Hester Biosciences Limited (524669) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Hester Biosciences Q1 FY '27 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. From the management side, we have with us today, Mr. Rajiv Gandhi, CEO and Managing Director; Ms. Priya Gandhi, Executive Director; and Mr. Ashish Desai, CFO. I now hand the conference over to Ms. Priya Gandhi. Thank you, and over to you, ma'am.

Yes. Thank you. Good afternoon, everyone. This is Priya Gandhi. Thank you for joining us today to discuss our Q1 FY '27 results. As always, we sincerely appreciate your continued engagement and long-term support. At our Annual General Meeting earlier this month, we spoke about the theme of this year's report, which is building with intent, growing with science. We shared how our focus over the past year has been on strengthening Hester's scientific capabilities, manufacturing platform, operational discipline and long-term competitiveness. And the first quarter of FY '27 does give us some encouraging evidence that these efforts are beginning to translate into stronger operating performance. As our detailed financial results have already been published in the press note, I will focus my remarks today on the key highlights and developments during the quarter rather than reiterating all the financial numbers. On a stand-alone basis, our revenue from operations grew by 14%, and the PAT increased by 88% over the corresponding quarter over the previous year. Gross margins improved from 69% to 78%, which was mainly supported by a favorable product mix and our continued operational efforts on operational efficiencies. EBITDA grew by 95%, reflecting stronger operating performance and disciplined execution across the business. At a consolidated level, our revenue from operations has declined by 8%, primarily due to lower revenues from Nepal and Africa operations. Consolidated profitability during the quarter includes an exceptional accounting gain arising from the amendment of the soft loan extended to Hester Africa by the Gates Foundation. During the quarter, the outstanding loan was reduced from USD 12 million to USD 5 million. The accrued interest was waived and revised loan was made interest-free. This reflects the foundation's recognition of the geopolitical and operating challenges in the region and its continued support for Hester Africa's long-term mission and development. Coming on to our division-wise performance, speaking of the Poultry Healthcare division. The Poultry Healthcare division delivered an excellent quarter, recording 48% growth over the corresponding quarter of the previous year. The growth was supported by higher institutional business, deeper market penetration and continued strengthening of customer engagement across key markets. We are also encouraged by the early traction that we witnessed in the poultry health products portfolio introduced during the previous financial year, including feed supplements and disinfectant solutions. These products complement our vaccine business by strengthening bird immunity, improving farm hygiene and supporting better disease prevention outcomes. As we discussed during the previous call, our approach to avian influenza extends beyond vaccination alone. We have developed a more holistic offering that combines vaccines with biosecurity, farm hygiene, gut health products and scientific advisory. Our objective is to provide poultry farmers with integrated health solutions that improve farm productivity and disease management rather than viewing disease prevention through a single product approach. Alongside this, we continue to strengthen our poultry portfolio through scientific engagement, customer education and responsible commercialization of our products. Coming to the Animal Healthcare division. The Animal Healthcare division continued to be impacted by the timing of government-led immunization programs, particularly under the PPR eradication and the lumpy skin disease control initiative for which we supply our goat pox vaccine. As we have consistently maintained, this remains a timing-related issue rather than a reflection of any underlying demand issue. Preventive animal health care continues to offer a significant long-term opportunity, and we remain committed to strengthening our portfolio while building a more balanced business across institutional, commercial as well as export markets. Speaking a little bit about research and development. Speaking a little bit about research and development, at Hester, innovation continues to remain central to our long-term strategy. During the quarter, we have submitted regulatory dossiers in the Animal Health segment, reflecting our continued investment in expanding our biologicals pipeline and creating future growth opportunities. Scientific innovation is inherently long term -- is a long-term process, requiring sustained investment, regulatory discipline as well as patience. And we remain committed to strengthening our research capabilities and building a differentiated portfolio across poultry and animal health care. Coming to the international operations. Internationally, we continue to strengthen our long-term presence. While Nepal and Africa have reported lower revenues during the quarter, our strategic direction remains unchanged. We continue to focus on registration, market development and strengthening our commercial presence across international markets. We remain confident that the investments being made today will support sustainable long-term growth. Looking ahead, as we move through FY '27, our priorities remain unchanged. We will continue strengthening our biologicals portfolio, expanding market penetration across domestic and export markets, advancing our research and development pipeline, improving utilization of our manufacturing infrastructure and maintaining our focus on operational excellence and disciplined execution. Many of these initiatives require time before they are reflected in financial performance. Product development, regulatory approvals, registrations and market development are inherently long term in nature. However, we remain confident that the investments made over the past several quarters and years have positioned Hester on a much stronger footing for a sustainable long-term growth. Thank you once again for your continued trust and support, and we look forward to taking your questions.

