Kilpest is available at a discount of ~51% to the average P/E ratio of two prominent diagnostic players. Buy for 43% upside: Nuvama

Kilpest India (KLPI) has seen multiple transformations in the last ~50 years of existence. Based in Bhopal, it started with agrochemicals in 1972 and forayed into the niche molecular diagnostics business in FY10 through its subsidiary 3B Black Bio Biotech India. The molecular diagnostics business clocked 46% CAGR in the last five years (FY18–23) and contributed over 80% of revenue in FY23 from 33% in FY18. The management intends to amalgamate 3B BlackBio Biotech with the parent and rechristen the company as 3B BlackBio Dx. It will now be classified as a diagnostic player instead of an agrochemical company. The molecular diagnostics business is a niche and emerging segment globally given the need for accurate and real-time PCR-based diagnosis, rapid test kits for infectious diseases, and genome sequencing. We expect KLPI to sustain healthy growth in the molecular diagnostics business led by product launches, acquisition of new customers, and geographical expansion. KLPI has a strong network of dealerships, sticky customers, and a presence in 35 countries. We recommend a ‘BUY’ with a TP of INR1,184.

The molecular diagnostics business offers strong potential

The Indian molecular diagnostics market is expected to touch ~USD1.6bn by 2030 from USD0.95bn in 2022 (7% CAGR). The global market is expected to grow at 5% over this period to reach USD34bn. In India, the addressable market for KLPI stands at INR300–400cr. It commands 10–12.5% market share which offers it a huge growth potential on the strength of its in-house enzyme production and bulk procurement of other components that gives it a competitive edge.

Well-placed to tap the growing molecular diagnostics market

After establishing a strong foothold in real-time PCR-based molecular diagnostic kits via brand ‘TRUPCR’ (85– 90% of molecular diagnostics revenue is from the non-COVID business), KLPI is set to expand the rapid test kits (10– 15% of segmental revenue) for infectious diseases and antimicrobial resistance (AMR) under the ‘TRURAPID’ brand. It is also foraying into next-generation sequencing (NGS) under the ‘TRUNGS’ brand, which may be the biggest opportunity for the company in FY25.

UK subsidiary set for a fast expansion in Europe and RoW

Exports for 3B BlackBio Biotech have grown 4x over FY21–23 driven by rapid test kits for COVID-19. Even after the drop in demand for COVID-related kits, it is fast recouping growth. To expand in the UK and RoW market, KLPI has set up a subsidiary TRUPCR Europe, which earlier acted as a distributor for 3B BlackBio Biotech’s products. European subsidiaries have multiple distribution agreements with UK-based clients to supply its products. It is actively looking to expand its customer base across Europe and RoW markets.

Business reorganisation to bring in more focus

KLPI is de-prioritising the agrochemical business, which has been operating on a wafer-thin operating margin and contributed 19% to FY23 revenue. It may think of selling this business, which is becoming noncore. To focus on the molecular diagnostics business, it is amalgamating 3B BlackBio Biotech with KLPI and expanding the global business through subsidiaries. This will help improve margin.

Cash-rich position offers scope for inorganic initiatives

As of March 31, the company is sitting on a cash of INR151cr, including liquid investments. We expect an FCF of INR69cr over the next three years. The company is actively scouting for inorganic opportunities to expand the molecular diagnostics business, which offers upside risk.

Initiate ‘BUY’ with a TP of INR1,184

Despite the recent run-up, KLPI is available at a discount of ~51% to the average P/E ratio of two prominent diagnostic players: Dr. Lal PathLabs and Metropolis Healthcare (based on the average P/E ratio for FY25– 26E). A healthy Balance Sheet, change in business classification, and healthy growth prospects in the molecular diagnostics business are key triggers for a re-rating in the stock. We forecast ~22% earning CAGR over FY23–26, with an upside risk from any M&A that the company is keen on. We recommend a ‘BUY’ with a TP of INR1,184, which includes INR1,165/INR22 for the molecular diagnostics/ agrochemicals business (25x/10x average EPS for FY25–26E)