Vimta Labs Ltd (VLL)

[Mayank_d]

Hello everyone,

I am creating this post since could not able to find a dedicated thread on Vimta Labs Limited (VLL)

Introduction

VLL incorporated in 1990 by Dr S P Vasireddi and currently engaged in the business of testing and contract research in the areas of analytical testing of food and water, drugs, environment testing, clinical research and clinical reference testing (diagnostics), biopharmaceutical testing, pre-clinical studies and testing services for electronic and electrical products. It has one of the largest lab network across India with 400000 sqft lab area. Vimta is the first gazette notified EPA laboratory (1986) in India and is highly reputed for its quality and integrity. VLL have around 20 Labs pan India (Inc 9 food labs)

Around 60% of their revenue come from Pharma, 15% from Food testing, 15-20% from diagnostic and rest is others. 25-30% revenue come from exports (100% from Pharma) and rest is domestic (Inc Pharma, food, environmental etc.). Mainly they export to US, Europe, Dubai, China and Malaysia.

Food testing is very fragmented and unorganized sector, VLL is among top 7. Vimta has acquired 100% stake in EMTAC Lab in Mar’20, EMTAC is engaged in testing of electrical & electronic equipment against standards and physical testing and certification of physical things like lockers, fire resistant doors etc.

Promoter stake is low around 37% but consistent over the period, however they have silent investor like Eurofins, LCGC which operate in similar field.

Customer Concentration
Top 5 customers contribute mostly around 20% and are from pharma industry.

Market Size

1. Diagnostic market in India is of 60000 Cr and expected to grow at 16% CAGR for next 5 years. Unorganized players have market share of 48%, hospital own labs have share of 37% and organized player just have 15% market share. Further as organized player will take over unorganized players (consolidation), rising middle class and aging population diagnostic may do well for VLL.
2. Electrical & Electronic market in India is of 1000 Cr size and have competitors like TUV, Wipro, SGS, STQC labs, LAB-UL etc.
3. The market for India’s environmental testing is forecast to reach 2500 Cr by 2025, growing at a CAGR of 10.8% from 2020 to 2025.
4. Indian Food market is of 6000 Cr.
5. Pharma (Global Scenario since VLL has pharma business globally):

• The global drug discovery and development services market size is projected to reach USD 21.4 billion by 2025 from USD 11.1 billion in 2020, growing at a CAGR of 14.0%
• Global preclinical CRO to grow at cagr of 8.3% and reach usd 7.8 billion by 2027
• Biologics safety testing market was valued at USD 3.05 billion in 2019 and is projected to reach USD 7.15 billion by 2027, growing at a CAGR of 12.13% from 2020 to 2027.
• The global bioanalytical testing services market size was valued at USD 3.3 billion in 2020 and is expected to expand at a compound annual growth rate (CAGR) of 8.6% from 2021 to 2028.

Positive Triggers

1. Last year they have been authorized by FSSAI to open a national food lab on PPP basis at Jawaharlal Nehru port, Mumbai and operate for 25 years and agreement can be renewed further. Vimta will have right to charge customers and will have revenue sharing model with FSSAI. Facility has commenced operation on 7th Feb’22 as per company fillings.
2. With EMTAC acquisition now they are present in electrical & electronic equipment testing, further they are setting up new labs which will be NABL accredited and also have EMI-EMC testing capabilities. Main focus is on medical device (for existing pharma client and GOI has taken medical device under DGCI) and in future to go for telecom, defense, EVs etc. Further a lot of MNC R&D setups are coming up in cities like Bengaluru, Pune & Chennai. They would prefer to outsource these testing to the logistical nearest lab.
3. Dividend payout is consistently 20-30%.
4. Their diagnostic business was mainly B2B (health checkup for volunteers for pre-clinical research). But after covid they realized the potential of entering to B2C. Now management is going aggressively in diagnostic space (like Lal Path Labs).
5. Their food business is not contributing meaningfully right now but company expect it to take front seat once the regulation related to food items testing tightens.
6. Environmental business is laggard right now, but going concern over environmental may prompt government to tighten the regulation which may result in growth for VLL business.
7. 1300 employees and around 70% of them are scientists.
8. As per credit report, the average length of relations with its top clients runs to ~14 years.
9. Remuneration of the management is on higher side, but this statement from AR can sooth nerves on management quality:
   “Smt. Harita Vasireddi, Managing Director has voluntarily foregone the remuneration from April 2020 to September 2020, in view of the uncertain economic conditions owing to Covid-19 pandemic”
10. From 2022, proposed to start ESOPs for linking employee interest with performance of company.
11. Compliant with GMP, GCP and over the years have been successfully conducted USFDA audits.
12. Strengthen the leadership, recruited Mr. Suresh from competitor TUV SUD in 2019, IT experts are being taken over the years to automate things and improve efficiencies.
13. Company has started concalls form 2019.

