Vimta Labs Ltd – Bet on the emerging theme of Contract Research & Testing Outsourcing


Company Name – Vimta Labs Ltd (Vimta)


Current Share Price – INR 386 (August 5, 2022)


Market Cap – INR 853 cr


 

1. What is interesting about the stock?


Vimta Labs Ltd. was established in 1984 in Hyderabad by Dr. S.P. Vasireddy and Mr. V. Harriman. The company began its operations by venturing into minerals and ore testing and then gradually moved into environmental and regulatory services testing for various industries like power, infra, cement, and mining. The Company made a major push into the pharma contract research segment in 2006 witnessing the increasing intent from major MNCs to outsource various stages of the drug development lifecycle to Contract Research Organizations (CROs). As of today, Vimta is India’s most comprehensive contract research and testing organization (CRTO), extending its services to pharmaceutical, biopharmaceutical, food, consumer goods, electronic, electrical, agrochemical, healthcare, and medical device, and many other industries. Vimta has a network of 16 laboratories along with 6 Clinical Diagnostics patient services centers in India supported by a team of 1300+ professionals.


Company’s services can be grouped under 5 major industries –


Pharmaceutical and Biopharmaceutical industry services


This segment contributed about 60% of the total revenues in FY22. These services are provided out of the Genome Valley lab in Hyderabad where Vimta has already announced a brownfield expansion worth INR 60 cr to be completed by FY24.


In general, CRO services can be divided into preclinical and clinical trials. Vimta offers its services across the entire spectrum of the drug development lifecycle – Preclinical/early development stage, Invitro studies, clinical research and development, regulatory submissions as well as bioanalytical/bioequivalence studies and central lab services. Apart from this, Vimta also provides pre-clinical research and testing services for medical device companies. Vimta was involved in the quality check of Covid-19 vaccines for the last 2 years.


The global CRO market is expected to grow at a CAGR of ~7% between FY21 and FY26 (from USD 64 bn in 2021 to USD 90 bn in 2026). Currently, big pharmaceutical companies outsource around 40-45% of their activities to (CROs), and this number is expected to grow to about 60% by 2028. On the contrary, medium-sized companies outsource up to 65-70% and the emerging biotech startups typically outsource up to 90% of their activities, and few of the smaller companies are aiming for 100% outsourcing as they have fewer internal resources. Vimta through its integrated drug development and discovery services is well positioned to take advantage of these trends. The graph below, from a Frost & Sullivan study, shows the market opportunity in the CRO space across the drug development value chain.


Food & Agriculture Industry


This segment currently contributed to about 15% of the total revenues in FY22 and is growing at a rapid pace driven by increased demand for convenience and packaged food products, rising demand for organic food, heightened consumer awareness, and preference by food manufacturers to assess the safety parameters of their food products to sustain their product brands in the market. The global food testing market was estimated to be USD 20 bn in 2022 and is expected to grow at an estimated CAGR of ~9% in the next 10 years.


Vimta provides services such as GMO testing, heavy metal tracing, radioactive isotope detection, and packaging stability testing. The company has 8 labs in various locations across India and is accredited by the Food Safety and Standard Authority of India (FSSAI) and the Bureau of Indian Standards (BIS) along with recognition as the National Reference Laboratory (NRL) for water and beverages testing. In the last few quarters


Vimta has won a contract for setting up a National Food Laboratory (NFL) under Public Private Partnership (PPP) mode at JNPT, Navi Mumbai for 25 years. This port handles 60% of India’s food imports and hence provides a humongous opportunity for Vimta to scale up this division. The NFL commenced operations for 70% of its scope in Q4 FY22 and the remaining 30% scope will be commissioned by Q2 FY23. The company expects this division to cross INR 100 cr of revenues in the next 2 years supported by a stronger margin profile from the JNPT lab.


Other focus industries are – Clinical Diagnostics, Environmental Testing & Consultancy, and Electrical & Electronics Testing.


Management Quality


Dr. Vasireddy, who remains as Non-Executive Chairman, is regarded as a visionary in this field and is known as the father of the CRTO industry in India. Harita Vasireddy acts as the Managing Director of Vimta Labs since 2013 and comes with more than 25 years of experience in the industry.


