Hikal Ini Cov

Hikal Ltd.
( HIKCHE)
CMP: | 166 Target: | 200 ( 21%) Target Period: 12 months BUY
March 04, 2019
Unique blend of pharma and crop protection…

Established in 1988 by first generation promoter Jay Hiremath, Hikal has a
unique business model with ‘pharma’ and ‘crop protection’ as separate
Initiating Coverage
Particulars
growth engines. The company has evolved as a B2B player catering to Particular Amount
global crop protection and specialty chemical companies besides Market Cap | 2044 crore
pharmaceutical and animal health players. For 9MFY19, pharma and crop Debt (FY18) | 635 crore
protection accounted for 60% and 40%, respectively, of total operating Cash (FY18) | 27 crore
EV | 2652 crore
revenues. We are initiating coverage on the company as we find a
52 week H/L (|) 207/134
compelling risk-reward proposition at the current level considering the
Equity capital | 24.7 crore
capability of the company in both pharma and crop protection along with
Face value |2
future growth prospects based on client stickiness and calibrated capex.
MF Holdings (%) 1.5
Expertise in APIs to drive pharma growth FII Holdings (%) 4.2
Key Highlights
Hikal ventured into the pharma API business by virtue of acquisition of
Novartis’ Panoli plant in the year 2000. In a short span of time, banking on  Hikal has a unique business model,
with crop protection and pharma as
its chemistry skills, the company has been able to tap incremental customers separate growth engines
via the CDMO route. Hikal also operates as a dedicated API supplier as it
expands its portfolio. We expect the pharma segment to grow at a CAGR of
 Expertise in APIs is expected to drive
pharma growth
15.5% in FY19-21E to | 1250 crore on the back of new offerings and repeat
 Crop protection growth to piggyback
business from CDMO customers. on client relationship
Crop protection growth to piggyback on client relationship  After years of volatility in growth, the
ICICI Securities – Retail Equity Research

Hikal started operations as a crop protection company in 1991 after company is witnessing a relatively
acquiring Merck’s facility in Mahad. Since then, it has come a long way with stable growth trajectory
a predominantly CDMO focused business model catering mainly to global Price movement
innovators. Over the years, the company has increased its product offerings
with a foray into niche products and specialty chemicals. We expect crop 16000 300.0
protection segment to grow at 12.5% CAGR in FY19-21E to | 773 crore due 12000
200.0
to sustained product offerings and optimum capacity utilisation. 8000
100.0
Experience in high profile clients servicing to the fore… 4000
0 0.0
For years, the company has been dealing with high profile MNCs like Merck
Mar-16
Sep-16
Mar-17
Sep-17
Mar-18
Sep-18
Mar-19
& Co, Bayer, Syngenta, BASF, Pfizer to name a few. With proven capabilities
CNX Pharma Hikal
and management pedigree, we believe Hikal offers a compelling value
proposition as it continues to expand in both pharma and crop protection Source: ICICI Direct Research, Company
segments with separate focus and a calibrated approach. This bodes well in
the current scenario when Chinese supply disturbances are likely to create
opportunities for Indian players both in APIs and crop protection CDMO. The Research Analyst
company has spent ~| 500 crore over the last five years to augment
Siddhant Khandekar
capacities. After years of volatility in growth, Hikal has been witnessing a
siddhant.khandekar@icicisecurities.com
relatively stable growth trajectory. We expect sales, EBITDA, PAT to grow at
a CAGR of 15%, 18%, 30%, respectively, in FY19-21E on the back of new MItesh Shah
launches and better operating leverage. Simultaneously, we also expect a mitesh.sha@icicisecurities.com
330 bps RoCE improvement to 17.3% through FY21. We arrive at a valuation
of | 200 based on 15x FY21E EPS of | 13.3.
Key Financial Summary

(Year-end March) FY18 FY19E FY20E FY21E
Revenues (| crore) 1296.1 1,548.1 1,783.7 2,051.3
EBITDA (| crore) 241.7 293.7 345.0 409.7
EBITDA Margins (%) 18.6 19.0 19.3 20.0
Net Profit (| crore) 77.2 97.3 127.4 164.4
EPS (|) 6.3 7.9 10.3 13.3
PE (x) 26.5 21.0 16.0 12.4
EV to EBITDA (x) 11.0 9.2 8.0 6.7
Price to book (x) 3.1 2.7 2.4 2.1
RoE (%) 11.5 13.0 15.0 16.8
RoCE (%) 12.2 14.0 15.3 17.3
Source: ICICI Direct Research, Company
Initiating Coverage | Hikal Ltd. ICICI Direct Research
Company background
Established in 1988, Hikal is predominantly a B2B player that provides
intermediates and active ingredients to global pharmaceutical, animal
health, crop protection and specialty chemical companies. For 9MFY19, Hikal is predominantly a B2B player that provides
pharma and crop protection accounted for 60% and 40%, respectively, of intermediates and active ingredients to global
operating revenues. The pharma business is currently divided almost pharmaceuticals, animal health, crop protection and
equally between generic active pharma ingredients (APIs) and contract specialty chemicals companies
development and manufacturing organisation (CDMO) businesses. Animal
health business accounts for 20-25% of CDMO business. In crop protection,
70% of revenues are derived from CDMO with the remaining from
proprietary products, specialty chemicals and specialty biocides. Hikal owns
five manufacturing facilities: Taloja, Mahad (Maharashtra), Panoli (Gujarat)
Jigani (Karnataka) and an R&D centre at Pune.
Exhibit 1: Flow chart (gross revenues of FY19E)
Hikal (| 1548 crore)
Pharma (API) (| 938 Crop Protection (| 610

crore; 60%) crore; 40%)
Proprietary, Agro Chem

Generic (| 469 crore; CDMO (| 469 crore; CDMO (| 427 crore;
and Biocide (| 183
~30%) ~30%) ~28%)
crore; ~12%)
Pharma business (60% of revenues) -- The pharma business is currently

divided almost equally between the generic APIs and CDMO businesses.
Currently, the company has around eight to nine products in the generic The pharma business is currently divided almost
portfolio and five to six products in CDMO. equally between generic APIs and CDMO
businesses
In the pharma segment, the company owns manufacturing facilities at two
locations- Jigani near Bengaluru and Panoli in Gujarat.
Jigani hosts two manufacturing plants: Unit I is spread over 87000 square
metre. It is USFDA approved for manufacturing intermediates and active
pharmaceutical ingredients (APIs). Unit II is spread over 8000 square metre.
The Panoli plant is spread over 126,000 square metre. The site received
For the pharma segment, the company owns
USFDA accreditation in September 2012 and EUGMP in January 2014. It is
manufacturing facilities at two locations- Jigani near
involved in manufacturing intermediates along with specialty chemicals
Bengaluru and Panoli in Gujarat
insecticides and intermediates for crop protection.
In the CDMO business, the company focuses on developing APIs for the
commercialised products of innovator companies that are in the late stage
of patent expiry.
The animal health business accounts for 20-25% of the CDMO business and Animal health business accounts for 20-25% of the
8-10% of overall pharma segment. The company has a strong business CDMO business and 18-10% of overall pharma
relationship with four of the top eight global animal health companies in the segment
world.
Crop protection (40% of revenues) - Hikal partners with crop protection In CDMO (70% of crop protection business) the
companies for custom synthesis and custom manufacturing of company works with global innovators
intermediates and active ingredients. It manufactures insecticides,
ICICI Securities | Retail Research 2

