Stock Note 30 June 2016
RETAIL RESEARCH
Industry
Pharmaceuticals
HDFCSec Scrip Code HIKLTDEQNR
BSE Code
NSE Code
Bloomberg
CMP (as on 30 June, 16)
Equity Capital (Rs crs)
Face Value (Rs)
Equity Sh Outstanding crs
Market Cap (Rs crs)
Book Value (Rs)
Avg. 52 Week Volumes
52 Week High
52 Week Low
Shareholding Pattern % (March 2016)
Indian Promoters
Institutions
International Fin Corp
Non Institutions
Total
Fundamental Research Analyst:
Zececa Mehta
zececa.mehta@hdfcsec.com
RETAIL RESEARCH
Hikal Ltd
CMP Recommendation Add on Dips to band Sequential Targets Time Horizon
Rs. 164 Buy at CMP and add on declines Rs. 137-142 Rs. 189-206 2-3 quarters
Hikal is a reliable long-term partner to companies in the Pharmaceuticals, Crop Protection, and Specialty Chemicals industry.
The company is in the business of supplying research services, active ingredients and intermediates, manufactured using
524735
stringent global quality standards, for its global customers. The Crop protection facilities are located at Taloja and Mahad
HIKAL (Maharashtra). Hikal’s R&D facilities are located at Pune. The Pharmaceutical manufacturing facilities are situated in Jigani
HKCI IN (Bangalore) and Panoli (Gujarat).
Rs. 164 Investment Rationale
16.44  Pharmaceutical division – projects in various stages of clinical trials, world’s largest supplier of Gabapentin, serves US &
2.00
Europe clients and is looking for entry in Japan, augurs a strong future for the company
 Crop Protection – focus is to diversify the product offerings, partner with new clients, introduce several new products
8.22 which are under development in R&D that will grow the revenue and increase profitability in the near future.
1348.1  R&D - ensures scale up from Lab to Commercialization in both Pharma (couple of products in development stage to be off
patent soon) and Crop Protection (10-15% success rate of molecules of herbicides, fungicides and insecticides going into
68.7
commercial production) and venturing into animal health
108304
Rs. 178.0 Risks and Concerns
 Regulatory Risk
Rs. 98.0
 Customer & Product Focus
 Production & Quality Risk
 Crop protection division dependent on agriculture prospects
68.77
Outlook and view
12.78 Hikal realizes the potential of chemistry to improve the quality of life. The scientists and engineers of the company explore
8.27 the composition, structure, properties and reaction of molecules to provide customized solutions meeting the expectations
of innovator, specialty and generic companies. Hikal delivers intermediates for candidate drugs and active pharmaceutical
10.18 intermediates for formulations. It also supplies building blocks for discovery research in a contractual model.
100.00
We think that investors could buy the stock at the CMP and add on declines to Rs. 137-142 band (~16-16.5x FY18E EPS) for
sequential targets of Rs. 189 and Rs. 206 (22x and 24x FY18E EPS) over 2-3 quarters.
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Financial Summary
Particulars (Rs in Cr) FY12 FY13 FY14 FY15 FY16 FY17E FY18E
Total Operating Income 694.2 660.4 829.2 871.9 925.7 1040.0 1100.0
Operating Profit 167.2 176.8 192.0 182.5 180.9 207.0 224.4
OPM (%) 24.1 26.8 23.2 20.9 19.5 19.9 20.4
Reported Profit After Tax 54.1 25.5 64.1 40.5 41.3 56.1 70.5
PATM (%) 7.8 3.9 7.7 4.6 4.5 5.4 6.4
EPS (Rs.) 32.9 15.5 39.0 4.9 5.0 6.8 8.6
PE (x) 5.0 10.6 4.2 33.3 32.6 24.0 19.1
EV/EBITDA 4.0 4.0 3.2 9.6 9.8 8.8 8.2
RoNW (%) 11.8 5.7 12.7 7.6 7.3 9.2 10.6
(Source: Company, HDFC Sec)

Company Profile
Hikal is a reliable long-term partner to companies in the Pharmaceuticals, Crop Protection, and Specialty Chemicals industry.
The company is in the business of supplying research services, active ingredients and intermediates, manufactured using
stringent global quality standards, for its global customers. Hikal’s advanced manufacturing facilities have been inspected and
approved by leading multinational companies in the Crop protection and Pharmaceutical sectors. The Crop protection
facilities are located at Taloja and Mahad (Maharashtra). Hikal’s R&D facilities are located at Pune. The Pharmaceutical
manufacturing facilities are situated in Jigani (Bangalore) and Panoli (Gujarat).