Key Risk

1. Since with tightening of regulation in Pharma industry, old testing equipment needs to be replaced or upgraded every 5-6 years. So, to be relevant in this business company has to do fresh capex every 5-6 years. In fact, company takes useful life of their equipment round 5 years for the purpose of deprecation.
2. Slowdown in pharma industry globally can pose risk (as 60% revenue comes from Pharma)
3. Regulatory risk (like USFDA).
4. Foreign currency volatility risk, currently VLL hedge part of their risk through loan in foreign currency.
5. Two CFO resigned since 2015 may be a red flag…
6. Reputation risk (like IP data breach and adverse effect on health of volunteer for clinical research)
7. Company has long receivable days, may be that is partially because VLL says average receivable days from export is around 180 days.
8. In earlier years, company has a dealing with a IT service company which was related to one of the independent director and that director was not taking sitting fees. One other independent director was also not taking sitting fee, but I could not able to find the reason for this case. Currently both have left board, further dealing with that IT company has also stopped. May or may be not corporate governance related issue.

Guidance

1. 70-80 Cr capex in 4 years on electrical & equipment segment alone.
2. Operating margin to stay between 20-25% in future.
3. Revenue can double in next 6 years.
4. Target to reach around revenue of 100 cr in the electronic segment in next 5-6 years.
5. In normal course company has guided to do capex equivalent to deprecation.

Competitors

SGS, Intertek, TUV, Eurofins, Covance and PPD, Charles Rivers are global peers and they all operate in India also.

Valuation

1. Company acquired EMTAC labs with Price to Sales of 6 (loss making company with turnover of 1 Cr). However, VLL itself has price to sales of 1.53.
2. Over the last 5 years, VLL has traded on a PE of 25. Currently trading around 22.

Looking forward to have view of other members who may be tracking VLL. @ayushmit sir, you have participated in some of the concalls, appreciate if you can share your views

Disc - Small tracking position.

Regards
Mayank

[RaviYendru]

I am seeing the company has some pricing power which is positive . But ROE, ROCE, ROIC Ratios are on the lower side and the CFO change is a cause of concern.

[dhruvrawani]

The fact that Eurofins wanted to acquire the company in 2014 gives a strong credence to the business prospects. The company has entry barriers because of business it is in and long term nature of contracts. The recent win should help the company in increasing revenue and provide stability of growth forecast. The firm will benefit from China +1 since it will lead to more export of products from india thereby leading more use of their services. The B2C diagositic part is interesting. Didnt know about it.

[Marathondreams]

This extract is from the book “Bottle of Lies” by Katherine Eban which is about dark side of Indian Pharma companies

[raj1968]

It’s almost a two decade old story. You can read the details below:

How Ranbaxy hurtled towards a meltdown

Regards,
Raj
Disc: Invested

[Marathondreams]

Yes it is. I am fully aware of Ranbaxy’s shenanigans but was not aware that Vimta Labs was also involved during that time. Potential or current shareholders of Vimta may not be aware of this. Hence posted on this forum. Even though it is 20 year old story, company culture rarely change (unless there is complete ownership change) I was studying this company but after this news, I have decided to give it a pass.

[hitesh2710]

Vimta labs came up with decent results for q4 fy 22. Full year eps at 18 plus. q4 fy 22 revenue growth might have some contribution from the food testing lab which started operation in Feb 22. It should improve marginally going ahead.

Concall tomorrow might give a better idea about where the company is headed.

https://archives.nseindia.com/corporate/Reg_30_Outcome_12052022131905.PDF

[GARP_niveshak]

@hitesh2710

q4 fy 22 revenue growth might have some contribution from the food testing lab

The notes to financials have something on this. Wanted to clarify on the concall but didn’t get a chance to ask. Encouraging concall though

Disc: invested

[rcinvestor999]

How does the Technical chart look to you, @hitesh2710 ??

Good Long term base formation:

[rajguleria]

Interesting Q4FY22 Conference call Snippet against a Q to have regular Conference calls as it was skipped earlier
'Plan is to have a conference call every 6 months as every Qtr there is nothing much to share with investors , if there some good news some exciting news then we are always ready to come and share & also we have an AGM which will make it 3 times connect in a year which is sufficient ’

Dont know what to make of this , learned Investors any comments ? Tracking , no investment yet !

