Hester Biosciences Limited (HESTERBIO.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Hester Biosciences Limited Q3 FY '20 Earnings Conference Call hosted by IIFL Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Sharma from IIFL Securities. Thank you, and over to you, sir.

Good day, everyone. This is Abhishek from IIFL Securities. I thank the Hester management team for giving us the opportunity to host this call. From Hester, we have with us today, Mr. Rajiv Gandhi, CEO and Managing Director. I will now hand over the call to Rajiv [Foreign Language] for his opening remarks. Over to you, sir.

Good afternoon to all of you. And as always, it's a pleasure connecting with you on this quarterly call and discussing the financial results of our company. Please pardon me a little bit today because I have a sore throat and my voice might not be as clear or I might be coughing sometime in between. So please pardon me for that. So anyway, welcome to all of you talking about the Q3 results and the 9-month ended results, as you have already got the results with you. The results, I need to admit, they have been below expectations for various reasons. The reasons being that though the poultry industry has now come out of its earlier issues in terms of maize prices, et cetera, but as always, the recuperating time probably is always longer than the time that one gets into it in a bad situation. So that is probably taking its toll on us to some extent. And -- but we have already seen in this quarter in itself in January as well as heading towards in February, we see a remarkable difference in the sales on the positive side as far as the poultry industry is concerned. On the Animal Health side, the trade business has more or less grown to our expectations. Yes, it was 50%, but it has gone to approximately 43% in the quarter. But the tendering procurement of -- from various states has been slow. But as always has happened in the past on -- before March 31, the budget gets exhausted, the procurement is done, including the payments are made. So this quarter, it's not that we hope to get it -- we get those orders, but we are very sure that the tender business would lead us -- lead to a great jump as far as the Brucella and the PPR vaccine of the Animal Health division, these 2 vaccines are concerned. We also on -- okay, coming to the domestic sales versus the exports, while the domestic sales have definitely been lower, the exports have shown a reasonable amount of improvement. In fact, on a quarter 2-quarter 2 comparison, it has grown to around 2.5 to 3x. While on a 9-month comparison, it is showing a 66% growth. So the deficit in domestic sales has definitely been partly covered by the international business. Also talking about the bottom line and the reasons for a drop in the bottom line. Though the sales have been less in the last 2 quarters, 3 quarters, we have kept up the pace and the budget in hiring salespeople, marketing team because we believe that this was necessary for us in order to have a reasonable good spurt in sales. The spurt has not come because of the various market reasons, but the hiring has taken place, the hiring continued in Q3. And once this situation -- once we are out of this situation, I'm sure it would show a very steep growth in terms of sales. So in our preparation for that, we have taken on marketing people and that has definitely added on to our personnel costs. In the current situation, when there is less buying shown by our end users, at that time, the products which are more necessary and which are regularly used are more actually sold rather than we trying to manage and manipulate our products selling in trying to sell more higher-margin products. So in order to make sure that at this point of time we continue to have as much sales possible, we have pushed on to the more needed products rather than focusing on the value addition, et cetera, on products, which give us a higher margin. So there has been an adverse change in the product mix temporarily, but in January, we have already started rolling back on to our original product mix, on to our original production forecast. And within this quarter, we should be back on track in terms of selling products, which give us a much better bottom line, much better margins. In terms of credit, yes, whenever there is a problem with the cash flows, in fact, the cash flows of our end users, the poultry industry has forced them to buy less, and therefore, the situation, so it has been our -- and clients, many -- most of them being very old, as you know, from as old as 20 years, 15 years, 18 years, 10 years. So we have gone a little bit extra mile in giving