Hikal is amongst the few Global Company to offer customized, cost effective and sustainable solutions from R&D to
Commercial Manufacturing and it is also one of very few global and only Indian Company to provide APIs for both
Pharmaceuticals and Agrochemicals – Hybrid Model

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Businesses Overview
Pharmaceuticals
Hikal is a partner of choice to the global pharmaceutical industry. The company supports the pharmaceutical industry from
the early lead generation stage till the launch of new chemical entities. Hikal's specialization spans the entire spectrum from
conventional synthesis to complex chiral chemistry and is backed by state-of-the-art analytical facilities.

Intermediates are manufactured at Panoli, Gujarat and Active Ingredients are manufactured in Bangalore meeting regulated
markets (US, Europe and Japan) standards.

Hikal undertakes custom manufacturing projects in intermediates and APIs for multinational companies. Hikal has expertise
in custom synthesis and contract research, with capabilities scaling up from gram to kilo and ton level of production. It offers
suite of services encompassing the whole process, beginning with a Confidentiality Agreement, followed by a detailed offer,
laboratory, pilot plant work and concluding with commercial manufacture of the intermediate and/or API.

Major pharmaceutical companies have audited the company’s facilities and rated them on par with the best in the world. The
state-of-the-art, multipurpose production plants are ISO 9001-2000 compliant and follow cGMP standards. The plant at
Bangalore is approved by USFDA, TGA and WHO GMP.

Agrochemicals
Hikal specializes in Custom Synthesis and Contract Manufacturing of Agrochemicals, Intermediates and Specialty Chemicals.
Today, it is the preferred choice of leading Crop Protection companies in the world. Multinational companies leverages the
company’s expertise in developing non-infringing processes for molecules and analytical development.

The company has made significant investment in Intellectual Capital, Research & Development and state-of-the-art
manufacturing plants. Hikal’s strengths in process development, analytical development, pilot plant, basic engineering
capabilities and process automation have resulted in long-term partnerships with major Crop Protection companies.

The facilities are ISO 9001-2008, ISO 17025, ISO 14001 and OHSAS 18001-2007 certified.

Hikal offers a range of high quality active ingredients for the Agrochemical industry. The Herbicide, Insecticide and Fungicides
meet stringent global, specifications and quality standards. Hikal's list of intermediates and specialty chemicals includes
several fine chemicals used to manufacture agrochemicals.

R&D
R&D is a core competency of Hikal. They assign top most priority to investments in world-class scientists and laboratory
instrumentation. Their R&D team is mentored by a Scientific Advisory Board of eminent scientists. They have an impressive

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R&D record. Their scientists have published several publications and received patents. They have developed several
innovative and cost effective processes for several well-known APIs.

Products:
Pharmaceuticals Products: Gabapentin, Bupropion Hydrochloride, Gemfibrozil, Pentoxifylline, Ondansetron Hydrochloride,
Ondansetron Base, Triprolidine Hydrochloride, Acebutolol Hydrochloride, Cinnarizine, Flunarizine Hydrochloride and
Levetiracetam.

Agrochemicals Products: Diuron, Ethion, Isoproturon, Metoxuron, Quinalphos and Thiabendazole

Manufacturing Facilities
Location Products Accreditations Current functions Future expansions
Pharmaceuticals Facility Overview
Jigani, APIs & Bulk USFDA, KFDA, TGA, Offers scale up capabilities and Debottlenecking at two API blocks,
Bangalore Drug PMDA (Japan) & ISO can provide validation and launch Further there is a scope of
Intermediates 9001, ISO 14001, quantities under cGMP conditions debottlenecking in future. Also
OHSAS 18001 and is audited frequently by there are plans of installing a large
Innovator companies from US, bio-mass boiler & setting up a co-
European and Japan generation plant
Panoli, Bulk Drug US FDA certified, Manufactures cGMP Expanded capacity for key starting
Gujarat Intermediates PMDA (Japan), ISO Intermediates & Regulatory raw materials. Evaluating further
9001, ISO 14001, starting Materials. expansion plans which would de-
OHSAS 18001 risk the Bangalore site for the
manufacture of final APIs
Crop Protection Facility Overview
Taloja, Crop Protection ISO 9001, ISO Manufactures Fungicides,
Maharashtra AIs & 14001, OHSAS Insecticides and Intermediates.
Intermediates 18001 & ISO 17025 The site manufactures on patent
(GLP) active ingredients for innovator
companies
Mahad, Crop Protection ISO 9001, ISO Manufactures Intermediates and
Maharashtra AIs & 14001, OHSAS is audited frequently by several
Intermediates 18001 Fine Chemical and Multinational
Companies
R&D
Pune, Provides process research of APIs
Maharashtra and intermediates involving multi-
step synthesis, troubleshooting
support and process development

