Hester Biosciences Research Report By Karvy

High-margin Large Animal Vaccines Sales to Boost Both Revenues and Operating Leverage

Domestic Brucella and PPR Vaccines Sales Drive Profitability:

A surprise and significant jump in domestic Large Animal Vaccines (LAV) sales – primarily Brucella vaccine and to smaller degree PPR vaccines – have led to considerable expansion in gross margin and EBITDA margin. LAV sales have increased from Rs.2.2 Mn in Q2FY17 to Rs.56.2 Mn in Q2FY18. During Q1FY18 LAV sales were Rs.4.9 Mn. Both Brucella and PPR sales during the quarter are attributed to tender orders from about 10 state governments.

Management believes that these orders are not only sustainable but will also increase in size in the future as more states start participating in issuing tenders. Competition is expected to be limited with about 2 firms for Brucella vaccine and about 3 firms for PPR vaccine.
Management believes that margins may expand further with rising LAV sales – both domestic and exports.

Slow Traction in PPR Exports from Nepal But is Expected to Ramp-up by End of FY18E and During FY19E:

Nepal plant has required the approvals from African Quality Control Lab, this enables the firm to participate and compete in the FAO tenders process.

Tendering by FAO has been slow leading to smaller PPR sales. Management says that they would quote PPR vaccine at a price higher than that in India and expects to be the lowest price bid. During H1FY18, Nepal facility had sales of Rs.19.4 Mn and a net loss of about Rs.19 Mn.

Management expects that in the near-to-mid term, PPR tendering would pick-up and that the financial health of Nepal plant would turn around.

Valuation and Outlook

We are introducing FY19E financials in this report. At CMP of Rs.1162, HBL is currently trading at P/E of 18.1x based on FY19E EPS of Rs.64.4. Rise in high-margin LAV sales would lead to higher operating leverage, clearly visible in 813 bps expansion in EBITDA margin. We believe that the company is well-poised for significant growth in the future. We, thus, reiterate a “BUY” recommendation with Rs.1417 target price revised upwards based on 22x FY19E EPS of Rs.64.4. The target of Rs.1417 represents a potential upside of 22%.