1 October 2019

Hester Biosciences Stock Analysis

Hester Biosciences stock has delivered stellar returns over the last decade. Over the last 5 years, the revenues have grown at a CAGR of 20.8% while PAT has grown at a CAGR of 34.51%. The Bill and Melinda Gates foundation has given the company a soft loan and grant to start manufacturing in Africa.

Company Overview

Hester Biosciences was founded in 1987 by Mr. Rajiv Gandhi (MD & CEO). The company operates in two verticals – Poultry and animal healthcare. The company is one of India’s leading animal healthcare and second largest poultry manufacturer. Hester derives 76% of its revenues from poultry and 21% from animal healthcare. The company derives 92% of its revenues from the domestic market and just 8% from exports. The company has over 50 vaccines and 35 health products. The company’s competitors include Venky’s, Suguna, Virbac, Indian Immunologicals, Zydus, etc.

Industry Overview
The global animal healthcare market is estimated at $27 Billion and is expected to grow at a 4% CAGR till 2024. The Indian animal healthcare industry is estimated at ~ Rs 6,000 Crores. Poultry makes up ~ 35% of the industry and is expected to grow at 8% CAGR. India has 31.05% of the world’s total cattle population. Also, India is the second largest producer of eggs, behind China.

Business

Hester Biosciences makes vaccines that treat diseases such as fowl pox, newcastle, etc. for the poultry segment. For the large animal segment, the company makes vaccines for diseases such as goat pox, PPR and Brucellosis. The Government of India has cleared a Rs 13,342 Crore outlay in the first cabinet meeting for treating Brucella and other foot and mouth diseases
The company’s sales come from tenders and private distribution network. Of the animal healthcare business, ~ 40% of the business is from tenders. The management says that the average EBITDA margins are 35% to 36%.
Globally, the major companies derive the maximum revenues from animal healthcare and a small portion from poultry vaccines. Hester Biosciences has been growing aggressively on the animal healthcare segment over the last 4 years. The management expects poultry business to grow at ~ 10% p.a. and animal healthcare to grow at ~ 50% p.a. for the coming few years.

Financials


The company has grown revenues at a CAGR of > 20% for the last decade. Coupled with expansion in margins, the bottom line has grown faster than the topline. However, because of the cyclicality in the poultry business, the growth rate has slipped below 12% p.a. multiple times in the past.
The company has maintained a healthy ROCE and with improving margins, the return on equity (ROE) also started improving from FY15. Moreover, the company has reduced it’s debtor days and inventory days which has reduced its working capital requirements. Hester Biosciences has a healthy interest coverage ratio of ~ 9.57x and a low debt-equity ratio of 0.5.
The company has issued a corporate guarantee of ~ Rs 27.66 Crores in favour of Bill & Melinda Gates Foundation on behalf of the Tanzanian subsidiary. The company has invested $4 Million in the Africa project while the Bill & Melinda Gates Foundation has given a loan of $10 Million and a grant of $4 Million.

Hester Biosciences Stock Analysis

The company is looking for inorganic growth opportunities and has taken an approval for a QIP of upto Rs 100 Crores. The company had put up a plant in Nepal in FY15 and the company expected to achieve a turnover of Rs 50 Crores from the plant. However due to slow tenders the company has only achieved a turnover of ~ Rs. 9 Crores by the end of FY19, against an expectation of a turnover of Rs 50 Crores. The company expects to commission the Tanzania plan by FY21 and record a turnover of Rs 200 Crores at full capacity. But it will take the company 3-4 years to reach full capacity at the plant.
The company is targeting a 50% contribution from exports in the coming years. While exports will add to the topline of the company, there is a possibility that the African operations will increase the working capital requirements. Also, the company might have to operate at low margins to gain a foothold in the African market, this can dent the bottomline of the company.

Valuations and Verdict

The Hester Biosciences stock trades at a PE of 35x and a M.Cap to sales of 8.5x. While the valuations seem expensive, the growth rate compensates for the premium valuations.
The company has 85.06 Lakh shares outstanding of which the promoters hold 54.09%, so there is low float in the market.  The company commands a market cap of Rs 1,475 Crores. Over the next 4-5 years, the company can increase the topline to ~ Rs 400 to Rs 500 Crores and see the profits more than double during this period. However, the company has encountered cyclicality in growth. Often, the share price corrects by 40% to 50% and thus investors might have to sit through heavy drawdowns when they hold the stock for long term.
Investors can put the Hester Biosciences stock on their watch list and buy on dips of 15% to 20%. Also, investors should carefully assess the volatility and other factors before making a high allocation of the stock to their portfolio.

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