As per media reports, some toxic chemicals were not discharged properly from Hikal’s Taloja plant which has led to killing of six people and left several hospitalised in Surat (Sachin GIDC).

Hikal has notified Stock Exchange that the Sodium Hydro Sulphide (dilute solution 16%) that is generated at its Taloja plant is actually a non-hazardous chemical and this was entrusted to Sangam Enviro Private Limited for processing and onward sale to the textile/cement sector.

They further clarified that the toxic fumes that led to this unfortunate accident, was from a different Tanker bearing No. GJ-06-ZZ-6221 and not the same tanker that left the company’s premises in Taloja. The Surat Police is investigating the matter and the Company is rendering all assistance in the matter.

As per reports, Hikal paid Rs 14 per litre for disposal of 25,000 litres of chemical waste, which seems to be in line with industry standards. Hence, prima facie this doesn’t seem to be a case where company tried to cut corners to save cost. Also this is too tiny a cost (Rs 3.50 lacs) with respect to company’s scale of operations (turnover of Rs 2,000 Cr & net profit of Rs 200 Cr).

However, the reports also point that this vendor is not licensed to undertake disposal of waste chemicals, which if true, could mean an operational lapse on the part of Hikal.

Historically, Hikal has had a very clean compliance track record which is evident from the fact that it has never had any negative observations, warnings or alerts from any Pharma regulator in its entire three decade history. It has marquee clients like Bayer, Merck, Pfizer, Syngenta and BASF, with 100% retention since its very inception in 1980s.

This particular instance could be a case of some corruption/greed at junior/plant management level where they might have had some kick back arrangement with this unauthorised vendor. Either ways, we cannot deny that this shows certain major lapses in systems and processes being followed at their plants and can have implications if they found guilty.

Subsequently, there have also been some media reports that senior management has been arrested, but there has been no clarification from the company in this regard. This led to selling pressure in the stock today. We have written to company’s investor relations and await clarity in this regard.

The dilemma is should we exit based on this news? One school of thought could be to just exit, given we are already sitting on a nice 5-bagger. But it is difficult, and mostly not wise, to act with incomplete information based solely on media articles. The other option is to wait for clarity and not act in haste. There is immense potential in this business - they are on track to compound at 20-25% CAGR for next many years. But if we wait and something ugly comes out, we might be forced to sell later at lower prices eating into our profits. Clearly, there is a trade-off here, but which is the right way would be clear only in hindsight.

Having deliberated on this, we prefer to await for more clarity on this issue, instead of panic selling, to assess how deep is it, what could be the exact implications and then deciding the right course of action for us.