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Strong Q2 driven by crop protection, pharma flat…

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)

Q2FY22 Results: Hikal reported robust Q2FY22 results.

* Sales were up 26.1% YoY to | 469.1 crore

* EBITDA in Q2FY22 was at | 90.9 crore, up 30% YoY with margins at 19.4%

* Consequent adjusted PAT was at | 44.1 crore (up 63.5% YoY)

What should investors do? Hikal’s share price has grown by ~4.5x over the past five years (from ~| 123 in July 2016 to ~| 550 levels in Oct 2021).

* We change our view from HOLD to BUY on account of persistent guidance and visibility capex, which, in turn, can maintain the growth tempo

Target Price and Valuation: We value Hikal at | 640 i.e. 30x P/E on FY23E EPS

Key triggers for future price performance:

* Hikal continues to expand in both pharma, crop protection segments with separate focus and a calibrated approach

* Margin improvement on 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 two 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 | 785

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