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Hester Biosciences Ltd.

BSE: 524669 Sector: Health care
NSE: HESTERBIO ISIN Code: INE782E01017
BSE LIVE 15:43 | 21 Aug 855.25 -6.10
(-0.71%)
OPEN

881.70

HIGH

881.70

LOW

850.00

NSE 15:31 | 21 Aug 863.05 0.60
(0.07%)
OPEN

879.00

HIGH

887.95

LOW

860.00

OPEN 881.70
PREVIOUS CLOSE 861.35
VOLUME 1495
52-Week high 1233.00
52-Week low 666.00
P/E 29.03
Mkt Cap.(Rs cr) 728
Buy Price 855.25
Buy Qty 1.00
Sell Price 0.00
Sell Qty 0.00
OPEN 881.70
CLOSE 861.35
VOLUME 1495
52-Week high 1233.00
52-Week low 666.00
P/E 29.03
Mkt Cap.(Rs cr) 728
Buy Price 855.25
Buy Qty 1.00
Sell Price 0.00
Sell Qty 0.00

Hester Biosciences Ltd. (HESTERBIO) - Chairman Speech

Company chairman speech

I am pleased to present the performance of your Company for 2016-17.

Your Company reported the 17th straight year of profitable growth whereinthe percentage increase in profit after tax was higher than the percentage increase in thecompany's revenues.

The performance of your Company during the year under review indicated a certainmaturing reflected in operational consistency and the optimism of better days.

2016-17 in Retrospect

Your Company reported net sales of Rs.32.16 million in FY17 compared to Rs.1008.92million in the previous year a growth of 22.13 per cent. Domestic sales grew 20.95 percent whereas exports strengthened 44.01 per cent.

Your Company recorded a net profit after tax of Rs.248.43 million in FY17 as againstRs.2.23 million in the previous year a growth of 29.24 per cent on account of operationalimprovements prudent product mix changes and credit control.

The result was that your Company reported a profit growth of 29.24 per cent that washigher than the revenue growth of 22.13 per cent which we believe distinguishes companiesthat possess robust and sustainable business models.

Concurrent with this increase in revenues and profits was an increase in our EBIDTAmargin by 12 bps from 33.10 per cent in FY16 to 33.22 per cent in FY17. I am particularlypleased that the year's performance validated that we made a superior use of resourcesreflecting in our ROCE strengthening from 20.69 per cent to 24.06 per cent.

Industry Scenario and Hester's Outperformance

Your Company's sustained outperformance was achieved despite prevailing challenges.

The H660 billion Indian poultry sector encountered an acute shortage in cold chain andallied transportation infrastructure. Limited slaughtering and processing facilitiesa!ected exports. Besides numerous disease outbreaks like ‘bird flu' were reported;avian influenza outbreaks were reported in Tripura Kerala Karnataka Haryana Punjab andOdisha which impacted supply a!ected realisations and impacted cash flows.

Challenges notwithstanding the industry achieved volume growth of 6 per cent in CY16with broiler meat production volumes increasing to 3.9 million tonnes compared to 3.7million tonnes in CY15. Poultry is the major meat source in India with a meat consumptionshare of 28 per cent as against 14 per cent just ten years ago. Poultry outpacedcompetitors like beef veal and bu!alo meat.

High mutton prices religious restrictions on beef and pork and limited availabilityof fish outside coastal regions helped enhance poultry meat relevance and consumption.Interestingly India's per capita poultry meat consumption of around 3.6 kg per year isstill low compared to the global average of around 17 kg per year. The National Instituteof Nutrition recommends that a balanced diet should contain 30 gram of eggs/day (i.e. 180eggs per annum) and 30 grams of meat daily (11 kg per annum) auguring better prospects.

The average rearing cycle for broilers in the country is 35-40 days to a weight of 1.8to 2.2 kg. India's feed conversion ratio has improved significantly from 2.2 in the 1990sto 1.65 today. Feed costs constitute approximately 60-70 per cent of the total productioncost. Average farm broiler realisations for FY17 at H70/kg were better than H67/kg inFY16 while average broiler production cost at H64/kg in FY17 was almost 5-7 per centlower than the FY16 levels given the sharp decline in soymeal prices in the second halfof FY17. There was a year's delay in commissioning our H433.96 million Nepal plant for avariety of reasons that comprised political instability natural calamity inputs shortageand internal issues.

Your Company continued to prioritise the need to do good business than engage in mererevenue accretion. For a company where a majority of the customers are rural your Companyfocused on quality sales marked by timely receivables. In a business marked by nearly SKUscovering around 50 products your Company continued to strengthen inventory management. Ina business that potentially addresses a range of animal health issues your Companyselected to concentrate on specific segments narrowing its focus and generating relatede"ciencies.

The result was something that we have always emphasised: that it is better to do goodbusiness over any kind of business. The result was that our business gravitated towardsthe value-added; even as external market realities remained competitive the large animalbusiness revenue grew 61.84 per cent and export earnings strengthened 5.72 times.

Your Company commenced commercial production in its Nepal plant and submitted batchesto the African centralised quality control laboratory. The Company bagged an FAO tender tocommence PPR production. As a forward-looking company your Company invested H79.94 mn inresearch in India which was about 6.49 per cent of revenues. I must take this opportunityto indicate that in the last four years your Company invested H367.85 mn in researchfacilities apparatus and recruitment strengthening its position as a seriousresearch-driven veterinary products company. It would be relevant to indicate that adisproportionately large proportion of the investment is being made in the area ofrecombinant vaccines the next frontier for the business.

