Hester Biosciences Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Poultry dependency halved, but not by design alone: The poultry division's revenue share fell from 80% to 60%, driven equally by animal health expansion and a stressed poultry industry where farmers face input costs above selling prices.
• Animal health is lumpy but structural: The LSD-driven spike in Q3 (₹43 Crores) halved to ₹21 Crores in Q4 as government immunization orders paused, yet the ₹40 Crore PPR tender win and a new LSD vaccine for FY2024 anchor a multi-year government-led growth story.
• Africa is the long-dated call option: The Tanzania plant holds \$25 million revenue potential at optimum capacity, but sales begin only in 6–9 months and the ramp takes four to five years, with no additional capex needed.
• Margins dipped, and the fix is a year away: Gross margin fell 1% on health product mix and expansion spend; management is "very conscious" and targets restoration to earlier levels, but not in a few quarters — "overall in a year's time or so."
• What to watch next quarter: Fill-finish commissioning doubling vaccine capacity, the pace of PPR tender execution, and whether the poultry industry's "abysmal low" actually begins to improve.

Poultry Division: Stress and a Floor

• Industry in recession: High input costs and low egg and meat prices have pushed the poultry industry into a tough phase where farmers cannot invest in resources, and payment cycles have been adversely affected even though demand continued.
• Degrowth arrested: Poultry healthcare degrowth narrowed from 27% in Q1 to 16% in Q4, and poultry other revenues rose from ₹32 Crores in Q3 to ₹36 Crores in Q4, driven by disease incidences and health product sales through the same marketing team.
• Vaccine vs health product mix shift: Within poultry, vaccines degrew 15% QoQ while health products increased 60% QoQ, though health products are growing from a very low base.
• No structural change in the customer base: The number of integrators and poultry producers remains the same; structural changes are now being seen in cattle rearing for milk, where consolidation and scientific tools are rising.

Rajiv Gandhi: "Probably now the poultry industry has reached such an abysmal low level that the only thing that can happen to it is improvement from here on."

Animal Health: Government Tailwinds, Lumpy Execution

• LSD created a Q3 spike, then a Q4 trough: Animal health revenue halved QoQ from ₹43 Crores to ₹21 Crores because government immunization orders placed in one quarter spike sales and the next quarter is lower, a lumpiness management accepts as inherent to the tender-driven business.
• PPR tender provides near-term visibility: Hester won the Government of India's PPR immunization tender worth ₹40 Crores, with ₹38 Crores to be executed in the coming year in a phased manner, though the program was delayed as the government focused on LSD.
• LSD vaccine for FY2024: Technology acquired from IVRI will yield a vaccine ready by FY2024, and yearly immunization against LSD is now advised by the Ministry, creating recurring demand for Hester's goat pox vaccine.
• PPR export dip is temporary: PPR export saw a dip due to lack of FAO tender orders compared to last year; FAO tenders will start coming in this year, aligned with the global PPR eradication goal.

Rajiv Gandhi: "The opportunity in India to grow in the agriculture sector is high and within the agriculture sector the easiest way to double the income of farmers especially those who have small chicken or cows in their home to improve the productivity of those production animals that way their income will go up much more faster..."

Africa: Capacity Built, Revenue Still to Come

• Tanzania plant is licensed and selling locally: Hester Africa received licenses for five or six products (PPR, CBPP, LSD for ruminants; ND, IBD for poultry), has begun sales within Tanzania, and started registration processes in nearby eastern and some western African countries through the Thrishool Exim JV, where Hester holds 50% equity.
• Revenue timeline is measured in years: Sales in Tanzania will start first in around six to eight or nine months; sales to other countries will begin after registrations, which take six to ten months. The ramp to the plant's \$25 million optimum capacity revenue will take approximately four to five years.
• Margins protected by higher realizations: Realization prices are higher in Africa; at worst case, margins will be in line with Indian profitability.
• No modular capacity build possible: Vaccine plant capacity is dictated by freeze-drying and incubation equipment sizing, so plants are built large from the beginning — this is standard in biologicals, not a one-off.

Capacity Expansion and the COVID-19 Legacy

• Fill-finish doubling imminent: Fill-finish (drug product) capacity commissioning will be completed in Q1 FY2024, doubling overall vaccine manufacturing capacity; bulk antigen (drug substance) capacity expansion is already complete.
• BSL-III facility repurposing underway: The BSL-III laboratory built under the Suraksha program with DBT, BIRAC, and Gujarat Biotechnology Research Centre received regulatory approval in Q4 FY2023; Hester is now working out which other vaccines requiring Biosafety Level 3 production can be made there.
• All capex is behind the company: Total capital is already invested for the ₹600 Crores revenue potential across geographies; only ₹10–12 Crores in capital creditors remains payable, and embarking on additional capital is "unlikely." Debt is at its highest level and will only go down.

Pet Care and Other Segments

• Pet care division launched and growing: Functional for three quarters, the division has launched around 10 products in 15 territories, with deworming solutions launched in Q4; a couple more specialized products are planned for the coming quarter. The business is growing at around 20% year-on-year, higher than poultry or animal healthcare.
• Pharmaceutical exports to Africa: ₹8.8 Crores revenue and ₹3.4 Crores PBT came from pharmaceutical products exported to Africa, which did not qualify under the two main divisions.
• Hester Nepal: Turnover of ₹12 Crores; introduced a few poultry vaccines due to increased local demand and expanded the local distribution channel. Capacity is currently at 20, with plans to first reach 40, requiring six months with marginal investment. Nepal's sales outlook depends on FAO PPR tenders and growing domestic market share.

Margins and the Mix Shift

• Gross margin declined 1%: The decline was driven by growth in health products contribution and work done towards expansion of animal and pet divisions, though health product gross margin percent improved more than 4% QoQ.
• The target mix is balanced: Management wants to grow both poultry and animal health on a one-to-one basis, within a 60-40 or 40-60 band, but will not commit to a precise ratio.
• Margin restoration is a year-long project: Management is "very conscious" of margins and will restore them to earlier levels, but now with both vaccines and health products in the mix; the timeline is not a few quarters but "overall in a year's time or so."

Rajiv Gandhi: "Having tasted blood that is the same thing having tasted good margins we are not going to leave it at that."

Guidance & Commitments

Key Metrics