Hester Biosciences Ltd Management Discussions.

EconoMic ovErviEw

Global Economy

The global economy was facing challenges amidst heightened policy uncertainty, persistent trade tensions, Brexit issues and declining business and consumer confidence. The outbreak of COVID-19 pandemic in early 2020 has spread with alarming pace, infecting millions and bringing economic activity to a near-standstill, as countries imposed tight restrictions on movement to halt the spread of the virus. The lockdown measures brought in by most governments had frozen business activity in many sectors leading to supply chain disruptions, international trade disturbances, widened inequality and undermined confidence in the future. Consumption in most of the economies will slowdown owing to increase in precautionary savings. Consequently, the global economy is expected to contract by 4.9% during 2020 which will mark the steepest downturn since global financial crisis of 2008-09.

The pandemic is expected to plunge most countries into recession in 2020. Advanced economies are projected to shrink by 8.0% in 2020, emerging market and developing economies are expected to contract by 3.0%. China, where the coronaviruss impacts were first recorded this year is the only country projected to remain in positive growth trajectory in 2020. In China, the business activity has started resuming with the help of large fiscal and monetary stimulus and is thus projected to grow at 1.0% in 2020. Emerging Asia is likely to remain in the best position for recovery with growth seen improving to 7.4% in 2021. However, a varying degree of fiscal support, economic output, commodity exposure and debt structure result in large divergences across emerging economies. world Economies: Performance at a Glance world Economic output growth in %

2018 2019 2020P 2021P
World Output 3.6 2.9 -4.9 5.4
Advanced Economies 2.2 1.7 -8.0 4.8
United States 2.9 2.3 -8.0 4.5
Euro Area 1.9 1.3 -10.2 6.0
Japan 0.3 0.7 -5.8 2.4
United Kingdom 1.3 1.4 -10.2 6.3
Canada 2.0 1.7 -8.4 4.9
Other Advanced Economies 2.7 1.7 -4.8 4.2
Emerging Market and Developing Economies 4.5 3.7 -3.0 5.9
Emerging and Developed Asia 6.3 5.5 -0.8 7.4
China 6.7 6.1 1.0 8.2
India 6.1 4.2 -4.5 6.0
ASEAN-5 5.3 4.9 -2.0 6.2
(Indonesia, Malaysia, Philippines, Thailand, Vietnam)

Source: IMF, June 2020

To combat the economic disruption caused by COVID-19, the governments and central banks worldwide have enacted sweeping and sizable fiscal and monetary stimulus measures. The Governments across the world are strengthening health care systems and build the supply of medical equipment. To support governments requiring financial assistance, several facilities are also made available from the IMF and the other global community. Even after COVID-19 is contained, it will take some time for economic activity returning to pre-pandemic levels. Assuming the pandemic fades in the second half of 2020, partial recovery is expected in 2021, although with considerable uncertainty about the strength of the rebound. A sharp decline in consumer spending in the European Union and the United States will reduce imports of consumer goods from developing countries. World economy is still exposed to re-escalation of US-China frictions and a global credit crunch. Further the growth prospects depend on many factors, including containment period for COVID-19, the duration of any shutdowns, the impact on activity, and the implementation of fiscal and monetary policy support.

ndian Economy

India is currently facing notable challenges, including the outbreak of COVID-19 and the preceding slowdown of the informal economy. However, prolonged weak investment, slowdown in private consumption driven by financial stress among rural households, weak job creation and credit crunch among non-bank financial institutions (NBFIs) have increased the probability of a more entrenched weakening. As per the second advance estimates released by the Central Statistics Organisation (CSO), the growth in real GDP during FY 2019-20 is estimated at 5.0% as compared to 6.1% in FY 2019-20 .

Source: Central Statistics Organisation, 2nd Advance Estimates dated 28th Feb, 2020

To support the Indian economy in the aftermath of the Covid-19 pandemic, the Government had announced the "Aatma Nirbhar Bharat Abhiyan" or "Self-Reliant India Movement", which is equivalent to approximately 10% of the nominal GDP of India. The package includes the liquidity measures announced by the Reserve Bank of India, levy to banks over asset quality, relief package announced under the Pradhan Mantri Garib Kalyan Yojana (PMGKY), the emergency response and health system preparedness package etc. However, the pandemic has significantly weakened Indias growth potential for this year and exposed the challenges associated with a high public-debt burden.


