Mr Piramal And His $3.8 Billion

Even as many are struggling with myriad problems associated with a slowing economy, Piramal Group chairman Ajay Gopikrishna Piramal is dealing with a very different issue: the problem of too much money. His flagship company Piramal Healthcare (PHL) sold its formulations division (annual sales of Rs 2,000 crore) on 21 May 2010 for $3.8 billion, or about Rs 18,500 crore, to global drug giant Abbott.

The deal was structured with an upfront payment of $2.12 billion (Rs 10,000 crore) and the remaining amount in four equal instalments of $400 million until FY14. "Getting so much money together is an issue," points out Piramal. "You may end up making bad investments."

So far, PHL has received about Rs 12,000 crore from Abbott, almost all of which is invested. First, outstanding debt of Rs 1,300 crore was paid off; capital gains tax (at 22 per cent) of Rs 2,640 crore was also paid. Then, PHL bought back 20 per cent of its shares from the open market, using another Rs 2,500 crore. In August 2011, PHL bought 5.5 per cent of telecom major Vodafone for Rs 2,856 crore, and another 5.5 per cent this February (this time, it used Rs 1,200 crore of its own money and borrowed Rs 1,800 crore issuing commercial paper, which it has since paid off).

Over the next three years, in September of each year, PHL will receive around Rs 2,000 crore. What is Piramal going to do with all this largesse? Most money managers tell us that windfalls involve strong emotions, values and personal psychology. On any significant occasion, whether of great celebration or stress, Piramal and his doctor-turned-scientist wife Swati fall back upon meditation, which teaches them ‘complete relaxation and surrender to the Lord'.

Professional money managers also list five or six things that should be done: pay off taxes and debt, deposit a large amount safely (the Vodafone investment), don't touch the money for months (it is coming in instalments), make a wish-list (more on that later), and get professional help (the Piramals have loads of it). Now that all this has been done, what next?

View From The Top Floor
Step into the Piramal corporate office at Parel , in central Mumbai, and you might be forgiven for thinking that you are in an exclusive art gallery. Expensive artefacts and paintings by world-renowned artists adorn the walls, and are replaced periodically with new ones.

Here, Piramal and his team of experts go through the investment proposals he receives. And there are stacks of them, many exploring the possibility of making even more money, from the latest advance in medical science and technology to the newest idea in entertainment television. With an almost Buddha-like serenity, Piramal listens to the analyses his team of experts present, quietly questions their conclusions and directs the flow of the sometimes-animated discussion.

"Ajay Piramal is probably the best mergers and acquisitions (M&A) expert in the Indian pharmaceutical industry," says Ajit Mahadevan, partner, life sciences practice, Ernst & Young, the global consulting firm. "And the group can grow substantially from any deals that they choose to get into."

Comparisons are inevitable with the Singh brothers — Malvinder and Shivinder — who sold Ranbaxy Labs to focus on healthcare and financial services, or with Analjit Singh, who sold his stake in Hutchison Max (see ‘Big Bucks') to also focus on healthcare and insurance. Piramal's vision: to make the Piramal Group a multi-billion dollar empire spanning manufacturing, real estate, technology, financial services, defence and security services, drug research and discovery, and medical equipment retailing, to name some.

The $900-million Piramal Group has interests in healthcare, drug discovery and development, diagnostics, glass, real estate and financial services. Piramal Healthcare, its $650-million flagship company, had a CAGR growth record of above 29 per cent since 1988. Ajay Piramal's father, the late Gopikrishna Piramal, came to Mumbai from Rajasthan with a few rupees in his pocket, and became a cotton trader. He later bought Morarjee Gokuldas Spinning & Weaving Mills, India's oldest surviving composite mill. He died in 1979, at the age of 55 in New York. His eldest son Ashok took over the business, but he too died of cancer at the age of 36 in 1984. Just before that, Ajay's elder brother Dilip had decided to part ways and start his own business. Ajay Piramal took over as chairman of the group at the age of 29. He not only turned around the textile business but also entered real estate and pharmaceuticals. In 2005, the group was split. While Ajay Piramal kept the pharmaceutical and glass businesses, the rest went to Ashok Piramal's widow and sons. CHIEFTAINS: (from left) Swati Piramal, director, strategic alliances and communications; A.K. Purwar, vice-chairman, PHL Capital; Nandini Piramal, executive director, Piramal Healthcare; Anand Piramal, executive director, Piramal Realty; Sudha Ravi, CEO, PHL Finance; Ramesh Jogani, MD & CEO, India Reit; Vijay Shah, executive director and chief operating officer, Piramal Glass

The only thing common between Piramal and the Singh brothers (to whom Piramal sold his  diagnostic chain for Rs 600 crore after the Abbott deal) or Analjit Singh, is that healthcare will remain the centrepiece, whether through contract manufacturing or through research and development (R&D) that could lead to new drug discoveries. New ideas, such as defence and homeland security technologies — surveillance and monitoring systems — are exploratory in nature. "Either we will acquire a global company to bring products to India or float a joint venture with an established player," says Piramal.

