Back in 2008, Nihar Parikh had no inkling about the ferocity of the takeover battle between his family and Kolkata based
who had raided their family’s crown jewel – the 10 year old OTC and ayurveda company Zandu Pharmaceuticals, makers of the eponymous pain relief balm, chyanprash etc.
Like most 22-year olds, Nihar loved his weekend pub crawls in Antwerp, taking several swigs of his favourite Belgian pale ales, after week long toils on the shop floor at the Johnson & Johnson speciality chemicals manufacturing plant at the industrial town of Geel where he was interning as a chemical engineer.
“I was enjoying the good weather and the good beer while working in a god MNC,” reminiscenses, Parikh, now 34, sitting in his 12
th floor glass and chrome office in midtown Mumbai. “I was insulated from the corporate wars back home till my father Ajay, called and informed that the family had decided to sell out.” Their attempts to stave off the hostile marauder had failed.
On Tuesday, Parikh signed on all the legal documents to complete yet another cash out – this time from ZCL Limited – formerly Zandu Chemicals — a loss making, sub scale, non-core group company he took charge off when he returned to India, nurtured, turned around, scaled up 160 times over 12 years, only to sell out to Advent International, a private equity buyout group, for Rs 2000 crore, after a keenly contested bidding war that saw several peers including, PAG, CX Partners, Apax Partners and a Bain Capital backed Dutch company Centrient making a play.
“I didn’t see myself running a company for life like my father did, or my grandfather before him,” explains, the 3
rd generation scion. “We had massive in-bound interests from buyout groups to take control. Unlike formulations businesses, Active Pharmaceutical Ingredient (API) – the raw materials that go into making a medicine — companies, largely B2B have only recently received significant investor attention. Being debt free and professionally run, we were a prized catch and decided it’s a good time to monetise. The management team stays on, they will just have to replace me.”
Unlike founders of several family run enterprises, Parikh pragmatically looks ahead, planning for his upcoming trip to New York City where he wants to settle for the next 6-7 months with wife and their 2 year old son, overlooking Central Park, soaking up its verve and energy and plan ahead for his next venture. “I have a 3 year non-compete, so it’s unlikely it will be in the API space but healthcare, pharma has been my life so perhaps….I am yet undecided.. Hoping it will be as exciting as Big Apple itself,” he says wistfully.
Many would argue Parikh sold too soon at the onset of a long-term growth cycle for speciality chemicals/ APIs. Had he waited out, perhaps the company valuations would have stacked up further and even got rerated upwards.
The Indian speciality chemical industry (which includes the API Industry) has been delivering consistently higher margin profile in the last 4 years – average EBITDA margins are 17-18% range as against 13-14% before, as per recent study on the Indian speciality chemical Industry by Candle Partners, an investment bank. “The valuation of large caps (ie > USD 1 billion market cap) which were in the 17-18 (x) trailing twelve months trailing (TTM) EV / EBITDA in April/May 2020 has now moved up to 26-27 (x) TTM EV / EBITDA,” said Navroz Mahudawala, its founder. “Similarly, valuation of
mid-caps have almost doubled to 11-12 (x) EV / EBITDA.”
BUILD TO SCALE
“It’s a great mix of detail and cost oriented business,” said a senior partner from one of the contenders for ZCL. “It’s a tough, transient business with long term and merchant customers and Nihar has built an agile, aggressive organisation. He’s picked the right kind of molecules, right balance between generics and innovators which in turn has given him arguably among the best EBITDA margins.”
But that was not how he inherited it.
During the telephone conversation that he had with his father back in 2007-08, he was given two conditions. His father (then 55) could be on the board but stay away from day to day running of the operations and beyond the initial Rs 12.5 crore seed money that the family provided to buy back this arm from Emami, Nihar had to fend for himself.
“Being a chemical engineer, my father wanted me to run the business, but I had to reinvigorate the entire company,” says Parikh. “The first thing I did was to professionalise the entire management team.” They came from domestic pharma companies like Lupin, Ranbazy, Zydus, Glenmark having handled bigger portfolios and scale.
Then came the facility in Ankleshwar in 2009, followed by USFDA and WHO GMP approval etc. in the years following. At present, it has more than 100 clients as against less than 20 clients in 2008 with an employee strength of 450 as against 150 then, catering to J&J, Mylan, Otsuka or domestic players like Sun Pharma among others. “Since 2008-09, we have had 100% track record with USFDA,” Parikh adds.
“Nihar is technically sound and has built a great professional team,” highlights Satish Khanna, former CEO of Lupin who was also on the strategic advisory board of ZCL. “He built a great rapport with larger MNC clients and delivered consistently.”
AGAINST THE TIDE
From inception, Parikh’s contrarian strategy has been to focus on niche molecules such as an intermediate chemical for that make for Methylphenidate, used by J&J for their ADHD drug Concerta.
That meant, low volumes but high margins. With over 90% of sales from the highly evolved markets of US and Europe, in retrospect, with Advent scooping up the business, its second within months. Earlier in 2020, 2020 Advent had bought a controlling stake in RA Chem Pharma from Micro Labs, doubling down with the ZCL acquisition would help us get closer to our goal of creating one of the top five merchant API platform in India according to Pankaj Patwari, Director, Advent International India.
This at a time, when globally big pharma companies are looking at diversifying their supply chain and manufacturing bases from China due to geopolitical headwinds and cost pressures. “There are very few scaled, independent APIs players. Assets that have global leadership in the molecules they play in with lowest cost position will continue to hold and gain market share. Other than their current product portfolio and pipeline, ZCL also scores highly on product compliance and quality, a universal tail risk in this space.”
The world of chemicals and pharma are also increasingly merging with several cross pollination. Players like PI Industries is undertaking capex for APIs while Natco has diversified into agrochemical technical, thereby unveiling new possibilities.
“In API very few have scale. So mergers are imminent as people are de-risking from China,” feels Parikh. “Next 2 years will see a lot of action.”
The temptation is also often huge for an Indian entrepreneur to list and benefit from the public market valuations rather than do a private market trade where valuations could get substantially discounted as Glenmark is trying to do with its API business but Parikh had his priorities set. “Its not an annuity business but a grind where a substantial chunk of the business is floating,” said another bidder who had evaluated the company. “Parikh laced it up with a CMO layer and ran it well which got all the funds excited. Will Advent now merge RAChem and ZCL for a scaled platform and flip it quickly for a listing will be an interesting play.”