Don't want to be starved of capital as we grow: Ajay Piramal

Financial services will soon overtake healthcare as the larger contributor to Piramal Enterprises Ltd’s (PEL) revenues, though both businesses will continue to grow, says the company’s chairman Ajay Piramal. PEL declared its fourth quarter and fiscal 2017 earnings on Friday, and reported robust growth in revenue and profitability.
 
While business-to-business (B2B) products and services account for a greater share of the company’s earnings at present and will continue to do so, the flagship firm of the Piramal Group, which has interests ranging from real estate-to-financial services and healthcare, will also gradually see the share of turnover from business-to-consumer ventures increase. This is a function of PEL’s plans of getting into consumer-facing ventures such as housing finance, and baby care products.
 
In an interview with Forbes India, the 61-year-old chairman of the $1.32 billion-company, which has been re-investing the proceeds from the divestment of PEL’s branded generic drugs portfolio to Abbott for $3.7 billion in 2010, also ruled out any merger of his company’s financial services business with that of the Shriram Group (PEL holds a stake in three of its financial services arms) in the near term, stating that it was better for the two entities to independently grow their respective ventures.
 
Edited excerpts:
 
Despite having an exposure to sectors such as real estate and pharmaceutical, which are facing serious challenges, PEL has done well in FY17. How did it manage to achieve this?
If you look at pharmaceuticals, the sectors that have been challenged are the domestic business and exporters of products to the US who have faced issues with the USFDA (US Food and Drug Administration). Also prices of plain generics in the US has come down. How have we addressed this? In the domestic market, we are not in the prescription drugs market. We are only in the over-the-counter (OTC) segment. OTC was generally hit due to demonetisation, but because we had made good investments in terms of expanding our field force, deepening distribution channels and acquisition of some good brands, we actually more than 40 percent in this business.
 
As far as our international business goes, we remained unaffected because the investments we made ensuring world-class quality systems and processes and their integrity are paying off. We have had more than 25 USFDA inspections across our plants over the last few years, but there hasn’t been a single minute lost due to any regulatory action. Also, globally we aren’t in the plain generics business. We have very specialised products that are complex branded generics, which aren’t affected by price erosion so much.

In real estate, we have only focused on tier-I developers, and even after the introduction of RERA [Real Estate (Regulation and Development) Act] and demonetisation, these developers haven’t been impacted. If anything, their sales have only gone up because the lesser known realtors have fallen by the wayside.
 
PEL’s board of directors approved a fund raising plan of Rs5,000 crore. How will you utilize this money?
Since 1988, we have only raised external equity of Rs100 crore once in the early 1990s and we have done a few rights issues to raise Rs400 crore earlier. We have been very conscious about creating value for shareholders and from 1988 we have delivered a 30% CAGR (compounded annual growth rate) in value creation. But now we feel that there is a huge opportunity for future growth in the sectors that we are in – whether it is financial services, pharmaceuticals or information management. To fuel this growth we need to have capital on our side and I don’t want to be starved of capital for the next few years.
 
Your financial services business is almost equal to the pharmaceutical vertical, in terms of contribution to topline, at the end of FY17. Will we see the financial services business growing bigger than healthcare at PEL?
I think that will be the trend. Though it isn’t as if we are not growing in pharma. We have invested a lot in that space – around Rs3,000 crore in the last 18 months – and in the last quarter (January-March 2017) pharma has also grown by 30 percent. But yes, as a proportion of revenue, financial services will be a larger piece going forward.

ALSO READ: Q4'17: Robust growth in pharma and financial services helps Piramal Enterprises' net rise 61%
 
You have announced the intention of demerging the healthcare and financial services businesses into separate entities. When will that process materialise?
We will do it in the mid-term. Not immediately. Till then, for investors who seek more transparency in accounts – to see how much debt and equity is on account of what business and so on – we have moved a lot of the financial services into a separate subsidiary where this information is available.
 
