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HESTER BIOSCIENCES LTD Buy at Rs.440/-. Duration 18 to 24 months 16th Mar, 2015

INDUSTRY OVERVIEW

ANIMAL VETERINARY VACCINES MARKET

The global market for animal vaccines is estimated at $5.8 billion by 2013 and

expected to grow at a healthy CAGR of 8.1% to $8.6 billion 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 Tier 1 players; the top 5 players

contribute close to 70% of the global market. New entrants, though facing high

barriers in entering these markets on account of capital-intensity and strict

regulations, these markets are reaching maturity and could register mid-single

digit growth rates for five years. Asia, parts of Africa and LATAM are poised to

grow at double-digit rates owing to the increasing investment opportunities for

companies in these immature markets and improving healthcare facilities for

animals. Countries like China, India and Brazil are expected to be major growth

drivers.

Animal health sits at the intersection of two large and growing industry sectors:

pet care and livestock production. These two sectors are interrelated. As livestock

production and pet ownership increase in response to demand growth and

increased standard of living, animal health medicines and vaccines will be

required in greater volumes.

INDIAN VETERINARY INDUSTRY

The size of the Indian veterinary health industry in 2011was H22.50 billion (USD

375 million) out of which biological/biosecurity products held a 28% share, feed

additives held 26% and therapeutics held 46%.The growing awareness for health

animals is driving growth in the animal healthcare market; besides, a limit on

arable land, is making livestock an important source of food security. The Indian

veterinary market is gaining importance.

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INDIAN LIVESTOCK SECTOR

India possesses the largest livestock population in the world and accounting for a

fifth of the worlds cattle population. The pet population though, still remains

small. Consequently, the Indian animal health care industry is estimated at Rs22

billion, contributing a mere 2.2% to the global health care industry. Livestock

plays an important role in the national economy as well as the socio-economic

development, augmenting family incomes and generating gainful rural

employment particularly for the landless marginal farmers and women.

Growing at a CAGR of about 4%, Indias livestock population is likely to grow

from 280 million to about 312 million by 2015. Cattle constitute 60 percent of

Indias livestock population followed by buffaloes (32 percent), goats (four

percent) and sheep (two percent). Andhra Pradesh, Rajasthan and Uttar Pradesh

account for about 35 percent of Indias total livestock population followed by

Karnataka, Madhya Pradesh, Maharashtra, Tamil Nadu and West Bengal.

India is the worlds largest milk producer with an annual output of around 116

million tonnes. With an annual growth rate of 4%, Indias milk production

accounts for 16% of the total global output. The Union Agriculture Ministrys

Department of Animal Husbandry, Dairying & Fisheries is focusing on increasing

animal population and productivity. Besides, the Ministry of Food Processing

Industries intends to implement programs to increase dairy processing and

value-added product export, in line with the vision to make India the food

factory of the world.

INDIAN POULTRY SECTOR

India is emerging as the worlds fifth largest egg producer. It produces 3.6% of

global egg production. India also ranks sixth in broiler production with an

annual output of 2.39 million tonnes of broiler meat estimated at about H350 bn.

The scope of this sector is reflected in the fact that the annual per capita

consumption of poultry in India is a mere 3.1 kg compared with 70-80 kg in

developed countries. India produces nearly 27 million chickens a week (95%

traded alive). The outlook for poultry production appears bright, the annual

growth of the layer business estimated at 6% and broilers at 12%. Efficient

distribution, cold chain infrastructure investments and increasing preference for

frozen chicken are likely to be key industry drivers.

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COMPANY PROFILE

Hester Biosciences Limited is one of Indias leading animal health care companies.

Being the countrys second largest poultry vaccine manufacturer, Hester has

rightly positioned itself to capitalise on upcoming opportunities in the animal

health care industry globally.

Apart from poultry vaccines, the company has recently forayed into poultry

health products, large animal vaccines and large animal health products. These

four verticals put together will underpin Hesters identity as a strong animal

health company, addressing all segments in the animal health care sector.

Founded in 1987, by Mr. Rajiv Gandhi, a first generation entrepreneur, he

converted a proprietary trading business into Asias largest single-location

animal biological manufacturing facility. Benchmarked to international quality

compliance standards, Hester manufactures and markets veterinary vaccines and

health products in the Indian as well as globally.

The Company has a state-of-the-art manufacturing facility unit in Mehsana,

Gujarat, complying withstringent international norms. Hester is WHO-GMP,

Good Laboratory Practices (GLP), ISO 9001, ISO 14001&OHSAS 18001 certified.

The Companys product portfolio comprises of over 45 vaccines and over 70

health products, which are distributed through Hesters all-India distribution

network. Exports are currently to eight countries with the registration process on

in over 20 countries.

