Vivimed Lab Ltd Initiating Coverage Report K C Securities

VIVIMED LABS LTD (VLL) – INITIATING COVERAGE (NOT RATED) Vivimed Labs Ltd (VLL) is a leading manufacturer and exporter of specialty chemicals mainly used in the personal care and pharmaceutical industries. The company’s prime focus is on the home and personal care (H&PC) segment (covering oral care, sun care, skin care, hair care, preservatives, and anti‐ageing molecule. It has a supply chain relationship with global leaders such as Unilever, L’Oreal, Procter & Gamble, and Johnson & Johnson. With a manufacturing base across 6 locations world‐over, the company has an employee base of nearly 800 employees. New Product Launches to fuel growth VLL’s key thrust area is development of new skin‐care and sun‐care products. The company plans to develop market for vivinol (4‐n‐butyl resorcinol) and etone (ethyl hexyl triazone). It also has firm plans to introduce SAP (sodium ascorbyl phosphate) as a new product. Vivimed has received additional new product approvals from existing global customers within the H&PC industry. Capacity expansions to lead the growth charter VLL intends to expand capacities of existing products for both Specialty chemicals and Pharmaceutical business segments. The company’s forthcoming product launches will be in the Skincare, Sunscreen and Anti‐microbial segments. The capacities are expected to be commissioned in the next 12‐18 months and will add to revenues from Q4FY13 onwards. The company has also shown impressive performance in the first quarter of FY12 clocking revenue of Rs 120.5 cr, a 42% growth over the same quarter last year. Operating profit margin (EBITDA) for Q1FY12 is slightly lower at 20.4% vs. 20.7% during the same period last year. Q1FY12 net profit is up 26.3% (YoY) at Rs 12.4 cr vs. Rs 9.8 cr last year. The current year has seen a surge in interest costs and Fund Raising to help chart the growth trajectory VLL is raising Rs 34 cr ($7.5 mn) from International Finance Corporation (IFC) via issue of foreign currency convertible bonds (FCCBs). The company has plans to get funding of up to $20 mn from the private investment arm of World Bank. These funds will be used for capex of $42 mn to expand existing facilities at Bidar (Karnataka) and Bonthapally (Andhra Pradesh) and for both the green‐field projects in Andhra Pradesh at Choutuppal and at SEZ in Srikakulam. The Srikakulam project will help to enhance resource efficiency for VLL. Valuation VLL is currently quoting ~Rs 267 a multiple of 5.6x consolidated FY11 EPS of Rs 48. KEY FINANCIALS

(Consol. Rs. Mn) FY09 FY10 FY11Operating income 2,761 3,435 4,160EBITDA 450 631 841Adj. Net income 194 310 488Adj. EPS – Rs 19.0 30.5 48.0EPS growth (%) 18.9 60.2 57.5P/E (x) 7.5 8.6 5.6RoCE (%) 12.6 18.4 17.5RoE (%) 21.2 25.8 29.8EV/EBITDA (x) 8.7 7.2 5.3

VIVIMED LABS LIMITED (VLL) – INITIATING COVERAGE (NOT RATED)

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VLL’s Business Divisions

H&PC Division segments

Active Pharmaceutical Ingredients Products Active Pharmaceutical Ingredients Products include:

(i) AVIS, an effective sunscreen chemical used in body creams and lotions (ii) NDGA, a new anti‐oxidant developed by the company that finds use in the cosmetics and

the food and beverage industries (iii) CaGP, used in oral care formulations for protecting the dental enamel (iv) Triclosan, an anti‐bacterial drug used in toothpastes and soaps (v) Chlorophenesin an anti‐fungal preservative used in cosmetics, foodstuffs and fibres

