Vodafone investment not a gamble, we expect decent returns

Written by Nikita Upadhyay | Nikita Upadhyay | MG Arun | Updated: Feb 7 2012, 09:12am hrs
Flush with funds from the $3.8-billion sale of its domestic drug business to US-based Abbott Laboratories in May 2010, billionaire Ajay Piramal-owned Piramal Healthcares (PHL) investments in Vodafone India, the countrys second largest telecom company by revenues, last year had surprised many, as the sector got mired in the 2G spectrum scam and competition eroded profits. Piramal has now made a similar investment in the UK telecom companys Indian arm, purchasing 5.5% more for R3,007 crore, taking PHLs stake to 11%, while parent Vodafones stake is down to 64%. In an interview with Nikita Upadhyay and MG Arun, PHLs chairman Ajay Piramal justifies his decision to invest in telecom, saying the long-term Indian telecom story is intact, and that his investment is opportunistic, as he continues to scout for avenues both within the country and overseas. Edited excerpts:

Wouldnt your latest investment amount to putting all eggs in one basket How are you addressing investor concerns regarding this

It is a short-term investment, and we have fund flow coming from the Abbott deal to the tune of Rs 2,000 crore in September every year. We still have three more tranches to go. Today, we have a cash surplus of Rs 1,200 crore. We will be raising short-term finance of Rs 1,800 crore to fund this deal. We also have the ability to leverage and raise more debt.

What triggered the second round of stake buy in Vodafone India

A number of things have been considered. I feel that Vodafone is a good company to deal with. Our engagements and discussions with them ever since August last year have confirmed that. Also, I believe the Indian telecom story is strong and we will get better returns in the short term on the investment that we have done, considering the surplus that we had. Overall, the value proposition in the deal makes sense for us.

What does an additional 5.5% stake bring

Apart from the value, we will get a board seat. We have nominated Rajesh Laddha, who is group chief financial officer, to be on Vodafones board. Our involvement with Vodafones operations will be limited to what a board member is authorised to.

Your option to sell the stake back to Vodafone has no price guarantee. Also, a volatile stock market can scuttle Vodafones planned initial public offering. Isnt that a gamble

Vodafone has not told us when they want to go for an IPO. Its a private company and its decision is subject to market forces and regulatory approvals. However, this is not a gamble, and we know we can get a return of 17-20% in 12-18 months either through a public offer or by selling the stake back to Vodafone. There are other ways to exit as well if both these routes do not materialise. I think from what we have invested, we should get decent returns. We are always on the lookout for short-term investments in companies that have a good track record. We believe this investment is in that direction.

What makes you bullish on the telecom sector considering the quagmire some companies have been in

I am not a telecom expert. The telecom sector interests me not in terms of an investment, it is more like a financial instrument for me. We will keep looking at other opportunities like this one to increase shareholder value.

What are some of those other opportunities You seem to be extremely cautious before investing.

We believe it is better to be conservative in looking for opportunities. In some way, we are better off today than we were five months ago. I feel many opportunities are coming in various spaces in Europe, the US and India. We are looking closely at opportunities in our real estate funding company Indiareit Fund Advisors and other Vodafone-type deals. I could also could go for retail banking. In the non-banking financial company (NBFC) space, we had lent Rs 130 crore in November last year, which we want to increase to Rs 600 crore with a return of 17-20%.

Has your focus shifted from pharma as you are a more diversified group now

No, pharma still is a major focus for us in the areas of drug discovery, over-the-counter (OTC) drug space, contract manufacturing and critical care and we will keep investing. In the next few years, we will be close to a drug discovery. Also, the growing middle class in India is good for our OTC business.