Hesters key strength is embedded in its cutting-edge research and development

capabilities. The Companys R&D Centre is recognized by the Department of

Scientific and Industrial Research (DSIR), Ministry of Science and Technology,

Government of India. Current research activities are aimed at developing next

generation veterinary recombinant vaccines.

For the financial year 2013-14, the company reported revenue of INR 690 million

with a net profit of INR 100 million. In the current financial year, 9 months results

have shown revenue of INR 666.76 million with a net profit of INR 104.55 million.

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SYNOPSIS

Hester Biosciences Ltd manufactures and markets animal vaccines and health

products.

In Q3 FY15, net profit jumps to Rs. 33.72 mn against Rs. 25.45 mn in Q3 FY14,

an increase of 32.50%.

Revenue for the quarter rose by 37.95% to Rs. 218.83 mn from Rs. 158.63 mn,

when compared with the prior year period.

During Q3 FY15, EBIDTA is Rs. 63.52 mn as against Rs. 50.98 mn in Q3 FY14,

grew by 24.60%.

During the quarter, PBT increased by 78.06% to Rs. 45.37 mn from Rs. 25.48

mn over the corresponding quarter of previous year.

EPS of the company stood at Rs. 3.96 a share during the quarter as against Rs.

2.99 over previous year period.

During the quarter, the company has acquired 100% share holding of Gujarat

Agrofarm Ltd at Rs. 5.25 mn, thereby formed new Wholly Owned Subsidiary

Company.

Hester Biosciences Ltd has approved Composite Scheme of Amalgamation

and Arrangement between Diavetra Lifesciences Private Ltd, Gujarat

Agrofarm Ltd, Hester Biosciences Mauritius Ltd and Innoves Animal Health

Private Ltd.

Net Sales has been reported at Rs. 666.76 mn for 9M FY15 as compared to Rs.

472.01 million for 9M FY14, thereby registering a growth of 41%.

Net Profit for 9M FY15 at Rs. 104.55 mn as compared to Rs. 61.73 mn in 9M

FY14, grew by 69%.

Net Sales and PAT of the company are expected to grow at a CAGR of 18%

and 20% over 2013 to 2016E respectively.

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Results Updates- Q3 FY15

Hester Biosciences Limited manufactures and markets animal vaccines and

health products in India and internationally has reported its financial results for

the quarter ended 31 Dec, 2014.

The companys net profit jumps to Rs. 33.72 million against Rs. 25.45 million in

the corresponding quarter ending of previous year, an increase of 32.50%.

Revenue for the quarter rose by 37.95% to Rs. 218.83 million from Rs. 158.63

million, when compared with the prior year period. Reported earnings per share

of the company stood at Rs. 3.96 a share during the quarter as against Rs. 2.99

over previous year period. Profit before interest, depreciation and tax is Rs. 63.52

million as against Rs. 50.98 million in the corresponding period of the previous

year.

Break up of Expenditure

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Latest updates

Hester Biosciences Ltd has approved Composite Scheme of Amalgamation

and Arrangement between Diavetra Lifesciences Private Ltd, Gujarat

Agrofarm Ltd, Hester Biosciences Mauritius Ltd and Innoves Animal Health

Private Ltd.

Hester has acquired 100% share holding of Gujarat Agrofarm Ltd at Rs. 5.25

mn. Gujarat Agrofarm, a company located in Gujarat, is involved in the

manufacturing of growth media. This backward integration by Hester aims

at securing for itself a source of growth media used in the production of

vaccines. The acquisition would enable Hester in saving over Rs 15.0 mn

annually towards growth media procurement costs.

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FINANCIAL HIGHLIGHT

Balance Sheet as at March 31, 2013 -2016E

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Annual Profit & Loss Statement for the period of 2013 to 2016E

Quarterly Profit & Loss Statement for the period of 30th June, 2014 to 31st Mar,

2015E

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Ratio Analysis

OUTLOOK

At the current market price of Rs. 411.90, the stock P/E ratio is at 24.06 x

FY15E and 20.91 x FY16E respectively.

Earnings per share (EPS) of the company for the earnings for FY15E and

FY16E are seen at Rs. 17.12 and Rs. 19.70 respectively.

Net Sales and PAT of the company are expected to grow at a CAGR of 18%

and 20% over 2013 to 2016E respectively.

On the basis of EV/EBITDA, the stock trades at 14.33 x for FY15E and 11.85 x

for FY16E.

Price to Book Value of the stock is expected to be at 3.87 x and 3.27 x

respectively for FY15E and FY16E.

Hesters growth is on account of buoyancy and strong performance across 3

of the 4 business verticals. Demand for Hesters poultry vaccines and health

products as well as for its large animal health products have increased

considerably. The companys focus is now on improving the bottom line and

in introducing its own research products, besides launching the Large

Animal Vaccine Vertical in Q4 FY 14-15. Hence, we recommend BUY in this

particular scrip with a target price of Rs. 820.00 for Medium to Long term

investment more than Rs.3,300.00.