Ajay Piramal’s big bet
Piramal is putting in place the building blocks for a financial services powerhouse and has wagered Rs.2,014 crore in buying a stake in Shriram Capital
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Mumbai: Ajay Piramal joined his father’s textile manufacturing unit at the age of 22 in 1977 after completing his MBA from Jamnalal Bajaj Institute of Management Studies in Mumbai, then known as Bombay.
He was still struggling to get the hang of the textile trade, then in a state of decay and headed inexorably towards doom, when barely two years later, in March 1979, his father died after giving him the reins of a newly acquired company called Miranda Tools, a maker of precision cutting tools.
His eldest brother, Dilip Piramal, separated from the family business the following year, taking away the better-performing plastics and luggage maker Bloplast VIP Industries Ltd, saddling Ajay and his other brother Ashok with the textile business. Just 16 days after the separation, all textile mills in the city closed down after prolonged labour strife. In 1982, Ashok died of cancer.
From that time in the school of hard knocks, Ajay Piramal has come a long way, entering the unfamiliar territory of pharmaceuticals in 1988 by acquiring Nicholas Laboratories Ltd for Rs.1.6 crore at a time when most multinational drug makers were exiting India. The payback came 22 years later when, in 2010, US-based Abbott Laboratories bought his Indian branded generics business for $3.72 billion in a blockbuster deal that valued the unit at nine times annual sales and 30 times profit.
With a net worth of $1.7 billion today, Piramal, 58, has his sights set on building his Piramal Enterprises Ltd into a financial services powerhouse, having changed its name from Piramal Healthcare Ltd last year to reflect its altered focus.
Money is no obstacle. In addition to the proceeds from the Abbott deal, Piramal raised Rs.8,900 crore from the 11 April sale of his 11% stake in Vodafone India Ltd, saying he would invest the money to expand his group’s interests in financial services, life sciences and information management.
Less than a week after the sale, Piramal spent Rs.2,014 crore to buy an effective 20% stake in Shriram Capital Ltd, an arm of the Chennai-based Shriram Group. That came on top of a Rs.1,636 crore investment by Piramal last year to acquire a 9.9% stake in Shriram Transport Finance Co. Ltd, another Shriram Group firm.
The latest acquisition gives Piramal access to two listed entities, Shriram Transport Finance and Shriram City Union Finance Ltd, and four privately held entities engaged in life and non-life insurance, stock broking and wealth management.
Piramal is betting that the financial sector will expand at at least one-and-a-half times the pace of overall economic growth. (Read interview)
“This is one reason and the other is the opportunity in a capital-starved economy, where government and banks do not meet the requirements sufficiently and there is a huge demand-supply gap,” he said.
Piramal Enterprises also provides contract manufacturing services for drug makers, sells consumer-health products and has interests in laboratory diagnostics. The firm bought US health care research firm Decision Resources Group LLC in 2012 for $635 million to capitalize on demand for information on the drug market.
Throughout his entrepreneurial career, Piramal’s guiding principle has been to build businesses that deliver long-term value.
Nicholas Piramal Ltd, the first pharmaceutical company in the Piramal group, grew rapidly through a series of acquisitions, including the local units of Swiss drug maker Hoffman La Roche Ltd , Germany’s Boehringer Mannheim GmbH and Rhône-Poulenc of France, now Sanofi SA.
“When I wanted to acquire Nicholas Lab, I knew nothing about the pharma industry,” says Piramal.
“I met Mike Barker (the person who was in charge of selling the local arm of the Australian company) expressing my interest in the asset and at the same time confessing to him that I have no track record (in the pharma sector),”he recalls.
Many strategic investors were competing to buy Nicholas Laboratories at that time.
“But Barker liked me or perhaps my innocence and conviction on what I wanted to do with the company. He agreed and sold it to me,” Piramal says.
Piramal’s key strengths have been an unwavering faith in what he believes and his ability to forge key relationships, say people close to him.
“No one would have given him much of a chance when he acquired Nicholas Labs. But he made such a success out of it that he became a health czar,” says S. Manikutty, a professor at the Indian Institute of Management (IIM), Ahmedabad, who has researched family-owned businesses in India.
“He is a person I admire greatly for sound business judgment and execution capabilities. His inherent financial acumen is also beyond doubt,” says Manikutty.
Piramal took five years to turn Nicholas Piramal, which focused on the domestic pharmaceutical market with pure generic drug formulations, into India’s fifth largest drug maker.
The company expanded beyond India by venturing into custom manufacturing of drug ingredients and formulations for global companies. It diversified into glass bottle making after acquiring Gujarat Glass Ltd. Then it moved into diagnostics solutions and services and drug research.
