Eye on the prize: Ajay Piramal strikes it big with contrarian calls

Ajay Piramal, chairman of Piramal Group, invariably chooses the path less travelled
Image: Joshua Navalkar

Ajay Piramal, chairman of the well-diversified, $3.2 billion Piramal Group, has been navigating the world of big business for over three decades now and, despite the length of his journey, he has managed to avoid any serious misstep. Reason: Even while taking decisions relating to investments, he has kept the values and the approach of trusteeship at the core—be it in financial services and health care under the holding and flagship company Piramal Enterprises Ltd (PEL), real estate development through Piramal Realty or philanthropic activity through the Piramal Foundation.

Of course, his biggest windfalls are the result of contrarian calls: For instance, entering the pharmaceuticals space in 1988 by acquiring Australian multinational Nicholas Laboratories when others stayed clear of the field. Then, selling Piramal Healthcare’s branded generic drugs business for $3.72 billion to Abbott Laboratories in 2010, when multinationals like Pfizer and GlaxoSmithKline Plc were eyeing a bigger share of the Indian market.

Piramal, thereafter, struck it big by investing in Vodafone, at a time when the telecom sector was plagued by intense competition and low tariffs. Flush with funds from the Abbott deal, PEL picked up a near 11 percent stake in Vodafone’s Indian arm for over Rs 5,800 crore and exited in 2014 with a roughly 52 percent gain.

He continues to eye growth opportunities in other sectors. PEL, which operates three main lines of businesses (financial services, health care and information management), is involved in wholesale lending to real estate projects across major cities, at a time when others have shied away due to a sluggish growth trajectory. Between May 2013 and June 2014, Piramal’s PEL picked up stakes in three companies of the Chennai-headquartered financial services conglomerate Shriram Group; he also became chairman of the group in 2015.

“We always go on the path less travelled,” Ajay Piramal, 61, tells Forbes India in an interview at the Piramal Group’s corporate headquarters at Peninsula Corporate Park in Mumbai’s Lower Parel.

And traversing that path has paid off. His flagship company PEL’s revenues have risen at 29 percent CAGR over the past four years to Rs 6,610 crore for the year ended March 31, 2016; net profit went up at 71 percent CAGR in the same period to touch Rs 951 crore in FY2016. For the quarter ended June 30, 2016, PEL reported a 36 percent year-on-year rise in net profit to Rs 231 crore and a 27 percent increase in revenues, which stood at Rs 1,776 crore.

Investors have taken note and the Piramal Enterprises stock has jumped over four-fold from Rs 463.5 on September 30, 2012 to Rs 1,836.15 on the same day in 2016, taking its market cap on BSE to Rs 31,685 crore.

Not surprisingly, Piramal is the second highest gainer by both wealth and rank in the 2016 Forbes India Rich List. His wealth has risen over 82 percent to $3.25 billion from $1.78 billion in 2015, while his rank has jumped 27 places to 35, from 62 earlier.

This success is proof, if any was needed, of Piramal’s strong business acumen, one that has spurred a regular reinvention at Piramal Group.

Constant reinvention
The reinvention started as early as in the 1980s when 90 percent of the business was still textiles (Morarjee Mills) and the balance was precision cutting tools. By 1984, Ajay Piramal, then only 29, along with his eldest brother, the late Ashok Piramal, found himself at the helm of the family business after their father Gopikrishna passed away suddenly in New York.

By 1988, Ajay Piramal had decided to focus less on the textile business, which was a failing sector plagued by labour strikes. It continued to be a part of the broader Piramal Group, which was then managed by Ajay Piramal and his sister-in-law Urvi (Ashok Piramal’s wife).

The group underwent a management split in 2005-06 during which the traditional textiles business went to Urvi Piramal and her sons, under the Ashok Piramal Group.

In 1988, Ajay Piramal, despite being a novice to the pharmaceuticals business, decided to bid for Nicholas Labs, which manufactured formulations, from its parent Aspro Nicholas. He met Mike Barker, the man in charge of selling the company, and convinced him of “his dream” to make Nicholas Labs one of the top five companies of its kind in India. Barker was amused but decided in Piramal’s favour, impressed by his honesty and ambition.

