Informist, Tuesday, Oct 19, 2021
By Apoorva Choubey and T. Bijoy Idicheriah
MUMBAI - Ajay Piramal has never shied away from looking at mergers and acquisitions to grow Piramal Enterprises Ltd. Even as the conglomerate undergoes a demerger to separate its pharmaceutical and financial services operations, the appetite for such deals in both areas remains strong.
The important thing is to find the right strategic fit at the right price, including in the domestic formulations space that the company had exited in 2010, the Piramal Group chairman tells Informist in an interview.
"In other words, this is a business we know, there is some goodwill in it, and if we can acquire something reasonably priced in domestic formulations, we will do it," Piramal says.
Piramal Enterprises had sold its domestic formulations business to Abbot Laboratories Ltd in 2010 for $3.7 bln.
The pharmaceutical business may look to raise more debt for acquisitions. "I think debt will go up because we want to do acquisitions,” he says. “For the current business, we will not need more debt but for acquisitions, we will have to."
Even in the financial services business, where the company just acquired Dewan Housing Finance Ltd, Piramal hints at the possibility of more such opportunities.
"We look at opportunities, and according to me, consolidation is taking place in the (financial services) industry. The stronger ones are doing much better, the marginal ones are finding it difficult to raise money for capital adequacy. So, there are opportunities, and we will look at that."
Asked if transformation into a bank is a natural progression for the financial services business, Piramal says a lot will depend on whether the Reserve Bank of India will allow a conglomerate to promote a bank, and whether it will be a profitable move to transition.
"We will progress towards becoming a bank and that is the natural progression. But will we do it or not, I am not sure," he says.
Following are edited excerpts from the interview:
Q. For the last five years, you have spoken about splitting the business into pharma and financial services. A lot has happened since then, including your takeover of Dewan Housing Finance. What made you decide that this was the right time?
A. We have been planning this demerger for some time, as expressed publicly too, that in the medium term, we would do the demerger. We realised that at this stage, both the businesses, pharmaceutical and financial services, were strong enough to stand on their own in terms of what we see as business, team, or capital required.
We also recognise that investors are not very happy with the conglomerate structure, they want a simpler structure. I remember when we were a pure pharmaceuticals company, we would have more than 20 analysts or brokerage houses cover us. Today, with this conglomerate structure, there are four-five covering us.
Also, when we meet investors, there are some who are only interested in financial services, and others specialise in pharmaceuticals. That's why we thought that this was the right time.
Moreover, I believe that if we tell the market something, we must live by whatever we say. We had said that we would demerge the businesses in the mid-term, a couple of years ago. So, we were ready, we took steps last year itself.
We simplified the structure for pharmaceutical operations, got it into a 100% subsidiary and then to establish credibility, we got Carlyle Group as a 20% investor. We had a DRG (Decision Resources Group) business that was not related, so we exited that. We also built up our capital so that we would have enough firepower to do any acquisitions because we wanted to diversify our lending mix from just wholesale to wholesale and retail, and therefore we did DHFL. So, all this is not out of the blue, it's part of a plan that we are executing.
Q. The RBI likes a simple structure in financial services; it doesn't like too many layers. What would the financial services structure look like?
A. We are doing exactly what I believe the RBI wants. But it still has to give approval. We had Piramal Enterprises, which had (lending) businesses and two finance arms--Piramal Capital and Housing Finance and PiramalFininvest. Lending was actually taking place from all three entities. So, the RBI was not very happy with two NBFCs and one housing finance arm.
Now, we are merging PiramalFininvest into Piramal Enterprises. Only two entities will lend, one an NBFC and the other a housing finance company. This is the structure that most institutions have. I believe this will be a simpler structure.
The fact that the pharmaceutical business is no longer under Piramal Enterprises and there is no DRG is so that RBI will get greater transparency into the financial operations. So, I presume they will be happy with it.
Q. What is the timeframe you are looking at for the demerged structure to play out and the approvals to come in?
A. It may be three-four quarters. Within 10 months to a year, we should be able to do it.
Q. You have other entities in the financial services space, and now you also have insurance ventures that you have inherited as part of the DHFL transaction. What is the future there?
A. We have India Resurgence Fund, which is investing in both equity and debt in distressed assets. This fund was one of the first in the distressed assets space and is a joint venture with Bain Capital. So, we want to continue to build on that. Actually, we will expand our fund business as well, both through equity and credit.
We also have a performing credit relationship with CDPQ (Canada's Caisse de depot et placement du Quebec) and we will continue to do that. We have real estate private equity with Ivanhoe Cambridge, which to some extent has been a little dormant, but we would like to continue it.
Q. The initial reaction suggests the market is not really enthused by the deal. How would you allay concerns that the pharma business may not get its fair share when it comes to the division of cash flows and net worth?
A. We have shared some broad numbers about the pharmaceutical business. Towards the end of the year, its net worth would be about 70 bln rupees and the debt levels will be a little over 30 bln rupees. We have not shared the exact numbers because audit and all that have not happened. We will be able to know this in mid-November.
If I look at it in terms of the debt/EBITDA (earnings before interest taxes, depreciation and amortisation) ratio, it's a pretty conservative number, it will be in the 2ish-range, could be a little lower as well. Debt to equity is also conservative. According to us, pharmaceuticals has a good run rate for growth, as far as capital is concerned. That's why we got Carlyle last year. We have done pretty well in the markets in general.