fungicides and herbicides for customers with a major chunk from

insecticides. In CDMO (70% of crop protection business) the company
works with global innovators, which involves developing crop protection
products from gram to kilo to tonne scale at its kilo lab, pilot plants and
commercial plants meeting the stringent regulatory and customer
requirement. Majority of the crop protection business is export oriented.
The company has around nine to 11 products in the CDMO business and
about five to six own products. No single product in the CDMO business The company has around nine to 11 products in the
comprises more than 15% of the business. Hikal is also working on a few CDMO business and about five to six of own
niche patented products in this segment. The company has about one or products
two products that are in late stages of registration and launch.
In the specialty chemicals business (~20% of crop protection business), the
company offers specialty biocides and antimicrobial actives and additives.
These products are predominantly used in industries like leather, paint,
paper, water treatment, personal care, building materials and textiles.
The company has three sites dedicated to crop protection, Mahad, Taloja The company has three sites dedicated to crop
and Panoli. The 27000 square metre Mahad facility is the first manufacturing protection- Mahad, Taloja and Panoli
site of Hikal that was established in 1991. This site facilitates manufacturing
of specially chemicals, fungicides, herbicides and intermediates. Another
site is in Taloja (60,000 square metre), Maharashtra that was commissioned
in 1997 in a technical collaboration with US based Merck & Co. The site
facilitates manufacturing of fungicides, insecticides and intermediates. This
site also manufactures patent API for innovator companies.
The company spends 3-4% of total revenues in R&D filing and developing The company spends 3-4% of total revenues in R&D
own proprietary products in both pharma and crop protection segments. filing and developing own proprietary products in
Hikal has also developed a new API for Pregabalin (CNS) using an enzymatic both pharma and crop protection segments
process that is both cost-effective and environmental friendly.
Exhibit 2: Time Line
Year Milestone
1988 Hikal incorporated
1991 First manufacturing at Mahad, begins operations - signs long term agreement with Hoechst India
1995 Signs long term manufacturing and supply agreement with Merck, US for large volume Agrovet active ingredient
1997 Manufacturing of active ingredient for Merck begins at Taloja site
2000 Acquires manufacturing site from Novartis in Panoli, Gujarat
2001 Acquires R&D and manufacturing site in Bangalore. Maiden entry in pharmaceutical business
2002 First pharmaceutical API DMF filed in US
2003 New API plant commissioned at Bangalore. Multi-purpose pharmaceutical intermediate plant commissioned at Panoli
2005 Signs long term supply agreement with a multinational crop protection company
2006 Signs long term supply contract with global innovator company for commercial supply of APls
2007 Signs long term contract API manufacturing supply agreement with leading animal health company
2008 IFC (World Bank) invests 8.27% equity into company
2009 Acoris (R&D centre), Pune becomes operational
2009 Signs long term supply contract for on patent molecule with global crop protection innovator company
2013 Signs long term supply agreement for human health products with global biopharmaceutical company
2014 Pharmaceutical sites Panoli & Bangalore receive EUGMP approval
2015 New development & launch plant in Bangalore commissioned for new products from pharmaceutical division
2017 Commissions new state-of-the-art plant at Mahad for leading global crop protection innovator company

Exhibit 3: Regulatory milestones

2004 USFDA approval of Bangalore pharmaceutical manufacturing site
2008 Second successful USFDA audit of Bangalore facility
2011 Bangalore clears its third successful USFDA audit
2012 USFDA certifies Panoli. Panoli & Bangalore sites receive Pharmaceuticals and Medical Devices Agency (PMDA) of Japan approval
2013 EU audits Panoli & Bangalore pharma sites
2014 Successfully completes European Directorate for Quality of Medicines (EDQM) audit at Bangalore site for fourth successful USFDA audit for facility
2017 Fifth successful USFDA audit for Bangalore facility
2018 Second successful PMDA approval for Bangalore facility
Exhibit 4: Shareholding pattern

Share Holding % Q4FY18 Q1FY19 Q2FY19 Q3FY19
Promoter 68.77 68.77 68.77 68.77
FII 4.08 4.77 4.18 4.17
MF 4.26 2.09 1.62 1.45
Others 22.89 24.37 25.43 25.61
Source: ICICI Direct Research, Capita line

Investment Rationale-
Expertise in APIs to drive pharma growth
Having got established as a crop protection B2B player, Hikal ventured into Pharma bifurcation
the pharma API business by virtue of acquisition of Novartis’ Panoli plant in
2000. The company later acquired another manufacturing and R&D facility
at Jigani near Bangalore in 2001. Since then, Hikal has developed and filed
as many as 28 drug master files (DMFs) with the USFDA for the US market.
The company has also filed product dossiers for other regulated markets.
As mentioned earlier, the business was divided almost equally between
CDMO APIs
generic APIs and CDMO. ~50% ~50%
Currently, the company has around eight to nine products in the generic
portfolio and five to six products in CDMO. Gabapentin (CNS) is the largest
product that contributes ~40% to total pharma sales. The pharma business
is mainly export-oriented with ~55% of sales derived from the US, 30% from
Europe and the balance from the rest of the world (RoW).
During FY16-19E, pharma segment grew at ~18% CAGR YoY due to 1)
timely addition of capacity, 2) new launches, 3) improved market share in
existing products, 4) windfall on account of API supply constraints from
China and 5) favourable currency. The company is mainly focusing on
Central Nervous System (CNS) and anti-diabetic segments.
Exhibit 5: Strong growth in FY16-19E (| crore)
CAGR 18.1% 937.6 During FY16-19E, growth was driven by 1) timely

1000
addition of capacity, 2) new launches, 3) improved
752.8 market share in existing products, 4) windfall on
800
610.7 account of API supply constraints from China and 5)
569.1
600 a favourable currency
400
200
0
FY16 FY17 FY18 FY19E
Pharma
Generic (APIs) – Hikal manufactures APIs and intermediates for global

innovator and generic companies.
The company has followed a three-pronged strategy for API development The company has followed a three-pronged strategy
(already generic, to be generic and future generic) to generate revenues in for API development (already generic, to be generic
the short-term, as well as build a pipeline from a long-term perspective. It and future generic)
identifies products by a combination of client requirements and niche
molecules where the company has a technological edge, backed by its
expertise in advanced chemistry and backward integration.
The company has a small but strong product pipeline. Currently, Hikal has Currently, the company has around eight to nine
around eight to nine products in the generic portfolio. The company products in the generic portfolio
normally targets | 50 crore+ opportunity for each product. For this, Hikal
typically identifies products that have clocked billion dollar sales at their
peak with high volume.
Leveraging on strong cost efficiency, manufacturing capability and Gabapentin contributes ~40% to the company’s
chemistry background, the company is able to generate sizeable revenues pharma revenues and 15-16% of overall revenues
even from commoditised generic products. Its flagship Gabapentin (CNS) is
a clear example of the company’s ability to garner higher market share in a
product despite steep competition (more than 25 DMF filings). Gabapentin
contributes ~40% to the company’s pharma revenues and 15-16% of overall
revenues. Hikal is the largest supplier for Gabapentin globally. The company