When Piramal acquired Nicholas Labs, it stood 48th in the Indian domestic formulations business. A decade later, it was in the top five and by 2010, Nicholas Labs was the third largest.

“He [Piramal] has always been a clear thinker and never really gets distracted once he decides on something. He has also been good at tapping opportunities, whether it is the Abbott or Vodafone deal,” says elder brother Dilip Piramal, 67, who split from the family business in 1980 to set up a successful luggage business through his flagship VIP Industries.

Ajay Piramal’s reinvention strategy continued through the years. “By 2005, none of those old businesses (textiles or machine tools) were there and we were big in pharmaceuticals and glass. We are reinventing again, but not through exits; this time we are bringing in new businesses,” Piramal says, “and this time led by financial services.”

His timing could not have been better. By 2011, macro-economic conditions had started to change dramatically in India. In the financial services industry, lending is still dominated by state-owned banks, but they have been crippled by a combination of factors like rising non-performing assets (NPAs) and the dipping quality of management. “Their ability to take risks and give credit is not what it used to be,” says Piramal.

Also, unlike the 1990s, foreign banks—particularly since the 2008 global slowdown—are no longer aggressively pursuing their ambition to grow globally. In this scenario, India has seen the rise of private banks, non-banking financial companies (NBFCs), microfinance companies and small finance banks as viable options for credit.

Financial services constituted 28 percent of PEL’s FY2016 revenues, up from 11 percent in FY2013. The share of health care in the same period has come down to 54 percent from 71 percent, while revenues from the third line of business—information management through the US subsidiary DRG (Decision Resources Group)—are steady at 18 percent.

The financial services business portfolio under PEL has jumped by 41 percent to Rs 29,410 crore for the quarter ended June 30, 2016, from Rs 20,870 crore in the corresponding period a year earlier. This includes a wholesale lending loan book of Rs 16,112 crore, alternative assets under management of Rs 8,715 crore —third party funds managed by the Piramal group for which they earn a fee—and Rs 4,583 crore which are investments in the Shriram Group. These form part of the financial services division, loosely called Piramal Fund Management.

Piramal has also found the sweet spot in areas like financing of land purchases, which banks are not allowed to do. Through alternative assets under management, the group has invested in 62 real estate projects across seven cities with 25 leading developers.

Real estate, after all, is familiar territory for Piramal, who has been involved in building some of Mumbai’s landmark properties, such as the Peninsula Corporate Park and the erstwhile shopping mall Crossroads.

The PEL stock has been rising on growing conjecture that Piramal will demerge the financial services division from the group and possibly list it to unlock shareholder value. [Another industrialist Kumar Mangalam Birla, chairman of the diversified Aditya Birla Group, plans to demerge and list his financial services business in the first quarter of FY18.]

“As the [lending] book becomes larger, investors need to understand the break-up between financial services and non-financial services. Over time, we will move towards greater transparency. We may create a separate subsidiary for financial services or decide to demerge the business,” Piramal says.

He maintains that strong value systems are core to the growth of partnerships and goals for the group. This is evident even in the commercial decision he took in 2013-14 to buy into three Shriram Group companies. In May 2013, Piramal picked up a 9.9 percent stake in commercial vehicle financing giant Shriram Transport Finance; in May 2014, 20 percent in the financial services and insurance firm Shriram Capital; and in June 2014, 9.9 percent in Shriram City Union Finance, the retail finance firm.

“Their [Shriram’s] retail franchise is very strong, which cannot be replicated. The relationship with their customers is unique. Their value systems are very similar to ours,” says Piramal. “[I am sure] that many private equity players were interested in them… and probably would have given a higher valuation, but our approach with Shriram is different. We are there for keeps. It is like a traditional marriage of old, and there are no exits. You are stuck for good, bad or ugly, therefore one must make the most and best of the situation.”

Investors believe that it is only a matter of time before Piramal decides to merge his group’s financial services with that of Shriram’s. “It should be value accretive to both groups of shareholders; they have to be stronger as one than as individual businesses. We should add to the franchise and not dilute it,” Piramal says. Also, going forward, Piramal plans to add a retail component to the PEL book, but will not disclose more details.

