Vivimed Labs Ltd Result Update: Q3 FY 12

C.M.P: Rs. 405.00 Target Price: Rs. 466.00 Date: March 24 th 2012 BUY

Stock Data: SYNOPSIS

Sector: Pharmaceutical

Face Value Rs. 10.00 Vivimed Labs Ltd engages in the specialty chemicals & pharmaceuticals 52 wk. High/Low (Rs.) 413.00/212.50 Volume (2 wk. Avg.) 34000 businesses in India. BSE Code 532660 During the quarter ended, the robust Market Cap (Rs. in mn) 5643.27 growth of revenue is increased by

8.20% to Rs.928.50 million. Share Holding Pattern Vivimed Labs Ltd has acquired Uquifa, a 75-year-old manufacturer of pharma

APIs and intermediates with operations in Spain and Mexico. Vivimed has offices in India, China,

Europe & USA, with manufacturing 1 Year Comparative Graph facilities focused around Hyderabad city in India. Vivimed Labs has floated three overseas subsidiaries, either directly/ through its subsidiary companies. Net Sales and PAT of the company are expected to grow at a CAGR of 32%

and 44% over 2010 to 2013E BSE SENSEX Vivimed Labs respectively.

Years Net sales EBITDA Net Profit EPS P/E

FY 11 3100.97 556.30 277.63 27.32 14.83

FY 12E 4034.73 815.85 395.91 28.41 14.25

FY 1 3E 4841.68 985.28 496.86 35.66 11.36

Peer Group Comparison

Market Cap. Name of the company CMP(Rs.) (Rs. mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%)

Vivimed Labs 405.00 5643.27 27.32 14.83 2.84 20.00

Dr. Reddy’s Lab. 1674.00 28384.40 51.10 32.76 4.71 225.00

Cipla Ltd. 302.60 24296.40 13.03 23.22 3.68 140.00

Lupin Ltd. 506.20 22608.01 17.89 28.30 7.17 150.00

Investment Highlights

Q3 FY12 Results Update

Vivimed Labs announced a phenomenal rise in standalone net sales for the quarter ended December 2011. During the quarter, the profit of the company rose 4.20% to Rs 94.58 million from Rs 90.77 million in the same quarter previous year. Net sales for the quarter for the quarter surged 8.20% to Rs 928.50 million, while total income for the quarter jumped 8.20% to Rs 928.50 million, when compared with the prior year period. It posted earnings of Rs 6.79 a share during the quarter.

Quarterly Results - Standalone (Rs in mn)

As At Dec-11 Dec -10 %change

Net sales 928.50 858.13 8.20%

PAT 94.58 90.77 4.20%

Basic EPS 6.79 8.93 (23.99%)

Break up of Expenditure

Segment wise Revenue

Acquisition of Uquifa Spain and Uquifa Mexico

Vivimed Labs Ltd has acquired Uquifa, a 75-year-old manufacturer of pharma APIs and intermediates with operations in Spain and Mexico. In a move to bring in strategic growth into its product mix and expand the footprint in Europe and the Americas, the Company has taken a measured stride with the acquisition of Uquifa Spain and Uquifa Mexico.

Company Profile

Vivimed Labs Ltd was originally incorporated as Emgi Pharmaceuticals & Chemicals Private Limited with Registrar of Companies of Karnataka, Bangalore & subsequently converted into a public limited company on April 21, 1994. The name of the company has been changed to Vivimed Labs Limited on April 22, 1997.

The company was originally promoted by A. M. Rao. In 1989 Santosh Varalwar and Subhash Varalwar acquired Emgi Pharmaceuticals and Chemicals Limited and commenced manufacturing of bulk drugs in 1991.

The company’s manufacturing unit is located at Bidar, Karnataka, where it was originally engaged in the manufacturing of Active Pharmaceutical Ingredients (APIs) and bulk drugs like Ibuprofen etc. However, due to downward price movement in the products of the company during 1995, it gradually moved over to manufacturing specialty chemicals and cosmetic ingredients like Triclosan, Avis etc. catering to global and domestic markets.

The Specialty Pharma division of Vivimed is a merged entity of VVS Pharma and Creative Healthcare. The Specialty Pharma Division has its inherent strengths in drug delivery ad drug discovery. The division is focused on providing cures in oncology space, arthritis, syndrome X, macular degeneration, psoriasis and stress. Vivimed has offices in India, China, Europe and USA, with manufacturing facilities focused around Hyderabad city in India and across nearly 50 countries. The company is now set to expand its operations into the fast-emerging and highly demanding sector of Printable Electronics and Organic Semiconductors.

