Hikal - Pharma & Agrochem

Stock Opportunities
1

The Story

Hikal is yet another pharma/CRAMs turn-around story, where because of forex hedging strategy, company is loosing around 33% of gross profit in forex expenses, resulting in a very poor EPS numbers. In last meeting the director had told that all the forex issue will get resolved in 2 quarters (At the end of the year). Which implies a solid 60-100% increase in EPS even without any extra effort by the management.






Jun'12 Mar'12 Dec'11 Sep'11

Total income 165 221 185 145

Expense 120 170 140 108

Operating Profit 45 52 45 37








Interest 13 13 12 12

Depreciation 12 11 11 11

Forex Loss 15 10 11 2

Total 40 34 34 25








Net Profit 5 15 13 11
44
Net Profit + Forex 20 25 24 13
82

Currently it is quoting at a PE of 13, D/E ratio of 0.94, And has a pretty decent ROCE of 16. Another good sign is that it has a progressively decreasing DE ratio year after year.

The details about its management, bussiness is given in the links provided at the reference section. Not copy-pasting the same.

Thanks Vivek Gautamji for making me think about this. Thinking to add little bit of Hikal to my portfolio.

References:-

http://www.moneycontrol.com/news/stocks-views/limited-downside-seenhikal-says-rajen-shah_706146.html

http://www.hikal.com/investors/pdf/chairman_speech2012.pdf

http://www.moneycontrol.com/news/market-outlook/tulsians-multibaggers-hikaldic-india_666499.html

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I had studied the 2012 AR sometime back - here are the excerpts - the ‘good’ I could find with nearby triggers. This ran recently (20% in a day) in the pharma rush but might come back if people run after momentum now. The management is excellent.

2011-12 was a very successful year for Hikal, where overall sales increased by 41%. It is positive to note that the Crop Protection business grew by 42% after many years of slow growth. The Pharmaceutical business continued to grow and recorded an increase of 40% in revenues. EBIDTA increased by 47% to 1,884 million from 1,282 million, and PAT increased by 22% from 443 million to 541 million.

The shareholders’ funds of the company increased from 4,217 million to 4,598 million, an increase of 9%. The long-term debt has decreased by ` 57 million despite the revaluation of our dollar denominated loans due to the depreciation of the Rupee versus the US dollar. The debt to equity ratio has improved from 0.99 to 0.92.

The loss in our foreign exchange due to hedging of forward exchange contracts was higher than we expected during the year. It was primarily due to the significant devaluation of the rupee in the last two quarters of the year 2011-12. Most of the forward contracts will expire during the first two quarters of the coming year and we expect significant improvement in profitability in the second half of the year ahead.

Our strategy exercise with a leading global consulting company was completed in the first half of this year. We have reviewed the recommendations in detail and have initiated the implementation in a phase- wise manner. We expect the benefits of this study to be realized over the years to come. In 2011, the facility (Jigani) was audited successfully by the USFDA for the third time. A new multipurpose API manufacturing block is scheduled to be commissioned by 2013.

The increase in profit can be attributed to the larger sales volumes of existing products and operational efficiencies in the manufacturing plants

In 2011-12, the revenues of the Crop Protection division increased substantially by 42% to 2,465 million as compared to1,734 million from the year before. The increase in sales was primarily due to the larger off take of

products by our customers. Our new products which were in the R&D stage are expected to be commercialized in the next financial year leading to additional growth in the years to come.

Our Pharmaceutical division recorded its highest turnover at 4,477 million as compared to3,201 million in the previous year, a growth of 40%. Much of the growth can be attributed to the increase in sales of our existing product

portfolio as we captured a larger market share and added new customers.

One of our leading API products in the Pharmaceutical division experienced higher than expected volumes from existing customers as well as from newer indications that have been approved for the product. We received

clearance to manufacture two contract manufacturing products which are expected to grow in volume over the next few years. This will further improve the capacity utilization at our Panoli and Jigani facilities considerably.

The contract manufacturing of these molecules will add stable revenues and margins for the division over the next few years.