Industry sources say the group has floated a new firm, Piramal Systems and Technologies, and is discussing a joint venture with Global Technical Systems, a US-based surveillance technology developer. But so far, Piramal has not earmarked any specific amounts for this foray.

Piramal is unlikely to make decisions in a hurry. Large acquisitions that run into millions of dollars are not his preferred way. "Acquiring large assets is a fairly risky proposition," he says. "Just look at the performance of the companies that have done such acquisitions (including pharmaceutical firms)."

The Opportunistic Businessman
In 1988, Piramal convinced Australian firm Nicholas Laboratories to sell its Indian units for Rs 16.50 crore. At that time, Nicholas ranked 48th in the Indian market. He then expanded his pharmaceutical empire by acquiring units of MNCs and entering into strategic alliances and joint ventures.

"He may seem calm and composed to the outside world but he is very aggressive internally," says N. Santhanam, CEO at Breach Candy Hospital in Mumbai, who served as chief financial officer and chief operating officer of the Piramal Group between 2001 and 2011.

He acquired an impressive number of units of Indian subsidiaries of MNCs and merged them with Nicholas: F.Hoffmann-La Roche, Boehringer Mannheim, the pharma division of ICI, the R&D centre of Hoechst (now Aventis), to name a few. Alliances include those with world leaders such as Allergan, Boots, Aventis, Pierre Fabre and Advanced Medical Optics.
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Back in 1984, when he took over the reins of the family business at age 29 following the death of his brother Ashok Piramal (their father's demise in 1979 was just as sudden), he led the turnaround of the family's ailing flagship textile business Morarjee Mills. In a few years, he achieved his target of crossing Rs 100 crore in revenue.

But he has sold businesses when he felt it was appropriate. For example, the sale of his diagnostics business to Fortis Healthcare. He was just as sanguine in giving the textile business to his brother Ashok's widow, Urvi Piramal, and her sons when the split in the family was formalised in 2005, along with the real estate assets — like Peninsula Park — and two machine tools companies. "I am a bit detached when it comes to business decisions," says Piramal, with a smile.

Heavy Dose Of Pharma
Piramal and wife Swati are passionate about new drug discovery, and almost religious about the need to respect patents and develop India's own research in new drugs. If anything, it is clear that most of the investments from the Abbott sale proceeds will be around pharmaceuticals — according to sources, Piramal is close to cutting a new deal in this space, which could be announced as early as next week.

They are betting big on PHL's sister firm Piramal Life Sciences (PLSL, a firm they listed in May 2008), even if its current finances look dismal. For 2010-11 and 2009-10, its net loss was Rs 142.98 crore and Rs 129.80 crore, respectively, while net sales were just Rs 15.90 crore and Rs 6.21 crore. PHL is buying PLSL's new drug discovery business (offering one share of PHL for every four of PLSL) and the R&D set-up. By 2014, PHL plans to become the first Indian drug company to develop a new chemical entity (NCE) or an originally researched drug.

PLSL has 16 products under development. Of them, the lead molecule, P276, is currently undergoing phase I/II clinical trials for various cancers: head and neck mantle cell lymphoma, malignant melanoma, pancreatic and breast cancer. "We are banking on developing a pipeline that can be commercialised or out-licensed," says Piramal.



PLSL has already launched a psoriasis drug and will soon take it to global markets. Besides, it is planning to launch another product globally, BST-Car Gel, for cartilage repair this year (it has a market potential of about $200 million in Europe alone). Another molecule, P1736, for diabetics is now in the second phase of clinical development, and PHL may out-license it or partner with others for further development.

PHL will invest Rs 150-170 crore every year for the next four years in its drug discovery business, says Piramal.

Sharpening Old Tools
Then, there is contract manufacturing where PHL's reputation and credibility give it an edge. The Piramals' stance on patents has impressed Big Pharma enough to award PHL fat contracts (the Pfizer contract still forms a good chunk of PHL's revenues). The company is ranked 5th among global contract manufacturing companies, according to the UN Conference on Trade and Development's (UNCTAD's) World Investment Report, 2011.

Contract manufacturing revenue was Rs 1,020.6 crore in FY11, having grown 8.6 per cent over FY10. It is slower in comparison to the global pharmaceutical outsourcing market, which is growing at 12 per cent annually, and expected to be worth $64 billion by 2017 from $32 billion at present.

