Par Drugs & Chemicals Ltd

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.