Ajay Piramal, chairman, Piramal Group speaks to CNBC-TV18 on closing the USD 635-million deal to buy Decision Resources Group, a US-based healthcare information data provider, his interest in high-growth areas that are knowledge-based with intellectual property.
He explains his focus on the financial services sector, interest in the defence sector and lack of regret about investing in Vodafone. Piramal calls the lack of firm decision-making in government and bureaucracy to be the real challenge that India faces.
Below is an edited transcript of the interview on CNBC-TV18. Also watch the accompanying videos.
Q: The deal comes just a month after you closed an acquisition with Bayer. Can you explain the rationale behind this particular deal, because I understand that the healthcare information industry is pegged at about USD 5.7 billion and you believe that there is a critical need for specialist information providers?
What is the kind of opportunity that you are hoping to seize with the company for which you have paid a price that's almost four times the sales and 12 times more than the EBITDA?
A: The Decision Resources Group is a company involved in providing proprietary information and analytics to the pharmaceutical and healthcare industry. The reason for our foray into this segment because it is a segment where leaders are at a premium and DRG is a leader of the segment.
As complexity in the pharmaceutical and medical tech industry keeps increasing and as growth becomes more personalized, this market is going to grow. The whole pharmaceutical market is about USD 850 billion and medical tech market is about USD 350 billion.
They are both growing and the complexities are increasing. And this calls for the requirement for high quality information.
Q: Does this acquisition meet with your 18-20% return-on-investment criteria that you have held out so far for all your other deals?
A: This will meet the criteria of investments that we have made, but do remember that this is in the US and therefore the dollar returns would be a little lower than the 18-20% of the Indian rupee. This is a business which is profitable. The company has a CAGR growth of 20% and its customers include 48 out of the top 50 healthcare companies in the market. Its rate of customer retention is 95% and has a platform of solid growth
Q: You were talking about the kind of clients that you will now get on account of this acquisition. Can you tell us about the kind of margins and that will accrue due to this acquisition? I understand that for 2012 the expected sales of USD 160 million. What is the boost in growth that you expect this company to offer?
A: The sales, as you said, for the year is expected to be in the USD 160-million range. The company has grown through a combination of organic and inorganic routes. There are enough opportunities to grow organically and target M&As.
The company has a successful track record of acquiring businesses and integrating them. So, I expect both combinations to give healthy topline and bottomline growth.
Q: In terms of acquisitions, the acquisitions that you plan to bolster the Decision Research Group portfolio, what are the gaps currently that you hope to plug and how soon can we see you embark on an inorganic growth strategy for Decision Research?
A: We have not even acquired the company yet. I think we will complete the acquisition by the end of June and then we will look at other acquisitions which will be particularly in the same segment. They need not be necessarily large companies and could be in the USD 5-10 million range and upwards.
Q: Have you already identified any because you sound like you have set your sights on some potential targets that fit in with your larger strategy for acquiring this particular company?
A: No, we have not identified any yet. Yes, we have had a preliminary look at some of these opportunities but as I said, only when we takeover the management and get ownership of the company, is when we would look around seriously.
Q: There was a lot of talk on DRG launching an IPO. Has the IPO plan been put on the backburner or is it something that you would consider for the future?
A: We have no plans for an IPO. We believe that this business has a high potential to grow within our system and also that we have adequate funds if and when we need it. So a good free cash flow has been generated in this business. So we don’t have any plans in the near future of an IPO.
Q: What is your own opinion about the economic climate and what is the kind of war-chest that you are now working with for potential acquisitions?
A: As far as the economic environment is concerned, there is no doubt that it is very challenging whether in India country or overseas. The reason for our exit out of the domestic business was also to invest in certain high growth areas with a lot of knowledge based and intellectual property.
We invested in molecular imaging which will still require investment for a couple of years before we see any revenues sometime in 2014 or 2015 and DRG is quite the opposite where revenues will come in immediately.
Q: Your areas of focus, I understand, include OTC, research and development, healthcare information management, financial services and defence. Have you firmed up your plans on financial services? Is there any truth about the speculation in the market about your conversation with Biyani over Future Capital?
A: Let me not comment on market rumours because they surround almost every transaction we have put on the table somewhere or the other. So I don't want to comment on rumours because that has always been our policy.
But let me share with you my thinking on financial services. We have forayed into financial services in three different blocks. The first block, is the non banking financial companies (NBFC) sector and we have started an NBFC with focus on real estate and education.
This is because we believe we can offer some value, thanks to our domain knowledge of the real estate business being adequate to assess the risk is in the sector and do business where banks have not invested.
The second foray is through our private equity fund, Indiareit, is probably one of the best performing funds in the real estate sector.