Vivimed Products

Vivimed brands touch the lives of people around the world through its products segment in various areas with different ingredients within daily routine. Vivimed products are acknowledged in following ways:

Oral care Maintaining good oral hygiene is an essential part of overall healthcare and well- being. Vivimed's products for Oral Care find applications in some of the most effective products in the market for good oral health-antibacterial for toothpaste and mouthwash, neutraceuticals for dental enamel protection.

Sun care The most important skin-care products available for the prevention of wrinkles and skin damage are sunscreens.

Exposure to damaging ultraviolet light from the sun's rays, UV-A or UV-B, accounts for 90% of the symptoms of premature skin ageing such as wrinkles and skin cancers. UV-A radiation (320-400nm) is linked with the loss of skin elasticity, wrinkling and premature ageing, whilst the more powerful UV-B radiation (290- 320nm) is linked to sunburn, cell damage and cancer risk.

Skin care Vivimed's range of skin care ingredients covers active anti-wrinkle, anti-ageing compounds, anti-oxidants, skin-lightening actives and emollients. Proven care in a harsh world - the beauty of chemistry.

Hair care Under the well-known Jarocol® trademark, Vivimed offers a full range of hair dye intermediates for use in permanent, semi-permanent and temporary colorants. They offer a variety of products, including anti-dandruff agents, UV absorbers, hair loss actives and guar gums for the formulation of shampoos, conditioners and styling products.

Thickeners and Conditioners

Vivimed's range of speciality Co-Guar thickeners and conditioners is derived from natural extract of Guar bean. A range of cationic guar-gum products across a spectrum of pH and viscosity profiles cover many personal care and cosmetic applications; thickeners for hand and face creams, lotions, body washes and shower gels; stabilisers for shampoos and conditioners which build body for hair, improve combability and add bounce.

Reversacol Photochromic Dyes

Vivimed is a world leader in the development of innovative photochromic dyes. Under the Reversacol trade name, Vivimed manufactures and markets the most comprehensive range of patented, high performance dyes available in the world. This portion have 30 vibrant colors in their dye portfolio, including a unique selection of single-molecule, neutral grey photochromic dyes.

Anti-Microbials & Preservatives

Vivimed's range of effective and established anti-microbial actives finds uses in a wide range of applications from plastics additives through to anti-bacterial hand washes. Catering to the personal care markets and industrial sectors Vivimed provides effective preservatives for a wide range of formulations.

Imaging Chemicals

Vivimed is a major manufacturer of photographic chemicals used for areas of traditional photographic imaging technology such as medical and industrial X-ray imaging, consumer photography and litho-plate production for the graphic arts industry.

Financials Results

12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) FY10 FY11 FY12E FY13E

Description 12m 12m 12m 12m

Net Sales 2125.97 3100.97 4034.73 4841.68

Other Income 0.00 0.00 0.00 0.00

Total Income 2125.97 3100.97 4034.73 4841.68

Expenditure -1716.35 -2544.67 -3218.88 -3856.39

Operating Profit 409.62 556.30 815.85 985.28

Interest -144.36 -176.31 -237.97 -271.28

Gross profit 265.26 379.99 577.89 714.00

Deprecation -43.99 -50.31 -82.97 -92.92

Profit Before Tax 221.27 329.68 494.92 621.08

Tax -55.84 -52.05 -99.01 -124.22

Profit After Tax 165.43 277.63 395.91 496.86

Equity capital 99.65 101.64 139.34 139.34

Reserves 1085.08 1348.82 1744.73 2241.59

Face value 10.00 10.00 10.00 10.00

EPS 16.60 27.32 28.41 35.66

Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) 30-Jun-11 30-Sep-11 31-Dec-11 31-Mar-12E

Description 3m 3m 3m 3m

Net sales 1039.50 952.53 928.50 1114.20

Other income 0.00 0.00 0.00 0.00

Total Income 1039.50 952.53 928.50 1114.20

Expenditure -831.68 -740.69 -737.32 -909.19

Operating profit 207.82 211.84 191.18 205.01

Interest -58.65 -69.68 -51.96 -57.68

Gross profit 149.17 142.16 139.22 147.34

Depreciation -14.12 -24.79 -20.98 -23.08

Profit Before Tax 135.05 117.37 118.24 124.26

Tax -27.02 -23.48 -23.66 -24.85

Profit After Tax 108.03 93.89 94.58 99.41

Equity capital 101.64 124.44 139.34 139.34

Face value 10.00 10.00 10.00 10.00

EPS 10.63 7.55 6.79 7.13

Key Ratios

Particulars FY10 FY11 FY12E FY13E

No. of Shares(In Million) 9.97 10.16 13.93 13.93

EBITDA Margin (%) 19.27% 17.94% 20.22% 20.35%

PBT Margin (%) 10.41% 10.63% 12.27% 12.83%

PAT Margin (%) 7.78% 8.95% 9.81% 10.26%

P/E Ratio (x) 24.40 14.83 14.25 11.36

ROE (%) 13.96% 19.14% 21.01% 20.87%

ROCE (%) 17.03% 16.26% 21.01% 22.03%

Debt Equity Ratio 1.25 1.57 1.27 1.06

EV/EBITDA (x) 9.85 7.40 6.92 5.73

Book Value (Rs.) 118.89 142.71 135.21 170.87

P/BV 3.41 2.84 3.00 2.37

Charts:

