Hester-Biosciences Karvy 010915 PDF

Aug 28, 2015
Hester Biosciences
Ltd
Aug 28, 2015
Pharmaceuticals Animal Health
Hester Biosciences Ltd

Bloomberg Code: HBIO IN
BUY
India Research - Stock Broking
Recommendation (Rs.)
Rising Star in Animal Healthcare Business

PPR Eradication Program by FAO - A Tremendous Opportunity for Hester
Food and Agriculture Organization (FAO) has embarked on a mission to eradicate
PPR disease (plague affecting Sheep and Goats) and has planned to spend about
US$ 7.6 Bn over a span of 15 years starting 2015. Annual spend on PPR vaccines
will be about US$ 0.5 Bn in the initial stages. This is a tremendous opportunity and
HBL (Hester Biosciences Ltd.) has already set up a plant in Nepal to manufacture
and export PPR vaccines worldwide. Nepal plant is expected to start operations
in Oct 2015. Hester has already begun establishing cold storage and distribution
networks, the backbone of vaccines business, across southern and eastern Africa.
International manufacturers have priced the vaccine at 10 US cents per dose, but
Hester would be aggressively pricing between 2.5 to 3.5 US cents.
Animal Health Products to Piggy Back on Vaccines Sales and Expand

Multi-fold in Few Years
Hester is planning to leverage its existing vaccines cold storage and marketing &
distribution network to sell animal health products (medicines, feed additives and
disinfectants). Health products are expected to become the top contributor to total
revenue, which is the case with most large multinational animal health companies.
Animal health product sales during FY15 were a tiny 6% of total sales. Margins
are expected to be little lower than those in vaccines but revenues would be much
larger than vaccines. HBL will get these products toll-manufactured (loan license
manufacturing) from third parties and market it under the Hester brand.
Valuation and Outlook

At CMP of Rs.610, HBL is trading at 15.5x FY17E EPS, which is lower than the
18-month average TTM PE of 22x. Considering the above growth drivers, we initiate
a BUY recommendation on HBL with a target of Rs.865 based on 22x FY17E
EPS of Rs.39.3 and time frame between 12-18 months. The potential upside is
42%.
CMP (as on Aug 27, 2015)
610
Target Price
865
Upside (%)
42
Stock Information
Mkt Cap (Rs.mn/US$ mn)
5,189 / 79
52-wk High/Low (Rs.)
849 / 262
3M Avg. daily volume
11,203
Beta (1-yr)
0.01
Sensex/Nifty
26,231 / 7,948
O/S Shares(mn)
8.5
Face Value (Rs.)
10.0
Shareholding Pattern (%)

Promoters
54.1
FIIs
0.5
DIIs
1.8
Others
43.7
Stock Performance (%)

1M 3M
Absolute
Relative to Sensex
(12)
(10)
18
19
6M
12M
103
171
108
166
Source: Bloomberg
Relative Performance*
320
260
200
140
yySignificant delay in manufacturing and exporting vaccines at the Nepal facility.
HBL
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
yyDelayed/No product registration in African and other countries where PPR

eradication strategy is planned. Not able to win PPR vaccine tenders in Africa.
Aug-14
80
Key Risks
Sensex
Source: Bloomberg; *Index 100
Exhibit 1: Valuation Summary (Rs. Mn)

YE Mar (Rs. Mn)
FY13
FY14
FY15
FY16E
FY17E
Net Sales
651
690
906
1,325
2,115
EBITDA Margin (%)
33.6
35.4
27.3
28.9
28.5
EPS (Rs.)
12.9
11.1
14.7
22.8
39.3
9.6
8.0
32.0
26.8
15.5
EBITDA
PAT
RoE (%)
PE (x)
219
93
14.3
244
95
13.1
247
125
15.6
383
194
21.1
603
335
29.1
Source: Company, Karvy Research; *Represents multiples for FY13, FY14 & FY15 are based on historic market price
For private circulation only. For important information about Karvys rating system and other disclosures refer
to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY<GO>,
Thomson Publishers & Reuters
Analyst Contact
Jagannadham Thunuguntla
040 - 3321 6296
jagannadham.t@karvy.com
Aug 28, 2015

Company Background
Company Financial Snapshot (YE Mar)

Profit & Loss (Rs. Mn)
FY15
FY16E
FY17E
Net sales
906
1,325
2,115
EBITDA
247
383
603
Optg. Exp (Adj for OI)
718
Depreciation
1,015
59
Interest
73
48
53
1,598
86
49
PBT
170
260
471
PAT
125
194
335
EBITDA margin (%)
27.3
28.9
28.5
P/E (x)
32.0
26.8
15.5
0.7
0.6
1.0
Tax
48
62
113
Profit & Loss Ratios

Net margin (%)
13.8
EV/EBITDA (x)
14.6
18.1
Dividend yield (%)
14.6
15.8
9.0
Having worked as Indias leading distributor for poultry health

products and being passionate about animal health, Mr. Rajiv
Gandhi, a first-generation entrepreneur founded Hester in
1987 and is currently CEO and MD of HBL. The company
was listed in 1994 under the name Hester Pharmaceuticals
Ltd. Hester began its humble journey when it rolled out the
first Poultry Vaccine batch in 1997. In 2003, Hester terminated
the collaboration agreement with the American company
and since then Hester has been a 100% Indian company.
Hester Biosciences Ltd (HBL) is exclusively into animal health
(perhaps only listed firm in India doing business exclusively in
animal health) and has no business/products in human health.
HBL has two manufacturing units - Its first and the largest
manufacturing unit is located in Kadi, Mehsana district of
Gujarat. The second unit located in Kathmandu, Nepal is under
construction and is expected to start operations in October
2015. HBL is a WHO-GMP, ISO 9001:2008, ISO 14001:2004,
OHSAS 18001:2007 & GLP certified company.
Source: Company, Karvy Research
Cash Flow (Rs. Mn)
Balance sheet (Rs. Mn)