The third is opportunistic investments, like the investment in Vodafone. I don't foresee going beyond these blocks in the near future.
Q: I want to pick up on that comment on the opportunistic investment in Vodafone. Is there any regret on the Vodafone investment because the company is mired in controversy and it is obvious that the IPO has been pushed back for at least a year if not longer.
You have an exit timeline of about between one and two years, how worried are you about your investments in Vodafone, is this something that you perhaps regret?
A: I don't regret the investment at all and I am not worried about Vodafone. When we made the investment, it was agreed that we will exit anytime between two-to-three years.
I still believe that timeline to be good. If there is an IPO that's fine, if not then, we can sell out to Vodafone subject to the FIPB (Foreign Investment Promotion Board) limits or we could find a third alternative party.
I think all the options are available and I am not particularly worried about it.
Q: But is the second option available? Vodafone has actually withdrawn its application from the FIPB ran into trouble with the regulator. So does the option of selling your stake to Vodafone hold true today?
A: It does, because they have some headroom already within whatever is approved.
Q: But they have withdrawn that application, so is it being reworked? What is your own understanding?
A: My understanding is that there is enough headroom; they have not yet fully exhausted the limits available.
Q: Are you going to be reapplying? Is Vodafone going to be reapplying to the FIPB on account of the new sales arrangement in order to comply with the regulations?
A: No I think that's for Vodafone to decide and you can ask them. I know that there will be enough headroom for us to do it.
Q: Are you looking perhaps at entering the insurance space at all?
A: No, we are not looking at that sector.
Q: Is there any truth in rumours about your interest in the aviation sector?
A: There is a lot of speculation and I don’t want to comment on rumours. My only worry is that I will have no friends left if everybody thinks that I am going to takeover the whole industry.
Q: Are you looking at aviation at all, would that be a sector that would interest you?
A: No, that is not a sector that would interest me.
Q: Why would you like to foray into the defence sector which is a highly regulated sector?
A: The first reason for our foray into defence is if we can get a product or a company, which has a lot of intellectual property and is really in line with some of our other businesses.
The second reason is based on our forecast that India is probably going to be the largest importer of defence equipment in the near future and with imports also comes the offset and that is an area which the interested foreign companies would want to have a reliable partner.
I think even the government of India wants companies of high repute to enter the sector. It is a combination of the demand, availability of high technology products and thirdly, good partners, that will confirm our foray.
Q: So you are looking at a potential joint venture in defence? Have you already identified potential partners?
A: No, not at this stage. We haven't identified anybody but we could. This is the only way we will enter the sector.
Q: How soon could we see you make an announcement in the defence sector?
A: I feel that by September, we should have a clear strategy. We will make an announcement when we have more information.
Q: What would be the war-chest you have outlined in order for you to complete some of these forays or make your debut into sectors like defence?
A: No, we don't have any war-chest. The only thing I can say is that our foray is not going to be as large as the healthcare information initiative because that is a space that we understand a little more. So if we do defence, it will be a more conservative entry in the beginning.
Q: Will your continue to focus on the healthcare information management segment you are now interested in?
A: Whatever the existing pharmaceuticals areas we are in, that's where we want to be. I am not looking at now major acquisitions and our focus now is to really deliver products.
We want to move out from drug discovery and development into the market phase and that's where our focus is going to be. As we discussed earlier, it’s in the healthcare information segment where we want to make interesting, though small, acquisitions.
Q: Where you see the real estate market and prices headed given the state of the domestic economy and low probability of the Reserve Bank to aggressively unwind rates?
A: The real estate market, as far as we are concerned with our focus in Mumbai, is still a robust market. It's not what it was in 2010 but those levels were not scalable.
So today it is a healthy market. In the last year, approvals for new construction were held up and has therefore resulted in a shortage today. I think in the next three or four years this will be made up and is till think that this is a good industry to be in.
Q: What is the biggest challenge that you are facing at this point in time?
A: I think the biggest challenge is taking quick decisions at various kevels whether by the government or bureaucracy. India has faced tough situations and we have overcome problems with firm decisions. But today I find that there is a lack of firm decision-making and that's what we really need.
Q: Since you brought up your list of friends, do you have friends are financially trapped and may lean on you for help at this point in time given the fact tat you are sitting on perhaps fair amount of cash?
A: None of my friends have approached me, But yes, there are lots of groups in the country which are stretched due to delays in approvals or execution and it is a challenging situation for many people in the industry today.
Q: I want to end by asking you what else could you be looking at from an opportunistic financial investment deal point of view that could give you 18-20% ROI and you could look at existing within the next one or two years?
A: Unfortunately, there is nothing in the pipeline. But if something comes up at your end, please let me know.