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Saturday, October 4, 2008

Hikal

Ideally poised to capitalise on the increasing opportunities in global outsourcing of key crop protection chemicals and pharma intermediates by MNCs

Established in 1988, Hikal collaborates with innovator companies and offer solutions in contract research, custom synthesis and custom manufacturing. Broadly, the company manufactures bulk agro technicals (crop protection), active pharmaceutical ingredients (APIs) and intermediates.

In 2008, there were many measures taken by Hikal to remove low-margin agrochemicals from its portfolio. As a result, the crop protection business grew only 9% as against the 56% growth of the pharmaceutical division. Pharma sales, therefore, overtook sales of agrochemicals. The share of the pharma division in total sales stood at 50.2% as against 49.8% of the crop protection business in the year ending March 2008 (FY 2008).

In the crop protection business, sales of Thiabendazole to Syngenta, Switzerland, constitutes around 40% of the total agrochemical division sales. Syngenta is expanding and Hikal expects the sales of Thiabendazole to remain at least steady, if not buoyant, going forward. Many products in the crop-protection market are becoming offpatent in the coming years and Hikal has taken necessary steps including expansion of production capabilities to cater to the demand. It is in talks with two such players and will make an announcement. Contribution from the Syngenta group to the agrochemical division is expected to reduce to 25% in 2010-11 because of new products and new clients.

Hikal to bag outsourcing orders for won a big order of manufacturing (outsourcing) patented products from Bayer Corporation. This is a big achievement because it is the only company that will manufacture a patented product whose intellectual property (IP) is still with Bayer. This opens up opportunity to bag outsourcing orders for patented products, where margin is high and competition is very low. The production of the product will start from Q4 of FY 2009.

The shortage of capacities facing western agrochemical companies due to the increase in demand across the entire product chain, particularly active ingredients and select intermediates, has created the necessity for outsourcing. Hikal, with its expanded facilities, is poised to capitalise on these opportunities. The drive towards ethanol for fuel has farmers planting more corn making the farm land more valuable, increasing the value of crops and creating a wider use for crop protection products.

China, the main supplier of crop protection intermediates and actives, has been witnessing changes in export subsidies and strengthening of its currency, the renminbi (RMB), leading to product prices going up significantly. This is an advantage for Indian companies like Hikal to supply crop protection products.

The pharmaceutical division had a rough ride in 2005-2007, when the generic market collapsed and price erosion was severe. It is at this moment that Hikal decided to secure orders to manufacture patented products and rationalise its product stream. The pharma division is now expecting stupendous growth and is very optimistic about contract research and manufacturing services (CRAMS). The company wants to establish itself as among the top companies in the would in the CRAMS business.

Hikal has signed long-term supply agreements with Pfizer and Alpharma to supply API and intermediates. It invested to enhance the capacities of its existing facilities in FY 2008, and is further increasing these capacities substantially. Supplies of products to Pfizer has already commenced. The company is now looking to expand its customer base in the US., Europe, South America and the Far East. The manufacture of two new products is currently under validation by its prospective customers and is ready for commercial production at its US Food and Drug Administration (FDA)-approved facility.

Hikal plans to allot 13,60,000 equity shares to International Finance Corporation at Rs 474 a share, raising Rs 64.46 crore. After this allotment, the equity capital will rise to Rs 16.44 crore. The company still has foreign currency convertible bonds (FCCBs) pending conversion at Rs 745 by October 2010, which will dilute equity by a further Rs 0.72 crore if all FCCBs are converted.

We expect Hikal to register EPS of Rs 36.2 on equity of Rs 16.44 in FY 2009. The share price trades at Rs 459. P/E works out to 12.7.

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