CDMOs are the talk of the town in India’s pharma landscape, with the market projected to grow at ~15% CAGR, reaching ~$45 billion by 2029. The industry is still in its early stages, with significant capex underway. But it’s not just about the quantity of business—the quality is improving, with Indian CDMOs increasingly focusing on high-value segments like advanced intermediates, complex generics, biologics, and specialty molecules. However, this write-up is not about the broader CDMO space (for that, I recommend listening to Sajal Kapoor and Aditya Khemka). Instead, the focus is on a specific player with a highly favorable risk-reward setup—Hikal.

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. The current business looks as under

What has been happening in Hikal

Like Laurus and Neuland , Hikal has also been architecting is transition from pure play generic API’s to CDMO. The company has invested ~ 1000 cr capex in last 5 years. The recent concall (Q3 FY 25) gave a very good insight into whats underway in Hikal

Some key insights from the call are under

1. Pharma Business & CDMO Growth – Strong Momentum

CDMO Expansion & NCE Commercialization

• Pipeline & Phase Progress:

  • 13-14 molecules in development, mostly in Phase II & III trials.

  • Two NCE-based molecules will be commercialized in late FY26 – early FY27.

  • One more molecule expected to be commercialized in FY27.

  • Hikal aims to increase its pipeline beyond 14 molecules in the coming years.

• First Major NCE Commercialization at Scale:

  • While Hikal has worked on intermediates before, this is the first large-scale commercialization of advanced intermediates for blockbuster NCEs.

  • The company will supply advanced intermediates, with customers completing final API steps in-house.

• Revenue & Market Positioning:

  • CDMO business is expected to overtake generics, shifting towards a 60:40 revenue mix.

  • Long-term contracts with global innovators are helping secure sustainable revenue.

  • CDMO revenue will gain significant momentum post-FY26 as these molecules scale up.

• Blockbuster Drug Potential:

  • These NCEs are expected to be high-volume blockbuster drugs, based on customer market projections.

  • Revenue per molecule could range from ₹50 crore in the worst case to a few hundred crores in the best case.

  • Hikal will be either the sole supplier or one of two suppliers for these intermediates, ensuring strong demand.

• Long-Term Growth Strategy:

  • The shift towards high-value, complex intermediates enhances profitability.

  • Targeting 20%+ EBITDA margins by FY27, driven by higher-margin CDMO contracts and operational leverage.

• China Plus One Advantage:

  • Increasing demand from U.S., Japan, and now European innovators for non-China supply sources.

  • Hikal’s regulatory compliance, cost improvements, and technology differentiation make it a preferred partner.

( For readers just to clarify what is NCE and what is advanced intermediates and what is its significance for any CDMO partner

NCE - New Chemical Entities are newly discovered, patented molecules that have never been approved for medical use before. The ability to support NCEs enhances a CDMO’s long-term growth potential as these projects often lead to high-margin, multi-year contracts

Advanced Intermediates - These are complex chemical compounds that serve as building blocks for APIs (Active Pharmaceutical Ingredients). Manufacturing advanced intermediates allows CDMOs to participate early in the value chain of drug production. CDMOs that supply advanced intermediates for NCEs can establish strategic, long-term partnerships with pharmaceutical innovators

2. Animal Health – Emerging High-Margin Business

• Strategic Focus & Revenue Potential:

  • Expected to grow into an independent business division, similar to Pharma & Crop Protection.

  • Projected to reach ₹400+ crore revenue in 5 years, with continued expansion.

• Commercialization & Validation Status:

  • Full commercial sales to start in FY26 after completing regulatory approvals.

  • Currently validating multiple products, with registration in various countries underway.

• High-Margin Business Model:

  • Contribution margin expected to be 45%+, with CDMO projects exceeding 50%.

  • Includes a mix of generics and CDMO projects for NCEs

• Expanding Client Base:

  • Engaging with new innovator customers, generating strong RFP inflows.

  • Leveraging CDMO expertise to capture more high-value contracts.

3. Crop Protection – Recovery & Shift Towards High-Value Products

• Market Challenges & Stabilization Outlook:

  • The worst of pricing pressures may be behind the industry.

  • Domestic demand is showing signs of recovery, expected to stabilize within 2-3 quarters.

• Shift to NCEs & CDMO Projects:

  • Moving away from commodity generics towards proprietary & NCE molecules.

  • Eight active CDMO projects in the pipeline, expected to drive growth from FY27 onwards.

  • This strategy will improve margins and reduce reliance on low-value generics.

• Specialty Chemicals Expansion:

  • Some crop protection assets are being repurposed for specialty chemicals.

  • Specialty chemicals provide higher-margin opportunities with global innovator customers.

4. Financial & Operational Strategy

• Revenue Growth Targets:

  • Targeting a high-teens CAGR (12-18%) over the next five years.

  • Expected to double revenue by FY29 from a base of ~ 2000 cr revenue

• Project Pinnacle – Business Transformation Initiative:

  • Focused on cost efficiency, customer acquisition, and strategic realignment.

