The wisdom of not investing

Written by MG Arun | Baiju Kalesh | Mumbai | Updated: Oct 17 2011, 06:59am hrs
On the top floor of Piramal Towers Mumbais first business park are, on the left, a small Buddha idol, a symbol of peace, on the right, embossed Hindu scriptures from the Mahabharata on karma, and ahead, a Shiva linga, representing the Hindu god of destruction.

The floor nestles healthcare-to-real estate Piramal Group chairman Ajay Piramals office. His company is now loaded with $3.2 billion or R17,000 crore earned by selling his generics business to US drug maker Abbott Laboratories. He can be at peace with the booty, multiply it or even destroy. His plan is to multiply.

Cash is king

Cash is king, he agreed in an interview to FE. But, behind the calm and peace, his shareholders are a bit nervous about where their chairman will invest their money. The groups flagship Piramal Healthcare (PHL) has lost 44% of its market value until now after he signed deal on May 21, 2010.

A cash-rich company has three options. One, to invest in new growth opportunities, two, to purchase companies to gain scale and three, to return excess money to shareholders. Piramal, 56, chose the first two to make up the third, to increase shareholder value. He has put money to develop real estate, plans to run a non-banking financial company to fund power, road and real-estate developers, and recently invested $640 million to purchase a 5.5% stake in Vodafone Essar, Indias third-largest mobile telephony company, which raised investor concerns. Now, he wants to acquire more, which is what he is best at.

Future moves

We have a two-pronged strategy to invest in India, and to look at global companies in the developed world, said Piramal in an interview to FE last week. There could be a service or a product not yet introduced in India, which we may bring in by doing some acquisition, or a joint venture, overseas.

Globally, drug discovery is under great threat, said Piramal. Not many new drugs are being discovered... This is an area we will invest, he added. According to him, this would mean some new model has to emerge from India, not just in terms of cost, but in method and time. He smells an opportunity as PHLs development of 23 molecules is in works.

Big Indian companies with money will find opportunities to acquire R&D assets in the developed world, said Sujay Shetty, a partner at consulting firm Pricewaterhouse-

Coopers India. Intellectual property is the buzzword now, and there could be interesting compounds with small firms that require capital. His comments werent specific to PHL.

Shareholder concerns

Piramal, a Harvard Business School grad, needs to act fast as investors have started fleeing. Piramal understands his investors concerns, but says they should bet on his future plans. I wont be able to lay a clear path today, in an uncertain world, he said. If I lay it out, I will make calls that will change. It is worth keeping cash, and investing at an appropriate time, he added.

Piramal cannot spend all this money on a less capital-intensive business like pharma; so it should either be invested in newer areas, or returned to investors, an analyst at a domestic brokerage said. But Piramal, who attends religious discourses two hours a week, believes spirituality helps him work without worrying about results. He also has two spiritual gurus.

Until now, he is proved right to preserve cash than invest. If I had made an investment in infrastructure last year, I would have been in trouble this year, he said. Sometimes, the good decision is not to invest, as much as it is to invest.

But, Investment bankers say PHL is weighed down by its new diversified portfolio, from financial services to funding real estate developers. Markets generally like focused scrips, said Navroz Mahudawalla, managing director of Mumbai-based Candle Partners, a boutique investment firm. The issue with Piramal Healthcare is that when a fund manager allocates money, he is not sure whether he is investing in pharma, real estate, telecom or some other yet-to-be announced sector. Till this situation exists, markets will continue to give consolidation discount, he said.

Four funds sold out of PHL, while one bought his stock in past two quarters. Canara Robeco, Escorts, JM Financial and SBI sold their blocks and ICICI Prudential MF nearly doubled its stake in second quarter, showed data from Value Research, a mutual fund industry tracker.

Piramal, who owns a private yacht, wants to keep the mast steady in a turbulent market. Investments in power were a rage last year, and Piramal got several proposals. People used to come to me with projects, but they did not smell right to me. Now, we have been proved right.


He has an academician advisor to rely on to take buy and sell calls Harvard Business School (HBS) dean Nitin Nohria, an associate for more than a decade. We have always taken contrarian calls, said Piramal. People used to say the acquisition of Rhone-Poulenc is not good. But Nohria said, You must do it, it will make a big difference, he added. The India-born HBS dean also gave nod to Piramal's deal with Abbott. He has a very exceptional mind, Piramal saidabout Nohria. He is quick and clear in taking decisions.

In his role as dean, Nohria does not comment on people or organisations with whom he has personal or professional relationships, Brian C Kenny, chief marketing and communications officer at HBS wrote in an e-mail reply.


But,despite his uncanny ability to spot targets, Piramal shocked investors by buying a slice of Vodafone-Essar, entering a sector unfamiliar to him, and which is under a cloud over wireless spectrum allocations.

My job as a trustee for shareholders is to ensure that we get the maximum returns, he said. A transaction like Vodafone is to see that the company maximises returns in the short term, but that won't be a permanent model. However, there could be opportunistic investments to maximise the returns on cash, he added.

Is there a trader instinct here Piramal disagrees. We are not traders. If we were, then we would not have invested in drug discovery.

PHL's business model has changed over the last two years, with a series of divestments as well as entry into new business, said global brokerage Citigroup Global markets in a report released on September 30, 2011. The brokerage lowered the company's revenue for financial year 2012 by 59% and earnings by 74%. PHL earned R12,730 crore net profit both from operations and money from Abbott for the financial year March 2011.

Ask Piramal, will there be more on the block What we did for the branded generics business (selling it off), we won't do for all other businesses, he said. The value the company got by selling the branded generic business, could not have been realised over the next many years.


In May, Piramal struck another deal. PHL purchased realty-focused private equity fund IndiaReIT Fund Advisors for R230 crore.

Piramal is now back to building business. We would like to enlarge it some time, if we are able to get a banking licence he said. That would be our ultimate aim. Piramal has to play his cards safe as he develops real estate, a sticky issue for the Reserve Bank of India.

We will lend wisely, and only to those cities we understand and projects where we can recover the money, said Piramal who has hired former State Bank of India chairman A K Purwar to roll out his financial service business.

Consultants say this may not be easy.

Procuring a banking licence for corporates, however, will not be easy, says Saurav Tripathi, partner and director at consultancy firm Boston Consulting Group. The RBI, by putting a great deal of checks and balances, is taking all regulatory precautions before allowing companies into banking. Companies who want to foray into banking are waiting for the final norms, he added. According to him, It will be easy to convert major NBFCs into banks as they have a ready-made infrastructure to undertake financial sector services. His comments are not specific to PHL. Piramal senses that an NBFC route could get him a banking licence.


Piramal and wife Swati Piramal, an MBBS with a Master's in Public Health from Harvard University, are grooming the next generation, daughter Nandini and son Anand, for leadership roles in the group. One way to prepare the next generation is through education, said Piramal. The other is to allow them to see and experience for instance, my children would be with me in meetings. So they get to see the whole environment that's the advantage of a business family, he added. Anand has joined the real estate developer Piramal Realty, while Nandini is executive director at Piramal Healthcare.

A family-run business is in the long-term interest of shareholders, said Piramal. Someone who has a significant stake in a company will not do things short term.

That should help allay fears of investors in his company to some extent, he added.

(Chirag Madia and Sitanshu Swain contributed to the story)