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BW Businessworld

Piramal’s Rs 20,000 Cr Gambit

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Who wouldn’t want to be in Piramal Enterprises chairman Ajay Piramal’s shoes right now? There is the Rs 20,000 crore-plus cash pile to lord over from the biggest cashout in India’s corporate history — the proceeds from the $3.72-billion sale of its pharmaceutical formulations business to Abbott Laboratories and a fruitful exit from Vodafone. There is also a host of investment options ranging from banking to retail to power and real estate to pick from. There is a beeline of investment bankers suggesting deals and there is a swarm of consultants ever-ready with the next ultra-strategy.

The irony, however, is: you wouldn’t want to be in Piramal’s shoes right now. Notice the fast-greying 59-year-old chairman — a contrast from the BW cover shot two years ago. As Piramal and his core team, comprising wife and vice-chairperson Swati Piramal; Vijay Shah, executive director and chief operating officer of the Piramal group; former SBI chairman A.K. Purwar, who heads the NBFC (non-banking financial company) business; son-in-law Peter D. DeYoung and executives with IndUS Growth Partners — a company floated by Piramal to invest in new businesses, wrestle with the all-important question: Where to invest? In a few months from now, Piramal will receive the last tranche of $400 million from Abbott, leaving him with nearly Rs 9,000 crore in hand. But Piramal’s problem of plenty comes with plenty of problems to deal with. Before we get into them, consider how Piramal got to this stage.

The Cashback
In The Light Has Come To Me, a book authored by Ajay and Swati Piramal, he narrates a dream in the section Footprints In The Sands of Time about God carrying him in his hands during difficult times. You are likely to believe Piramal is blessed.

Piramal’s past will tell you that he has a knack for spotting opportunities. At 31, he turned around India’s oldest surviving composite textile mill Morarjee Goculdas Spinning & Weaving. In 1988, he entered the pharma business by buying the Indian subsidiary of Australian firm Nicholas Laboratories for Rs 16.5 crore, at a time when multinationals (MNC) were exiting the business in India. In 1999, he set up India’s first organised mall Crossroads. In early 2000, he forayed into contract manufacturing for MNCs when Indian pharma leaders were just thinking about it.

His biggest break came on 21 May 2010 when flagship Piramal Healthcare (since renamed Piramal Enteprises) sold the cream of its pharmaceuticals business — the formulations division — for $3.72 billion or roughly Rs 18,000 crore to US-based drug firm Abbott and got Rs 10,000 crore upfront. The rest of the money was to come in four equal instalments of $400 million (around Rs 2,000 crore each) every September until 2014.

Till date, Piramal Enterprises has received nearly Rs 16,000 crore from the Abbott deal. From the proceeds, he bought an 11 per cent stake in Vodafone India for Rs 5,856 crore (in two tranches in August 2011 and February 2012) which was encashed for Rs 8,900 crore on 11 April 2014 — a profit of Rs 3,044 crore or 52 per cent. He could have got more from the depreciating rupee had he not hedged the receivables at Rs 49.85/dollar. Estimated loss on paper: Rs 627.2 crore.

Of the remaining money, Piramal Enterprises paid Rs 2,640 crore as capital gains tax, spent Rs 2,500 crore in paying dividend to shareholders (Piramal and the promoter family netted around Rs 426 crore as they own 52.94 per cent of the company) and share buyback, and retired Rs 1,300 crore in debt.

It also made investments of Rs 925 crore in Green Infra and Navayuga Road Projects and Rs 1,630 crore for a 9.96 per cent stake in commercial vehicles financier Shriram Transport Finance. On 16 April, Piramal Enterprises bought 20 per cent in Shriram Capital, the holding company of the Shriram group, for Rs 2,014 crore.

Click here to read interview with Ajay Piramal

Piramal also made 13 other acquisitions (mainly using borrowed money). The largest was that of US-based healthcare information management firm Decision Resources Group (DRG), for $635 million (Rs 3,400 crore) and German firm Bayer’s molecular diagnostic business for an undisclosed amount. After accounting for small acquisitions and investments in the four-year period — Caladryl brand, $11.5 million investment in Bayer’s molecular imaging, R&D spend for Piramal Life Sciences and others — collectively amounting to Rs 780 crore, and a cash balance of Rs 379 crore, Piramal has invested almost all the proceeds so far from the Abbott deal. With the fresh Rs 8,900 crore coming from the Vodafone exit and after deducting the recent Rs 2,014-crore Shriram Capital stake buy, Piramal is left with Rs 7,265 crore in hand, even as he awaits the last tranche of Rs 2,000 crore from Abbott in September 2014.

