Piramal Enterprises lists potential investment areas

Mumbai: Ajay Piramal-led pharma-to-financial services group Piramal Enterprises Ltd, which formed a core strategy team to identify potential investment opportunities after completing the sale of its drug formulation unit in 2012 to Abbott Laboratories for 17,000 crore, is ready with a list of businesses it wants to enter.

After altering the memorandum of association and changing its name from Piramal Healthcare Ltd a year ago, the group had proposed new business plans in banking, insurance, information technology and security solutions, among other areas, to grow bigger.

But it has dropped them from the final list, opting to fall back on its known strengths: real estate, financial services and pharmaceuticals.

The group’s new focus areas of investment now include realty funding and lending and structured equity investments in infrastructure and education on the financial services and realty side; and drug discovery research, hospital-based products and consumer health and information management on the pharma side.

“Our immediate goal is to consolidate the efforts on the business plans in each of the shortlisted areas and to grow them vertically to help transform the group into a diversified conglomerate that should ideally have a turnover of at least ₹ 20,000 crore in the next six years,” says chairman Ajay Piramal.

To be sure, it is not going to be an easy journey for the group, which has a consolidated revenue of $650 million (about ₹ 4,100 crore) as of December 2013.

The deal with Abbott Laboratories was closed in 2010 after it received the first payment of the total valuation, spread over five tranches. The cash-rich group has been seeking to deploy the money in new strategic businesses along with expanding the existing ones.

The company altered its memorandum of association to include more business interests in its fold along with a change in name.

It also formed an internal strategy group with sector experts and senior management executives to identify new investment opportunities. In the interim, it also looked at some portfolio investments, including the purchase of a 11% stake in telecom company Vodafone India Ltd with a two-year exit option.

Piramal Enterprises has four business entities—Piramal Life Sciences, Piramal Capital and Indiareit Advisory Services Ltd and Decision Resources Group—that broadly deal with the businesses that it wants to invest in.

It also continues to operate other businesses in healthcare—custom manufacturing, consumer health and critical care.

Banking was one of the businesses that analysts had thought Piramal would be keen on so as to expand the financial services business. But people in the group say this seems quite unlikely now as the group does not want to sacrifice the existing line of businesses under this vertical.

Reserve Bank of India’s new banking licence guideline prevents a corporate entity from operating a banking and a non-banking financial services business in tandem.

“Piramal would always prefer a non-banking finance company (NBFC) to a bank,” said a corporate advisor with a foreign consultancy group.

According to him, there are compelling factors that will make the group prefer an NBFC. Firstly, it’s the business that will provide the group the best synergy with its long-associated business history of realty development and funding. Secondly, a structured equity investment and debt finance model in the realty space will provide a niche to the group in the present market scenario.

Historically, the Piramal group has been closely associated with the real estate business through Piramal Realty and Indiareit, the group’s real estate development and private equity companies, respectively. The group, which is already strong in funding realty developers, may soon get into retail lending as well.

“The group can leverage its expertise and relationships as an added advantage when getting into retail lending,” said a senior group executive in an earlier interview. The executive didn’t want to be named.

According to this executive, the home mortgage business is most likely to come under the group’s retail finance services strategic business unit—Piramal Finance.

Piramal Enterprises, having jointly announced a structured debt finance business in the Indian realty industry with Canadian Pension Plan Investment Board with an initial investment of some $500 million, is taking its real estate private equity business to the next phase of growth. Managing this debt finance, Indiareit, which has already invested at least $1 billion in the Indian realty sector through equity deals, will also enter structured debt finance.

“Realty funding, both equity and debt, is in demand now as many banks have stopped lending to developers and IPOs (initial public offers) to raise money from the market have virtually died in this sector,” said Ajay Piramal.

Piramal bought a 9.9% stake in Shriram Transport Finance Co. Ltd for ₹ 1,652 crore from American private equity fund TPG Capital in May 2013, and is keen to invest in infrastructure and education through the financial services company Piramal Capital.

The company, which will make equity and debt investments in the size of around ₹ 500 crore, has already funded to Navayuga Road Projects Pvt. Ltd, the road development arm of Navayuga Engineering Co. Ltd, and Green Infra Ltd, an infrastructure company.

Drug discovery is another major area of focus after the re-merger of its drug research firm Piramal Life Sciences.

With a couple of lead molecules targeting infective diseases and cancer already in the clinical research stage, the company claims to have a pipeline that has big potential, although this will remain a high-risk area till it reaches critical milestones.