Vivimed Labs Ltd. (VLL) ` 335.3 (1/11/12) BUY

TM
Vivimed Labs Ltd. (VLL) ` 335.3 (1/11/12)
BUY
VLL has two main divisions – Pharma & Specialty Chemicals. Till FY ’11 Specialty
Chemicals was contributing 75% of the consolidated revenues. However, with the
acquisition of Uquifa, an API manufacturer , in Nov. ‘11, Pharma contributed ~ 50%
of the consolidated revenues and will be a major contributor going forward (64.5% in June
’12). Both the divisions have reported excellent revenues and profit growth in the last five
years. Pharma – Revenues CAGR of 44% and net profit CAGR of 46% (incl. acquisitions).
Specialty Chemicals – Revenues CAGR of 21% and net profit CAGR of 22%.
A CONSILIUM INFORES & ADVISORS INITIATIVE FOR BALANCE EQUITY BROKING (INDIA) PVT LTD

Vivimed Labs Ltd.
TM
Highlights
BSE SENSEX/S & P NIFTY 18,561.70/5645.05
Sector
Pharmaceuticals
Market Cap./Free Float (` Crs.) 467.1/181
Market Price as on 1/11/12 ` (FV ` 10/-) 335.3 (1/11/12)
52 Week High/Low ` 444.00 / 212.50
Equity Shares Outstanding (in Crs.) 1.393
P/E Ratio (Times) (for FY ‘12) 7.4
P/B (Times) (for FY '12) 1.6
EV/EBITDA (Times) (FY ‘12) 7.7
ROE % (FY ‘12) 21.59
Shareholding Pattern as on
Sep ‘12 (%)
Share Price Performance
u Company has made a strategic foray in to API through
Uquifa acquisition. It will now focus on expanding the portfolio
and increase its global reach. For formulations exports it will
concentrate on CIS countries where new product registrations
have been made. For generic sales it will concentrate on both
regulated and non regulated markets.
u Company will also be leveraging customer relationships
of Uquifa to expand its Finished Dosage Formulations (FDF)
business. It will also leverage Uquifa’s dossiers by using its
experience in FDF segment.
u With the acquisitions of Indian companies - Octtantis
Nobel and Klar Sehen - Company will renew its focus on
domestic retail branded generic and formulations market.
u VLL operates in a niche specialty space where attaining
position of preferred supplier is a time consuming process. Other
factors like brand sensitivity, technical qualification, pricing and
timeliness also act as entry barriers.
u To drive growth in specialty chemicals segment,
Company has added new segments such as Automotives and
printable Electronics, apart from focusing on expanding its
share with existing global customers.
u Working capital requirements have been bit stretched
due to acquisitions. Inventories as on March ’12 have gone up to
about 4.4 months sales, while debtors are at 4 months sales. This
may be partly because API business was consolidated only from
Nov. ’11.
u Although consolidated debt has gone up to finance
acquisitions and other capex , debt equity ratio has come down
to 1.26 x in FY ’12 from 1.63 x in the previous year, as a result
of issue of equity and convertible preference share capital.
Promoters have pledged shared equivalent to 9% of Company’s
capital out of 45% held by them.
u Company expects to earn revenues of ` 1150 Crs. and
net profit of ` 105 Crs. in FY ‘13 (9% net margin). Fully diluted
EPS works out to ` 65 on the basis of this guidance.
u Company is at present available at 5.2 x FY ‘13E
guidance. We see reasonable chance of appreciation in the next
12 months.
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Vivimed Labs Ltd.
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Equity Capital
For funding acquisitions and other capex, VLL attracted equity investments from IFC, Washington D.C and from reputed global
private equity players NYLIM Jacob Ballas, New York and Kitara Capital, Mauritius. Equity capital went up from ` 10.16 Crs to
` 13.93 Crs. 18.3 lacs shares were issued to Kitara Capital( @ ` 327/share), 14.9 lacs shares to promoters and others on conversion of
warrants (@ ` 150/share) and 4.5 lacs shares issued for consideration other than cash. IFC has subscribed to FCCBs of US $ 7.5 million
and has sanctioned Term Loan of US $ 12.5 million.