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Manufacturing Capabilities
Year Details
1991 First Manufacturing site at Mahad begins operations - Signed a long term supply agreement with Hoescht India
1997 Manufacturing of the Active Ingredient for Merck begins at Taloja site
2000 Acquires manufacturing site from Novartis in Panoli, Gujarat
2001 In Bangalore, acquired R&D and manufacturing site; enters the Pharmaceutical Business
2003 First new API plant commissioned at Bangalore. Multi-purpose pharma intermediate plant commissioned at Panoli.
2009 R&D Center in Pune becomes operational

Investment Rationale
Pharmaceutical division – projects in various stages of clinical trials, world’s largest supplier of Gabapentin, serves US &
Europe clients and is looking for entry in Japan, augurs a strong future for the company

The pharmaceutical business focuses on contract manufacturing opportunities and developing generics. Hikal continues to
add new products on a commercial scale while improving the cost advantage of the existing portfolio. The company explores
opportunities in early stage development projects for new molecules and works towards their commercial manufacturing at
the facilities. Hikal is more closely aligned with client requirements to achieve growth and profitability.

Hikal provides expertise in custom synthesis and contract research with capabilities scaling up from gram to kilo and ton level
of production. The company’s business model is to provide services and support across the value chain which helps the
company to develop strong customer relationships with global generics and innovator companies.

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Hikal has an impeccable quality and regulatory track record which helps it to attract and retain clients. The company’s past
performance will help it to increase profit margins since cost alone will not be the sole reason to outsource for life science
companies. Hikal actively pursues opportunities for clinical molecules in Phase II and III as well as lifecycle extension projects
for innovator companies. It enables the company to provide a compelling value proposition as products reach patent
expiration. Several mid-size and biotech clients for early stage molecules have been added for custom development projects.
Projects are in various stages of clinical trials where some clinical development quantities have been supplied by Hikal.

The company is world’s largest supplier of Gabapentin, an API for Neuropathic use enjoying 45% of world market share.
Gabapentin is used with other medications to prevent and control seizures. It is also used to relieve nerve pain following
shingles (a painful rash due to herpes zoster infection) in adults. Gabapentin is known as an anticonvulsant or antiepileptic
drug. It may also be used to treat other nerve pain conditions (such as diabetic neuropathy, peripheral neuropathy,
trigeminal neuralgia) and restless legs.

Hikal has a long-term contract manufacturing agreements with a European innovator client to commercially manufacture
molecules which is gaining momentum. The molecules are performing well in the market and volumes have increased
substantially. These products are expected to grow in the future according to the positive indications received from the
client. Hikal is also scouting for various other projects which can be started for commercial manufacturing.

Hikal also offers a specialised product to US based food ingredient client. Several other new clients are interested in this
product. A dedicated manufacturing line has been commissioned for this product and volumes are expected to grow in the
near future.

Hikal also serves the Japanese market where its track record of meeting quality requirements is established. Several contract
manufacturing opportunities are in discussion for advanced intermediates. Also there are several products derived through
R&D which have also progressed to the semi commercial stage. Hikal expects commercial manufacturing business to expand
over the next few years in Japan.

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For future, the company’s strategy is to start with specific products and expand horizontally and maintain relationships with
existing clients.

Hikal has devised a strategy to become a formidable generic API supplier. It identifies products early in the pipeline for
clients, use technology and innovative chemistry for a cost advantage in molecules that go off patent in the next 3-5 years
and explore products for the long term. This approach has given Hikal a superior cost position which helps to differentiate the
company from other API suppliers. Hikal has invested significantly in the generic API business both in terms of personnel and
manufacturing capabilities. The company has strengthened its R&D infrastructure by hiring experienced scientists and
specialists. In FY15, debottlenecking of capacity in two of the API blocks at Jigani, Bangalore was completed. The capacity can
be further debottlenecked as per client’s requirements.

The company wants to gain market share in key APIs by increasing the volumes of the existing contract manufacturing clients
for their molecules. Hikal plans to file 4-5 DMFs per year and the selection of these products are on the basis of client’s
interest and niche molecules where the company has a distinct technology advantage to gain considerable market share
backed by expertise in advanced chemistry and backward integration. Hikal as part of its diversification strategy is pursuing
allied niche opportunities in steroids and oncology. The company has invested in setting up labs and is in the process of
evaluating commercial manufacturing opportunities in steroids. This diversification strategy along with the healthy product
pipeline will continue the growth and profitability path for the pharmaceutical division.

Several cost rationalization initiatives were undertaken at the pharmaceutical manufacturing plants. The company
commissioned a large bio-mass boiler and co-generation plant at the Bangalore facility. Hikal is increasingly using renewable
energy to substantially reduce overheads and mitigate the risk of interrupted power supplies.

The company is evaluating the expansion of Panoli facility for API manufacturing. It will help de-risk the Bangalore plant for
manufacturing final APIs. The strategy of a two-site production base will enable Hikal to cater to increased volumes and offer
a wider range of products.