The Moodys rating agency has downgraded the Indias sovereign rating to ‘Baa3 from Baa2, and maintained negative outlook noting that there are risks of sustained period of relatively low growth, significant deterioration in the general government fiscal position and stress in the financial sector. Moodys expects Indias real GDP to contract by 4.0% in FY 2019-20 due to the shock from the coronavirus pandemic and related lockdown measures, followed by 8.7% growth in FY 2020-21.

Despite near-term volatility, the countrys robust foundation—built on structural reform, the domestic nature of the market and prudent monetary and fiscal policy will help it to navigate the current challenging market environment. The RBI has also cut interest rates by 115bps since March 2020 and lending rates are headed lower which is always a good sign for the economy. The growth in Indias GDP will be further aided by reinforcement of labour reforms and regulations, savings from oil import bills due to fluctuations in oil prices and improvement in supply chain.

inDusTry ovErviEw

Global veterinary healthcare industry

The veterinary healthcare industry comprises of goods and services consumed for diagnosis, treatment and prevention of animal diseases. It includes establishments that provide veterinary services, veterinary medical equipment producers and animal medicine producers. The industry can be classified under three categories namely veterinary services, veterinary medical equipment and animal medicine.

In the year 2019, the global veterinary healthcare industry has reached to USD154.4 billion, achieved a remarkable CAGR of 10.1% between 2015 and 2019. As per a study, the trend is expected to further accelerate to achieve 11.0% CAGR to reach USD234 billion by 2023.

As per a study, North America is the largest region in the global veterinary healthcare market, contributed 47.1% share of the global industry in 2019. Its followed by Western Europe, Asia Pacific, and then the other regions. It is expected that Africa and Asia Pacific regions, would be the fastest-growing regions in the veterinary healthcare market. https://www.thebusinessresearchcompany.com/report/veterinary-healthcare-market

ndian Animal healthcare industry

The India animal health market is currently witnessing strong growth and expected to achieve a CAGR of 5.5% between 2020 and 2025. Animal health refers to the regular monitoring of the health of domesticated animals or livestock including the development of veterinary drugs, pesticides, feed additives, pharmaceuticals and biologics. In addition, it also consist of ensuring constant food supply and preventing the outbreak of various zoonotic diseases, such as feline leukemia, animal flu, Lyme disease and tick infestation, caused by viruses, bacteria and parasites. In order to reduce the chances of inter-species infection in a veterinary or a domesticated situation, effective practice of animal healthcare is inevitable. In India, the Government focuses and invests significantly for improving the animal healthcare practices as major industries such as dairy in India are animal-dependent.

Animal healthcare sector in India has witnessed a paradigm shift over the last few years because of the adoption of innovative technologies used for prevention and cure of farm and companion animals. The business approach among animal health companies have evolved from therapeutics to preventive and then from productivity enhancement to now focusing on overall healthcare.

India has the highest zoonotic disease burden among the developing countries with widespread illness and death. As per the International Livestock Research Institute (ILRI) study, 27% of the livestock in India showed signs of being infected with bacterial food-borne diseases, which are sources of food contamination. Hence rising prevalence of infectious and parasitic diseases is creating the next wave of innovation in managing animal health.

Major growth enablers for the industry

Significant growth in the veterinary pharmaceutical industry

Rising prevalence of zoonotic diseases

Various technological advancements, such as the integration of the Internet of Things (IoT) with animal health monitoring solutions, coupled with the increasing utilization of mobile sensors and wearables to monitor animal behaviour and health

Increasing demand for poultry and milk products is, in turn, driving the demand for feed additives, vaccines and drugs.

Growing urbanisation, changing lifestyle and increase in per capita income have encouraged pet ownership as well as increased willingness to pay for pet healthcare.

Increase in the number of Government strategies to promote healthcare policies

The Government of India, along with various nongovernmental organizations, are undertaking research and development (R&D) activities in the field of animal health. For instance, the Indian Federation of Animal Health Companies (INFAH), an organization formed under Section 25 of the Companies Act, works extensively to create awareness for controlling disease and provides effective treatments. https://www.imarcgroup.com/india-animal-health-market

Government initiatives

In September 2019, The Government has launched worlds largest ever vaccination programme National Animal Disease Control Programme (NACDP) for eradicating the foot and mouth disease (FMD) and brucellosis in livestock with a financial outlay of Rs. 13,343 crore for five years (FY 2019-20 to FY 2023-24). The programme aims to control the livestock diseases by 2025 and eradicate the same by 2030 It also aims at vaccinating over 500 million livestock including cattle, buffalo, sheep, goats and pigs against the FMD and 36 million female bovine calves annually in its fight against the brucellosis disease. As on 24 June 2020, out of 51.7 million animals registered, 17.5 million FMD vaccination and 6,105 brucellosis vaccination were conducted.

