Par Drugs & Chemicals Ltd

[Jay_shankarpure]

Overview
Par Drugs & Chemicals makes API’s & Fine Chemicals for domestic as well as Exports Market

Business
They have 2 business verticals namely - APIs & Fine Chemicals. 72% of Revenue comes from APIs & rest 28% from Fine Chemicals

APIs

In APIs the company makes APIs for Formulation Manufacturers. For example when a drug is formed their are many steps to it. First is KSM which is key starting material then comes your intermediate after that API and then at the end comes Formulation which is also called Finished Dosage.

It has entire range of Antacid Molecules. Antacid Means a medicine that prevents Acidity. Currently they have around 18 APIs molecules , As follows-

The company is one of the largest manufacturer in Magnesium Hydroxide, Sucralfate and
Magnesium Trisilate in India. Their uses are stated above in the Image. So basically they are a End-to-End Antacid Solution Provider. With many APIs that cater to same segment.

Fine Chemicals

Coming to Fine Chemicals. Unlike APIs fine chemicals have uses in many Sectors such as Pharmaceuticals, Adhesives , Agricultural etc etc

Currently company has around 10 fine chemicals portfolio, Which looks like this -

As you can see they have variety of uses

Capacity

Company has around 9,700 MT Capacity in Bhavnagar for APIs, Fine Chemicals & Magnesium Hydroxide.

Company also doing a 1,400 MTPA Brownfiled CAPEX in 2021 , which will add put to their capacity

Customers

Company caters to around 132 Customers & Added 20 New Customers in FY21 .Its key customers include Essential Drugs Company, Pfizer, United Phosphorus, Cipla.

R&D

The company mentioned that its R&D Team is focusing on Chronic therapies like
antidepressants, anti-diabetic and anti-bacterial. This shows that they are also entering newer & newer Therapeutic Segments & Expanding their Product Portfolio.

Financials

Financials as such looks good in FY21 Numbers -

EBITDA Margin - 26%

PAT Margin - 19%

ROCE - 22%

Risks

Risks in this business can be -

• Over Dependency on Antacid Products
• Lack of Execution of Management in terms of diversifying Product Portfolio & Capacity Expansion

Disclosure - Not Yet Invested

Here were my 2 Cents of the company. Thanks for reading & Giving your valuable time

Sources used in this Thread was Investor Presentation of the Company.

Link for it is this -

PAR_15122021173303_InvestorPresentationDecember2021.pdf

[sameernics]

@Jay_shankarpure Thanks for the details.

Few observations from my end.

a. They are enjoying one of the best operating profit margins in the industry with marquee client base.
b. Set up a new R&D for diversification into antidepressants, anti-diabetic and anti-bacterial just to reduce the dependence on Antacid products.
c. Expanded brownfield capacity to reflect in higher revenues and profits
d. Its a debt free & high promoter holding company and continues to impress on the financial ratios.
f. As per insider trading data, Promoters were indeed busy shopping their shares during Dec 2021.
g. All the expansions including R&D was setup using internal accruals.
h. The management is confident of adding another greenfield capacity in the next 2-3 years.
i. As per last intimation in Dec 2021, the company had entered into an agreement with a German trading company to increase global presence.

Discl: Invested at low levels

[Jay_shankarpure]

Here are some risks in the business pointed out by @dineshssairam Sir

Dinesh Sairam

[sameernics]

The stated objective of IPO was.

[dineshssairam]

I didn’t say it wasn’t in the DRHP.

1. Working Capital Requirements were tame before the IPO and seems to have become tame after it. But in between — just for a year — there was a massive increase in requirement and an IPO was done just to take care of it. Sounds really odd. I doubt I’ve seen an IPO just to take care of 1 year’s worth of Working Capital.

2. Also see the point on the Promoters acquiring a chunk of the company (+35% over their previous stake and almost 16% of Pre IPO size) just before the IPO.

3. Also see the Related Party Transactions, where Directors are given regular loans.

4. The Annual Report available in their website is detailed only in 2019-20 (Year of the IPO). Before and after it, they’ve given only the bare minimum (Which I presume is their MCA filing). This makes it difficult to analyse the company in detail.