expects Gabapentin revenues to continue to grow at a stable pace. However,

the contribution from this product is likely to come down to below 10% of
Total ~30% of pharma revenue contribution
overall revenues mainly due to incremental contribution expected from new
expected from new products, especially from
products, especially from Pregabalin (CNS; ~US$5 billion global sales),
Pregabalin (CNS; ~US$5 billion global sales),
Venlafaxine (CNS; ~US$4 billion peak global sales in patent period),
Venlafaxine (CNS; ~US$4 billion peak global sales
Quetiapine (~US$5.8 billion peak global sales in patent period), Valacyclovir
in patent period), Quetiapine (~US$5.8 billion peak
(~US$4.8 billion peak global sales in patent period). The company expects
global sales in patent period) and Valacyclovir
these four products to contribute ~30% of pharma revenues in the next two
(~US$4.8 billion peak global sales in patent period)
to three years. It is looking to file five to six DMFs every year.
Exhibit 6: List of DMF filings till date
SUBMIT
No SUBJECT Brand Name Therapy Patent
DATE
Pain
1 6/1/1999 Pentoxifylline Pentoxil Expired
Management
2 7/24/2002 Gabapentin Neurontin CNS Expired
3 3/13/2003 Bupropion Hydrochloride Wellbutrin CNS Expired
4 7/15/2003 Ondansetron Hydrochloride USP Zofran anti-nausea Expired
5 9/15/2005 Gemfibrozil USP Lopid CVS Expired
6 9/3/2005 Ondansetron USP Zofran Odt anti-nausea Expired
7 12/8/2005 Triprolidine Hydrochloride API Actidil/Myidyl Anti-Allergy Expired
8 1/10/2006 Levetiracetam API Keppra CNS Expired
9 7/18/2009 Venlafaxine Hydrochloride API Effexor Xr CNS Expired
10 2/22/2010 Memantine Hydrochloride USP Namenda CNS Expired
11 8/18/2010 Quetiapine Fumarate API Seroquel CNS Expired
12 9/30/2013 Donepezil Hydrochloride API Aricept CNS Expired
13 2/18/2014 Venlafaxine Base Khedezla CNS Expired
14 5/24/2014 Gabapentin (A01804) Neurontin CNS Expired
15 6/21/2014 Bupropion Hydrochloride Usp [Process-2] Forfivo Xl/Wellbutrin/Zyban CNS Expired
16 9/19/2014 Pregabalin Usp Lyrica CNS On patent
17 8/12/2015 Pregabalin (Process-Ii) Lyrica CNS On patent
18 10/14/2015 Vildagliptin Valtrex Anti-diabetic Expired
19 2/25/2016 Lacosamide Vimpat CNS Expired
20 3/22/2016 Olmesartan Medoxomil Benicar CVS Expired
21 3/29/2016 Valacyclovir Hydrochloride USP Valtrex antiviral Expired
22 3/17/2017 Sitagliptin Phosphate Januvia Anti-diabetic Expired
thrombin
23 3/25/2017 Dabigatran Etexilate Mesylate Pradaxa On patent
inhibitor
Pain
24 6/29/2017 Butorphanol Tartrate Stadol Expired
Management
Pain
25 7/29/2017 Celecoxib Celebrex Expired
Management
26 12/29/2017 Apixaban Eliquis CVS On patent
27 4/30/2018 Dapagliflozin (Dapagliflozin Propanediol Monohydrate) Farxiga Anti-diabetic On patent
28 9/12/2018 Empagliflozin Jardiance Anti-diabetic On patent
Source: ICICI Direct Research, USFDA
Unforeseen Chinese API problems opportunity for Indian API companies

China has been a major supplier of APIs and intermediates for decades. Chinese supply lines have been facing some
However, these Chinese supply lines have been facing some particular particular issues, most of which were never faced in
issues, most of which were never faced in the past. Cornered by growing the past
pollution related issues, the Chinese government has initiated a strong anti-
pollution drive. Thus, in the process, this has forced many APIs, intermediate
and chemical units to close down. Similarly, on the macro front, issues like
a squeeze on easy availability of bank credits, increasing in-depth scrutiny,
mainly from developed markets regulators, increasing labour cost due to

higher standard of living and last, but not the least, the US-China trade war
have impacted API exports to the US. Although Chinese goods have not
been altogether out of the game, the void has provided other global players,
especially Hikal and other Indian API manufacturers, an opportunity to fill the
gap, to a greater extent.
Some of China’s loss can be India’s gains…
The once unparalleled Chinese bulk manufacturing capability and capability What can be termed as a new opportunity for Indian
in APIs is facing headwinds for the first time. Even though most of the lost players is the strategic shift of global players from
ground is likely to be restored, the remaining vacuum still presents a good single sourcing to multiple sourcing of APIs and
opportunity for Indian players to step in. What can be termed as a new intermediates to counter the uncertainties in the
opportunity for Indian players is the strategic shift of global players from future
single sourcing to multiple sourcing of APIs and intermediates to counter
the uncertainties in future. India can be a perfect strategic fit due to dual
sourcing for global customers, mainly on legacy adherence to stringent
compliance (1298 UAFDA approved API units) and zero-discharge
compliance adopted by most players at the behest of state governments
besides technical capability and local sourcing.
Another advantage for sourcing APIs from India can be its legacy proficiency
in formulations (where China lags), thus providing an end-to-end solution
for customers. The Indian formulations market is the third largest in terms
of volume and thirteenth largest in terms of value globally. The Indian
pharma industry supplies 40% of generic demand in the US and 25% of all
medicine in the UK. Companies like Hikal are poised to benefit in this sort of
a scenario as they can be potential suppliers to global and Indian players.
Exhibit 7: Potential incremental opportunity for Indian players (10% assumption)
China, RoW, India ,

US$3 bn US$3 bn
US$30 bn
Source: ICICI Direct Research, Industry
CDMO
Hikal approaches innovator companies targeting their late stage The company has a dedicated business
commercialised products, which are likely to face steep competition post development team for the US, Europe and Japan to
patent expiry in the near term, for value proposition. Similarly, the company identify large and virtual companies for CDMO of
also offers early-stage R&D services such as synthesis, scale-up, API intermediates and APIs that are in different stages of
development, stability studies and method development all the way through development
manufacturing services, ranging from preclinical R&D material for clinical
trial purposes and commercial production, Phases I through III. For this
business, the company has a dedicated business development team for the
US, Europe and Japan to identify large and virtual companies for CDMO of
intermediates and APIs that are in different stages of development.
Currently, the company is working on five to six products in CDMO segment.
Following are some key contracts the company is pursuing currently
US innovator client: Hikal is the contract manufacturer of two large volume
molecules, a neuropathic pain reliever and an anti-cholesterol molecule
exclusively for a leading US-based innovator company. These products
have stringent technical specification requirements. As per the
management, both these products are for life-cycle extension. The volumes
of both these molecules increased this year. The trend is expected to
continue next year as well.

