Demerger of the group’s healthcare and financial services business will happen over next 12-24 months, says Ajay Piramal, Chairman of the Piramal Group.
Since pharmaceutical and financial services are two distinct businesses,
demerging the two will make it to understand valuation of each.
Piramal said that both Shriram Group and Piramal Enterprises might be put under same umbrella at some future date. However, the issue has not been discussed by the boards yet.
With public banks reeling under stressed assets, Piramal feels that NBFCs will have to fill the space to accommodate rising funding needs of the growing economy. A growth of 15-20 percent in this space is possible, he adds.
The company is looking at floating a fund to deal with stressed assets situation in future. “not only will this fund be just taking on assets but it will also work upon those assets, so that you can create value out of them,” he said.
In next two years, the company plans to grow both organically and via acquisitions in its financial services, pharmaceutical and information management business.
Below is the verbatim transcript of Ajay Piramal’s interview with CNBC-TV18's Shereen Bhan.
Q: You have come off a good quarter. If I were to take a look at your Q4 numbers across your segments whether it is financial services or healthcare, revenues and margins are higher. But let me talk to you about what the market's big expectation is and that is the proposed restructuring exercise that you hope to take over to demerge your healthcare business from your financial services business. How soon can we expect that restructuring to take place, what kind of timelines are you working with?
A: We are working that in the near future, in the next couple of years we should be in a position to really demerge both these businesses of ours into two independent companies.
Q: When you say that you are working on over the next few years, can I tie you down to a more specific numbers. Can we expect some forward movement over the next 12 months, the next 24 months in your attempts to try and restructure and demerge?
A: It will be somewhere between 12 and 24 months.
Q: So between 12 and 24 months you hope to start or conclude the process of the restructuring and the demerger?
A: Yes, I would say 24 months.
Q: I also wanted to ask you where things currently stand because if I were to take a look at your market capitalisation at about 23,000 crore performing very well. What would this mean in terms of unlocking shareholder value and has there been any valuation exercise that has been done that gives you a preliminary assessment of the kind of valuation that can be ascribed to these two businesses?
A: We as a board do not look at what the valuation exercise would be in this case. We just feel that it is in the best interest of all shareholders because today there is a bit of difficulty in understanding our numbers and particularly because financial services and pharmaceutical are two very distinct sort of businesses and we felt that if we demerge or we segregate these two, it will be become more simpler to understand and people can then appreciate what the true values are. So I would let the market discover what the valuation would be.
Q: There has also been a lot of talk about you bringing the Shriram Group entities under one roof along with your other financial services businesses. So can we expect that to happen along with the eventual restructuring that we just spoke about?
A: As far as Shriram Group is concerned, there are independent boards both in the Shriram Group and in the Piramal Enterprises. I am sure that we can examine it. I am not in a position to say it today as to what will happen. It makes some strategic sense that in the long-term, we should have, Piramal Enterprises is much more in the wholesale side, Shriram is much more on the retail side. If together it would make a complete picture but it is still not discussed by the two boards, so it would be too early to say anything.
Q: Is this a plan that you intent taking up with the board?
A: I think we need to appreciate that the cultures are different of the organisations, so we need to see it still. It is little early as I said. At the right time we would like to consider it.
Q: Let me talk to you about your individual segment. Let me start by asking you about financial services, revenues are up 111 percent to Rs 558 crore in Q4, margins at about 45.3 percent. Give us a sense and some colour on what the expectation really is as far as growth in the long-term for this space is concerned?
A: We have entered in financial services relatively lately, in 2012, and we found that it is a good scope to grow. If you look at today, of the whole financial services sector, 70 percent is with public sector banks, 30 percent is with the private sector. You know the issues that the public sector has today saddled with. So I feel there is an opportunity for non banking financial companies (NBFCs) like ours to fill in this space because with the economy growing, there is going to be a need for funding and with our adequate capital that we have on our side and our understanding generally about the business, I think this is an area for growth; this is what we have identified in 2012 and I believe that we should continue to grow.
Normally people say that financial services grow 1.5 or twice that of the gross domestic product (GDP) growth rate. So to look at 15-20 percent growth in this space, should be par for the course.
Q: Since you are talking about growth aspirations on the financial services side, would those include aspirations to get into banking as well. Are you looking at the possibility of banking licence? You still keen on that or do you believe that whatever your efforts are going to be on this space, will continue through the NBFC?
A: At the moment we are not looking at banking. In the eventuality if something happens between Shriram and us in the future then we could look at that - that would be the next logical step but today we are not looking at banking. We are confining ourselves to be NBFC.