them more credit. That has also impacted our credit number of days. So these are the few things that have more or less impacted in terms of the top line as well as on the bottom line. Looking at things further from here, the PPR and the Brucella are the 2 main vaccines for which we hope to get into a good business, not only in this quarter, but now in the next coming year or in the coming few years. PPR through the tender, we would be supplying in this quarter to cover up this year's forecasted for tendering. PPR supplies are still controlled and are bought directly by the states, while the Brucella procurement has now been transferred from the state to the central. So on PPR, while we hope to get good business in February as well as in March, the Brucella tender, the big tender was already released by the Government of India. There had been 2 bidders, us and another company. So hopefully, once when the whole process is through, we have reasons to believe that we would also be getting a good chunk of the Brucella vaccine business that is expected to take place from -- as per the tender from February this year to February next year. We now await the government's further administrative procedure to get on to actual supplies -- confirming and then supplies. Another thing that I would like to notify is that Hester Biosciences has signed a technical collaboration agreement with an Egyptian company by the name of Novapharma, wherein Hester India would give them technical know-how to manufacture mainly poultry vaccines and 2 other large animal vaccines, and this know-how would entail us to get technology transfer fees. And besides that, on the business standpoint of view, Hester has taken up the exclusive marketing rights for -- internationally from the Egyptian company wherein we would under our own brand market the vaccines. The main vaccine expected to be exported out of Egypt is the AVR influenza for the poultry, which neither has India allowed us nor has Nepal, and in Tanzania, we are still struggling for that permission, but we are not very sure. So this is a sure shot for us to get the AVR influenza vaccine for the international market, which has a very big market, and we hope from Nepal -- sorry, from Egypt, we hope to export this vaccine all across. Coming to Hester Nepal, there seems to be a reasonably good news for us in terms of the top line and bottom line. We hope to at the least touch a breakeven point in this financial year. In fact, we are hoping to be in the black, hoping to make some profit out of it, but the least we expect is that we will at least break even. On Texas Lifesciences, it continues to support Hester India in manufacturing and supplying all the health products required for the poultry as well as for the Animal Health divisions, and it's going as smoothly as possible and more and more products are being converted and shifted on to Texas. Therefore, we still see a reasonable good growth as far as Texas Lifesciences is concerned. On a 9-monthly basis, it's 51% growth in terms of sales. And on a quarter basis, it is nearly 23%. Hester Tanzania, our trading arm in Tanzania, has also started picking up marginally. In fact, we have even got a few permissions as late as in the last month. So with these things happening, our trading initiatives in Tanzania will take a big boost in the next -- within a month's time, and we hope to see much bigger turnover in -- right beginning from Q4 of this financial year. For Hester Africa, the construction is going on as per schedule. There is no notable delay that needs to be reported. And Hester India has already invested its full equity that it needs to be investing over there. The project is on track, and it will commence as per the scheduled date as well as -- as what has been informed to us. So yes, with a little bit of lower than -- quite lower-than-expected Q3, I do assure you all that all at Hester are working hard towards reversing this situation, and we are more or less convinced that this should be a temporary phase for us, and we should be back up with a full bounce this quarter or at the maximum by Q1 in the next financial year. So thank you for being patient and hearing out all to me. In fact, in the call last time as we had agreed upon that we will not have our finance person speak. So we have in our press release added the profitability analysis as well as the balance sheet analysis figures also. So it cuts down on to that. So after this, I directly would invite questions. And if there are any finance-related specific figure-related issues, they would be answered by Sahil Shah on behalf of our finance team. Thank you for hearing me out patiently.

