Hester Biosciences Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Animal healthcare drove the quarter: The division grew 93%, lifting its revenue share from ~30% to 42%, powered by government immunization programs and a now-optimal sales force.
• Poultry stress is the drag: Poultry healthcare grew only 13% as weak egg and meat prices squeezed farmer margins, cutting chick placements and vaccine offtake; health products provided a partial offset.
• A one-off trading order distorts the P&L: INR26 crores of pharma products revenue, shown separately, is a competitive-price, no-commitment order that depressed the bottom line; excluding it changes the profit picture.
• Africa is a capacity story waiting on market creation: Hester is the continent's largest animal vaccine plant with no local competition, but dollar shortages and post-COVID delays have pushed the ramp-up out by six to eight months.
• What to watch next quarter: Whether the poultry trade upturn firms into a real recovery, the pace of PPR tender execution toward the INR35 crores target, and any concrete progress on repurposing the BSL-3 facility.

The Animal Healthcare Surge

• Government programs became a material revenue stream: The LSD outbreak triggered a national advisory for yearly cattle immunization using goat pox vaccine, and the PPR national immunization program in sheep and goat commenced, with Hester as a named supplier under tender.
• PPR tender quantified: Total supply of INR30 crores doses by October 2024 in a phased manner, with total sales expected at approximately INR35 crores, or roughly INR3 crores a month.
• LSD is now an annual recurring opportunity: The government vaccinated 9 crore cattle against LSD last year; management knew the program would repeat this year and planned capacity accordingly, unlike the surprise nature of the prior year's order.
• Sales force at optimal size: The marketing team now covers most of the country with 282 people; management stated no further hiring is planned on the marketing side, so incremental revenue should flow with lower associated cost growth.
• Margins improved on product mix: Animal healthcare margins rose primarily because of increased sales of higher-margin goat pox and PPR vaccines during the quarter.

Priya Gandhi: "To achieve a greater height one has to redefine many things, which is gives an impression of going down a little bit. but that is to consolidate and have a subsequent huge sustainable rise."

Poultry Healthcare: Stress and the Offset

• Vaccine sales fell on industry stress: Continuous pressure on egg and meat prices relative to rising product costs led farmers to place fewer chicks, directly reducing vaccine offtake.
• Health products grew 23% and derisk the division: Three new products (two therapeutics, one supplement) achieved over 100% of budget, and the growing health product contribution reduces dependency on any single product line.
• Ketoprofen ban created a manageable disruption: Two Hester brands (CuRx and iSumovet) contained the now-banned API; management estimates a potential sales loss of around INR1 crores and expects newer versions out in a couple of months, with rebranding taking approximately three months.
• Poultry trade showing tentative upturn: The trade business has taken a little upturn, lesser than expected but with an upward trend, though a full recovery remains unconfirmed.
• Margins compressed as mix shifted: Poultry healthcare margins reduced primarily because vaccine sales, which carry higher profitability than health products, declined during the quarter even as health product sales increased.

The Pharma Products One-Off

• INR26 crores of trading revenue, fully disclosed: Management showed the pharma products line separately for transparency, confirming it is a trading business distinct from animal and poultry healthcare.
• No commitment for recurrence: The order was sold at competitive prices which impacted the bottom line; management stated there is no commitment for future such orders and, for practical purposes, it should be presumed as one-time, though they believe it could reoccur.
• Excluding it changes the profit view: If that business is excluded, the bottom line looks different, a point management made explicitly when discussing profitability.

Rajiv Gandhi: "For sheer transparency, we have shown it separately. This is an order which -- yes, we have no commitment for any future such orders. We believe it will happen. But on documentation basis, this could be taken as a one of its kind."

Africa: Capacity Without Competition, Waiting on Markets

• Structural advantages are in place: Hester is the biggest animal vaccine plant on the African continent and the biggest pharmaceutical investor in Tanzania, with no local competition. The Bill and Melinda Gates Foundation funded the asset creation but does not underwrite sales or offtake.
• Market creation delayed by macro forces: COVID, dollar strengthening, and countries lacking dollars have slowed the ramp-up; management said all this should have happened faster and the company should have been sailing by now.
• Early signs of movement: Botswana has ordered vaccines, and Hester Africa has already launched six products with licenses for multiple vaccines. In coming quarters, the company shall start supplying PPR, CBPP, LSD, ND and IBD vaccines.
• Rupee trade agreement with Tanzania: India and Tanzania have entered into a rupee trade agreement, allowing sales to be denominated in rupees, which could ease dollar-shortage friction.
• Timeline for normalization: Management asked for around six to eight months for things to be back on track in Africa, though it declined to give quantitative guidance, calling it very difficult given the delays.

Rajiv Gandhi: "All this would have happened much more faster, had COVID not been there. It would have happened much more faster if the current political situation, the dollar strengthening; the country is not having dollars."

Capacity, Pipeline and the BSL-3 Question

• Capacity doubling near completion: Construction of bulk antigen (drug substance) and fill-finish (drug product) facilities is complete; the drug substance facility is already approved, and the drug product facility is preparing for regulatory inspection. Together they will double overall vaccine manufacturing capacity.
• Four next-generation vaccines in development: The pipeline includes a next-generation Brucella vaccine (technology from IVRI), Classical Swine Fever vaccine, sheep/goat pox vaccine, lumpy skin disease vaccine (technology acquired), a PPR and goat pox combined vaccine (in talks with IVRI), and an Avian influenza vaccine for poultry. These will be produced in current production areas, not the BSL-3 facility.
• BSL-3 facility needs a new purpose: Built with Department of Biotechnology and BIRAC support under Mission COVID Suraksha, the facility has regulatory approval but no COVID demand. Discussions are ongoing with BIRAC to repurpose it for other human or veterinary vaccines requiring Biosafety Level 3.
• Repurposing spend is nominal: Management estimates the spend would not exceed a couple of crores, and could be under INR50 lakhs.
• No significant capex remaining on existing projects: The majority of expenditure has already been done and the company is now in the regulatory approval process; it is well covered for current projects unless a new project arises.

The Mix Shift and the Path to INR500 Crores

• Vaccine share will rise from current levels: Management expects the vaccine business to increase as a percentage of the mix, but to reach INR500 crores and beyond, the company will have to sell more health products because that is the bigger market in rupee value.
• Health products carry a better asset-to-turnover ratio: The return on investment is higher in animal health products because the asset-to-turnover ratio is much better; as the company consolidates that business, higher turnover at lesser investment will balance off profitability concerns.
• Exports were a drag this quarter: All exports come from the poultry healthcare division and were impacted by geopolitical situations in African countries where the company's focus lies, compounded by registration delays that caused forecasts to be missed.
• Hester Nepal provided stability: Turnover of INR6.5 crores was primarily driven by export orders picking up and local poultry vaccine demand met by producing Gumboro; the company is hopeful on receiving FAO tender orders in coming quarters.
• FAO business yet to pick up: The FAO tendering business has not materialized, likely due to funding challenges at their end, though INR6 crores of business has been done from Nepal.

Rajiv Gandhi: "Yes, it will be absolutely right. One, there is no competition. Two, we are the biggest animal vaccine plant in the continent of Africa, the biggest pharmaceutical investor in the country of Tanzania."

Guidance & Commitments

Key Metrics