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Specialty Chemicals & Pharmaceuticals Initiating Coverage Vivimed Labs Limited November 12, 2010 BUY HIGH RISK PRICE Rs.338 TARGET Rs. 450 STRENGTH: High Entry Barriers, Early mover advantage, Growing end user industry, Strong Specialty Clientele, Consistent Past Performance WEAKNESS: Difficult to make inroads to acquire Chemicals & new customers. OPPORTUNITIES: Foray into branded formulations space in the Russia/CIS region; Capacity Expansion in Specialty chemicals & Pharmaceuticals. THREAT: Pharmaceuticals Exchange rate volatility, Dilution risk. High Entry Barriers to become a preferred supplier SHARE HOLDING (%) Customer qualification norms are complicated, stringent, and costly making the registration Promoters 52.2 a time consuming process. It takes around 3-5 years for a company to make inroads to FII 6.4 become a preferred supplier for major global companies. Business is normally not done on FI / MF 0.2 “price” but on relationships, product portfolio, service levels and quality standards. Body Corporates 5.8 However, quality of the product takes the topmost level in the pyramid for clients since they Public & Others 32.6 invest a lot of time and money to get in a new supplier as any compromise on the quality front could tarnish the brand value of the product and the company as well. STOCK DATA Strong clientele base Reuters Code VVMD.BO Vivimed is an approved supplier to global personal care giants like L’Oreal, Unilever, P&G, Bloomberg Code VILA IN and Johnson & Johnson etc., wherein the contracts are generally long-term in nature. In the specialty pharmaceuticals division, it supplies to major pharmaceutical companies like BSE Code 532660 Merck, Lupin, Novartis, Cipla, and AstraZeneca etc. NSE Symbol VIVIMEDLAB Market Rs. 3876.8 mn Continuous capacity expansion in existing plants and setting up of an SEZ Capitalization* US$ 86.2 mn Capacity expansion is a continuous and an ongoing process for Vivimed. Vivimed has been undertaking Brownfield expansion by building new blocks at its Bonthapally plant catering to Shares 114.7 mn specialty chemical segments of Skincare, Hair & Oral care and also at its Jeedimetla (Pharma) Outstanding* plant. Vivimed is also setting up a pharmaceutical manufacturing plant in Choutuppal, 52 Weeks (H/L) Rs. 351/114 Hyderabad (AP) and has received an in-principle approval for setting up an SEZ, on 250 acres of land for its specialty chemicals business. Avg. Daily 85,474 Shares Volume (6m) Alliance with ISP Vivimed has entered into a manufacturing alliance with US-based International Specialty Price Performance (%) Products (ISP) in Jun’10 for sunscreens, with full support from ISP's global sales, marketing 1M 3M 6M and technical service teams. We believe this alliance would generate revenue of around Rs. 421 mn in FY12E. 7 54 114 200 Days EMA: Rs.218 Focus more on Branded formulations Vivimed has forayed into formulation exports to Russia / CIS countries, where we believe *On fully diluted equity shares the Company will witness a CAGR growth of 16.5% in sales for the period of FY09-FY12E. OUTLOOK & VALUATION Vivimed backed by its strong product profile has delivered excellent numbers in the past. Its revenue has grown at a CAGR of 37% from FY07-10, while the EBITDA and PAT have grown at a CAGR of 32% and 34%, respectively. Vivimed has embarked on a Rs. 1.58 bn expansion plan to be executed over the next three years, which we believe will be a significant growth driver. Keeping in mind the Company’s strong track record, established customer base, increasing product profile and increasing demand for its products backed by volume expansion, we expect its revenue and PAT to grow at a CAGR of 27.7% and 35.8% over FY09- 12E. It is currently trading at a P/E of 6.8x its FY12E diluted EPS of Rs. 50 and we recommend a “BUY” with a target price of Rs. 450 (9x FY12E EPS). ANALYST Suneel Rao | +91 22 4093 5068 KEY FINANCIALS [email protected] Y/E Revenue RPAT AEPS AEPS P/E ROCE ROE P/BV SALES: Mar. (Rs mn) (Rs mn) (Rs) (% Ch.) (x) (%) (%) (x) Devang Shah | +91 22 4093 6060/61 FY09 2761.2 193.5 20.6 21.3 16.4 11.4 20.7 3.1 [email protected] FY10 3434.9 310.1 31.1 51.2 10.9 12.9 25.1 2.3 Nishit Shah | +91 22 4093 5074 FY11E 4116.1 391.4 39.3 26.2 8.6 14.2 23.7 1.8 [email protected] FY12E 5598.0 572.1 50.0 27.1 6.8 15.7 26.0 1.5 Please refer to important disclosures at the end of the report For private Circulation Only. Sushil Financial Services Private Limited Member : BSEL, SEBI Regn.No. INB/F010982338 | NSEIL, SEBI Regn.No.INB/F230607435. Office : 12, Homji Street, Fort, Mumbai 400 001. Phone: +91 22 40936000 Fax: +91 22 22665758 Email : [email protected] Please refer to important disclosures at the end of the report For private Circulation Only. Vivimed Labs Ltd. COMPANY OVERVIEW Incorporated in 1989, Vivimed Labs Ltd (Vivimed) is a predominantly a speciality chemical manufacturer with primary focus on the Home and Personal