Mumbai: Billionaire Ajay Piramal-led Piramal Healthcare Ltd, set to receive Rs17,600 crore from selling off two businesses, may put some of that money into insurance, one of the fastest growing segments of the Indian financial sector.
He confirmed that an entry into the insurance sector is one such large investment opportunity the company would consider as part of the new ventures it is planning to enter.
“None of the businesses that the company is currently focused in can absorb the capital it will have in its possession once the deals are closed,” Piramal, chairman and managing director, had said in an interview with Mint last week.
Piramal Healthcare sold its domestic formulations business to US drugs and nutritional giant Abbott Laboratories for $3.72 billion (around Rs17,190 crore today) in May. This was followed by the sale of the diagnostics services business to Delhi-based Super Religare Laboratories Ltd for Rs600 crore. While the formulations business was valued at nine times sales, the diagnostics services arm was valued at three times sales.
“We will look at segments which are outside the current businesses that our company is engaged now,” Piramal said. “The new businesses should require large investments and hold attractive growth potential.”
Piramal is known for acquiring businesses cheap and building value over the long term. This quality, analysts say, will serve him well if he enters the capital-intensive insurance business, which is known for its long gestation period of 10-15 years at least before profits are made.
“Piramal Health could look at new areas that can grow even faster, such as real estate and the financial sector, especially insurance—both life and non-life segments—that is all set for a boom in India,” Muralidharan Nair, partner (health sciences advisory practice) at audit and consulting firm Ernst and Young, had earlier told Mint.
Graphic: Ahmed Raza Khan / Mint
It’s not clear what area of insurance the company will choose or whether it will seek a partner.
Among the 23 life insurance companies that exist in India currently, most of the private sector players have tie-ups with foreign life insurance firms. Overseas partners are only allowed to hold up to 26% in an Indian insurance company. Such foreign tie-ups facilitate the easy availability of capital, product expertise and actuarial support.
Life insurance is a capital-intensive business and typically, during the initial years of inception, huge amounts of cash are required to expand operations, comply with solvency margins, hire agents, manage policies and acquire customers.
Life Insurance Corp. of India, the largest life insurance player, is the only state-owned life insurer in the country. Among the private players, ICICI Prudential Life Insurance Co. Ltd is the largest.
The life insurance business is a long-term one and typically companies take up to 10 years to break even. Partnering with foreign players ensures easy flow of capital infusion programmes without hurting the operations due to losses in the initial years. Since 2001, when the life insurance sector was opened up for private players, capital worth at least Rs20,000 crore has been pumped in for expansion by the private players.
The life insurance industry manages assets worth at least Rs11 trillion, and during the 2009-10 fiscal, the industry collected total premium worth nearly Rs2.61 trillion.
The industry has been growing at a rate of 10-18% annually in terms of premium collections. The profitability of a life insurance firm is proportionate to the collection of renewal premiums.
In the non-life insurance space, too, there are 23 companies, with most of the privately-held ones floated in partnerships with foreign firms.
Sector analysts say that the high valuation of Piramal’s divested business hasn’t really been reflected in the stock.
“Since the company was left with a few tiny businesses after the divestment, and also as no clear plan for further growth was spelt out by the company, minority investors haven’t gained anything so far,” Ranjit Kapadia, vice-president (institutional research) at HDFC Securities Ltd, had said earlier.
“The money is yet to come as it will take another couple of months for the official closure of the deals,” Piramal said. “One should be patient to see the real potential of the next investment opportunities that the company is exploring.”
This would also hold true in the context of management decisions on investments, he said.
Piramal Healthcare has said that it will make fresh investments in its remaining buinsesses, which include contract manufacturing of drugs, consumer health or over-the-counter (OTC) drugs, hospital-based products and drug research.
Soon after announcing the Abbott deal, Piramal Health had acquired a key OTC brand, iPill, from India’s second largest drug maker Cipla Ltd for Rs95 crore.
The company will also look at acquisition opportunities in the contract manufacturing space, especially in the international markets, said Piramal.