Another key piece of the PEL puzzle is the US-based DRG; its presence in the Piramal portfolio is the result of a decision taken just after the Abbott deal, to not have all their money in businesses that are based in India. Piramal identified the acquisition of DRG in 2012, which provides research, data analytics and consultancy in the high growth life sciences space. “We wanted to invest in a ‘future’ business and to diversify risk,” explains Piramal. At the time of the acquisition, DRG provided data to just pharma companies, but has now expanded to insurance companies and hospitals.

DRG, serving 1,400 clients worldwide with 1,057 employees, reported a 13.4 percent jump in revenues to Rs 1,156 crore in FY2016. This subsidiary is set to be listed separately in the US in 2018, Piramal says.

STRONG GLOBAL PARTNERSHIPS
The Piramal Group has been shy of raising capital, with the chairman’s philosophy being that one should not dilute the value of capital if the company is faring well.

“From 1988 till today, we would have raised only about Rs 500 crore, but it has created more than Rs 40,000 crore in value. If you invested Rs 1,00,000 in 1988 and remained with the company, the value of that investment would be Rs 14 crore, which works out to a 28.5 percent CAGR over a 28-year period, one of the highest on a consistent basis,” Piramal says.

Strong global partnerships have played a part in this growth story. These could also be seen as additional sources for capital, if and when the Piramal Group feels the need to raise funds. Dutch asset manager APG—a partner with PEL—has committed to deploy up to $1 billion in infrastructure mezzanine investments in India. (APG had disbursed Rs 525 crore by June 30, 2016, on which PEL will earn management fees and carry interest on the investments made by APG.) Bain Capital is a partner for stressed debt investing. In 2015, private equity major Warburg Pincus invested Rs 1,800 crore for a minority stake in Piramal Realty.

Global investment bank Goldman Sachs followed, with an announcement to invest Rs 900 crore for a small stake in Piramal Realty as well.

Grand plans require the right people. Consequently, while building up the empire, Ajay Piramal has managed to build a robust management team to head different verticals, which includes Khushru Jijina who heads the financial services business and Jonathan Sandler who heads DRG.

Piramal’s two children, Nandini (36) and Anand (32), are also playing critical leadership roles: Nandini oversees HR for Piramal Group and the consumer products division, or the over-the-counter (OTC) business, of the health care segment. This business, which includes brands such as Lacto Calamine, Saridon, i-pill, Caladryl and Ferradol, is ranked sixth in its type in 2016 from 40th in 2008.

Prior to joining the PEL board, Nandini was general manager (strategic marketing) at the group’s health care division. “The family business, I realise, gave me the opportunity to do more at a young age,” she says.
Nandini’s brother Anand heads the group’s real estate development business, Piramal Realty.

Their presence underscores Ajay Piramal’s belief that legacy has a role to play even in a professionally-run group. “I believe that the combination of family and professionals is the best; the family brings the long-term vision (provided they look at it as trustees) and professionals, the execution skills,” he points out.

He is also happy with the combination of businesses in the group’s portfolio. “These are all growth industries even for the future. Geographically we are well diversified too,” he says.

It is difficult to grudge Piramal’s satisfaction at having built an empire from a largely family-owned business. In fact, this is what impressed former Tata Consultancy Services (TCS) CEO, S Ramadorai most. “His [Piramal’s] strength has been the ability to shift the focus from being a family-owned business to an institution,” says Ramadorai, now a PEL board director.

Ramamurthy Thyagarajan, founder of the Shriram Group, concurs: “Businessmen go on instinct. Ajay Piramal is one who is clear who he wanted to work with. He is familiar with the changing financial services world and will lead Shriram’s second generation forward.”

It helps, adds brother Dilip, that “he is grounded, despite the successes. There is no opulence, no fancy private jets or a yacht to show. He prefers to spend time with family and a strong close circle of school friends.”
Staying real is a learning Ajay Piramal has drawn from the Bhagavad Gita: “In the concept of trusteeship, you don’t look at your own benefit,” he says. “You have to look at the benefit of all shareholders. We are known as a value-based company. This will last… reputation is bigger than size.”