  • Expected to push EBITDA margins beyond 20% by FY27.

• Capex Plans:

  • ₹140-150 crore capex for FY25, similar range planned for FY26.

  • ₹340 crore capex already invested in the Agrochemical plant.

To summarise the concall hints at three major milestones which is worth looking for Hikal

✔ FY26: First full year of Animal Health commercial sales.
✔ FY26-FY27: Large-scale NCE commercialization in Pharma CDMO.
✔ FY27 and Onward: Crop Protection recovery & specialty chemicals ramp-up, EBITDA margins > 20%

Hikal appears to be undergoing a strategic transformation akin to what Neuland Labs experienced between 2019 and 2022. The post-transformation trajectory of Neuland is well documented. While it is not certain that Hikal will follow the same share price movement, the company's current valuation, the margin of safety it offers, and the qualitative guidance consistently provided by the management make it a stock worth looking into

Valuations and return estimates

Herein I have used two methods ; EV/ Sales and EV/ EBITDA to get a rough estimate of what CAGR can Hikal can deliver . I havent used PE or DCF as I feel estimating the earnings or going for DCF at this stage would be a futile exercise now .

1. EV/ Sales based valuation

Herein I have tried to value the company based on EV to Sales. Current Hikal is trading at EV/ Sales of ~ 2.8-3 . Once the transition towards higher margins happen there would be a re-rating of multiple . The table presents the EV under various multiples ranging from 3-14 and for various topline estimates in 2029 ranging from 3000 cr to 4000 cr.

EV/ Sales multiple has been taken from the case of the re-rating which happened in case of Neuland Labs . Neuland Labs was re-rated from EV to Sales of around 2.5 to as high as EV to sales of 15 . Herein I assume that somehow Hikal can get EV to sales in the range of 5-7 ( re-rating of more than that is something like a black swan event and we should not base our estimations on that) and by 2029 its sales would end up somewhere between 3500-4000 crores

Based on these assumptions Hikal can fetch an EV between 17500 crores - 28000 crores by 2029 (most likely scenario - highlighed in green) . I assume the debt levels for 2029 to be same as of September 2024 i.e 775 crores - a super conservative estimate ( As per the latest Q3 FY 2025 results , the gross debt has come down to 731 crores and in 9M FY 2025 Hikal has generated 102 crores of positive operating cash flow . Hence if the margins and sales grow further from here then of course debt levels will reduce by 2029)

Based on above , estimated equity value ranges between ~ 16000 cr to ~ 27000 cr by 2029 which gives a CAGR of > 30% from current valuations

2. EV/EBITDA based valuation

Herein I have tried to value the company based on EV to EBITDA. Current Hikal is trading at EV/ EBITDA of ~ 17. Once the transition towards higher margins happen there would be a re-rating of multiple as seen in Neuland Labs . In Neuland labs EV/ EBITDA multiple was re-rated from close to 14 to as high as 52 .

To start with I have estimated the EBITDA range which Hikal can achieve by 2029

To me the best EBITDA range at which Hikal can land at ranges between 630 crores to 880 crores. (between 3500-4000 cr sales and 18% to 22% EBITDA - area highlighted in green)

Based on above likely scenarios lets now estimate the EV and equity value where Hikal can land . I have assumed the EV/ EBITDA multiple range between 17-27 ( Hikal is currently trading at EV/ EBITDA of 17 and if whatever management is indicating is delivered then definitely a re-rating will happen here also as happened with Neuland . However any re-rating in excess of 27-30 is just a black swan event)

The assumptions regarding debt levels remain same as earlier

It can be seen from the above table that even at super conservative estimates i.e 3500 cr sales, 18% EBITDA , 775 crores debt and no re-rating , Hikal presents a decent investment case by presenting an opportunity of 17-18% CAGR. If the management is able to walk the talk then definitely we are in a for much bigger CAGR here

So to summarise if the management is able to walk the talk there are good chances of Hikal delivering 20% + CAGR in next 3-5 years.

My views on the management

The best way to judge a management in such cases is to see what they have acheived in the past . Hikal has demonstrated a very solid regulatory track record till now and scaled the business very well by growing its topline by 12 % CAGR over last 15 years. It’s the market leader in gabapentin with around 35-40% market share in the API which is great deal considering the competitive landscape in this API(Gabapentin is an Active Pharmaceutical Ingredient (API) used in the formulation of drugs primarily for neuropathic pain, epilepsy, and restless leg syndrome) . Overall management has demonstrated good execution track record till now, they understand the markets well and can be banked upon to execute their future plans considering the tailwinds that Indian CDMO landscape is experiencing

Overall I believe , Hikal presents a good investment case in current scenario. In the current market fall , may be it can fall further and risk reward ratio may improve further . Post Laurus and Neuland for me Hikal is another play in the CDMO space that is worth watching. Even despite the latest correction the stock is already up by 25% in last one year

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