The construction of our newest multipurpose API plant which is capable of manufacturing 4 APIs simultaneously is underway at our USFDA facility in Bangalore. This plant is expected to be ready in 2013 and will cater to the new

products under development at Hikal R&D and contract manufacturing requirements of our existing customers.

Our Crop Protection division revenues are primarily driven from contract manufacturing products for multinational innovator companies. The past year saw a volume increase of a fungicide produced for a major European

multinational company. An intermediate for the same customer produced at our Mahad facility has grown in volume and based on future forecasts given by the customer, we expect it to grow further.

We have added two customers for commercial manufacturing which is expected to commence next year. The lab trials for these molecules have been completed. We worked on multiple late stage research projects for Japanese

Crop Protection companies which are expected to fructify over the next two years. It will lead to additional revenues in the Crop Protection division. We are currently working on an intermediate to be manufactured at our Mahad

facility for the Japanese market. It is a solvent for the electronic chemical market with extremely stringent quality requirements. The success of this project along with others has opened up a new market in the fast growing

specialty chemicals field for the company.

We have invested incrementally in debottlenecking our plants at Taloja and Mahad to cater to the additional demand of our customers. Going forward, we are focusing on maximum capacity utilization at our manufacturing

facilities which will improve our profitability We received final clearances from a European innovator multinational company to commence commercial production of multiple products at our Panoli and Jigani facilities. We had built dedicated facilities for the production of these molecules which are expected to be commercialized in the second quarter of the next financial year. These are both large volume products and are expected to grow in volume over the next few years. This will further improve the capacity utilization of both sites considerably.

Commercial quantities of an API product that we had under development has been successfully manufactured and approved by an innovator company in the US. This product will be contract manufactured at our USFDA plant

in Bangalore and supplies are expected to start in the second quarter of the next financial year.

Validation trials of two new APIs under development have been completed. We expect commercial quantities to begin in the next financial year. These products are in the process of being approved by our customers as they go

off patent.

Construction of our newest multipurpose API plant which is capable of manufacturing 4 APIs simultaneously is underway at our USFDA facility in Bangalore. This plant is expected to be ready in 2013 and will cater to the new

products and contract manufacturing requirements of our existing customers.

On the regulatory front, we had two milestones. Our Bangalore USFDA facility passed its third audit successfully receiving zero 483s (zero regulatory deviances). It is an accomplishment for the company from a regulatory,

quality, environment, and health and safety perspective. It bears testimony to the high standards that we uphold. As part of the company’s initiative to become an integral component of the global supply chain, we were audited

and certified by the globally recognized voluntary supply chain consortium, Rx360. We are the first Indian life sciences company to be successfully audited by this organization. A significant number of leading multinational

innovator, biotech and chemical companies are members of this supply chain which is a clear differentiator to become a supplier to these companies.

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Here is some detail on the forex front taken from the AR 2012. They dont seem to be following the m2m policy which has been the nemesis of stocks like jubilant.

The Company has not provided for a âmark-to-marketâ loss on derivative contracts/receivables aggregating to

Rs.452.63 million as at 31 March 2012. (31 March 2011: Rs.295.28 million) (Refer Note 27 (b) to financial

statements) for the reasons stated by the management in the said note. Consequently, without considering the tax

effect, the profit before tax for the year and reserves and surplus are overstated by Rs.452.63 million (31 March

2011: Rs. 295.28 million), short term loans and advances are overstated by Rs.70.10 million (31 March 2011:

Rs.80.10 million) and other current liabilities are understated by Rs.382.53 million (31 March 2011: Rs.215.18

million). Had the effect of observation made by us above been considered, the profit before tax for the year would

have been Rs.148.08 million (31 March 2011: Rs.161.54 million) (as against the reported figure of Rs.600.71

million) (31 March 2011: Rs.456.82 million), the reserves and surplus would have been Rs.3,981.15 million (31

March 2011: Rs.3,757.13 million) (as against the reported figure of Rs.4,433.78 million) (31 March 2011:

