Hester Biosciences - Growing Steadily

Stock Opportunities Untested - but worth a good look
1

Cmp 104, market cap around 88.47 crores.

Hester Biosciences is a 25 year old company specialized in the manufacturing of advanced veterinary vaccines. It is the second largest poultry vaccine manufacturer in India. The company operates one of the largest single location animal manufacturing units in Asia. Its primary manufacturing facility is located in Merda-Arday, in Gujarat. The company has a large product basket of 39 live and inactivated vaccines. In 2008, the company changed its name to Hester Biosciences from Hester Pharmaceuticals. Hester Biosciences has two subsidiary companies, Hester Biosciences Mauritius (wholly owned) and Hester Biosciences Nepal Private Ltd (65% holding). The facility in Nepal is a 100% export oriented unit, aimed at expanding reach to the markets of Nigeria, Sudan, Pakistan, Iran, Ethiopia and Middle East.**

This company initially started with Poultry vaccines, and then entered in large animalâs vaccine segment based on its growth plan. Beginning this financial year, Hester has launched 3 additional divisions - Large Animal Biologicals, Large animal healthcare and Poultry healthcare, besides its existing Poultry Biologicals division. The products are planned in the new division to be launched in phases beginning from October 2012. (Expecting to see positive effect in their top line in this qtr). With the launch of these divisions, Hester expects a better penetration in the domestic as well as in the international veterinary market.*

EXPANSION PLANS

The company has inorganically expanded its Indian footprint by strengthening the marketing team and product portfolio after buying Innoves Animal Health Private limited.

The company has invested Rs. 12 crore in setting up a quality control laboratory, (to be commissioned by December 2012) which will qualify the company for additional international accreditations, which should translate into a wider footprint across the regulated markets of Europe and Asia.*

The export oriented unit in Nepal, which is being developed at an investment of close to Rs. 18 crore. The facility is expected to go on stream by February 2013. The facility in Nepal will manufacture vaccines for large animals like sheep and cattle. **

FINANCIALS

The company recently gave Bonus shares 1:2. This is dividend paying company

LAST FEW YEARS RESULTS

H1 FY12

Q2 FY 12

Q1 FY 12

FY12

FY11

FY10

FY9

FY8

Total Income

29.41

15.55

13.87

48.47

42.1

37.61

30.25

32.91

Total Expenses

18.42

9.65

8.77

29.35

23.91

21.42

15.37

15.66

Interest

1.48

0.83

0.65

2.83

2.53

2.36

2.89

2.66

PBDT

9.52

5.07

4.45

16.34

15.67

13.83

12

14.6

Net Profit

4.45

2.35

2.1

8.27

7.6

6.03

4.74

7.04

Equity

5.67

5.67

5.67

5.67

5.19

5.19

5.19

5.19

Reserves

55.52

41.15

35.67

31.46

28.5

INDUSTRY OVERVIEW

As per estimates by ICRA (as of June 2011), the domestic poultry market size is more than Rs. 47,000 crore. The poultry sector has been growing 8-10% annually over the past decade and at more than 15% over the past three years. ICRA estimates that the domestic broiler meat demand will grow at around 15-18%, while table egg demand is expected to grow at 5%-7% over the medium term. India ranks fourth in broiler meat production, producing 2.9 million metric tons (MMT) of broiler meat. The U.S. and China lead with annual production of 24.0 MMT and 12.3 MMT respectively, thereby providing large potential to grow. At the same time, India is ranked third in table egg production after the U.S. and China, with annual production of 57 billion eggs. Moreover, the annual per capita consumption of poultry meat in India is far below the recommended and global levels. This offers ample opportunity for the industry to grow. Moreover, the demand pull for the sector is strong owing to rising purchasing power of Indians, changing food habits and rapid urbanization.**

The vaccination market in the other than poultry segment is also vast, given that India boasts of the worldâs largest dairy herd. Moreover, 90% of the market constitutes branded generics. The transition of livestock rearing is evolving towards commercial farms in India, which will lead to better nutritional and health care for Indiaâs livestock and demand for products thereof.**

CONCLUSION

For long-term investors this is truly an Untested -but hey, worth a look!!!..

Reference:

www.bseindia.com

*Source: Company Annual Report

**Source: http://www.bseindia.com/download/Research_Report/Report/524669/2012-13/Hester%20Bio.pdf

VIEWS INVITED.

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2

Working capital is outpacing sales. Not a good business to put money in to.




