Morgan Stanley Private Equity Asia is making benchmark returns as it exits Mumbai-based ZCL Chemicals Ltd just over four years after betting around $25 million on the pharmaceutical company.
The PE firm will sell its stake to buyout major Advent International as part of a larger deal worth around Rs 2,000 crore.
Morgan Stanley PE had shelled out Rs 170 crore ($25 million then) to buy 20% of ZCL four years ago. It will get around Rs 390 crore ($54 million) in the latest deal. This means it generated a return of 2.3 times on its investment in rupee terms. The dollar returns are a tad lower because of the rupee’s depreciation against the greenback.
Interestingly, this is despite ZCL facing growth headwinds. The company had reported revenue of Rs 272.5 crore with a net profit of Rs 48.8 crore for the year ended March 2016, just before roping in the PE investor. In the following fiscal year, its revenue and operating profits significantly declined due to high reliance on a single product.
But ZCL has bounced back thanks to product diversification. For the year ended March 31, 2020, it had net sales of Rs 261 crore and a net profit of Rs 58.7 crore.
This means that, even as ZCL shrank in size and recorded only a marginal increase in earnings after roping in the PE backer, the low entry valuation saved the day for Morgan Stanley PE.
In a report dated July 2020, rating firm CRISIL Ltd said the strong financial risk profile marked by comfortable capital structure, controlled indebtedness (ratio of total outside liabilities to adjusted networth), and adequate debt protection metrics.
“These strengths are partially offset by moderate scale of operations and working capital intensive nature of operations,” it had said.
ZCL was Morgan Stanley PE Asia’s first investment in the life sciences sector in India. The firm established its PE business in India in 2008. Its earliest investment the same year in Biotor Industries went under water after the founders were booked for fraudulent activities.
ZCL was founded in 1991 by the Parikh family and was initially known as Zandu Chemicals. It focuses on niche therapeutic areas of central nervous system, anti-retroviral and controlled substances. It has a manufacturing facility and an R&D center in Ankleshwar in Gujarat.
For Advent, this marks the third deal in the pharmaceutical sector in India and the second in the bulk-drugs segment over the past year. In 2019, Advent had acquired a majority stake in Bharat Serums & Vaccines Ltd in its first pharmaceutical bet in India.
Last year, Advent picked up a controlling stake in RA Chem Pharma Ltd from Bengaluru-based Micro Labs Ltd. Advent’s India chief had said then that the PE firm was looking to build a bulk-drugs platform in India and that it would scale RA Chem Pharma both organically and inorganically.