[Operator Instructions] The first question is from the line of Ankit Kanodia from Zen Nivesh Advisors Private Limited.

Congratulations on a good set of numbers. Ma'am, my first question is related to a recent meeting of the ministry regarding high pathogenic avian influenza. And I think they also decided something related to importing of vaccines, which will be used for testing. If you can throw some more light into it as to how it will create opportunities for us and how we are involved, that would be very helpful. That is my first question.

Yes. So at this point, it is really a little bit premature to comment on this. The first step is for the government to really determine a specific regulatory pathway for such a vaccine, whether it has to be imported or manufactured within the country. And unless and until there is more clarity on that front, it would really not be appropriate to comment on this at this point. And any such development will highly depend on the government's policy, regulatory framework and disease situation. And we are also monitoring developments. But at this point, there is nothing that we can really speculate or comment.

Sure. And ma'am, there was a recent news article related to the compensation not being paid to the farmer association related to the culling of the -- basically culling operations, which were there. This is related to H5N1 outbreak. Any clarity on that? Or any more color on that, that would be very helpful, ma'am.

Yes, Rajiv Gandhi here. Those questions or the answers for that would not be within our purview because that's something between the insurance company, the government and the farmers. So that's something which we should not comment and we would not be able to comment.

Yes, sir, I understand that, sir. Just my question related to that is, how do you see that delay being impacting the industry in general? That is what I wanted to know.

I really don't think that is impacting the industry at this point of time. Yes, there has been -- the birds would have been culled or they would have died, et cetera. But no, there is no much impact on this. In fact, these discussions have not even come up in our manufacturers meet or association meetings, et cetera.

Got it. Got it, sir. Sir, one last question. I think over the last 1 year or so, we have done a lot of efforts in terms of streamlining our operations and improving the product mix, which is already reflecting not only the income statement, but also on our balance sheet. And with all these things now looking very good, how do we see -- especially the demand scenario and how we think in terms of -- especially in terms of African operations, how do we see that? I'm not asking for any guidance, but over the next few quarters, maybe 4 to 6 or 8 quarters, how do we see that?

I think the demand and our strategy in Africa is exclusive from what operational discipline and operational excellence activities that we undertake. That is something that regardless of anything, we want to continue maintaining this momentum for quarters and years to come. And with respect to the Africa operations, as already mentioned, we do have reasons to believe that the future is good. The opportunities are there, and we are working towards our long-term strategy in Africa.

But there would be volatility, as we mentioned in the previous calls. So it would not be a steady-state growth in Africa. Is that fair to assume?

Today, the world is volatile. We have read about it. So this is -- it's too precise for us to answer. We will take it as it comes. And there is a demand, we will meet the demand. Sometimes demand is ability as well as willingness. Willingness is there, ability may not be there, et cetera, et cetera, because of these geopolitical reasons. We'll take it forward.

The next question is from the line of Dhruv Bajaj from GrowthSphere Ventures.

Congratulations on a great set of numbers. Considering I'm fairly new in this company, so pardon me if some of the questions have been answered in the previous con calls. Sir, my first question was more to do with the poultry division. Based on my understanding, this was supposed to be a more mature business for us, considering we are among the market leaders in this segment. But in this particular year, especially in the past 2, 3 quarters, this division is growing at a very fast pace versus a historical track record. So is it mainly due to some cyclical recovery? Or is there some structural change? Like if you can provide some sort of breakup on the value and volume terms. I understand we have gotten some marketing approvals as well. So if you can share more on that front, that will be very helpful.