[Operator Instructions] The first question is from the line of [ Ketan Gandhi from Gandhi Securities. ]

Sir, regarding Novapharma, what is the investment made by Hester for this arrangement?

No, there is no investment. We are only giving technical know-how for which we would be getting a fee. There is 0 investment by Hester.

Is it possible for you to share the tech transfer fee to Hester from Nova? And when it will -- we will get it?

I'm not sure whether am I obligated to transfer -- to inform about the fees, et cetera. But the fees would be spread over a period of 1.5 to 2 years' time.

Fair enough. And sir, when will the sale start for Hester from Novapharma from Egypt for avian influenza?

That project, it will take till 2.5 years before even the first sale starts from there.

Okay. So we are still 2.5 years away?

Yes, but our technology transfer fees would be got in that much time.

All right, sir. My next question is, sir, what is the pending CapEx at Tanzania, India and Nepal in the next 12 months?

The expenditure at Tanzania in Hester Africa has already been made. Sorry, it is totally -- just a minute. I'll give it to my finance person, let him answer.

Hello?

Yes, what is the pending CapEx at Tanzania, India and Nepal?

Pending CapEx at Tanzania would be around INR 25 crores to INR 30 crores. And at present, there are no project expansion planning going on either in India or in Nepal.

Okay. So we have to spend only in Tanzania?

Yes, yes.

And can you please give me the gross debt in cash at the consolidated level for Hester?

Just a second. We will just give you this figure on the call. While we're checking that figure, if we can take the -- hello, just a minute, he's got it.

Yes, gross debt is INR 95.48 crores as on December 31, 2019 on a consolidated basis.

And cash -- gross cash?

Gross cash is around INR 22 crores.

Okay. I have one more question. And sir, what is the likely time to -- and investment required to double the Brucella vaccine capacity for supply within India?

The time that -- it would be a process that we would -- I don't think it should be more than 6 months' time -- 6 to 8 months' time.

And likely CapEx?

Partly by -- I think it -- we are yet planning on it. We could even try to work it out within our existing capacity, So then that would be at a minimal cost.

[Operator Instructions] The next question is from the line of Prakash Kapadia from Anived PMS.

Yes. A couple of questions, Rajiv. On the Brucella and PPR, what kind of revenues we can look at in terms of over the next 2, 3 years? And typically, government business would have lower margins and higher working capital. So if you could give us some sense on these initiatives which the government is keen on doing? And you mentioned in your opening remarks, you see a good opportunity, not only this quarter, but in the coming years. So if you could give us some direction, it will help.

One is that the working capital requirement for government supplies not necessarily are higher because it is -- it's not that payments come late or anything of that sort. Yes, sometimes there could be a delay, but those delays are even with the normal nongovernmental business. So we don't really see that. In terms of our gross margins or the net margins as far as supplies to the government are concerned, yes, they are marginally less, but they fit well within the percentages that our expected -- that we are expected to achieve in our balance sheet, not that if -- let's presume hypothetically that Brucella becomes the biggest selling product that our margin would go down substantially. At the max, it could go down by 2% to 3%. Nothing really more than that.

Okay. Okay. Understood. And does this get compensated by lower sales and other operating expenditure, so it is not so much of an impact or not necessarily?

Sorry, in the sense?

Government orders would require, say, lesser sales or lesser -- that comes out of selling and distribution expense.

Yes, government -- I mean yes, so in a way, if you look at it, if you differentiate it, it compensates. But the end if you look at -- when we count our per capita -- per marketing or per employee sales and all, we tend to include everything and then take the figures. Yes, but if you look at it in isolation, I mean we would even not have any marketing team and we could only be doing tendering business, and we could save a lot of money.

Yes. Obviously, that's not the objective. I understand that. And directionally, what kind of a turnover in terms of direction number or for the next 2, 3 years, what...

I think the Brucella business tendered by the Government of India for the next 12 months should be approximately to the tune of around INR 60 crores.

And the other part, the PPR could be what, as much as that or lesser by the state government?

PPR would be far lesser than that. It could be say, around INR 10 crores to INR 15 crores -- INR 15 crores.

Yes. That is helpful. You also mentioned in your opening remarks about a slight increase in receivable days due to the current input cost pressure and slowdown seen. So last few years, if I look at our average receivable days, they are around 40 days. So what is it currently? And by the year-end, do we expect normalization?

It has never been 40 days. In fact, I think, earlier days, it should be around 70 -- 60, 70, that has been our normal cycle, and it has gone higher to -- just a minute, I'll give it to Sahil.

Yes, receivable days are around 90 days currently -- 90 to 95 days, ranging between. And earlier, it were around 60 to 75 something.

Okay. And this should get normalized by the year-end or maybe fixed for once or by the first half of next year...

It should get normalized. See what happens, anything extended, the extensions happen fast and the retraction always takes a little longer time, and we have even learnt it in this quarter itself. We were very enthusiastic, but the poultry industry still is recovering from the whole thing. So what has led from 65, 70 to 90, 95, I think it would take around 2 quarters for it to come back to its original level. I would like to talk about it conservatively.

Sure. That's always better. Lastly, on the marketing side, what were the number of employees maybe a year ago or as on March? And what are -- is the number today, if you could share?

From around 50 to 60 to we have got around now 150 people.

And this is just domestic we are talking?

