Vivimed Labs - An interesting pharma - specialty chemicals company

I am researching Vivimed Labs (VL) and want feedback from fellow boarders on the pros and cons of the stock.
VL is Hyderabad based pharma and speciality Chemicals Company, listed on NSE and BSE. The promoters are Varalwar family are in Pharma business for a long time.
In my view the key strategy positives are:

  1. Focus on pharma and speciality chemicals – both sectors are likely to grow for foreseeable future ensuring demand for product
  2. US FDA approved sites – has manufacturing sites in Spain, Mexico and Chennai which are US FDA approved and the current utilization in Chennai site is not very high. So company has scope to increase supply to US market
  3. Focus on R&D – spends 4-5% of revenue on R&D and has stated aim of filing 6 -8 DMFs and 6 ANDAs annually for products going off patent during 2019-22. When company can start manufacturing of inhouse APIs the profitability will improve further.
  4. Speciality chemicals – niche products like photochromics, imaging chemicals, hair care, established manufacturing and large MNC clients like P&G, Unilever, ITC, L’Oreal, J&J, etc.
  5. IFC invested in company earlier and all the clients are large MNCs and company sold speciality chemicals business to Clariant. So management dealings seem to be above board.
    A snapshot of financials:
  6. Q2 FY17 - Consolidated turnover of ~300 crs, EBITDA - ~61 Crs and PAT - ~26.9 Cr.
  7. FY2016 - Consolidated turnover of ~1345 crs and PAT - ~83 Cr. PAT margin – 6 -7%
  8. Q2 FY17 – Net debt on 30th Sep – 807 Cr.
  9. Market cap – 713 Cr. and annual PAT of 83 cr so annual PAT/mcap - ~11.6%
  10. EV – 1520 Cr. and H1 FY17 EBITDA of 128 Cr. Assuming annual EBITDA of ~250 cr, so EV/EBITDA –~ 6

Key risks:

  1. High debt - Company has grown through acquisitions (outside India and in India) which increased the debt upto ~1000 Cr. Then company divested part of speciality chemicals business to Clariant for 380 Cr. Still company has some land purchased earlier for 50 Cr. which may be sold to reduce debt.
  2. Regulatory risk – dependence on US FDA approved sites has a key risk that in case facility is not approved it leads to substantial wealth destruction especially for company as it has only one FDA approved site in India.
  3. Lack of immediate triggers – I want to understand if company can deliver >15% CAGR on sales and net profit in coming 2-3 years. Over 5 -10 year term if DMF and ANDA filing is successful company can increase revenue though the CAGR can’t be figured out today.

The key attraction for me is market cap/sales - ~0.5, EV/EBITDA is reasonable for a growing company, has diversified manufacturing and R&D sites reducing regulatory risks, niche products and clients ensure lower business risk and reasonable margins. If company can deliver >15% growth by launch of new products in pharma and speciality chemicals, generate 300 Cr EBITDA and reduce the debt by ~100 Cr. next year; then the stock can rerate with market cap doubling to 1400 Cr and EV reaching ~2000 Cr.

  • Disclosure – I recently purchased 1000 shares @ Rs. 88.5.
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I always look at return on assets ( net of cash and investments ) when making any investments. In the pharma business usually its on the higher side. Unfortunately, i cant see that in the case of Vivimed. I suggest that you take a close look at ROA. However, i have seen many companies go up despite having low return ratios because they were simply very cheap to begin with. This may be the case with Vivimed. But usually, over the long term the returns on any stock market investments track returns of the underlying business. As of now, Vivimed doesnt look to me as fitting that slot unless of course it starts making its assets more productive.

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Thanks for the feedback. I agree that ROA is an important criteria. One possible reason for lower ROA is appreciation of INR against EUR (85.1 on 1st Jan 2014 to 70.9 now) which would have reduced any improvement in ROA of European subsidiary. Company focused on margins against revenue (as per Annual Report) which may have dampened ROA.

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hey sachin

The ROA ( excluding cash and investments ) is 4% to 5%. I dont know what vivimed cost of capital is but judging by all the debt is must be in the region of 15%. I would be doubly cautious - just saying.

Just for reference - here is the ROA of symphony over the years - unrelated company but serves to illustrate the basic point. Plus its any investors dream come true within a dream come true. look at its unreal ROA over time. No wonder its almost a 1000 bagger


Thanks. The ROA growth for Symphony is phenomenal.

Currently were companies like sun pharma. Divis lab wockhart are facing usfda issues vivimed has 2 plants with usfda approval.

Ace investor Ashish kacholia has entered the stock some time back and recently Kotak international has sold it’s stake.

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Vivimed labs moved from being a sub Rs.5000 Mn speciality chemicals operations to a pharmaceuticals led company with revenues which more than doubled in FY11-15. The valuations have not trailed the growth as the bottom line and returns generated have not moved in line with the growth in top line.

The company had faced slower turnaround in acquired assets and high debt servicing concerns in the period, which impacted the accruals and hence valuations.

Had anyone analysed the business risks of VLL.

Business growth risk: Inability to sustain business growth could result in a decline in profitability.

Competition risk: Growing competition could impact business profitability over the medium-term.

Capacity Risk: Inadequate manufacturing capacities could impact the Company’s ability to service customers.

Quality risk: Inconsistent quality issues could lead to client attrition impacting business growth.

Funding risk: An inability to garner adequate funds may adversely impact the Company’s prospects.


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