Billionaire Ajay Piramal, the Contrarian Investor, Is Sending A Clear Message To Us With His Stock Picks

Ajay Piramal is a contrarian investor. His recent mega stock picks reveal a strategy of buying top quality stocks that are temporarily out of favour with investors. There is much that we can learn from the investment technique of this savvy investor

If you study Ajay Piramal’s life history, you will find a pattern in it. He is a contrarian investor with the ability of being able to identify investment opportunities ahead of the curve.

The first indication of this came in the late 1980s when Ajay Piramal decided to invest in the pharmaceutical sector and bought Nicholas Labs. At that time, the decision appeared bizarre because the pharma sector was totally out of favour. MNCs were getting out of the business in droves. Also, while other pharma companies were focusing on generic drugs, Ajay Piramal decided to go the other way with formulations.

In 2010, when Abbott swooped up the formulations business for a mind-boggling USD 3.72 billion, one knew that Ajay Piramal’s contrarian approach has paid rich dividends. This transaction propelled Ajay Piramal firmly into Billionaire category.

What Ajay Piramal did with those billions further enforced his credibility as a savvy investor.

In yet another contrarian move, Ajay Piramal invested Rs 5,864 crore in Vodafone India in 2012. The move was contrarian because the telecom sector was/is struggling owing to intense competition from aggressive & heavy-weight rivals like Bharti Airtel, Idea Cellular etc and the ARPUs were/are plunging. Also, Vodafone itself was/is in serious trouble over the $12 billion tax demand.

However, in a brilliant strategic move that is reminiscent with what Warren Buffett did when he bailed out Goldman Sachs in the 2008 crises, Ajay Piramal bargained with Vodafone that he would be entitled to exit at the higher of the IPO price, if any, or with a return of 19% CAGR. This way, Ajay Piramal ensured that his investment risk was minimal.

In April 2014, Ajay Piramal pocketed a 52% gain over his Vodafone investment when he exited for a consideration of Rs 8,900 crore.

As any accomplished investor will tell you, a 52% return over a period of two years for such a big-ticket investment is incredible by any standards, especially given that the telecom stocks have not given their investors any returns.

Now, what we need to pay attention to is Ajay Piramal’s future game plan because there is much to learn from this.

In February 2012, Ajay Piramal bought a 10% stake in Shriram Transport Finance for Rs 1,652 crore.

The question is: Why Shriram Transport Finance out of the whole universe of banking & financial stocks?

The answer is that Shriram Transport Finance is a powerhouse stock on all standards. It specializes in funding the purchase of new & second-hand commercial vehicles (trucks). It has a somewhat unique business model which gives it an edge and moat over its competitors. The company is very profitable though the hostile macro-economic environment caused by the slowdown and the high interest rates has taken a toll over the company. Also, there has been disappointment over the non-allocation of a banking license. This is reflected in the valuations of the stock at 2 times book and 12 times EPS.

Frankly, it doesn’t need someone of the genius quotient of Ajay Piramal to tell you that the time is most opportune to buy Shriram Transport Finance. You can put large amounts of money to work in such stocks, without having to look over your shoulder for lurking dangers. The downside is limited while the upside is huge.

Ajay Piramal’s confidence in the Shriram group is also reflected by his recent decision to invest Rs. 2,000 crore to acquire a 20% stake in Shriram Capital, the holding company.

This is also a brilliant strategic move because the investment in Shriram Capital gives Ajay Piramal a stake in four distinct businesses – Truck Finance (25% in Shriram Transport), Consumer & Gold loans (30% in Shriram City Union), Mutual Fund (100% in Shriram Asset Management) and Life Insurance (100% each in Shriram Life Insurance & Shriram General Insurance).

In an interview, Ajay Piramal made it clear that he was fascinated by the Shriram Group. The group is uniquely positioned today, with a leadership position in their businesses, a moat which competitors cannot easily replicate, and with a long history of giving very good returns to shareholders, he said.