Only domestic. Companies have 400, 500, 600 people in the veterinary division, just for your information, sir.

Right. Right. Understood. And lastly, I'm still awaiting on the meeting revert, I've been following up with Sahil.

Yes, you had sent us a long questionnaire and the meeting, we will be organizing -- we will organize a meeting. Some of the questions you might have to pardon us from [indiscernible] critical information, but we will organize a meeting for you, Mr. Kapadia for sure. It -- you will get a call from somebody in the next 24 hours.

The next question is from the line of [ Manish Gandhi ], an individual investor.

Sir, my question is in budget, the government has announced that they want to eliminate FMD, Brucella and PPR. So if they walk the talk, so how big is the opportunity for us in PPR and Brucella?

I think the total budget given by the government when it formed the government, they had an outlay of INR 13,000-odd crores, okay, towards FMD and Brucella alone. Out of it, 60%, 70% would go to Brucella. Say, you can take it as around 20% to 30% would go towards -- towards FMD, 30% would go towards Brucella. And PPR is beyond that. If the government really goes aggressive on PPR and Brucella because these are the 2 which concern us, it could easily take -- take the requirement to approximately INR 200 crores.

Per year?

Per year, yes. Per year, I'm talking. Yes, sorry.

Okay. And so we have tied up in Nepal collaborating for making FMD vaccines. And I asked you in the AGM, you said it is not economically viable in India as of now. So do you feel the government want to eliminate in 2025 and where in future, it becomes economically viable...

First, a correction, we have expressed a desire to get into FMD in Nepal. We have not yet started. In India, the prices still recently were very low. Now the government has started -- now the tender prices have gone up, so there seems to be a little change in the whole issue as far as FMD is concerned. But we do have a very strong desire to get into FMD. We are still studying on how and when to get into it. But yes, in the long run, Hester Biosciences India would get into foot and mouth disease, that is FMD vaccine.

Right. That's great. And in your note, you have said that Hester Nepal is expected to achieve at least breakeven. So that is for the full year or only for the quarter 4?

No, no, full year, full year, full year.

So that means you are saying that we'll be making around INR 2 crore a quarter -- next quarter. I don't want the guidance on the next quarter...

Yes. What I'm saying is that I don't have the exact figure, but we will go beyond breakeven for sure.

Yes. So because we are at 9-month loss of INR 1.8 crore.

Yes, yes. That all will be covered. So...

Is it sustainable for the next year and all?

Yes.

So in INR 10 crore turnover around approximately this year and we are -- so that's great.

The next question is from the line of [ Viraj Mahadeviya ] from an individual investor.

Rajiv [Foreign Language], congratulations on stable results. A couple of questions from my end. One is, what are the key markets that you are targeting from this Novapharma plant for the influenza vaccine or the avian flu vaccine?

We are -- see I mean there are a few companies that -- a few countries that allow the avian influenza. A few Southeast Asian countries as well as African and Middle Eastern countries that we are targeting for avian influenza.

Right. Okay. And is the competitive situation pretty high in this space? Or is pricing pretty good and margins pretty good?

No, I think it's -- the pricing is good. There is competition. But I think all our -- I think it's a good business to be in.

Okay. Second one is now that Hester Nepal will be breaking even and turning profitable, like you mentioned, are you looking to increase the field force in Nepal?

We have a field force in Nepal. We are trying to improve the productivity of the field force in Nepal. In fact, the local sales has gone up to some extent also. And we are doing it as needed. We are reasonably covered at the moment in Nepal.

Okay. Next question is, given the time you spent in Africa, obviously with the underconstruction and engaging with the authorities and studying the market, in how many years do you think we can hit India-like sales in Africa of roughly INR 150 crores to INR 200 crores after commencement, seeing FY '22 is the first full year?

4 to 5 years.

4 to 5 years?

Yes.

Okay. And last question, sorry, very quickly. Just on the previous question that was asked on Brucella and PPR by the Indian government. If I caught it, you are saying roughly there's INR 1,000 crore market opportunity between Brucella and PPR, excluding FMD if I just take the INR 13,000 crores divided by 5 years. So for Brucella of about...

For 5 years you are talking?