Segment Review

Poultry Vaccines: The poultry industry witnessed significant improvements in FY17catalysed by lower feed costs and higher broiler and table egg realisations. The Company'smanufacturing facility at Mehsana produced 3.43 bn doses of live and inactivated vaccinesin addition to ELISA & PCR diagnostic kits. The Company developed and started themarketing of NDV and IBV ELISA kits for sero-monitoring of poultry and PCR moleculardiagnostic kits for a variety of diseases. These kits will help towards an accuratediagnosis of diseases or virus strains in broiler thereby inducing corrective action.Poultry vaccine sales were Rs.1043.33 million in FY17 comprising 85 per cent of theCompany's revenues.

Poultry Health Products:

Your Company markets health products such as medicines feed supplements anddisinfectants. To ensure timely supplies as well as exercise a higher control on qualitythe Company acquired a controlling interest in an animal health products manufacturingcompany. This impact is expected to be seen in FY18. While we do not envisage a higherprofitability due to this this surely would ensure smooth product supplies. Sales frompoultry health products were Rs.36.80 million accounting for 3 per cent of the Company'srevenues.

Large Animal Vaccines:

Your Company manufactured three vaccines in the large animal healthcare segment namelyBrucella Abortus vaccine Goat Pox vaccine and Peste Des Petits Ruminants (PPR) vaccinefor the Nigerian and Sungri strain. PPR is a highly contagious disease that a!ects sheepand goat in over 70 countries. The Food and Agriculture Organisation (FAO) and WorldOrganisation for Animal Health (OIE) launched a global programme for the eradication ofPPR by 2030. Hester is participating in PPR tenders to supply the vaccine to variouscountries. Sale from large animal vaccines stood at H68.23 million amounting to 5 percent of the total revenues. The Company will continue to focus on strengthening its largeanimal vaccine segment by developing new vaccines.

Large Animal Health Products:

The Company outsourced the manufacture of large animal health products on a loanlicense basis. But the investment in a facility manufacturing veterinary health productswill have an impact on the supplies of large animal health products similar to that ofpoultry health products. Sales of H83.80 million from this sector accounted for 7 per centof the total revenues. Hester continues to focus on this value-added segment in line withincreasing demand for livestock health products.

Strengthening the Business

Over the last year your Company selected to strengthen the business in various ways.Your Company embarked on the exercise of building a distribution network in Africa. Thecompany entered Tanzania and Kenya invested in prudent recruitments strengthened itsmanagerial bandwidth to address the prospects arising out of each country and intends haveadequate distribution bandwidth in at least three countries by September 2017. Thispatient expansion is in line with our conviction that your Company would like to extenddeep roots in each geography before extending horizontally across the rest of thecontinent. It would be pertinent to indicate that Africa occupies a large strategicpriority for your Company on account of Africa's large animal and cattle population whichis extensively under-addressed. Your Company had committed in the previous report that itsanimal diagnostic business would be commissioned by the last quarter of FY17. Thiscommissioning was delayed and extended into the first quarter of FY18. This launch has nowbeen finalised in July 2017. Your Company is optimistic that this business represents thenext frontier; there is a growing priority for proactive and advance diagnostics oversymptomatic diagnostics. This extension will moderate the room for trial and error inanimal health care evolving animal and cattle owners towards accurate curative preventivemedication.

Your Company is optimistic of prospects in the advance diagnostics space given thefact that India accounts for the largest head-count in the world and the fifth largestpoultry population on the one hand and a low level of scientific diagnosis at the other.Your Company also believes that this business represents a prudent backward integrationfor its business model; the business of diagnostics will in turn create a market for thevaccines and other products marketed by the company; an early insight into diagnosticscould also prompt the company to refine its product mix in line with a change in diseasepatterns. Your Company has an important responsibility through this business of creating amarket where virtually none exists followed by the capturing a disproportionately largermarket share. Your Company also continued the market penetration model for backyardanimals in Jharkhand Chhattisgarh and Odisha.

Outlook

Your Company has passed the stage of survival and entered a phase of sustainability.Your Company is optimistic of its prospects for a number of reasons.

Your Company derived nearly 88 per cent of its revenues from the poultry segment withonly a modest share of revenues derived from the high-margin animal health segment; goingforward we believe that the rate of growth of animal health business at 61.84 per centthis year will be higher than the corporate growth average correcting the revenue skewwith cascading implications in terms of revenues and margins.

Your Company intends to grow its PPR vaccine business leveraging its manufacturingoperations within India to feed the growing national demand and leveraging its Nepaloperations to service growing global demand. Your Company believes that the prospects ofthis business are bright; Food Agriculture Organisation has launched a plan over the next15 years to eradicate PPR. Your Company expects to capitalise on improved prospects forBrucella Abortus vaccine the market for which is growing due to awareness campaigns byvarious states as well as the increasing demand internationally. Your Company's businesshas extended from diverse Indian terrains and is now at the cusp of evolving into aglobally-respected veterinary vaccines organisation through joint ventures or consideringgreenfield projects in emerging markets and Africa. Your Company expects to grow its largeanimal health business 50 per cent year-on-year its poultry business 15 per cent andexports around 100 per cent year-on-year reporting 30 per cent year-on-year revenuegrowth at attractive margins strengthening value for all stakeholders.

Your Company strengthened its credit rating during the year under review from"BBB+" to "A-" a development that we believe will translate into alower debt cost and enhanced corporate respect.

Your Company's principal capital expenditure projects were more or less completed lastyear; from this point onwards we foresee the investments being commissioned andmonetised translating into enhanced revenues and increased margins the foundation forsustained profitable growth.

In view of these realities your Company expects to perform even better during thecurrent financial year enhancing value in the hands of all those who are invested withus.

Rajiv Gandhi

CEO and Managing Director.