Hester Biosciences Ltd

NSE:HESTERBIO

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Hester Biosciences Q2, H1 FY '24 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abdulkader Puranwala from ICICI Securities. Thank you, and over to you, sir.

[Abdulkader Puranwala, analyst]

Yes. Thank you, Lizanne, and good afternoon, everyone, and I welcome you all to the Hester Biosciences Limited Q2 and H1 FY '24 Earnings Conference Call. Today, from Hester Biosciences, we have the senior management with us, Mr. Rajiv Gandhi, CEO and Managing Director; Ms. Priya Gandhi, Executive Director; and Mr. Nikhil Jhanwar, CFO, on this call. I thank the management of Hester Biosciences for giving ICICI Securities this opportunity to host this call.

And now I hand over the call to Ms. Priya Gandhi. Over to you, ma'am.

[Priya Gandhi, executive]

Good afternoon, everyone. This is Priya Gandhi, Executive Director at Hester. Thank you for joining the call today, where I will be providing an overview of our performance in Q2 FY '24.

Commencing with a comprehensive overview of our financial performance, I am pleased to announce that in the first half of FY '24, our standalone revenue surged by 20%, and our consolidated revenue saw a growth of 28%. However, speaking of Q2 FY '24 specifically, we observed a slight dip in our standalone revenue by 8%. On a consolidated basis, we saw a marginal 4% decrease in revenue during this period.

Delving into the division performance. Starting with our Animal Healthcare division, we've observed a 16% decline in sales during the quarter compared to the corresponding quarter. This decline can be attributed to the shift in the sales pattern of the Goat Pox Vaccine, GPV. In Q2 FY '23, a surge in demand for GPV was driven by an outbreak of the LSD, which is the Lumpy Skin Disease in cattle, resulting in a concentrated sales for that quarter. However, this year, due to the distributed immunization program, the sales was spread across the first 2 quarters, thereby showing a higher differential in the compared quarter. This was about the division vaccine.

Now regarding the health products. The discontinuation of our brands, CurX injection and iSumovet due to the change in the drug regulations prohibiting the use of ketoprofen for animal purposes has also impacted the sales of our health products in the division in this quarter. These 2 products collectively contributed approximately INR 5 crores in the sales in the last financial year. In response to this, we have introduced a new product called CurX LA as a substitute for CurX, which got launched this month. And additionally, the substitute of the other brand that I mentioned, iSumovet, is planned to be launched in quarter 3.

We anticipate these 2 products will help mitigate the sales loss resulting from the withdrawal of the mentioned brands in the following quarters. Having said this, it's noteworthy that this segment has experienced a 10% growth on a YTD basis. This growth can be attributed to the robust sales stemming from the government tenders for PPR and GPV, as well as an upswing in the sales in the other health products of physical.

Now turning to our Poultry Healthcare division. We have experienced a 4% decrease in our overall sales in Q2 FY '24. However, there has been a growth in the domestic sales after 6 quarters. But the decrease in the export sales has led to the overall decrease of sales in this division in Q2.

Mentioning a little bit about the Indian poultry industry now. This segment has exhibited an upward trajectory, primarily driven by consistent consumer demand, mitigating the challenges posed by elevated speed and operational costs. Notably, the prices of meat and eggs have maintained stability.

About the Petcare division. The segment has demonstrated a sustained upward trend, primarily due to the strategic expansion and penetration into our new territories. This segment has achieved a sales of approximately INR 1.8 crores and remains on a trajectory of growth. We anticipate the expansion of this segment will be driven by the Tier 2 and Tier 3 cities with a particular focus on this segment in these areas.

Moving on to financial performance. We have maintained an overall gross profit margin of 69% in Q2 FY '24. However, the EBITDA and PAT experienced a decrease of 24% and 34%, respectively, during this period. This decline can be attributed to several factors: Ongoing rationalization of our product mix, the withdrawal of 2 products in the Animal Healthcare division due to changes in the drug regulations, and overarching strategic emphasis on increasing the sales of health products across both the divisions to tap into a broader market.

Regarding Product segment, our vaccine sales continue to be an important component of our business. In line with this, all states in India have initiated an immunization program targeting the Lumpy Skin Disease using our Goat Pox Vaccine, and we anticipate selling between 3 crores to 3.5 crore doses over the next 2 quarters.

Additionally, in Q1 FY '24, we began the distribution of the PPR vaccine as a part of the national immunization program, which we have mentioned in the previous call. This contract entails a supply of 30 crore doses of PPR vaccine with the completion expected by October 2024.