INR 13,000 crores is over 5 years, right?

Yes. Yes.

So per annum, it's about...

[Foreign Language] you divide it by 5 and then remove 80 -- 70% of it, so the balance 30% to 35% is Brucella

Correct. So Brucella is about INR 3,900 crores. So per annum is about INR 780 crores. And you mentioned PPR is about INR 200 crores per annum. So between Brucella and PPR, it's about INR 1,000 crore market opportunity, am I right, per annum?

No, no, PPR, I did not say INR 200 crores. This amount, first of all doesn't include PPR. Okay? PPR is independent. Okay, so PPR would be approximately -- the total of all put together for the 5 years should be around INR 200 crores.

All right. Okay. So PPR would be about INR 40 crores per annum?

Yes.

Brucella about INR 780 crores, PPR INR 40 crores, so roughly...

It could go beyond that.

The next question is from the line of Ravi Naredi from Naredi Investments.

Sir, Nepal shown good performance. So what is the reason? Did we get some tender or anything else you want to share?

I think our people are working hard in getting business, that is...

You are also working hard that we knew very well.

That, of course, there have been some tender businesses, also there have been some nontender business international also that we have got. So everything put together has definitely worked for us.

Okay. Okay. Okay. And sir, since I joined the late, if it is repeat question, please forgive me, how much recovery possible in quarter 4?

Recovery for sales?

Sales, sales -- sales recovery.

I think rather than me giving a figure because I have fallen short in the last 2 quarters when I have said something. Let's just allow our people to work hard at this point of time. And we will at least do something better than what we did last year for sure.

The next question is from the line of Anirudh Shetty from Solidarity Investment Advisors.

I just wanted to clarify, this tender opportunity for Brucella and PPR that we just mentioned of -- over the next 5 years, about INR 200 crores for PPR and about INR 520 crores for Brucella, is that only for vaccines? Or will that include other costs that are required to deliver the vaccine?

Only vaccine.

Just vaccine. And in terms of competition, you said, currently, there is 2 bidders for Brucella and how's the competition like in PPR?

There are I think probably 3 totally.

[Operator Instructions] The next question is from the line of Manjeet Buaria from Solidarity Investments.

I just wanted to check in terms of a new CFO for the company, where are we in the process to appoint one?

We are mostly over there. I think [indiscernible] we shall make the announcement.

[Operator Instructions] As there are no further questions -- we take the question from the line of Tanush Mehta from Dalal and Broacha.

Sir, could you just throw light upon the sustainability of Nepal and Texas business?

Texas business is directly dependent on Hester India as well as now we are registering direct products from Texas Lifesciences in Africa and in a few other countries. So I think the base being small at this point of time, the growth expected in Texas Lifesciences should be reasonably good, and we should be able to maintain a high growth rate all the time more than -- I mean very easily in double figures and in higher double figures, 20%, 30%, at least on a year-on-year basis. And which is the other company you mentioned? Hester Nepal?

Yes, yes. So it's been performing...

Yes. Hester Nepal, we are now getting a little bit -- we are getting a foothold as far as international business as well as local sales is concerned. And we would make sure that we have left the bad days of being in the red behind. And it will rise further from where we are at this point of time. One is because PPR tenders are getting more regularized internationally. And secondly, even the domestic business is looking upon us as far as Nepal is concerned.

The next question is from the line of [ Manish Gandhi ], an individual Investor.

Just wanted to check till now in 9 months, how much we have done in Brucella in India, tender business?

I would not have the figures -- I would not even know whether it is appropriate for us to give a product-wise sales. And I don't even have those figures at this point of time, sir.

Ladies and gentlemen, as there are no further questions from the participants, I would now like to hand the conference over to the management for closing comments.

Thank you all for being patient with me. I hope I've been able to answer all your questions. We are always there. If at all there are any more queries, you can e-mail to us. And as I started off mentioning that the results have been below expectations, but if you see my press note, my last sentence reads as "our endeavor continues to enhance quantitative and qualitative values," be rest assured, not only myself, but our whole team is working at Hester to make sure that we take things to the next level, leave aside, at least coming out of this current situation. Thank you.

Ladies and gentlemen, on behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.