The company also has successfully completed all the regulatory approvals needed each time their site is inspected.
Year Details
2004 US FDA approval of Bangalore Pharmaceutical manufacturing site
2008 Second successful US FDA Audit of Bangalore facility
2011 Bangalore clears its 3rd successful US FDA audit
2012 Panoli certified by the US FDA. Panoli & Bangalore sites receive PMDA approval
2013 Panoli & Bangalore Pharma Sites are EU Audited
2014 Successfully completed EDQM (European Directorate for Quality of Medicines) Audit at Bangalore site. 4th Successful US
FDA audit for Bangalore facility

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Crop Protection – focus is to diversify the product offerings, partner with new clients, introduce several new products
which are under development in R&D that will grow the revenue and increase profitability in the near future.
The crop protection division is focused on contract development and manufacturing for global multinational companies. The
company adopts two pronged strategy for this division; first is to target the existing clients for additional molecules in their
portfolio, and second is to focus on commercializing new molecules to provide them to several clients in existing and new
markets. Hikal’s clients have traditionally been large innovators in western countries. The company plans to de-risk its client
and product profile by introducing new molecules in markets where it has limited reach such as emerging markets. The
company started to develop and sell proprietary products such as Quinalphos, Diuron and 3,5DCA. Also the company
streamlined some of their large manufacturing facilities by debottlenecking plants and improving existing processes through
the support of the R&D. Hikal has exclusive supplier-relationship with Syngenta (for Thiabendazole), Bayer (for Fenamidone,)
and BASF (for Initium). These fungicide molecules contribute largely towards crop protection revenues for the company.

The company has manufactured a fungicide exclusively for an innovator client. It is used to protect grapes, potatoes, tobacco
and vegetables. The wide use of this product would help the molecule to grow over several years. The company has also
developed an on-patent new generation herbicide which is used on vegetables, potatoes and specialty crops. The product is
very well accepted and hence receiving additional market approvals which are in turn increasing volumes. The Japanese MNC
customer, for which the plant got commissioned in August 2015 and trial production was going on, has commenced its
commercial operations and the customer will contribute additional turnover of about Rs 50 crore. As per the management,
there is surplus capacity with the company in crop protection business, which they will use it for the Rest of the Market other
than US and EU. The Rest of the market slowly is picking up and will start contributing in a meaningful way in 3 to 4 years
from now.

Several projects have reached the development phase and pilot plant level. The clients include Japanese, European and mid-
size specialty chemical companies. The products range from advanced intermediates to final actives including herbicides,
fungicides and insecticides and small niche products. We expect the pipeline of projects to yield additional revenues and
profitability in the years to come.

Hikal is developing a niche animal health business. The flexibility of the facilities and chemistry competencies (through R&D)
are suitable for value-added services in this fast growing market.

The global crop protection chemicals market is segmented into regions and further subdivided into key countries. In terms of
regions, the market is segmented into North America, Europe, Asia-Pacific, Latin America, and the rest of the world. Asia-
Pacific and North America are the top two markets for crop protection chemicals, accounting for nearly 50% of the total
market share. Asia-Pacific is the fastest-growing region in terms of revenue.

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R&D - ensures scale up from Lab to Commercialization in both Pharma (couple of products in development stage to be off
patent soon) and Crop Protection (10-15% success rate of molecules of herbicides, fungicides and insecticides going into
commercial production)
Hikal has realigned its strategy to strike a balance between the contract development, manufacturing business, and internal
product development for both divisions. The crop protection research focuses on herbicides, fungicides and insecticides. The
pharmaceutical research focuses on the central nervous system-related diseases and diabetes, while Hikal pursues new
opportunities in other therapeutic areas such as steroids.

The company has several early stage projects in the crop protection business. A majority of these projects are from innovator
clients in Japan and Europe. These molecules are on patent and in these situations one does not know the target indication
or the candidate molecule. In the past, several projects have passed the development phase and reached semi-commercial
trials. Hikal expects a 10%-15% success rate of molecules going into commercial production. During FY15, Hikal
commercialized an insecticide for an innovator company. While volumes are small, this niche product is also used in the
veterinary market. The company completed process development for an on-patent herbicide for another innovator client.
In Animal Health, Hikal completed development of a topical parasitic used for dogs and cats & a veterinary medication to kill
external parasites for pets for a Mid-sized European Company. It also completed the process development & first pilot plant
campaign for a regulatory starting material used in oral flea and tick treatment for dogs. In Steroid development, two
products were used on livestock to increase muscle growth and appetite and a synthetic opioid analgesic which was used in
cats and dogs, are in late stage development for which client is already secured.

On the pharmaceutical front, Hikal validated an API product using enzymatic technology developed by the R&D team with
commercial manufacturing starting soon. Some of the products under various stages of development are Sitagliptin,
Dabigatran, Lacosamide, Olmesartan and Darunavir. These blockbuster products are coming off patent shortly. The company
has approached potential clients for these products and has received a positive response from several of them.