In the Health Products segment, in response to the discontinuation of our 2 brands, as I mentioned earlier, which is CurX and iSumovet, due to the change in the drug regulations, we have launched new products to address this gap, and we expect that these new products will recoup the sales loss which has arisen from the withdrawal of the brands that I just mentioned.

Speaking of our subsidiaries' performance for the quarter, Hester Nepal generated a turnover of INR 73 lakhs, driven primarily by the domestic sales of vaccines. However, there was an overall net loss of INR 70 lakhs. Despite of the impact of the export and international tenders felt in Nepal, we are offsetting this effect by placing strong emphasis on leveraging on the potential of the domestic business over there, primarily into the poultry segment.

Meanwhile, Hester Africa has sustained an export sales amounting INR 2 crores in Q2 FY '24. However, the overall financial performance has reflected a loss of INR 4.9 crores, primarily attributed to the foreign exchange fluctuations on borrowing as well as the weak purchasing power of the African countries in the public as well as the private sector.

Having said that, it's worth noting that our Africa plant is now equipped with 6 registered vaccines and an additional 5 vaccines are in process of being registered by the end of this financial year. The long-awaited harmonization of the registration process is currently being implemented. This will enable us to promptly market our vaccines to the other East African countries.

Moving forward, on an overall basis, we are dedicated to introducing enhanced solutions to improve products, both in the form of vaccines as well as health products. Within the Animal Healthcare segment, we are set to launch a line extension of one of our flagship products under the brand name of ProtinC. This growth and productivity tonic is a significant contributor to our sales and has generated a top line of INR 10 crores last financial year. This modified version will be indication-specific, featuring refined ingredients to yield even more promising results.

In the Poultry segment, we are in process of launching a modified version of the Newcastle disease vaccine, a crucial element in the poultry health. This volume of product will optimize performance and deliver superior output with plans for release by quarter 4.

Furthermore, we are gearing up to introduce line extensions for 2 of our products within the Petcare division as well. These additions will fall under the nutritional and the parasiticide category, aligning with the forthcoming seasonal demands in line.

Additionally, we are focused on enhancing our operational efficiency, both in the field as well as in the back end. We remain committed to honoring our commitments to all our stakeholders, both within our organization and externally. Our dedicated efforts are aimed at ensuring that we not only meet, but exceed expectations as we continue to work hard towards shared goals and objectives.

Finally, although our bottom line may have been affected, and it may concern you all, but our contribution in supplying vaccines for the immunization of cattle against the Lumpy Skin Disease, and for sheep and goat against the PPR disease have played a crucial role in enhancing the health and well-being of livestock in our country.

This not only supports the food security initiatives in India, but also uplifts the livelihoods of small-scale livestock farmers in the country, thus making a positive impact on India's agriculture and economy. This accomplishment is a source of pride for all of us at Hester and our stakeholders.

With this, I complete my presentation, and thank you all for hearing me out patiently. We look forward to your questions and discussions. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Keshav Garg from Counter Cyclical PMS.

[Keshav Garg, analyst]

Sir, I'm trying to understand what is the outlook for the coming second half of the year? And what kind of recovery in our revenues and margins do you see going forward?

[Rajiv Gandhi, executive]

Yes. This is Rajiv Gandhi here. I will take your question. It is outlook on BH to the second half of the year. Am I right?

[Keshav Garg, analyst]

Right.

[Rajiv Gandhi, executive]

Yes. There has been a little bit of slip in our margins. And due to the exports, there has been a hit because countries have not been able to import material, and thereby, our exports have been impacted. We are looking towards the exports picking up, the poultry industry picking up, both of these. We can't go lower than this. So both of these seem to be picking up. As well as from Africa also, we hope that 1 or 2 products get registered in the nearby countries and we immediately start the sales. So these are a few things that we are at the moment looking up to.

[Keshav Garg, analyst]

Sir, would you like to quantify what kind of revenues and margins we can expect for the second half?

[Rajiv Gandhi, executive]

Our focus is definitely on health products where margins are a little less than what they are of vaccines. But we would like to offset that percentage by a quantum actual jump in terms of INR. So that would be able to offset that for sure. So that's something which we are looking at. It would be inappropriate for me to give exact financial figures at this point of time on these aspects. But things seem to be turning around, as far as exports are concerned, is all that I can tell at this point of time.

[Keshav Garg, analyst]

Sir, and also in our consolidated number, the finance cost has seen a quantum jump from INR 2.5 crores in first quarter to INR 8 crores in the second quarter. And I understand this is due to currency fluctuation, et cetera. So going forward, this is expected to again come back to INR 2.5 crore level?

[Rajiv Gandhi, executive]

Yes. Just a minute, our CFO will answer.