Working Capital/Sales 52.61('12) 39.93('11) 23.18('10) 9.02('09) 3.43('08)
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3
[quote="atulgarg, post:2, topic:974813914"] > Working capital is outpacing sales. Not a good business to put money in to. [/quote]

HelloAtul,

Thanks for your reply on this.I am not an full time analyst, I have just joined valuepickr andI will introduce myselfin ouranother thread.I am a learner through my readings,Lessons froexperiences (have burntmy fingers)andconvictions.

So allseniors please correct mewherever you feelI am wrong.

Following are my calculations on Working Capital perrupee of Sales.

FY12

FY11

FY10

FY9

FY8

Sales Turnover

48.26

41.97

37.53

30.16

32.63

Net Current Assets (cr)

28.72

27.6

21.17

14.88

12.7

Current Liabilities (cr)

10.67

7.7

6.64

7.54

5.43

Working Capital (cr)

18.05

19.9

14.53

7.34

7.27

Working Capital perrupee of Sales (%)

37.40

47.41

38.72

24.34

22.28

Being a manufacturing company20 -25 % of working capital perrupee of sales is expected (I will let seniors to comment on this), As you can see this ratio is higher than expect, this might be the reason why they have initiated the strengthening of Marketing footprints. (Accquisitionof Innoves).

Disc: Through this posting , My intention was to bring the untested, undiscussedstock to the tableandget views from seniors like, Donald,Hitesh,Ayush.. list is big.

Regards.

Satya




Working Capital/Sales 52.61('12) 39.93('11) 23.18('10) 9.02('09) 3.43('08)

4

satyendra,

It seems while sales growth has been steady though not spectacular, profits seem to be almost stagnating.

unless there is a definite trigger which can push the company on a strong growth track It is difficult to see too much investment logic in the stock.

the results of the expansions need to be monitored to see any future growth potential.

regards

hitesh.

5

Hi Satyendra,

The positives are surely there - like 1. its a niche area and if the company does something innovative big upsides can be there 2. The margins are pretty good.

However, the negative is that the size at which the co is, I’m not seeing anything extra-ordinary as of now. While venturing into the small caps, I try to look for - higher growth along with cheap valuations.It seems to be missing as of now.

Do share if you have any updates on their expansion plans or some new developments taking place.

Ayush

6

Satyendra,

A good post. I feel the Company is in a niche that is set to grow with growth in coroporatisation of poultry/ dairy.

Need to find out the strength of the Company’s product vis-a-vis competitors to understand if the Company will be able to reap the benefits out of the growth in the segment.

PS: This is on my watchlist

Regards

7

Hester'sreported net sales of Rs 18.7 crore up around 60 per cent from Rs 11.7 crore in the corresponding quarter last fiscal.

