Hester Bioscience Ltd

(BSE Code: 524669)

Presentatio by: Tejas Jariwala

Jainam Wealth

Date: 25-03-2017

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ü Global animal healthcare market was valued at USD 32,081.5 mn (~Rs.208530 Cr) in 2014 and is expected to rise to USD 43,032.1 mn (~Rs.280000 Cr) by 2020 at a CAGR of 5.1 %.

ü Increasing adoption of pets in emerging economies such as India and China are driving pet vaccinations in emerging economies and increasing the global demand for meat, milk and eggs, steadily pushing feed additives, pharmaceuticals and vaccine sales around the world.

ü Demand is expected to increase in the emerging markets of India, Indonesia, Thailand, Vietnam, Brazil Argentina, Chile, Israel, CIS countries Ukraine, Russia, South Africa and China.

Industry Overview - Global Veterinary Market

ü The Indian veterinary healthcare market was estimated at Rs.6800 Cr in 2014

and expected to reach Rs.15900 by 2020, reporting a CAGR of 15.2 per cent.

ü Though the market size of animal health products worldwide is approximately

Rs.156000 Cr (as of 2014), currently the Indian size is just Rs.3270 Cr but it is

growing at a very fast pace so offers a good scope for the future.

ü Per capita chicken consumption in India has been on the rise. At present, urban

markets account for about 80% of demand but rural demand is expected to pick

up.

ü The PPR vaccine is to be administered annually to a target population. The

targeted global sheep and goat population for PPR vaccine is 1.70 billion; the

targeted Indian population is 200 million.

Industry Overview - Indian Veterinary Market

About Companyü Hester Biosciences Ltd is engaged in the manufacturing of Poultry Vaccines.

The company is a 100% biotech company producing animal biologicals. They currently manufacture 39 types of poultry vaccines against various poultry diseases.

ü Product range includes Live Vaccines, Killed Vaccines, Diagnostic kits & Seromonitoring services.

ü The 4 verticals: Poultry Vaccines, Large Animal Vaccines, Poultry Health Products and Large Animal Health Products.

ü Company’s product portfolio comprises of over 50 vaccines and over 35 health products.

ü Hester is the 2nd largest producer of poultry vaccines in India with a market share of 28-30 % (1st is Venky's)

ü 87 % of the revenues are derived from the poultry vaccines segment. This segment grew at a CAGR of 20% over FY 2011 to FY 2015 and the Company expects the segment to grow at a CAGR of 16% over FY 2015-18.

ü Company manufactures both strain of PPR vaccines (Goat & Sheeps) .i.e. Nigerian and Sungari (Indian)

Hester Biosciences Ltd

About Companyü 1st to launch Goat vaccines in India.ü Launched new Brucella vaccine which is both in tender business & private

distribution & marketing so is expected to drive growth in large animal vaccine segment.

ü For Brucella vaccine size of Indian market is 15-20 Cr they are second private manufacturer in India

ü Hester’s Nepal plant will manufacture and export PPR vaccines. Commercial operations have been commenced from Nov 15, 2016

ü They have 2 vaccine to bid internationally one PPR from Nepal and other Brucella vaccine from India.

ü To bolster its distribution capabilities in Africa, Hester registered a Company named ‘Leruarua Vetcare (Proprietary) Limited’ under the trade name of Vetsol in Botswana with 49% stake.

ü Leruarua Vetcare (Proprietary) Limited is in the business of trading for the Poultry Vaccines and Large Animal Vaccines & Health Products

ü The Company’s current international presence spans over 18 countriesü Company intends to acquire 55% stake of Texas laboratories (located at

Mehsana) who is manufacturer of pharma formulation, tablets, capsules, injections. (Animal related)

Hester Biosciences Ltd

Rationale..(Growth Drivers)ü India has the largest cattle population in the world. It accounts for 31.05 %

of the world cattle population with an estimated 301,600,000 units of in May 2016. This presents a massive opportunity for the animal healthcare market.

ü Poultry has a crucial place in India as the eggs and chicken meat are important and rich sources of protein, vitamins and minerals. Many Indian families, especially the educated people in urban areas, have begun to accept eggs as a regular supplemental part of their vegetarian diet.

ü The annual per capita consumption of poultry in India (in 2015) was merely 3.1 kg compared with 17 kg in developed countries.