[Nikhil Jhanwar, executive]

So this finance cost jump which is coming up is primarily because of the loan which has been taken in dollars in the African entity. And there, there has been a significant fluctuation which has arisen in this quarter. It doesn't seem to be having the same trend in the subsequent period, because this is a significant jump, in one shot it has happened. But obviously, it may not be INR 2.5 crore, a bit higher on that, but not in the range of like INR 8 crores, which has happened all together in 1 quarter only.

[Operator]

[Operator Instructions] The next question is from the line of [ Vivek Tulsyan from New Mark Capital ].

[Unknown Analyst]

Yes. Sir, if we look at our animal segment, on a quarter-on-quarter basis, the EBIT margin as reported on the consolidated numbers has improved quite substantially from about 8% towards 31%. What is the reason for this sharp improvement in the last quarter?

[Rajiv Gandhi, executive]

Your voice is muffling. [Foreign Language].

[Nikhil Jhanwar, executive]

So apparently what you're asking is in our consol results, the Animal Healthcare, the result has been INR 94 million against the sale of INR 328 million with almost like 30%. And against that, earlier it was INR 91 million against INR 378 million revenue, correct? Is that the question?

[Unknown Analyst]

No, I was asking, compared to last quarter, the June quarter, it is INR 24 million on a revenue of INR 310 million. So that's a very sharp improvement in volume.

[Nikhil Jhanwar, executive]

Oh, okay. June quarter you are saying?

[Unknown Analyst]

Yes.

[Priya Gandhi, executive]

Sorry, we are not able to understand your question.

[Unknown Analyst]

What I'm trying to understand is if you compare first quarter margins versus second quarter margins, for the Animal Health business, there is a very sharp improvement in margins. So I'm just trying to understand what is the reason for that?

[Rajiv Gandhi, executive]

See, what has happened is, you see, we have already started the sales in Africa continent. And with that, there has been the revenue which has been generated in Africa, okay? That has given me benefit into the segment results, okay? African finance cost is sitting in unallocable on the finance cost side. That is the reason, though Africa has made a loss, but still at the EBITDA level, there are positive trends. So that is one main aspect which has been increasing the profitability in segmental revenue in this period.

[Unknown Analyst]

Yes. But if I look at the press release, Africa's revenue was quite similar in the first quarter compared to the second quarter. It was about INR 18 million in first quarter and INR 20 million in this quarter.

[Rajiv Gandhi, executive]

We are looking into it. We are just a bit confused ourselves. Please wait.

[Operator]

Mr. Tulsyan, are you done with your questions?

[Rajiv Gandhi, executive]

He's done with his question. We have not been able to understand the question. What we can do is that after the call, he can talk to our CFO or send an e-mail and we will address it, because we are not able to really understand what is he asking. So we'll talk to him offline.

[Unknown Analyst]

Sure. Sir, I have just one more question, and that is more longer term in nature. If you look at our historical numbers, our EBITDA margins were in the range of about 35% when we were largely a vaccine-driven business. But now the mix has changed towards health products as well.

What would you say would be the -- I understand current margins might be lower because of our investment in Petcare and some of the other issues in Nepal and Africa. But if you exclude that, what would you say would be the normalized margin given the mix now of Petcare -- of Animal Health and vaccine is about 50-50?

[Rajiv Gandhi, executive]

I think what we hope to do that in 3 years' time, we should come up to the margin what we had earlier on plain vaccine business. Because by that time we would have gained a lot of traction. Our sales team would be performing very efficiently. That is definitely one of the goals, as mentioned by Priya in wanting to increase the efficiency, as has been mentioned in our press note. So it is our desired objective to come up to those margins in the coming years in 2 to 3 years' time. We would not want to settle for lesser margins.

[Operator]

[Operator Instructions] As there are no further questions, I now hand the conference over to the management for your closing comments.

[Rajiv Gandhi, executive]

Yes. Good afternoon to all of you. Rajiv Gandhi over here. As always, we have tried to be as elaborate as possible in going through the working of the company. We shall continue doing so on our calls. Behind the scenes all throughout every quarter, we are putting in our best to make sure that we improve the functioning of the company, improve the governance of the company. And now, we have a specific objective to improve the profitability, the bottom line of the company. As stakeholders, please be rest assured that we are in that direction. Ups and downs do come, but that's part of the journey. Not that we are trying to justify anything, but we are on track, and we hope to again speak to you in the next quarter and probably we will have some few additional things to talk on. Thank you.

[Operator]

Thank you, members of the management team. Ladies and gentlemen, on behalf of ICICI Securities, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.