See, we are overall in the veterinary biologicals and health products, poultry as well as cattle sheep, swine, goat, swine -- yes, these are the species of production animals. It is our endeavor that both these divisions grow hand-in-hand and we get equal revenues, top line, bottom line, et cetera. But sometimes the market dynamics are such that it forces business in one of the divisions. And therefore, it has so happened at this point of time. Government vaccine tender business got delayed. So therefore, the animal health vaccine sales could not happen as planned, but it will come up into the next quarters. While poultry -- hello? Yes. The others, can they put it on mute, please? In poultry, we got the opportunities. We have taken it in our hand, and we have pushed the sale. When we make more sales in one division, we really don't worry that why is the other less, so we do this less or do that more. [Foreign Language]

Fair enough. Anyways, poultry is a very high-margin business for us. So as a shareholder, it's always good to see that business scaling up. Sir, coming to the second question, like I understand that given the tender basis or the nature of the Animal Healthcare business, that business has always been pretty volatile in nature. And I understand that some of our past CapEx decisions in global markets like that in Nepal didn't work for us. And we were very hopeful on this Africa one, considering the sheer TAM and the higher realizations that we can generate from that market. However, we have faced some sort of challenges in terms of scaling that Africa division, considering the exception of one quarter wherein we reported some positive profitability. So sir, I'm just trying to understand like is it natural deficient period that we are witnessing in this division considering we have gone into a new geography? Or has there been some sort of troubles on the tendering front as well, which has led to slightly lower scale up versus what we were earlier envisaging in our previous con calls?

Yes. Everything is combined, new territory, virgin continent, a continent where economies are struggling financially, politically, there we are trying to create demand. So all these things added up, come together. And then therefore, these things happen, gestation period, I don't think we could call it as a gestation period. It is a formative period, I would say. And we are working on it, and we are seeing positive results and things will happen, it will take off.

Sir, any directional guidance on that, like are we seeing some sort of green shoots in the near future?

I'll tell you, we would not want to get into any directional guidance or anything. Our quarter-to-quarter work we are working -- everybody is putting their efforts into the organization to build sales top line, bottom line, et cetera. [Foreign Language] There is no guidance or anything of this.

Fair enough, sir. And just one last question from my end. I think when we started this human vaccine vertical at a peak of this COVID, that didn't work out well for us, that capital expenditure. And we have, I think, repurposed the entire BSL-3 facilities for fill-finish capacity. And I think that also came live in a couple of quarters back. So can you provide us some understanding on the current utilization of those capacities? And how will we ramp up that going forward? Like any directional guidance on that front maybe?

Again, difficult to give a directional guidance or give you a number as to how much percent we are utilizing. Yes, it is a BSL-3 biosafety Level 3 facility, which we are very proud of. Whichever circumstance we did build it, but we really believe that it is a requirement, a regulatory requirement in years to come for all organizations, and we are just glad that we built it for something else, but we are quite sure about the fact that this will get utilized. And given the product pipeline also that we have and our efforts into operational excellence, we will be fully utilizing it for the products -- the veterinary products that we have in our pipeline. At this point, really cannot give you a capacity utilization percentage, but we are working towards optimum utility of our manufacturing facility.

The next question is from the line of Manish Jain from GormalOne LLP.

Congratulations on great numbers, but more importantly, the way you are creating a big platform for growth going ahead. So just wanted -- initial market feedback of your low pathogen avian influenza, which you got approval in March this year, how has been the market response for it?

Yes. The market response has been very good, I would say. And we are selling this vaccine. And I think -- I mean, to answer your question in one sentence, the market response is very good. You might say that why isn't the sales picked up so much and -- but it has picked up. You see the business that has taken place in the poultry division. It has really -- I mean, that vaccine has contributed towards some of the jumps that we have taken at this point of time.

Beautiful. Beautiful. And in your pet care business, when do you expect to launch vaccines in that business segment?

Yes, Mr. Manish. So we are gradually expanding the portfolio in the pet division. But with respect to vaccines right now, I mean, a little premature for us to say. We will share the development as the products progress to appropriate development and regulatory stages. And at this point in time, a little early to really say something because the regulatory time lines and the regulatory demands are very stringent and rightfully so. But yes, we are working towards it, and we are progressing well.

I would like to add in this that while there are some opportunities to import and to sell, but we are reasonably clear make in India, produce in India and sell from India. [Foreign Language] this is taking a little longer time, but we do not want to be dependent on foreign buying, importing and selling over here. In fact, we want to sell abroad.