Evolvence India Life Sciences Fund has subscribed to 1,25,00,000 preference shares of US $ 1 each in Vivimed Labs Mauritius
Ltd., wholly owned subsidiary of VLL(` 63.95 Crs.). Apart from this, Nylim Jacob Ballas India Fund III subscribed to 6,70,000 CCP of
` 1000/- each (` 67 Crs.) Of this, ` 2.13 Crs. will be converted in to equity shares before April ’13, at the investor’s option, increasing
equity capital to ` 16.06 Crs.
Promoters & Background
VLL, established in 1989, is engaged in two businesses - Specialty Chemicals and Pharmaceuticals. In the Specialty Chemicals
space, VLL is a global supplier of active ingredients for a comprehensive and diverse range of home and personal care products,
as well as industrial products such as photo-chromic dyes, imaging chemicals, preservatives, and antimicrobials. It has gradually
increased its product offerings through innovation, and today has international presence in both developed and emerging markets.
It supplies its products to reputed global MNCs like Unilever, P & G, L’Oreal, Procter & Gamble, ISP, Novartis, Merck, Cipla, AVON,
Microban, Thomas Swan & Co, Corning etc.
In the Skin care segment, the company has developed and formulated products of greater acceptance to multinational clients
such as Unilever & BDF. There has been growing demand in the Hair care segment with products such as Cationic Guar Gums. With
different MNCs making strong market presence with their products in Indian markets, VLL has been able to increase market share in
the products like ZPTO, Anti-dandruff, and various fashion Hair colors and Hair Dyes.
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Vivimed Labs Ltd.
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In Pharma segment it sells formulations in domestic markets and CIS countries. It is an approved vendor for various healthcare
products in a few public and private institutions.
Company’s products are sold in more than 50 countries and exports account for more than 50% of its revenues. It has made
product registrations for key therapeutic areas like oncology and tuberculosis and obtained key certifications for its manufacturing
facilities and products.
Company has seven manufacturing facilities for Pharma products – 4 in India and 3 abroad – and two for specialty chemicals
in the country. Facilities are spread over AP, Uttarakhand, Karnataka and WB in the country and Spain and Mexico. Out of three R &
D centers, one is located at Hyderabad and one each in UK and Spain. Apart from this, Company also has presence in USA and China
through global support offices. Expenditure on R & D is about 3% of revenues.
A new molecule which finds application in the Anti-ageing segment is being developed at Company’s R&D centre and is
currently undergoing product stability testing.
In all, as on March 31, 2012, the Company has 3 Indian and 9 foreign subsidiaries - all 100% owned. Total equity investment
in subsidiaries was ` 87.17 Crs. as on March ’12. Apart from this, Company has lent ` 77.52 Crs. to subsidiaries by way of short term
advances.
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Vivimed Labs Ltd.
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Pharma
VLL is a global supplier for APIs and key intermediates with presence in Anti-ulcer, Anti- virals and therapeutic segments.
Formulations covers therapeutic areas like oncology, tuberculosis, anti-malarials, pain management etc. Company also undertakes
contract manufacturing of APIs and formulations. It is focusing on product registrations in Europe, Russia and other CIS countries.
Product range includes
- Capsules / Tablets: Flexasur, Spasmocip Plus, Codarin, Butaproxivon, Valenzia, Arachitol, C Pink.
- Syrups and Liquids: Codarex, Inalgel, Viscodyne, Brozedex (sugar-free), Celadrin, Codeine Linctus, Candid Lotion, Candid
Mouth Paint.
- Small Volume Parenterals: Otrivin, Nasivion Moist (Spray), Nasivion (Nasal Drops), Candbiotic Ear Drops, Otrivin Nasal
Spray, Tobrop.
Segmentwise Sales
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Vivimed Labs Ltd.
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Uqifa Acquisition
VLL acquired Uquifa, a 75 year old leading manufacturer of generic and off patent APIs and intermediates, in November 2011.
Uquifa has three USFDA, MHRA and EMEA approved manufacturing facilities – two in Spain and one in Mexico which provides
proximity to USA and Europe markets. It has about 60 product offerings in 15 thherapeutic classes which are supplied in 70 countries
to over 100 customers. Anti- ulcer segment contributes 40% of its total sales. Other segments include Oncology, HIV, Veterinary and
General therapeutic. It supplies to top 10 generic pharma players in the world and has relationships with leading innovator companies.
