Vimta Labs Ltd.

Brickwork Ratings upgrades the ratings for the Bank Loan Facilities of Rs. 60.63 Crs. of Vimta Labs Ltd.

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
	Previous	Present		Previous (04 Aug 2021)	Present
Fund Based	55.35	54.85	Long Term	BWR A- /Negative to Stable Reaffirmation and change in Outlook	BWR A /Stable Upgrade
	(15.00)	(15.00)
	(0.00)	(15.00)
	(0.00)	(10.00)
Non Fund Based	5.78	5.78	Short Term	BWR A2+ Reaffirmation	BWR A1 Upgrade
	(0.00)	(2.00)
	(0.00)	(2.00)
Grand Total	61.13	60.63	(Rupees Sixty Crores and Sixty Three lakhs Only)

#Please refer to BWR website www.brickworkratings.com for definition of the ratings
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure
Note: Previously, BWR had rated the facilities of Axis Bank and Kotak Mahindra Bank under the multiple banking arrangement (MBA). Now the facilities of Kotak Mahindra Bank have been fully repaid and HDFC Bank has joined the MBA.

RATING ACTION / OUTLOOK

The upgradation of ratings of Vimta Labs Limited (VLL or the company) reflects the sustained improvement and better than envisaged year-to-date business and financial profile after a stable performance in FY21. The performance is despite the Covid-19 related disruptions and challenges in FY21 and Q1FY22. The improvement is expected to be sustained in the current fiscal. The company’s performance has improved significantly during 9MFY 22 wherein the top line grew by ~35% on YOY basis, margins have been better than pre covid times, capital structure has been maintained and improved liquidity. 

The rating upgrade also factors in the Positive industry/business outlook of the diagnostics/analytical business, especially in view of the current pandemic scenario and the recent addition of 3 new laboratories to its network expanding the count to 20 laboratories across the country, aiming to tap the growing demand. The ratings continue to reflect the company’s established market position in contract research, its experienced management and long operational track record, long-standing relations with strong and diversified clientele, diversified revenue streams, consistent performance and a comfortable financial risk profile. The rating strengths are partially offset by the exposure to foreign exchange fluctuation risks, increased competition in the fragmented contract research industry, regulatory risks inherent in the clinical research industry, susceptibility to operational risks in laboratories and reputation risk associated with the safety of subjects. The sustained revival in demand and impact of the fresh waves of the pandemic will remain key monitorable over the medium term. 

Brickwork Ratings (BWR)  believes VLL’s business risk profile will be maintained over the medium term. The outlook may be revised to Positive if a sustained increase in the scale of operations, timely realisation of receivables, and higher-than-envisaged improvement in profitability result in an improved financial risk profile. The outlook may be revised to Negative if lower-than-expected revenue or profitability, a stretch in the working capital cycle due to the delayed realisation of receivables or sizeable, unanticipated capex adversely impacts the financial risk profile.

KEY RATING DRIVERS

Credit Strengths:

• Experienced management and long operational track record :

  The management is well experienced in the contract research industry, and the company has an established track record of around three decades. VLL has an established market position, with a network of 20 laboratories spread across the country, including multiple branch laboratories for food testing and clinical diagnostics. With the establishment of the wholly-owned subsidiary - M/s Emtac Laboratories Private Limited (Emtac), the company plans to take advantage of the growing electrical and electronics industry.

• Established relations with reputed and diversified clientele :

  The company has established relations with reputed clients in domestic and export markets. The company exports to the US, Europe, Dubai, China, and Malaysia, among others, and exports contributed approximately 27% to the total revenues in FY21. The average length of relations with its top clients runs to ~15 years. BWR has also taken note of further diversification in the revenue stream post the execution of the long-term Public-Private Partnership (PPP) agreement between the company and Food Safety and Standards Authority of India (FSSAI), Government of India to set up, operate and transfer the National Food Laboratory (NFL) at Jawaharlal Nehru Port Trust (JNPT), Navi Mumbai. NFL would primarily cater to testing samples of food imports and will be ISO 17025:2017 accredited by National Accreditation Board for Testing and Calibration Laboratories (NABL). The company will operate and maintain the facilities for 25 years with an extension clause. The infrastructure work has been completed using internal accruals and has formally inaugurated NFL on September 29, 2021.

• Comfortable financial risk profile :

  The company’s financial risk profile continues to be comfortable, as marked by the steadily growing revenue, stable profitability margins, robust networth and comfortable gearing and debt protection metrics. The total operating income was Rs.209.05 Crs in FY21, against Rs.180.67 Crs in FY20. During 9MFY22, the company has achieved a total operating income and net profit of Rs.202.38 Crs and Rs.17.62 Crs. Although the performance during Q1FY22 was adversely impacted by the second wave of Covid-19, the company was able to recover well since Q2FY22. The company's net worth has been growing over the years with TNW at Rs.194.32 Crs as of 31 Mar 2021. The company's capital structure is strong as marked by a D/E ratio of 0.15 times and TOL/TNW of 0.41 times as of 31 Mar 2021, which have further improved to 0.13 times and 0.39 times respectively as of 30 Sep 2021. Debt/EBITDA ratio of 0.56 times as on 31 Mar 2021 reflects the company's comfortable leverage position. Debt protection metrics were comfortable,  marked by ISCR of 24.52 times and DSCR of 3.76 times during FY21. VLL's liquidity position continues to be strong as of 31 Mar 2021 and 30 Sep 2021.

