PEL.IN - Piramal Enterprises

[MrB]

Primal Enterprises Ltd (PEL) is the flagship company of the Piramal Group that is based in India but has operations in over 30 countries, and a brand presence in 100 countries. The company has evolved from being a textile-centric business to a diversified conglomerate with business operations in three broad categories – healthcare, financial services and information management. All of PEL’s businesses have a leadership position with significant market potential, strong revenue growth and profitability.

 

Early years

Until 2010, PEL, in its erstwhile avatar as Piramal Healthcare, was one of the largest pharmaceutical formulation manufacturers in India. Through a series of acquisition, alliances and operating synergies, PEL transformed itself from being a relatively small player (ranked 48th in India in the 1990s) to being a formidable player (amongst the top 4 in India by 2010).

 

Deal of a lifetime

In 2010, when the company anticipated price controls, a tighter regulatory environment and believed that the growth in the domestic branded generic business had peaked, it sold its domestic formulation business to Abbott for $3.8bn, a valuation of 9x Sales and 30x EBITDA - highest in the industry till date. Post selling the major portion of its pharma business, the Company decided to retain a few pharma businesses where it could foresee significant potential to grow.

 

Life after Abbott

Over the last few years, with the consideration received from the Abbott deal and the free cash flow realized from its operations, the company has once again strengthened its presence in the healthcare space through organic and inorganic growth initiatives as also making a foray into financial services (Shriram Capital, IndiaREIT) and healthcare information management (acquisition of DRG for $635mn in 2012).

 

The man

Ajay Piramal- a large portion of the investment thesis of PEL is centred on Ajay Piramal, the chairman of the Piramal Group and one of the best capital allocators in India. Ajay, an avid Warren Buffet fan and a regular attendee of the annual Berkshire Hathaway meetings, has been leading the group since the 1980’s when he took over a dwindling family textile business (founded originally in 1871).  Ajay decided to exit this business completely and made a foray into pharmaceuticals just when international companies were exiting the Indian markets due to various socio-economic reasons and a wobbly patent regime. Over the next two decades he focused solely on this business and in 2010, in spite of having grown the business from scratch, exited when he felt that the shareholder value that would be created by the Abbot acquisition could not be matched by holding onto the business. His success is best illustrated by the fact that between 1988 and 2010 PEL’s sales grew at 28% CAGR, profits at 34% CAGR and book value at 25% CAGR!

Ajay does things differently. He buys low, invests, builds and then if the price is right he is open to a sale. There is a desire to create shareholder wealth without any attachment or a need to leave behind a legacy. It’s interesting to note that no investment bankers were involved in the Abbot deal (a $3.8bn deal!) as Ajay wanted to get the best possible valuation for his business, which he felt could only be done by him. Furthermore, Ajay is an avid dealmaker and partner of choice for international majors- in 2011 Vodafone decide to specifically approach him to acquire an 11% stake in their India unit. Vodafone bought back this stake in April, 2014 and Piramal exited the investment with a total return of 52% and a profit of ~$450mn. Vodafone wanted someone they could trust to hold the stake until regulations allowed them to increase their stake and Ajay was their partner of choice. This is further illustrated by recent partnerships with CPP ($250bn AUM) & APG ($450bn AUM) who have tied up with PEL for their India forays. [CPP - Canada Pension Plan Investment Board/ APG - Dutch pension plan]

 

The future

So a large part of the investment in PEL is an investment in Ajay and trusting his capital allocation abilities and believing that the excess capital from the Abbot deal (PEL bought back 20% of outstanding shares and invested the rest in the Company) will be utilized efficiently. Sine 2010 his various business have evolved as follows-

 

Pharma (54% of sales) - Post the divestment of the domestic formulations business in FY11, PEL was left with the four broad healthcare segments – Contract Manufacturing Business (now top 10 globally), Critical Care (top 3 globally), India market OTC (7th in India) and innovation R&D. Over the past five years, the company’s first three segments have grown steadily through a combination of aggressive inorganic measures and organic growth initiatives. PEL has also entered a new segment, Imaging, while it shut down the innovation R&D business (a big cash guzzler) in FY14. Revenues in this segment have grown at a 16% CAGR over FY11-16 to Rs36bn (in FY16), led by an interesting and differentiated business mix compared with most Indian pharma peers.

