Mumbai: Hikal has been assigned a rating of A1+, indicating highest safety in the short term, to the Rs 10-crore short-term debt programme by ICRA. The prospect of timely payment of debt and obligation is the best.

The rating takes into account its exclusive long-term contract with Syngenta AG for the supply of Thiabendazole (TBZ) and favourable prospects for its contract manufacturing business model. The rating also takes into account the steps taken by Hikal to diversify its revenue streams - Hikal's foray into the bulk drug business backed by long-term supply agreements.

Hikal is involved in custom synthesis and contract manufacturing of agrochemicals, active pharmaceutical ingredients (API) and intermediate chemicals. Hikal's crop protection unit had a turnover of Rs 120.20 crore in FY 2002-03, which constituted 89 per cent of the company's gross sales.

The main product in the crop protection segment is TBZ - a post-harvest and seed treatment fungicide - used on fruits, vegetables, crops and other farm produce. In FY 2002-03, Hikal signed a long-term contract (valid till 2008) with Syngenta AG for exclusive manufacturing of TBZ at its 100-per cent EOU at Taloja, Mumbai.

The highlight of the revised agreement with Syngenta Ag was that Syngenta wrote off debt amounting to $9.50 million, which also gave Hikal the flexibility to manufacture other products for other customers at the Taloja facility. The other major products in this division are Quinalphos, an organophosphorus insecticide, and related formulations like Ekalux and Nuvan.

Hikal entered into API manufacturing in FY 2001-02. This division contributed Rs 13.46 crore and accounted for 10 per cent of the company's gross sales in FY 2002-03. Hikal's focus in this segment will be on molecules going off patent in the highly regulated markets of the US and Europe.

Currently, the company has filed three drug master files (DMF) in the US market, which include Gabapentin, an adjunctive therapy in the treatment of partial seizure of epilepsy and post-herpetic neuralgia. Hikal has signed a long-term contract with a large generic pharmaceutical company for the supply of Gabapentin to the US market.

During the period 1998-2003, Hikal's operating income has grown at a compounded annual growth rate (CAGR) of 29.5 per cent. The exclusive long-term supply arrangement with Syngenta AG has enabled Hikal to maintain comfortable profitability, with return on capital employed of 16.46 per cent in FY 2002-03.

Steady accretion to reserves has helped the company reduce its gearing from 2.70 times as on 31 March 2002 to 1.74 times as on 31 March 2003 and the gearing is expected to decline further in FY 2003-04. With improved cash accruals and falling debt levels, the net cash accruals and total debt are comfortable and increased to 26 per cent in FY 2002-03 from 18.4 per cent in FY 2001-02.

While, the growth in turnover is expected to come from new product launches in the pharmaceuticals division, the crop protection division will continue to generate stable cash accruals backed by long term supply agreement with major international players. With strong operating profitability, stable cash accruals and limited capital expenditure, ICRA expects Hikal to maintain comfortable liquidity in the short to medium term.