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  • CMP : 1,574.9 Chg : -24.90 (-1.56%)
  • Target : 2,015.0 (6.45%)
  • Target Period : 12-18 Month
Company Update

16 Aug 2022

Weak poultry performance continues to weigh on numbers…

About The Stock

Hester is one of India’s leading animal healthcare companies & the second largest poultry vaccine manufacturer in the country. It has a strategic presence in 30+ countries with key markets being India, Nepal and Tanzania.

  • It operates through four broad verticals: poultry vaccines, poultry health products, animal vaccines and animal health products
  • Revenue segment wise: poultry healthcare:73%, animal healthcare: 27%
Q1FY23

Numbers weak as poultry farm economics turned adverse.

  • Sales were down 16% YoY to ₹ 50.7 crore
  • EBITDA was at ₹ 7.4 crore, down 56% YoY with margins at 14.7%. Margins declined amid higher spends on market expansion in the animal health
  • Adjusted PAT was at ₹ 4 crore (down 68% YoY)
What should Investors do?

Hester’s share price has grown by ~1.3x over the past three years (from ~₹ 1591 in August 2019 to ~₹ 2154 levels in August 2022).

  • Downgraded from HOLD to REDUCE due to adverse demand environment for poultry vaccines, slower ramp-up in Africa business, delay and uncertainty in execution of tenders along with dwindling margins
Target Price and Valuation

We value Hester at ₹ 2015 (base business at ₹ 1967 i.e. 38x FY24E EPS of ₹ 51.8 + NPV of ₹ 49 for Covaxin DS opportunity)

Key Triggers for future price performance
  • Opportunities in animal vaccines such as classical swine fever, lumpy skin disease (only player), sheep pox (only player) in the domestic space and expected launch of the modified Inactivated Coryza Vaccine, along with additional revenue from PPR national tender
  • Increased focus on health products & widening of portfolio with differentiated herbal line of products looks promising for growth prospects
  • Traction from manufacturing from Tanzania facility, Hester Africa and strengthened distribution network in Africa, along with increase in bulk antigen capacity and fill finish line for animal vaccines
  • Foray into pet care with 11 products and new marketing teams in four zones
Alternate Stock Idea:

Apart from Hester, in our healthcare coverage we like Indoco.

  • Indoco manufactures and markets branded formulations and APIs for the domestic and export markets.
  • BUY with target price of ₹ 525

Particulars

Particulars (₹ crore) Amount
Market Capitalization 1,339.8
Debt (FY22) 223.0
Cash (FY22) 25.0
EV 2,030.0
52 week H/L (₹) 2,496.5/1,243.0
Equity Capital 8.5
Face Value (₹) 10.0

Price Chart

Recent Events & Key Risks

  • Acquired 50% stake in Thrishool Exim, Tanzania
  • Key Risk: (i) Prolonged logistical challenges in exports (ii) Faster ramp up of new launches

Research Analyst

Siddhant Khandekar
siddhant.khandekar@icicisecurities.com

Company Update
ICICI Securities – Retail Equity Research

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Revenues 178.1 183.3 214.3 235.0 13.8 252.8 281.7 9.5
EBITDA 68.1 55.4 68.7 60.0 8.0 59.6 77.8 13.9
EBITDA margins(%) 38.2 30.2 32.0 25.5 - 23.6 27.6 -
Adjusted Net Profit 41.6 29.2 37.8 38.9 10.7 30.5 44.0 6.4
EPS (|) 48.9 34.3 44.4 45.7 - 35.9 51.8 -
PE (x) 44.1 62.8 53.2 47.1 - 60.0 41.6 -
Target PE (x) 41.2 58.7 45.4 44.1 - 56.2 38.9 -
EV to EBITDA (x) 27.6 34.9 27.9 33.8 - 33.7 25.4 -
RoNW (%) 23.4 14.5 16.5 15.0 - 10.8 14.0 -
RoCE (%) 22.5 14.0 16.2 10.9 - 9.3 11.8 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Q1FY23 Results: Below-par numbers

  • Revenue witnessed a 16% decline YoY to | 51 crore on back of 14% YoY de-growth in poultry business to | 38 crore and 20% YoY decline in animal business to | 12 crore. EBITDA margins declined 1370 bps YoY to 14.7%, mainly due to higher market development cost in Animal health and petcare divisions on account of the company’s continuous efforts in expansion activities. EBITDA declined 56% YoY to | 7.4 crore. Subsequently, PAT was down 68% YoY to | 4 crore
  • Hester’s poultry vaccines continued to face strong headwinds on account of increased cost of inputs (mainly feed) and pricing pressure on eggs and broiler birds. Overall margins are down due to the increase in the proportion of health products sales, which have lower gross margins compared to vaccines. Health products sales constituted 34% of total sales in Q1FY23, vs. 20% in Q1FY22. Going ahead, Hester is expected to focus on vaccine tailwinds on the back of LSD outbreak and PPR tender while improving sales productivity and scaling-up health products remain key for better operating leverage. As the company strengthens its hold in the animal healthcare space, order flow and pricing power is likely to improve