Total Assets
Net Fixed assets
FY15
FY16E
FY17E
1,597
1,843
2,165
571
711
913
589
Current assets
Other assets
437
Total Liabilities
759
Networth
Total Liabilities and Networth

Debt
Current Liabilities
Deferred Tax
839
686
446
842
1,001
800
452
865
1,300
1,597
1,843
2,165
759
842
865
315
53
315
53
195
53
Balance Sheet Ratios

RoE (%)
RoCE (%)
21.1
29.1
0.6
0.4
0.2
14.7
Net Debt/Equity
P/BV (x)
4.7
Exhibit 2: Shareholding Pattern (%)

DIIs
1.8%
15.6
21.3
5.2
31.3
4.0
FY15
FY16E
FY17E
EBITDA
247
383
603
Interest
(48)
(53)
41
18
Other Income
(1)
Tax
(55)
Changes in WC
CF from Operations
Capex
Investment
238
Change in Equity
484
(166)
(196)
(120)
(88)
(183)
22
Change in Cash
338
(6)
(228)
(17)
CF from Financing
(113)
(200)
147
Dividends
(49)
(62)
(170)
Change in Debt
(4)
(76)
(6)
CF from Investing
(4)
32
(29)
84
(50)
105
Exhibit 3: Sales by Geography
Others
43.7%
Domestic
Sales
94%
FIIs
0.5%
Exports
6%
Promoters
54.1%
Source: BSE, Karvy Research
Aug 28, 2015

Global Animal Health Market

The global market size of Animal Health is approximately US$22 Bn. Animal health market can be broadly divided in two main
categories: 1. Farm Animals 2. Companion Animals.
Animal Health Market
Companion Animals (Pet Care)
Farm Animals (Livestock)
Animal health products can be divided into four broad categories 1. Vaccines 2. Pharma (medicines) 3. Feed additives
4. Disinfectants
The global market for animal vaccines is estimated at approx US$5.8 Bn in 2013 and is expected to grow at a healthy CAGR
of 8.1% to $8.6 Bn by 2018. The factors responsible for the growth of the market include an increasing incidence of zoonotic
diseases in humans, growing prevalence of animal disease, increasing investments and continuous innovation. With growing
awareness of animal health in emerging economies, players are introducing recombinant vaccines.
Europe accounts for the largest share of the animal vaccines market followed by North America. The market is dominated by
multinational players with the top 5 players contributing close to 70% of the global market. The top 5 players by worldwide sales
in 2014 are:
Exhibit 4: Top 5 Global Animal Health Companies by Sales
Zoetis
Company
4.8
Worldwide Sales, 2014 ($ Bn)
Elanco
(a division of Lilly)
3.5
MSD
(Merck & Co. in US)
3.4
Merial
(a division of Sanofi)
2.5
Bayer
1.6
Animal Health Market in India

The market size of animal health in India was Rs. 22.50 Bn (USD 375 Mn) in 2011. The growing animal health awareness and
limited arable land is making livestock an important source of food security. The Indian veterinary market is gaining importance.
Manufacturers are focusing on specialized formulations and manufacturing processes.
Exhibit 5: Global Animal Health Market Size by Product
Exhibit 6: Indian Animal Health Market Size by Product
Feed
Additives
12%
Biologicals
(Vaccines)
26%
Feed Additives
26%
Pharmaceuticals
62%
Pharmaceuticals
46%
Biologicals
(Vaccines)
28%
Vaccines
What are Vaccines?
A vaccine is a biological preparation (made from a living organism as opposed to chemically synthesized) that improves immunity
to a particular disease. Vaccines are not medicines. Vaccine are intended to protect from a disease before it has affected a
person/animal (prophylactic use) whereas medicines are intended to treat a disease after it has occured. A vaccine typically
contains either weakened or killed microbes (disease-causing microorganisms such as virus, bacteria, fungi, or protozoa) and
can be administered through needle injections, by mouth, or by aerosol.
Aug 28, 2015

How Vaccines Work?
Vaccines teach the body how to defend itself when germs invade the body.
yyVaccines expose the animal to a very small, very safe amount of viruses or bacteria that have been weakened or killed
yyImmune system then learns to recognize and attack the infection if the animal is exposed to it later in life
yyAs a result, animal will not become ill, or it may have a milder infection. This is a natural way to deal with infectious diseases.
Vaccine Types
Live Vaccine
Inactivated
Vaccine
Recombinant
Vaccine
Live Vaccines: are relatively easy and less costly to create for viruses than for bacteria because viruses are simple microbes
containing a small number of genes, and scientists can therefore more readily control their characteristics. Viruses often are
attenuated through a method of growing generations of them in cells in which they do not reproduce very well. This hostile
environment takes the fight out of viruses: As they evolve to adapt to the new environment, they become weaker. Live vaccines
are more difficult to create for bacteria because bacteria have thousands of genes and thus are much harder to control. Hester
markets about 15 live vaccines for poultry and 4 live vaccines for large animals.
Inactivated Vaccines: are manufactured by killing the disease-causing virus/bacteria with chemicals, heat, or radiation. Such
vaccines are more stable and safer than live vaccines because the dead microbes cannot mutate back to their disease-causing
state. Inactivated vaccines usually dont require refrigeration, and they can be easily stored and transported in a freeze-dried
form, which makes them accessible to people in developing countries, particularly in remote places in African countries.
Most inactivated vaccines, however, stimulate a weaker immune system response than do live vaccines. So it would likely take
several additional doses or booster shots, to maintain an animals immunity. This could be a drawback in areas where people do
not have regular access to animal healthcare and cannot get booster shots on time for their livestock.
Hester markets 23 inactivated vaccines all for poultry and primarily for the following diseases 1. Newcastle Disease virus 2.IBD
(Infectious Bursal Disease virus) also known as Gumboro disease, 3. Infectious Bronchitis virus, 4. Egg Drop Syndrome virus,
5. Coryza 6. Fowl Cholera 7. Reovirus
Hester has vaccines for just one of 7 diseases above or vaccines for combination of these diseases such as one vaccine for
Newcastle, IBD and EDS.
Recombinant Vaccines: Viruses latch on to cells and inject their genetic material into them. Scientists have taken advantage of
this process and figured out how to take the roomy genomes of certain harmless or attenuated viruses and insert portions of the
genetic material from other microbes into them. The carrier viruses then ferry that microbial DNA to cells. Recombinant vaccines
closely mimic a natural infection and therefore do a good job of stimulating the immune system.
Attenuated bacteria also can be used as vectors. In this case, the inserted genetic material causes the bacteria to display the
antigens of other microbes on its surface. In effect, the harmless bacterium mimics a harmful microbe, provoking an immune
response.
Hesters Business Segments

