Should you invest in Hester Biosciences for long term? Stock Analysis by Finology

Hester Biosciences, India’s 2nd Largest Poultry Vaccine Manufacturer, holds a 35% market share in the sector poised for high growth.

Finology Research Desk has analysed the company this week, providing a clear verdict on whether Hester Biosciences Ltd. is a good long term stock or not. Find out in this article.

What makes the Poultry Industry special?

The poultry meat consumption in India has grown by ~1.4x over the last 11 years. According to a study by Statista, daily per capita meat consumption in India rose by ~63% between 2013-2020. With growing population, the demand for poultry consumption is increasing in India. Rising incomes and evolving lifestyles has lead to increased protein consumption, with chicken meat and eggs being seen as healthier alternatives to red meat. Additionally, poultry products are generally more affordable than other protein sources, making them accessible to a larger portion of the population.

Source: Statista

According to Basic Animal Husbandary Statistics 2024 study, India is home to the largest livestock population in the world with 537 million+ animals. Livestock breeding is one of the most critical economic activities in rural India. The sector has grown at ~15% CAGR over FY15-FY23, increasing its contribution to the Indian agriculture and overall economy with its contribution to overall agriculture GVA (Gross Value Added) increasing to ~30% in FY21 compared to ~24% in FY15.

The number of increased zoonotic (diseases which can spread from animals to humans) cases has led to an increase in demand for poultry vaccinations. For example, according to a report by the WHO, the number of zoonotic cases in Africa increased by 64% in 2022. With increasing number of diseases, the demand for poultry vaccines is expected to increase from hereon. The global poultry vaccine market valued at ~USD 2.39 billion, is expected to grow at ~7.6% CAGR till 2030.

We decided to look for key players in the Indian stock market who could benefit from the poultry vaccination theme. Our search led us to an interesting company: Hester Biosciences Ltd.

Business Model of Hester Biosciences Ltd.

Hester Biosciences Ltd. is engaged in the business of manufacturing of poultry vaccines, large animal vaccines and trading of poultry and large animal health products. Started in 1987 as small proprietary trading business, the company has grown over the years to now become the 2nd largest poultry vaccine manufacturer in India with ~35% market share.

The company generates revenues from multiple segments:

1. Poultry Healthcare: This is the largest revenue-generating segment for the company. It is the core operating segment for the company. For FY24, the segment contributed to ~48% of the revenues and ~34% to the profits, operating at ~13% profit margins.  Profit margins in this segment has reduced over the years. The company used to operate at average ~27% profit margins for the FY19-FY23 period. The decline in margins is majorly because poultry industry continues to be under pressure due to high feed costs and low product realisations, leading to significantly lower new bird placements and poor collection cycles.

The poultry healthcare division primarily provides 3 products/services: vaccines, health products and diagnostic services. As of FY24, the company offers 50+ vaccines and 70+ healthcare products.

2. Animal Healthcare: This is the largest 2nd largest revenue generating segment for the company.  For FY24, the segment contributed to ~43% of the revenues and ~56% to the profits, operating at ~23% profit margins. Over the last few the company has focused to increase its revenue contribution from this segment to reduce its dependency from poultry healthcare segment. Animal healthcare segment’s revenue contribution has increased from ~8% of total sales to ~43% now. The sales of the animal healthcare division grew fast mainly due to the demand for Goat Pox vaccines, which was consequent to the outbreak of Lumpy Skin Disease (LSD) in cattles.

In the animal healthcare segment, with ~75% market share, the company is a market leader in providing PPR (Peste des Petits Ruminants) vaccines. PPR is one of the highly contagious and economically important transboundary viral disease of sheep and goats, with mortality and morbidity rates as high as 90% and 100%, respectively.

3. Petcare: Started in 2023, this is a relatively new business segment for the company. The petcare segment currently contributes ~1% to the total sales for the company. Currently, the segment is operating in losses. The company is focused on providing high-quality products, nutritional supplements and grooming essentials to ensure pet well-being and health.

Every year 6 lakh+ pets are adopted in India. Veterinary healthcare market is valued at $169 million and is expected to reach $186 million by 2027. The rise in awareness and education about petcare has significantly led to a rise in pet adoption rates. This increased awareness has also driven the trend of pet humanisation which has made pets integral family members. As a result, there is a growing demand for high-quality petcare products and services.

4. Others: This includes sales of other pharmaceutical products. For FY24, the segment contributed ~9% to the total sales and  ~13% to the total profits, operating at ~26% operating margins.

Unit Economics of Hester Biosciences
 

Source: Annual Report FY24

The unit economics of Hester Biosciences tells us how they spend every rupee they earn in revenue:

1. Material Cost: Material costs form the largest cost component, accounting for ~30% of total revenue. This means for every ₹100 rupees the company earns it spends ₹30 in its material cost. In the past year, material costs fluctuated, peaking at 34.50% in FY22 but declining to 29.98% in FY24. It can be seen that Sales grew by around 11% CAGR and material cost grew by 9.7% CAGR. This suggests better cost control measures, price optimisation, or supply chain efficiencies. Any fluctuations in the prices of key raw materials directly impact gross margins.