European innovator client: Hikal has an exclusive long-term contract

manufacturing agreement with a leading European innovator for two
molecules. Based on the forecast provided by the client, these products are
expected to grow further in the next year as well. One of these molecules is
an anti-epilepsy drug that is widely used to control seizures while the other
is a drug used for memory enhancement.
Business in Japan: The company is working on several products that have
come through R&D and progressed to the semi-commercial stage. In FY20,
the company expects a repeat order of two intermediates going into a new
generation API to be launched in Japan.
Intermediate contracts – Hikal has supplied an intermediate to a US-based
biotechnology company, which, in turn will supply the same as food additive
for a global FMCG conglomerate. The company expects a repeat order of
higher quantity from this product. Hikal delivered another intermediate to a
leading US company for one of its APls under development. Apart from this,
the company expects a repeat order of two intermediates going into a new
generation API to be launched in Japan. Business for the supply of an
intermediate going into high-value Prostaglandin API is also expected. It will
supply an intermediate going into Phase 1 of the oncology product used for
treatment of breast cancer and investigated for different types of cancer
developed by a biotech company. The company has also entered into a
contract with a US-based company for process development services for a
food ingredient.
Animal health business - In the animal health business (20-25% of CDMO
revenues), the company manufactures a non-antibiotic veterinary drug API
that is used to prevent coccidiosis, a disease that threatens newly arrived
cattle that often have a compromised immune system. This is under an
exclusive manufacturing contract with a leading US-based veterinary drug
innovator. Hikal has also developed two APls in this segment. One of them
has a dual application and is also used as a human health product.
Additionally, the company has filed a USDMF in FY18 and plans to file
another DMF in the near term.
We expect the pharma segment to grow at 15.5% CAGR in FY19-21E on the
back of new offerings and repeat business from CDMO players. Continuance
of China induced opportunities will also be a major factor.
Exhibit 8: Pharma growth likely to remain strong
1400 15.5% CAGR 1250.2

1200 18.1% CAGR 1087.1
937.6
1000
752.8
800
569.1 610.7
600
400
200
0
FY16 FY17 FY18 FY19E FY20E FY21E
Pharma

Crop protection growth to piggyback on client relationship and capabilities-

Crop protection bifurcation
In crop protection, partnering with global innovators has been the hallmark
for Hikal since inception. It all began in 1991 when the company signed a
long term supply agreement with Hoechst India from the then newly
established Mahad (Maharashtra) facility. Again in 1997, as a part of
backward integration policy, the company commissioned a manufacturing Proprietary
facility at Taloja (Maharashtra) in technical collaboration with Merck & Co. & Others
Inc. US. Since then, Hikal has been involved with innovators on a fairly ~30%
regular basis. CDMO
~70%
During FY16-19E, the crop protection business grew ~20% YoY due to 1)
successful commercialisation of new products, 2) diversification into
specialty chemicals and specialty biocides, 3) windfall on account of Chinese
supply constraints of key crop protection ingredients, 4) additional product
offerings to existing customers and 5) favourable currency. ICICI Direct Research, Company
Exhibit 9: Strong growth through FY16-19E
700 CAGR 19.6% During FY16-19E, the crop protection business grew
610.3
600 547.3 ~20% YoY due to 1) successful commercialisation
of new products, 2) diversification into specialty
500 423.3 chemicals and specialty biocides, 3) windfall on
400 356.5 account of Chinese supply constraints of key crop
(| crore)
300 protection ingredients, 4) additional product

offerings to existing customers and 5) favourable
200
currency
100
0
FY16 FY17 FY18 FY19E
Crop Protection
Hikal partners with crop protection companies for CDMO of intermediates

and active ingredients. The company has a successful track record of
developing crop protection products from gram to kilo to tonne scale as per
requirement. It manufactures insecticides, fungicides and herbicides for
customers with a major chunk from Insecticides. Hikal also has its own Hikal is currently working for 20-25 clients including
portfolio of products for the specialty chemical and biocide industry. CDMO top five out of seven in global crop protection
contributes ~70% with the balance contributed by specialty chemicals and business
biocides besides Hikal’s proprietary products. It is currently working for 20-
25 clients including top five out of seven in global crop protection business.
As per the management, competition in this segment is lower than pharma
No single product in the CDMO constitutes more
mainly due to fewer players and consolidation among large players. In crop
than 15% of the business
protection, the company has around 10 to 11 products in the CDMO
business and about five to six own products. No single product in the CDMO
business constitutes more than 15% of the business.
Strategically, the company has also diversified into specialty chemicals
which includes specialty biocides, antimicrobial actives and additives that
contribute ~20% of total crop protection sales. These products are used in Specialty products are used in industries like leather,
industries like leather, paint, paper, water treatment, personal care, building paint, paper, water treatment, personal care,
materials and textile industry. The company is expecting good demand for building materials and textile industry
specialty biocides, especially in the domestic market on account of
shortages from China.
The company focuses on a broad spectrum of products in the fungicides,
insecticide and herbicides space. Following are a few instances wherein the
company has engaged with global innovators
Key herbicides products
On–patent herbicide intermediate for global innovator – In FY18, the

company commissioned a new plant in Mahad to manufacture an exclusive

and high volume product for one of its global innovator customers. Based
on the company’s on-time delivery, quality and successful scale up, the
client has awarded an exclusive supply contract to make the precursor of
this product to the company.
Two on-patent herbicide products for Japanese innovator –These products

are used predominantly for controlling broad-leaved weeds in water-seeded
rice and for seed treatment in cotton crop. The volume of one of these
products grew strongly in FY18 due to successful commercialisation and
scale-up and the company expects to achieve similar growth in FY19.
Key fungicide products
On-patent fungicide product for global innovator— This product is used to

prevent late blight and downy mildew on vine, potato, fruit and vegetables.
The product has shown a significant increase in volumes in FY18 mainly due
to increased demand from the global Innovator for whom the company
manufactures this product exclusively. The increase in demand was due to
the de-stocking of inventories and multiple new registrations across various
geographies along with introduction of a new combination of products.
Versatile fungicide for leading Japanese innovator -- This fungicide has

preventative, systemic and curative properties for soil-borne and other
diseases in almonds, peaches, plums, apricots, other fruits and vegetables,
golf courses, professional sports fields and lawns. Sales of this product was
impacted in FY18 due to unavailability of key raw materials due to a volatile
supply chain situation involving Chinese suppliers. However, with the
improved and positive change in raw material availability, the company
expects to grow volumes significantly in FY19 and make good both last
year’s pending orders as well as fresh orders.
Niche fungicide for Japanese innovator -- This special product is a selective

new compound with new modes of action for protection from fungal
diseases, especially in rice crops. In FY18, due to capacity constraint, Hikal
could not fulfil customer demand. However, the company has
debottlenecked plants and will supply the backlogged quantities apart from
additional requirements in FY19.
Exclusive fungicide product for European innovator – This product is used

to control Oomycete disease, for late blight control in potatoes, tomatoes
and for downy mildew in vegetables. It witnessed a substantial increase in
volume last year. The company exclusively manufactures this product under
contract for a leading European innovator. Based on the projections given
by the innovator, the company is expecting strong volume growth in FY19.
Thiabendazole– This product accounts for less than 15% of the crop
protection sales and is one of the company’s legacy crop protection
products. The product is versatile and used in both crop protection to
control mould and other fungal diseases in fruits and vegetables, as well as
an anti-parasitic to control roundworms. It is also used in the material
protection industry to prevent fungal growth.
Key insecticide products
Low volume margin accretive insecticide product for Japanese innovator --