In contract development, the process development and two pilot plant trials for a regulatory starting material used in the
treatment of ventricular systolic heart failure has been completed. The process development has been completed for an
intermediate in Phase III trials for a Japanese innovator company used for treatment of chronic constipation.

Facilities ensures seamless scale up from Lab to Commercialization

Activities R&D Pune Mahad Bangalore Panoli Taloja
Manufacturing
Drug Discovery Support
Analytical method Development Y Y
Process Research Y
Process Development Y Y Y
Process Improvement Y Y Y Y
Kilogram Laboratories Y Y Y

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Pilot Plants Y Y
cGMP compliance Y Y

Risks and Concerns

Regulatory Risk
In today's regulatory environment, non-compliance risk is a major concern for the company. Issues raised by the USFDA and
other global regulatory authorities can have a detrimental impact on revenue and profitability. Any change in the law or
regulation made by the government or regulatory authorities can substantially increase the cost of operations and reduce
profitability.

Customer and Product Focus

The crop protection and pharmaceuticals businesses are based on long-term contracts with clients. A muted forecast (due to
macro conditions) by clients will certainly affect revenues. Based on the company’s experience of such risks, they have
expanded their client base and diversified the product portfolio across regions to mitigate this risk.

Production and Quality Risk

Hikal upholds global quality and regulatory standards in manufacturing and development. The company maintains consistent
product quality across manufacturing processes and complies with Good Manufacturing Practices (GMP).

Crop protection division dependent on agriculture prospects

Crop Protection segment’s revenue is directly dependent on the prospects of agriculture, crop commodity and farm income.
The crop protection chemicals market is driven by limited availability of arable land, high profit margins, modern farming
practices, techniques and technology. However looking at the global scenario, Asia Pacific is the fastest growing market in
terms of revenue.

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Intellectual Property
Hikal believes that protecting the intellectual property rights of their clients is integral to business. Adequate measures are
taken using technology and training to ensure that employees respect intellectual property.

Supply Chain Continuity

A majority of the key raw materials used in manufacturing operations are available from more than one source. If one of
these suppliers is unable to provide the materials or product, Hikal has sufficient inventory until an alternative source is
identified. However, in the event of an extended supply failure, they may experience an interruption until a new source is
identified or an alternate process is implemented. The company continuously monitors the supply chain to ensure that there
is minimum downtime for the production facilities so that the requirements of the clients are met.

Forex Risks
Hikal earns nearly 75-85% of its revenue through exports. This possesses a risk of foreign currency fluctuation which needs to
be mitigated. The company has diversified its customer’s base which includes more local customers who in turn re-export the
manufactured products. The company also has certain working capital loan in foreign currency (FY15-Rs. 188.4 crore, FY14-
Rs. 116.4 crore).

Financials
Q4FY16 and FY16 Result Review
Net sales for Q4FY16 of Hikal stood at Rs. 289.8 crore, up by about 36% YoY. Pharmaceutical segment sales was up by 22% to
Rs. 169 crore and that of Crop protection segment was up by 62% to Rs. 120.79 crore.

EBIT of Pharmaceutical segment stood at Rs. 23.76 crore, up by 18% YoY and that of Crop Protection products business stood
at Rs. 24.55 crore, up by 119% YoY. Overall, OPM stood at 20.6% resulting in an OP of Rs 59.57 crore, up by 32% YoY basis.

Other income stood at Rs. 0.33 crore up by 65%. Interest costs, other than forex fluctuations were down by 5% YoY to Rs
12.02 crore due to improved credit rating of the company. However, there is an unrealized notional foreign exchange loss on
working capital to the tune of Rs 1.25 crore during the quarter, as compared to foreign exchange gain of Rs 3.61 crore for
Q4FY15. Thus interest costs including forex fluctuations was up by 46% YoY to Rs. 13.27 crore, thus PBDT was higher by 29%
to Rs 46.63 crore. Depreciation was lower by 6% to Rs 17.37 crore. After paying total tax of Rs 7.02 crore including deferred
tax, down by 7% YoY, PAT for Q4FY16 stood at Rs. 22.24 crore, up by 118% YoY.

Net sales for FY16 of Hikal stood at Rs. 925.65 crore, up by about 6%. Pharmaceutical segment sales was up by 6% at Rs
569.14 crore and that of Crop protection segment was up by 7% to Rs. 356.51 crore.

PBIT of Pharmaceutical segment for FY16 stood at Rs 80.51 crore, down by 15% YoY and that of Crop Protection products
business stood at Rs 54.72 crore, up by 9% YoY. Overall, OPM stood at 19.5% resulting in an OP of Rs 180.93 crore, down by
1% YoY basis.

