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‘Revenues Will Shoot Up Soon’

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Ajay Piramal met with P. B. Jayakumar to explain the investment and exit strategies followed by Piramal Enterprises. Excerpts:

Why did you decide to restrict your investments to just three areas - financial services, healthcare and information management?
Before I answer that, let's analyse why we decided to sell the formulations division, which we never wanted to sell. We felt the valuation we were offered was good, a multiple of 30 times EBITDA and nine and a half times of sales.  This is the highest valuation any branded generics company has got so far in the world. So it was in the interest of all our shareholders to accept it. We did a calculation and realised we can't do the same compounded annual growth rate of 20 percent for the next 20 years. It is very difficult. Over 21 years that we were in this business, in terms of value, it was a compounded value growth rate of 40 percent. It is not easy to do in future. So we decided to exit.  We could have relaxed after paying the shareholders, but felt there is lot of potential left for future and decided to reinvest this money, after rewarding the investors with some money.

The first thing was that then (in 2010) the business environment in India was a bit difficult, and the immediate future for India looked bleak.  So we made a thrust to invest globally. That is why we created the IndUS Growth Partners with a Boston office to look at global opportunities. At that time, the US and Europe were undergoing a slowdown and the valuation for available assets were reasonable. But we took two calls: We knew the US would bounce back because of its inherent strength. In the short time India was a bit down, but will continue to grow in future. So we decided to invest in high growth sectors in India as well.

The sectors we identified as high growth apart from healthcare, which we are already in, were information management and financial services. You look at any studies, the data shows that three most exciting areas of future are going to be these three. We chose to be in all these three. We decided that the market for financial services will be restricted only to India, because this is the market we can understand very well. But information is a very much global industry. Therefore, (we) acquired DRG in June 2012.

But Information management is not a familiar terrain. Aren't your investments in areas like critical care risky and what is their potential?
DRG is into information management in healthcare, which is an area we understand. Globally, the cost of technology is coming down in all the areas.  IT is going to be an important tool in everyday life. Since technology costs are coming down, there is much more data available. Secondly, competition is increasing everywhere and you get a competitive edge if you use data in decision making. Considering these factors, we decided information is a good area to be in. Healthcare is also a high potential area. In the US, 16-18 percent of GDP is into healthcare, in India it is not even 2 percent and we have a lot to do. Cost of healthcare should come down. As the population in the world ages, healthcare is going to become more and more important. With information on one side and healthcare on the other we thought DRG is a good bet to invest. DRG is a niche and leader in its space. It has a $6 billion opportunity in the US. The opportunity is going to be huge if we calculate the opportunity in Europe, emerging markets like Brazil etc. Today they may look niche, but in future that is going to be a big opportunity with lots of competition. So are critical care and the Alzheimer device, which is a going to be another huge opportunity.

Despite the growth through acquisitions, Piramal Enterprises' profits are suffering with losses for the last two years. The main businesses like contract manufacturing and Piramal Glass are not growing as expected. How do you analyse the scenario?

It is not fair to judge our growth and value we have created just by looking at the numbers. We have made huge investments like in Vodafone and once that money comes back, we will be showing huge profits. We are in an investment phase and also into NBFC business. Liabilities are increasing because of the swelling loan book, but will be normal once the money comes back. The day I start consolidation of Sriram investment, which I will do soon, my revenues will shoot up.  Revenue should not be the measure for us today.

Why did you choose Sriram Capital alone for your big investments in financial services?
Frankly, financial services are higher margin business. Through Sriram, we wanted to get into entire spectrum of financial services. If you scan the market, they have the best reputation and have niche businesses. They have consistently grown the markets they are in since 1974, especially in rural and semi urban area throughout India by lending for second hand commercial vehicles. They are making good margins and are performing. Their business model is difficult to replicate, many had tried and failed. It is not easy to recover money from a driver turning to owner of a truck.

You also re-entered real estate business with Piramal Realty, which you had exited long time ago….
Real estate is a good industry to be in for the long run. We are more focused on Mumbai today and we believe the story of Mumbai will remain and there will be big potential in future. The markets are challenging today. We are trying to create buildings which are unique and best in class. It is still early days. Few projects are going on at Byculla, Thane and Kurla and a few other properties are under development. It is a private company and revenues will start coming soon.

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