H&PCDivision

Oral Care

Sun Care

Skin Care

HairCare

Preservatives

Pharma Ingredients

Triclosan

Chlorophenesin

AVISNDGA

CaGP


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INVESTMENT POSITIVES Products used in growing sectors VLL’s has two main divisions, viz., H&PC that produces synthetic organic chemicals in oral care, sun care, skin care and hair care items and preservatives, and Specialty Pharmaceuticals division that is focused on drug delivery and discovery, with focus on providing cures for cancer, arthritis, macular degeneration, psoriasis, Syndrome X and stress. H&PC segment has been instrumental in providing international repute and visibility to the company and has also driven growth. Strong Client Relationships VLL’s has focused on building strong relationships with top‐notch global brands such as Unilever, L’Oreal, Proctor & Gamble and Johnson & Johnson. It is an approved supplier to these global personal care majors and has been extremely cautious on maintaining quality norms and withstood client competition. This has also led to a higher entry barrier for competitors. VLL has not only started supplying multiple products to these companies over the past few years, but also managed a larger pie of revenues from the same customer. Focus on better R&D facilities VLL is focused on R&D as a key growth driver for its future growth. Its innovation has helped VLL in expanding its relationships with existing customers manifold. VLL’s UK‐based R&D team is working on development of novel chemicals for application within printable electronics industry, part of UK government‐funded project. PRODUCTS OF VIVIMED’S HOME & PERSONAL CARE BUSINESS

o Oral Care: VIV‐20, VIVCAL‐G, VIVHEX, VIVHEX‐6

o Sun Care: AVIS, BEN 3, BEN 4, CINNAMON, OCTYNE‐B, ETONE

o Skin Care: VIVINOL, VINTOX, TRU ALOE, C‐VITE

o Hair Care: DANTUFF C, DANTUFF Z, DANTUFF K, VIPIROX, VIVIDINE, CO‐GUAR 113

o Preservatives: COSVAT, VIVILIDE, VIVMAX, VIV‐20 VLL has a large number of global brands that use products manufactured by the company.


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Porter Analysis Buyer Power – High VLL’s customers have a higher degree of purchasing power as the company is positioned in a competitive market where quality makes a very big difference. It has been able to from customer loyalty due to its focus on quality and product resource enhancement. Supplier Power – Moderate to High VLL raw materials are chemical ingredients for its end products. Since chemical prices are highly fluctuating the suppliers have a moderate bargaining power. Threat of New Entrants – Low The sector has a large number of players and competition is stiff. VLL has a strong loyalty amongst its customers and has been able to entrench further into their businesses by supplying more products to same client. The service standards and maintenance of quality serve as entry barriers for new players to enter the sector. Threat of Substitutes – Low Threat of substitutes is low as product development is an expensive and time consuming process which only large players can afford. VLL is also focusing on the right areas of preservatives, skin care, oral care, sun care and hair care. Rivalry – Moderate to High

The home and personal care segment has a higher competition as the industry has a large section of unorganized players as well. This makes VLL vulnerable to price competition and a constant quality check is required on products manufactured as any lapse can lead to loss of business.


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MANUFACTURING FACILITIES For Active Ingredients: Bidar (Karnataka) Plant established in 1991, has 60 reactors and equipped with

capacity of 300 kl. Bonthapally (Hyderabad) Modern US FDA compliant plant established in 2005 with 78

reactors and capacity of 350 kl. For Pharmaceutical Dosage Forms: Jeedimetla (Hyderabad) Plant equipped to manufacture dosage forms such as liquid orals,

tablets, capsules and ointments in various therapeutic categories and compliant with WHO GMP Standards.

Haridwar (Uttarakhand) Wide range of sterile products and small volume parenterals

(SVPs) are manufactured at this facility. The plant has sophisticated equipment designed as per stringent US FDA norms.

Kashipur (Uttarakhand) Facility enjoys tax‐concessions and is engaged in manufacture of

non‐sterile syrups, tablets, capsules and dry powders. KEY BUSINESS RISKS Maintaining Quality VLL is serving global brands of high repute that are most careful of the quality of product being sold to their end customers. This makes VLL susceptible to stringent action if there is any compromise on quality front. The company has to continually focus on maintaining product quality and this has helped it acquire more business from same client. Dependence on Global Economic Growth VLL has a large number of global clients that it serves and its growth is linked to global economic growth. The company’s home and personal care segment is likely to see an impact from any economic slowdown or global meltdown. Compliance with Stringent Norms and Global Standards VLL’s facilities comply with US FDA, WHO GMP and other stringent norms and any negligence on part of the company can lead to serious damages to the extent of product recall and loss of clients.


