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Diwali Muhurat Pick 2021

Buy Kilitch Drugs (India) Ltd  For Target Rs.238 CMP 164

EXPANSION IN ETHIOPIA LIKELY TO DRIVE TOPLINE GROWTH.

The company has expanded in Addis Ababa, Ethiopia for manufacturing of Cephalosporin Injectables with a manufacturing capacity of 26.4 mn vials per annum with an outlay of ~Rs. 90-95 crore. The expansion is expected to increase the company’ssales by Rs. 100 crore with EBITDA margins of 14-15%.

INDIA BEING A NEW GLOBAL CENTER FOR PHARMA COMPANIES DUE TO THE EFFECT OF CHINA +1 STRATEGY OF VARIOUS MNCS.

According to industry reports in the 2020-2030 period, Indian pharma industry is expected to grow at a compounded annual growth rate (CAGR) of ~12% to reach at US$130 bn by 2030 from US$ 41.7 bn in 2020. Though the pharmaceutical industry has grown at a CAGR of approx. 13% over the two decades, in the last decade, the CAGR has been ~ 8.5% and it has currently been ~6.2% over the past five years. India has attracted higher investments in R&D over the last couple of years, hence, total investment in Pharma sector increased from US$ 100 mn in 2010 to US$ 2.4 bn in FY20.

STRONG FUNDAMENTALS TO STEER THE COMPANY ON A GROWTH PATH.

With the strong operating history of more than 43 years and the company is on the path to create a robust presence in Ethiopia. From FY15 to FY21, the turnover grew at a CAGR of ~24%, albeit on a small base, from Rs. 18.94 cr to Rs. 68.40 cr; the company is virtually a debt-free company and holds net cash of Rs. 12 cr. Further, the company’s cash accruals are expected to remain healthy over the next two fiscals with stable cash flows.

OUTLOOK & VALUATION

We expect the company to deliver top line growth of 40% for the year FY24E on a YoY basis. Additionally, we expect the company to deliver strong EBITDA and PAT margins of ~12.7% and ~8.9% respectively in FY24E. Our estimates for EPS for the year FY22E, FY23E & FY24E are projected to be Rs.4.1, Rs.6.8 & Rs.10.3 respectively. We have assigned a P/E multiple of ~23X and arrived at a target price of ~Rs.238 that provides an upside of ~45% from the current market price of Rs. 164 within an investment horizon of 18 to 24 months. Hence, we initiate coverage on Kilitch Drugs (India) Ltd with a ‘BUY’ rating.

KEY RISK

• Foreign Exchange Fluctuation Risk: The company is poised to start its operations in Africa and forex translation gain/loss of the subsidiary may have a substantial impact on the financials of the parent.

• Political Uncertainty: Ethiopia is not as stable a region as other countries in the world, political uncertainty and social unrest plays an important role in ascertaining the business sustainability of the company.

• Competition Risk: The products manufactured by the company are generally off patent and for general usage, this can create competition risk.

• Price Risk: The pricing of the products depends on the RM sourced from different parts of the world and their prices tend to fluctuate through the year.

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