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Other income stood at Rs 1.81 crore up by 17%. Interest costs, other than forex fluctuations were down by 14% YoY to Rs
47.6 crore due to improved credit rating of the company. However, there is an unrealized notional foreign exchange loss on
working capital to the tune of Rs 14.62 crore during FY16. Thus interest costs including forex fluctuations were higher by 4%
YoY to Rs 62.18 crore, thus PBDT was lower by 3% to Rs 120.59 crore. Depreciation was up by 5% to Rs 67.28 crore. After
paying total tax of Rs 12 crore including deferred tax, down by 38% YoY, PAT for FY16 stood at Rs 41.31 crore, up by 2% YoY.

As per the management, in FY16 they focused on increasing the business for both the divisions and strengthening the
balance sheet. Hikal has expanded its team by adding more professionals with expertise in both the business divisions. The
company has also added more new products in both the divisions. The results of the same will be visible in the years to come.
As a result of strong relationship with suppliers and customers, the company is able to maintain its payable and receivable
days at 63 and 44 days respectively in FY16.

A turnaround was seen in Q4FY16 results of the company with record overall sales in a quarter. This can be due to any
projects which have now started earning revenues for the company, higher utilisation of capacities with fixed cost intact
leading to better margin profile. New product launches and addition of personnel in both the divisions of the company can
result in robust revenue prick up from here on.

Conclusion & Recommendation

Hikal realizes the potential of chemistry to improve the quality of life. The scientists and engineers of the company explore
the composition, structure, properties and reaction of molecules to provide customized solutions meeting the expectations
of innovator, specialty and generic companies. Hikal delivers intermediates for candidate drugs and active pharmaceutical
intermediates for formulations. It also supply building blocks for discovery research in a contractual model.

Hikal will focus on both the generic API and custom manufacturing businesses. Hikal is positioning itself as a leading provider
of contract development and commercial manufacturing services as well as a reliable supplier of generic APIs.

Hikal’s focus in the crop protection business is to diversify their product offerings, partner with new clients, introduce several
new products which are under development in R&D that will grow the revenue and increase profitability in the near future.

Strong and integrated R&D process at Pune Centre is resulting in scaling up of capabilities and process development for APIs
for Pharmaceuticals and Animal Health Industry and AIs for the Crop Protection Industry.

Hikal after showing peak performance in FY14 (especially Q1FY14 - though aided by other income), faced adverse times due
to a combination of factors including sluggish demand in crop protection, uncertain raw material prices, forex fluctuations
etc. The bad times seem to have peaked in Q1FY16 and it has shown steady improvement in performance thereafter. Q4FY16
sales of Rs. 290 crore (aided by a sharp turnaround in crop protections sales and margins) were the highest quarterly sales in

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the history of the company, while its PAT was the highest since Q1FY14. We think that Hikal could see better times gradually
going forward.

We think that investors could buy the stock at the CMP and add on declines to Rs. 137-142 band (~16-16.5x FY18E EPS) for
sequential targets of Rs. 189 and Rs. 206 (22x and 24x FY18E EPS) over 2-3 quarters.

Particulars (Rs in Cr) FY12 FY13 FY14 FY15 FY16 FY17E FY18E
Total Operating Income 694.2 660.4 829.2 871.9 925.7 1040.0 1100.0
Operating Profit 167.2 176.8 192.0 182.5 180.9 207.0 224.4
OPM (%) 24.1 26.8 23.2 20.9 19.5 19.9 20.4
Reported Profit After Tax 54.1 25.5 64.1 40.5 41.3 56.1 70.5
PATM (%) 7.8 3.9 7.7 4.6 4.5 5.4 6.4
EPS (Rs.) 32.9 15.5 39.0 4.9 5.0 6.8 8.6
PE (x) 4.8 10.2 4.1 32.3 31.6 23.3 18.5
EV/EBITDA 4.0 4.0 3.1 9.4 9.6 8.6 8.0
RoNW (%) 11.8 5.7 12.7 7.6 7.3 9.2 10.6
(Source: Company, HDFC sec)
Financials
Quarterly – Standalone
Particulars (Rs cr) Q4FY16 Q4FY15 % chg Q3FY16 % chg FY16 FY15 % chg
Total Income 289.8 213.5 35.7% 240.4 20.5% 925.7 871.9 6.2%
Raw Material Cost 177.4 123.1 44.1% 143.6 23.6% 550.4 519.0 6.0%
Employee Expenses 29.2 22.1 32.1% 27.4 6.7% 108.1 89.2 21.1%
Other Expenses 23.6 23.2 1.4% 23.5 0.3% 86.2 81.1 6.3%
Total Expenditure 230.2 168.5 36.6% 194.5 18.4% 744.7 689.3 8.0%
Operating Profit 59.6 45.0 32.3% 45.9 29.7% 180.9 182.5 -0.9%
Other Income 0.3 0.2 65.0% 0.8 1.8 1.6
PBIDT 59.9 45.2 32.4% 46.7 28.2% 182.8 184.1 -0.7%
Interest 12.0 12.7 -5.1% 12.4 -3.1% 47.6 55.4 -14.2%
Exchange (gain)/loss 1.3 -3.6 1.6 14.6 4.6
PBDT 46.6 36.2 28.9% 32.7 42.5% 120.6 124.1 -2.8%
Depreciation 17.4 18.4 -5.8% 17.0 2.1% 67.3 64.2 4.8%
PBT 29.3 17.8 64.8% 15.7 86.4% 53.3 59.9 -11.0%
Tax (including DT & FBT) 7.0 7.6 -7.1% 3.3 113.4% 12.0 19.4 -38.0%
Reported Profit After Tax 22.2 10.2 118.3% 12.4 79.2% 41.3 40.5 1.9%
EPS (Rs.) 2.7 1.2 1.5 5.0 4.9
Equity 16.4 16.4 16.4 16.4 16.4
bps bps bps

