Morgan Stanley PE Asia to sell 20% in Zandu Chemicals; promoters may also exit if valuations positive

Zandu Chemicals Limited

The private equity arm of financial services powerhouse Morgan Stanley is looking to exit Mumbai-based ZCL Chemicals (formerly Zandu Chemicals) and sell its 20 percent stake in the active pharma ingredients (API) maker and exporter, people familiar with the matter told Moneycontrol.

The promoters of the firm, the Parikh family, may also evaluate an exit provided the transaction is struck at the desired valuations, these people added.

“Investment bank Jefferies has been mandated for this proposed deal. ZCL Chemicals has a strong backward integrated API business, along with presence in advanced intermediaries and contract manufacturing and this deal is likely to see interest from both strategic and private equity players,” one of the persons cited above told Moneycontrol.

The Parikh family and the Vaidya family were the erstwhile co-promoters of another company named Zandu Pharmaceuticals, which owned the popular brand Zandu Balm, among other Ayurvedic products. In 2008-09, Zandu Pharmaceuticals was acquired by the Emami Group for around  Rs 730 crore after a protracted takeover battle with the Parikh family.

APIs are the raw material that give drugs the intended therapeutic effect and dometic players in this segment have thrived since COVID-19 rocked the global API hub China and the focus shifted to India. In December 2016, Morgan Stanley PE Asia picked up 20 percent of ZCL Chemicals for Rs 170 crore, valuing the firm at around Rs 850 crore.

“The promoters are seeking a valuation of 15 times projected FY21 Ebidta (which is Rs 120-Rs 130 crore).This  translates into a valuation of Rs 1,800 crore- Rs 1,950 crore for the firm. If they get this valuation, a majority stake sale is on the cards,” a second individual told Moneycontrol. A third individual confirmed the same.

All the three individuals spoke to Moneycontrol on the condition of anonymity. Moneycontrol is awaiting an email response from ZCL Chemicals and has sent multiple reminders. This article will be updated as soon as we hear from the company. Jefferies and Morgan Stanley PE declined to comment in response to queries from Moneycontrol.

THE INDIAN API FRENZY

“In the API space, there are a few tailwinds. Pricing has improved and there is a trend to switch to Indian firms with global players de-risking their dependence on Chinese suppliers. This has bumped up valuations both in the listed space and it is logical to expect some impact in the private space too,” said Amey Chalke, vice- president, healthcare sector, Haitong Securities.

Recent deals like Advent-Ra Chem Pharma, Carlyle – Sequent Scientific and Carlyle –Piramal Enterprises are examples of rising interest from private equity funds in the domestic API segment. The government is also pushing for greater domestic manufacturing with incentives for the segment and manufacturing in special API parks.

Established in 1991, ZCL Chemicals has a US FDA approved facility with a capacity of 214 kl along with  research and development capabilities located in the industrial park of Ankleshwar, Gujarat. It is a 100 percent EOU (Export Oriented Unit) engaged in manufacturing and exports of advanced drug intermediates and APIs, focusing on the niche therapeutic areas of CNS (central nervous system), ARVs ( antiretroviral) and controlled substances. Up to 90 percent of the firm’s revenue comes from established markets (US and Europe) and it focuses on low to medium volume and high value products. More than 50 percent of its revenues come from products which are still under patent, its website says.

MORGAN STANLEY PE’S INDIA FOOTPRINT

Morgan Stanley Private Equity Asia specialises in privately negotiated minority investments in companies with substantial business operations in the Asia-Pacific region.  It invests across sectors, particularly in the areas of consumer products, industrial products, financial services, healthcare and telecom/technology. In India, its portfolio includes urban focused micro finance company Jana Small Finance Bank, NBFCs Kogta Financial India Ltd & Five Star Business Finance, packaged food products company Southern Health Foods & education services company Nspira.