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Weak poultry performance continues to weigh on numbers…

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: 27%

Q1FY23 Results: Numbers weak as poultry farm economics turned adverse.

* Sales were down 16% YoY to | 50.7 crore

* EBITDA was at | 7.4 crore, down 56% YoY with margins at 14.7%. Margins declined amid higher spends on market expansion in the animal health

* Adjusted PAT was at | 4 crore (down 68% YoY)

What should investors do? Hester’s share price has grown by ~1.3x over the past three years (from ~| 1591 in August 2019 to ~| 2154 levels in August 2022).

Downgraded from HOLD to REDUCE due to adverse demand environment for poultry vaccines, slower ramp-up in Africa business, delay and uncertainty in execution of tenders along with dwindling margins

Target Price and Valuation: We value Hester at | 2015 (base business at | 1967 i.e. 38x FY24E EPS of | 51.8 + NPV of | 49 for Covaxin DS opportunity)

Key triggers for future price performance:

* Opportunities in animal vaccines such as classical swine fever, lumpy skin disease (only player), sheep pox (only player) in the domestic space and expected launch of the modified Inactivated Coryza Vaccine, 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 and strengthened distribution network in Africa, along with increase in bulk antigen capacity and fill finish line for animal vaccines

Foray into pet care with 11 products and new marketing teams in four zones

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 | 525

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