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MANAGEMENT OVERVIEW VLL is steered by a very strong management team headed by Mr. Santosh Varalwar who is the Managing Director & CEO of the company. He is the key driving force behind the company and has immense experience in the Pharmaceuticals industry. He played an active role in VVS Pharmaceuticals from 1985 onwards and later expanded the business to manufacture APIs by acquiring EMGI Pharmaceuticals and Chemicals Private Limited, Bidar, which was later converted into a public limited company and named as Vivimed Labs Limited (VLL). VLL got listed on both BSE and NSE in 2005 via a public issue of shares and since then Mr. Santosh has been steering the company to various successful milestones from strength to strength. VLL has a strong board member team of 12 and had planned to increase the strength to 18 in the 2010 AGM. The board members are eminent professionals from diverse fields and the company plans to induct further professional team members in the board to enhance the thinking tank and bring more expertise in the management of the enterprise. COMPANY OVERVIEW Vivimed commenced operations in 1991 as an API manufacturing company. The company forayed into the home and personal care (H&PC) segment in 1997 with Viv‐20 (Triclosan). From 1998‐2004, the company focused on expanding its presence across the globe, establishment of R&D centre, capacity expansion and manufacture of sterile and small volume parenterals. VLL got listed in 2005 on both BSE and NSE and established a new manufacturing facility in Hyderabad for specialty chemicals. The company made 2 acquisitions, first one in 2008 of UK‐based James Robinson Limited (renamed as Vivimed Labs Europe Limited) and the second in 2009 of US‐based Harmet International Inc. (renamed as Vivimed Labs USA, Inc.) VLL has a strong R&D focus and has managed to grow from a small bulk actives manufacturer for few Indian pharmaceutical and FMCG companies to a supplier of choice for leading household brands across the globe such as Unilever, Proctor & Gamble, Johnson & Johnson, and L’Oreal amongst others.


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Revenue and revenue growth (%)

PAT and PAT margin (%)

EBITDA and EBITDA margin (%)

52.5%

24.4% 21.1%

276.1

343.5

416.0

‐

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

FY 09 FY 10 FY 11

Revenue Growth

Revenue in Rs cr

7.0%9.0%

11.7%19.4

31.0

48.8

‐

10.0

20.0

30.0

40.0

50.0

60.0

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

FY 09 FY 10 FY 11

PAT Margin

PAT in Rs cr

16.3%18.4% 20.2%

45.0

63.1

84.1

‐

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

FY 09 FY 10 FY 11

EBITDA Margin

EBITDA in Rs cr


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Financials

INCOME STATEMENT

Particulars (Rs. cr) FY 09 FY 10 FY 11

Operating income 276.12 343.49 416.00

EBITDA 45.01 63.08 84.07

EBITDA margin 16.3% 18.4% 20.2%

Depreciation 7.15 8.73 9.15

EBIT 37.86 54.35 74.93

Interest 17.27 21.23 20.60

Operating PBT 20.58 33.12 54.33

Other income 2.53 6.53 0.93

PBT 23.11 39.65 55.26

Tax provision 3.76 8.63 6.43

Minority interest ‐ ‐ ‐

PAT (Reported) 19.35 31.01 48.83

Less: Exceptional Items ‐ ‐ ‐

Adjusted PAT 19.35 31.01 48.83

CASH FLOW Particulars (Rs. cr) FY 09 FY 10 FY 11

Net cash from operations (16.8) 55.1 NA

Net cash from investments (161.1) (7.1) NA

Net cash from financing 179.3 (59.4) NA

Change in cash position 1.4 (11.4) 5.5

Opening cash 15.5 17.0 5.6

Closing cash 17.0 5.6 11.1


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BALANCE SHEET Particulars (Rs. cr) FY 09 FY 10 FY 11

