Hold Hikal Ltd For Target Rs.290 - ICICI Direct
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Multiple headwinds continue to stress; FY24 outlook cautious but upbeat…
About the stock: Hikal is predominantly a B2B player that provides intermediates and active ingredients to global pharmaceutical, animal health, crop protection and specialty chemical companies.
* Pharma & crop protection are 58% & 42% of operating revenue, respectively. Pharma business is currently divided into 50:50 ratio of APIs, CDMO. Animal health business accounts for 20-25% of CDMO business
* In crop protection, 69% revenues are derived from CDMO while remaining is from proprietary products, specialty chemicals & specialty biocides
* One of the largest suppliers of Gabapentin API (CNS) and in crop protection, one of the largest suppliers of Thiabendazole (TBZ)
Q1FY23 Results: Muted quarter amid headwinds in pharma and crop protection.
* Revenues declined 17% YoY to | 379 crore
* EBITDA was at | 23 crore, down 76% YoY with margins at 6%
* Loss of | 9 crore in this quarter vs. profit of | 50 crore in Q1FY22
What should investors do? Hikal’s share price grew by ~2x over past three years
* Downgraded from BUY to HOLD due to the adoption of cautious stance in the backdrop of near to mid-term headwinds as we wait for improvement in macro environment in both demand and supply side to improve before taking a directional call.
Target Price and Valuation: Valued at | 290 i.e. 20x FY24E EPS of | 14.4.
Key triggers for future price performance:
* Capex progress in both pharma and crop protection
* Margin improvement on the back of several cost rationalisation & efficiency improvement measures undertaken during the pandemic
* Continuum in crop protection growth rate * Received manufacturing license for the production of APIs at Panoli site, to resume post validations over the next quarters
* Raw material challenges expected to continue in the next few months
Alternate Stock Idea: Apart from Hikal, in our healthcare coverage we like Laurus.
* Laurus Labs operates in the segment of generic APIs & FDFs (formulations), custom synthesis and biotechnology
* BUY with target price of | 675
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