This product increases colouration of fruits as well as enhances fruit quality
by increasing the citric acid content. In FY16, the company had
commercialised the product for a leading Japanese innovator company.
Since the client was in the process of developing the market for this
innovative product, the company could not achieve scalability in the last two

years. However, the company expects revenue from this product from FY19
onwards.
New insecticide for European customer – This product is used to control a

wide range of insects on rape, maize, fruits & vegetables along with pome
fruit and also as a wood preservative to control termites, wood boring
beetles and other insects. The volume of this product is likely to increase
substantially in FY19 due to the ban on some of the products of competitors
in the European Union.
Biocides, specialty chemicals businesses - To diversify into new and allied

business areas, the company has entered the specialty biocides and
specialty chemicals businesses. Contribution from these products has gone
up to~20% from a low single digit in past three years. These products are
used in industries like leather, paint, paper, water treatment, personal care,
building materials and textile industry.
New product development
Hikal owns a research and technology (R&T) centre in Pune for crop
protection, biocides and specialty chemicals products. The company has
several new products in the pipeline, both for customers in contract
manufacturing and own development. Hikal is developing a versatile
product that is used as a microbiocides as well as a fungicide. It has a wide The company is developing a versatile product that
range of applications as a preservative in varnishes, adhesives, inks, laundry is used as a microbiocides as well as a fungicide
detergents, stain removers, fabric softeners, leather processing solutions,
fluid preservation and in emulsion paints. The company expects to scale up
and further commercialise these products in the near future.
The company is also working on developing a commercially viable process

for a complex crop protection product, which has recently gone off-patent. The company is also working on developing a
This product is used to control a wide range of diseases by pests on commercially viable process for a complex crop
soybean, cereals, fruits and vegetables. One more key product in the protection product which has recently gone off-
pipeline is used to control a wide range of pests on cereals, rape and patent.
soybean. Both these products involve complex chemistry and technology.
Hikal is expecting to complete the complex process development by FY19.
On the specialty chemicals front, it is working on the development of two

products with wide usage in the chemical industry. These products have a
wide range of applications including that of an antiseptic disinfectant. Hikal
expects to commercialise both these products in the near future.
Stagnant global crop protection market scenario conducive for CDMO

evolution
Overall global growth has been stagnant over the past few years due to 1) The global crop protection market has grown at a
patent expiry of some ley molecules, 2) climatic and crop pattern changes CAGR of just 1% during CY12-18
in different parts of the world, 3) broadly muted food grain prices affecting
farmers’ income and 4) higher use of genetically modified crops with better
insects and herbs resistance. The overall market has grown at a CAGR of
just 1% in CY12-18. The market is well diversified (Asia Pacific- 30%, Latin
America- 24%, Europe- 22% and North America 20%), which suggests that
in any particular year, besides patent expiry, any headwinds in a particular
geography would slow down overall growth.

Exhibit 10: Global crop protection market value (US$ million)

Total Crop
Sales (US$ million) Crop Protection Non-Crop
Protection
2012 52,617 6,520 59,137
2013 54,075 6,512 60,587
2014 58,746 6,515 65,261
2015 56,160 6,882 63,042
2016 52,882 7,106 59,988
2017 54,219 7,311 61,530
2018 (P) 56,500 7,538 64,038
Source: ICICI Direct Research, ICRA
Some challenges faced by global crop protection industry

Demand for crop protection is mainly driven by a desire to enhance crop
yield, increase plant growth and protect crops against pests and other
harmful aspects. Globally, farmers use various kind of crop protection
including herbicides, insecticides, fungicides, and seed treatment chemicals
to optimise their agricultural output. Besides this, the global consumption of
crop protection is also growing as arable land is shrinking due to rapid
industrialisation and population expansion. That said, the crop protection
market has its own set of challenges. They are discussed in brief below-
Regulations
Globally, the crop protection market is governed by many national and
international laws, which are increasing the cost of developing new
products. Since manufacturers have to consider numerous regulations,
there is a delay in the introduction of new products in the market. A case in Different countries will have varying product filling
point is Herbicide Glyphosate, which faced stiff regulatory challenges in requirements
Europe and Brazil. Additionally, different countries will have varying product
filling requirements. As a result, global players need to submit technical
grade registrations with the full dossier. Such processes further increase the
complexities for overseas suppliers that have to conduct additional tests and
studies to obtain approval for selling the crop protection within the region.
Europe in particular is highly regulated.
High R&D costs
Developing a typical crop protection molecule takes nine years on an
average with average spending of US$180 million. During the same time, Crop protection molecule takes nine years on an
the market may witness newer innovations or competitors may come up average with average spending of US$180 million
with better chemicals. As a result, manufacturers in the crop protection
industry are struggling to cope with such high R&D costs.
Growing usage of GM crops
Progress in genetic science has enabled genetically modified crops (GM
crops) to develop resistance to pests. As a result, such GM crops do not The development and growth of GM crops can pose
need crop protection and pesticides for them to grow. Pest-resistant GM- a threat to the growth of the global crop protection
maize crops are widely used in the US and are further used in industrial- market
scale biofuel. The development and growth of such crops can pose a threat
to the growth of the global crop protection market as they would not be
required to be applied to GM crops.
Upheaval on account of consolidation in global crop protection space- Over
the past few years, a number of global crop protection conglomerates have Merged entities together account for 75-80% of
acquired or merged their business operations to counter fluctuations in market share
currencies, crop prices and crude oil prices that had adversely affected the
sales and profit margins. The trend was initiated ~by the US$130 billion
merger announcement between Dow Chemicals & Du-Pont, followed by
They have expanded their scope from being a
~US$44 billion acquisition of Syngenta by ChemChina. The last in the
standalone crop protection or seed provider to a
pipeline was acquisition of Monsanto by Bayer AG for ~US$63 billion. These
much broader solution provider for global farming
merged entities together account for 75-80% of market share. The trigger

for these companies to merge their business operations was to boost

margins, lower cost & development time, streamline workflows and increase
the efficiency of the R&D process. Similarly, they have expanded their scope
from being a standalone crop protection or seed provider to a much broader
solution providers for global farming.
Other global developments- China issues and Japanese potential
China impact
Chinese policies have become increasingly stringent in the last few months.
A case in point is the 2017 release of new regulations on pesticides
administration. These new regulations have made major adjustments in
pesticide production, registration, operation, application and penalties. New regulations have made major adjustments in
These regulations provide a solid legal basis for safeguarding the quality and pesticide production, registration, operation,
safety of China's agricultural products and promoting the development of application and penalties
resource-saving and environment-friendly modern agriculture.
This is likely to have significant impact on the production and export of
technical materials. This may expand to formulation products and even
pesticide application in coming years. The Chinese government has
circulated a series of policies, such as the Soil Pollution Control Action Plan,
Water Pollution Control Action Plan and Gas Pollution Control Action Plan. The new environmental protection standards are
The new environmental protection standards are likely to substantially likely to substantially increase the cost for Chinese
increase the cost for companies in the future. The environmental protection companies in future
policies are a way for the government to eliminate backward production
capacity and non-compliant enterprises. This suggests that the crackdown
is mainly on intermediates & APIs along with other chemicals.
Many customers on the innovator side had moved to China in a big way. A
lot of them have been having major supply issues with China. Hence, they
are looking at Indian companies as alternative source on a permanent basis.
Japanese potential- Tough market to crack but opening up…
Japanese companies boast strong R&D strengths, with 40% of the world’s
patented crop protection products coming from Japanese enterprises.
Japan has nearly 20 new agro-chemical products that are poised for
registration before entering the international market. These macros suggest
that Japan remains a potentially significant market for sustained growth. Post the recent tsunamis, Japanese companies are
However, post recent tsunamis, Japanese companies are looking at looking to outsource capabilities outside Japan to
outsourcing capabilities outside Japan to de-risk themselves. As in pharma, de-risk themselves
Japanese companies are very strict about confidentiality and intellectual
property protection in crop protection. Some of them have seen an
opportunity in India and are now creating a base here. Secondly, Hikal
already has an engagement with Japanese players for five to six products.
Normalised growth still significant
Being an export driven company, Hikal’s fortunes are directly dependent on
structural changes at the global level especially over the last three years,
besides legacy industry dynamics. With the global crop protection industry
growth being stuck in low single digits (CAGR of just 1% in CY12-18), Hikal
has maintained its mid-teen growth tempo, especially since FY16. This
suggests an increasing trend of outsourcing in the backdrop of falling
We expect crop protection segment to grow at a
revenues and squeezing margins for top tier global players after the patent
CAGR of 12.5% in FY19-21E on the back of new
expiry of major products in the last few years. By 2020, some more brands
clients’ addition and capacity augmentation
worth US$3 billion are scheduled to go off-patent. This has led to massive
consolidation in the global landscape with added focus on cost control
measures. This, along with issues in China, have led to incremental ex-China
outsourcing, which is reflected in the performances of most crop protection
B2B players including Hikal. While replicating the FY16-19E growth looks
unlikely, we believe the expansion of base business along with new
launches on the back of new clients’ addition and capacity augmentation will
drive growth henceforth. We expect the crop protection segment to grow at
12.5% CAGR in FY19-21E.