Rs.4,052.41 million) and short term loans and advances would have been Rs.416.44 million (31 March 2011:

Rs.345.66 million) (as against reported figure of Rs.486.54 million)( 31 March 2011: Rs.425.76 million) and other

current liabilities would have been Rs. 1,444.99 million (31 March 2011: Rs.1,262.96 million) (as against reported

figure of Rs.1,062.46 million) (31 March 2011: Rs.1,047.78 million).

the reasoning given :

The Company has entered into forward/options contracts to hedge its exposure to fluctuations in foreign

exchange for approx 30% of future exports. These contracts have been staggered over the next four years as the

major percentage of the Company’s turnover is realized from exports. The management is of the opinion that the

mark to market losses of these transactions represents unrealized losses that are notional in nature and will not

affect its ongoing business as the Company has requisite long term export orders to cover these contracts. The

management is of the opinion that the fluctuation in currency movements against hedged contracts gets

compensated by realization of a higher value of sales realizations and therefore, the actual profit/loss against such

outstanding contracts crystallizes only on maturity of such contracts. The gain/ loss on these contracts will be

recognized as and when they fall due. The mark to market valuation loss is at 452.63 millions as at March 31, 2012

(March 31, 2011: 295.28 millions).

The highlights say this

The loss in our foreign exchange due to hedging of forward exchange contracts was higher

than we expected during the year. It was primarily due to the significant devaluation of the rupee in the

last two quarters of the year 2011-12. Most of the forward contracts will expire during the first

two quarters of the coming year and we expect significant improvement in profitability in the second

half of the year ahead.

so the net result is :

  1. The gain/ loss on these contracts will be recognized as and when they fall due,

  2. Most of the forward contracts will expire during the first two quarters of the coming year

  3. we expect significant improvement in profitability in the second half of the year ahead.

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Mandatory disclosure:-

I am invested in Hikal, and is 3% of my portfolio at CMP.

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I read the annual report of the company about few months back and I felt that they are using aggressive accounting. I mean I felt the nos are probably higher than they should be (read interest provision, depreciation being provided, treatment of R&D exp etc)

Similarly, I think such huge forex losses is a very concerning thing and if there isn’t a clear answer as to why they happened at first place, one should be careful.

Regards,

Ayush

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Some excerpts,

**AR 2010,
**
_In 2009-10, Hikal registered growth of 12% in rupee terms and 20% in US dollar terms.
Our pharmaceutical business grew at 30%, while the crop protection business declined by 12%.

However, profit after tax (PAT) was up by only 2%, from Rs. 589 million to Rs. 602 million. It was mainly due to an exceptional item charge of reversal of ‘cash flow hedge reserve’ of Rs. 284 million on account of foreign exchange losses._

The Company has not provided for a âmark-to-marketâ loss on derivative contracts aggregating to Rs 458.80 million as at 31 March 2010 (31 March 2009: Rs 1,498.57 million)

**AR 2011, **

_Overall sales revenues declined by 8% due to costs and rupee appreciation against the dollar. Our pharmaceuticals business was down by 10% due to the regulatory issues faced by major customer. Our crop protection business was down 3% for the year.

The improvised mark-to-market loss on foreign exchange fluctuations on forward/ options contracts to hedge for future exports has** reduced from Rs 459 million to Rs 295 million.**_

AR 2012

_The loss in our foreign exchange due to hedging of forward exchange contracts was higher than we expected during the year. It was primarily due to the significant devaluation of the rupee in the last two quarters of the year 2011-12.

The Company has not provided for a âmark-to-marketâ loss on derivative contracts/receivables aggregating to Rs.452.63 million as at 31 March 2012. (31 March 2011: Rs.295.28 million)_

Key Assessments:

  1. The company repeated the same gross mistakes from FY2010 again in FY2012. They have repeatedly showed their inability in managing forex volatility.

  2. The company had a veru dismal FY2011, while rupee appreciation will help it to negate the loss on derivative contracts, at the same time it has very negative impact on revenues. In other words the company sees pain both on rupee upside as well as downside.