Q. What would be the immediate area of focus for the pharmaceutical business, with some key markets seeing price erosion? You mentioned you would look at inorganic growth opportunities as well, so what can investors expect?
A. Our pharmaceutical business has three areas, CDMO (contract development and manufacturing organisation), complex hospital generics, and over-the-counter drugs business. The first two are global, and almost 92% of the turnover comes from outside India. The OTC business would be about 8-9% of the turnover.
After the Carlyle deal, we have grown organically, as well as through acquisitions. We did three acquisitions in the last 12 months in pharma. One of them was a solid drug entity in Sellersville in the US, we acquired 50% equity in our joint venture with NavinFlourine International which makes intermediates for anaesthesia business, and the third was in peptides, called Hemmo Pharma.
We are seeing good traction and will continue to grow organically as well as inorganically. I am not seeing that much price erosion now. There is some inflation in raw materials because of what's happening in oil and gas, and other supply constraints. My view is people are recognising that these are global phenomena and are willing to pay a surcharge on that, so all customers are facing this.
Q. You have also hinted that the company could be looking at re-entering the India formulations business. What has changed since 2010, when you sold the business to Abbott?
A. There was an option sometime ago, but I believe we need to find out if there are value-based acquisitions that are possible. When you have to again build a whole new business from scratch, which is what we will have to do, the synergies you get in an acquisition are not there. Therefore, the acquisition must make sense.
The reason we could do so many acquisitions in pharmaceuticals in the past is we had a lot of synergies and so, we could compete effectively with anybody for the acquisition.
Frankly, I find that many people look at valuation differently today. Like private equity funds, they hope that valuation will go up in five years, and they will make money. From a strategic view, it does not make sense because you have to be in it for the long term. In other words, this is a business we know, there is some goodwill in it, and if we can acquire something reasonably priced in domestic formulations, we will do it.
Q. For the pharmaceuticals business, must shareholders brace themselves for high debt and the company investing the cash generated back into the business for growth?
A. I think debt will go up because we want to do acquisitions. For the current business, we will not need more debt but for acquisitions, we will have to. We find there are many opportunities, such as the consolidation happening in the CDMO business, and with our reputation, we have options. As you perhaps know, we keep saying our record with the US Food and Drug Administration is unblemished till now.
There are opportunities due to consolidation in the global market too, and if there are certain capabilities you need, you can acquire. In complex hospital generics, we have a strong complex distribution setup, especially in the US. It is easy for us to actually use the existing infrastructure when we do any acquisitions, and this is the synergy that we get.
Q. There are a lot of private equity funds looking for 20% internal rate of return for specific product mixes. Would you be in the market to buy or sell a specific product? We have seen all kinds of smaller pharma deals play out.
A. We are not looking at any exit or monetising anything. We continue to buy products; we bought products across every area, not in CDMO because there aren't any products to buy. We have bought products in hospital generics, we have done pretty significant deals. We've done that in OTC as well.
Q. You are constantly looking at deals, whether financial services or pharma. Would you consider financial services plays beyond the credit mix and the private equity mix that you have right now?
A. We look at opportunities, and according to me, consolidation is taking place in the industry. The stronger ones are doing much better, the marginal ones are finding it difficult to raise money for capital adequacy. So, there are opportunities, and we will look at that.
Q. You've been in the market for portfolios, to grow the retail loan portfolio. After the DHFL deal, would that be a focus or would you look at consolidating?
A. We don't need portfolio acquisitions now, but I can't say no to anything. If it makes economic sense, then we can do it. We wanted to change the mix. So, in some ways, DHFL was a portfolio acquisition.
Q. In the next year or two, will the focus be only on credit?
A. I never make a commitment which I don't believe in. If there is an opportunity and if we have the time, and it is strategic and has good value, we will do it. There is no hurry.
In retail lending, our first investment was through Shriram. The idea was to get into retail. The idea was you build wholesale from Piramal Enterprises and get retail from Shriram, and at some time you could merge. But we realised that the cultures were so different that it did not make sense, and both the companies could suffer. So we waited, tried one or two other things that didn't work out. We waited till DHFL. So, we know the strategic direction we need to go in.
Q. The RBI policy paper suggests it would be open to conglomerates looking at bank licences. Considering the size you have now achieved, after DHFL, is that a natural progression and would that be a natural ambition for Piramal?
A. We will progress towards becoming a bank and that is the natural progression. But will we do it or not, I am not sure. It will take a couple of years for us to get the integration of DHFL, to get our systems and to get everything aligned with what the RBI would want. It takes time, I am conscious of that. It must make profitable sense.
And I do not know how the RBI will look at it, this is a policy paper. Let us see how it implements, what it implements.
Q. Would we see any further fund-raising by the company?
A. We do not need capital. After pharmaceuticals moving out, we still have adequate capital. If we take Piramal Enterprises and Piramal Capital and Housing together, our capital debt-to-equity will be less than one.
Q. Do you have any concerns over pending litigation at DHFL?
A. There is no pending litigation as far as we are concerned. There are one or two as far as the committee of creditors is concerned. They will fight it, and we will join in that fight. I cannot presume what the courts will do, but what I am told by our legal team is that we have a very strong case, especially now since the deal is completed. End
Edited by Avishek Dutta
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