Researching It Right - Vimta Labs

Vimta Labs (VLL), which is in the business of contract research and testing activities, seems to be a good investment opportunity at its current levels and there are varied compelling reasons why we think so. It includes the good financial performance for Q4FY09, its noteworthy dividend payment history with a dividend yield of 3.63 per cent; good institutional holding in the counter and last but not the least, none of the promoters’ shares are pledged at the current levels. Another noticeable factor is that the company has high cash flows. Further, along with all these factors, the scrip is also well placed on the valuation front wherein its CMP of Rs 23 (FV Re 1) discounts its FY09 earnings by 11.50x (EPS of Rs 2). Even the EV/EBITDA of 3.26x is well placed. Additionally, its new facility is expected to drive growth in FY10. Considering these factors we recommend that investors should buy the scrip at its current levels with a target price of Rs 35 in the next one year.

As regards its business, VLL’s activities are spread over four areas - contract research, clinical reference laboratory services, testing and validation, and environmental consultancy. Regarding the capacities, in the last two years, VLL has invested in setting up a good infrastructure across various states in India. As for its research facilities, it has one regional lab in Chennai and two satellite labs at Vijaywada and Visakhapatnam. Going forward, the company has plans to have four regional labs and at least one satellite lab in each of the major states.

Till date the capacity constraints and delay in commissioning of the new facilities have affected the revenue and earning growth of the company. But with the new facility already in place, Vimta is ready to tap the huge opportunities in contract research and manufacturing services. Though an early sign of recovery has already been seen in Q4FY09, the actual ramp-up in the business will be seen from FY10E onwards. The clinical research outsourcing (CRO) market in India is estimated at USD 100 million and is expected to reach USD 300 million by 2010. With the new facility already in place, VLL is ready to tap these huge opportunities.

As mentioned earlier, the company has been paying dividend since FY02 and at current levels the dividend yield stands at 3.50 per cent (cum dividend). Further, it also generates higher cash flows despite lower net profit. The reason is that recently the company has ramped up its facilities and as a result it has a depreciation of Rs 14.83 crore which is 3.35 times of its equity. The company also has good MF and FII investments to the tune of 22.56 per cent and 7.64 per cent respectively.

On the financial front, the topline of the company has witnessed growth but as mentioned earlier, its bottomline has got impacted on account of higher depreciation. For FY09, its topline stood at Rs 81.60 crore and bottomline at Rs 4.04 crore as compared to Rs 76.69 crore and Rs 6.25 crore respectively for FY08. But if we take look at the Q4FY09 results, it clearly shows that there are some signs of recovery in the bottomline too which stood at Rs 1.61 crore as compared to Rs 1.31 crore in Q4FY08. Considering all these factors, our recommendation to investors is to buy the scrip at current levels with a target price of Rs 35 in the next one year.