Hester Biosciences Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Poultry stress drags top-line, Animal Health rescues: The core poultry vaccine business remains under severe pressure from a two-year industry downcycle, while the Lumpy Skin Disease outbreak handed Hester an 80–85% share of India's goat pox vaccine supply, driving Animal Healthcare growth.
• Deliberate margin sacrifice for derisking: Operating margins contracted as the company aggressively pushed lower-margin Health Products, a conscious trade-off to reduce segment and territory concentration, with management confident the spend recovers in H2.
• International business stalled on Dollar shortages: Exports to key African markets (Egypt, Nigeria, Ethiopia) and Nepal tender business both slumped because importing countries cannot remit Dollars, a macro headwind outside Hester's control.
• Pipeline building but not yet billing: The PPR tender win (~Rs. 40 crores), Covaxin drug substance project, Monkey Pox vaccine shortlisting, and LSD vaccine technology acquisition are all in motion, but none contributed materially to Q2 and most are back-half or next-year stories.
• What to watch next quarter: Whether the PPR supplies actually begin in January, whether Hester Africa's four registered vaccines convert to meaningful sales, and whether the marketing spend laid down in Q2 shows up as revenue in Q3/Q4.

Poultry: The Core Business Under Pressure

• Two-year downcycle: High raw material input prices combined with low final product prices (meat and eggs) have squeezed poultry farmers, causing them to reduce inputs including vaccines, which directly hits Hester's productivity-linked product demand.
• Vicious cycle: Diminishing poultry population leads to lower vaccine consumption, which further stresses the industry; management described this as a structural stress rather than a one-quarter blip.
• No quick fix offered: Management did not call a bottom or timeline for recovery in the poultry segment, implying the drag could persist until input-output price dynamics normalize for farmers.

Rajiv Gandhi: "The raw material input prices have been going up. The final product prices that is meat and eggs are very low. And this has really put the industry in a lot of stress input costs high, output revenues coming in low."

Animal Healthcare: The LSD Windfall and Beyond

• Goat pox vaccine dominance: The Lumpy Skin Disease outbreak made Hester the main supplier of goat pox vaccine across India with an 80–85% market share, giving a strong spurt to the Animal Healthcare division this quarter.
• Recurring, not one-time: The vaccine must be administered once a year, and the Government of India is considering including it in the National Immunization Program, so demand is expected to sustain and even grow year-on-year.
• LSD vaccine technology: The government has released technology to make the Lumpy Skin Disease vaccine directly, and Hester is one of the pitchers to acquire it and would soon do so, adding a second LSD-related product to the portfolio.
• PPR tender won, supplies delayed: Hester won the Government of India tender for PPR vaccine worth approximately Rs. 40 crores over ~24 months, but supplies were postponed by 2–3 months at Hester's own request due to the LSD situation and will now start from January onwards.
• Private market pricing nuance: Some veterinarians recommend a 3ml dose versus the government directive of 1ml, so the cost to farmers can be up to three times higher in private channels, though Hester's per-unit pricing does not differ materially between private and government sales.

Margin Story: Derisking Now, Recovery Later

• Health Products drag: Health Products carry lower margins than vaccines, and the deliberate push to grow this segment (up ~30%, mostly in Animal Healthcare) directly compressed gross profit, operating EBITDA, and PAT margins.
• Raw material squeeze: Input prices for Health Products formulations rose tremendously, but Hester could not pass on the increase because it needs price consistency in the field and does not deal in commodities where prices can fluctuate quarter-to-quarter.
• Marketing investment front-loaded: Aggressive promotional activity including disease videos, expanded sales team outreach, and increased client visits were expensed in Q2, with management "extremely sure" these costs will be more than recovered in Q3, Q4, and the coming year.
• Two-year normalization path: Management acknowledged the margin compression and committed to turning the wheel around in roughly two years, aiming to get close to, if not touch, the highest margins ever achieved, with pet business margins expected to help.