Pfizer and Glaxo SmithKline are one of the important customers. It has already filed 150 active DMFs worldwide and 47 Type-II DMFs
with USFDA. The team possesses the capability to handle complex chemistry (lyophilisation, hydrogenation and chiral chemistry).
This acquisition will enable VLL to leverage Uquifa’s presence as a leading global API manufacturer in the regulated markets
apart from capitalizing on low cost Indian manufacturing base. Company proposes to complement Uquifa with captive formulation
facilities and use its R & D capabilities to increase regulatory filings from Uquifa. Cross selling of products to customers of both
companies will also aid growth.
Company proposes to bring about savings in purchase of raw materials to the extent of US $ 1.34 Million. It is also planning to
shift production of certain APIs and intermediates to India. Facilities for production of 3 such intermediates are almost ready and were
expected to commence production in Oct. ’12. Niche products and products without any margin pressures will continue to be produced
in overseas plants. With all these measures Company expects to increase Uquifa EBITDA margins from 13-14% to ~ 17%.
The acquisition was financed by a balanced mix of debt and equity. The investment consideration of US$ 55.60 million was
paid through an equity infusion of US$ 20.60 million into Vivimed Labs Spain S.L., an SPV formed to acquire Uquifa Spain and Uquifa
Mexico, debt funding of US$ 25 million and the balance US$ 10 million by way of deferred payment. Company expects to generate
enough cash flows in Spanish & UK subsidiaries to repay the debt raised in their books.
Formulations Companies acquisition
In Oct. ’11, VLL acquired a 30 year old Kolkata based company, Klar Sehen Pvt. Ltd. (KSL), with cGMP compliant manufacturing
facilities in Kolkata and Hyderabad. KSL operates in the niche ophthalmic segment with marketing presence in North-East, Bihar
and AP – occupies top position in East India and fifth position pan India. It owns 50 trademarks and well known brands like Renicol,
Lysicon-V, Diconal, ODAL, Care Tears and Dexacort. Product basket comprises of about 40 products.
It also acquired Hyderabad based Octtantis Nobel Labs Pvt. Ltd.(ONL), a branded formulations marketing company, in September
2011. ONL has presence in both pharma and nutraceuticals segments. Product basket consists of about 20 products including brands
like Ironin, Xyrex, Xypod, Nutriva, Coltamycin. It has presence in AP, Bihar, Jharkhand and entire North East.
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Vivimed Labs Ltd.
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Vivimed Labs Ltd.
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Vivimed Labs Ltd.
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Specialty Chemicals
Specialty Chemicals are widely used in personal care products as active ingredients in the form of emollients, foaming agents
and stabilizers. Their performance characteristics (thickening, foaming, imparting smoothness and conditioning), represent key
functionalities sought in several personal care products. Skin Care & Hair Care constitute 85% of personal care ingredient market. The
Indian personal care industry typically uses Specialty Chemicals such as surfactants, fragrance compounds, polymer compounds, and
UV filters as active ingredients. Growing demand is leading to development of high-end specialty active ingredients with a stronger
emphasis on organic (natural) ingredients.
The company specializes in anti-dandruff agents, anti-fungal agents, hair loss actives, hair growth agents, emollients and guar
gums for use in shampoos, conditioners and styling products.
The Indian personal care ingredients market is currently estimated at ~ US$ 300-350 million, growing at 12% p.a. The
market will henceforth grow at 14% p.a. with increasing consumer preference for products with better functional benefits. Changing
demographics have resulted in rising personal care products demand in the country and thereby personal care ingredients demand.
However, market is very competitive with 1500 manufacturers with small and medium sized companies taking more than 50% market
share. As a result of competition, price sensitivity is high restricting spend on R & D.
Company operates two Speciality Chemical manufacturing facilities at Bidar (Karnataka) and Bonthapally, AP. It is a global
supplier of certain intermediates and active cosmetic ingredients for oral care, skin care, sun protection, hair care, preservatives and
antimicrobials. It offers diversified product portfolio to personal care industry and shares strong relationships with global personal
care majors. It has wide presence in developed and emerging markets. Its product basket comprises more than 55 active ingredients ,
catering to the range of different applications. Company is expanding its product basket to cater to automotive ( used in automobile
safety air bags), biocides and plastic electronics.
