Twenty is an important number for Ajay Piramal, founder of the Piramal Group. Whether it is the target of 20 per cent annual growth or the goal of taking market capitalisation to $20 billion by 2020, the number is key in his scheme of things.
It's this number that drove his decision to sell the group's domestic formulations business to Abbott in 2010 for $3.7 billion (Rs 18,000 crore) when Abbott offered a valuation of nine times sales and thirty times EBITDA. Explaining the decision, Piramal says: "I realised that we would have to grow our business at 20 per cent year-on-year with an operating margin of 35 per cent for the next 20 years to break even. We realised we could not grow at that rate on such a high base."
The 20 per cent growth rationale has not only driven Piramal to exit businesses, but it has also determined his choices for the future. The last three years for the group have been about building an empire with diverse business interests. The first step in this regard-the decision to sell Abbott- came relatively easy, but the big question facing the group was: "what next?" Piramal had returned to the drawing board with the intention of entering new businesses that would take the group's collective market capitalisation to $20 billion by 2020, and generate return on equity of 20 per cent. (BUYING FOR GROWTH: ACQUISITIONS SINCE 1988)
"Ultimately it's the next generation that had to take the business forward, so we collectively decided to retain the funds within the company and not distribute it among shareholders," he says.
True to his style, Piramal is banking on acquisitions to fuel this growth. In the last three years, Piramal Enterprises has acquired new capabilities and enhanced existing ones by buying companies primarily in life sciences, pharmaceutical solutions and information management systems. In each of these new businesses, the group has been able to profitably fill an area where there was no competition. For instance, its financial services arm caters to businesses that have real assets but need capital to grow. The pharmaceutical and life sciences businesses, on the other hand, have invested in areas which will be big in the future such as molecular imaging for early detection of diseases.
Ready with a war chest of Rs 18,000 crore, the group wants to use the money to acquire scale and capability. Today, 67 per cent of its revenues come from outside India. The aim is to bring the split between domestic and global revenues down to 50:50. A large part of this could come from its financial-services arm which is expected to contribute heavily to its profits in the future. (THE MANY BUSINESSES)
The pharmaceutical business is high on the agenda too. Swati Piramal, vice-chairperson of Piramal Enterprises, believes critical care and molecular imaging are going to be big. The group has acquired Bayer's molecular imaging and R&D portfolio. This would be a diagnostic business involving early detection of Alzheimer's and prostrate cancer. Swati, who heads the life sciences business, says: "Our over-arching focus will be intellectual property-led businesses."
On the back of acquisitions, the company is the third-largest player globally in inhalation anaesthesia market and is the seventh largest player in the over-the-counter wellness products. The pharmaceutical division of the group, which comes under Piramal Pharma Solutions, seeks to partner with big pharmaceutical companies and do custom manufacturing for them rather than compete with them in the generics space. Headed by Vijay Shah, the pharmaceutical business generates Rs 1,700 crore in sales.
Information technology is going to be another growth engine for the group as Piramal believes data will be the oil of the 21st century. With that objective, the group acquired US-based information systems management company Decision Resources Group in 2012 for $635 million. All their businesses are those that will be big in the future (over-the-counter-medicines, imaging business and the information management business).
In theory, this acquisition-led strategy with a focus on businesses of the future seems credible, but is the group spreading itself too thin? Possibly, says Piramal, but it is still too early to arrive at an outcome. The impact of the strategy to become visible will take time and it will only be after two years that the markets will know whether the gambles have paid off, says Piramal.