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Sep 15, 2006, 01.30 PM IST | Source: Moneycontrol.com

Buy Vimta Labs with target of Rs 286: Brics PCG

Broking house, Brics PCG is bullish on Vimta Labs. It has recommended buy rating on the stock with a 12-month target price of Rs 286.

Broking house, Brics PCG is bullish on Vimta Labs . It has recommended buy rating on the stock with a 12-month target price of Rs 286.

The Brics PCG report on Vimta Labs:

“Established in 1984, Vimta provides contract research and testing services in the areas of clinical research, pre-clinical (animal) studies, clinical reference lab services, environmental assessments and analytical testing of a wide variety of products. Its clientele includes six "Fortune 500" companies, and three of world's "Top Ten" generic drug development companies.”

“The 130 roomed, centrally air conditioned state-of-the-art Laboratory, equipped with the latest analytical instruments and computerized data management systems at Hyderabad is the only one of its kind in South Asia. Vimta has earned accreditations from NABL and ANVISA Brazil in addition to regulatory approvals for its clinical trial data from USFDA.”

Investment rationale

Established player in the CRO space

“Vimta is one of the largest CRO in the country having conducted over 620 BA/BE studies and association with six "Fortune 500" companies, and three of world's "Top Ten" generic drug development companies.”

Strong expected growth

“Revenues are expected to grow at CAGR of 45% in the period between FY06-FY08 driven by strong volume growth in the clinical reference lab, CRL business. Earnings too are expected to grow in excess of 50% in FY07 and in excess of 40% in FY08.”

Betting big on CRL

“Vimta sees its CRL business as the next growth driver and has invested in setting up the infrastructure for the same. Vimta has set up around 639 franchises for collecting samples with plans for further expanding the network. We expect CRL to contribute about 30% to top line in FY08 as against 12% in FY06.”

Facility at S P Biotech Park to come on stream in FY07

“The facility at S P Biotech park which is equipped with modern advanced molecular research facility (proteomics and genomics) would provide the much needed capacities to increase volume for the CRL business as well as free capacities to grow the contract research business.”

High profitability business

“Contract research is a high profitability business with entry barriers due to the relationships involved. The company has been operating at margins in excess of 45% and we expect this trend to continue.”

Key concern

“Any further delay in the commissioning of the S P Biotech park facility would adversely impact our estimates.”

Valuation

“We have used the DCF model to value the company, with a terminal growth rate of 3%. We estimate the cost of capital for the company to be 12.2% using a risk free rate of 8%, an equity risk premium of 7.5% and a beta of 0.63. The 12-month price target of the stock works out to Rs 286, which is a 51% upside to the current market price of Rs 189.”

Conclusion

“Vimta is all set to grow again after the capacity constraints that it faced in FY06. Being one of the largest CROs in the country, the company is well poised to benefit from the increased outsourcing that would happen in light of the improved regulatory scenario in the country. The management has been very active in identifying growth avenues for the company in terms of clinical reference labs and has a plan outlined till FY10. We believe the company is on its inflection point and is all set to tread the growth path again. Buy.”

READ MORE ON  Brics PCG, Vimta Labs
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