Analysts’ Enigma
Quick-fire entries and exits and a new mix of businesses has left analysts and observers of Piramal Enterprises thoroughly confused. Even its pharma business is entirely different from its peers who mainly sell generic drugs and active ingredients across the globe.

Piramal Enterprises’ current pharma business is spread across five niche segments: Contract manufacturing, critical care, diagnostics, new drug discovery and over-the-counter (OTC) products. Several seasoned pharma analysts have stopped covering Piramal Enterprises for the past two years. “Now healthcare is just a part of their businesses and I am not an expert to comment on the company’s investments in financial services or information management,” says Ranjit Kapadia, senior vice-president at Centrum Broking. “It is very clear, Piramal Enterprises no longer wants to be known as a pharma company, but as a conglomerate operating in various unrelated businesses,” notes Ajit Mahadevan, partner and leader, Life Sciences, EY and former president, International, Piramal Enterprises.

And here is the irony: the cash-rich Piramal Enterprises is also a loss-making company. It posted a net loss of Rs 187.1 crore for the nine months of FY2014, despite its total operating income for the period increasing by 30 per cent to Rs 3,399 crore. In FY2013, it reported a net loss of Rs 227.29 crore on revenues of Rs 3,544 crore. As of December 2013, Piramal Enterprises had investments of Rs 9,568 crore and outstandings of Rs 9,497 crore (including dollar term loans worth Rs 3,590 crore).

Clearly, Piramal no longer sees himself as a pharma baron. Instead, he has crafted his new business empire under Piramal Enterprises in three areas: Healthcare and pharma, information management and financial services. “The acquisitions, entry into financial services, short-term and strategic investments are building blocks for future growth,” says Piramal. Those are the businesses that Piramal believes have the potential to grow at a minimum rate of 20 per cent every year for the next 20 years. “You look at any study, data shows that the three most exciting businesses of the future are going to be these three areas and we chose Piramal Enterprises to be in all these three verticals,” he adds.

New-look Pharma Business
Piramal Enterprises’ pharma solutions (contract manufacturing across the entire drug lifecycle) business is spread across Canada, England, China and India. It is among the top 10 global contract manufacturers. But its slow growth is a concern. Revenues grew 7.2 per cent in the first half of FY2014; the global industry average is 12 per cent. Various estimates say the global contract manufacturing business is expected to total $63 billion by 2017 from the current $36 billion.

“We realise global pharma wants to outsource, but they are very conservative in outsourcing. Also, they will have to shake up many existing manufacturing set-ups, shut down plants and go for outsourcing,” says Piramal, adding that quality is a concern for Big Pharma. He expects this business, currently at break-even, to grow at 20 per cent over two years, with investments in facilities.

The other leg of his new pharma empire is critical care — mainly inhalation anesthetics. Piramal Enterprises is among the top three globally — after Abbott and Baxter. Piramal entered this business in 2005 with the acquisition of UK-based Rhodia’s inhalation anesthesia division, and since then has made three more acquisitions — Haemaccel business of German firm PlasmaSelect (2008), US-based Minrad (2009) and the anesthesia business of Bharat Serums and Vaccines in 2010. This business has seen significant growth in the last two years and revenues are split equally between North America and the rest of the world. “But the global inhalation anesthesia market is stagnant, and intense competition puts a lot of pressure on prices,” says Vivek Sharma, chief executive, Piramal Critical Care.

Click here to read interview with Ajay Piramal

Piramal is also betting on risky patented products. Piramal Life Sciences, which employs over 400 scientists, spent Rs 227.4 crore in the first nine months of FY2014 on R&D. Its new drug research has now been restructured to focus mainly on two areas — diabetes and cancer. The company has about a dozen products in various stages of research and trial in India and the US but, save for one, none is close to commercialisation. “It is a risky business. We will rope in more multinational collaborations, especially for metabolic disorders and diabetes products under development,” says Piramal.