Liabilities

Equity Share Capital 9.4 10.0 10.2

Reserves 90.8 129.9 177.68

Net worth 100.2 139.9 187.8

Convertible Debt 2.3 5.0 8.86

Other Debt 300.5 235.3 307.72

Total Debt 302.8 240.2 316.6

Deferred Tax Liability (Net) 13.0 16.2 14.65

Total Liabilities 416.1 396.3 519.1

Asset

Net Fixed Asset 148.0 160.7 181.46

Capital WIP 26.9 1.1 ‐

Total Fixed Asset 174.9 161.9 181.5

Investments ‐ ‐ ‐

Current Asset

Inventory 69.1 79.3 84.5

Sundry Debtors 70.7 93.9 127.6

Loans & Advances 26.4 15.2 91.6

Cash & Bank Balances 17.0 5.6 11.1

Total Current Asset 183.3 194.1 314.7

Total Current Liabilities 31.4 59.4 68.3

Net Current Asset 151.9 134.7 246.4

Intangibles / Misc. Exp 89.2 99.8 91.3

Total Asset 416.1 396.3 519.1


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RATIOS

Particulars FY 09 FY 10 FY 11

Growth

Operating income (%) 52.5% 24.4% 21.1%

EBITDA (%) 43.7% 40.2% 33.3%

Adj PAT (%) 21.3% 60.2% 57.5%

Adj EPS (%) 18.9% 60.2% 57.5%

Profitability

EBITDA margin (%) 16.3% 18.4% 20.2%

Adj PAT Margin (%) 7.0% 9.0% 11.7%

RoE (%) 21.2% 25.8% 29.8%

RoCE (%) 12.6% 18.4% 17.5%

RoIC (%) 4.8% 8.2% 9.7%

Valuations

Price‐earnings (x) 7.5 8.6 5.6

Price‐book (x) 1.3 1.9 1.4

EV/EBITDA (x) 8.7 7.2 5.3

EV/Sales (x) 1.4 1.3 1.1

Dividend payout (%) 5.3 4.9 4.2

Dividend yield (%) 0.7 0.6 0.7

B/S Ratios

Inventory days 91 84 74

Creditors days 66 43 NA

Debtor days 109 118 56

Working capital days 90 93 114

Total asset turnover (x) 0.7 0.9 0.8

Net asset turnover (x) 0.9 1.4 1.2

Current ratio (x) 5.8 3.3 4.6

Debt‐equity (x) 3.0 1.7 1.7

Net debt/equity (x) 2.9 1.7 1.6

Interest coverage 2.2 2.6 3.6


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Quarterly Financials Particulars (Rs. cr) Q1 FY 11 Q2 FY 11 Q3 FY 11 Q4 FY 11 Q1 FY 12

Net Sales 85.0 105.7 105.6 120.6 120.5

Q on Q growth (%) 0% 24% 0% 14% 0%

EBDITA 17.6 21.4 24.2 20.9 24.6

Q on Q growth (%) ‐3% 22% 13% ‐14% 18%

EBDITA Margin 20.7% 20.3% 22.9% 17.3% 20.4%

PAT 9.8 13.5 13.3 12.2 12.4 Adjusted PAT 9.8 13.5 13.3 12.2 12.4

Q on Q growth (%) 22% 38% ‐2% ‐9% 2%

Adjusted PAT Magrin 11.55% 12.8% 12.6% 10.1% 10.28%

Adjusted EPS 9.7 13.3 13.1 12.0 12.2

PER SHARE Particulars FY 09 FY 10 FY 11

Adjusted EPS 19.0 30.5 48.0

CEPS 28.2 39.9 57.0

Book Value 106.6 140.4 184.8

Dividend (Rs.) 1.0 1.5 2.0

Actual o/s shares (mn) 9.4 10.0 10.2


Bibhash Asar Research Head & [email protected] 022‐33026066 Senior Economist F&O AND TECHNICAL RESEARCH : Research Analyst Sector Allocation E‐mail Direct Nos.

Jaldeep S. Vaishnav F&O Analyst [email protected] 022 ‐ 33026066 Muralidhar Shenoy Senior Analyst [email protected] 022 ‐ 33026035 Kapil Vasania Analyst [email protected] 022 ‐ 33026036 Nemish Shah Analyst [email protected] 022 ‐ 33026037 FUNDAMENTAL RESEARCH : Research Analyst Sector Allocation E‐mail Direct Nos.

Amit Anwani Construction & Realty [email protected] 022 ‐ 30287987 Capital Goods


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Vivimed Lab Ltd Initiating Coverage Report K C Securities