Net Sales & PAT

P/E Ratio (x)

Debt Equity Ratio

EV/EBITDA (x)

P/BV

Outlook and Conclusion

At the current market price of Rs. 405.00, the stock is trading at 14.25 x FY12E and 11.36 x FY13E respectively. Earning per share (EPS) of the company for the earnings for FY12E and FY13E is seen at Rs.28.41 and Rs.35.66 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 32% and 44% over 2010 to 2013E respectively. On the basis of EV/EBITDA, the stock trades at 6.92 x for FY12E and 5.73 x for FY13E. Price to Book Value of the stock is expected to be at 3.00 x and 2.37 x respectively for FY12E and FY13E. We recommend ‘BUY ’ in this particular scrip with a target price of Rs. 466.00 for Medium term investment.

Industry Overview

The Indian chemical and petrochemical industry was worth $83bn in 2010 and it was the third largest in Asia and 12th worldwide by volume. The industry has consistently been moving towards knowledge based speciality products but with recognition of the importance of being self-sufficient in primary feedstocks to service the growing demand for higher added value products.

The global speciality chemicals market, at $740bn represents 22% of the global chemical industry; saw a sharp rebound from the downturn in 2009.

Increasing raw material costs continued to be a major factor, accelerating further in h2 2010 and impacting on margins but this was mitigated by the increase in demand enabling some companies to improve margins and post higher sales levels. Many companies undertook restructurings to reduce costs and thus took greater advantage from higher volumes. Other companies restructured the portfolio towards even higher margin specialties and quality products.

Towards the back end of 2010 and into 2011, the level of M&A activity increased leading to further consolidation within the market with the largest deal being BASF’s acquisition of cognis. The global crisis and recovery also signaled the overall strength of Asia in chemical manufacture and the growing importance of India as both a producer and consumer of speciality chemicals.

The Indian speciality chemicals (excluding Knowledge chemicals) market was estimated at $15bn in 2010 and is forecasted to grow at 15% pa to 2015 primarily driven by the growth in the number of middle class consumers who are able to afford products which consume speciality chemicals. This in turn is underpinned by growth in exports to meet the demands in existing global markets for competitively priced solutions to customer needs.

Due to the investment in base petrochemicals and other feedstock within India, MNEs within the speciality chemical industry are focusing on India as a manufacturing base for both the local and global markets.

Pharma industry:

The Indian pharmaceutical market is expected to grow to US$ 55 billion by 2020 from the 2009 levels of US$ 12.6 billion, as per a McKinsey & Company report titled “ India Pharma 2020: Propelling access and acceptance realising true potential”. The industry further holds potential to reach US$ 70 billion, at a CAGR of 17 per cent.

India’s pharmaceutical industry constitutes of about 8 per cent of the world’s pharmaceutical production. Over the last couple of years, Indian pharma companies have been increasingly targeted by multinationals for both collaborative agreements and acquisition, as per a Espicom report titled, “The Pharmaceutical Market: India Opportunities and Challenges”.

Sector Structure/ Market Size

The US$ 12 billion valued pharmaceutical industry in India is expected to grow at an annual compound annual growth rate (CAGR) of 10-11 per cent. The industry spends around 18 per cent of its revenue on research and development (R&D).

India is one of the most significant emerging markets for the global pharmaceutical industry. Moreover, India is expected to join the league of top 10 global pharmaceuticals markets in terms of sales by 2020 with the total value reaching US$ 50 billion, according to a report by PricewaterhouseCoopers (PwC).

The domestic pharma market is expected to grow at a CAGR of 15 to 20 percent to reach a value anywhere between USD 50 and 74 billion by 2020, says a PwC report titled ‘India Pharma Inc: Enhancing Value through Alliances & Partnerships’.

Growth

The drugs and pharmaceuticals sector attracted foreign direct investments (FDI) worth US$ 4.89 billion between April 2000 and August 2011, according to the latest data published by Department of Industrial Policy and Promotion (DIPP).