HBL has four business segments: 1.Poultry Vaccines 2.Poultry Health Products 3. Large Animal Vaccines 4. Large Animal
Health Products. Currently, Hester manufactures and markets Livestock (animals reared for commercial purpose) products only,
and does not market products for pet care.
HBL
Vaccines
Poultry Vaccines
Large Animal Vaccines
Health Products
Poultry Health Products
Large Animal Health Products

4
Aug 28, 2015

Poultry Vaccines Segment: HBL manufactures about 15 live and 23 inactivated vaccines for poultry at its plant in Mehsana
district of Gujrat. Many of these vaccines are intended to protect chicken from Newcastle disease (also known as Ranikhet),
Infectious Bursal disease (IBD) also known as Gumboro, Infectious Bronchitis, Fowl Cholera, Egg Drop Syndrome. Current
capacity utilization is about 95% for inactivated vaccines and about 50% for Live vaccines.
HBL plans to expand its inactivated vaccines capacity and has allocated about Rs.170 Mn to be spend in FY16E. The expansion
will be funded with internal accruals and bank limits. While inactivated vaccines would mostly be sold in the Indian markets,
Live vaccines would be majorly exported, mostly to African countries where the use of Live vaccines is higher than Inactivated
vaccines.
Large Animal Vaccines Segment: HBL started manufacturing and marketing of large animal vaccines in March 2015 and
currently manufactures 4 live vaccines for large animals 1. PPR vaccine (sheep and goat plague) one with Indian Sungri strain
at Mehsana plant, the other with Nigerian strain, which would be manufactured at its Nepal plant likely starting Oct 2015. 2. Goat
Pox vaccine, HBL is the first company to manufacture Goat Pox vaccine in India. 3. Brucella abortus (S19) calf Vaccine. During
Q1FY16 sales of Large Animal vaccines were about Rs. 0.3 Mn.
Poultry Health Products Under this division, HBL primarily sells feed additives and medicinal products for poultry. Sales
during FY15 were Rs.7.7 Mn. Poultry health products are manufactured by third party under toll manufacturing.
Large Animal Health Products constitute medicinal products (pharmaceuticals), feed additives and disinfectants. In about
5 years time, HBL estimates that this division will contribute the highest revenue among the four divisions. HBL does not
manufacture large animal health products but gets the products toll manufactured under loan license manufacturing. Sales
during FY15 were Rs.54.12 Mn.
Corporate Structure
HBL
(Hester Biosciences Limited)
HBML
(Hester Biosciences Mauritius Limited)

Wholly (100%) owned subsidiary, yet to start
activities.
Diavetra Lifesciences Private Limited

Wholly (100%) owned subsidiary, yet to start
activities.
GAFL
(Gujarat Agrofarm Limited)

Wholly (100%) owned subsidiary
manufacturing, selling and distributing

growth
HBNPL
media
used
vaccines industries.
for
animal
(Hester Biosciences Nepal Private Limited)