  3. Inefficient forex management in FY2012. The FY2012 growth numbers looks very robust since the base was very low after the company posted de-growth during Fy2011. So take the numbers with a pinch of salt and make your assumptions for growth in FY2013 accordingly.

  4. I am very weary of companies which pays very low to zero tax in the Indian context. From my experience with Indian markets it seems it is very easy to manipulate profits etc when you are not paying any tax.

  5. From Ayush’s post above I see he has raised some concerns to their aggressive accounting.

I have not studied the company or it’s growth story going forward, but will request the investors in this stock to advice caution. There are many good growth stories available at decent prices so choose your stocks accordingly.

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Hi Rudra,

When the management has assured investors that the forex issue will be over within 2 quarter, than I feel we have to trust them. And once they are done with the bugging forex issue, their EPS will rise at least 10rs/quarter.

Even with current PE of 15, this implies a straightforward price appreciation by 600 bucks/share. Which is like 150% price appreciation. I am not even talking into account of reducing DE ratio.

If I am wildly off my calculated target and have a EPS rise of 20/yr (50% of my calculated value) still there is a scope of 75% gain from current price.

One need to look this not as a growth story, but rather than a forex+debt turnaround story.

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

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

Hikal Ltd., being aBaba Kalyani (Bharat Forge fame) Group company, who, alongwith Hiremath Family,owns 73.52 % equity stakein the company, needs a closer look by any prudent fund manager because of it being on verge ofcommencement of a significant growth phase starting Q4FY13when major molecules of the company begin commercial production.

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

CurrentMarket-Cap of just INR 697 cr.which is evenlower than its current Net Fixed Asset base at INR 714.87cr. withFY14e Revenues of INR 1040 cr. at 27 % + EBITDA marginsmake 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


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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.

**
**

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

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Hi Mahesh,

Excellent post! For lessor mortal like us please post a concise form of your analysis, so that we can apprehend the true potential of this stock story.

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Hi Subhash,

For exactly that reason I have posted here key investment arguments in favour & against…Its the most concise form of my research note…

However, in case anyone wants to understand the true potential of this co., or for that matter any company, he must take some pain and go through the entire research note in which i have explained as simplistically as possible the true potential of this co…afterall research is a tough process and unless one does through detailed research he will not be able to build required conviction…

Feel free to get back to me in case of any query.

Rgds.

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Our dear PN Vijaya-jee of moneycontrol.com fame :slight_smile: has recommended this as his multibagger of the day (with a target of 700 in 12-18 month). Expecting some short-term firework here.

Disc: Hikal is now 8% of my portfolio, and planning to push it to 10-15% of my portfolio in near future.

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:)) Link: Multibagger ideas: PN Vijay's 2 attractive bets

Yes…fair assessment…seems the company is getting its due recognition.

Rgds.

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My replies to queries on Hikal of some knowledgeable members :

Query:

This co has made several investments in new products and expansions. However, I am informed the execution has been poor. retail investors may not see the benefits any time soon.

Comparing its valuation with that of Divi’s is not appropriate because Divi’s has demonstrated exceptional execution skills in its new projects. Hikal is simply not in the same class.

Disclosure - I have a substantial stake in Divi’s.

Reply :

Yes…I totally agree with this and that is the reason why, if you go into my detailed research on Hikal posted in the beginning, for peer comparision I have included PI and Shasun in addition to Divis…Now, PI’s scale from l-t-l business for FY12 is 374 cr. with 21 % EBITDA margin whereas Shasun’s gabapentin business scale is 193.1 cr. which are both lower as also at poor EBITDA margins v/s Hikal…Still, Hikal is quoting at discount to both which can’t remain for long…

Similarly, asset base for PI is at 296 cr. and Shasun is at 277 cr. as at FY12 whereas asset base of Hikal is at 639 cr. as at FY12 which limits downside risk considerably as also provides ample scaope for valuations to catch-up…