H1 FY12

Q2 FY 12

Q1 FY 12

FY12

FY11

FY10

FY9

FY8

Total Income

29.41

15.55

13.87

48.47

42.1

37.61

30.25

32.91

Total Expenses

18.42

9.65

8.77

29.35

23.91

21.42

15.37

15.66

Interest

1.48

0.83

0.65

2.83

2.53

2.36

2.89

2.66

PBDT

9.52

5.07

4.45

16.34

15.67

13.83

12

14.6

Net Profit

4.45

2.35

2.1

8.27

7.6

6.03

4.74

7.04

Equity

5.67

5.67

5.67

5.67

5.19

5.19

5.19

5.19

H1 FY12

Q2 FY 12

Q1 FY 12

FY12

FY11

FY10

FY9

FY8

Total Income

29.41

15.55

13.87

48.47

42.1

37.61

30.25

32.91

Total Expenses

18.42

9.65

8.77

29.35

23.91

21.42

15.37

15.66

Interest

1.48

0.83

0.65

2.83

2.53

2.36

2.89

2.66

PBDT

9.52

5.07

4.45

16.34

15.67

13.83

12

14.6

Net Profit

4.45

2.35

2.1

8.27

7.6

6.03

4.74

7.04

Equity

5.67

5.67

5.67

5.67

5.19

5.19

5.19

5.19

H1 FY12

Q2 FY 12

Q1 FY 12

FY12

FY11

FY10

FY9

FY8

Total Income

29.41

15.55

13.87

48.47

42.1

37.61

30.25

32.91

Total Expenses

18.42

9.65

8.77

29.35

23.91

21.42

15.37

15.66

Interest

1.48

0.83

0.65

2.83

2.53

2.36

2.89

2.66

PBDT

9.52

5.07

4.45

16.34

15.67

13.83

12

14.6

Net Profit

4.45

2.35

2.1

8.27

7.6

6.03

4.74

7.04

Equity

5.67

5.67

5.67

5.67

5.19

5.19

5.19

5.19

H1 FY12

Q2 FY 12

Q1 FY 12

FY12

FY11

FY10

FY9

FY8

Total Income

29.41

15.55

13.87

48.47

42.1

37.61

30.25

32.91

Total Expenses

18.42

9.65

8.77

29.35

23.91

21.42

15.37

15.66

Interest

1.48

0.83

0.65

2.83

2.53

2.36

2.89

2.66

PBDT

9.52

5.07

4.45

16.34

15.67

13.83

12

14.6

Net Profit

4.45

2.35

2.1

8.27

7.6

6.03

4.74

7.04

Equity

5.67

5.67

5.67

5.67

5.19

5.19

5.19

5.19

Q3FY12

Q2 FY 12

Q1 FY 12

FY12

FY11

FY10

FY9

FY8

Total Income

18.70

15.55

13.87

48.47

42.1

37.61

30.25

32.91

Total Expenses

11.61

9.65

8.77

29.35

23.91

21.42

15.37

15.66

Interest

0.83

0.83

0.65

2.83

2.53

2.36

2.89

2.66

PBDT

6.28

5.07

4.45

16.34

15.67

13.83

12

14.6

Net Profit

2.77

2.35

2.1

8.27

7.6

6.03

4.74

7.04

Equity

8.51

5.67

5.67

5.67

5.19

5.19

5.19

5.19

The reason for 4 % growth in PAT is convincingly given by CEO in following link.

http://economictimes.indiatimes.com/news/news-by-company/earnings/earnings-news/hester-enters-veterinary-diagnostic-segment-q3-net-profit-rs-2-76-crore/articleshow/18240335.cms

Request all seniors to express their views/ analysis.

Disc: I have this stock in my portflio.

8

Administrator please provide a button to edit the replies to the owner of thread. I want to clear extra pastes from above message. btw readers please refer last table.

Satya

9

Hello Satyen,

I refer to your table computing the Working Capital per rupee of sales. I think there is an error in computing theWorkingCapital. Net Current Assets are ideally computed reducing CurrentLiabilities from Total Current Assets to arrive at Net Current Assets. You seem to have reduced Current Liabilities again from the Net Current Assets. Pls check.

http://www.moneycontrol.com/financials/hesterbiosciences/balance-sheet/HB01#HB01

10

Hester had applied for manufacturing licenses for sheep and cattle vaccines which were supposed to be received by Calendar 2013 end.

Does anyone have any updates on the same?

11

Details from latest AR

1.2013-14 was a tough year for Hestor bcz one of the imported intermediate got suspended,this affected their top line growth in first 2 quarters.By the end of the year they are managed to come up with substitute product for the intermediate.

2.Much awaited Nepal plant will come operational from Jan 2015 onwards.subsequently LAH (large animal health division) will also contribute significantly from the 3rd quarter of this FY.

3.PPR vaccine for goat and sheep and brucella vaccine for cattle both having good opportunity size will be launched 3rd quarter of this year.

4.During the year Hestor terminated its JV with ubio tech.(Animal diagnostics business).

My comments

A small company aspiring to reach the big league doing its all effort for growing big.One go through last few AR’s we get the feeling that management is ambitious and transparent,most of the time they walk the talk and delivering as per management comments.Their foray into LAH division is a thing to watch as it seems like a low margin high volume products not like poultry vaccines.Diagnostic business is a question mark now as the company not shared any reasons behind the termination of JV.

Second half of this year could be a major turning point for this company,may be that is the reason behind the recent run up.

If anyone can throw some light on this un discovered gem ) : it will be great.

Disclosure :Bought recently 2% of portfolio average buy price 240.

12

Few clarification/queries anyone can help out.

1). Nepal plant is setup only for export.where they are going to manufacture large animal vaccines for Indian market.

2).Any change in govt policy towards PPR eradication policy which is embarked by UPA.

3).Poultry vaccine segment is growing slowly,how much is the export contribution in this segment.As per previous AR company has excess capacity in this segment.

4).What is the immediate opportunity size of PPR vaccine.

13

Shanid,

Valuation looks expensive after recent runup. 26.3% PE for 325 MarketCap company is on higher side.

The best way to participate in Animal Bioscience growth story is to closely track it. Starting with smaller allocation and moving towards higher in future as story unfolds is safest way.