Q: If things were to work out and there was to be a merger of sorts between Shriram Group entities as well as Piramal Enterprises, you could look at the possibility of a bank licence?
A: It is very hypothetical. First of all, both the companies need to merge then we have to see what the environment then is. So it is little premature to ask that question now. However, a couple of years down the line, I would be in a better position to answer that.
Q: Let me talk to you also about something else that there has been a fair degree of buzz around, the government is looking at stressed asset fund through the National Investment and Infrastructure Fund (NIIF). I understand you yourself are also looking at stressed asset fund. Can you take us through the details of that?
A: I believe that this is a good opportunity because now there is a lot of pressure on the banking system to clear up the assets and the non performing assets they have had and this is the first time I see that there is a lot of seriousness whether it is with government or it is with the Reserve Bank of India (RBI). Looking at the passing of the bankruptcy law, which is quite a significant one and also what pressures the RBI is saying to truly recognise what have been non-performing assets (NPAs). Therefore, I think this is an opportunity where there will be stressed assets which need to be worked upon and here is an opportunity for groups like us, so therefore, we are looking at floating a fund. We will get some international partner with us in that fund and then raise money and work on the stressed assets because I feel that there is a shortage of money for managing stressed assets and the experience that our group has had in turnaround of various industries. I think there is an opportunity. So not only will this fund be just taking on assets but it will also work upon those assets, so that you can create value out of them.
Q: You said that you will be looking at an international partner. Has anyone been identified and by when can we accept you to launch that stressed asset fund and what is the anticipated corpus as well?
A: We have not yet finalised on a partner. We are in conversations with a few of them and in the next three or four months we should be in a position to finalise who the partner would be. We would put in funds. The size of the fund would be in the region of USD 500 million to a billion dollars and we would put in some capital of our own. We will get the partner to put in some and the rest we would raise. I think that the fund should get operational towards the end of the year.
Q: Any particular sectors that you are going to look at by way of the stressed asset fund. Is this going to be sector agnostic?
A: We would focus on few sectors. We are still in the process of identifying those sectors where we think we can make a difference, so we are trying to look at sectors where of course there are stressed assets but where by and large stressed assets have some value in them and also some areas where we have interest or which are akin to those areas that we worked, that would be the preference but we have not yet shortlisted it.
Q: Let me also then talk to you about the healthcare business because you have just done an acquisition of about Rs 110 crore. You have acquired four brands from Pfizer. I know that the aspiration has been to be in the top three in the over-the-counter (OTC) business. You are currently I believe, if my memory serves me right, at about number seven. What is the plan, are we likely to see you grow by way of acquisitions even further here?
A: If you look at what we are trying to do in the OTC space, we are just trying to replicate what we did in the domestic generic formulation space. When we enter the generic formulation space we were ranked 48th that was in 1988. In 2010 when we exited it we were ranked number three. The way we grew in this business was both through organic means as well as acquisitions. So, we invested in the business, we invested in sales, distribution and brands and also acquired it.
So that is the same thing that we are trying to do in the OTC space. We were, when we entered let us say about six years ago, we were ranked 40th. We have now grown through investing again in acquiring businesses. So, besides Pfizer brand only about three or four months ago we acquired two sets of brands one from Merck Sharp and Dohme (MSD) and the other from another company call Little's. We have also grown our sales and distribution and therefore I think we have a chance to be a number three soon.
Q: Can we expect more acquisitions on this front? What kind of war chest are you working with?
A: We always look at acquisitions and if it makes strategic sense, if there is value to it then yes, we would do it because if we have a strong sales and distribution the brands can just easily fit into it. So, it is not that we have a separate war chest for it but we have enough adequate capital for good transactions.
Q: So far we have spoken about growth within your existing businesses or at least opportunities that are aligned to your current businesses but let me ask you about possible diversification because there has been a lot of speculation on the possibility of you being in the race to pick up Lafarge’s cement asset in India. Is that something that you are considering?
A: You always read a lot of speculation about what we are doing, so let us leave it at that. We always look at opportunities, again we are very sure and we are very disciplined in this that if it makes sense, if we can trade value, there is strategic fit for us then we will do it otherwise we would not.
Q: Just the cement business, don't talk to me about Lafarge, but the cement business makes strategic sense for Piramal? You are in real estate, in infrastructure, so in that sense it is little bit aligned to what you are doing on that side. So, would the cement business make strategic sense for you?
A: The logic of being in real estate and in infrastructure doesn’t -- I mean I can stretch it if you like for cement but there is strategic linkage to it. When you buy cement, when we do it in real estate, it is not the brand which counts, it is the location, whichever is near you, which is a good brand you buy cement on that bases.