Now, the question arises asto why with such a large asset base Hikal has been generating such low scale of operations…the answer is in the history of Hikal in which if you go deeply you will find that the company has so far invested considerable resources to build strong foundation for future growth as also has focussed on EBITDA margins inspite of being a player in generic API space…Such high 26 % + EBITDA margins are possible only in HPAPI space only and Hikal has did a commendable job of operating in mature API like Gabapentin and still maintain such high EBITDA margins…

Another thing that you are missing as also most of the market players are unaware is the fact that Hikal has over last few years built good dedicated capacities for biopharma segment…this is another interesting segment like crop protection and is again concentrated one with top 10 companies cornering 75 % market…However, the manufacturing process involved is so complex and needs so much resources that not many CMOs are attemptiing this…The trend to outsourcing in biopharma space is catching up considerably and Hikal has done a good job by forging relationship with one of the top biopharma innovator for which dedicated facilities are built and deliveries are set to start by Q4FY13…This will increase the scale of operation considerably in FY14 and with premium EBITDA margins as biopharma space offers super-normal EBITDA margins because of not many players involved…Panoli plant will be catering to this space and its receiving of USFDA approval in September’2012 is a great news…

In Crop Protection space, Initium, BASF’s patented product for Hikal is the supplier, has on 4th September 2012 got CPMRA approval and now will be launched in more countries thereby increasing volumes considerbaly for Hikal in 2HFY13…

The problem so far since last 2 years had been forex losses which are now out as hedge contracts are expiring in this month…so, from Q4FY13 there will be no drag on profitability on account of this issue…Debt of 550 cr. is a concern but not substantial concern as EBITDA starting FY14 is likely to be ~250 cr. + and there is unlikely to be any significant increase in debt as CAPEX plans for next two years are relatively modest…Infact, the cost of debt should go down going forward in a low-interest rate environment…

Hence, Divis is quoting at significant premium to Hikal and both can’t be compared as Divis has established and best business model with clean balance sheet…However, Hikal has to catch up to quote at atleast half of Divis commanded valuations for it to be called reasonable valuations and its here the real stroy is there as a company like Hikal can’t quote at below fixed asset mcap for too long.

Feel free to get back to me in case of any query.

rgds.

Query:

as usual you have madethe note very exhaustive and we all liked it and itscontent. Your assessment is Quite right.I liked the fact that you are also tracking it now.

How much eps you expect for FY14?

In your opinion, what is the fair value forHikalfrom FY13 perspective please?

Regards

Reply :

FY13 will again have forex losses booked in first 3 qrtrs. till q3fy13 to the extent of ~30-35 cr. out of which 15 cr. is already booked in q1fy13…as all forward and derivative contracts expire in Oct’2012… However from q4fy13 we should see sharp rebound in profitability…

for next year i.e. FY14 we should see PAT margins between 11-13.5 % which translates into PAT of ~114-140 cr. on FY14e scale giving an EPS of INR ~69-85 on conservative basis. Hence, at CMP of INR 430 stock is trading at FY14e PE of 5.1 - 6.2 in addition to mcap/sales of 0.68 which is gross undervaluation by any standards… I will refrain from givng any fair valuation estimate here as such companies which are on verge of yielding results of past multi-year efforts usually see a sharp growth in financials which sometimes is beyond our estimates…We need to constantly monitor each & every development.

However, atleast one thing is clear that this company has to settle at much higher valuations than current, going into FY14 and rerating process for it should hopefully start by this qrtr.-end (q3fy13).

Feel free to get back to me in case of any query.

Rgds.

Discl. : I have Hikal as part of my core portfolio and my views have to be taken in that regard

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Hikal bags ICC Aditya Birla award for Best Responsible Care Committed Company 2011

Our Bureau, Mumbai
Thursday, October 18, 2012, 17:10 Hrs [IST]


The ICC in the presence of the International Council of Chemical Association (ICCA), Responsible Care Leadership Group presented âBest Responsible Care Committed Company for 2011â award to Hikal Ltd. at the Annual Indian Chemical Council Awards function held at The Taj Mahal Hotel, Mumbai on12 October 2012.