"In the past few years, many top multinational companies were in a merger mode and the recession had deferred investment or outsourcing decisions," says Piramal, explaining the slowdown. India's low-cost manufacturing capabilities can attract more contract manufacturing opportunities, he adds. Its current share is just $1.8 billion, and growing at 20 per cent annually. It could be $5.3 billion by 2017.

Despite the seemingly lacklustre numbers, Piramal believes PHL has the capabilities of a full-service contract research and manufacturer across the drug life-cycle and that, he says, will bring business. The company has dedicated facilities in Canada, the UK and India. For the first nine months of FY12, the pharmaceutical solutions business' revenue was Rs 963 crore, 43.4 per cent more than it did in the same period in the previous year, and Rs 585 crore of that came from the Indian facilities.

Critical care is another not-so-big bet in financial terms ($550 million in FY11 and an estimated $1.8 billion in 2017), but big in market leadership terms, which PHL has built through acquisitions over the past seven years. Revenues were Rs 387.7 crore in FY12; many acquired subsidiaries are making losses, though business had grown 18.3 per cent. With new products in the coming years, especially in the US and Europe, this business is poised to leapfrog in future, says Piramal.
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In 2011, the company broke into the top 10 over-the-counter (OTC) companies, growing at a compound annual growth rate (CAGR) of 29 per cent since 2008. Sales were Rs 195.8 crore in FY11, a growth of 10.6 per cent over the previous year. Its product basket includes popular brands like Saridon, Lacto Calamine (which was rebranded two years ago), anti-pregnancy tablet i-Pill, and switchover prescription products like Polycrol, Tetmosol and Supractiv. The company is aggressively improving distribution to cover 400,000 chemists and 485 towns with a population of over one lakh people. The company is also looking to acquire brands, but high valuations are a deterrent.

Land Of The Brave
Real estate is a business close to Piramal's heart; he was responsible for creating one of India's first organised malls — Crossroads — a decade ago in Mumbai. "We have made good investments in real estate under my privately-held Piramal Realty," says Piramal. "We are developing many projects, mainly in Mumbai."

The returns will take some time to come though; it will take 4-5 years to earn revenues, he acknowledges. But the windfall does leave him the opportunity to buy land parcels. Here again, perhaps the acquisitions may not be in big chunks. In metropolitan areas like Mumbai, available land parcels are usually on islands.

That business is run by Piramal's son Anand, who is in his mid-20s. Anand cut his teeth elsewhere. In 2004, when he was just 19, Anand launched Dia, an NGO that helps develop entrepreneurial skills in rural areas. Later, he co-founded eSwasthya, a rural healthcare start-up that became a case study at the Harvard Business School.

For Piramal, from real estate to real estate finance is but a short step. In May 2011, PHL bought out Piramal and Ramesh Jogani-promoted Indiareit Fund Advisors and IndiaReit Investment Management, Mauritius, for Rs 225 crore. The former is the advisor to IndiaReit Fund, an India-focused real estate private equity fund with assets under management of Rs 3,000 crore. IndiaReit Investment Management is manager to real estate private equity funds investing in India.

The fund, which started in 2005, manages three domestic and offshore funds worth Rs 800 crore. "So far we have deployed over Rs 2,800 crore and profitably exited from four projects," says Jogani, managing director and CEO of IndiaReit. The fund focuses on real estate projects in Delhi and NCR region, Mumbai, Chennai and Hyderabad, and works only with reputed builders; it plans to invest Rs 5,000-6,000 crore over the next five years.

On the anvil are an exclusive Rs 500-crore fund for slum re-development and a $125-200 million Rental India Fund, targeted at maintenance and leased commercial spaces in special economic zones, says Jogani. Piramal himself will contribute 3-5 per cent of these investments as a promoter.