[hitesh2710]

@rcinvestor999

The chart of Vimta labs has previously been shared in 52 weeks high thread. There is a long term inverted head and shoulders pattern. Stock price had faced resistance in the 310-330 range twice in 2018, (formed a left shoulder) and once in 2021 ( right shoulder) and ultimately crossed this level in Oct 2021 and went on to post a high of 444, only to come down and retest the previous resistance zone. In recent weeks stock price has fallen to levels of 310-330 and successfully taken support at that zone. Now it seems to be showing good resilience in an overall weak market.

Fundamentally speaking the results for last few quarters have been quite good. q4 has shown good topline and bottomline growth. In recent concall, the management seems confident of achieving aspirational target of a topline of 500 crores by FY 25, from current levels of 275 crores. Nearly doubling of revenues of the company in a matter of three years. If what management expects materialises, then stock price can povide good returns from hereon.

How frequently they conduct concalls is up to them. And as she says if she has something new and exciting to share, she will share it outside the ambit of concalls and AGMs. So I think that’s okay. As long as they remain focussed on taking the company on the growth path, I am okay with even one concall (or no concall ) a year.

[Mayank_d]

Notes on Q4 FY 22 Concall

• Food testing at JNPT and electronic services just started and yet to see traction.
• Higher order book this year compared to last year (approx 20% in preclinical, clinical & environment, rest is retail) and visibility looks good.
• Brownfield capex of 60 Cr for 2 years for new lab at Hyderabad.
• 60% of food imports happen through JNPT. FSSAI then decide which sample to give to us and which to external labs. Allowed to test outside sample also.
• First phase (70% accreditation of scope) done and meant for higher volume import wise whereas rest 30% will come in Q1 where mostly low volume import product falls.
• Diagnostic business B2C is performing good in Hyderabad as customers are acquainted with Vimta brand but less traction then expectation in Delhi, Varanasi & Kolkata lab due to strong players in that market, need more marketing to build brand before further expanding.
• Diagnostic didn’t perform as per expectation.
• 500 Cr revenue by 2025 and diagnostic business also constitute a good part in it.
• There is some price compression on pharma side, but able to maintain 29-30% kind of margin due to operating leverage kicks in due to high revenue. Going ahead able to maintain this kind of margin.
• 9 locations for diagnostic business.
• Capex requirement for EMTAC lab around 1 Cr this year
• Top 10 customers contribute about 25-30% of our business.

IMHO we need to see how management commentary pan out in future for it’s diagnostic business, E&E and JNPT food lab business.

Disc: Invested

[Malhar_Manek]

Some qs:

1 What is their right to win in the competitive B2C diagnostics space (especially outside home state)? What was the reason for entering this? Isn’t there enough growth potential in B2B testing?

2 Are various forms of testing adjacencies to each other? Is electronic testing a natural extension to pharma testing? What is the degree of overlap in the competence required for electronic testing vs pharma testing?

Disc- no holdings as of now, tracking closely

[Mayank_d]

Thanks for asking, such questions surely will help us to build conviction in the story and revisit our thesis time to time. My view on the question as follows:

1. They were initially in B2B business, mainly for the test requirement of volunteer before conducting preclinical studies. B2B business was purely linked to number of project they are getting from pharma side. But then came COVID, at that time B2B become 0 due to volunteers were not available. At the same time they started RTPCR testing and earned good amount of money through RTPCR testing, other related tests. That’s when they realized to enter into B2C in big way. Further management think that diagnostic sector is shifting from unorganized to organized, currently organized player have market share of just 15%. In Q4 concall management accepted that they are weaker outside home state and need to do more marketing activities to scale up their diagnostic business outside home state.

2. Some of their customers are medical equipment manufacturer, they are required to show the effect of that equipment on humans (we can take example of pacemaker). Vimta is already doing it, but now with medical equipment are coming under DGCI, equipment manufacturers are also required to test equipment itself on certain electrical parameters. So, yes in a way we can say that part of electronic testing is extension pharma testing . But opportunity in electronic testing exist not only in medical equipments but also in other things like EV, telecom etc. I don’t think there is competencies overlap in pharma and electronic testing (both require different skill set), in case you are thinking in terms of operating leverage it will not help. But they have already acquired electronic testing competencies by acquiring EMTAC Lab which was already doing electronic testing.

Disc - Same as before.

[hitesh2710]

Vimta Labs results out today. Very good growth y-on-y and marginal growth q-on-q. results attached.
vimta q1 fy 23.PDF (5.9 MB)

[Shani]

Good result posted today…
need to see if they can sustain the OPM.

