Par Drugs and Chemicals: Why its sharp crash is a wake-up call for micro cap investors

Besides firefighters and defence personnel, investors in micro-cap stocks also know a thing or two about daring and bravery. On one hand, there is the promise of exhilarating growth that can transform their small investments into fortunes. On the other, they brave the risk of waking up to a boardroom decision that can erase wealth faster than they can hit the sell button. The latter, as it often does, recently happened to investors of Par Drugs and Chemicals —a pharma micro cap that otherwise stands out on financial stability and growth.

Its stock plummeted 36 per cent in just two days after the company on December 2, 2024, announced a slump sale of its entire pharma business for a cash consideration of just Rs 93 crore, a nearly 78 per cent discount to its market capitalisation of Rs 429 crore (prior to sale announcement).

Why the pivot unnerved the market

Specialising in active pharmaceutical ingredients (67 per cent of FY24 revenue) and fine chemicals (33 per cent), Par Drugs is India's largest manufacturer of antacids, including magnesium oxide, sucralfate, and magnesium trisilicate, and counts giants like United Phosphorus, Pfizer, and Cipla among its clients. The company's financials have been robust due to the core business.

No wonder why the management's decision to sell the business abruptly at a steep discount has stunned the market. The promoters aim to utilise the cash from the sale for new ventures in real estate and construction (Rs 27 crore), clean energy (Rs 25 crore), and capital markets (Rs 41 crore), citing that these sectors offer more opportunities than the existing pharma business.

More importantly, the buyer in the transaction, PHAL-JIG Fine Chemicals (a private entity), is controlled by those also part of the promoter group at Par Drugs.

Saritaben Vallabhabdas Savani and Shilpa Falgunbhai Savani, promoters of PHAL-JIG Fine Chemicals, are immediate family to Par Drugs' promoter group members Falgun Vallabhbhai Savani and Jignesh Vallabhbhai Savani. This related-party transaction has sparked accusations of undervaluing the pharma business for insider benefit.

A daylight robbery?

The decision feels nothing short of daylight theft. The promoters have orchestrated a move that appears to benefit them at the expense of minority shareholders. Selling businesses for less than their market cap is not unusual, but such a sharp discount to related parties is concerning. The promoters are effectively pocketing the value of the business, leaving minority shareholders with a shell of a company and a speculative future in unrelated sectors. While the board of directors has approved the sale, shareholder approval is still required at the upcoming Extraordinary General Meeting (EGM).

Lessons for investors

This case is a stark reminder that good numbers alone are not enough to make an investment case. Good governance, transparency, and alignment of interests are equally critical. In their absence, even the best-performing companies can turn out as duds.

The related-party nature of the transaction undermines trust in management and highlights serious corporate governance issues. For long-term investors, trust in the stewardship of their capital is paramount. Par Drugs is a hard lesson in the perils of investing in micro-cap companies, where fraudulent behaviour on the part of owners is not uncommon.

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