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HIKAL LIMITED

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Independent Equity Research

HIKAL LIMITED PHARMACEUTICALS

BSE Scrip Code: 524735

Wide product range across pharmaceuticals and agri chemicals

Hikal Limited (Hikal) offers products across two segments:

pharmaceuticals and agri-chemicals. The company offers variety

of APIs for custom manufacturing. Hikal offers herbicides,

insecticides and fungicides in the agri-chemical business and is

among the biggest producers of ‗thiabendazole‘ in the world. The

company also manufactures the agri-chemical intermediates such

as ‗meta chloro aniline‘ and ‗mono chloro acetone‘. A wide

product portfolio across two segments mitigates the risk of

slowdown in any one particular segment. Also the company has

been shifting its product mix towards the higher margin pharma

products from the relatively lower margin agri chemicals business

over a period of time.

Bright outlook due to buoyancy in pharma sector but New Drug

pricing policy is a concern

CARE Research believes buoyancy in Indian Pharma sector to

remain intact but the industry may face pricing pressure from the

New Drug pricing policy. The global crop protection sector is

also set to witness robust growth along with opportunities for

companies in India as the cost pressures on global companies

increases.

Key concerns

• Exchange rate volatility risk

• Stiff competition from other Asian countries for manufacture

of API‘s

• Seasonal nature of the agro chemical industry

Valuations

Hikal is currently trading at trailing P/E and EV/EBITDA

multiples of 13.2x and 8.3x, respectively.

CMP Rs. 285.50 1

14 Feb 2012

HIKAL LIMITED

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Background

Incorporated in 1988 with equity participation of the two promoters — Hiremaths and the Kalyani group Hikal, is

engaged in Research and Development (R & D), manufacturing of various chemical intermediates, speciality

chemicals, active pharma ingredients for the Pharmaceutical and Agrochemical industries. The areas in which Hikal

specializes are: Discovery Research Support, Process Development, analytical method development and custom

manufacturing of key intermediaries and Active Pharmaceutical Ingredients (APIs). The company operates through

two segments: Pharmaceuticals and Agrochemicals. The company has two subsidiaries: 1) Acoris Research Limited:

A 100% subsidiary of the company engaged in Contract Research activities. Acoris has setup a R&D facility for

carrying out process development, custom synthesis, analytical development & fermentation. 2) Hikal International

BV: A 100% subsidiary engaged in trading activities and based in Netherlands.

Operations

Taloja Site: It is a fully integrated plant which produces active ingredient – Thiabendazole. Construction of a new

multi-purpose plant was completed and validated in FY 11 and the second production campaign of an 'on patent

active ingredient' was successfully commercialized. Pilot production of six molecules intended for commercial

production at different Hikal sites was successfully completed. Of these molecules, one was a pharma intermediate

and the remaining five were for the crop protection industry.

Mahad Site: Manufactures intermediates and herbicides for the crop protection industry. It was the initial facility set

up for the manufacturing of intermediaries for dyes, pharmaceuticals & agrochemicals. It has the capability to handle

complex chemistries and has the capability to meet the customized requirements for overseas customers.

Panoli Site: It has the capability to manufacture agrochemicals, technicals and formulations. An exclusive new multi

product intermediates has been commissioned to manufacture intermediaries for Pharmaceutical industry. These

have been validated at the plant scale and successfully passed the customer audits. To meet GMP requirements, the

existing manufacturing block and warehouse were refurbished.

Bangalore USFDA Site: It is a USFDA approved facility for manufacturing of API with fully developed onsite

infrastructure facilities. Construction and commissioning of a new multi product manufacturing block has been

completed in FY11. The company is also in the process of upgrading some of the API facilities at the Bangalore

plant.

Bangalore R&D Centre: The company has added a new synthetic lab and refurbished a kilo lab at the Bangalore

HISTORY AND BACKGROUND

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R&D centre. This will help to focus on improving processes of existing products as well as developing new DMFs

and processes for new products.

Pune R&D Centre: This is the Actoris Research centre and the facility conducts process development, custom

synthesis, analytical development & fermentation. This facility will help the company to get more orders in contract

manufacturing and research.

Industry Segments

35%

65%

Segment Revenue Breakup - FY11

Agro Pharma

33%

67%

Segment RevenueBreakup - FY10

Agro Pharma

Source: Company, CARE Equity Research

Hikal operates through two industry segments: pharmaceuticals and agri-chemicals. The company has strong

presence in the CRAMS segment and caters to the European and the US markets. The company earned about 69%

of total revenues from the export segment in FY11 compared to about 87% in FY10. The company has increased its

geographical distribution of products and have increased sales to the fast growing companies in the local market. It is

in line with the strategy to diversify the customer base and broaden the supplies to domestic companies who have a

growing market share in varied geographies.