[Mayank_d]

Just attended the Vimta concall. Sharing some notes here:

1. Growth in pharma and food is encouraging.
2. Diagnostics business slightly improved but can do better. Able to do partnerships with local labs.
3. Environment testing remains subdued during monsoons, will pickup in next half.
4. E&E business showing good response.
5. Able to maintain same ebitda margin going forward. Margin improvement is combination of both operating leverage and revenue growth.
6. Quite optimistic on H2 to be better than H1.
7. NFL, received full accreditation now & expecting samples to gradually ramp up.
8. Current utilization is 50-60% in NFL.
9. Business performance to be seen exc. JNPT lab building cost which is neutral to both revenue and expense.
10. Employee expense continue to be in range of 28-30% going forward.
11. JNPT lab is already profit making.
12. Still firm on target of 500 Cr revenue by 2025
13. Writeoff is usual process, nothing unusual this quarter. Typically remains 1% of revenue.
14. Globally outsourcing trend is increasing, funding is coming in mid & small sized pharma companies who depends on outsourcing.
15. Pharma may grow very well in coming years.
16. E&E business will be first expanded into Hyderabad, later on will move onto city like Pune, Bangalore etc.
17. Currently we don’t have testing capacity for testing electric vehicle battery but do have for electric vehicle equipment.
18. In pharma 70% business from India and 30% from export. India is more toward generic side while export mainly belongs to preclinical studies for discovery of new molecules.

View - IMHO, overall good result by Vimta and margins are looking strong. Going forward we need to see if they able to maintain this growth and margins.

Disc- Same as before.

Note- May please excuse for any wrong interpretation as call was on handset, please further verify details once the transcript comes.

[pratikkothari14]

@Mayank_d

• Still firm on target of 500 Cr revenue by 2025

The 2025 target earlier was 550-600 crores, they seem to have revised it down.

7c56e18a-8874-428b-acf4-a43b35eb6101.pdf

[nikhil090]

Vimta Labs broke above the last Yearly high with reasonable volumes.

Regards,

Nikhil
Disc: Invested

[phreakv6]

I am trying to get an idea of the numbers that can be contributed by the NFL setup at JNPT. The number of samples is ~ 1 lakh as mentioned in the concall by some participants and not refuted by management.

This number is roughly there substantiated by the RFP floated by FSSAI

Annexure-II screenshot

But here it says “during the last 3 years”. Unsure if this is annualised or cumulative.

The FSSAI presser also talks of 9000 samples/month capacity (Why would they setup this much capacity if the expected run-rate is around 3000-4000/mo?)

Now what is the rough/avg charge per sample. Here management is saying the charge is doubled from Rs.5000 - so should we assume Rs.10k/sample?

If that’s the case, does it mean a revenue potential of ~100 Cr from this lab? (Or is it much less, if we assume 1 lakh samples for 3 year period?)

On the margin front, it looks like they can maintain or even improve company level margins as guided in diff concalls.

May concall

Oct concall

So if they can maintain the 32% margin post revenue sharing with FSSAI, perhaps they can make an EBITDA of 32 Cr from NFL alone when its fully functional?

It looks like NFL revenues are present in Q4, Q1 and Q2 as well but its not very easy to identify the quantum of it, but if we assume all of it is NFL related - then probably somewhere around 35-40 Cr is probably already coming from NFL for 9 months YoY. Considering they didn’t have accreditation for all, this number should only go up I think. Also seasonality is a big factor in food imports as mentioned by management as well.

Bulk of the Fresh fruit imports seems to happen in Dec quarter going by import data, so there’s a good possibility current quarter and Q4 numbers should be better now that there’s full accreditation towards last week of Oct (Assuming the joint steering committee is setup and volume of samples has increased as guided).

In addition to this, the E&E division has incurred a capex of 25 Cr. Unsure about how quickly they can ramp this up, but if they are able to achieve ~1.5x turns like the rest of the business, this can contribute ~40 Cr to topline as well in a normal year.

Management’s guidance of 500 Cr by FY25 doesn’t seem way off if its indeed 1 lakh samples/yr and also provided pharma and diagnostics can make up another 60-80 Cr growth

UPDATE: This part mentions it unambiguously that its 3000 avg/month for JNPT. So we should probably work with an estimate of 40 Cr or so I think at most. Have to see how FSSAI’s incentives are aligned since they have a revenue share in this lab, as well as growth in imports as the affluent population grows (this growth should be higher than GDP I think).