A manufacturing and marketing partnership with ISP Inc. (USA) for sunscreens was announced and new manufacturing facilities with
1000 tonnes capacity were commissioned and started during FY ’11. However, ISP was acquired by Ashland and this arrangement
is supposedly being examined again in the light of developments. Also, demand for the product has not picked up as projected and
Company is utilizing only 300-400 tonnes at present. Plant may be used for other purposes.
This division is expected to grow primarily in organic manner. Efforts for growth are directed towards increasing business
with existing clients, attracting tier II customers (regional brands) and establishing growing presence in emerging markets. Company
has robust pipeline of 20 molecules under various stages of development/customer approvals.
Company has completed 11 customer audits in FY ’12 which is expected to drive volumes in FY ’13, apart from additional
volumes from new product launches in FY ’12.
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Vivimed Labs Ltd.
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Vivimed Labs Ltd.
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Vivimed Labs Ltd.
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Capex
Company is enhancing capacities across the pharmaceutical value chain to strengthen its global presence (especially regulated
markets), leveraging India’s cost efficiencies.
VLL has set up its own sector-specific Special Economic Zone (SEZ) in Srikakulam District, AP, which will help the company
to support its growing demand from the export markets and also from upcoming industries for manufacture of specialty chemicals
as well as APIs. It has received in principle approval from the authorities and has acquired 327 acres of land for this project. Total
cost of the project is expected to be around ` 120 Crs. and it is expected to be fully commissioned in FY ‘15.
The company is also setting up a Pharmaceutical formulation plant in Chouttuppal, Andhra Pradesh, to be utilized for
manufacturing tablets and capsules in accordance with USFDA and cGMP standards. Land acquisition for this facility has been
completed and initial activities such as obtaining approvals, fencing the land, etc., are in progress. Total cost of this project is
expected to be around ` 40 Crs. and it is expected to be fully commissioned in FY ‘14.
Additionally, to cater to the growing global demand for specialty chemicals, VLL has acquired additional land acreage
in both Bidar and Bonthapally manufacturing facilities and is expanding these facilities. It has also completed de-bottlenecking
and upgrading to cGMP standards of its pharmaceutical manufacturing facility at Jeedimetla. Total project cost of these three
expansions is around ` 30 Crs.
Capex details
Pharmaceuticals
Project Cost ` Crs. Details Rationale Expected Commissioning
Expansion of Jeedimetla 5 Liquid Orals,Tablets, Capsules &
Ointments
Debottlenecking & upgrading to cGMP &
EU norms
Commissioned
Formulation Dosage
facility at Choutuppal
Specialty Chemicals
Expansion of
Bidar & Bonthapally
facilities
Pharma & Specialty Chemicals
40 Tablets & Capsules To produce as per USFDA and cGMP
standards
25 Active ingredients for home & personal
care, anit-microbials, perservatives
SEZ in Srikakulam, AP 120 Synthetic Organic Chemicals &
commercial R & D
To cater to the growing global demand for
specialty chemicals
Setting up its own sector specific SEZ to
support global & domestic demand for
APIs and specialty chemicals. Acquired
about 327 acres of land & recd.
In principle apporval.
2013-14
2012-13
2014-15 (Phase I)
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Vivimed Labs Ltd.
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Financials
Specialty Chemicals (SC) formed ~ 50% of revenues in FY ’12 and reported growth of 6% to ` 336.3 Crs. in FY ’12 over previous
year. Within Specialty Chemicals, Personal Care and Photo Chromatics grew 10% & 18% respectively. AMET (Africa Middle East
and Turkey) region reported growth of 30% during the year albeit on small base. While largest region - Asia Pacific - grew 14%, North
America reported growth of 21%.
In Pharma, API formed 51% of total Pharma revenue of ` 332 Crs. as a result of Uquifa acquisition. The segment revenue went
up by 233% y-o-y. However, organic operations, FDF category, clocked turnover of ` 150 Crs., a growth of 50% over previous year.
Within that, CRAMS business contributed ` 105.7 Crs., branded exports ` 21 Crs. and institutions ` 23 Crs. Retail branded domestic
formulations business (acquired recently) reported revenues of ` 12.7 Crs. Company exported to Russia/CIS and appointed personnel
to cover African countries also and has already initiated registrations in eight African countries.