The other important point that we need to pay attention to is that Ajay Piramal is clearly indicating his preference for the beaten down financial and infra sector as opposed to the booming pharma sector. In fact, Ajay Piramal also has a NBFC which is involved in funding realty and infra companies. The NBFC has a loan book of Rs 1,000 crore. It has made investments in Navayuga Road Projects and Green Infra.

Source : http://rakesh-jhunjhunwala.in

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Ajay Piramal's 20-20 game plan

Three years after selling its generics business to Abbott, the group is ready with a new strategy on becoming a $20-billion company by 2020

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.

Source : Malini Bhupta; http://www.business-standard.com 
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Pic : http://www.livemint.com
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Ajay Piramal set to pick up 20% stake in Shriram Capital

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(Having dipped his toe last…)

Having dipped his toe last year, Ajay Piramal is now set to take a fuller plunge into financial services. His Piramal Enterprises Ltd (PEL) will purchase a 20% stake in Shriram Capital Ltd, the financial services holding company of the Chennai-based Shriram Group, for Rs 2,071 crore, said two people with direct knowledge of the development, which was reported first in economictimes.com.

Piramal had purchased a 10% stake in group unit Shriram Transport Finance Co in May 2013. The new acquisition will mean a closer engagement for Piramal with the entire gamut of services aside from truck funding — consumer finance, insurance and asset management.

PEL will purchase fresh shares issued by Shriram Capital and Shriram Ownership Trust or SOT, which owns a64% stake in the company. Shriram group founder R Thyagarajan, 77, who built the group from the ground up with starting capital of Rs 1 lakh in 1973, has transferred his ownership to SOT as a reward to employees.

South African financial services company Sanlam, a joint venture partner of the Shriram Group in both life and general insurance, owns a 26% stake.

Deal to Value Shriram Cap at Rs 20,355 Crore

American private equity fund TPG Capital, which has been a partner of the group over the past decade in many of its financial and retail ventures, owns 10%. The deal is expected to be announced on Thursday. "Piramal is seen as a long-term partner and not an investor like PE funds," said one of those cited above. He didn't divulge the deal's financial details as it's not yet been made public. A PEL group spokeswoman said, "No comments." UBS Securities Corporate Finance was the exclusive adviser to the transaction.

Piramal could eventually end up owning a third of Shriram Capital with his right of first refusal on the 10% stake held by TPG. That would put it more or less on par with Sanlam and is something that would have the founder's support.

"We would like to see equal partners running the business as against any partner with higher stake wielding greater influence," Thyagarajan had told ET on November 12 last year.

Piramal, who has been seeking to build a financial services firm after he sold his local formulations business to Abbot Laboratories for Rs 18,000 crore in 2010, had purchased the stake in Shriram Transport Financial Services, India's largest truck financier, for Rs 1,652 crore.

"By picking up a stake in Shriram Capital, the Piramal group is not only securing a presence in the financial services sector but recognising that the company will generate substantial value creation, based on its performance so far,'' said Ashwin Parekh, managing director, Ashwin Parekh Advisory Services, and former head of financial services at consultant EY. "Shriram, founded by a professional, is a four-decadestrong story and needs capital for continuous growth."

The deal will value Shriram Capital at around Rs 20,355 crore, about a fivefold increase in value over the past seven years after TPG purchased its 10% stake in the holding company for a Rs 4,500 crore valuation. ET had first reported plans for such a deal in November last year.

The 57-year-old Piramal's latest stake purchase fits in well with his plan to build a financial services business by deploying cash generated from the sale of his domestic formulations business to reward shareholders. To be sure, Piramal has been involved in several areas related to finance over the years. He has a non-banking financial company, or NBFC, that funds real estate developers, while his structured investments group loans money to various companies and has a real estate investment trust (REIT).

  "We want to do three-four, big-ticket structured transactions every year and strengthen the NBFC business. We are aiming to achieve an asset size of Rs 15,000 crore in the next five years," Piramal told ET earlier.

