The $2-bn Question

You are obliged to act, Arjuna, even to maintain your body. Fulfil all your duties: action is better than inaction.

Ajay Gopikrishna Piramal, Chairman of Piramal Healthcare, has not followed this advice from the Bhagavad Gita, a text he reveres. He has not done much with the cash pile of $2.12 billion(over `10,000-crore) he got as part-payment in September 2010, when he sold his company’s formulations business to the US-based Abbott Laboratories.

He has no doubt paid his taxes on the amount – `3,800 crore; handed out a special dividend – `250 crore; made a `2,510-crore share buyback and invested `2,856 crore in Vodafone, while parking `1,000 crore in liquid investments. Earlier this year, he got more money from the deal – the first of four annual instalments of $400 million each that will complete the deal.

Why this inaction? “I am glad that we haven’t made any major investments in the last one year,” says Piramal, 56. “One could have been trapped in so many things. But one year is not too long in the life of a company.”

You can say that again. The story goes that in 1988, when Piramal diversified for the first time – the family business had been in textiles – by bidding for the Indian unit of the pharmaceuticals multinational Nicholas Laboratories, he clinched the deal by telling a sceptical Mike Baker of Nicholas he would put the company among the top five drugmakers in India. Nicholas was then ranked 48th. Ten years later, when Nicholas Piramal became the fifth-largest, Ajay Piramal visited Baker at his retirement home in Kenya with the news.

But Piramal’s deal with Abbott and the fact that much of the cash he earned lies unused has not enthused investors. Piramal Healthcare’s stock has fallen 37 per cent since May 2010 when the deal was first announced. Investors expected more for themselves from the sale, and were further spooked by the investment this year in telecom company Vodafone Essar.

Think Before You Leap

Piramal is not worried: he has bigger payoffs in mind for them. Business Today learns that he has set up three strategy groups to look for business opportunities. One group is studying the pharmaceuticals sector, in which the company still has a strong presence in contract research and manufacturing services, or CRAMS, and over-the-counter, or OTC, drugs. Its brands such as i-pill, Lacto Calamine, Saridon and Polycrol are household names. He says: “We are looking for newer [OTC] brands here, and also ways to strengthen the exist- ing ones. We are looking at mergers and acquisitions..., but valuations are high, and that’s posing a challenge.”

Drug discovery is another area, with Piramal banking on a molecule for rheumatoid arthritis that he expects to start selling next year.

The two other strategy groups are looking outside pharmaceuticals. Vijay Shah, a director of holding company Piramal Enterprises, who has been with Piramal for over two decades, heads one group that is India-focused. It has already incubated a non-banking finance company, or NBFC. “We studied the subsectors and short-listed real estate,”says Shah. The NBFC is now a separate unit and lends to the real estate sector. It will also start lending to the healthcare and education sectors.

The third strategy unit, IndUS Growth Partners, is based in the United States and is headed by Shikhar Ghosh of Harvard Business School. IndUS is looking for specialist companies there which can help Piramal’s push into financial services, real estate and other sectors in India.

In the cash-starved real estate sector, Piramal will use its capital via two entry points – the venture capital fund Indiareit and the NBFC. Piramal Healthcare acquired Indiareit in May for `225 crore to enable its entry into real estate. Ramesh Jogani, Managing Director&CEO of Indiareit, says: “With banks not lending, there are enough op- portunities for Indiareit... In the last six months, we have made three investments totalling `530 crore.”

Pharma, Act II

In the July-September quarter, the bulk of Piramal Healthcare’s profit of `53 crore came from interest and investment income and foreign exchange gains. However, its CRAMS business grew by 32 per cent, OTC and ophthalmology nearly 59 per cent, and the critical-care business, 43 per cent.

Analysts say Piramal’s CRAMS business needs improvement but the macro scenario may make it tough to bring in the much-needed growth. Ajay D’Souza, head of Crisil Research, says: “It [CRAMS] has grown 20 per cent over the last five years, but we see it slowing down to as little as eight to nine per cent in the next three to four years. The time needed for approvals to set up a CRAMS unit has gone up from 18 to 24 months. This is negating the cost advantage that India has.”

Bino Parthiparamil, analyst at financial company IIFL, says:“Investors are not seeing much potential in CRAMS due to lack of pricing power, its highly competitive nature, and Piramal’s history being sketchy here.” He notes that the market is not giving the company the benefit of the cash it holds.

Piramal’s biggest bet will be on the drug discovery business, which it had spun off in 2007 into a separate company, Piramal Life Sciences, but will now bring back into Piramal Healthcare. Somesh Sharma, Managing Director of Piramal Life Sciences, says: “We want to discover[new molecules], do the clinical development and commercialise the drug ourselves.” It is looking at niches such as oncology, inflammation, drug-resistant bacteria and hospital-acquired infections.

The strategy is to focus on one risky area at a time – where failure is frequent, like oncology – and balance it against anti-inflammation and anti-infectives research, where the success rate is high. Investors are wary of the merger of Piramal Life Sciences – which handles the drug discovery business currently – with Piramal Healthcare, as they fear the impact of the unit’s high costs. But Ajay Piramal says the biggest advantage of the merger will be the significant tax benefit it will give the company to adjust against profits.

But diversification is taking time. Shah and his India strategy unit have been evaluating sectors carefully rather than jumping into any.“A year ago, we thought the infrastructure sector was very hot. But we started to see risks and eventually decided to steer clear of it. Today, our decision is proving right,” he says. They also rejected EPC – engineering, procurement and contracting – because of its fluctuating demand and poor accounting standards, and information technology, where big companies dominate.“Much effort has gone into looking at why we should not do some things,” adds Shah.

Even the US strategy unit has yet to clinch a deal, though it has evaluated over 100 proposals so far. Says Piramal: “It takes time. We are learning new industries. The world is a very uncertain place now.”

For now, he says, it is the opportunity that will determine things. And there will be enough funds for the right opportunity.