Kunal

14

Another point that needs clarification is theincome tax of earlier year of Rs. 1.87 crs paid in FY14 as well asRs. 2.4 crs Interest on Income Tax paid in FY 14. Both may be possibly linked to non - payment of Income Tax in the previous financial years. However there is no mention in the FY13 AR of any income tax disputes?

15

I think higher valuation for Hester Bio is mainly because of sustaining above average OPM with decent growth.

Kunal

16

Edelweiss has initiated coverage on Hester in their CUB Series. It is a good short and crisp report that they have come up with. Pasting the link below for everybody’s benefit. The report is available in public domainand the samecan be accessed by registering for free on the Edelweiss website.

https://www.edelweiss.in/research/CUB-Series-Hester-Biosciences-Ltd--Initiating-Coverage/10004939.html

In the ‘Cub Series’ Edelweiss covers Small Cap companies with Strong long term potential.

Cheers,

HR!

Discl: I hold.

17

Hai,

interesting biz. Can you share full report ?

Regards,

Vijay

domainand the samecan

https://www.edelweiss.in/research/CUB-Series-Hester-Biosciences-Ltd–Initiating-Coverage/10004939.html Link: https://www.edelweiss.in/research/CUB-Series-Hester-Biosciences-Ltd–Initiating-Coverage/10004939.html

Discl: I hold.

18

Hi Vijay,

As I said in my post above. One can create a login id, password on Edelweiss website anddownload the report. Use the weblink given in my post above.

It is a PPT in a PDF format. Cant paste the information here as lot of slides in it.

Cheers,

HR!

19

First Indian Goat Pox Vaccine Released - http://www.thesheepsite.com/news/1131/first-indian-goat-pox-vaccine-released/

1 Like
20

This year finally seems like sales and profits are growing as expected.Nepal plant is expected to start commercial production by July 2015.Company’s product portfolio comprises of over 47 vaccines and over 35 health products, which are distributed through Hester’s pan-India distribution network. Exports are currently to eight countries with registration process on in over 20 countries.

Hester also plans to achieve sales of 200 cr by FY 16-17E(In 2012-13 annual report they expected sales to be 1000 crore by 2020 but that looks extremely difficult) and Export sales to be equal or more than domestic sales in 4 years.They have constant focus on R&D and innovation and many new innovations are mentioned in Annual reports.Africa plant was supposed to start by 2015 April but no other updates as of now.They have also acquired number of companies recently and expanded their portfolio and products substantially.

Concerns/Queries

1)OPM seems to be declining trying to Grow Sales.It has come down to about 30% from earlier 44-45%.Management has clearly indicated they are chasing Top line growth now and expects bottom line to improve going forward.

“I must mention however that an aggressive pursuit to grow our topline impacted our bottom line growth to some extent on account of higher production and distribution costs.We believe that this will get corrected progressively with better planning and once we reach scale in terms of our production and distribution infrastructure.”

As per the data I have from moneycontrol, looks like Miscellaneous Expenses has risen a lot.Need to investigate the different components.

2)Delays - Nepal plant was expected to start early 2013 and it’s postponed to July 2015.No update in Africa.

3)Inventory days seem to be increasing constantly till 2014 but this year there is some improvement.

4)Working Capital/Sales also seems to be quite high.

5)As per annual report data , they are still dependent on Domestic market heavily and export seems stangant(Attached Excel).Infact their Trading Sales is growing faster than export.I am not sure what trading sales refer to.Can anyone help? Also export sales in 2014 was around 3.2 crores and domestic sales 62 crores.Can export sales really jump 20+ times in next 4-5 years?

6)Animal health segment is still not significant part of their portfolio.Only about 6.5% sales from animal health as of Q3.Heavily dependent on Poultry something like bird flu can have adverse impact?

7)Are they making too many acquisitions?Recently Hester terminated its JV (in the name of Diavetra Lifesciences Private Limited) with Ubio Biotechnology Systems Private Limited. The JV was set up with an objective to manufacture veterinary diagnostics. Hester still independently pursues the objective to manufacture veterinary diagnostics.This initiative shall gain momentum in 2015-2016. This diagnostics opportunity was mentioned as 1billion USD opprtunity which is also postponed now.

Also adding some links I googled for overview of this sector. Industry is 70% owned by top 5 players in regulated markets(EU/US) so growth has to come mostly from other markets.

I don’t have any position in this stock as of now ,at 34 PE it seems really expensive to me considering the delays and slow growth as of now.Attaching the screener excel i used for analysis (Thanks to Ayush for the super website and Donald for the template).

Please note - I have just started my equity learning recently, so if you see anything wrong/blunder please point out to me.

Thanks,
Anindya

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