|Type of Report||First Recommendation|
|Report Date||Sep 9, 2016|
|Price on Report Date||Rs. 95|
|Current Market Cap||Rs. 210 Cr|
|Indicative Target Price*||Rs. 150|
Company Background: Vimta Labs is a Hyderabad based company in the field of Testing and Pharma Contract Research. The below table will briefly explain its business profile.
1. Not just a Clinical Trials Player; Other High Potential Segments: In the past, Vimta’s major revenue contribution used to come from the Clinical Research and Pre-clinical research segments carrying 2 million tests per year. However, with the regulatory bottlenecks in clinical research since 2012, Vimta has put thrust into providing testing services for various other categories that includes Pharma Testing, Food Testing and Environmental Testing. It is one of the very few players who could survive the downturn caused by loss of Clinical Research business due to regulatory change and hurdle in India. The business of Clinical research has bounced back since then however now remains a very small portion of the overall revenues.
2. Food Testing –New Frontier of Business: The Food Safety standards and its enforcement are increasing for all the food manufacturers and food operators which can be seen from the activism shown by FSSAI in regulating the food sector. At the same time, the awareness about quality standards is increasing and will create an economic need for the food companies to improve the food quality standards. Due to this, food companies are relying on third party testing services for their raw material and final products. This will create huge opportunity for players like Vimta as it has been already serving the Food Testing market which contributes nearly 10-15% of its current revenues.
In the recent problems that Nestle faced for its Maggie Noodles, the Bombay High Court has selected Vimta as one of the 3 testing laboratories for testing various Maggie sample. This speaks a lot about the credentials of Vimta as a brand in food testing space.
3. Setting up of 9 Additional Food Testing Labs Across India: In order to capture the strong demand for third party food testing on a pan India basis, Vimta decided to setup 9 Food Testing Laboratories across different cities at a cost of approximately Rs. 35 crore in FY15.
Three out of these nine labs will become commercial by Q3FY17 and the work for other labs is going in full swing. Over the next 3 years, Food testing will emerge as a major revenue contributor for Vimta. A point to note is that Dr. S P Vasireddi (Executive Chairman of Vimta Labs) has been a key member of Advisory committee to FSSAI for last 6 years and therefore makes Vimta better placed to seize this opportunity.
4. Strong Support of Analytical Testing: Vimta has a very strong presence in India for providing analytical services related that caters to the needs of pharma companies, medical device companies, biotech companies and animal health industries across the globe. The contribution from this business stands at around 40-50% of sales and provides strong stability to Vimta’s business. In addition to analytical testing for Pharma companies, Vimta has added new services for Biosimilar manufacturers. Over the next 2 years, this segment should also bring in additional revenues for the company and aid in the growth of the company.
5. Strong Operation Leverage Possible: Apart from its large infrastructure of 3 Lakh Square Feet, Vimta has been continuously investing in its human capital and building a strong team. Even without any major increase in revenues in the past, the company has increased its employee from 679 in FY12 to 908 employees in FY16. With the revenues increasing from its food testing business and Pharma / Biosimilar analytical testing business, the company may see its profitability rising much faster than its costs.
6. Strong Balance Sheet gives further comfort: It was mainly because of its strong and asset light balance sheet; Vimta was able to easily take the expansion of 9 Food Testing Labs. In FY16, Vimta’s debt stands at Rs. 26 crores against its net worth of Rs. 126 crores. The debt is mainly used for the recent capex done for setting up of 9 Food Testing Laboratories. As a policy, the management of Vimta is quite conservative in use of debt and would want to achieve debt free status as soon as possible.
Valuation: Vimta lab is trading at Rs. 95 with current market cap of Rs. 210 crores with net profit of Rs. 6.43 crores (EPS Rs 3) in FY16. Considering the potential increase in earnings due to Food testing business, Pharma / Biosimilar Analytical business and strong balance sheet, we think that the stock price of Vimta provides substantial upside from its current level of Rs 95. We therefore suggest a BUY in Vimta Labs.
1. Consolidation in Pharma industry global reduces the number of clients for Pharma Testing Industry
2. Increased competition in Food Testing Business
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