Eurofins Analytical Services holds a ~20% stake in Vimta Labs. Eurofins Scientific is the world leader in food, environment, pharmaceutical, and cosmetic products testing, and agro-science CRO services. Another key shareholder is LCGC Chromatography Solutions which holds a 9.4% stake in the Company. Strategic investments by MNC companies boost confidence in the technical and execution capabilities of Vimta.


Competitive advantages (MOATs)

  • Vimta possesses an entire gamut of CRTO services under its umbrella. It faces competition from major global players like SGS, Intertek (both are in the general goods testing and certification segment), TUV Rheinland (in the EMC testing segment), Eurofins (food, environment, and pharma testing), Covance, PPD, and Charles Rivers (all in pharma segment). The opportunity size in the CRTO business is huge and multiple players co-exist. Vimta has built strong brand equity in the segment due to its focus on quality.

  • In the preclinical space, Vimta is the market leader in India with 18 of the top 20 Indian Pharma companies amongst its clients. The service portfolio offered by Vimta is much wider than peers like Eurofins. Vimta was one of the earliest labs to get GLP (Good Lab Practices) certification in the late 90s. GLP certification is a mandatory requirement for pharmacological toxicology testing which is a high entry-barrier business (and thus has high outsourcing rates).

  • Vimta is one of the most premium players in the Clinical Research, bioavailability, and bioequivalent market, where it derives 80% of its revenues from exports.

  • In the food segment too, Vimta is the market leader in India with 7 out of the top 10 food producers in India amongst its customer profile.

  • Company has a diversified revenue profile with top 10% customers contributing to around 25-30% of revenues. Vimta has continuously expanded its services portfolio in the last 2-3 years.

2. Key Historical Financials

  • From F16 to FY22, the company has doubled its revenue from INR 138 cr to INR 278 cr. As it enters into new verticals, Vimta management has given guidance of more than 20% CAGR going forward to achieve an INR 500-550 cr topline by FY25.

  • EBITDA margins have also been on an increasing trend (from 18% in FY17 to 29% in FY22).

  • Company has a healthy D/E ratio

  • Vimta has managed to improve its ROCE from 14% in FY21 to 24% in FY22. Similarly, the ROE has improved from 11% to 19% in the same period. This is driven by growth in margins and an increased asset turnover ratio.

  • Company’s Cashflow from Operations has improved from INR 24 cr in FY20 to INR 59 cr in FY22 with a CFO/EBITDA of 74% in FY22

3. What is my view on Company valuation?


Currently, Vimta Labs is trading at a PE of ~18x which is close to its 5-year median.


Going forward, the major drivers of growth in this stock shall be:

  • INR 60 cr of capex in its Hyderabad lab by FY24 to cater to increasing demand from the pharma segment. Currently, Vimta has 180 to 200 beds (for testing of volunteers) which are running at full utilization.

  • Phase-II of the NFL at JNPT to start operations by H2FY23 adding another 30% testing scope to its portfolio

  • EMI/EMC testing has just started generating revenues from FY22. There is huge potential in this segment going forward to contribute to the top line and bottom line.

Investors can evaluate investing in the stock for the long term. However, they should do extra diligence as the Company is a micro-cap.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Quality-related risks - Poor performance in regulatory audits and accreditation body audits could adversely impact Vimta’s business as this is the basic foundation of CRTO business.

  • Data integrity – As a CRTO, Vimta often gets into various service agreements with customers including requirements on data confidentiality, data security, and IP protection. Company may be at risk as a result of unintentional violations of customer contracts and agreements, which could further lead to significant legal risks for the business.

  • Seasonality in the food segment – There is an inherent risk of seasonality in the food business due to which the testing volumes might vary indirectly leading to margin fluctuations in this segment.

 

About the Author


I am an MBA grad from the Indian Institute of Management, Bangalore, and currently working as a corporate finance specialist in a technology-based startup. I have cleared all 3 levels of CFA, US. I am an avid reader of businesses and like to analyze emerging trends in various sectors and macroeconomy.


Disclosure


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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