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OPM (%) 20.56 21.09 -54 19.11 145 19.55 20.93 -139
PATM (%) 7.67 4.77 290 5.16 251 4.46 4.65 -18
(Source: Company, HDFC sec)

Segment Revenue Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16
Pharmaceuticals 121.26 140.37 136.85 139.02 128.2 133.65 138.29 169
Crop protection products 69.13 102.51 88.2 74.51 63.28 70.33 102.11 120.79
Total Revenue 190.39 242.88 225.05 213.53 191.48 203.98 240.4 289.79
Segment Results
Pharmaceuticals 18.75 31.69 24.1 20.16 16.44 20.41 19.89 23.76
Crop protection products 9.36 15.44 14.04 11.19 7.8 7.34 15.06 24.55
EBIT 28.11 47.13 38.14 31.35 24.24 27.75 34.95 48.31
Less: Finance cost 14.18 17.96 18.84 9.06 17.74 17.18 14 13.27
Less: Unallocable expd 6.03 8.57 6.35 4.79 3.97 5.15 5.45 6.17
Add: Interest Income 0.18 0.33 0.15 0.25 0.15 0.24 0.2 0.39
EBT 8.08 20.93 13.1 17.75 2.68 5.66 15.7 29.26
(Source: Company, HDFC sec)
Profit & Loss – Standalone
Particulars FY12 FY13 FY14 FY15 FY16 FY17E FY18E
Net Sales 694.2 660.4 829.2 871.9 925.7 1040.0 1100.0
Other Operating Income 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total Income 694.2 660.4 829.2 871.9 925.7 1040.0 1100.0
Total Expenditure 527.1 483.6 637.2 689.3 744.7 833.0 875.6
Raw Material expense 387.4 350.3 472.5 519.0 550.4 613.6 645.7
Employee expense 55.7 70.2 79.0 89.2 108.1 120.6 124.3
Contract execution expenses 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other Expenses 84.0 63.1 85.8 81.1 86.2 98.8 105.6
Operating Profit 167.2 176.8 192.0 182.5 180.9 207.0 224.4
Other Income 5.0 6.3 34.1 1.6 1.8 1.9 2.1
PBIDT 172.1 183.1 226.1 184.1 182.8 208.9 226.5
Interest 47.8 52.3 54.8 55.4 47.6 49.3 54.3
Exchange (gain)/loss 21.9 48.4 17.9 4.6 14.6 15.5 8.0
PBDT 102.5 82.4 153.4 124.1 120.6 144.1 164.2
Depreciation 42.4 49.1 55.0 64.2 67.3 70.3 69.6
PBT 60.1 33.4 98.3 59.9 53.3 73.8 94.6
Tax (including DT & FBT) 6.0 7.8 34.2 19.4 12.0 17.7 24.1
Reported PAT 54.1 25.5 64.1 40.5 41.3 56.1 70.5
(Source: Company, HDFCSec)

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Particulars FY12 FY13 FY14 FY15 FY16
Segment Revenue
Pharmaceuticals 447.69 371.61 475.44 537.51 569.14
Crop protection products 246.54 288.81 353.77 334.35 356.51
Total Revenue 694.23 660.42 829.21 871.86 925.65
Segment Results
Pharmaceuticals 124.05 102.69 102.55 94.7 80.51
Crop protection products 27.32 46.43 59.57 50.03 54.72
EBIT 151.37 149.12 162.12 144.73 135.23
Less: Finance cost 47.76 52.29 54.8 60.04 62.18
Less: Unallocable expd 43.55 64.63 43.07 25.74 20.72
Add: Interest Income 0 1.13 34.07 0.92 0.98
EBT 60.06 33.33 98.32 59.87 53.31
(Source: Company, HDFCSec)
Balance Sheet – Standalone
Particulars (Rs in Cr) FY12 FY13 FY14 FY15 FY16 FY17E FY18E
Equity & Liabilities
Shareholders’ Funds 459.8 451.3 505.9 533.5 564.9 609.1 667.7
Equity Share Capital 16.4 16.4 16.4 16.4 16.4 16.4 16.4
Reserves & Surplus 443.4 434.8 489.5 517.0 548.5 592.7 651.3