Again, these may not be fishy in the end. I’m just asking questions. If you are able to answer them satisfactorily for yourself, good on you.

[sameernics]

Refer their last investor presentation available on the exchanges.

[vx294]

Par Drugs & Chemicals Ltd

Primary products

• APIs: 18 APIs which are primarily used for Antacids used for the temporary relief of heartburn, upset stomach, sour stomach or acid indigestion. A wide majority of them are Magnesium salts. Details of the various APIs have already been posted on the thread.
• Fine Chem: 10 Fine chemicals that the company markets for uses in agriculture, paint/adhesives, cleaning products and more. Again, the various chemicals are discussed in the thread. I won’t go over them again .

Rough revenue breakdown

Antancid market trend
Talking about the antacid market, it is expected to grow at a CAGR of 3.7% over the next 5 years. Growth triggers are:

1. The increasing prevalence of gastroesophageal reflux disease (GERD). Furthermore, increasing awareness about GERD is anticipated to boost the market growth.
2. Lifestyle changes of the newer generation like stress, smoking, alcohol and obesity.
3. The rising geriatric population is also contributing to the growth of the market as more that 65% of the geriatric population suffers from acid reflux.
4. Asia is forecasted to have the fastest antacid growth at 5.4%. Pfizer is known to be a key player in this market who is a client of Par Drugs & Chemicals.

Does the company have a competitive edge?

1. The company’s current API portfolio primarily consists of magnesium salts. Magnesium hydroxide is a better antacid than sodium hydrogencarbonate. Reason: Magnesium hydroxide being insoluble, it does not allow pH to increase above neutral, whereas hydrogen carbonate being soluble, its excess can make the stomach alkaline and trigger the production of even more acid. A small counter to this: Magnesium antacids are known to have more serious long term side effects like severe nausea, vomiting, or diarrhea.
2. The only other major listed competitor in India is Vasundhara Rasayans Ltd. It is 4 times smaller, fluctuating OPM%, and a 250% higher cash conversion cycle. The annual capacity only stands at 1.5kMT as compared to 9.7kMT for Par. However, they too have a strong client base with big names like Abbott and Cipla.
3. China +1 theme is applicable to this company because of countries trying to explore alternative supply chain options other than China.
4. Cashflow positive, and hence debt free and able to fund their working capital comfortably. They are generating good return on their assets, ROA = 13.4%.

Raw material breakup (rough)

Caustic Soda Lye prices have fallen significantly and looks like it can help the company achieve good margins in the coming quarters:

Key risks

1. Side effects of antacids: Antacids, especially those containing aluminum or magnesium, can have side effects such as constipation or diarrhea.
2. Sodium antacids are the most common type of antacids and dominate the segment. However, the company’s primary API portfolio consists of Magnesium salts and hence is missing out on a major chunk of the market. That being said, expansion into sodium salt APIs will not be very tough if the company decides to make that leap.
3. North America is the largest market for antacids with a revenue share of 44.0% in 2022. So there is geographic concentration risk.
4. Cyclicality: Margins are highly dependent on raw material prices. Company is not backward integrated, as would be expected for a company of this size.

[SHAIL_APTE]

I am. We can have a call, please DM me.

[vx294]

Reading between the lines of their FY24 annual report:
Here are some statements that I found interesting in the recent annual report.

Growth projections:

Par Drugs And Chemicals Limited is diligently working towards achieving a minimum of 20% growth in top-line revenue while enhancing margins.

Expanding product portfolio:

Over the past year, we have continued to expand our product portfolio, targeting new application segments and introducing high-value products that resonate with diverse market needs.

To modify our existing products so as to develop entirely new products/formulations for different segments of the industry.

Geographic expansion:

We have strategically pursued expansion into high-potential regions such as Japan, South Korea, and China. This move aims to mitigate market concentration risks and create a more balanced and resilient revenue stream, further solidifying our global presence.

Capex plans:

An upcoming greenfield expansion is set to significantly enhance our production capacity, positioning us to meet the market’s growing demands and contribute meaningfully to economic and community development, and meet the growing demand.