BIG BUCKS How some of the other mega-gainers invested

MALVINDER & SHIVINDER MOHAN SINGH, Fortis & Religare In 2008, Malvinder (left in pic) and Shivinder Mohan Singh sold their entire share of 34.82 per cent in India's leading drug firm Ranbaxy Laboratories, for Rs 10,000 crore. With that war-chest, they launched an aggressive global hunt to expand the hospital chain, Fortis Healthcare, globally. In India, they bought 10 Wockhardt hospitals for Rs 909 crore. Fortis Global, a company privately owned by them, acquired assets in Australia, New Zealand, Hong Kong, Vietnam, Mauritius, Canada, Singapore and Sri Lanka. Recently, Fortis Global was merged with the listed Fortis Healthcare for a valuation of $665 million. Now Fortis has revenues of over $1 billion. ANALJIT SINGH, Max Group In 1998, Analjit Singh, son of Ranbaxy's Bhai Mohan Singh and the founder of Max India Group, sold 41 per cent stake in MaxTouch to Hutchison (now Vodafone) and Kotak Mahindra Group (KMG) for Rs 561 crore. Over the next seven years, he sold his remaining 10 per cent stake. In 2006, he bought 7.6 per cent stake in Vodafone from KMG and after two years, sold 3.7 per cent for Rs 533 crore. Max India invested in life insurance, healthcare, clinical research and speciality foils. Now, the group's annual turnover is Rs 8,000 crore, and Rs 2,700 crore is invested in various businesses. THE BURMANS, Dabur Pharma The Burmans sold the listed Dabur Pharma's non-oncology formulations to Alembic in 2007 for Rs 159 crore and oncology business to German MNC Fresenius Kabi for Rs 878 crore to focus on the healthcare and FMCG businesses. They invested in insurance, private equity, investment banking and stock broking, apart from sports cars, tractors and education. Now Dabur India is the largest ayurveda and natural healthcare company with Rs 4,110 crore revenue and Rs 570 crore profit (FY10-11). (In pic: Amit Burman NIMMAGADDA PRASAD, Matrix Laboratories In 2006, N. Prasad sold his stake in Matrix Laboratories, which he founded, to Mylan and pocketed about Rs 570 crore. He became a serial entrepreneur with strategic investments in cement, power, healthcare (hospitals), media, infrastructure, hospitality and IT.

Piramal's tryst with financial services is not new. He and former State Bank of India chairman A.K. Purwar jointly floated a healthcare fund — India Venture Advisors — in 2006, which has invested about Rs 372 crore out of its corpus of Rs 400 crore. A second round of fund-raising is planned, says Purwar. Now, the stage is being set for a larger financial services play.

Piramal is floating two NBFCs (non-banking finance companies) under a holding company, PHL Capital. The already operational PHL Finance will focus on lending to real estate, promoter financing, hospitals and educational institutes. The second NBFC will focus on infrastructure. "By next year, PHL Finance is looking at a loan book of Rs 1,500 crore, and Rs 7,000 crore by 2016-17," says Purwar.

Sudha Ravi, CEO of PHL Finance (she is also a former SBI executive), says the company is evaluating three projects in Pune and one in Chennai. The proposed loans are in the Rs 50-250 crore bracket. Another project being evaluated is medical equipment funding for doctors who have small practices and clinics. PHL will invest Rs 450 crore in PHL Finance, and a similar amount in the infrastructure NBFC.

Clouds Of Concern
While plans look good, even exciting, investors are concerned about the various investment ideas. PHL's share price fell to Rs 340 in November 2011, though it recovered to reach a 52-week high of Rs 562.50 by April. At roughly Rs 9,750 crore, PHL's market capitalisation is lower than most other blue-chip companies.

"Piramal Healthcare was a steadily growing niche pharmaceutical company. After the sale to Abbott, what is left are just small businesses," says industry analyst Ranjit Kapadia, senior vice-president, Centrum Broking.

Then there are people issues. The Piramal Group was almost unique in having an M&A expert — Murari Rajan – on its rolls. But he left the group in May last year "to pursue his own interests," says Piramal. Rajan now heads the M&A team of JSW.

Industry analysts point out that apart from Piramal himself and Vijay Shah, there appears to be no one who can run the healthcare business. True, daughter Nandini and her husband Peter D. DeYoung, who also joined PHL, are being groomed, but they are untested, says an analyst. "Critical decisions are made around the table in the boardroom; not around the dining table," was one remark.

Kapadia says the management should re-jig the group's organisation, otherwise investor concerns will remain. But Piramal is not worried. "For the time being, we are not thinking of any organisational restructuring," he says. "PHL will operate in different areas, and leverage its brand. The existing businesses have huge potential and are growing."

But are they? After the sale to Abbott, what's left of the PHL businesses is a pharmaceutical business with revenues of Rs 1,700 crore, nearly Rs 1,000 crore in revenue from Piramal Glass (which turned around recently), and a few investments in real estate.

Piramal Glass (PGL) is not going to get any funds from the PHL windfall, says Vijay Shah, head and director at PGL. Nor in his opinion does his company need it. From being a small local player in Gujarat, the company has become a global player. Now, one out of every two nail polish bottles in the world is made by PGL and it controls 70 per cent of that market.

There are those who believe that like many other corporate chieftains, Piramal is also growing increasingly disgusted with the business environment in India. "Policy drift and uncertainty could be forcing Piramal's caution," says a leading investment banker who requested anonymity. "It is possible that he could put his money into companies he acquires overseas."

Seven years ago, Piramal and Swati had written a book based on the verses of inspiration from the Bhagavad Gita — The Light Has Come to Me. It was a narrative of how he believes God helped him through adversity and doubt, and cemented his spirituality. Piramal still believes God is carrying him and has not left him. Now God has another task: to give him guidance on where to invest over Rs 10,000 crore.

p(dot)jayakumar(at)abp(dot)in

(This story was published in Businessworld Issue Dated 23-04-2012)