Gautam Baid of Summit Global Investments presented his in-depth investment thesis on Hester Biosciences (NSE: HESTERBIO, BOM: 524669) at Wide-Moat Investing Summit 2018.

Thesis summary:

Hester Biosciences is the second largest domestic poultry vaccine player in India with a market share of ~35%. In the last five years, the company has diversified its portfolio from a predominantly domestic poultry vaccine to a complete chain of veterinary vaccines, medicines and healthcare segments. Hester is expected to sharply ramp up operations at its Nepal plant which will be primarily dedicated to developing PPR vaccines for exports.

Global agencies Food and Agriculture Organization (FAO) of the United Nations and the World Organization for Animal health (OIE) have earmarked US$7.2 billion (~US$500 million annually) for the eradication of peste des petits ruminants (PPR) disease, globally by 2030. In addition to PPR vaccine, Hester has also developed Brucella cattle vaccine. As per the management, the export opportunity for Brucella vaccine is likely to be even higher than the PPR vaccine. Looking at the size of the opportunity in PPR and Brucella vaccines, even gaining marginal market share could provide very strong revenue traction for Hester.

High net profit margins of ~24% are expected to further improve going ahead, driven by operating leverage (optimum utilization of Nepal plant which is currently reporting a loss) and better realization in PPR vaccines by drawing on its “untapped” pricing power since Hester enjoys a significant low-cost advantage among its global peers for these vaccines.

Businesses with such a long runway ahead for growth and a high degree of predictability enjoy premium valuations for a very long time and are compounding machines. Given Hester’s significant pricing differential for PPR vaccines in the global market, there is a high probability of Hester winning many of the upcoming PPR tenders. Ascribing a “price target” to such a business would not be meaningful as the stock price is expected to keep factoring in the tender win announcements till 2030. Thus, the stock returns are expected to be derived in an irregular and lumpy manner over the next many years. And for patient investors, it is the cumulative total returns over the long-term which ultimately matter. As Buffett said – “Charlie (Munger) and I would much rather earn a lumpy 15 percent over time than a smooth 12 percent.”

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About the instructor:

Gautam Baid, CFA, is Portfolio Manager, Global Equities at Summit Global Investments, an SEC-registered investment advisor based out of Utah, USA. Prior to his current role, he served at the Mumbai, London and Hong Kong offices of Citigroup and Deutsche Bank as Senior Analyst in their healthcare investment banking teams. Gautam is a CFA Charter holder from CFA Institute, an MBA in Finance from Nirma University, Ahmedabad, India and an MS in Finance from ICFAI University, Hyderabad, India. He is a strong believer in the virtues of lifelong learning and is an ardent student of the value investing philosophies of Benjamin Graham, Warren Buffett, Charlie Munger, William O’Neil and Joel Greenblatt.