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BW Businessworld

Grappling With Billions

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Malvinder Mohan Singh's farmhouse-cum-residence and part-time office in south Delhi's Rajokri is the family's new centre of operations since the Singh brothers sold Ranbaxy Laboratories and its Gurgaon headquarters to Japan's Daiichi Sankyo. Number 26, Maulsari Avenue, Westend Greens is the last house in a long row of farmhouses. Its tranquil exterior this Saturday morning is in stark contrast to the flurry of activity inside. Ushered into the Persian-carpeted drawing room filled with silverware, crystalware, a Hussain and family pictures of the late Parvinder Singh, we notice a white robed gentleman hurrying past the entrance area — then another. "What are doctors doing at the Singh residence?" we wonder.

We get our answer when, after waiting for 20 minutes, a visibly worried Malvinder dashes in and asks us to give him another 15 minutes to start the meeting. "My eldest daughter has to go through blood tests. I just have to do this," he says with a firm swing of hands before vanishing inside. A fierce one at keeping his children away from limelight, Malvinder surprises us by walking in with his second daughter Nanaki (named after the first Sikh Guru Nanak Dev) and asks her to sit quietly on the side. Ready for the meeting, he swats a question on the company he owned just a year ago: "Why are we talking about Ranbaxy? That part of my life is over. Let's move on."

Malvinder has come to mean different things to different people since the sale of Ranbaxy, the company his late grandfather Bhai Mohan Singh used to affectionately refer to as his "fourth child". Some call him heartless, others call him arrogant, but to Malvinder it was a sound business decision. "I am in the business of doing business. When I take business decisions, I take them objectively, based on economic rationale," he explains.

 The Road Ahead

 Fortis Healthcare says it will overtake Apollo Hospitals soon, and establish itself as a clear market leader in India

Religare Enterprises, a diversified financial services company, wants to feature among the top three globally

A new private equity fund, a "fund of funds", will be launched by the end of this year

The group is also readying plans for entering the banking sector

The sale netted 37-year-old Malvinder and brother Shivinder Mohan Singh, 34, some Rs 10,000 crore in cash. But for critics it was a case of selling the family silver in the face of market heat. Former Ranbaxy hands feel that the company, always a pioneer in the Indian pharma sector and built into a powerhouse by the duo's late father Parvinder Singh and his confidante D.S. Brar, should have been the last one standing. Ranbaxy took with it the group's identity, which the brothers are still to recreate around their newer businesses.

The sale couldn't have been better timed —  from the sellers' point of view. Within weeks of the deal being announced last year, the global financial markets crashed and the world entered the worst economic crisis in over half a century. At the same time, long-pending regulatory issues with the US Food and Drug Administration began to surface, eventually leading to the ban on 30 of Ranbaxy's drugs in the US. This left new owner Daiichi Sankyo with many problems to contend with. Ranbaxy's stock fell to an all-time low of Rs 133 in March 2009 at the Bombay Stock Exchange, compared to the price of Rs 737 a share that Daiichi Sankyo paid.

 The Rs 10,000 Crore Question
As the world collapsed around them, Malvinder and Shivinder sat pretty with over $2 billion. The question that everybody is asking is: Where has the money been deployed? A year since the deal, the answer is that at least some of the money is going to financial services and healthcare, two businesses that were born in the late 1990s.

The brothers are clear in their ambition to build a new empire, unhindered by their current status in these businesses. "No matter what business we get into, we must be the market leader. We need to drive the agenda for that industry,"  says Malvinder.

Today, the group's total revenues are barely Rs 2,000 crore, against Ranbaxy's Rs 7,421 crore. Total market capitalisation is Rs 7,025 crore compared with Ranbaxy's Rs 16,783 crore.

Financial services flagship Religare Enterprises, headed by family friend Sunil Godhwani, wants to be counted among the top 3 in the world. A bank "would also complete the picture, provided the regulations permit", says Malvinder with a smile.

Healthcare flagship Fortis Healthcare is half the size of leader Apollo Hospitals, but managing director Shivinder sees overtaking Apollo as a non-issue. "It doesn't matter whether it happens this year or three years from now. We know it will happen," says Shivinder with supreme confidence. Following the acquisition of Escorts Escorts Heart Institute And Research Centre in 2005 and Wockhardt's 10 hospitals last August, Fortis is already bigger than uncle Analjit Singh's Max group. But Apollo is still way ahead. Fortis's Rs 631 crore revenue for the year ended March 2009, added to Wockhardt's hospitals' Rs 313 crore still takes the Fortis group's combined turnover to Rs 944 crore, compared with Apollo's Rs 1,614 crore in the same year.