The one medical product that is nearing commercialisation is Florbetaben 18F, an imaging device to screen patients and detect onset of Alzheimer’s. In April 2012, Piramal Enterprises floated a new subsidiary, Piramal Imaging, and acquired the molecular imaging development portfolio of Bayer Pharma, mainly for Florbetaben — then in phase III clinical trials. The product is currently under review by the US Food and Drug Administration and has been recommended for approval in the European Union by the Committee for Medicinal Products for Human Use. Piramal plans to launch it first in Japan though. “We hope to launch it in the second quarter of this year,” says Piramal. The new class of PET imaging agents for Alzheimer’s has an estimated global market of $1.5 billion.

Another product with potential is a bio-orthopaedic drug for cartilage repair, BST-CarGel, acquired in 2010 from Canadian firm BioSyntech Technologies. It got approval in the European Union (EU) last year. The estimated market potential is $200 million in the EU alone. Piramal Life Sciences has 10 other products in various stages of research in areas of oncology, metabolic disorders, inflammation and anti-infection.

The last component is the OTC business in India. It grew 16.7 per cent in the first half of FY2014 with revenues of Rs 244 crore. The company, which sells products such as anti-headache drug Saridon and topical cream Lacto Calamine, acquired emergency contraceptive tablet i-pill from Cipla in 2010 and topical cream Caladryl from Valeant Pharmaceuticals last year. In 2013, the company launched six new OTC products.

Managing Information
Piramal Enterprises’ entry into information management has most observers agog. In May 2012, it acquired DRG (it had revenues of $160 million in 2012). It provides information related to biopharma, market access and medical technology, addressing a niche $2.5-billion market of the larger $5.7 billion global healthcare information industry.

“We looked at several hundred targets before zeroing in on DRG and there were many interested parties,” says Jonathan Sandler, MD, IndUS Growth Partners. The need for specialist information is going to be critical and the demand is growing as technology costs are coming down and more data is available cheap, says Piramal.

DRG has 48 of the top 50 pharma firms as its clients. Since 2006, its revenues have been growing at an average of 20 per cent, with profit growth higher than growth in sales. Since its acquisition, DRG has made two buys: Abacus International and Relay Technologies. In the last financial year, Piramal’s information management business grew 24 per cent to Rs 652 crore. For the first three quarters of FY2014, revenues have grown to Rs 725 crore.

“The opportunity is huge in Europe and emerging markets. Today, it may look niche but, in future, it is going to be a big opportunity with lots of competition coming in,” says Vipul Agarwal, a strategy specialist at Piramal Enterprises.

Financial Services
Piramal Enterprises’ third area of focus, financial services, is also its biggest headache and the key reason for its losses. The business currently has two entities: an NBFC that lends to real estate developers, educational institutes and infrastructure companies, and Indiareit, a private real estate fund set up by Piramal — acquired by Piramal Enterprises in 2011. The NBFC is yet to make money. “We are in an investment phase and also into the NBFC business. Liabilities are increasing because of the swelling loan book, but will be normal and show huge profits once the money comes back,” says Piramal.

Indiareit has over Rs 5,000 crore under management and has exited a few projects, fetching Rs 1,060 crore since 2008. Piramal says his financial services business will be restricted to India. “That is because this is the market we understand best,” he explains. The NBFC business, started in 2010, had a loan book of Rs 2,590 crore as of December 2013.

Piramal Enterprises also started a joint venture residential property development fund in February with Canada Pension Plan Investment Board. Both the partners plan to invest equally in the $500-million fund, providing project-level debt to local developers for residential developments in Mumbai, National Capital Region, Bangalore, Pune and Chennai.

Recently, he invested Rs 2,014 crore in Shriram Capital, which has a customer base in excess of 9 million, 2,600 offices, a net profit of Rs 800 crore (FY2013) with assets under management (AUM) in excess of Rs 78,000 crore. “We are looking at a long-term partnership with them,” says Piramal. “The tie-up with Shriram Capital gives me an opportunity to enter the spectrum of banking services — from insurance to various financial service platforms — especially in rural and semi-urban areas. Shriram has country-wide reach and is a respected company with a proven track record,” he adds.