Speaking on the occasion, Jai Hiremath, chairman and managing director of Hikal said, âThe ICC Aditya Birla Award is a testament of Hikalâs commitment to continuous improvement in performance when it comes to environment protection, health and safety and commitment to sustainability through the development of innovative technologies. Our goal is to continuously improve the environmental, health and safety knowledge of people and those of the surroundings, using resources wisely and minimising waste and to foster the responsible management of chemicals in our development and manufacturing processes along the value chain. For us, being a Responsible Care company goes beyond the mandatory regulatory compliance and enables us to positively contribute to the sustainable development of local communities and society as a whole.â

The Indian Chemical Council was established to promote the Indian Chemical Industry. Its vast membership includes both Indian companies with a global presence as well as subsidiaries of multinationals. ICC holds its annual awards to encourage achievements of excellence in various fields. Nominations received for this award were scrutinised by a committee consisting of experts from the industry and academia.

Hikal, a manufacturer of active ingredients, intermediates, regulatory starting materials and a provider of research support services to the Pharmaceutical, Crop Protection and Specialty Chemicals industry.
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results out…prima facie…crop protection segment seems to have benefited alot due to initium delivery…crop protection segment should be a star performer this year…pharma segment seems to be facing the headwinds of inventory build-up issues of gabapentin as reported by me in my research note too…pharma segment should revive only when biopharma products delivery starts in q4fy13…forex losses continue and may hamper the financials till atleast another one quarter…I maintain my earlier view that-reasonable rate for Hikal is below 425 and best rate to Buy is below 400 in 350-400 range…one should not attempt to buy at current levels…

Rgds.

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Last 12 month NP figure is coming to be 35 (13 + 15 + 5 + 2).

Conservative Expected NP at Dec’13 is (18 + 18 + 18 + 18) = 72 . At a conservative PE of 17, it should reach a value of 734 in 15 month. (a conservative upside of 67% from here).

So one’s buying decision should depend on, whether he is happy with an expected upside of 67% in 15 month or not. To me it is hold and load-up more on 10% decline.

Disc: I am loaded with 10% of my portfolio is Hikal and hence my views can be biased.

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New NP figures post Dec’12 numbers 32 (15+5+2+9). I think expectation of next 4Q NP is on high side.

We already have a gap of NP of 9 in first Q. Keep eye on interest outflow / debt.

Any specific reason of consistent equity dilution?

Disc - no holding

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Hi Mahesh,

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

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Key Highlights of AGM by Capital Mkt;

In FY’14, both Pharma and Crop protection business grew strongly backed by volumes and addition of clients. However while crop protection business continued to do well on margin front, margin pressure was seen in Pharma segment.

In Q1 FY’15, the company had its plant shut down for more than a month, which resulted in loss of production of about Rs 30 crore. Also there were some additional repairs and maintenance expenditure. Margin pressure also continued in Pharma segment in Q1. All these, led to poor performance of the company.

Management is confident of recovering the loss of production of Q1 in subsequent quarters of FY’15.As per the management, the worst in terms of Pharma segment margin is over and there will be a gradual increase from here on. The focus continues to remain on volumes as it’s difficult to raise price due to tough competition that is prevailing in the market.

In crop protection business, the company has its plants dedicated for customers. The Japanese MNC customer, for which the plant has got commissioned and trial production is going on, will commence its commercial operations from Q4FY’15 onwards. In FY’16, the Japanese market will contribute additional turnover of about Rs 50 crore. As per the management, there is surplus capacity with the company in crop protection business, which they will use it for the Rest of the Market other than US and EU. The Rest of the market slowly is picking up and will start contributing in a meaningful way in 2 to 3 years from now.

There are no major capex planned by the company in next couple of years, unless there is some big opportunity from a new client.Overall, management expects net sales growth of around 15-17% and the same should translate in bottom line growth. However for FY’16, management is more bullish with sales from Japan and rest of the market consuming the surplus crop protection capacity that the company has.

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