Mr Money Bags
Malvinder refuses to disclose how much of the Rs 10,000 crore corpus has been deployed already. The details are decided in what is called the "Family Office" which is owned 50:50 by the two brothers. Invested wisely, the Rs 10,000 crore would earn between 10 per cent and 15 per cent by conservative estimates. That is Rs 1,000-1,500 crore annually.

THE ‘THIRD BROTHER': Sunil Godhwani, CEO and managing director of Religare Enterprises (BW pic by Biwash Banerjee)It is numbers like these that give Malvinder the confidence to make audacious proposals such as Religare's bid for AIG Investments, the multi-assets investment management arm of the troubled American International Group (AIG). Finally, it was Hong Kong-based Pacific Century Group that closed the deal last month for $500 million. Yet, this provides an inkling of the family's ambitions.

"When the opportunity is ripe, money will not be a problem," says Malvinder. Nanaki appears bored and fidgety. The Singhs are believed to have lent money to distressed realty majors DLF and Unitech, but Malvinder refuses to confirm that. Religare's arms Religare Securities and Religare Finvest have together acquired a 4.1 per cent stake in Karnataka Bank which Godhwani calls just an "investment". That should be taken with a pinch of salt. The Singhs will go all out to own a bank.

However, obtaining the Reserve Bank of India's approval to start a banking business may not be an easy task. "I don't think it will be a challenge, it will just take its time," feels  Godhwani, Religare's CEO and managing director. For now, though Religare is readying a grand plan for its private equity fund due to be announced soon. "We will launch a fund of funds. It is still in concept stage right now," says Godhwani.

In a way, the ‘family office' corpus couldn't have come in more handy than now. Even as Shivinder was looking at inorganic growth in his hospitals network, his peer in both pharma and hospitals business, Habil Khorakiwala of Wockhardt group, found himself trapped in debt. Over the years, Fortis had built a strong network in north India. However, the group had little presence in the south and west. Wockhardt Hospitals was the perfect match. Fortis snapped up 10 of Wockhardt's hospitals in Mumbai, Bangalore and Kolkata for Rs 909 crore. "When their IPO failed is when we felt — ho gaya kaam (it's a done deal)," says Shivinder.

 Fortis Healthcare was the late Parvinder Singh's brainchild. Before he passed away in 1999, he had already laid the foundation of the Mohali hospital. "We had a five-man team and a 500 sq. ft office in Connaught Place. But the month dad passed away, Shivinder and I had to take a call. We hadn't put any investment in the project. Dad had hired a CEO, but he hadn't joined yet. Shivinder and I were both very clear, we needed to do it because we were convinced that we could make a difference to healthcare in the country," recalls Malvinder. Later on, it was Shivinder who took over the reins at Fortis. He joined the company after completing his MBA in healthcare management from Duke University's School of Business in the US.

With the Wockhardt acquisition, Fortis will have 38 hospitals, including 12 smaller satellite and command centres, and 5,180 beds, bringing the group, at one stroke, comfortably close to the target — 40 hospitals and 6,000 beds — it had set for 2010. This would narrow the gap with Apollo Hospitals that counts 8,065 beds. Shivinder explains the deal in medical terms. "If you had to do a carve out, you couldn't have probably chosen a better cut surgically," he says. The acquisition will be funded through a mix of debt and equity, including Rs 350 crore to be raised via the Rs 997 crore rights issue, which is slated to open this month. The promoters' 68.5 per cent stake would require them to fork out Rs 683 crore to maintain their stake after the rights issue.

Future Perfect?
Having cash handy, however, is still just half the battle won in business. The other half is to devise a strategy that will deliver and then execute it to perfection. It is in this aspect that cynics are raising doubts about the brothers' youthful exuberance. In healthcare, for instance, the biggest challenge lies in widening the reach of Fortis into the hinterland. For that, Fortis, like every major player in the industry, has adopted a hub-and-spoke model to reach out to patients in smaller cities.

Analysts also agree that is the way out. "In smaller cities, one cannot offer all specialities because volumes are too small, so using a reference hospital makes sense,"  says Monika Sood, head of the Healthcare division at Feedback Ventures. Big chains either set up satellite centres or tie up with smaller hospitals in small towns, which refer patients to the larger hospitals. According to Technopak, the healthcare market in India is set to double to $80 billion by 2013, from $40 billion today. Healthcare delivery accounts for about 77 per cent of this market. "Most of the growth in the healthcare market will come from tier-II and tier-III cities going forward," says Rana Mehta, vice-president for healthcare at Technopak Advisors.