Rajiv Gandhi: "Health Products, margins are definitely lower than the Vaccine margin. So, with the increase on the Health Product sale, it directly impacts the bottom-line. But as you all may be aware, the overall global market, the Indian market of Health Products is infinitely bigger than that of the vaccines."

International Business: Dollar Headwinds and Africa Build-Out

• Remittance blockade: Countries including Egypt, Nigeria, Malawi, Zambia, and Ethiopia have imposed high restrictions on international remittances due to Dollar shortages, preventing Hester from making supplies that would otherwise have shipped.
• Hester Nepal tender lumpiness: The Nepal business depends mainly on sporadic FAO tenders; an entire quarter can pass with no tender activity, and then more than a year's requirement may be covered in the next quarter, making quarterly comparisons meaningless.
• Nepal domestic pivot: To reduce tender dependency, Hester has started pushing poultry vaccines domestically in Nepal and has also registered vaccines from Nepal into a few African countries, shifting some production from India to Nepal for export.
• Hester Africa early stage: Four vaccines are registered and nominal sales have begun, but scaling up is an "uphill task" due to the taxing geopolitical situation; the company bought equity in an African distribution company and is registering in additional countries, with a bump-up expected "maybe in the next year" once approvals come through.
• Africa registration harmonization: Three or four regional organizations in Africa are moving toward centralized registration where approval in one country is automatically deemed in others, which would accelerate Hester's market access.

Rajiv Gandhi: "100%, that is the only objective, only focus, that is our goal."

Pet Care: Early Innings, Separate Reporting Coming

• Q1 launch, Q2 focus: Hester launched 9–10 pet products in Q1 across Therapeutics and Specialty Nutrition and concentrated on those 10 products in Q2; the top-line target of Rs. 1 crore for H1 was expected to be met by November 2022.
• Standalone division by year-end: Pet Care is currently included in Animal Healthcare, but after the end of this fiscal year it will be reported as a separate standalone division, signaling management's intent to build it into a material business.
• Q4 product wave: A new set of Therapeutics products including NSAIDs will launch in Q4, timed for the coming monsoon season and expected to work more in the first half of next year.
• Distribution push: The company plans to penetrate deeper into Tier-II cities and explore online channels to build its pet distribution network.
• Competitive positioning still undefined: When asked for granular market-share data and a specific competitive strategy, management offered general statements about product quality, packaging, and pricing advantage as an indigenized company, but did not provide a quantified roadmap.

Priya Gandhi: "I think one advantage we have being indigenized company is definitely with respect to the price. So, our prices are also something, the price at which we are giving the same quality is also something which is playing into our favor."

Capacity & Pipeline: Building for the Next Leg

• Capacity doubling by Q4: Bulk drug and fill-finish line expansion is nearly complete; by Q4, capacity for bulk antigen production and fill-finish will be doubled, ensuring that situations like the PPR postponement due to capacity constraints do not recur.
• Covaxin drug substance: In consortium with Gujarat Biotechnology Research Center, Hester set up a drug substance manufacturing unit to produce bulk antigen for Bharat Biotech's Covaxin, with an estimated capacity of ~0.7 crore doses per month and commercial production expected by fiscal year-end.
• BSL-3 facility optionality: The facility is described as one of the most modern BSL-3 laboratories in the country; management has already started thinking about alternative uses if Covaxin does not work out, and assured it will be put to use for "the best cause for producing any biological."
• Monkey Pox vaccine shortlisting: ICMR shortlisted Hester among companies to develop a Monkey Pox vaccine, an announcement made just two days before the call.
• Next CAPEX cycle: The company is looking at creating a state-of-the-art animal testing facility that would serve both Hester's needs and potentially international companies' trial requirements; a quantitative figure is expected next quarter after Board approval.

Rajiv Gandhi: "And be rest assured that this facility is one of the most modern BSL-3 laboratories created in the country would be put to use for the best cause for producing any biological."

Guidance & Commitments

Key Metrics