Thread by @AkhilJa20441968

#Hikal Important to note that the mgmt of #LaurusLabs & Neuland Labs have eschewed the China+1 narrative being trumpeted by the mgmt of Hikal. Also don't know how #Hikal will be benefited by the domestic PLI scheme.

https://twitter.com/AkhilJa20441968/status/1459496179859812357

#Hikal In terms of operating performance of Hikal, not much has changed since Q3FY21 (adjusting some overflow of business from previous quarters in Q4FY21). Only the old business has been restored.

#Hikal Important to note that even after the decent performance in Q3FY21, the stock languished for almost 3 months until just before the long term animal healthcare deal was announced. Stock suddenly went up 75% before the announcement, which likely indicates insider trading.

#Hikal Since then, pharma twitter opinion leaders & assorted pumping bags have been on an overdrive touting Hikal. One pumping bag of a participant in one of the concalls was loudly talking about a $5bn market cap, instead of being focused on business fundamentals.

#Hikal The animal healthcare CDMO deal doesn’t provide prospects of non-linear growth as molecules aren’t blockbuster in nature like human pharma & don’t command the prices of innovator human pharma drugs. Its economics are almost akin to that of a CMO.

#Hikal The mgmt has been pretty loose in its commentary guiding for 2-3X growth in sales. Its capex of 600 crores at 1.5x asset turns & abt say Rs200crs sales for animal healthcare provides a sales increase of Rs1100 crores, an increase of about only 60% in sales.

#Hikal Even the Rs300 crs capex out of the capex will be utilized fully only in FY24, so the capex guidance of Rs300 crs in FY23 also needs to be taken with a pinch of salt.

#Hikal As regards its strategic transformation being trumpeted, this take a lot of time. Its low returns despite >50% sales from CDMO indicates that its a middling company that has neither the strong technical capabilities nor the cost efficiencies of a #DivisLabs or #LaurusLabs.

#Hikal It seems to have its hands in a lot of pies. Hikal seems to have neither the focus & technical capabilities of a Neuland Labs, nor a presence in branded generic formulations in animal pharma like #SequentScientific where the superior economics & moat seems to lie.

#Hikal has an envious track record of strong regulatory compliance. But strong regulatory compliance is only a necessary but not a sufficient filter for picking pharma stocks. Technical capabilities, cost efficiencies & capital allocation become most important after that filter.

#Hikal has gone up abt 250% since its lows in April21, while only the old business has been restored. So a lot of where the puck might go, a lot of it seems to be currently priced in. Also, investors are likely to find the puck going much below their expectations.

#Hikal The risk-reward trade-off for #Hikal seems unfavourable for a middling company at ~30x trailing P/E. Brace for disappointments. No reco for any of the stocks discussed. Do your own research.