ü Company’s large animal business revenue grew by 73.23 % (Newly started division in 2015). It 's export earnings 73.66 %, which reduced its dependence on the domestic market.

ü The targeted global sheep and goat population for PPR vaccine is Rs.170 Cr; the targeted Indian population is Rs.20 Cr.

ü The price of PPR vaccine as high as 10 US cents (Rs 6 per dose) while the company’s selling price in India is approximately around 2.5 to 3.5 cents (around Rs.2 per dose)

What we like.....

Rationale..(Growth Drivers)ü The world market for PPR vaccine is slated to be for Rs.300 Cr.annually. The

Indian market is slated to be Rs.40Cr annually. Hester is looking to aggressively market PPR and goat pox vaccines in India.

ü Hester is pursuing R&D to manufacture recombinant poultry vaccines, which Hester expects to patent in about 2 years. Hester believes that is the only Indian company right now working on a Recombinant Poultry Vaccines.

ü Recombinant vaccine would command premium price and would have higher margins compared to conventional vaccines.

ü CARE has upgraded credit ratings (Long Term credit facility BBB+ to A-) & (Short Term credit facility A3+ to A2) of the company so company will get benefit of interest leverage in coming quarters.

ü Goat pox and Brucella vaccines are not imported in India. Neither Indian Immunologicals are supplying got pox and Brucella in India.

ü Brucella (Cattle Vaccines)has good market internationally, which is more than PPR vaccine, but for first 6-8 months they will only focus in India and then will go to African market.

What we like.....

Hester’s Strength Cold Storage and Distribution

ü The distribution network is an important aspect as vaccines generally need

to be stored between 4 to 8 degrees Celsius, and some required to be stored at minus 196 degrees Celsius.

ü The Company has established a strong, multi locational cold chain for the distribution and storage of vaccines. Most of the places in African countries have hot climate, are very remote and lack widespread refrigeration. Thus, storage points and transportation network are critical for the success of vaccines business.

ü The company has put a lot of focus on the African market for distribution and thus has appointed distribution agents/centres in various countries mainly in Southern part of Africa as well as Eastern Africa.

What we like.....

Entry Barriersü 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.

ü Biologics manufacturing technology is complex and very difficult to replicate, which is why there are only a handful of manufactures in India - Venky’s, Indian Immunologicals, and Indovax are the only major manufacturers besides Hester.

ü Also availability of strain in order to make vaccines is another issue.

ü Another major barrier is the cold storage depots and distribution network, which forms the backbone of this business. Hester has its own depots in Chandigarh, Pune, Bengaluru, Coimbatore and Hyderabad.

ü All Vaccines are transported by Hester-owned refrigerated vans under 4-8 degree Celsius. Cold storage and distribution is capital-intensive and is most efficient when owned by the company itself.

ü Others --submitted 92 dosseries, patent likely in the coming years

ü Increasing focus on export revenues (presently ~10% of total revenue)

What we like.....

Financial Highlights..

Financial Highlights..

Riskü Contagious viral Diseases - and other flue which adversly affect the business

whereby poultry owner has to destroy live stocks.

ü Competition because of high entry barrier, nich business and good margins. It may easy for large pharma conglomerate to focus this kinda business.

ü Managements are over promised and delayed delivered. :)

ü Any mismanagement in storage and distribution may lead to expiry of vaccines.

ü Our limited understanding on the diseases, vaccines types , any scientific terms and its proper knoweldge --”Black Swan”

Pending Works for further due diligence:ü To study sequent Scientific in detail (Demerger-Human and Animal health

division)

ü AGM / Plant Visit / Management meet

What can go wrong..

ü Final View:At the CMP of Rs. 753, the stock is trading at TTM PE of 33x with the TTM EPS of Rs.22.20. We believe, Hester is good placed in the poultry vaccines business which is niche in the overall Pharma categeries. Nepal Plant set up, Goat vaccines, tendering of PPR and Brucella vaccines, strong distribution channels globally- appeals to have this company in the portfolio. :)

Disclosure: Holding tracking position in the personal portfolio. So, obviously biasness may be there.:)

We, Jainam Wealth, a partnership firm is registerd with SEBI- Research Analyst Regulation,2014. Our Registration Number is: INH000003218

Final View & Valuation:

Q & A