Hester Biosciences Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Revenue and profit both down: Poultry vaccine sales collapsed against an exceptional prior-year comparator and an industry-wide bird-population cut, while health product margin compression and market-development costs hit the bottom line.
• A lumpy skin disease windfall is arriving now: Hester is one of very few suppliers of the goat pox vaccine being used against LSD; supplies began in August and management says the opportunity could take the company “absolutely to the next level.”
• The PPR national tender is a near-term, high-certainty catalyst: Hester was L1 on a mandate to supply PPR vaccine across India; supplies are expected to begin within 30 days and the order book is roughly ₹20 Cr, with a separate FAO tender of nearly ₹50 Cr waiting to restart.
• New divisions are burning cash today but promise diversification: The health products segment lost ₹1.68 Cr on ₹58 Cr of sales after heavy hiring, the pet division just began selling, and the Covaxin facility is still in validation; all three are positioned as future growth engines.
• What to watch next quarter: Whether PPR supplies actually commence, the pace of LSD vaccine offtake, and any sign that the poultry industry’s nine-to-ten-month downturn is reversing.

The Poultry Downturn

• Comparative base effect: The year-ago quarter saw an exceptional disease outbreak that drove unprecedented vaccine sales, making the current quarter’s poultry vaccine revenue look far worse on a comparative basis.
• Industry-wide bird-population cut: Feed costs and production inputs rose sharply over the last nine to ten months while output prices were unstable or falling, leading many farmers to reduce bird populations; Hester insists it lost no market share.
• Gross margin mix shift: Because the higher-margin vaccine business degrew while the lower-margin health products division grew 42%, overall gross margins compressed.

Rajiv Gandhi: “today it appears that we have everything more capacity, less sales, yes this is a typical phase that we are going through at this point of time but things are going to change.”

Lumpy Skin Disease: The Immediate Catalyst

• Existing vaccine, new application: Hester has been producing the goat pox vaccine (Uttarkashi strain) for two years; the same vaccine is now being administered against lumpy skin disease in cattle at a higher 3 ml dose versus 1 ml for goats.
• Supply ramp underway: Supplies began in a “reasonable big way” in August, and the company expects the next month to be an all-time higher supply, though the sudden rush has made the ramp a little staggered.
• Recurring-revenue potential: Management believes the vaccine will be needed on an annual basis because immunity lasts roughly one year, creating continuous repeated business.
• International inquiry pipeline: Esther Africa manufactures a pure LSD vaccine, and the company expects worldwide LSD problems to generate significant international inquiries.

Rajiv Gandhi: “it is an opportunity which could take us absolutely to the next level that is what I can tell you for sure.”

PPR Tender & Government Vaccine Pipeline

• National PPR mandate: Hester was L1 in the national tender for PPR vaccine for sheep and goat and has been given the supply mandate; supplies are expected to begin within 30 days of the call.
• Order book scale: The national tender is worth roughly ₹20 Cr, and a separate FAO tender of nearly ₹50 Cr in PPR vaccine is waiting to restart once FAO revives its procurement; together they would require Hester to add one or two freeze dryers.
• Brucella re-tender: Hester bid last year, was L2, and declined to match the L1 rate; the one-year exclusion period is about to expire and re-tendering is expected soon.
• Broader government thrust: A national advisory committee on animal health has been formed (Rajiv Gandhi is a member) with an objective that includes preventive vaccination for FMD, Brucella, Rabies, PPR, lumpy skin, goat pox and sheep pox, though no meetings have been called yet and no specific outlay has been communicated.

New Divisions: Investment Phase

Health Products

• Top-line growth, bottom-line loss: The division grew 42% but posted a segment operating loss of ₹1.68 Cr on ₹58 Cr of sales, driven by raw-material cost inflation that the company chose not to pass on to consumers and a near-50% increase in headcount for market development.
• Breakeven within reach: Management estimates that an additional ₹4–5 Cr of health product sales will bring the segment to breakeven.

Pet Care

• Early-stage launch: The division spent its first four months building a sales force across Delhi, Calcutta, Bangalore and Bombay and identifying contract manufacturers; actual sales occurred only in the last 1–1.5 months of the quarter.
• Product portfolio: Eleven products have been launched covering anti-infectives, parasites, grooming, nutritionals and therapeutics, with more launches planned from Q3 and Q4.
• Breakeven ambition: Management expects the division to break even on sales within this financial year, but declined to give any revenue guidance or timeline for when it becomes meaningful to overall revenue.

Rajiv Gandhi: “we have been passing through tough times for the last two years just let us breathe and let us just put our head down and take it further trust me this division is also going to give us a lot of pride.”

Covaxin Drug Substance

• Validation phase: The multipurpose facility is in validation; a recent meeting was held with Bharat Biotech and the structure is being put in place to go on-stream and take up the first batch within roughly three months.
• Repurposing readiness: A strong plan is ready to repurpose the facility the moment any indication of changing demand for Covaxin drug substance is received; management says this is fully prepared and not a concern.

International Business: Africa & Nepal

• Africa commercialization progressing: Five vaccines have been commercially made in Africa; NOC to start marketing three has been received and the remaining two are expected in the next few weeks.
• Demand visibility vs. macro reality: Innumerable meetings over three to four years with African departments of animal husbandry have confirmed requirements, but country programs are slow due to worldwide recessionary conditions, inflation and geopolitics.
• Africa sales outlook: The company is targeting sales to governments for CBPP, Newcastle disease, Gamboro and LSD vaccines; management expects reasonable sales by next quarter and hopes Africa reaches breakeven by mid next year, though it declines to quantify.
• Nepal: Esther Nepal had a tough quarter because FAO issued zero tenders; FAO has indicated things are reviving and the PPR eradication mandate is clear, while local domestic business efforts are slowly gathering.

Capacity Expansion & R&D Pipeline

• Bulk antigen capacity: Capex is complete; the expansion is about to commence and should start in Q3, doubling production capacity for current poultry and select large-animal vaccines.
• Fill-finish expansion delayed: Equipment supply from a foreign company has pushed the start to Q4.
• H9N2 avian influenza vaccine: The Government of India has permitted manufacture and sale; inquiries are already coming from multiple countries, and international registrations will follow initial domestic sales.
• R&D pipeline: Classical swine fever vaccine, sheep pox vaccine and a new version of the Brucella subunit vaccine are expected to be ready in the next six to eight months.
• Africa capacity utilization: Achieving roughly 20% of production capacity within the next six to eight months would be considered a success and in line with forecast.

Margins & Profitability

• Cost-side pressures: Cost on sales was higher year-on-year because the prior-year quarter still had COVID-era travel restrictions; market-development hiring grew the team by 1.5x; and raw-material costs for health products surged without being passed through.
• Segment profitability divergence: The vaccine segment remains profitable; the animal health products segment posted an operating loss of ₹1.68 Cr; management could not explain on the call a divergence versus the June 2021 quarter’s ₹0.68 Cr segment profit and committed to revert offline. The analyst stated the June 2021 quarter showed an operating loss of ₹3.6 Cr in the animal health care segment in the current results, versus a profit of ₹0.68 Cr shown last year.
• Margin recovery commitment: Management expects to return at least to the margins of a year ago, with gross margins in the higher 60s up to 70% and PAT margins around 35% to 40%.

Rajiv Gandhi: “We could go back to our margins which were there a year ago and you could be rest assured that we would be at the least up to those margins which we had at the least.”

Guidance & Commitments

Key Metrics