Talent Hunt
Ironically, one of the criticisms against the Piramal group has been the lack of quality talent. Insiders say Piramal relies a lot on family, especially his son-in-law, while taking key business decisions.

Among the first things Piramal did after the sale of the formulations division was to set up two teams to explore new investment avenues. He floated IndUS Growth Partners to invest in the US. Jonathan Sandler, a Boston-based investment banker was roped in as managing director and Shikhar Ghosh, an entrepreneur-turned-professor at Harvard Business School, as chairman.“We started operations in Boston in January 2011 with a mandate to look for acquisitions in select areas; now, our team has half a dozen people,” says Sandler.

Another management team named Structured Investment Group is headed by Parvez Umrigar, former MD and CEO of Welspun Infratech, and Jayesh Desai, former CEO of Unitech Infrastructure. With adequate investments and acquisitions, the role of these groups will be to run the acquired businesses and look for fresh investments in the chosen three sectors.

Now, CEOs are also in place for various key businesses. Vijay Shah, who has been with the group for over two decades and was heading Piramal Glass, now has the additional role of executive director and chief operating officer of Piramal Enterprises.

Piramal’s daughter Nandini, who was earlier looking after supply chain management, heads the human resources function as executive director. Son Anand, an executive director with the group, is heading the privately held real estate venture — Piramal Realty — which is developing residential projects in Mumbai. The new drug research team of Piramal Enterprises is now headed by DeYoung and Owe Orwar, a Swedish scientist and former global vice-president of exploratory medicinal research at Sanofi.

All business decisions are taken by a management group consisting of various business heads and key executives. Piramal says two-thirds of the management team now comprises foreign nationals and this was done to tap opportunities abroad. “Going forward, I would ideally make this a 50:50 mix once we ramp up Indian operations,” he says.

The Next Round
So, where will the next investment of Rs 9,265 crore be directed? “We plan to use part of the money to clear some high-cost debts, expand the NBFC business, for acquisitions and further investing in businesses like Shriram,” says Rajesh Laddha, chief financial officer, Piramal group.
As the largest shareholder with 52.9 per cent equity in Piramal Enterprises, the Piramal family has netted about Rs 426 crore in dividends since the sale to Abbott. Ajay Piramal could have bought islands or private jets with the money. But, big money has only made him more humble, say people close to him. “I am a bit detached when it comes to business since ups and downs happen in life,” Piramal told BW at the time of the deal. Instead of a Porsche, Piramal still drives around in an Audi A8L or an old BMW. His only lavish spend was an undisclosed investment in the hill station of Mahabaleshwar in Maharashtra, a couple of years ago. The Piramals bought the mansion of the former king of Sangli at Mahabaleshwar and converted it into a second home which the family now uses frequently for recreation and business meetings. The only visible change at the corporate office — Piramal Towers — is the facelift given to the ground floor ballroom, which can match the best-in-class hotel ballrooms the world over. Like his wife Swati’s new-found interest in popularising rare plants and preserving ecology, Piramal has taken up a new hobby — training school head-masters and district education officers. Piramal Foundation has set up a campus at Baggar in Rajasthan, Piramal’s birthplace, for the Principal Leadership Develop-ment Programme to hone headmasters’ skills and help identify students’ talents. So far, more than 800 headmasters have been trained. The programme will soon roll out in Gujarat and Maharashtra.

But, much of the investment strategy will be driven by Piramal’s new goal to grow the group at 20 per cent and bring in profits of 25-30 per cent per annum for the next 20 years. “We will use the funds for investing in the existing lines of business — financial services, pharmaceuticals and life sciences and information management,” says Piramal.

The question is: Can he deliver? “Piramal has delivered well for investors in the past and that is why they are backing him despite the entry into new businesses that are yet to unlock potential,” says EY’s Mahadevan.

Piramal knows he is treading a rough and risky path. The reassurance, perhaps, is that by investing in growth sectors, Piramal is swimming with the tide. Now, more than ever before, his strategy must deliver results in line with those he managed in the past. 

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(This story was published in BW | Businessworld Issue Dated 19-05-2014)