Exhibit 11: Crop protection business expected to grow at 12.5% over FY19-21E
1000
CAGR 12.5%
CAGR 19.6% 773.0
672.2
610.3
547.3
(| crore)
423.3
356.5
0
Crop Protection

Financial highlights
Revenues expected to grow at CAGR of 15% over FY19-21E
The 9MY19 revenues grew 24.5% YoY to | 1132 crore on the back of robust
performance across segments. Volume growth was 13-15% while the
remaining growth was attributable to favourable currency movement and
higher realisation. This, in turn, was possible due to passing on of
incremental raw material cost to customers. Raw material prices increased
mainly due to raw material supply constraints from China.
Segment wise, the pharma segment grew 26.4% YoY to | 680 crore owing
to 1) direct advantage of APIs supply constraint from China, 2) volume The company also entered into a partnership with
growth in existing products and 3) new launches. Crop protection has also new players, which has started contributing to
grown 21.7% YoY to | 452 crore due to 1) commercialisation of new growth
products 2) strong volume growth from existing products led by
geographical expansion and market share gain and 3) higher contribution
from specialty biocides and specialty chemicals segments. The company
also entered into a partnership with new players, which has started
contributing to growth. Looking at the company’s strong product pipeline, Currently, around 15-20% of reported sales are via
capacity expansion, timely execution and order positions, we expect growth new products both in pharma and crop protection.
momentum to continue, going ahead. Currently, 15-20% of reported sales This is expected to go to 25%
are via new products both in pharma and crop protection. The management
expects this percentage to go up to 25% per year, going forward. We expect
revenues to grow at a CAGR of 15.1% YoY to | 2051 crore.
Exhibit 12: Revenues expected to grow at 15.1% CAGR over FY19-21E
2500 CAGR 15.1%

CAGR 18.7% 2051.2
2000 1783.6
1547.7
1500 1296.1
(| crore)
925.7 1013.9
1000
500
0
Revenues
Exhibit 13: Pharma to grow at 15.5% over FY19-21E Exhibit 14: Crop protection to grow at 12.5% (FY19-21E)
1400 1250.2 900
773.0
1200 1087.1 800
672.2
937.6 700 610.3
1000
752.8 600 547.3
800
569.1 610.7 500 423.3
600 400 356.5
400 300
200 200
0 100
FY16 FY17 FY18 FY19E FY20E FY21E 0
Pharma Crop Protection
Source: ICICI Direct Research, Company Source: ICICI Direct Research, Company

EBITDA margins expected to improve 100 bps to 20.0% by FY21E

While revenue growth was solid, hindrances arising from availability of
certain key raw materials and advanced intermediates from China remain an
issue, (albeit on a lower scale). This has materially impacted gross margins.
However, the company has managed to pass on a majority of the price
increases to customers and make up the remaining with process
improvements and manufacturing efficiencies. The company manages to pass on 60% of the price
In a way, for ~60% of the overall business (pharma CDMO + crop protection increase in raw materials to customers due to CDMO
CDMO), the company manages to pass on 100% of fluctuation in raw factor
material prices. To mitigate the risk for the remaining 40% pie, the company
is planning to source from local vendors and making raw materials in-house
through backward integration. With all these measures, coupled with
stabilising raw material supplies from China, we expect gross margins to go
up to the historical level of ~50% from FY20. We also expect EBITDA
margins to improve 100
bps over FY19-21E to 20.0%.
Exhibit 15: EBITDA and EBITDA margins trend
450 409.7 20.5
400
345.0 20.0 20.0
350
293.7
300 19.5 19.5
241.7 19.3
250
194.319.2
(| crore)
180.8 19.0 19.0

200
18.6
150 18.5
100
18.0
50
0 17.5
EBITDA EBITDA Margins (%)
Improvement in operational margins to drive net profit

Net profit growth is likely to be driven by an improvement in operating
margin performance and better operational leverage. We expect net profit
to grow 30.0% in FY19-21E to | 164.4 crore.
Exhibit 16: Net profit trend
180 164.4
CAGR 30.0%
160
140 CAGR 33.2% 127.4
120 97.3
100
77.2
(| crore)
80 67.7
60 41.2
40
20
0
Net Profit
Return ratios to improve on the back of better asset turnover

Return ratios remained muted in FY14-18 in line with a decline in margins,
which were impacted due to a spike in raw material prices. However, on the
back of a persistent improvement in gross margins coupled with an
improvement in assets turnover, we expect improvement in return ratios.

Future capex mainly for brownfield expansion and debottlenecking

The company has substantial additional space in its existing facilities. To
cater to the strong volume growth, the company is spending | 250 crore in
the next 18 months to 24 months in brownfield expansion and
debottlenecking in current capacities. All the future capex is revenue
generating. This incremental capacity has the capability to generate 1.5-1.7x
asset turnover.
Exhibit 17: RoE and RoCE trend
20
18 17.3
16 15.0 16.8
15.3
14 14.0
12 11.2 12.2 13.0
10 10.7 10.6 11.5
8
(%)
7.3
6
4
2
0
RoCE (%) RoE (%)

Exhibit 18: Free cash flow

140.0 126.8
120.0 103.2
100.0 87.1
80.0
53.6 58.2
60.0 49.6
40.0 32.8
20.0 6.5
0.0
FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Free Cash flow