Hikal: Operational Performance (Rs. Crore)

FY08 FY09 FY10 FY11

Pharma 330 371 350 337

Agro Chemicals 150 202 189 166

Total sales 479 573 539 502

FY08 FY09 FY10 FY11

Domestic 234 134 69 156

Exports 246 439 470 346

Total sales 479 573 539 502

Source: Company, CARE Equity Research

HIKAL LIMITED


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Hikal: Peer comparison

(FY11) Units

Hikal

Limited

Granules

India

Elder

Pharma

Dishman

Pharma

Net operating income Rs. Crores 532 478 968 1,060

EBITDA Rs. Crores 119 55 179 203

PAT Rs. Crores 37 22 64 81

Growth in net operating income % -2% 2% 33% 13%

EBITDA Margin % 22.4% 11.4% 18.5% 19.1%

PAT Margin % 7.0% 5.6% 6.6% 7.7%

RoCE % 9% 10% 4% 5%

RoE % 9% 10% 10% 9%

Price/Earnings (P/E) Ratio times 12.7 7.2 10.6 5.9

Price/Book Value(P/BV) times 1.27 0.65 1.16 0.55

Enterprise Value (EV)/EBITDA times 8.3 4.87 7.3 6.5

Source: CapitalLine and CARE Equity Research

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Top line shows negative growth of 2.2% in FY11

The total operating income for the company declined by 2.2% in FY11, with total operating income for FY11

being Rs. 532 crore compared to Rs.544 crore in FY10. The reduction in sales was majorly due to de-stocking of

inventory by key customers in Europe and USA. The pharma segment sales were affected by a withdrawal of a

major customer who faced internal regulatory issues.

EBITDA margins shows marginal improvement while PAT margin declines

The EBITDA margin for the company showed marginal improvement in FY11 of about 100 bps over FY10 on

account of better cost management while the PAT margins declined by 140 bps over the same period on account

of increase in interest payments.

EPS shows de-growth of 25.7% in FY11 over FY10

Net profit for the company decreased by 26% in FY11 over FY10 on account of declining sales and high fixed

expenses. Even the EPS decreased in tandem with the Net Profit and recorded decrease of about 25.7% in FY11

over FY10 after showing growth of about 32% in FY10 over FY09.

Hikal: Consolidated Financial Performance (FY07-11)

FY07 FY08 FY09 FY10 FY11

Net operating income 452 514 552 544 532

EBITDA 56 94 91 117 119

PAT 15 46 36 50 37

Fully Diluted EPS* (Rs.) 6.1 28.9 22.0 29.1 21.6

EBITDA margins 12.3% 18.3% 16.4% 21.5% 22.4%

PAT margins 3.2% 8.9% 6.6% 9.2% 7.0%


CONSOLIDATED FINANCIAL PERFORMANCE AND ANALYSIS

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Expansion plans and initiatives

Acoris, the research and development center at the International Biotech Park, Pune is fully operational and

expanding its services and manpower. This will allow the company provide research for global innovator mid size

and biotech companies.

The company plans to increase its Drug Master Filing every year.

The company spent about 2.07% of sales on R&D in FY11 and plans to increase it year on year.

Two new pharma intermediary products have been validated at the Panoli plant and successfully passed the

customer audits. Commercialization of these products towards the end of this fiscal year.

Three process patents for the companies products have been drafted and will be filed in endFY12.

Key concerns

As about 70% of revenue in FY11 came from export market, the company is in direct competition from other

Asian countries for manufacture of API‘s. Any failure of quality control tests can impact the future growth

prospects. Also, with exposure to exports, the company also faces a huge currency volatility risk.

The agro segment which contributes 35% of total revenues is seasonal in nature and the domestic sales is

dependant on the vagaries of monsoon.

EXPANISONS, NEW INITIATIVES AND CONCERNS

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Sector outlook

The global pharmaceutical market grew 4.1% in 2010 to reach $856 bn. The market is expected to grow

approximately 28% by 2015 to reach $1.1 tn. Market growth will be driven by a continuing shift to generics and the

rapid growth of ―pharmerging‖ markets. In addition, drugs in the diabetic and oncology therapeutic sectors will grow

more rapidly than other sectors. In order to take advantage of the market situation, pharmaceutical companies will

need to strengthen production capabilities to meet demand and streamline their supply chain to meet the dynamics

of each unique market. India‘s pharmaceutical market is one of the fastest-growing globally and is estimated to rise

from US$10bn in CY10 to US$17.5bn in CY14 (14.5% CAGR).

