portfolio (as a basket)?

[swapnilyerande]

Management indicated Pregabalin for which Hikal has developed enzymatic technology has 50 cr sells potential. Pfizer is the innvoator of Pregabalin and it is major customer of Hikal for Gabapentin API. Hikal might also be able to sell Pregabalin to Pfizer.