Experience in high profile clients servicing to the fore…

For years, the company has been dealing with high profile MNCs like Merck
& Co, Bayer, Syngenta, BASF, Pfizer to name a few. With proven capabilities
and management pedigree, we believe Hikal offers a compelling value Chinese supply disturbances are likely to create
proposition as it continues to expand in both the pharma and crop opportunities for Indian players both in APIs and crop
protection segments with separate focus and a calibrated approach. This protection CDMO
bodes well in the current scenario when Chinese supply disturbances are
likely to create opportunities for Indian players both in APIs as well as crop
protection CDMO. The company has spent ~| 500 crore over the last five
years to augment capacity. After years of volatility in growth, Hikal is
witnessing a relatively stable growth trajectory.
The management has guided for 15-20% growth on the back of volume gain The management has guided for 15-20% growth on
in existing products, new launches, new client addition and geographical the back of volume gain in existing products, new
expansion. Continuance of China induced opportunities will also be a major launches, new client addition and geographical
factor. This guidance is also supported by the company’s annual capex expansion
guidance of | 150-200 crore, which is double the historical average. The
pharma segment is expected to grow at a CAGR of ~16% in FY19-21E on
the back of new offerings and repeat business from CDMO players. Crop
protection is expected to grow at 12.5% CAGR in FY19-21E on the back of
expansion of base business along with new launches on the back of new
client’s addition and capacity addition.
We expect sales, EBITDA, PAT to grow at a CAGR of 15%, 18%, 30%
respectively, in FY19-21E on the back of new launches and better operating
leverage. Similarly, we also expect 330 bps RoCE improvement to 17.3%
through FY21. We arrive at a valuation of | 200 based on FY21E EPS of
| 13.3.
Exhibit 19: Peer comparison
M cap EBITDA
Revenues PAT P/S EV/EBITDA P/E RoE RoCE
(| cr) margins (%)
FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY19E
Divi's Lab 42614 4928.8 5511.1 38.2 38.5 1421.4 1607.2 8.6 7.7 21.3 18.9 30.0 26.5 20.2 26.4
Neuland 659 659.2 788.6 8.9 14.0 16.5 51.5 1.0 0.8 26.7 14.3 39.9 12.8 2.7 3.0
Suven 3125 631.3 715.0 28.8 31.6 118.4 148.1 4.9 4.4 15.7 12.7 26.4 21.1 14.5 13.3
Dishman 3046 1889.0 2071.9 27.7 28.9 198.0 256.2 1.6 1.5 7.3 6.4 15.4 11.9 4.0 4.1
PI 13303 2819.2 3333.0 20.7 21.6 415.1 512.3 4.7 4.0 22.3 18.1 32.1 26.0 19.6 24.7
Hikal 2044 1548.1 1783.7 19.0 19.3 97.3 127.4 1.3 1.1 9.0 7.7 21.0 16.0 13.0 14.0
Lonza (CHF m) 22289 6059.4 5949.3 25.7 27.1 917.7 974.1 3.7 3.7 16.7 16.1 24.3 22.9 11.7 NA
Siegfried (CHF m) 1558 843.4 892.7 17.6 18.7 74.1 89.0 1.8 1.7 10.9 9.7 21.0 17.5 8.5 6.0
Source: ICICI Direct Research, Bloomberg, Industry

Exhibit 20: One year forward PE
350.0
300.0
250.0
200.0
150.0
|
100.0
50.0
0.0
Mar-16
Mar-17
Mar-18
Mar-19
Sep-16
Sep-17
Sep-18
Price 33.7x 13.5x 25.1x 19.3x 16.4x
Source: ICICI Direct Research, Bloomberg
Exhibit 21: One year forward PE of company vs. Nifty Pharma Index
45.00
36.00
17% Discount
27.00
(x)
18.00
9.00
0.00
Mar-16
Mar-17
Mar-18
Mar-19
Sep-16
Sep-17
Sep-18
Hikal CNX Pharma
Source: ICICI Direct Research, Bloomberg
Risk & Concerns

1. Estimation risk- peculiar phenomenon for B2B players
Verifying the revenue stream from third party and independent

sources is always a difficult task to estimate revenues of B2B players
compared to B2C players. On account of client confidentiality, most
of these players are reluctant to divulge important details. Similarly,
there can be significant quarterly gyrations (or even yearly) in the
performances due to the contractual nature of the revenue stream.
Hence, the only reliable source is the broader management
guidance.
2. Regulatory risk – 85% of pharma revenues come from developed

markets
In the current scenario, the major risk for the pharmaceutical
industry is regulatory risk, especially for a company that has high
dependency on regulatory market revenues. Total ~85% of Hikal’s
pharma revenues are generated from developed markets (US –55%,
Europe –30%). Although the company has a strong compliance track
record vis-à-vis regulatory authorities from the US, Europe and
Japan, any scaling up of future operations entails high risk.
In the crop protection business, the company operates in a highly

regulated markets where it faces extensive regulations and stringent
registration conditions. Penalties for non-compliance with these
regulations can vary from revocation or suspension of the
registration to imposition of fines or confiscation of such jurisdiction.

3. Product concentration risk – Hikal derives ~40% of pharma

revenues from Gabapentin and less than 15% of crop protection
revenues from Thiabendazole. Although the company expects the
dependency of single product to come down to less than 10% of
total revenues in the next two to three years, any adverse impact on
any of these products in the near term could impact future growth
4. Risk of raw material supply – FY18 gross margins declined 369 bps
to 46.1% mainly due to a sudden shoot up in raw material prices
leading to supply constraint from China. The company procures 30-
35% of raw materials from China. However, indirectly also most of
the raw material supply and prices were impacted by China issues.
Hikal is looking at backward integration and alternative sources to
mitigate this risk. The company also has the ability to pass on a
majority of the increase in raw material prices to the end user albeit
with lags. However, we are not denying such raw material volatility
in future, which may impact Hikal’s profitability.
5. Seasonality risk – The crop protection business is heavily dependent

on the agricultural industry, which, in turn, is subject to soil and
climatic conditions, rainfall, seasonal and other weather factors. This
renders the performance of the agricultural sector, as a whole, or the
levels of production of a particular crop relatively unpredictable.
Further, global warming and other changes to the weather pattern
are being witnessed globally. This may make it difficult for the
company to rely on weather forecasts and growth opportunities. The
weather can affect the presence of diseases and pest infestations in
the short-term on a regional basis. Accordingly, it may negatively
affect the demand. Further, on account of seasonality of the
agricultural industry, the company’s operating results may fluctuate
from quarter to quarter.

Financials
Exhibit 22: Profit & Loss (| crore)
Revenues 1,296.1 1,548.1 1,783.7 2,051.3
Growth (%) 27.8 19.4 15.2 15.0
Raw Material Expenses 699.0 809.8 910.1 1,036.5
Employee Expenses 128.1 152.1 180.8 205.1
Other Manufacturing Expenses 227.3 292.5 347.8 400.0
Total Operating Expenditure 1,054.4 1,254.4 1,438.7 1,641.6
EBITDA 241.7 293.7 345.0 409.7
Growth (%) 24.4 21.5 17.5 18.7
Interest 49.1 59.2 57.3 57.3
Depreciation 85.6 93.2 103.1 114.1
Other Income 4.5 2.8 4.1 5.3
PBT before Exceptional Items 111.5 144.1 188.7 243.5
Less: Forex & Exceptional Items 0.0 0.0 0.0 0.0
PBT 111.5 144.1 188.7 243.5
Total Tax 34.3 46.8 61.3 79.1
PAT before MI 77.2 97.3 127.4 164.4
Minority Interest 0.0 0.0 0.0 0.0
PAT 77.2 97.3 127.4 164.4
Adjusted PAT 77.2 97.3 127.4 164.4
Growth (%) 14.0 26.1 30.9 29.0
EPS 6.3 7.9 10.3 13.3
EPS (Adjusted) 6.3 7.9 10.3 13.3
Exhibit 23: Balance Sheet (| Crore)

