Buy Hikal Ltd For Target Rs.340 - ICICI Direct
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Headwinds to persist; recovery likely from H2FY23…
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 and crop protection are 58% and 42% of operating revenues, respectively. The pharma business is currently divided in 50:50 ratio of APIs and 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)
Q4FY22 Results: Muted quarter amid headwinds in pharma and crop protection.
* Revenues declined 6% YoY to | 502.4 crore
* EBITDA was at | 61 crore, down 44% YoY with margins at 12.1%
* Consequent PAT was at | 21 crore (down 59% YoY)
What should investors do?
Hikal’s share price grew ~1.8x over past three years.
* We maintain BUY despite near term headwinds as we continue to believe in the company’s execution prowess, visibility capex and the management’s expectation of gradual business normalisation in both segments. Recent steep correction continues to offer decent risk-reward proposition. That said we continue to monitor developments on recent critical issues- 1) Surat (Gujrat) GIDC incident and 2) MPCB notice for Taloja
Target Price and Valuation: Valued at | 340 i.e. 18x P/E on FY24E EPS of | 19
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 | 690
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