Q1FY23 Earnings Conference Call highlights

  • Vaccine sales declined 30% YoY in Q1FY23 due to high base as Q1FY22 hugely benefited from one-off sales on account of the then prevailing poultry disease outbreak while in this quarter poultry industry continued to face strong headwinds on account of increased cost of inputs (mainly feed) and pricing pressure on eggs and broiler birds. Consequent to severe margin pressure, the poultry industry sharply reduced new bird placements along-with initiatives towards input cost optimisation
  • Sales of health products grew by 42% on back of a strong momentum gained from new product and territorial expansion. Overall margins have reduced due to the increase in the proportion of health products sales which have lower gross margins compared to vaccines. Health products sales constituted 34% of the total sales in Q1FY23, vs. 20% in Q1FY22
  • EBITDA and PAT margin declined in Q1FY23 due to reduction in vaccine sales, increase in marketing expenses on a low base, increased market development cost in animal health and petcare divisions on account of company’s continuous efforts in expansion activities
  • Going forward, management expects the recent outbreak of lumpy skin disease (LSD) to result in additional sales in Q2FY23 while supplies for government tender for PPR vaccine for sheep & goat to start from September 2022
  • Over the next couple of quarters, Hester will focus on growing sales of health products on back of improving the sales productivity of the marketing team as well as launching new products and entering new territories
  • In pet care division, 11 products were launched in the market and sales force has been employed. The company is implementing distributorship model for supply chain on similar lines to poultry and health products
  • Hester Nepal has registered 16% growth in domestic revenues but there were no tender sales due to delay in tendering by FAO and other multilateral institutions. Hester Tanzania started commercial operations and received regulatory approval for four products with two additional products under approval process. Revenues are expected to start in Q2FY23
  • Bulk antigen production capacity expansion project is completed and trial runs are ongoing with commercialisation expected from Q3FY23. Expansion of Fill-Finish line capacity is expected to be completed by Q4
  • Government of India has allowed the manufacture and sale of Avian Influenza Inactivated vaccine, H9N2 strain, to contribute from Q3
 
Variance Analysis

  Q1FY23 Q1FY22 Q4FY22 YoY (%) QoQ (%)   Comments
Revenue 50.7 60.2 56.5 -15.8 -10.2   YoY decline as sales of vaccines declined by 30% YoY
Raw Material Expenses 14.4 17.9 15.4 -19.6 -6.8    
Gross Margin (%) 71.7 70.3 72.7 135.5 -105.2   Sequential decline impacted due to increase in proportion of sales of Health Products coupled with an increase in raw material prices
Employee Expenses 11.8 11.3 12.3 5.0 -3.4    
Other Expenditure 17.1 14.0 18.5 22.1 -7.7    
EBITDA 7.4 17.1 10.3 -56.5 -28.0    
EBITDA (%) 14.7 28.4 18.3 -1,370.4 -362.8   YoY decline amid higher spends in marketing expenses and market development cost in Animal Health and Petcare Divisions on account of
company’s continuous efforts in expansion activities
Interest  1.6 0.9 1.5 86.2 6.7    
Depreciation 5.1 3.2 5.1 56.7 -1.4    
Other Income 3.1 2.3 7.2 33.0 -56.6    
PBT before EO & Forex 5.5 15.3 11.3 -64.4 -51.7    
Forex & EO 0.0 0.0 0.0        
PBT 5.5 15.3 11.3 -64.4 -51.7    
Tax  1.9 4.3 2.3 -55.8 -17.3    
PAT before MI 3.6 11.0 9.0 -67.7 -60.5    
MI -0.4 -1.5 1.3 -72.3 -131.8    
Adjusted Net Profit 4.0 12.5 7.7 -68.2 -48.6   Delta vis-à-vis EBITDA mainly due to higher interest and depreciation
Key Metrics              
Poultry Healthcare 38.4 44.8 39.7 -14.3 -3.2   YoY decline as poultry industry continued to face strong headwinds on account of increased cost of inputs (mainly feed) and pricing pressure
on eggs and broiler birds
Animal Healthcare 12.3 15.4 16.8 -20.1 -26.7    

Disclaimer

ANALYST CERTIFICATION

I/We, Siddhant Khandekar, Inter CA, Raunak Thakur, PGDM, Kush Mehta, CA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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Pankaj Pandey

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pankaj.pandey@icicisecurities.com

 

 

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