A subsidiary of HBML with HBML holding
79.2% stake in HBNPL. Expected to start

operations in Oct 2015.
Aug 28, 2015

Investment Rationale
1. Hester To Capitalize on Global PPR Eradication Program
Background
Food and Agriculture Organization (FAO) of the UN, and OIE (World Organization for Animal Health) have embarked on a
mission to eradicate PPR disease from the face of Earth over a period of 15 years, starting in 2015. PPR is short for Peste
des petits ruminants or plague of small ruminants in French. PPR is a highly contagious disease of sheep and goats and is
considered to be one of the most damaging livestock diseases in Africa, the Middle East and parts of Asia.
PPR causes USD 1.5 to 2 Bn in losses each year in regions that are home to over 80% of the worlds sheep and goats and to
more than 330 Mn of the Worlds poorest people, many of whom depend on Livestock for their livelihoods. The disease threatens
food security and the livelihoods of smallholders and prevents animal husbandry sectors from achieving their economic potential.
Approximately a third of the financial impact occurs in Africa and a quarter in South Asia.
Vaccination Cost
FAO has decided to implement the eradication strategy in 4 stages. Phase 1 will mostly be diagnostics to gain a better
epidemiological understanding of the presence of PPR. Vaccination will primarily happen during Stage 2 and Stage 3. In Stage
4 use of vaccination will be suspended. During 2015, about 22 African countries would be in stages 2 and 3, thus vaccination
would start there in 2015. HBL plans to sell PPR vaccine in most of these African countries. FAO has estimated cost of the
eradication program to be between USD 7.6 and 9.1 Bn spread over 15 years, with the first five years costing between USD 2.5
and 3.1 Bn. The bulk of this money will be for vaccines alone. During the initial stages, FAO estimates that the annual costs will
be in region of USD 0.5 Bn. About 35% of global PPR-threatened population is in the African continent. FAO estimates about 20
vaccines manufacturers.
Product Registration
Registration in countries is the key to exports. Registration takes a large amount of time in various countries and this process
varies from country to country from 6-months to 3-years after submission of all the documents. During FY15, HBL submitted
72 product dossiers in 10 semi-regulated countries. HBL already has products registered in Zambia, Botswana, Egypt and
Kenya. HBL has WHO GMP (World Health Organization Good Manufacturing Practices) certificate which makes the registration
process easier.
Exhibit 7: Top 15 Countries in Africa by Sheep and Goats Population
31
26
24
24
22
16
15
11
10
Chad
31
Senegal
33
Mauritania
41
40
Uganda
52
60
Burkina Faso
80
Somalia
97
Niger
97
Morocco
100
South Africa
Algeria
Mali
Kenya
Ethiopia
Sudan (former)
Nigeria
20
Sheep and Goats (Million Heads), 2013
Source: FAO (Food and Agriculture Organization), Karvy Research
Nepal Manufacturing Facility

Nigerian strain is used to manufacture PPR vaccine worldwide except in India, where Sungri strain is used. Manufacture and use
of Nigerian strain PPR vaccine is banned in India because of the risks of accidentally introducing Nigerian strain in India, where
it is not found. For this reason, Hester constructed a plant near Kathmandu, Nepal at a cost of about Rs.360 Mn to manufacture
Nigerian strain PPR and other Animal vaccines. Anticipating the global demand of PPR on account of PPR eradication, HBL has
setup the plant in Nepal which can generate annual sales of Rs. 500 Mn operating at full capacity. HBLs management believes
that it can easily scale up the capacity to even 3x depending upon the demand for PPR vaccines. Nepal plant is expected to
start production in Oct 2015.
Hesters Strength Cold Storage and Distribution

The backbone of vaccines business is cold storage and distribution because in order to keep vaccines potent and effective,
vaccine should be stored at low temperatures between 2oC and 8oC. Most of the places in African countries have hot climate,
6
Aug 28, 2015

are very remote and lack widespread refrigeration. Thus, storage points and transportation network are critical for the success of
vaccines business. HBL has invested in a distribution network in Botswana and is also creating a depot in Nairobi, Kenya. HBL
has appointed distribution in various countries mainly in Southern part of Africa as well as Eastern Africa. HBL has registered a
company by the name of Hester Biosciences Africa in Kenya. In order to create an efficient distribution network, HBL has plans
to establish own depots in one of the African countries, have own sub-depots, which could be either completely Hester-owned
or in a partnership with a local agency and have stock points in various countries. HBL is planning ahead to benefit from the PPR
eradication opportunity.
Pricing
According to HBL, price of PPR vaccine in African countries is about 10 US cents per dose (about Rs.6 per dose), whereas HBL
sells PPR vaccine in India between 2.5 to 3.5 US cents per dose (around Rs.2 per dose). Thus, if HBL prices PPR aggressively,
it would definitely have a pricing advantage compared to competitors and may help HBL in grabbing a good chunk of market
share. Most of the vaccines business in PPR eradication program in Africa is expected to be through tenders likely floated by
FAO/OIE.
Non-African Opportunities
Exhibit 8: Sheep and Goats Population (Million
Heads), 2013
652
Latin America
185
45
South East
Asia
113
Middle East
72
Eastern
Europe
Africa
Central Asia
101
200
0
380
358
400
South Asia
600
China
800
Although majority of sheep and goats population where PPR is prevalent

is in African continent, significant population of sheep and goats is also
in South Asia, Middle East, China, South East Asia, Central Asia and
Eastern Europe. FAO has designed the strategy to first target bulk of
African countries starting 2015, and would continue further in later years
until 15 years in these other parts of world where PPR is prevalent. These
are possible but distant opportunities for Hester, it would happen later than
sooner.
Source: FAO (Food and Agriculture Organization), Karvy Research
2. Domestic Business - A Cash Cow

Hester has established a strong brand name among domestic manufacturers in India where 90% of the vaccines market share is
held by Indian firms. Hester is currently the second largest poultry vaccine manufacturer in India, commanding a healthy market
share of about 25% to 30%, next only to Venkys, whose market share is 40%. The growth in HBLs market share came from
gaining market share from competitors and growth in poultry industry.
Rising Meat, Milk and Egg Consumption To Boost Vaccines Sales

The vast gap between Indias current per capita annual consumption (54 eggs and 3.5 kg. of meat) and National Institute of
Nutrition (NIN) recommended level (180 eggs and 11 kg of meat) offers a tremendous opportunity for the growth of poultry
industry, at least for the next 20 years. As the disposable income rises steadily over the years coupled with urbanization in most
part of India, the growth in demand for poultry products is likely to sustain.
Exhibit 9: Production from Livestock In India
Exhibit 10: Livestocks Contribution to GDP vis-a-vis Agriculture
150
7.5
15,000
100
5.0
10,000
20%
15%
10%
50
2.5
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Milk Production (Million Tonnes, LHS)

Egg Production (Billion Eggs, LHS)
Wool Production (Million Kg, LHS)
Meat Production (Million Tonnes, RHS)
Source: Ministry of Agriculture, Karvy Research
0.0
5,000
0
5%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
0%
GDP-Agriculture (Rs. Bn)

