Highlights:-Strong Q1 performance despite delayed monsoon
-Medical devices and exports to drive growth in coming quarters
-Strong operating and net margins
-High return on capital employed
Kilpest India Limited (KILP) (CMP: Rs 89; mcap: Rs 67 crore) is a small agrochemical company which started making molecular diagnostic products in the last few years. The company’s two main verticals are agrochemicals (42 percent of business) and healthcare (58 percent of business).
The agrochemical segment focuses on crop-protection products, both chemical-based & biological (chemical free). The healthcare segment focuses on molecular diagnostics kits and enzymes, nutrigenomics & personalized medicine through the company’s subsidiary 3B Blackbio Biotech (Kilpest owns 95 percent).
3B Blackbio Biotech produces molecular biology products such as PCR enzymes, PCR reagents, real time kits, reverse transcriptase kits, cloning vectors, electrophoresis reagents, nucleic acid purification, molecular diagnostics, AGFoods kits, BIOFood ID kit, BIOFood mixed kit, BIOGenics standard kit and 3B control DNAs. It also manufactures medical equipment such as end-point thermal cyclers, real-time thermal cyclers and gradient thermal cyclers.
Despite a delayed monsoon this year and a overall slowdown in agri sales, the company reported a strong 37 percent year-on-year revenue growth in the June quarter. Its earnings before interest tax depreciation and amortization (EBITDA) was up by 55 percent YoY, with a strong 461 basis points (bps) increase in margin.
The growth was driven mainly by a robust performance in the molecular diagnostics segment which saw a 56 percent YoY rise in revenue and 61 percent YoY profit growth.
Post consecutive quarters of contraction, the agrochemical business saw a decent performance with a 15 percent YoY revenue growth and an 18 percent YoY rise in profits.
In Q2, the management expects the healthcare segment and the export business to continue driving the overall performance.
The company has steadily paid off a portion of its debt in the last few quarters and now aims to become debt free by the end of the current fiscal. The company had around Rs 6.19 crore of debt at the close of FY19 with a debt equity ratio of 0.28x. After this, the management has paid off further debt. With rapid growth coming in from the medical devices segment, we think it will be possible for the company to become debt free. Reduction in debt will help in savings on interest costs, which will boost margins. It will also strengthen the balance sheet and would be a positive for the company’s expansion plans in the longer term.
The company is generating a high return on capital employed (ROCE), facilitated by the high growth and high margin healthcare segment. Its ROCE of above 25 percent is better than its peers. With rapid growth in prospective markets, we expect the high return trend to continue.
Fast growing medical devices segment
The molecular diagnostics segment has seen strong growth in the current quarter. Globally the sector is huge. For India, this sector is relatively new and has an immense scope of growth. Due to a small base, the market is expected to grow exponentially. The market has been dominated by international players providing products at high costs.
Companies such as Thyrocare and Dr. Lal Path have ventured into molecular diagnostic-based (MBD) tests and have recently started to invest in hardware. Infrastructure for MBD tech is being developed, which spells a huge opportunity for KILP’s products. This indicates a healthy growth outlook for the company.
Threat from bigger players
The company’s foray into molecular diagnostic products remains vulnerable to a threat from the entry of new and bigger players who with the help of deeper pockets could capture the market. With rapid growth and high returns and margins, the segment could attract attention from bigger international players. This exposes the company to the threat of competition in the future.
Contraction in agrochemicals
The agri segment continues to be a drag on the consolidated profitability of the company. The segment had shrunk in the December and March quarters due to high raw material costs and inventories. While the June quarter saw a decent performance for the segment, there is no guarantee that growth will continue as the overall agri environment is strained. This remains a big overhang on the company.
Risks of a microcap
KILP is a small company with a market cap of around Rs 67 crore. This makes it vulnerable to market volatility. The stock could see sharp swings due to changes in market momentum.
Valuations and Outlook
We are optimistic about the long-term prospects of Kilpest India given the healthy growth trajectory so far. While the company is still small, we see the molecular diagnostic business as a rapidly growing one, generating strong returns. The June quarter growth in the agrochemical business also stands as a positive for the stock.
The stock has corrected 38 percent from its 52 week high. After the correction, the stock is now trading at an FY20 estimated price-to-earnings multiple of 9.6x.
We expect the company’s earnings to grow as the molecular diagnostic segment grows. With industry leaders now foraying into molecular diagnostics, the demand for the company’s products is seeing strong growth.
With changing cost and quality of healthcare, increasing demand for lifestyle disease related healthcare services and adoption of the molecular technology by leading labs and hospitals, we see growing scope for expansion of the company’s healthcare segment. The government’s increased focus on deeper penetration of healthcare also stands to benefit the company’s growth in the longer term.