The government also launched several other programmes concerning Livestock Health, Nutrition and Dairy Farming. It launched the National Artificial Insemination Programme (NAIP) and a country wide workshop in all the Krishi Vigyan Kendras (KVKs) in all the 687 Districts of the country on vaccination and disease management, Artificial Insemination and Productivity. More than 11 Lakh Artificial Inseminations were done under NAIP for breed improvement in 2019. As on 24 June 2020, out of 51.7 million animals registered, 4.96 million Artificial Insemination and 0.42 million pregnancy diagnosis were conducted in total. Swachhta Hi Seva Programme focuses on reducing the usage of Single Use Plastic in the country.

DAHD launched Quality Milk Programme in July 2019 with the objectives to achieve Global standards for domestic milk consumption and increasing share of milk and milk products in world exports. In the first phase of the programme during FY 2019-20, approval has been granted for strengthening of 231 dairy plants under "National Programme for Dairy Development (NPDD)" to equip them to detect adulterants in milk. The total cost of the project was Rs. 271.64 crore. Out of this, an amount of Rs. 128.56 crore has been released to States as first instalment during FY 2019-20. https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1598062 http://inaph.nddb.coop/ https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1584719 coMPAny ovErviEw

Hester Biosciences Limited (hereinafter to be referred as the Company/Hester) is one of the leading animal healthcare companies in India. Incorporated in 1987, Hester has established a strong brand name and is presently the second largest poultry vaccine manufacturer in India.

Hester has four business verticals namely Poultry Vaccines, Animal Vaccines, Poultry Health Products and Animal Health Products. The Companys products and services portfolio comprises of more than 49 vaccines and 60 health products. Hesters products and services are catering to all sectors of animal healthcare with wide acceptance across India and international markets. The Company has established its footprints in various countries of the African and Middle East region and in many countries like Colombia, Mongolia, Uzbekistan, Vietnam, Indonesia, Nepal and Bangladesh.

Headquartered in Ahmedabad, Gujarat, the Company has three state-of-the-art manufacturing units for vaccine, health products and diagnostics. Its first manufacturing unit located in Kadi, Mehsana district of Gujarat, is the largest single location animal biological manufacturing facility in Asia, created to benchmarked international quality and compliance standards. The second unit located in Kathmandu, Nepal. Hester has an installed manufacturing capacity of 4.80 billion doses in India and 1.24 billion doses in Nepal. The Company is also setting up another unit at Dar es Salaam in Tanzania, Africa. The Companys key strength lies in its cutting-edge research and development capabilities.

Hester is WHO Good Manufacturing Practices (GMP), Good Laboratory Practices (GLP), ISO 9001, ISO 14001 and OHSAS 18001-certified Company. During the year under review, the Company has received GMP from Tanzania drug authority manufacturing facility for both Hester India and HBNPL. The Companys R&D department is recognised and approved by the DSIR (Department of Scientific & Industrial Research) for in-house development.

Products & services

In the product category, the Company has two segments i.e. Poultry and Animals. It provides over 45 products across poultry vaccines, which includes Live Vaccines, Inactivated Vaccines and several health products. In addition to ELISA & PCR diagnostic kits, the Company develop and sale NDV and IBV ELISA kits for sero-monitoring of poultry and PCR molecular diagnostic kits for a variety of diseases. These kits help towards an accurate diagnosis of diseases or virus strains in broiler, thereby inducing corrective action.

HBL started manufacturing and marketing of animal vaccines in March 2015 and currently manufactures three types of vaccines for animals

1. PPR vaccine (sheep and goat plague)

2. Goat Pox vaccine, HBL is the first Company to manufacture Goat Pox vaccine in India.

3. Brucella abortus (S19) calf Vaccine.

The Company also markets wide range of medicines, feed supplements and disinfectants for poultry and animals.

