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Crop protection drives growth; tracking compliance

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 62% and 38% 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)

Q3FY22 Results: Pharma remained flat while growth was driven by crop protection.

Revenues were up 11.1% YoY to | 514.5 crore

EBITDA was at | 92.9 crore, up 1.7% YoY with margins at 18.1%

Consequent PAT was at | 45.2 crore (up 12.2% YoY)

What should investors do? Hikal’s share price has grown by ~2.5x over the past five years (from ~| 153 in Feb 2017 to ~| 389 levels in Feb 2022).

Maintain BUY on account of 1) consistency in offtake for crop protection CDMO, 2) expected recovery in Pharma, 3) Visibility capex. 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 | 500 i.e. 22x P/E on FY24E EPS of | 22.6

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

The crop protection segment maintaining growth due to sustained product offerings and optimum capacity utilisation

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 | 625

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