GDP-Livestock (Rs. Bn)
Agri as % of Total GDP (RHS)
Livestock as % of Total GDP (RHS)
Aug 28, 2015

Domestic poultry meat production is estimated to have increased from less than 1.0 Million Tons (MT) in 2000 to 3.4 MT in 2012
with annual per capita consumption increasing from 0.8 kg to 2.8 kg during same period. Table egg production is estimated to
have increased from 30 Bn eggs in 2000 to 67 Bn eggs in 2012 with per capita egg consumption increasing from 28 to 55 eggs
during that period. Just to give you an idea for comparison, annual per capita meat consumption in developed countries is 70-80
kg. India produces nearly 27 Mn chickens a week (95% traded alive).
The healthy growth in poultry output over last decade makes India one of the fastest growing major world market in the segment
with future growth potential remaining strong on back of wide gap against global per capita consumption norms and favorable
socio economic and demographic factors.
Exhibit 12: Poultry Population In India (Million Heads)
649
729
Exhibit 11: Livestock Population In India By Species Over Three

Census Years (Million Heads)
489
489
186
212
200
Buffalo
Sheep &
Goats
2003
Pigs
2007
348
307
275
208
14
11
10
98
105
109
185
199
191
Cattle
729
649
Poultry
1982
2012
1987
1992
1997
2003
2007
2012
Exhibit 13: Sheep and Goats Population In India (Million Heads), 2012
Exhibit 14: Top 10 States By Sheep & Goats Population (Million

Heads), 2012
1992
1997
2003
2007
2012
12.4
11.0
8.3
8.1
Odisha
12.6
MP
12.9
Bihar
UP
14.4
Maharashtra
1987
Rajasthan
16.9
AP
1982
30.7
WB
35.5
Tamil Nadu
156
144
180
166
200
Karnataka
212
186
Exhibit 15: Top 10 States By Poultry Population, 2012 (Million Heads)
Exhibit 16: Hester Poultry Vaccines Domestic Sales (Rs.Mn)

1000
117
36%
33%
FY09
34%
29%
FY10
FY11
FY12
40%
30%
20%
482
375
200
420
400
302
20
Odisha
23
Chhattisgarh
24
Kerala
27
29%
637
600
Assam
43
Haryana
53
WB
53
31%
857
800
Karnataka
Maharashtra
Tamil Nadu
AP
78
32%
661
161
10%
FY13
FY14
FY15
0%
Poultry Vaccines Sales (Rs. Mn)

Poultry Vaccines Segment Margins %
Total meat production (all meats basket) has been growing strongly at a 10-year CAGR of 11% over FY04-FY13. This further
expands the vaccines opportunity from poultry to other livestock as well. HBL started marketing PPR vaccine (Sungri strain) in
March 2015, furthermore HBL became the first company in India to manufacture goat pox vaccine. Goat population in India is
about 140 Mn heads and market size for goat pox vaccine is about Rs. 700 Mn. Population of Sheep and Goats is about 200 Mn
and market size of PPR vaccine in India is about 400 Mn. HBL is looking to aggressively market PPR and goat pox vaccines in
India.
8
Aug 28, 2015

The total poultry vaccines market in India is around Rs.3-3.5 Bn, growing at 15-20% per annum. HBL is expected to grow faster
than the poultry vaccines market during FY16E and FY17E. HBLs poultry vaccines sales grew at a robust 19% CAGR over
FY09-15. Margins in poultry vaccines continue to remain strong in the region of 29% to 30% and poultry vaccines segment
continues to be highest contributor with 93% of total revenue during FY15.
Backyard Poultry An Untapped Potential

According to animal health census about 217 Mn birds are considered backyard poultry in India. This is primarily untapped
market because of the remoteness of areas and farmers affordability to pay for vaccines. HBL has embarked on a project for
immunising backyard poultry in India, against Ranikhet (Newcastle) disease, in collaboration with GALVmed, a Scottish NGO,
which in turn is funded by the Bill Gates Foundation. The true impact of this immunisation program would only be manifested in
the years to come. The impact on poor rural families would be immense in terms of improved incomes as well as protein intake.
Besides, it will also help empower rural women who are primarily engaged in backyard farming. Backyard poultry is a significant
opportunity for HBL.
Exhibit 17: Poultry Population Distribution In India (Million Birds), 2012
Exhibit 18: Poultry Population in Farms/Hatcheries, 2012

Broiler
55%
Duck
1%
Backyard Poultry
30%
Others
2%
Poultry In
Farms/Hatcheries
70%
Layer
42%
3. Poultry Vaccines Exports On A Fast Track

During FY15, HBL received registration approvals for 14 poultry vaccines in four different countries. Hester currently exports
products to 17 countries. Total exports during FY15 were Rs. 50 Mn (6% of total sales) up by 55% over FY14. HBL has indigenously
developed a thermostable vaccine for Newcastle disease. The advantage of thermostable vaccine is that this vaccine can be
stored outside for 10-days at temperatures up to 37 to 40 degree Celsius and vaccine would still be potent and effective. This is
particularly important in backyard poultry because this poultry is in very remote areas and transportation is often not refrigerated.
This vaccine is expected to have a huge demand in Africa.
5,825
3,301
3,212
1,819
44
33
Source: FAO, Karvy Research
China
Latin America
South East Asia
Africa
Middle East
South Asia
30
Eastern Europe
Central Asia
51
50
40
107
1,713
60
1,519
Exhibit 20: HBLs Poultry Vaccines Exports (Rs. Mn)
1,249
Exhibit 19: Poultry Population by Geography (Million Heads), 2013

