Piramal wades into financial services with Abbott cash

Billionaire Ajay Piramal, known for buying assets cheap and building the business over decades, is branching out from pharmaceuticals to fund infrastructure and real estate projects as part of making an entry into financial services space.

Following the sale of domestic drug formulations business of Piramal Healthcare to American pharma company Abbott Laboratories for about Rs17,000 crore last May and Piramal Diagnostics to Super Religare Laboratories for Rs600 crore, Piramal has been looking to plough the money back into long-term growth opportunities.

“Our ability to take risks is much higher because of the funds we hold. The cost of funds is going up and it’s a good opportunity for those who have funds,” Piramal reasoned.

One of the two non-banking finanicial services firm (NBFCs) that Piramal plans to set up will focus on lending to infrastructure sector, while the other one has a broader investment mandate.

On the fund management front, Piramal Healthcare will pay Rs225 crore for buying group firms Indiareit Investment Management Co and Indiareit Fund Advisors Pvt Ltd, both of which will focus on real estate and infrastructure sectors. Together, the companies have around Rs3,500crore of assets under management.

On the rationale of creating two non-banking finance companies, Piramal said, “It is a better opportunity today, since we have funds, and it is a good hedge.”

With interest rates rising, following the hike in key policy rates by the Reserve Bank, Piramal expects people like him — those with funds — to be in a “stronger position” in the NBFC arena.

However, even as Piramal believes that he is using the wealth created in the best interests of shareholders, some analysts raise a red flag about the appropriateness of a company that was originally a pharmaceutical firm now entering an unrelated business.

At least two analysts who track or used to track Piramal Healthcare said separately that promoters should use their share of wealth created for unrelated businesses after returning investors their fair share.

“Minority shareholders invested in a pharmaceuticals company and not a diversified company with financial services operations,” said a Mumbai-based market analyst with a domestic brokerage.

“The promoter’s track record in return on investment may be above reprimand, but from an investor’s point of view, if they wanted a diversified risk portfolio, they could invest in a mutual fund and not a pharma company.”

On the day the Abbott transaction was announced, Piramal Healthcare shares fell 12% on the Bombay Stock Exchange. The shares have fallen a further 8.67% since then.

Piramal, while making new business entry announcements, said they will continue to invest in capacity expansion to grow pharmaceuticals business as well as increase their focus on new drug discovery.

Since the Abbott transaction, Piramal Healthcare has spent about Rs2,500 crore to buy back shares from the public, who still hold about 46% equity in the company. Another Rs200 crore was spent to pay dividend of `6 per share and a special dividend of Rs6 a share.

Announcing the earnings for the financial year ended March 31, Piramal said he expects the core pharmaceuticals business to grow at 20-25% annually over the next 2-3 years.

For the year, Piramal Healthcare reported revenues of Rs1,670 crore, up 16% from a year ago, while net profits at Rs12,730 crore reflected earnings from the sale of assets. Revenue from the sale is staggered over a period in the case of Abbott transaction, according to Piramal.

Separately, the new chemical entity research unit under group company Piramal Life Sciences will now be merged with Piramal Healthcare as it wants to put renewed focus on drug discovery and commercialisation. For every share of Piramal Life Sciences, four shares of Piramal Healthcare would be given.

Piramal Life Sciences was originally hived off from Piramal Healthcare in 2007 to de-risk the parent company from the perceived high risk of new drug discovery, which is not only highly capital intensive but also comes without any assurance of returns as the new chemical entities or drug candidates could fail at any stage between lab and the drug store.

Piramal also brushed away talk of the cash-rich company entering annuity businesses such as insurance for now.