 

Capital/Financial Services (28% of sales) - Piramal Financial Services has two key parts: 1) real estate financing and special situations and 2) strategic investments in the Shriram Group. PEL has become a formidable player in real estate financing business in the past few years. At end Mar-2016, AUMs for real estate/special situations financing amounted to Rs217bn, split into loans of Rs130bn and funds of Rs87bn managed under the alternative asset management route. PEL primarily finances real estate projects/developers in the residential space. The focus is on top quality developers, with A grade developers forming 70% of the portfolio. The loan book grew 174% YOY in FY16 while gross NPLs remain low at 0.9% and a low net debt-to-equity ratio of 1.3x (total PEL D/E). Revenues from financial services have grown 7x over FY12–FY16, from Rs2.7bn to Rs18.6bn and the YOY revenue growth from financial services was strong at 99% in FY16.

Since May 2013, PEL has been acquiring strategic equity stakes in companies of the Shriram group. PEL has invested Rs46bn in three companies of the Shriram group. The Shriram group has given PEL access to retail financing AUMs of US$16bn, 10.5m customers and over 3,000 branches. Ajay Piramal is also the chairman of Shriram Capital since November 2014.

 

Information Management (17.5% of sales) - PEL has also diversified into information management (IM) apart from financial services, post the Abbott transaction. This business involves provision of healthcare data, analytics and insights to various healthcare stakeholders, primarily located in major developed and emerging markets. PEL initially acquired Decision Resources Group (DRG) in the US, which subsequently became the platform for its IM foray. Since then, DRG has acquired five more companies. This business has grown sales at a 22% CAGR over FY13-16.

 

Valuation

PEL is trading at a P/BV of 1.9x (Rs 240bn market cap) currently. For a business that has compounded BV at 32% (excl dividends) over the last 28 years it seems to be undervaluing the Company considerably. Furthermore, there have been statements made by Ajay recently that PEL is looking at demerging the healthcare and financial services business in the near future and this would unlock tremendous value for shareholders. Just to give a flavour of the local market valuations- the Indian financials comps trade between 2-4x BV while the Indian pharma comps are between 4-9x BV.

The information management business probably made sense in 2012 but less so now since the foray into financial services. We see PEL either listing this business in the US or undertaking an outright sale in the near future. This will unlock precious capital that can be invested in the fast growing financial services business and reduce future capital requirements. Back of the envelop calculations show that PEL could get Rs 50-60bn from a sale.

Ajay and his family own 53% of PEL.

 

Link to IR http://www.piramal.com/investors

 

Now go have a beer. You deserve it for sticking it out to the end LOL

 

[Jurgis]

Let us know when it's purchasable from US. :)

[MrB]

Will mention it to them.

[AtlCDore]

Mr B,

 

How did you even find this company?  Are US investors allowed to invest in Indian equities? 

 

Thanks,

 

AtlCDore

[racemize]

Well it sounds fantastic, but I don't think any of us can buy it at this point?

 

Also, what is India's logic with stopping foreign investors?  Wouldn't that support their economy?

[MrB]

IDFC and Shriram entities merging - This is a big deal (no pun intended)

 

 

http://www.moneycontrol.com/news/business/companies/shriram-group-to-merge-with-idfc-group-to-create-financial-powerhouse-2321517.html

 

For reference: Piramal owns stakes in Shriram Transport Finance, Shriram City Union Finance and Shriram Capital.

[stahleyp]

My in laws are Indian. Any idea how they could buy a little of this one?

[indirect]

I think Pirmal will make 15% compounded annual return as long as Ajay is at helm. They are mainly hitting size limitation.

 

Easy compounder.

 

Other opportunities are smaller market cap and can grow faster

[MrB]

My in laws are Indian. Any idea how they could buy a little of this one?

 

I assume they're not living in India?

[MrB]

Piramal recently launched a Housing Finance Division. Well worth reading the presentation if you're following this.

http://www.piramal.com/download/presentation_new/PEL_Investor_Presentation_Launch_of_Housing_Finance_September_2017_20170927024359.pdf