• Accreditations and certifications :

  VLL is certified for compliance to Good Laboratory Practices (GLP) as per OECD guidelines, accredited by the National Accreditation Board for Testing and Calibration Laboratories (NABL) as per ISO/IEC 17025 and is also ISO 15189:2007 certified. The Food Safety and Standards Authority of India recognised VLL as the National Reference Laboratory for the testing of Water, Alcoholic & Non-alcoholic Beverages. VLL is recognised by the Ministry of Health & Family Welfare, Government of India, Ministry of Environment & Forests, Government of India and Bureau of Indian Standards. Additionally, the company has successfully completed various regulatory audits conducted by the USFDA, European Medicines Agency (EMA) and Ukraine Ministry of Health, National GLP Monitoring Authority (NGCMA), among others. VLL also has safety certificates OHSAS 18001. The company is one of the first laboratories in Asia to be pre-qualified by the WHO for the Medicines Programme Inspection of Quality Control Laboratory. The company has successfully been audited over 70 times by regulatory authorities across the globe from various countries, such as Brazil, Denmark, France, Germany, New Zealand, India, Sweden and South Africa, along with the US FDA, UK and WHO.

Credit Risks:

• Exposure to foreign exchange fluctuations :

  Exports contributed ~27% to the total revenues in FY21, and the company is thus exposed to foreign exchange fluctuation risks. The company hedges forex risk using working capital facilities availed in foreign currency.

• Exposure to regulatory and operational risks inherent in the clinical research industry :

  The contract research industry is subject to reputation risk associated with the safety of subjects. Any adverse impact on the subject’s health due to trials carried out by the Contract Research Organisation (CRO) would result in the loss of reputation for the CRO. Furthermore, various approvals, licenses, registrations and permissions are required for routine business activities. Any delay or failure in getting approval could adversely affect the business prospects of the company. The company faces operational risks related to the short supply of any input material or consumable fire and natural calamities.

• Competitive clinical research industry :

  Growth in the Indian clinical research industry would be driven by increased outsourcing from international pharmaceutical companies. The competitive intensity is further accentuated by many large pharmaceutical players which have their captive CROs, and the CROs based in China, Eastern Europe, and other regions. The intense competition constrains pricing flexibility considering the moderate scale of operations.

ANALYTICAL APPROACH - Standalone

M/s Emtac Laboratories Private Limited (Emtac), engaged in the electrical/electronic safety testing business, is the only subsidiary of Vimta Labs Ltd. Currently, the operations of Emtac are not meaningful in comparison with the holding company. Therefore, while assigning the ratings, BWR has adopted a standalone approach and applied its rating methodology as detailed in the Rating Criteria.

RATING SENSITIVITIES

Ability of the company to add new clients, increase the scope of existing contracts to ensure steady revenue growth while managing regulatory risks, and maintain its robust financial risk profile will remain the key rating sensitivities.

Positive

• Healthy growth in revenues and earnings with improvement in a competitive position on a sustained basis.

Negative

• Deterioration in key credit metrics owing to pressure on operating profits due to competition, sharp rise in receivables levels, or fresh capex.
• Specific credit metrics which may result in a downward rating action include Total Debt/TNW exceeding 2 times, DSCR declining to below unity, and ISCR below 2 times on a sustained basis.

LIQUIDITY INDICATORS - Strong

The liquidity position is strong, as reflected in the average working capital utilisation of below 20%, during the last 12 months which provides an adequate buffer in the form of undrawn bank lines. Cash and cash equivalents were around Rs.4.62 Crs as of 30 September 2021. The current ratio was 2.20 times, and net cash accrual/total debt was 2.14 times as of 30 September 2021. The estimated cash accruals of ~Rs.69 and ~Rs.84 Crs for FY22 & FY23 respectively would comfortably cover the term debt repayment obligation of ~Rs.5-6 Crs for the same period.

ABOUT THE ENTITY

Vimta Labs Ltd (VLL), incorporated in November 1990 in Hyderabad, is engaged in the business of testing and contract research in the areas of analytical testing of food and water, drugs, environment testing, clinical research and clinical reference testing (diagnostics), biopharmaceutical testing, pre-clinical studies and testing services for electronic and electrical products. The company is listed on the NSE and BSE. The company exports to the US, Europe, Dubai, China and Malaysia, among others, and exports contributed around 27% to the total revenue in FY21 and H1FY22. The company is cGMP-compliant and is an established market leader in contract testing and analytical R&D services. Vimta is reported to have India’s largest laboratory space of 400,000 sf.ft. with a network of 20 laboratories across the country, including multiple branch laboratories for food testing and clinical diagnostics. Emtac Laboratories Pvt. Ltd (Emtac), engaged in the electrical/electronic safety testing business, is the wholly-owned subsidiary of VLL.