Timeframe: 2-3 years

Risks:

In 2023, regulatory bodies such as the FDA and EMA tightened their scrutiny of API manufacturers, particularly concerning impurities like nitrosamines. This has led to increased pressure on manufacturers worldwide to enhance their quality control processes increasing delays and costs.

Western countries increasing their domestic production capabilities over supply chain concerns from India and China.

The magnesium market experienced considerable disruptions in 2023 due to geopolitical tensions and environmental regulations in China, the world’s largest producer of magnesium causing magnesium price volatility.

Over the past year, the cost of essential raw materials and utilities has risen substantially, likely to persist in the short term. This cost increase is expected to drive up the prices of Active Pharmaceutical Ingredients (APIs), potentially impacting demand domestically and internationally.

[vx294]

Results - Q2 FY’25

Some fabulous numbers posted by Par!

If we take a closer look at the quarterly numbers, we can point at:

1. Highest ever OPM at 33%
2. Other income of 1Cr
3. Is this one-off growth? Well, the last time Par saw a jump in revenue of a similar scale (marked in the diagram below), the revenue was sustained for the next quarters too. Can we assume a few good quarters ahead?

Margins
Highest ever margins, and that is a testament of Par’s focus on constantly improving their product quality and efficiency. In their annual report, they mentioned introducing high-value products that might have helped boost their margins.

Over the past year, we have continued to expand our product portfolio, targeting new application segments and introducing high-value products that resonate with diverse market needs.

Another reason could be that magnesium prices are at a 3 year low!

Par’s API portfolio primarily consists of magnesium salts, and their margins are directly linked to fluctuation in magnesium price. The price of magnesium can be correlated to their margins in the past as well. This was also mentioned by the company in their annual report (you may check my previous post on this thread).

Valuation
Currently on Screener, in Pharmaceuticals - Indian - Bulk Drugs companies, there are only 3 profitable companies (out of 34) with a lower PE than Par (PE-15), and none of them are as financially sound.

Under the radar currently, with markets looking relatively week. Could we see a possible re-rating after these results?

[AnantAgar]

It’s a phenomenal move by the management to gloriously short-change investors with this slump sell at close to BV(90cr.) at a time when the market-value is at 400cr. ( at PE of 20, you can’t say it is overvaued) and quarterly profits are only growing. Anyone has any thoughts?

https://nsearchives.nseindia.com/corporate/PAR_02122024174510_SignedOutcome02122024.pdf

I believe the listed entity is starting to make money, probably some traction in CRAMS, and management wanted the remaining 25% of public holding also onto itself, hence doing this cheap sale to their own related-party.

Also the new business in listed entity is construction. Everyone knows what that means- a euphemism to loot money (I mean a chemicals player venturing into real-estate and finance, laughably unbelievable. there could probably have been a better way to lie)

Anyway, if there are any holders out there, I would suggest you proxy-vote it negatively so as to prevent this management from short-changing the investors who supplied their capital for R&D at the time of listing.

[Chandragupta]

Indeed, this seems downright theft. They are selling Gross Block of Rs.74 crores + Other assets (Investments, Cash, Working Capital) of Rs.57 crore for just Rs.93 crore. Moreover, the intimation says, “Looking to the present scenario, the promoters of the company have found more opportunities in the sector of real estate & construction market, capital market and clean energy market as compared to the existing business of the company”. And so, the business is being sold to the Promoters themselves!! At an arm’s length of course, though they seem to be having quite a long arm.

Based on whatever information has been disclosed, this looks like a fit case for SEBI to issue Show Cause Notice to the Independent Directors, or for a Class Action Suit by Minority Investors.

(Disc.: No positions)

[AnantAgar]

May you educate me how such a show-cause notice could be made to effect from our end or the Class Action lawsuit?

[Chandragupta]

You have to consult a legal expert for that. My statement above is a comment on the brazenness of the company’s decision, not an advice to pursue such a course of action.

[HBORA1012]

Apparently someone complained to SEBI and got this response.

https://x.com/karan_Maheshwri/status/1871223454609129779?t=a6fhJeitUS3yT2WB6rMfog&s=08