Management Case | Piramal Enterprises: Of risks and rewards

Fuelled by a clutch of deals, Ajay Piramal-controlled Piramal Enterprises Ltd has transformed from a healthcare leader to one of India’s largest financiers for its debt-starved infrastructure sector.

Small steps

From a struggling textile business in 1988, Piramal entered an area unknown to him—pharmaceuticals and healthcare—by acquiring Nicholas Laboratories India Ltd. With a new management team focusing on Nicholas Laboratories, Piramal Enterprises turned around in five years. The management took the company beyond the country with custom manufacturing of drug ingredients and formulations for global firms. It was renamed Piramal Healthcare Ltd in 2006 to reflect its new interests.

But, the game-changing move came further down the line. In 2010, US-based Abbott Laboratories bought Piramal’s Indian branded generics business for $3.72 billion in a blockbuster deal, that valued the unit at nine times its annual sales and 30 times profit. Instead of investing the money in healthcare, Piramal took the road less travelled. Ignoring warnings, Piramal Enterprises invested nearly ₹ 6,000 crore in two tranches in Vodafone India Ltd in 2011-12. The management was willing to take the risk of making investments that offer opportunity to generate attractive long-term return on equity.

War chest

The risk was rewarded. In April, Piramal Enterprises sold its 11% stake in Vodafone India to an indirect subsidiary of Vodafone Group Plc, for ₹ 8,900 crore. And the sale of the 45.4 million shares, or 11%, was valued at ₹ 1,960 a share, a 51.8% premium to what it had paid. The deal resulted in a substantial cash chest of over ₹ 10,000 crore, at a time when capital market activity is drying up, banks are becoming reluctant to lend money, and companies are selling assets to reduce debt. Last year, Piramal Enterprises had shed its old name Piramal Healthcare to reflect its intentions in financial services. The management started looking for companies which were cash-starved as the market for initial public offerings had dried up.

Turning financier

In the past one year, Piramal Enterprises invested ₹ 4,600 crore in Shriram Group, bringing the Chennai-based group’s capital hunt to an end. In February, it signed a strategic alliance with CPPIB Credit Investments Inc. for a $500 million realty debt fund. And most recently, Piramal and Dutch pension fund asset manager APG Asset Management NV together planned to invest $1 billion in mezzanine securities—hybrids of debt and equity financing—sold by Indian infrastructure firms over the next three years. The announcement marks one of the largest private sector pledges to the infrastructure sector in India and one of the single-largest commitments to date by a foreign investor to help build public works. The management says more such deals are in the making.