The company is promoted by Dr S. P. Vasireddi (Founder, Non-executive Chairman), and Mr. V. Harriman (Co-founder, Executive Director – Operations). Ms. Harita Vasireddi is the Managing Director

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 20-21 (Audited)	FY 19-20 (Audited)
Operating Revenue	Rs.Crs.	209.05	180.67
EBITDA	Rs.Crs.	53.14	30.02
PAT	Rs.Crs.	21.26	6.93
Tangible Net Worth	Rs.Crs.	194.32	172.96
Total Debt/Tangible Net Worth	Times	0.15	0.19
Current Ratio	Times	2.09	1.67

KEY COVENANTS OF THE FACILITY RATED

The terms of sanction include standard covenants normally stipulated for such facilities.

STATUS OF NON-COOPERATION WITH PREVIOUS CRA

NA

ANY OTHER INFORMATION

Nil

RATING HISTORY FOR THE PREVIOUS THREE YEARS (including withdrawal and suspended)

Facilities	Current Rating (2022)			2021		2020		2019
Type	Tenure	Amount (Rs.Crs.)	Rating	Date	Rating	Date	Rating	Date	Rating
Fund Based	LT	54.85	BWR A/Stable (Upgrade)	04Aug2021	BWR A- Negative to Stable (Reaffirmation and change in Outlook)	25Jun2020	BWR A- Stable to Negative (Reaffirmation and change in Outlook)	09Oct2019	BWR A- Stable (Reaffirmation)
		NA	NA	NA	NA	06Nov2020	BWR A- Negative (Reaffirmation)	NA	NA
FB SubLimit	LT	(15.00)	BWR A/Stable (Upgrade)	NA	NA	NA	NA	NA	NA
		(15.00)	BWR A/Stable (Upgrade)	NA	NA	NA	NA	NA	NA
		(10.00)	BWR A/Stable (Upgrade)	NA	NA	NA	NA	NA	NA
Non Fund Based	ST	5.78	BWR A1 (Upgrade)	04Aug2021	BWR A2+ (Reaffirmation)	25Jun2020	BWR A2+ (Reaffirmation)	09Oct2019	BWR A2+ (Reaffirmation)
		NA	NA	NA	NA	06Nov2020	BWR A2+ (Reaffirmation)	NA	NA
NFB SubLimit	ST	(2.00)	BWR A1 (Upgrade)	NA	NA	NA	NA	NA	NA
		(2.00)	BWR A1 (Upgrade)	NA	NA	NA	NA	NA	NA
Grand Total		60.63	(Rupees Sixty Crores and Sixty Three lakhs Only)

COMPLEXITY LEVELS OF THE INSTRUMENTS - Simple

BWR complexity levels are meant for educating investors. The BWR complexity levels are available at www.brickworkratings.com / download / ComplexityLevels.pdf. Investors queries can be sent to info@brickworkratings.com.

Hyperlink/Reference to applicable Criteria

• General Criteria
• Approach to Financial Ratios
• Services Sector
• Short Term Debt

Analytical Contacts
Naveen S Manager - Ratings Board : +91 80 4040 9940 naveen.s@brickworkratings.com	Saakshi Kanwar Senior Manager Ratings saakshi.k@brickworkratings.com
1-860-425-2742 | media@brickworkratings.com

SL.No.	Name of the Bank/Lender	Type Of Facilities	Long Term(Rs.Crs.)	Short Term(Rs.Crs.)	Total(Rs.Crs.)
1	Axis Bank Ltd.	Term Loan - Out-standing	19.85	_	19.85
2	Axis Bank Ltd.	Cash Credit - Sanctioned	15.00	_	15.00
	Sub-Limit (EPC/RPC/PCFC/RPCFC/FBD/ EBRD) - Sanctioned	(15.00)
3	Axis Bank Ltd.	Loan Equivalent Risk - Sanctioned	_	0.98	0.98
4	Axis Bank Ltd.	BG/LC/ILC - Sanctioned	_	4.00	4.00
5	HDFC Bank	Term Loan - Out-standing	5.00	_	5.00
6	HDFC Bank	Cash Credit - Sanctioned	15.00	_	15.00
	Sub-Limit (BG) - Sanctioned		(2.00)
	Sub-Limit (LC) - Sanctioned		(2.00)
	Sub-Limit (PCFC/POST SHIPMENT CREDIT) - Sanctioned	(15.00)
	Sub-Limit (WCDL) - Sanctioned	(10.00)
7	HDFC Bank	Pre Settlement Risk - Sanctioned	_	0.80	0.80
8	Kotak Mahindra Bank	Pre Settlement Risk - Sanctioned	_	_	0.00
9	Kotak Mahindra Bank	Cash Credit - Sanctioned	_	_	0.00
10	Kotak Mahindra Bank	Term Loan - Out-standing	_	_	0.00
Total			54.85	5.78	60.63
TOTAL (Rupees Sixty Crores and Sixty Three lakhs Only)