Non-Current Liabilities 242.0 237.9 298.2 241.7 336.9 368.2 403.0

Long Term borrowings 226.9 219.6 254.8 201.4 296.6 326.3 358.9
Deferred Tax Liabilities (Net) 8.7 8.6 32.5 28.5 30.1 31.6 33.1
Long Term Provisions 6.4 9.7 10.9 11.7 10.2 10.4 10.9

Current Liabilities 438.6 502.8 466.6 517.8 374.3 381.1 388.6

Short Term Borrowings (Working Cap) 205.5 260.3 215.6 231.0 171.9 166.8 158.4
Trade Payables 113.9 112.8 131.1 137.1 127.9 134.3 141.0
Other Current Liabilities 106.3 123.6 100.2 131.5 62.0 67.0 75.0
Short Term Provisions 13.0 6.1 19.8 18.1 12.5 13.1 14.2

Total Equity & Liabilities 1140.4 1192.0 1270.8 1292.9 1276.1 1358.5 1459.3

Assets
Non-Current Assets 794.9 782.9 776.2 792.1 808.9 834.3 828.6
Fixed Assets 653.2 709.3 705.3 701.0 689.3 703.1 682.0
Non-Current Investments 18.2 3.1 3.1 3.1 3.1 3.1 3.1
Long -term Loans and Advances 123.6 70.5 67.7 87.9 116.5 128.1 143.5

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Current Assets 345.5 409.1 494.6 500.8 467.2 524.1 630.7

Inventories 191.9 257.0 311.3 314.0 291.1 343.5 419.1
Trade Receivables 98.7 84.6 88.7 128.0 112.3 121.3 135.9
Cash & Cash Equivalents 5.9 15.4 27.7 13.7 19.2 10.3 19.3
Short Term Loans & Advances 48.7 51.4 65.7 40.9 44.3 48.8 56.1
Other Current Assets 0.3 0.6 1.1 4.3 0.3 0.3 0.3

Total Assets 1140.4 1192.0 1270.8 1292.9 1276.1 1358.5 1459.3

(Source: Company, HDFCSec)
Key Financial Ratios – Standalone
Particulars FY12 FY13 FY14 FY15 FY16 FY17E FY18E
No of Equity Shares 1.6 1.6 1.6 8.2 8.2 8.2 8.2
Current Market Price 164.0 164.0 164.0 164.0 164.0 164.0 164.0
Market Capitalization 269.6 269.6 269.6 1348.1 1348.1 1348.1 1348.1
Enterprise Value 696.0 734.1 712.3 1766.8 1797.5 1830.8 1846.1
FD EPS 32.9 15.5 39.0 4.9 5.0 6.8 8.6
Cash EPS (PAT + Depreciation) 58.7 45.4 72.5 12.7 13.2 15.4 17.0
PE(x) 5.0 10.6 4.2 33.3 32.6 24.0 19.1
Book Value (Rs.) 279.7 274.5 307.7 64.9 68.7 74.1 81.2
P/BV (x) 0.6 0.6 0.5 2.5 2.4 2.2 2.0
OPM (%) 24.1 26.8 23.2 20.9 19.5 19.9 20.4
PBT (%) 8.7 5.1 11.9 6.9 5.8 7.1 8.6
NPM (%) 7.8 3.9 7.7 4.6 4.5 5.4 6.4
ROCE (%) 12.1 9.2 15.7 11.9 9.8 11.2 12.6
RONW (%) 11.8 5.7 12.7 7.6 7.3 9.2 10.6
Debt-Equity 0.9 1.1 0.9 0.8 0.8 0.8 0.8
Current Ratio 0.8 0.8 1.1 1.0 1.2 1.4 1.6
Mcap/Sales(x) 0.4 0.4 0.3 1.5 1.5 1.3 1.2
EV/EBITDA 4.0 4.0 3.2 9.6 9.8 8.8 8.2
(Source: Company, HDFCSec)

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Fundamental Research Analyst: Zececa Mehta (zececa.mehta@hdfcsec.com)

HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website:
www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com.
____________________________________________________________________________________________________________________________________________________________________________________________

"HDFC Securities Ltd. is a SEBI Registered Research Analyst having registration no. INH000002475."

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may be contrary with those of the other Research teams (Institutional, PCG) of HDFC Securities Ltd.

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