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Strong poultry demand drives Q4 performance…

Q4 revenues grew 47.1% to | 64.2 crore due to 74.4% growth in poultry segment to | 52.7 crore as bird-flu incidences led to higher usage of preventive and curative poultry vaccines and health products. However, animal healthcare segment de-grew 11.6% YoY to | 11.5 crore. EBITDA margins, not comparable YoY due to pandemic impacted base, came in at 30.8% (16.5% in Q4FY20). EBITDA came in at | 19.8 crore, ~2.8x YoY. Adjusting for exceptional loss on Patan farm disposal, PAT came in at | 13 crore vs. | 2.7 crore in Q4FY20.

Key conference call takeaways

* Guidance: Topline growth of 25-30% in FY22 o Exports to grow 100% over FY21, domestic to grow 22%+ o Growth in animal health – 50%, poultry – 10-15%

* Growth to be driven by o Animal vaccines - registration process continues for classical swine fever, lumpy skin disease (only player) and sheep pox (only player) vaccine production and marketing for all the three vaccines to likely be commenced by December 2021 o Health products to drive growth (70:30 mix of vaccine and health) o Ramp-up of herbal products and new launches in animal health

* MoU with Bharat Biotech – to manufacture only the intermediate/ drug substance (DS) for Covaxin from its Gujarat plant in 3 months o The DS would lead to 0.5-1 crore dose production per month

* Hester’s domestic Brucella tender bid was second lowest this year, Hester plans to again bid next year. Hester has got higher priced order for exporting to offset any opportunity impact

* Hester looking to increase India sales team by 40-50% in FY22.

Valuation & Outlook

Despite exports being impacted by air shipment restrictions due to Covid, Hester ended FY21 on a relatively strong note amid strong demand for poultry vaccines and health products in domestic market. Going ahead, opportunities panning out from animal vaccines such as classical swine fever, lumpy skin disease (only player) and sheep pox (only player) in the domestic space besides increased focus on health products, growth prospects look promising for Hester.

Additionally, the management intends to move away from preventive healthcare to curative healthcare as a long term strategy. As the company strengthens its hold in the overall animal healthcare space, the next important aspect would be its progress in the human vaccines space (via maiden Covaxin adjuvant foray) in the long run. Due to the recent stock run-up, we maintain HOLD and arrive at a revised TP of | 2870 (earlier | 1765) based on base business value of | 2758 at 40x FY23E EPS of | 68.9 + NPV of | 112 for Covaxin DS opportunity.

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