Within PEL’s real estate lending operations, it is focusing more on construction finance going forward. Why is that a prudent strategy?
Construction finance, relative to funding a real estate project in its early stage, is less risky. Because the approvals are in place and in construction finance, you don’t lend all the money in one shot. It is disbursed over time, linked to various stages of construction. So one can evaluate the progress of a project from time to time and get some visibility of cash flow expected from sales at a project.
 
You have plans of getting into housing finance and are also beefing up your OTC drugs business. So is the share of revenue from B2C businesses going to increase at PEL?
That’s right. In all the businesses we are in, we are reaching out to the retail customers more. But as a proportion of our overall turnover, B2B businesses will still have a larger share. All the businesses will grow and there will be diversification. In financial services we were much more into wholesale finance. Now we are getting into structured finance beyond real estate and stressed assets as well, along with construction finance and lease rental discounting for commercial projects. We will also extend our operations to the tier-I developers of tier-II cities, which we haven’t done so far.
 
When will the housing finance company commence operations?
Our team and strategy is ready. We are awaiting the licence and as soon as we get that we will start, which I think should be by July this year. There are only five-six housing finance companies in India that have a loan book larger than Rs10,000 crore and we want to be one of them in the very near future.
 
How is PEL’s investments in the Shriram Group’s financial services companies panning out?
These companies are doing well. Segments like two-wheeler funding or SME funding will only grow, as I see the economy. The general insurance and life insurance arms are also doing well. There was some challenge in the system because of the changed regulations that mandate NPAs (non-performing assets) to be recognized after 90 days from non-repayment. The central bank is not appreciating what it takes to lend to the rural sector. When you are lending to the owner of a truck, he is the machine that generates the money. Assuming he falls sick for 10 days and doesn’t earn anything, he will delay the payment. But does that then become an NPA?
 
There was speculation that PEL’s financial services business and that of the Shriram Group may merge.
This is the best time to be an NBFC (non-banking financial company). With all the pressure on the banking sector to resolve NPAs, there is a shortage of capital to fund growth in the system. So the space for NBFCs is only increasing. If you merge a company that has 70,000 people and whose culture is very different from the culture that Piramal has, at least two years will be spent in managing integration issues, which will distract from the task of growing the business. And the next two-three years will be a golden period for all NBFCs. So rather than worry about integration, if the two entities can grow individually, it is better. A potential merger can be done any time in the future. There is no hurry.
 
With the government bringing stringent norms for banks to deal with the menace of NPAs, do you see an opportunity for your stressed assets business to grow?
Absolutely. Bain (PEL’s partner in a private equity fund focused on distressed  assets) has been in India for 15 years. Globally, they have a sizeable stressed assets piece. So it is not as if they don’t know India or they don’t know stressed assets. Also, they don’t have any joint venture anywhere else in the world, except with us in India. Because they understand the quality that we bring to the table in terms of assessment of risk and understanding the business. Bain and us will put in approximately $100 million each, and do a few deals to establish proof of concept. After that we will raise it to around a billion dollars.
 
You exited the pharma business in 2010 ahead of the challenges the sector faced at present. Similarly, you exited telecom (PEL’s stake in Vodafone India) in 2014 ahead of the current stress in the industry. Just like to you have come back to the branded generics space with a different play, would you look at telecom or technology again?
We have no plans of getting back to telecom. I think there are too many elephants in the room and let them sort it out. In PEL, I don’t want to focus too much on anything else, because we are in those sectors where we see good growth in the future. So I’d rather concentrate on those and grow them. In technology, we use a lot of digital data analytics for our information management in healthcare business.
 
What kind of inorganic growth opportunities will you pursue in the future?
We will look at inorganic growth in healthcare and data and information. I don’t think there is much to do in terms of inorganic growth in financial services, since that piece is growing big by itself. When we did the Shriram transaction, we didn’t have such a big book.