6,000
5,000
4,000
3,000
2,000
1,000
0
33
29
20
10
0
FY9
FY10
FY11
FY12
FY13
FY14
FY15
Aug 28, 2015

Exhibit 21: Top 15 Countries in Africa by Poultry Population
49
49
46
41
Poultry (Million Heads), 2013
38
38
Zambia
51
Uganda
58
Burkina Faso
64
Sudan (former)
Tunisia
Algeria
Egypt
Nigeria
Morocco
South Africa
87
Cameroon
130
Senegal
164
Ethiopia
165
Cte d'Ivoire
195
Ghana
201
4. Health Products Segment To Expand Multi-fold in Few Years

Exhibit 22: LAHP Sales (Rs. Mn)
60
54
50
40
30
HBLs management believes that in the years to come, Large Animal

Health Products (LAHP) segment will become the highest contributor to
it total sales. LAHP will constitute animal pharmaceuticals (medicines),
animal feed additives, probiotics, and disinfectants. HBL will get these
products toll-manufactured (loan license manufacturing) from third parties
and market it under the Hester brand.
46
29
20
10
0
FY13
FY14
FY15
Until 2012, HBL was exclusively a poultry vaccines company and in 2013 HBL started selling LAHP, and has been steadily
growing in sales at a fast rate. HBL expects to leverage its existing cold chain, marketing and distribution network to sell LAHP
both in India and other countries where HBL sells vaccines (Africa, etc). Basically, LAHP sales are expected to piggy back on
vaccines sales and become a major contributor to total revenue. However, LAHP margins are expected to lesser than those in
vaccines segment. It will be interesting to watch how this strategy unfolds as HBL enters a new growth phase. HBL is geared to
export to around 20-countries in the next 2-years and expects export sales of Rs.1000 Mn in the next 3 to 5-years.
Exhibit 23: Distribution of Large Animals In India, 2012
88%
68%
40%
Africa
Americas
Cattle and Buffaloes

Asia
14%
44%
5%
5%
7%
5%
2%
Others
0.4%
Cattle
37%
83%
Pig
2%
8%
Goat
27%
85%
21%
Buffalo
21%
10%
Sheep
13%
Exhibit 24: Worldwide Livestock Distribution By Species

(as % of Total Livestock in 2011)
Europe
Oceania
Sheep and Goats
Poultry
5. Tall Entry Barriers

Vaccine R&D and large scale manufacturing is a niche business with tall entry barriers. Vaccines are biological i.e. made from living
microorganism, unlike many medicines that are chemically synthesized. Biologics manufacturing technology is complex and very
difficult to replicate, which is why there are only a handful of manufactures in India - Venkys, Indian Immunologicals, and Indovax
are the only major manufacturers besides HBL. Another major barrier is the cold storage depots and distribution network, which
forms the backbone of this business. HBL has its own depots in Chandigarh, Pune, Bengaluru, Coimbatore and Hyderabad. All
Vaccines are transported by Hester-owned refrigerated vans under 4-8 degree Celsius. Cold storage and distribution is capitalintensive and is most efficient when owned by the company itself. HBL definitely has an early mover advantage.
10
Aug 28, 2015

6. Diagnostics Business Could Be The Icing on the Cake

HBL also offers seromonitoring /seroprofiling services to poultry and dairy farmers to help them monitor the health status of
their animals. Through Elisa profiling HBL helps producers evaluate the immune response to administered vaccines and/or to
obtain evidence of flock exposure to field strains. This is a complete end-to-end solution for livestock farmers. If HBL can scale
up the diagnostics business, it can provide significant sales particularly from large organized hatcheries/farmers both in India
and internationally.
7. Recombinant Vaccines The Future

Hester has a strong R&D centre based in Kadi, Gujrat. The centre is recognized by the Department of Scientific and Industrial
Research (DSIR), Ministry of Science and Technology. HBL is pursuing R&D to manufacture recombinant poultry vaccines,
which HBL expects to patent in about 2 years. HBL believes that is the only Indian company right now working on a Recombinant
Poultry Vaccines
The advantage of recombinant vaccines is that they are easier in terms of handling the actual organism during manufacturing
compared to conventional vaccines, thus recombinant vaccine reduce bio-security hazards, and are the future of vaccines.
Another advantage is Recombinant Vaccine would protect against at least two diseases, therefore in one administration could
have protection against two or more microorganisms. Recombinant vaccine would command premium price and would have
higher margins compared to conventional vaccines.
11
Aug 28, 2015

Operating and Financial Highlights

Revenues are expected to soar by about 45% during FY16E and by about 65% during FY17E over previous year, primarily
driven by PPR vaccines sales in Africa and significant growth in domestic sales and exports of poultry vaccines as well as robust
growth in animal health products, which would pick up at a faster pace in domestic markets. Exports of poultry vaccines sales
are expected deliver strong sales because HBL has recently gotten approval for 14 poultry vaccines in four different countries
and currently exports to about 17 countries.
Since vaccines are high margin products and contributed to more than 90% sales during earlier years, EBITDA margins were
high about 35% during FY13 and FY14, but are expected to stabilize in around 29% to 30% range because animal health
products have lower margins compared to vaccines and will start contributing significantly to total sales.
On account of increasing operating cash flows during FY17E, HBL would have good amount of cash to partly reduce debt, thus
decreasing interest cost. Consequently, net profit and profit margins are expected to rise during FY17E to about 16% compared
to 14% during FY15 and FY16E. Capex expected during FY16E is Rs. 170 Mn, and during FY17E is Rs.200 Mn.
Exhibit 25: Net Sales (Rs. Mn) & Sales Growth %
2,500
80%
60%
2,000
60%
46%
1,500
1,000
Exhibit 26: EBITDA (Rs. Mn) & EBITDA Margin %
35%
31%
20%
500
0
FY12
FY13
FY14
FY15E
FY16E
39%
35%
34%
420
Net Sales (Rs. Mn)
29%
27%
FY12
FY13
FY14
FY15E
EBITDA (Rs. Mn)
Sales Growth %
Exhibit 27: Net Profit (Rs. Mn) & Net Profit Margin %
Exhibit 28: EPS (Rs.) & EPS Growth %
300
16%
15%
14%
14%
200
14%
16%
50
15%
40
14%
100
13%
FY12
FY13
FY14
FY15E
Net Profit (Rs. Mn)
FY16E
FY17E
12%
30
-9%
-3%
Exhibit 29: Net Worth (Rs. Mn) , RoE % & RoCE %
20%
21%
18%
FY15E
FY16E
FY17E
EPS Growth %
-25%
15%
40%
400
30%
300
0.38
0.30
0.20
29%
20%
200
10%
100
0.40
0.31
0.20
0.15
0.20
21%
500
FY13
FY14
EPS (Rs.)
0%
Exhibit 30: Debt and D/E Ratio