Care (H&PC) segment. It also is into manufacturing of pharmaceutical API’s and formulations. However, the H&PC Actives Division has been the key mover and the driver that has enabled Vivimed Labs to build its international reputation as it exports to more than 50 countries. H&PC Actives Division: Vivimed’s extensive range of speciality chemicals caters to segments such as: Divisions Products End Use VIV-20 Antibacterial for Toothpastes and Mouthwash VIVCAL – G Nutraceutical, Dental enamel protection Oral Care VIVHEX Antibacterial for Mouthwash VIVHEX – G Antibacterial for Mouthwash AVIS Broad Spectrum UV – A filter CINNAMON UV – B category 1 filter BEN – 3 Oil soluble UV – A & UV – B filter Sun Care Ben – 4 Water soluble UV – A & UV – B filter OCTYNE – B Oil soluble UV – B filter ETONE UV – A & UV – B filter VINTOX Anti-oxidant & Anti-aging molecule VIVINOL Skin Lightening agent Skin Care TRU ALOE Skin Moisturizer C-VITE Anti Wrinkle DANTUFF – Z Broad Spectrum Anti dandruff agent DANTUFF – C Anti-fungal agent in transparent shampoos DANTUFF – K Anti dandruff & Anti-fungal agent Hair Care VIPIROX Anti dandruff agent VIVIDINE Hair growth agent CO-GUAR Emollients & Conditioners Preservatives COSVAT Anti-fungal & Anti bacterial VIVILIDE Wide Spectrum Bacteriostatic Antimicrobials VIVMAX Antimicrobial & Germicidal VIV – 20 Antibacterial for Cosmetics & Toiletries It holds a unique position in the international H&PC industry with supply-chain relationship with global leaders including - Unilever, L'Oreal, Procter & Gamble, Johnson & Johnson etc. Having exclusive tie ups with global logistics companies, Vivimed has been offering shipment, warehousing, redistribution and door delivery services to large global majors. It has a global network of offices, representatives and distributors across America, Europe, Far East and the Asia Pacific region. Vivimed Labs Europe Ltd (James Robinson Ltd) – Acquired in the year 2008, Vivimed labs Europe Ltd is a leading global supplier of dyes used in a host of personal care and consumer products ranging from hair dye intermediates and photographic developer chemicals to ophthalmic lenses and fluorescent dyes for textiles, inks and coatings. This acquisition has seamlessly positioned Vivimed in the larger and high value space of high- end specialty chemicals. November 12, 2010 2 Vivimed Labs Ltd. Vivimed Labs USA, Inc. (Harmet International Ltd) – acquired in the year 2009 as a US hub to increase its global footprint and cut down the time to market for global customers Harmet International has become a strategic and relevant entity. Revenue Growth H&PC Actives Division 3000 2615 2500 2076 2000 1500 1275 992 1000 500 0 FY07 FY08 FY09 FY10 Source: Annual Report Specialty Pharma Division: This specialty division has its inherent strengths in drug delivery and drug discovery with focus on providing cures in the oncology space, arthritis, syndrome X, macular degeneration, psoriasis and stress. Moreover, Vivimed is an active player in CRAMS (Contract Research and Manufacturing Services) segment providing vendor partnerships ranging from molecular research to collaborative manufacturing. Vivimed has shown a steady growth in its revenues across segments over the past four years. Revenue Growth Speciality Pharmaceuticals 900 820 800 686 700 600 535 500 400 348 300 200 100 0 FY07 FY08 FY09 FY10 Source: Annual Report November 12, 2010 3 Vivimed Labs Ltd. Vivimed derives around 58% of its revenues from exports to around 50 countries across the world. A detailed breakup of the export and the domestic business contribution to the revenues of the company is given below. Segmental Breakup 2001 Export 1591 481 Total 1433 Domestic 1170 1329 45 Export 31 17 775 Specialty Domestic 655 518 Pharmaceuticals 1957 Export 1560 464 658 Specialty Chemicals Domestic 516 812 Rs. in Mn 0 300 600 900 1200 1500 1800 2100 FY10 FY09 FY08 Source: Company Vivimed has five state of the art manufacturing plants at various locations in India and two R&D facilities – one in Hyderabad & the other in Huddersfield, UK. It has also received in- principle approval for setting up an SEZ, on 250 acres of land, in Sirkakulam, Andhra Pradesh. Manufacturing Plant Locations Plant Location Manufacturing Details Bidar Northern Karnataka Specialty Chemicals - Bonthapally Hyderabad Specialty Chemicals - Dosage forms such as liquid orals, Formulations and Jeedimetla Hyderabad tablets capsules and R&D ointments in various therapeutic areas. Haridwar Uttarakhand Formulations Sterile Products Non-Sterile Syrups, Kashipur Uttarakhand Formulations tablets, capsules and dry powders. Source: Company November 12, 2010 4 Vivimed Labs Ltd. INVESTMENT ARGUMENTS High Entry Barriers to become a preferred supplier Specialty chemicals forms an important part of the personal care product even though on volume basis its presence in the product is approximately in the range of 0.1% to 0.5%.
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