value investing

Vimta Labs is in the business of contract research and testing for the pharmaceutical industry.

The company has received national and international accreditations, been subject to audits by global regulators, and entered into partnerships with market leaders in the past.
It reported stable operating profits on steadily growing revenues until the last twelve months – when it reported marginal operating losses (instead of the usual profits before depreciation of 20 to 25cr) on revenues of about 90cr, primarily due to delays in approvals (see below) and increased costs of materials consumed in its operations.
The company’s debt load is high relative to recent cash flows and is largely dependent on collection of its receivables to pay it off.  It is therefore exposed to high interest rates as well as a depreciating INR in paying its domestic and foreign currency loans respectively.
The auditors’ report revealed that the company has, in fact, defaulted in repayment of few of the instalments of the loans it owes – as suspected above.  This situation is unlikely to change unless receivables are collected in a timely manner and the below risks are mitigated in an effective manner.
The business is exposed to severe delays in receiving regulatory approvals for projects.  It is also subject to heavy competition from multi-national companies looking for a low cost base.
The business, by its very nature, requires continuous innovation in portfolios which precludes the building of sustainable competitive edge.  It also requires investments based on foresight – sometimes years in advance – that are subject to considerable risk of error.
Apart from the above, the business is exposed to changes in government regulations, high employee turnover in a rapid growth environment, and inflationary cost increases among other factors.
By AI