31%
21%
FY12
25%
-14%
1500
1000
100%
50%
32%
20
10%
75%
56%
Net Profit Margin %
FY17E
73%
10
0
FY16E
EBITDA Margin %
16%
30%
20%
400
40%
210
0%
FY17E
50%
29%
40%
6%
15%
630
14%
14%
13%
FY12
FY13
FY14
Net Worth (Rs. Mn)

16%
FY15E
FY16E
RoE %
FY17E
0%
RoCE %
0.10
0.02
FY12
FY13
FY14
Debt (Rs. Mn)
FY15E
FY16E
FY17E
0.00
D/E Ratio
12
Aug 28, 2015

Valuation & Outlook

HBL is perhaps the only listed company in India doing business exclusively in animal health. HBL has crossed the inflection
point and has entered into a high growth phase. The FAOs PPR eradication program presents a tremendous opportunity for
HBL to augment its vaccine sales worldwide. Hester is leveraging this opportunity well by planning ahead and establishing
relationships and distribution networks in African continent.
Furthermore, Hester also plans to expand the business of its health products to a large scale and expects that health products
will contribute more sales rupees than will vaccines in years to come. In light of these opportunities, the big picture of HBL looks
exciting.
At CMP of Rs.610, HBL is trading at 15.5x FY17E EPS, which is lower than the 18-month average TTM PE of 22x. Considering
the above growth drivers, we initiate a BUY recommendation on HBL with a target of Rs.865 based on 22x FY17E EPS of
Rs.39.3 and time frame between 12-18 months. The potential upside is 42%.
Exhibit 31: TTM PE Band
800
600
400
Actual Price
10x
20x
30x
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Aug-13
Jun-13
Apr-13
Feb-13
Dec-12
Oct-12
Aug-12
Apr-12
Jun-12
Feb-12
Dec-11
Oct-11
Aug-11
Jun-11
Apr-11
Feb-11
Dec-10
Oct-10
Aug-10
Jun-10
Apr-10
200
40x
Exhibit 32: One-Yr Forward PE

50
40
30
20
TTM PE
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Aug-13
Jun-13
Apr-13
Feb-13
Dec-12
Oct-12
Aug-12
Jun-12
Apr-12
Feb-12
Dec-11
Oct-11
Aug-11
Jun-11
Apr-11
Feb-11
Dec-10
Oct-10
Aug-10
Jun-10
Apr-10
10
1-Yr Forward PE
13
Aug 28, 2015

Exhibit 33: Company Snapshot (Ratings)
Low
1
High
2
Quality of Earnings
33
Exports
33
Domestic Sales
Net Debt/Equity
Working Capital Requirement

Quality of Management
33
33
Depth of Management
Promoter
Corporate Governance
33
33
33
33
33
Key Risks
yyDelayed/No product registration in African and other countries where PPR eradication strategy is implanted.
yySignificant delay in manufacturing and exporting vaccines at the Nepal facility.
yyHBL not able to win PPR vaccine tenders in Africa.
yyFailure/Delayed response to address growing demand for animal vaccines both in India and worldwide on account of capacity
shortage.
yySlow/ Delayed capacity expansion in response to address the animal vaccines demand both in India and worldwide at
manufacturing facilities.
yyFailure to establish effective cold storage and distribution network in Africa and other countries where HBL intends to sell
vaccines.
14
Aug 28, 2015

Financials
Exhibit 34: Income Statement
YE Mar (Rs. Mn)
Revenues
Growth (%)
Operating Expenses
EBITDA
Growth (%)
Depreciation & Amortization

Other Income
FY13
FY14
651
690
476
500
17.7
11.7
34.9
219
44
FY15
FY16E
FY17E
906
1,325
2,115
718
1,015
1,598
1.2
54.8
57.4
6.1
31.3
244
247
54
59
46.2
383
73
59.6
603
86
EBIT
177
198
192
313
521
PBT
144
134
170
260
471
Interest Expenses
Tax
PAT
Growth (%)
33
53
93
65
42
95
48
48
125
53
62
194
49
113
335
21.7
2.1
31.9
55.6
72.6
FY13
FY14
FY15
FY16E
FY17E
26
49
81
161
266
291
298
317
Exhibit 35: Balance Sheet

YE Mar (Rs. Mn)
Cash & Equivalents
Sundry Debtors
Inventory
Loans & Advances

Investments
150
141
184
80
131
128
311
356
3
239
132
317
137
Gross Block
652
867
977
1,147
1,347
CWIP
289
206
318
318
318
Net Block
Total Assets
Current Liabilities & Provisions

