Hester Biosciences – Growing Steadily

Hester Biosciences: Detailed Investment Analysis

Company Overview

• Established: 1987
• Headquarters: Ahmedabad, Gujarat
• Primary Manufacturing Facility: Located in Mehsana, Gujarat, recognized as one of the largest facilities for animal vaccines in Asia.

Hester Biosciences is a leading player in the Indian veterinary healthcare sector, primarily engaged in the manufacturing of advanced veterinary vaccines and health products. The company is acknowledged as the second-largest poultry vaccine manufacturer in India, with a significant market presence and a diverse product portfolio.

Key Business Divisions

1. Poultry Healthcare

   • Description: This division is Hester’s largest and most established segment, offering a comprehensive range of vaccines and health products specifically for poultry.
   • Market Position: Holds approximately 35% market share in the poultry vaccine sector.
   • Revenue Contribution: Contributed approximately 51% of total sales in FY24. The division experienced a rebound after facing a 17% decline in FY23 due to high feed costs and low product prices.
   • Product Range: Offers 44 vaccines with 126 stock keeping units (SKUs), making it the largest range offered by any Indian company.
   • Growth Drivers: The anticipated launch of avian influenza vaccines and recovery from previous challenges are expected to further drive growth in this division.

2. Animal Healthcare

   • Description: This division focuses on vaccines and health products for large animals, including cattle, sheep, and goats.
   • Market Position: A leading supplier of PPR vaccines globally, holding approximately 75% market share.
   • Revenue Contribution: Contributed about 39% to total sales in FY24. The division has shown resilience with a revenue increase despite regulatory challenges.
   • Key Products: Includes Goat Pox vaccine and PPR vaccines. Hester supplies around 95% of India’s requirement for the Goat Pox vaccine.
   • Growth Drivers: Increased demand driven by government immunization programs against diseases like Lumpy Skin Disease.

3. Pet Care

   • Description: Launched operations in Q2 FY23, this is Hester’s newest division focusing on health products for pets.
   • Revenue Contribution: Accounts for approximately 9% of total sales in FY24, with remarkable growth of 49% compared to FY23.
   • Product Range: Includes dermatology, grooming products, specialty nutrition, anti-infectives, and parasiticides.
   • Growth Prospects: Plans to introduce new products and expand distribution networks to cater to growing demand.

Revenue Contribution Breakdown (FY24)

Key Products and Programs

• Goat Pox Vaccine: Supplies around 95% of India’s requirement to protect cattle against Lumpy Skin Disease (LSD).
• PPR Vaccine: Secured a tender for supplying PPR vaccines for a national immunization program aimed at sheep and goats, with a total supply of 30 crore doses, valued at ₹30 crore by October 2024.
• CuRx and iSumovet: These brands contained Ketoprofen, which has been banned for animal use in India. Hester is redesigning these products for re-launch.

Financial Performance

In FY24, Hester Biosciences reported:

• Total Revenue: ₹305 crore
• Revenue growth was driven by:
  • A significant increase in sales from the Animal Healthcare division (up by approximately 89% YoY).
  • Poultry vaccines grew by 22%, contributing over half of the company’s revenue.

Challenges

1. Volatility in the Poultry Industry

   • High feed costs and fluctuating poultry product prices can impact demand for vaccines and health products.

2. Regulatory Challenges

   • Changes in drug regulations can necessitate product discontinuation or reformulation.

3. Competition

   • The animal healthcare market is becoming increasingly competitive; continuous innovation is required to maintain market position.

4. Dependence on Poultry Healthcare

   • While diversifying, Hester’s revenue is still heavily reliant on poultry healthcare; downturns could significantly impact overall performance.

Growth Prospects

1. Geographical Expansion

   • Targeting African markets presents substantial growth opportunities; plans include establishing a manufacturing plant in Tanzania.

2. Growing Animal Healthcare Division

   • Focused on critical disease vaccines tailored for the African continent.

3. Pet Care Expansion

   • Significant growth potential with plans to introduce new products and expand sales territories.

4. Research and Development Investments

   • Emphasis on developing new products to meet evolving market needs.

5. Focus on Government Tenders

   • Active involvement in government tenders contributes significantly to revenue growth.

Reasons for Slow Growth

Hester Biosciences has faced several challenges that have contributed to slower-than-expected growth:

1. Delays in Projects

   • Inordinate delays in projects such as Covaxin drug substance and operations at Hester Biosciences Africa Limited have hindered revenue generation.

2. Market Challenges

   • Saleability risk remains a concern for new markets; fluctuations in poultry product prices have adversely impacted sales growth.

3. Dependence on External Factors

   • Growth is dependent on government programs for large animal vaccines; delays can affect operations.

4. Challenges in New Markets

   • Expansion into African markets has faced challenges due to economic conditions and regulatory hurdles.

5. Capacity Constraints

   • Past capacity constraints limited Hester’s ability to meet demand; however, new capacities are now functional.

Reasons for Shrinking Margins

Hester has experienced declining profit margins due to several factors:

1. Change in Sales Mix Towards Lower-Margin Products

   • Diversification into lower-margin products has affected overall profitability.

2. Increased Marketing and Distribution Costs

   • Investments in expanding sales efforts have pressured short-term profitability.

3. Expiry of Poultry Vaccine Stock

   • Write-offs from expired stock have impacted gross margins directly.

4. Impact of External Factors

   • Disruptions from COVID-19 and fluctuations in feed costs have affected margins negatively.

5. Investment in New Business Units

   • Initial costs associated with launching new divisions like pet care have pressured margins temporarily.