Financial and operational overview – on standalone basis

During the period under review, poultry industry remained in a recessionary condition throughout the year. The animal segment performed reasonably well. However, the supplies under tenders in animal segment, which were expected to be executed in Q4 FY20 got delayed due to outbreak of Covid-19 and subsequent lockdown measures.

During FY 2019-20, the Company has invested considerably in marketing and distribution by hiring additional field force in order to drive increase in sales, by covering larger territories and expanding geographical presence. However, the investment did not delivered proportionate growth, resulting into high costs impacting the profitability of the Company.

Hester has established laboratory for nutritional products to get and test samples from various dairies and give them the report on the health status of their animals, etc. This will complement the efforts of the marketing strategy to extend the scope onto the large animal side and better market penetration.

Hester has also set up the Manufacturing Science & Technology Division to work on the improvisation of production yields and performances of the vaccines in the field. The Company has initiated the development of a vaccine against COVID-19 disease. A recombinant vaccine is being developed in collaboration with IIT Guwahati. The Company expects vaccine to get into animal trials by December 2020.

The Company has achieved sales of Rs. 1,694.25 million in FY 2019-20 as against Rs. 1,711.87 million in FY 2018-19, de-growth of 1 %.

The Poultry segment has achieved sales of Rs. 1,203.46 million in FY 2019-20 as against Rs. 1,258.18 million in previous year, de-growth of 4%. The segment has contributed 71% in total revenues of the Company in FY 2019-20 as compared to 74% in FY 2018-19.

The Animal segment has achieved sales of Rs. 308.37 million in FY 2019-20 as against Rs. 293.86 million in previous year, growth of 5%. The segment has contributed 18% in total revenues of the Company in FY 2019-20 as compared to 17% in FY 2018-19.

Other Operating Income was Rs. 182.42 million in FY 2019-20 as against Rs. 159.82 million in previous year.

The Company has achieved domestic sales of Rs. 1,316.04 million in FY 2019-20 as against Rs. 1,443.45 million in FY 2018- 19, de-growth of 9%. The Company has achieved export sales of Rs. 224.19 million in FY 2019-20 as against Rs. 133.89 million in FY 2019-20, growth of 67%.

The Company has achieved EBIDTA of 31% of sales in FY 2019-20 as against 40% of sales in FY 2018-19, de-growth of 846 basis points.

The Company has achieved Net Profit of 18% of sales in FY 2019-20 as against 26% of sales in FY 2018-19, de-growth of 719 basis points.

The Company has recommended a dividend of Rs. 6.60 per equity share representing 66% of Face Value Rs. 10 per share for FY 2019-20. This is in line with the Companys dividend policy to distribute a minimum of 18% of the net profit.


Diversify product-mix

In the past few years, the Company has attained Significant gains in Veterinary Healthcare Industry/Sector viz. Bovines, Poultry and other large animals. The entire vaccine portfolio i.e. PPR, Goat Pox, Brucella Abortus has witnessed healthy growth in previous year. The segments contribution in sales has increased from 17% in FY 2018-19 to 18% in FY 2019-20. Going forward, the segments contribution in sales is expected to rise further.

strengthen the marketing team

With the objective to penetrate our products in new geographies, marketing and sales team has been strengthened by adding 25+ manpower in the field force. These initiatives are expected to generate larger scale, specifically for Animal healthcare products.

Boosting international revenues

The Company is expanding its distribution network in select African countries via its subsidiaries. This network will distribute products from the Companys India, Nepal and Tanzania plants and will drive growth in the international business in the coming years.

In Nepal, the Company has 14 number of vaccine licenses and expects another 9 number of vaccine licenses in the future. These vaccines will be available for domestic sale as well as for exports.

To capturing the immense potential of the Africa market, the Company is setting-up a specific animal vaccine manufacturing plant in Tanzania. The new unit is under construction with full-fledged depot, cold room storage, transportation facility.

The Company has also entered into technical collaboration with Egypt-based Novapharma which is expected to reveal significant opportunity. Given high demand for poultry vaccine and low competition in Egypt, the Company would be able gain significant market share.