Beautiful. And 2 housekeeping questions for Ashish. One is post this debt reduction, what is the consolidated debt as of 30th June now?

The consolidated debt as on 30 June is INR 103 crores.

Wow. And the Africa entity is entitled for, I think, 10 years tax-free status of your profits. So that is still -- which year will that be available to you all?

It is till 2030.

The next question is from the line of Prarit Chopra from Invest Shoppe Private Limited.

Congratulations for your great numbers. So my first question is you guys are dependent upon the government tenders because this makes very unpredictable scenario. So how you guys overcome with this?

So how do we...

No. How do we overcome with the timing-led of the government...

Yes. [Foreign Language] Because we are very proud to be the producers of vaccines, which are immunizing the cattle, which are improving the milk yield in the country and we feel very proud that we are one of the big contributors to the dairy industry and now also to the sheep and goat and soon in the swine. These things are tender business. [Foreign Language] At the end of the day, if you look at a broader period of time, say, 1 year, 2 years, 3 years, then the variation is there for supplies during times. But overall, if you take longer periods, there is a steady business and it goes on. Your next question may be what happens if we don't get the tender business, then what will we do? We, as a company, we are also trying hard and working towards creating demand with the dairy farm directly also. And as now the dairy farms and institutes are becoming bigger, less and less they start depending on the free vaccine for the government. It is a long process. We are doing it. And on the flip side, you could be rest assured that there is not a single year that we will go without gaining one tender. [Foreign Language]

Look, our core strength and our core focus is in biologicals and preventive health care, whether in poultry or in large animal will always be -- the importance of it is unquestionable. And like I mentioned, our other R&D pipeline products are also vaccines, biologicals, which are -- which will be needed by the Government of India for tender. Yes, there is a timing-led issue. But I mean, we are aware of the risks involved, the timing delays involved. But at the same time, our focus is going to be on strengthening the biologicals division in AH.

Okay. I got it. My next question is I see -- There is some weak cash conversion. If you -- reported profit is not supported by operating cash flow.

Sorry. Can you explain what you're trying to say again?

Basically, I'm saying there is a weak cash conversion. The cash flow is not like you guys reported profit again and again. But the number of cash flow is not -- we are able to see.

[Foreign Language]

No, no, it is there. There is a positive cash flow. I think probably the cash flow is not part of this, but there is a cash flow which is generated from the operating activities.

No, no, there is. Your question doesn't seem to make us understand. But there is a cash flow. There is a positive cash flow in the organization.

I saw the report which is showing that you guys have a weak cash conversion.

What is mean by weak cash conversion?

Yes I think -- see, the -- we have improved on the conversion and the receivables are a little bit there, but comparatively, you'll see the impact we are...

The receivables are a little higher. Sometimes this is due to seasonal issues and all. It's a trend which goes on, but we don't see this as a concern at all, and it's not even a red flag or anything of a concern to us. It's going on perfectly. Manageable.

That's not the main concern. One concern is that it will be a concern for you. That's why I'm asking. So cash flow is not concerning. Okay.

No, no, there is no concern.

The next question is from the line of Ankit Kanodia from Zen Nivesh Advisors Private Limited.

Ma'am and sir, I just have a very simple question. I'm not asking for any guidance, any future forecast, but any rough understanding of how much is the capacity today and roughly how much is being utilized. So that we have just some idea as to how much expansion can be done as in how much sales can be done without any new capacity. That's the only reason to ask.

These questions have been answered in the past also. And our capacity utilization over here at the plant, we have -- it is at around 60% to 65%. Now these are -- these terms, again, are very subjective. [Foreign Language] So this is a very subjective thing. At the moment, the way we are progressing, at an average, you can say we have around 65% utilization, and that's about it.

The next question is from the line of Madhur Rathi from Counter Cyclical Investments.

I just wanted to understand what has led to the step-up jump in our revenue from the poultry segment from INR 45 crores, INR 48 crores revenue levels to close to INR 60-plus crores. Is it due to higher chick placement? Or is it due to new product addition or something else altogether?

Everything put together, the placement of poultry is good. Our market penetration has been more aggressive. None of this is attributed to increasing in prices because our prices of vaccines have not gone up. So it is -- they have marginally gone up, but most of it, it is getting hold of a bigger market share.