Equity Capital 16.4 16.4 16.4 16.4
Reserve and Surplus 653.0 731.0 833.1 964.9
Total Shareholders fund 669.4 747.4 849.6 981.3
Total Debt 635.1 685.1 735.1 735.1
Others Liabilities 15.7 17.2 18.9 20.8
Source of Funds 1,320.1 1,449.7 1,603.6 1,737.2
Gross Block - Fixed Assets 788.3 948.3 1,108.3 1,268.3
Accumulated Depreciation 154.7 247.9 351.0 465.1
Net Block 633.6 700.4 757.4 803.2
Capital WIP 117.9 117.9 117.9 117.9
Net Fixed Assets 751.5 818.3 875.2 921.1
Investments 2.6 2.9 2.9 2.9
Inventory 303.1 362.0 417.1 479.6
Cash 27.2 16.3 30.6 25.0
Debtors 287.4 343.2 395.5 454.8
Loans & Advances & Other CA 0.0 0.0 0.0 0.0
Total Current Assets 690.0 801.0 930.7 1,055.7
Creditors 177.6 212.1 244.4 281.0
Provisions & Other CL 44.0 48.4 53.3 58.5
Total Current Liabilities 221.6 260.5 297.6 339.5
Net Current Assets 468.4 540.5 633.1 716.2
LT L& A, Other Assets 97.2 87.5 91.9 96.5
Deferred Tax Assets (Net) 0.5 0.5 0.6 0.6
Application of Funds 1,320.1 1,449.7 1,603.6 1,737.2

Exhibit 24: Cash Flow (| crore)

Profit/(Loss) after taxation 85.6 97.3 127.4 164.4
Add: Depreciation & Amortization 85.6 93.2 103.1 114.1
Add: Interest Cost 46.1 59.2 57.3 57.3
Net Increase in Current Assets -140.6 -122.0 -115.3 -130.6
Net Increase in Current Liabilities 53.5 38.9 37.1 41.9
Others 8.68 0 0 0
CF from operating activities 138.8 166.5 209.6 247.1
(Inc)/dec in Fixed Assets -106.0 -160.0 -160.0 -160.0
(Inc)/dec in Investments 0.0 -0.3 0.0 0.0
Others 17.2 11.2 -2.7 -2.8
CF from investing activities -88.7 -149.0 -162.7 -162.8
Inc / (Dec) in Equity Capital 0.0 0.0 0.0 0.0
Inc / (Dec) in sec. Loan 37.7 50.0 50.0 0.0
Dividend & Dividend Tax -12.9 -19.3 -25.2 -32.6
Others -49.7 -59.2 -57.3 -57.3
CF from financing activities -24.8 -28.4 -32.6 -90.0
Net Cash flow 25.3 -10.9 14.4 -5.6
Opening Cash 1.9 27.2 16.3 30.6
Closing Cash 27.2 16.3 30.6 25.0
Free Cash Flow 32.8 6.5 49.6 87.1
Exhibit 25: Ratio Analysis

Per share data (|)
EPS 6.3 7.9 10.3 13.3
Cash EPS 5.0 6.3 8.3 10.7
BV 54.3 60.6 68.9 79.6
DPS 1.3 1.6 2.0 2.6
Cash Per Share 12.5 20.1 28.5 37.7
Operating Ratios (%)
Gross Margins 46.1 47.7 49.0 49.5
EBITDA margins 18.6 19.0 19.3 20.0
Net Profit margins 6.0 6.3 7.1 8.0
Inventory days 85.3 85.3 85.3 85.3
Debtor days 80.9 80.9 80.9 80.9
Creditor days 50.0 50.0 50.0 50.0
Assets turnover 1.6 1.6 1.6 1.6
Return Ratios (%)
RoE 11.5 13.0 15.0 16.8
RoCE 12.2 14.0 15.3 17.3
RoIC 13.3 15.2 16.6 18.5
Valuation Ratios (x)
P/E 26.5 21.0 16.0 12.4
EV / EBITDA 11.0 9.2 8.0 6.7
EV / Revenues 2.0 1.8 1.5 1.3
Market Cap / Revenues 1.6 1.3 1.1 1.0
Price to Book Value 3.1 2.7 2.4 2.1
Solvency Ratios
Debt / Equity 0.9 0.9 0.9 0.7
Debt/EBITDA 2.6 2.3 2.1 1.8
Current Ratio 3.0 3.0 3.0 3.0

RATING RATIONALE
ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorises them as Strong Buy,
Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined
as the analysts' valuation for a stock
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com
ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

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subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned
Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.
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Hikal Ltd.

Unique blend of pharma and crop protection…

ICICI Securities – Retail Equity Research

Key Financial Summary

Hikal (| 1548 crore)

Pharma (API) (| 938 Crop Protection (| 610

Proprietary, Agro Chem

Pharma business (60% of revenues) -- The pharma business is currently

ICICI Securities | Retail Research 2

fungicides and herbicides for customers with a major chunk from

Source: ICICI Direct Research, Company

ICICI Securities | Retail Research 3

Exhibit 3: Regulatory milestones

Exhibit 4: Shareholding pattern

Source: ICICI Direct Research, Capita line

ICICI Securities | Retail Research 4

CAGR 18.1% 937.6 During FY16-19E, growth was driven by 1) timely

Source: ICICI Direct Research, Company

Generic (APIs) – Hikal manufactures APIs and intermediates for global

ICICI Securities | Retail Research 5

expects Gabapentin revenues to continue to grow at a stable pace. However,

Source: ICICI Direct Research, USFDA

Unforeseen Chinese API problems opportunity for Indian API companies

ICICI Securities | Retail Research 6

China, RoW, India ,

Source: ICICI Direct Research, Industry

ICICI Securities | Retail Research 7

European innovator client: Hikal has an exclusive long-term contract

1400 15.5% CAGR 1250.2

Source: ICICI Direct Research, Company

ICICI Securities | Retail Research 8

Crop protection growth to piggyback on client relationship and capabilities-

Exhibit 9: Strong growth through FY16-19E

300 protection ingredients, 4) additional product

Hikal partners with crop protection companies for CDMO of intermediates

Key herbicides products

On–patent herbicide intermediate for global innovator – In FY18, the

ICICI Securities | Retail Research 9

Two on-patent herbicide products for Japanese innovator –These products

Key fungicide products

On-patent fungicide product for global innovator— This product is used to

Versatile fungicide for leading Japanese innovator -- This fungicide has

Niche fungicide for Japanese innovator -- This special product is a selective

Exclusive fungicide product for European innovator – This product is used

Key insecticide products

Low volume margin accretive insecticide product for Japanese innovator --

ICICI Securities | Retail Research 10

New insecticide for European customer – This product is used to control a

Biocides, specialty chemicals businesses - To diversify into new and allied

New product development

The company is also working on developing a commercially viable process

On the specialty chemicals front, it is working on the development of two

Stagnant global crop protection market scenario conducive for CDMO

ICICI Securities | Retail Research 11

Exhibit 10: Global crop protection market value (US$ million)

Source: ICICI Direct Research, ICRA

Some challenges faced by global crop protection industry

ICICI Securities | Retail Research 12

for these companies to merge their business operations was to boost

ICICI Securities | Retail Research 13

ICICI Securities | Retail Research 14

2500 CAGR 15.1%

ICICI Securities | Retail Research 15

EBITDA margins expected to improve 100 bps to 20.0% by FY21E

180.8 19.0 19.0

Source: ICICI Direct Research, Company

Improvement in operational margins to drive net profit