Nicholas Piramal was renamed Piramal Healthcare Ltd in 2006 and last year took on the moniker Piramal Enterprises to reflect its diverse business interests, including Piramal’s ambition of making it a financial services giant.
The deal with Shriram Capital fits in with Piramal’s strategy, giving it a stake in a company with over 9 million customers, more than 50,000 employees across 2,600 offices, and assets under management in excess of Rs.78,000 crore.
“Ajay Piramal is a very prudent entrepreneur,” says Arun Duggal, chairman of Shriram Capital. “I recall when the discussions with him started nearly two years ago, his main question was not the deal structure or the valuation but he wanted to make sure the association or partnership with Piramal Group was widely accepted by Shriram Group.”
Duggal says Ajay Piramal and his family visited Shriram Group in Chennai several times and, over time, both sides established a level of comfort with each other that resulted in the sealing of the deal.
Acquiring the 20% stake in Shriram Capital gives Piramal Enterprises the right to have two representatives on the company’s board.
When reporters asked Piramal who his company would nominate, he instantly replied his long-term investments in other entities were always based on personal trust and he would be more than happy to see Shriram Group chairman R. Thyagarajan become Piramal Enterprises’ representative on the board.
Piramal Enterprises has found an ideal partner that has four decades of experience in financial services, says Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services LLP, who has done more than 700 projects in the course of 33 years with large firms in the areas of business strategy and capital expansion.
“But the financial services business is not going to be easy for anyone, considering that any loaning or banking activity involves huge capital. If the sector turns bad, it can absorb a lot of capital and the company will be adversely affected despite its better performance,” adds Parekh, a former advisor, global financial services, at consulting firm EY, formerly known as Ernst and Young.
Raveendra Chittoor, an assistant professor of strategy at the Indian School of Business in Hyderabad, notes that Piramal Enterprises’ investment in Shriram Capital will enable it to establish a presence in all retail financial services, including vehicle financing, general and life insurance, consumer and gold loans, brokerage and mutual funds.
But financial services is a very competitive business to be in. “In fact, among the three businesses that Piramal chose to focus on—pharma, information management and financial services—I like the financial services business the least as it has the most severe competitive environment,” Chittoor says.
“It (Piramal Enterprises) is on the right path in the execution of its long-term strategy so far, and there is still a long way to go for the results to be visible,” Chittoor said. “All the three businesses of Piramal have a long gestation period and Piramal is a good investment only for investors with a long-term horizon.”
Since the 21 May 2010 sale of the generic business to Abbott, shares of Piramal Enterprises have risen 18.84%, half the pace of the BSE Sensex’s 38.55% advance in the same period, on investors’ unease about the company’s entry into unrelated sectors. That may change as its strategy crystallizes.
As a creator of wealth, there is no question that Piramal has been very successful, going by his 30-year track record of strategic acquisitions and divestments. Even so, analysts sound a note of caution: past performance is no guarantee of future results.
“Most of the areas that Piramal has chosen to enter now are quite new to the group and there are risks attached to them,” says an industry consultant who doesn’t want to be identified.
Ajay Piramal rarely tries to defend his business strategy but is a strong believer in India’s long-term growth story despite the hiccups the economy has been experiencing for the past two years.
He has a road map ready for the group. He wants Piramal Enterprises to more than treble annual revenue to Rs.20,000 crore by 2020.
Piramal maintains a rigorous work schedule, reaching his office by 8.30 in the morning and working 12 hours daily. He is very particular about starting his day early with a long walk and shuns late-night parties, yet makes time to play with Anya, his three-year-old granddaughter.
“Ajay is a smart entrepreneur and committed professional when it comes to business, and a complete family man in personal life,” says Swati Piramal, his wife and vice-chairperson of Piramal Enterprises.
Swati Piramal says her husband also has a unique ability to bring a personal touch to business relationships. For instance, on the eve of the deal with Shriram Capital, the Piramals hosted Thyagarajan and his family to a meal of South Indian delicacies prepared at home in Piramal House—a new eight-storey edifice in Mumbai’s Worli Seaface where they moved recently. Many of the deals he does are based on a personal equation, she says.
There is no doubting his innate toughness. Swati Piramal recalls the initial hardships he weathered when he inherited his father’s textile business and the responsibility of looking after a widowed mother and then his brother Ashok’s bereaved family.
The Piramals’s children—daughter Nandini and son Anand—have been already given independent responsibilities in the family business. Nandini heads human resources management at Piramal Enterprises and also oversees its consumer health business as an executive director; Anand has been managing the group’s real estate business since 2012 and is also executive director of the flagship Piramal Enterprises.
Their father isn’t taking it easy. He still has things to prove. With his bet on financial services, Ajay Piramal has laid on the line his reputation as a man who can take contrarian decisions, no matter the risk, and succeed. Investors and the industry are watching whether he pulls it off once again.