Q: Would I then be fair to assume on the back of what you just told me that in terms of future diversification, the cement business is not necessarily something that would make strategic sense for you?
A: I don’t think that is also correct, let us see. It is too early to say. I don’t want to say yes or no to that. Let us look at what happens.
Q: I won’t read further between the lines on this front but speaking of interesting opportunities in the future and perhaps other sorts of diversification, what else is on the agenda at this point in time, what else looks exciting to you?
A: Actually the spaces that we are in today are very exciting itself. So, if we have talked about financial services, I think there is going to be still a lot of growth for the reasons we talked about earlier where the whole economic growth space or the financial sector in that and our own presence in that, so that itself is a very exciting space.
In the pharmaceutical sector also we have three different areas that we are working in. We talked about OTC but in the critical care space where we are the third largest in the world and most of our sales is actually in inhalation anaesthetic is outside of India that is another area which is of high growth for us and so is the contract manufacturing and services.
So, pharmaceutical is also of growth for us and information and data management which is a business which is run out of the US again is a high growth area. With so much of data available with the cost of technology coming out and the increased competition, the value of data is becoming more and more and I see that this as a growth areas as well.
Q: On the information management space, can we expect some big ticket acquisitions or acquisitions per se within that space to further the growth opportunities that you see?
A: In that space, the way we have been doing it, we acquired this business in 2012, we will do both acquisitions as well as organic growth. So, half of the growth should come organically, and half of it should be via acquisitions.
Q: Let me also ask you that any future diversification away from the current businesses that you operate in, will they happen through Piramal Enterprises or will this happen in your personal capacity through a family investment firm, perhaps?
A: It is difficult for us to say, but what is important for us is to see that first and foremost, the shareholders get the best deal as far as Piramal Enterprises is concerned. And this is what we have been trying to consistently do. If you look at it, we entered pharmaceuticals in 1988 and since then, over the last 28 years we have created value at a compounded growth rate of about 28.5 percent. So, if you invested a lakh of rupee with us in 1988, it would probably be worth about Rs 11 crore today. So, we try and see that whatever is in the best interest if the shareholders, we would do that first. If it makes sense, that is the first priority, but sometimes, we find that it may not make sense for shareholders.
So, let us say, real estate. We started development of real estate about four years ago. I thought that in a public listed entity to do real estate development would be a little bit of a risk - and there also, lumpy revenues and therefore shareholders may not understand it and that is why we did it out of our own family office. So, that is how we keep looking at opportunities.
Q: Can you take us through what the current cash on books is and also the debt position for the group?
A: Today, the debt position is about, we have a net worth of approximately Rs 12,500 crore and the debt is about Rs 14,000-14,500 crore, but you must look at the debt slightly differently, because a lot of the debt is in the financial book, for the financial services sector. So for the existing businesses, there is not that much of debt. So, we have been able to fund most of the growth in pharmaceuticals and through Decision Resources Group (DRG). There is limited debt in that. Most of the debt is as far as the lending book is concerned and in a lending book as you know you do need debt otherwise it becomes too expensive.
Q: Speaking of financial services and your eventual or possible banking aspirations, would a mobile bank possibility be something that you could consider?
A: You are really jumping so far ahead. We have not even thought yet about the bank and you think about mobile. I think there is a while for all this. We have not given adequate thought to it, so I do not think I would be in a position to answer that.
Q: Let me ask you about the next 12-24 months. What will be the key priorities for the group, both within the growth, as far as the existing businesses are concerned, as well as key new opportunities?
A: As I said, we believe that in the next 12-24 months, first of all, all these three business areas that we have, whether it is financial services, whether it is pharmaceuticals and healthcare or it is information management, these are all high growth areas. We will look to grow in them, both organically as well as through acquisitions in all these three broad areas. We will prepare for an eventual demerger and to have two different entities in that period as well, because as I said, that will make it more transparent and easier for shareholders to understand.
Third, if there are, if it makes strategic sense and if it is going to create value for us, we could look at another opportunity as well. I just want to again, highlight that after 2010, when we sold our domestic formulations business, there were a lot of questions; people said that you should return the money that you got from Abbott. As you know, we got about Rs 18,000 crore then that we should return it to shareholders. We said that we will return part of it, and therefore, in these five years, we have returned about Rs 4,900 crore approximately, but we said that the rest of it, we will invest in new businesses because we think that we will be able to create more value for shareholders. And if we cannot do that, we will return the money. However, I am really happy to say that in the last five years, we have created a compounded growth rate of 34 percent of value for shareholders. So, we are really conscious that we act as trustees for our shareholders and work on creating long-term sustained value.