Government initiatives to drive growth

Hester is currently manufacturing and selling Brucella vaccine. Hester will be a contributor in the Brucella disease control program under National Animal Disease Control Program (NACDP) initiative taken by the Government by way of making the vaccine available across the country through the initiative of the Government. The Company has already geared-up to ensure that it is able to supply the required quantities in the coming years.

unique Distribution network

The Companys distribution network in India ensures a delivery system that maintains a cold chain up to the end user, besides making the vaccines available at competitive prices. The uniqueness of the distribution system earned Hester its partnership with GALVmed for successfully setting up the worlds largest backyard poultry and immunization program

risks iDEnTiFicATion & MiTiGATion sTrATEGiEs

Economic slowdown

The Companys products assist in producing the most low-cost forms of animal protein i.e. milk, eggs and meat. Any slowdown in economy will impact the demand of these products which could adversely affect the sales of the Companys animal healthcare products.

Mitigation Strategy:

The Company continuously monitor and evaluates the business and economic scenario. New technologies are being adopted to overcome such event and to improve market penetration.

The Company continuously monitor the business and economic environment and adapt new technologies and seek ways to improve market penetration to counter such an event.

competition risk

The manufacturing processes as well as geographical expansion is very complex in the industry given stringent registration requirements. However, in case any competitor emerges with better technology or better access to markets, it may adversely affect the Companys prospects.

Mitigation Strategy:

The Company is one of the largest animal healthcare companies in Asia and effortlessly strive to stay ahead in the learning curve by implementing latest technologies. The Company is also expanding its geographical reach and changing its product mix to stay ahead among the peers.

Delay in Government Programs

Animal vaccines such as those for Brucella and PPR are supported by the government for their initiatives to eradicate these animal diseases. The Companys operations in the short term may be affected, in case of delay in rolling out these programs by the government.

Mitigation Strategy

The Company is developing newer routes of market access such as selling to large dairy owners, cattle farms and cooperatives to ensure these products reach markets.

Product Development issues

One of the Companys key product advantages has been offering a thermostable vaccine for Newcastle disease, for the same any cold chain distribution system is not required. This allows the Company to offer product in remote regions as well. In case of delays in development, the Company would not be able to offer this product to areas doesnt have cold storage distribution facilities.

Mitigation Strategy

The Company have been building up inventory of these products and have implemented a production planning system. However, a disproportionately large government order or export tender may require us to divert stock from other markets, or use manufacturing capacity to handle such demand. Since these vaccines need to be administered only at a specific period in the animal life cycle, the Company build sufficient inventory to meet the demand.

Forex risks

Being exposed to a significant number of geographies, the Company deals in a number of currencies and runs the risk of unfavourable movement in any currency leading to financial losses

Mitigation Strategy

In the FY 2019-20, the Company derived over 13% of sales from exports and fulfil some of its raw material requirements through imports. The Company manage forex risks by adopting a very stringent hedging policy. The Company keeps a close watch on rupee movement and enters hedging contracts to protect margins.

regulatory risks

The Company must comply with all applicable quality standards prescribed by regulatory authorities of countries where it either supplies products or intends to do the same.

Applicable regulations are increasingly becoming stringent and the cost for non-compliance can be severe as it can lead to the revocation or suspension of licenses, imposition of fines and criminal sanctions. Any violation of regulatory methods or non-compliance of standards can also tarnish a Companys reputation and thereby, risk its future.

Mitigation Strategy

The Company always endeavours to reduce political or regulatory risks by involving proper legal consultations and ensuring documentations are done properly.

inTErnAl conTrols, sysTEMs AnD ADEquAcy

A robust, comprehensive internal control system is a prerequisite for an organisation to function ethically and in commensuration with its abilities and objectives. The Company has established a strong internal control system aimed at providing assurance on the effectiveness and efficiency of operations, compliance with laws and regulations, safeguarding of assets and reliability of financial and management reporting. The Company has clearly laid down policies, guidelines and procedures keeping in mind the nature, size and complexity of business operations.

The Companys resilience and focus is driven to a large extent by its strong internal control systems for financial reporting. Audit committee is also responsible for implementation and maintenance of adequate internal financial controls to ensure the orderly and efficient conduct of its business. The Company follows strict procedures to ensure prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information. Internal audits are conducted periodically to provide reasonable assurance over internal control effectiveness and advice on industry-wide, best practices. The Audit committee review important issues raised by the Internal and Statutory Auditors on a periodic basis. Timely and adequate measures are undertaken ensuring that the risk is mitigated appropriately with necessary rectification measures on a periodic basis.