2. Employee Benefit Expenses: Employee costs account for ~20% of total revenue in FY24. This means that for every ₹100 earned, ₹20 is spent on salaries, wages, and benefits. Employee expenses grew at a CAGR of ~9.54%, slightly lower than revenue growth (CAGR ~11%). The cost as a percentage of sales has remained stable (~18%-21%) over the years.

3. Finance Cost: Finance costs (interest and borrowing costs) have surged, increasing from 1.63% of sales in FY22 to 6.18% in FY24. CAGR of finance costs has been ~21.82% (much higher than revenue growth). Finance costs are rising faster than revenue, reducing profitability per unit sold. Rising finance costs directly reduce net profitability, as more earnings are allocated toward servicing debt. This increase is due to higher debt, rising interest rates, or foreign exchange risks.

4. Depreciation: Depreciation accounts for ~5.37% of revenue in FY24, slightly declining from 7.24% in FY23. Depreciation grew at a CAGR of 5.61%, which is slower than revenue growth. A decreasing depreciation percentage explains efficient capital deployment or fully depreciated assets.

5. Other Expenses: Other expenses (admin, marketing, logistics, etc.) account for ~28.42% of revenue in FY24,  which accounts for the 2nd  largest expense in the cost mix of the company, remaining stable over the years. It grew at a CAGR of 8.93%, which is slightly lower than revenue growth. Fluctuations indicate variable cost movements, efficiency measures, or market conditions.

The unit economics of Hester Biosciences Ltd. tell us that the profit margins are declining despite revenue growth, this is due to high finance costs  & rising employee expenses.

What grabbed our attention?

The company is the 2nd largest poultry vaccine manufacturer in India. It is also the market leader in providing PPR vaccines with a ~75% market share. The Government of India has also given a push to this industry as it is one of the important economic activities of rural India. The company has also been backed by organisations such as Bill & Melinda Gates Foundation and GALVmed Organisation.

Due to rising meat consumption, the threats from zoonotic diseases is increasing globally.  According to the World Animal Health Organisation (WOAH), 60% of human infectious diseases are zoonotic and at least 75% of emerging infectious diseases originate from animals. Addressing zoonotic infections at their animal source is the most effective and economical approach. Backed by its promoters' vast experience in the industry and dominant position, we thought the company could be well-positioned to contribute significantly to this global effort.

Why did we reject Hester Biosciences Ltd. in Finology 30?

1. High Working Capital Requirement

The company has a high working capital requirement to operate its business. The company operates on 100+ working capital days. Working capital days represent the time a company takes to converts its working capital investments (day-to-day running costs) into sales.

The cash conversion cycle is also longer due to its long inventory days (100+ days). This long inventory days indicate that the company’s business takes a long time to churn its existing inventory.

2. Over-committing and under-delivering

“Always reliably show up for the task entrusted to you. Never overpromise and underdeliver. Being unreliable will impair your career and friendships. If anything, underpromise and overdeliver. Trust is earned when actions meet words.” - Gautam Baid, Joys of Compounding

In the field of investing, Gautam Baid's advice highlights the critical role of trustworthiness and consistency. When a company’s promoters consistently fulfill their commitments, they establish a reputation for reliability, which is essential for building strong relationships with investors. 

On the other hand, failing to meet promises can lead to a loss of credibility. If stakeholders perceive that expectations are not being met, it can result in diminished confidence and may harm investors' confidence in the business and its management. This erosion of trust can have long-lasting negative effects on one's reputation and the success of business ventures.

However, Hester Biosciences’ management has given many bold guidances in the past and has failed to achieve them:
 

Source: Company Annual Reports, Finology Research Desk

We prefer to look for companies whose management has a strong record of meeting their set guidances or even those management who do not give any guidance at all over a management who commits big but fails to deliver on the same. We prefer companies that walk the talk.

3. Declining efficiency

The company’s ROE has been declining over the years. ROE is a key indicator of a company’s profitability and its ability to generate profits efficiently. Declining ROE for the company in Hester’s scenario was a problem due to its management’s active focus on growing its low margins health products business. While the management considers it as a key driver for long term growth, we do not believe that expanding in a lower margin segment for a small cap company like Hester Biosciences is a good decision, as it not only affects profitability of the business but also restricts the future potential for higher growth.
 

Source: Finology Ticker 

The Bottom Line

Hester Biosciences Ltd. stands out in the poultry vaccination industry with its leadership position in PPR vaccines. The company has also diversified its revenue streams over the past few years to bring stability in its business. 

However, the company's prolonged working capital cycle, exceeding 100 days, raises concerns about its operational efficiency. The management's history of setting ambitious targets— such as reaching ₹1,000 crore in revenue by FY20 and consistently falling short of the set expectations, raises concerns over shareholders' faith in the company’s management. Additionally, the company's declining Return on Equity (ROE), coupled with its expansion into lower-margin segments, raises questions about its strategic direction and impact on profitability.

For Finology 30, our ideology has always been to prioritise strong business models with robust financials. Keeping this in mind, we chose not to proceed with Hester Biosciences Ltd.

However, there are very few stocks that made it to Finology 30. Check them out here.