ICICIdirect Money Manager June 2019STOCK IDEAS12Key risks include:
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.
Risk of raw material supply - FY18 gross margins declined 369 bps
YoY 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.
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