The Indian pharma market is now the 3rd

largest in the world in terms of volume and 14th

largest in terms of value

thereby accounting for around 10% of world‘s production by volume and 2% by value due to lower prices. The

industry now produces about 500 bulk drugs (APIs) and almost entire range of formulations related to all major

therapeutic groups requiring complex manufacturing technologies. This is supported by availability of strong

scientific and technical manpower backed by pioneering work done in process development.

Exports constituted around 42% of industry‘s FY10 sales and have shown a robust growth of nearly 19% per annum

over the five year period ending FY10. Of the total exports, formulations represented approximately 60% while API

accounted for the balance 40% in FY10. The share of exports to regulated markets of North America and Europe

was 24% and 21% respectively in FY10 and the same has seen an increasing trend over the past few years. This can

primarily be attributed to increasing genericization in the regulated markets and growing trend in outsourcing of

pharmaceutical production by global pharma companies to low-cost destinations like India.

Key segments of the Indian market include formulations, bulk drugs and contract research and manufacturing

services. Geographically, the global pharmaceutical market can be classified into regulated markets and less-

regulated markets depending upon the level of regulation pertaining to drug quality and patents.

The industry is highly fragmented with around 20,000 odd players of which approximately 250 medium to large

corporations control about 70% of the total domestic market. In addition there is severe price competition coupled

with government price control in many drugs. The top-end of the market is dominated by the organized sector with

key players which include domestic pharmaceutical companies and MNCs. The unorganized sector with large

number of manufacturers faces intense competition and also deal with spurious drug manufacturers that hamper

overall credibility of the industry.

SECTOR OUTLOOK

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While the growing share of generics in the developed markets and the opportunity from Contract Research and

Manufacturing Services (CRAMS) have been the primary drivers for exports, changing demographics and growth in

chronic therapies have been the major factors contributing to the domestic market growth. The domestic pharma

market has grown steadily at a CAGR of around 8% in the past five years.

In addition, the score on demand is boosted by the high inelasticity between cost and price in most drugs while

penetration of pharmaceutical products in India remains low compared to global average. Also, there are no direct

substitutes for pharma products and the industry remains immune against any economic cyclicality or interest rate

fluctuations.

The Indian pharma market is quite regulated when it comes to the formulation business for both the exports and

domestic market. Indian manufacturers have to get their manufacturing units USFDA approved if they are exporting

drugs to the US which is the world‘s largest pharmaceutical market. The Japanese and European markets also have

their own stringent laws for exporters creating a huge entry barrier for new players. Moreover, branded drugs are

protected by patent laws while generic drug requires the incumbent to have specialized process reengineering

technique which is unique to each drug.

Strong distribution network is another important parameter in the formulation business for the drugs to reach every

hospital, medical practitioner and druggist in every part of the country. Certain generic drugs have brand name

advantage (branded generics) while branded drugs have patent protection. The formulations market is quite

fragmented and top 5 players control less than 20% of the market share. Competition is intense in the ‗generic-

generic‘ and Over-the-counter (OTC) business which have number of players with pressure on pricing. In the

domestic market there is not much of an import threat in formulations but in the export market competition from

major global generic players is intense.

The Indian pharmaceutical industry is mainly regulated on patents, price and quality. Until 2004, the regulatory

system in India focused only on process patents. Indian companies thrived during this phase by process re-

engineering products of global pharmaceutical players and launching them in India. Indian companies gained

process chemistry skills, but de-emphasized on research & development for new drug discoveries. From January

2005, India adopted the WTO norms to follow the product patent regime. The Act allowed for only two types of

generic drugs in the Indian market: off-patent generic drugs and generic versions of drugs patented before 1995. The

Amendment grants new patent holders a 20-year monopoly starting on the date the patent was filed and no generic

copies can be sold during the duration of the patent.

Other regulations like the Drugs and Cosmetic Act regulate the import, manufacture, distribution and sale of drugs

in India. The Drug Price Control Order (DPCO) fixes the ceiling price of some life-saving APIs and critical

HIKAL LIMITED


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formulations. Currently, a number of bulk drugs and formulations are under the purview of price control. Currently,

the government allows 100% FDI under the automatic route in drugs and pharma sector.