Indian pharmaceutical market is predicted to grow to US$ 55 billion by 2020 from US$ 12.6 billion in 2009, according to a report by McKinsey.

On back of a high middle-class population base, improvements in medical infrastructure and the establishment of intellectual property rights, the Indian pharma industry is estimated to grow manifold.

Generics

Generics will continue to dominate the market while patent-protected products are likely to constitute 10 per cent of the pie till 2015, according to McKinsey report ‘India Pharma 2015 - Unlocking the potential of Indian Pharmaceuticals market’. Moreover, as per a press release by research firm RNCOS, the report titled ‘Booming Generics

14 Drug Market in India'. The report further projects the Indian generic drug market to grow at a CAGR of around 17 per cent between 2010-11 and 2012-13.

India tops the world in exporting generic medicines worth US$ 11 billion. Currently, the Indian pharmaceutical industry is one of the world's largest and most developed, according to Mr Srikant Kumar Jena, Union Minister of State for Chemicals and Fertilisers.

• Dr Reddy's Laboratories Ltd has entered into a MoU with Tokyo-based Fujifilm Corporation to form a joint venture (JV) in Japan. The venture would develop, manufacture and promote generic drugs in Japan

• Ranbaxy Laboratories announced that it is on track to launch the generic version of the world's largest-selling drug, Lipitor-the anti-cholesterol pill, on November 30, 2011 in the United States (US), as per Tsutomu Une, Chairman, Ranbaxy

• Natco Pharma has applied for India's first compulsory licence to sell a generic version of Bayer's patented medicine, stating in its application that the German company's drug was unaffordable for the average Indian

• Natco Pharma has also entered into an exclusive agreement with Mabxience, part of Chemo Sa Lugano of Switzerland. Natco will purchase four drug substances (biogenerics) from Chemo Sa Lugano and use them for manufacturing finished dosage pharma formulations

Investments

• Strides Arcolab Ltd, maker of intellectual property led pharmaceutical products announced that it has received US FDA approval for clindamycin injection, USP, an antibiotic used to treat bacterial infections

• Sanofi-aventis Group is setting up its largest vaccine making facility in Hyderabad. "The new plant, our biggest facility in the world, is coming up here," according to Christopher A Viehbacher, Chief Executive Officer, Sanofi-aventis

15 • GlaxoSmithKline (GSK) has set aside US$ 1-2 billion to support its expansion plans in India. "We can afford a deal worth US$ 1- US$ 2 billion in the Indian pharmaceutical space," as per Andrew Witty, global CEO, GSK

• Lupin is set to enter the US oral contraceptive market. The company has received final approval from the US Food and Drug Administration (USFDA) to market a generically similar version of Watson's oral contraceptive NOR-QD tablets

• Daiichi Sankyo Company Ltd and Ranbaxy Laboratories Ltd have announced expansion of their business in Mexico, to maximise their hybrid business model. As part of the plan, the two companies will launch Olmesartan Medoxomil, used to treat high blood pressure, in Mexico before the year-end

• Aventis Pharma Ltd, a unit of France's Sanofi, plans to acquire unlisted Universal Medicare's nutraceuticals business to boost its consumer healthcare and wellness segment in India. Aventis was close to buying the over-the-counter (OTC) business of Universal Medicare for about US$ 109.5 million

Road Ahead

On back of aggressive marketing initiatives, the pharma companies witnessed rural market sales doubling. India's rural drug market grew by 18.8 per cent in the 12 months period ended April 2011 as compared with 10.9 per cent in the previous year.

With the focus of companies shifting to smaller deals catering to niche segments and markets, partnerships seems to be the new norm in the pharmaceutical sector. Today, domestic pharmaceutical majors are talking less of patent litigation and more of patent settlements. The fight seems to be giving way to partnerships and experts consider this the new way forward. Companies such as Ranbaxy and Dr Reddy’s were known for big acquisitions.

Interestingly, the international drug-makers have introduced generic or low-priced version of popular medicines and have also decreased prices of their existing products - in order to increase their share in the globally important market - in India. The Indian-makers business model is built around selling large volume of cheap generic

16 medicines at lower margins in the country, to add to twin purpose of affordability and popularity.

"The industry posting healthy growth consecutively for the second year reflects the inherent strengths of the industry and improving healthcare standards in the country... demand for drugs and pharmaceuticals is on the rise, and is likely to continue next year as well. The nutraceutical segment will continue to have better- than-average growth with people getting more conscious of their general health and well-being," as per Ganesh Nayak, Executive Director, Zydus Cadila.

______Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.

Firstcall India Equity Research: Email – [email protected] C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods A. Rajesh Babu FMCG H.Lavanya Oil & Gas Ashish.Kushwaha Diversified

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