But the flip side of the model is that while it attracts patients from far-flung areas, the big chains have no presence in those areas. "There is (also) a risk of diluting your brand equity because your service offering in these cities won't be full scale," Sood adds. Shivinder's Fortis is still to find an answer to this conundrum. Rival Apollo has launched a new chain ‘Apollo Reach' to cater specifically to patients in tier-II markets. "That could prevent them from diluting the brand of the main chain," explains Sood.

On the face of it, healthcare in India would seem like a dream business. Take a prosperous and growing middle class, add a rising incidence of lifestyle-related diseases and an ageing population, and you have a great business opportunity. However so far, these factors have not translated into windfall profits for entrepreneurs. While Fortis clocked in revenues of Rs 631 crore in the year ended March 2009, its net profit margin stood at just 3.3 per cent, worse than any old manufacturing business. Nevertheless, hospital chains continue to invest in the hope that better scale will translate to profits in future. "Our first priority is to expand our network across the country. Margins are very low in healthcare in India so we need scale," says Shivinder.

Vijay Zutshi, associate director at market research firm Synovate attributes the low margins mainly to the lack of penetration of health insurance in the country. Besides, while the cost of doctors and clinical staff keeps increasing, hospitals have not been able to increase their prices proportionately, points out Sood. Fortis says its occupancy rates are around 70 per cent against the private hospitals' average of 55-60 per cent.

Click here to view enlarged imagePatient care is not a very profitable proposition for hospitals in India. "Doctors in OPD (out patient department) are usually not salaried employees of the hospital, and conversion rates remain low," says Zutshi. In other words, few patients who come to the OPD are hospitalised. Shivinder feels that it is a business model issue. "If you have chest pain, you run to a cardiologist, not a general practitioner. You will also probably go to the best guy in town, most likely at a hospital. So technically, when you should come to me in round four, you are coming to me in round one," he explains.

In the US, patients would have to go first to a general practitioner. Doing away with the OPD is not an answer either. "I look at OPD not as a financial-viability issue but rather from a relationship building perspective," says Shivinder. With time, as hospital groups gain scale, their bottom line should also improve. "There is still scope for margin improvement. By improving utilisation of resources such as medical equipment, and procurement, hospitals can become more efficient," says Sood.

The second pillar to the Singh family's new empire is Religare-led financial services business. But the company is too heavily dependent on the equity trading business. Even though Religare is already dabbling in wealth management, insurance and mutual funds, 65 per cent of its revenues still come from equity trading brokerage fees. "Our goal is to have a full-blown integrated business model, with businesses other than broking, contributing between  60 per cent and 70 per cent of our total revenues," says Godhwani.

"We see great growth potential in this sector," says Malvinder. According to a recent report by the Noble group (Clear Capital), over the next 20 years, as India's per capita income rises four fold, its savings rate will go up from 38 per cent to 45 per cent of gross domestic product (GDP). As a result, the amount of retail money entering the stockmarket annually will rise nine fold, while long-term financial savings such as  insurance and pension, will attract $830 billion by 2030, a seven-fold increase. "The scope for growth in the financial services is very high, since today most savings still go into bank deposits. But we are likely to soon see a shift towards financial instruments," says Akhil Awasthi, partner at Baring Private Equity.

Religare's Godhwani, who calls himself Malvinder and Shivinder's "third brother" (and he pretty much is) hopes that excitement can come from his stable. Godhwani joined Religare back in 2001 when the company was still known as Fortis Financial Services. He is a scion of the Dhillon family, distant relatives of the Singhs, who own about 18 per cent of the 54 per cent promoter stake.

He turned around the company quickly. "Initially, we had to get the business back in order," he recalls. In theplast three years, revenues have more than tripled. Godhwani kicked off his global foray by acquiring UK-based Hichens, Harrison & Co. It is the oldest broking house in the UK and it gave Religare licences to do business in the Middle East and in the UK. "It will be a platform for corporate broking and investment banking," says Godhwani. Brian Tempest, a former CEO and managing director at Ranbaxy, was  recently appointed as non-executive chairman of this company, renamed as Religare Hichens. Religare, whose bid earlier this year for AIG Investments did not make the cut, is now scouting for other global assets. "There are opportunities today in asset management,"  says Malvinder, non-executive chairman at Religare.

From here on, the quest for wads has given way to the battle of wits at 26, Westend Greens. Malvinder, on his part, does not see himself going back to the job of a CEO. If at all, it will be "only temporarily". Rather, he sees himself as the architect of a new group. "While Sunny (Sunil Godhwani) runs the Religare system, Shivinder runs the Fortis system. And I am sitting on top of these two guys as the chairman. (The) three of us are a team and we work very well with each other." A year down the line, the success of this team will be measured against the legacy of the late Parvinder Singh.