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Muted Q3; launches in place for momentum pick-up

About the stock: Hester is one of India’s leading animal healthcare companies & the second largest poultry vaccine manufacturer in the country. It has a strategic presence in 30+ countries with key markets being India, Nepal and Tanzania.

It operates through four broad verticals: poultry vaccines, poultry health products, animal vaccines and animal health products

Revenue segment wise: poultry healthcare:73%, animal healthcare: 19%, others:8%; by geography: domestic:81%, exports:10%, others:9%

Q3FY22 Results: Numbers were impacted by base effect.

Sales were down 2.1% YoY to | 55.7 crore

EBITDA was at | 15 crore, down 29% YoY with margins at 27%

Adjusted PAT was at | 8.5 crore (down 31.3% YoY). [Base of Q3FY21 had | 3.3 crore of license fee income]

What should investors do? Hester’s share price has grown by ~3.3x over the past five years (from ~| 760 in January 2017 to ~| 2509 levels in January 2022).

We change our recommendation from BUY to HOLD on the back of rich valuations even as we focus on future launches and execution

Target Price and Valuation: We value Hester at | 2780 (base business at | 2712 i.e. 38x FY24E EPS of | 71.4 + NPV of | 67.8 for Covaxin DS opportunity).

Key triggers for future price performance:

Opportunities in animal vaccines such as classical swine fever, lumpy skin disease (only player) and sheep pox (only player) in the domestic space along with additional revenue from PPR national tender

Increased focus on health products & widening of portfolio with differentiated herbal line of products looks promising for growth prospects

Traction from manufacturing from Tanzania facility, Hester Africa along with increase in bulk antigen capacity and fill finish line for animal vaccines

Proposed maiden foray into pet care

Alternate Stock Idea: Apart from Hester, in our healthcare coverage we like Indoco.

Indoco manufactures and markets branded formulations and APIs for the domestic and export markets.

BUY with target price of | 575

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