Debt
Other Liabilities
Total Liabilities
Shareholders Equity
Reserves & Surplus
Total Networth
Minority Interest
Total Networth & Liabilities

377
538
591
727
856
1,237
1,422
1,597
1,843
2,165
137
155
315
315
195
389
26
552
85
588
455
49
659
85
665
385
59
759
85
739
468
59
842
85
898
611
59
865
85
1,172
685
763
839
1,001
1,300
1,237
1,422
1,597
1,843
2,165
12
13
15
19
43
15
Aug 28, 2015

Exhibit 36: Cash Flow Statement
YE Mar (Rs. Mn)
FY13
FY14
FY15
FY16E
FY17E
PBT
144
134
170
260
471
Interest
(33)
(65)
(48)
(53)
(49)
Inc/dec in Net WC
(50)
(60)
41
18
(6)
Depreciation
Tax Paid
Other Income
Other non cash items
Cash flow from operating activities

Inc/dec in capital expenditure
Inc/dec in investments
Others
Cash flow from investing activities

Inc/dec in borrowings
Dividend paid
44
(39)
(2)
51
115
(2)
49
94
73
(2)
(4)
(1)
(4)
20
238
86
(5)
(4)
49
(10)
338
484
(72)
(76)
(170)
(200)
(194)
(74)
(147)
(4)
(0)
(6)
(226)
(146)
(228)
(166)
(196)
(6)
(17)
(17)
(29)
(50)
99
74
22
(88)
(183)
162
(33)
Net change in cash
(11)
(15)
59
(27)
Interest paid
Cash flow from financing activities
54
155
(65)
22
85
(48)
32
(53)
84
(73)
(49)
105
Exhibit 37: Key Ratios

YE Mar
FY13
FY14
FY15
FY16E
FY17E
EBITDA Margin (%)
33.6
35.4
27.3
28.9
28.5
Net Profit Margin (%)
14.2
13.7
13.8
14.6
15.8
EBIT Margin (%)
Dividend Payout ratio

Net Debt/Equity
RoE (%)
RoCE (%)
27.1
15.6
0.4
14.3
20.4
28.7
18.0
0.5
13.1
18.0
21.1
21.2
0.6
23.7
15.0
0.4
24.6
15.0
0.2
15.6
21.1
29.1
14.7
21.3
31.3
Exhibit 38: Valuation Parameters

YE Mar
FY13
FY14
FY15
FY16E
FY17E
EPS (Rs.)
12.9
11.1
14.7
22.8
39.3
BV (Rs.)
80.5
89.7
98.6
117.7
152.8
P/BV (x)
1.5
1.0
5.2
4.0
DPS (Rs.)
PE (x)
EV/EBITDA (x)
EV/Sales (x)
2.0
9.6
6.1
2.1
2.0
8.0
4.8
1.7
3.1
32.0
4.7
18.1
4.9
3.4
26.8
14.6
Source: Company, Karvy Research; *Represents multiples for FY13, FY14 & FY15 are based on historic market price
4.2
5.9
15.5
9.0
2.6
16
Aug 28, 2015

Stock Ratings
Buy
Sell
Hold
Absolute Returns
> 15%
5-15%
<5%
Connect & Discuss More at

1800 425 8283 (Toll Free)
research@karvy.com
Live Chat
in
You
Tube
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that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report.
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Aug 28, 2015

Pharmaceuticals Animal Health

Hester Biosciences Ltd

India Research - Stock Broking

Rising Star in Animal Healthcare Business

Animal Health Products to Piggy Back on Vaccines Sales and Expand

Valuation and Outlook

CMP (as on Aug 27, 2015)

52-wk High/Low (Rs.)

3M Avg. daily volume

Face Value (Rs.)

Shareholding Pattern (%)

Stock Performance (%)

yySignificant delay in manufacturing and exporting vaccines at the Nepal facility.

yyDelayed/No product registration in African and other countries where PPR

Source: Bloomberg; *Index 100

Exhibit 1: Valuation Summary (Rs. Mn)

EBITDA Margin (%)

Aug 28, 2015

Company Financial Snapshot (YE Mar)

Optg. Exp (Adj for OI)

EBITDA margin (%)

Profit & Loss Ratios

Dividend yield (%)

Having worked as Indias leading distributor for poultry health

Source: Company, Karvy Research

Cash Flow (Rs. Mn)

Balance sheet (Rs. Mn)

Net Fixed assets

Total Liabilities and Networth

Balance Sheet Ratios

Source: Company, Karvy Research

Exhibit 2: Shareholding Pattern (%)

Source: Company, Karvy Research

Exhibit 3: Sales by Geography

Source: BSE, Karvy Research

Source: Company, Karvy Research

Aug 28, 2015

Global Animal Health Market

Animal Health Market

Companion Animals (Pet Care)

Farm Animals (Livestock)

Worldwide Sales, 2014 ($ Bn)

Source: Company, Karvy Research

Animal Health Market in India

Exhibit 6: Indian Animal Health Market Size by Product

Source: Company, Karvy Research

Source: Company, Karvy Research

Aug 28, 2015

Hesters Business Segments

Large Animal Vaccines

Large Animal Health Products

Aug 28, 2015

(Hester Biosciences Mauritius Limited)

Diavetra Lifesciences Private Limited

(Gujarat Agrofarm Limited)

manufacturing, selling and distributing

(Hester Biosciences Nepal Private Limited)

79.2% stake in HBNPL. Expected to start

Aug 28, 2015

Sheep and Goats (Million Heads), 2013

Source: FAO (Food and Agriculture Organization), Karvy Research

Nepal Manufacturing Facility