Consolidated revenues have gone up 9% q-o-q in Q1 FY ’13. Standalone revenues, however, have degrown during the quarter
on y-o-y basis mainly because one plant at Hyderabad was closed for one month for regulatory audit. Also, imaging chemicals business
is slowly being phased out due to lack of demand. Company incurred forex loss of ` 2 Crs. during the quarter. Interest costs have nearly
doubled on q-o-q basis. This was partly due to some one time costs like renewal and upfront fees charged by lenders.
Gross consolidated debt of the Company has gone up to ` 530 Crs. – up by ` 290 Crs. Out of the increased amount, ` 128 Crs.
was utilized towards Uquifa acquisition and ` 84 Crs. for other capex. Rupee debt is only ` 80-100 Crs. of the total debt and rest is in
foreign currencies. Apart from debt taken for acquisitions and expansion of existing facilities and SEZ, working capital debt has also
gone up due to step up of supply of intermediates to Uquifa and new products in the pipeline. Debt raised in Indian books can be
repaid from cash flow generated from Indian operations.
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Vivimed Labs Ltd.
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Consolidated Financial Results
Period Ended (` Crs.) FY '10 FY '11 FY '12 June '12
Revenues 350.01 416.93 671 274.33
(Inc.)/Dec. in stock in trade -2.45 -4.59 -18.35 -29.75
Raw Materials Consumed 205.94 241.56 355.74 139.69
Staff Cost 22.07 19.97 34.22 14.24
Other Expenditure 54.85 75 166.41 88.19
Total Exp. 280.41 331.94 538.02 212.37
EBITDA 69.6 84.99 132.98 61.96
EBITDA Margin (%) 19.89 20.38 19.82 22.59
Depreciation 8.73 9.15 26.79 14.13
Interest 21.23 20.6 28.38 15.89
Tax 8.63 6.43 14.68 5.79
Non Recurring Items -0.31 2.14 0.1 0
Net Profit 30.7 50.95 63.23 26.15
Net Profit Margin (%) 8.77 12.22 9.42 9.53
Equity Capital (FV ` 10/-) 9.97 10.16 13.93 13.93
Equity Shares (in Crs.) 0.997 1.016 1.393 1.393
Reserves 123.13 169.98 278.87
EPS (`) 30.79 50.15 45.39 18.77
Book Value (`) 133.50 177.30 210.19
ROE (%) 23.07 28.28 21.59
Segmentwise Results
Period Ended (` Crs.) FY '11 FY '12 June '12
Specialty Chemicals
Revenues 372.9 343.9 105.17
EBIT 59.32 60.07 19.7
EBIT Margin (%) 15.9 17.5 18.7
Pharma
Revenues 99.72 345.45 190.84
EBIT 16.54 46.12 28.11
EBIT Margin (%) 16.6 13.4 14.7
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Vivimed Labs Ltd.
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Comments
u To drive growth in specialty chemicals segment Company is enhancing its product range with existing customers and adding
new customers through collaborative research and manufacturing alliances with global majors. Recently completed customer audits
improves the chances of increase in supply orders.
u Apart from developed world, Company sees India as a big opportunity for Specialty Chemicals as net imports for some
applications are increasing.
u Acquisition of KSL & ONL with presence in East and South India respectively will alter VLL’s formulation business from pure
play institution business to a more balanced between institution and retail.
u Foray in to retail branded formulations through acquisitions will enable Company to increase its product offerings and extend
domestic market reach. Company expects 40-50% jump in revenues for the segment over previous year’s consolidated figure of ` 23
Crs.
u Company is focusing on improving product and process efficiencies in acquired API business besides taping their existing
customers for supply of finished dosages.
u In house API availability will help expand formulations capacity, strengthen the value chain and pave the way for increased
filings of dossiers.
u With acquisition of Uqifa, while Uquifa gets supply side efficiencies and expertise of VLL on pharma, VLL would leverage its
pre-eminent position in APIs and robust pipeline of filings to accelerate growth across Europe and America.
u Future earnings growth will depend on synergies attained with API business and proper utilization of new facilities being set
up by Company in India including SEZ.
• • • • • • • • • •
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