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Rs. Crores FY07 FY08 FY09 FY10 FY11

Income Statement

Net operating income 452.0 514.3 552.3 544.3 532.3

EBITDA 55.5 94.3 90.6 116.8 119.5

Depreciation and amortisation 19.0 27.7 23.0 35.8 41.0

EBIT 36.5 66.6 67.6 81.0 78.4

Interest 18.2 16.7 28.2 38.0 43.7

PBT 18.3 49.9 39.4 43.0 34.7

Ordinary PAT (After minority interest) 14.6 46.0 36.2 50.0 37.0

PAT (After minority interest) 14.6 46.0 36.2 50.0 37.0

Fully Diluted Earnings Per Share* (Rs.) 8.9 28.0 22.0 30.4 22.5

Dividend, including tax 9.8 10.6 - 13.2 9.9

* Calculated based on ordinary PAT on Current Face Value of Rs. 10/- per share

Balance sheet

Net worth (incl. Minority Interest) 180.7 171.7 363.9 384.9 400.4

Debt 289.3 440.4 581.8 498.8 536.5

Deferred Liabilities / (Assets) (5.1) (2.1) 0.3 (2.3) (4.3)

Capital Employed 464.8 610.0 946.1 881.3 932.6

Net Fixed Assets (incl. Capital WIP) 262.2 376.3 577.0 659.9 691.2

Investments 22.4 19.9 21.0 3.1 3.1

Loans and Advances 35.4 78.1 83.1 88.9 95.1

Inventory 148.7 177.0 184.6 183.1 172.3

Receivables 90.4 99.1 123.9 99.5 88.0

Cash and Cash Equivalents 30.4 13.3 10.0 13.3 10.1

Current Assets, Loans and Advances 304.9 367.4 401.6 384.8 365.5

Less: Current Liabilities and Provisions 124.2 154.0 53.8 166.5 127.3

Total Assets 464.8 610.0 946.1 881.3 932.6

Ratios

Growth in Operating Income 13.8% 7.4% -1.5% -2.2%

Growth in EBITDA 69.8% -3.9% 28.9% 2.3%

Growth in PAT 215.9% -21.2% 38.1% -26.0%

Growth in EPS 215.9% -21.2% 38.1% -26.0%

EBITDA Margin 18.3% 16.4% 21.5% 22.4%

PAT Margin 8.9% 6.6% 9.2% 7.0%

RoCE 12.4% 8.7% 8.9% 8.6%

RoE 26.1% 13.5% 13.4% 9.4%

Debt-Equity (times) 2.6 1.6 1.3 1.3

Interest Coverage (times) 4.0 2.4 2.1 1.8

Current Ratio (times) 2.4 7.5 2.3 2.9

Inventory Days 126 122 123 118

Receivable Days 70 82 67 60

Price / Earnings (P/E) Ratio 10.2 13.0 9.4 12.7

Price / Book Value(P/BV) Ratio 2.7 1.3 1.2 1.2

Enterprise Value (EV)/EBITDA 10.6 11.0 8.5 8.3


CONSOLIDATED FINANCIAL SUMMARY

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DISCLOSURES

Each member of the team involved in the preparation of this grading report, hereby affirms that there

exists no conflict of interest that can bias the grading recommendation of the company.

This report has been sponsored by the Bombay Stock Exchange (BSE).

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Somaiya Hospital Road, Sion East, Mumbai – 400 022.

CARE Research is not responsible for any errors or omissions in analysis/inferences/views or for results

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HEAD OFFICE

Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (East), Mumbai – 400 022

Tel: +91-22-67543456, Fax: +91-22-67543457.

NEW DELHI

3rd Floor, B -47, Inner Circle, Near Plaza Cinema, Connaught

Place, New Delhi - 110 001.

Tel: +91-11-23318701 / 23716199 / 23328524.

KOLKATA

3rd Floor, Prasad Chambers (Shagun Mall Building), 10A,

Shakespeare Sarani, Kolkata - 700 0717

Tel: +91-33-22831800 / 22831803 / 22808472.

CHENNAI

Unit No. O-509/C, Spencer Plaza, 5th Floor, No. 769,

Anna Salai, Chennai 600 002

Tel: +91-44-28497812/28490811

AHMEDABAD

32, Titanium, Prahaladnagar Corporate Road, Satellite,

Ahmedabad - 380 015

Tel: +91-79-40265656.

HYDERABAD

401, Ashoka Scintilla, 3-6-520, Himayat Nagar,

Hyderabad - 500 029

Tel: +91-040 40102030

BANGLORE

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No. 6, Raja Ram Mohan Roy Road, (Opp. P F Office),

Richmond Circle, Bangalore - 560 025

Tel: +91-80-22117140

ABOUT US

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