ValuePickr Forum

Hikal - Pharma & Agrochem

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.

**
**

**
**

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.

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.

:)) Link: http://www.moneycontrol.com/news/stocks-views/multibagger-ideas-pn-vijay39s-2-attractive-bets_768861.html#toptag

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

Rgds.

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.

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.

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.

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

Hi Mahesh,

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

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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AGM was addressed by Mr. Jai Hiremath, CMDKey Highlights by Capital Mkt
In FY’15, while Pharma segment grew by around 13%, crop protection continued to remain under pressure and de grew by around 5%. Margins were under pressure in both the segments due to sluggish overall demand and uncertain raw material prices.As per the management, while Pharma segment should continue to do well, challenges on inventory and global demand continues to remain on crop protection business.Internationally, due to uncertain climatic conditions and lower food prices, the demand as a whole for the crop protection market is not growing. While every player is busy in gaining what so possible share that it can grab in a falling market, pricing becomes a challenge.
The management was not happy with the performance of Q1 FY’16, which was more or less flat despite the fact that in Q1 FY’15, there was a shutdown of plant and a loss of production of nearly Rs 25 crore. However, management is confident of improving on profitability going forward.The Pharma business definitely is on recovering note after seeing its challenges in terms of margins in FY’14 and in early FY’15. The focus continues to remain on volumes as it’s difficult to raise price due to tough competition that is prevailing in the market.
The Japanese MNC customer, for which the plant has got commissioned and trial production is going on, has commenced its commercial operations and the customer 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 3 to 4 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.Thus, as per the management, while challenges continue in Crop protection market, company will be able to grab higher market share in Crop protection business in international market and new businesses will give volumes. For Pharma segment, the pricing is expected to remain stable and the company should be able to do better in terms of volumes.Thus it will be more of a volume led growth going forward in a scenario where pricing is uncertain

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HIKAL LTD
Cmp: 156 market cap: 1279.04 cr.

Hikal has a hybrid model which is in pharmaceutical and crop protection business. Both the business equally constitute to the revenue of the business. The company allocates 3/4th of the capital in the pharmaceutical business and 1/4th in the crop protection business (source business segment). Company has growing its revenue at 10.22% since 5 years where as the company profit growth is in negative by 17.34% since 5 years on standalone basis (Mainly due to higher R&D expenses).
Pharma business has been growing at a pace of 21% Q on Q basis while 6% on annual basis. Due to higher R&D expense pharma segment is showing lesser profit compared to the sales. They have been deploying cash in this business.
Crop protection business has been growing at 6% yearly while profit has been growing at 10%. In this business model they provide Crop Synthesis and Contract Manufacturing of Agrochemicals, Intermediates, Biocides and Specialty Chemicals. Preferred Suppliers to Top Crop Protection Companies.

R&D updates
The company has various molecules in the various stages of phase 2 and phase 3. They have been deploying R&D for internal pipelines to Developed processes for several molecules using enzyme technology & validated two green enzymic process technology for major AIP products. 3 patents for novel routes to AIPs filed. Several significant Phase 1 and Phase 2 projects in the development pipelines. First manufacturing potential for a project in the flavor and fragrance sector.
Under crop protection R & D, major project comes from innovator clients in Japan and Europe. They also have commercialized an insecticide for an innovator company and they have completed process development for an on-patent herbicide for another innovator client
In pharma segment, they have some product coming off-patent shortly and are under various stages of development are Sitagliptin, Dabigatran, lacosamide, olmesartan and Darunavir
In Animal health segments, they have completed the development of a topical parasitic used for dogs and cats & a veterinary medication to kill external parasites for pets for a mid-size company. They have completed process development & first pilot plant campaign for a regulatory starting material used in Oral flea and tick treatment for dogs.
In Contract development, they have completed the first pilot plant campaign for an intermediate of a non- regulatory starting material used for an oncology product under development while second pilot plant trails are under discussion with the same biotech company. The process development and two pilot plant trails for a regulatory starting material used in the treatment of ventricular systolic heart failure has been complete. Process development has been completed for an intermediate in phase 3 trials for a Japanese innovator company used for a treatment of chronic constipation.

Financials
Equity is 8.2 crores with 4.1 crore outstanding shares of 2 RS each
Promoter holding 68.77%
Long term debt of 296.6 crore and short term debt is 171.9 crore as of 31st June 2016. Company has Cash and bank balance of 19.2 crore and short term loans and advances of 44.3 crore.
Year 12 13 14 15 16
Sales 707.81 660.42 829.21 871.85 925.7
Np 46.03 25.25 63.90 40.41 40.5
EPS 28.01 15.36* 7.77 4.92 5.02
Dividend 6 6 4.5 2.5 2
*in 2015 the company has split from Rs10 to Rs2

Investment Thesis:
Company is under two business mainly in Pharma and Crop protection business where they manufacture contracted drugs with in-house R&D.
Mainly they use to have long term supply agreements in 2000s and then they shifted their allocation towards Animal Health care business and crop protection business and have started acquiring R&D companies.
They have been deploying cash into pharma business and they have been steading their crop protection business.
Their R&D expense is 4% of their sales. ROE is between 10-18% for last Five years.
Nearly all projects in R&D has been completed next phase of R&D project is left in pharma business. They would Validated an API product using Enzymatic technology developed and will start manufacturing soon. They would be filing 4 – 5 DMF’s every year and will continue to generate own IP through Process patents
They have an average of 20% payout ratios but their D/E ratios is 1.28
Based on valuation the company is trading on 30.61 PE based on FY 16 EPS of 5.02.
Based on the company’s projects they can be a growth story of 20 – 25% on Revenue and profitability of 25%

Risk
The patent approval gets delayed
Higher debt to equity ratio is a concern which is eating profits so their interest coverage ratios is low.
Any cancellation of contracts will hurt their future growth

Technical reasons:
A cup and handle is formed where handle is 15 and cup is 40 points

Disc- not invested

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Results,

Revenue:
221.23 Crores June 16 quarter vs 191.48 Crores June 15

Profit:
10.96 crore June 16 quarter VS 1.83 Crore June 15

Cash EPS
3.50 June 16 VS 2.21 June15

Eps:
1.33 June 16 VS 0.22 June15

Key points:

  1. During the June 2016 quarter, exchange loss of Rs 1.36 Lakhs (june15=6.12 Loss) on foreign currency working capital loans includes, unrealized exchange loss for June Q 16 is of 77 lakhs VS 5.37 Crores

DISC- invested

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