Many experts said the deal could lead to a change in Piramal's role. Thus far his strategic contribution has been as a provider of capital.

"He has been a ready supplier of capital to various companies until now, apart from building parts of financial services like funding real estate developers,'' said a consultant at a global firm. ''Now he is taking a plunge in the entire suite of financial products... With Piramal as a strategic investor, the Shriram group could attract better talent." Last week, another of Piramal's investments paid off handsomely.

PEL sold its 11% stake in Vodafone India back to the company for Rs 8,900 crore, a 52% return in less than three years, having acquired it for Rs 5,864 crore between August 2011 and February 2012.

Source : http://articles.economictimes.indiatimes.com

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CORPORATE TRENDS

Meet Ajay Piramal: Founder of a pharma empire and a strategic & financial investor

Is Piramal Enterprises a pharma and healthcare company, or is it a mindlessly diversified company with a promoter who seemingly can’t make up his mind.

As Ajay Piramal walks Azaan and Daisy Princess, a horse and a mare, down the lane at Mahalaxmi's Amateur Riders Club on a rare dry August morning in central Mumbai, it's difficult not to draw analogies with his flagship company. Piramal Enterprises today is either an enviable or perplexing mix — depending on whether you are rival or investor — of pure cash and various strands of a pharma business after the core of it was sold for a neat $3.72 billion (around Rs 18,000 crore) in September 2010.
Piramal got his first pet when he was eight — a pomeranian named Nita. By the age of 12 he had graduated to riding and owning horses. Today he owns four, along with a family of dogs. As this writer and Piramal talk about animal spirits, including the Keynesian variety and more, his granddaughter Anya plays with her own dog Dali, watched over by grandmother Swati Piramal.

At 57, Piramal has no reason to walk into the sunset, although the familial and serene environment — as grandfather and granddaughter do the morning routine of feeding the horses and dogs — do tempt you to believe he's less of the marauding takeover tycoon that he was for the past couple of decades.

Today, the Piramals are at a stage somewhere between the heydays of building businesses — organically as well as through acquisitions — and getting the next generation ready to pick up the baton. Daughter Nandini heads the over-the-counter (OTC) drugs operation, and son Anand, though not yet in the flagship, heads the realty business in a separate company. "It's up to them, let us see," says Piramal, a little more than a bit wistfully.

The Strong Legacy

It's not a bad legacy as it looks now, although if you're looking for a method, there may be little to it. As of March 31, 2013, Piramal Enterprises had more than Rs 3,000 crore of current assets on its balance sheet. Early September 2013, the company will get a payment of $400 million, or Rs 2,640 crore, assuming the rupee at 66 to a dollar (a big assumption admittedly in these times). This windfall will come from Abbott Labs, to which Piramal had sold the Indian branded formulations business. The American pharma and healthcare giant is paying the proceedings in yearly instalments.

Another $400 million is due in September 2014. Plus, Piramal hopes to sell his 11% in Vodafone India next year. He had invested Rs 5,856 crore (Rs 7,500 crore in today's rupee value) for the pie and is looking to make a cool profit on this investment (he won't say how much).

Dollops of cash is one thing, profits or the lack of them quite another. For the first quarter of 2013-14, Piramal Enterprises reported a loss of Rs 146.66 crore. For the entire 2012-13, the loss stood at Rs 227 crore on revenues of Rs 3,520 crore. In the two years preceding that, the flagship had reported profits of Rs 111 crore (2011-12) and Rs 12,883 crore (2010-11), the last one boosted by the sale to Abbott.

Revenues before the sale of the formulations business in 2009-10 stood at Rs 3,624 crore; duly dropped to Rs 1,673 crore in 2010-11; and if they've come back to earlier levels, it's because of a merger of a life sciences operation that is focussed on drug discovery, and acquisitions like Decision Resources Group, a healthcare information & analysis firm (see Piramal is still Making...)

Exasperated Analysts

The fluctuations in profits and revenues make it tough for the equity analyst community to understand the company, and make earnings projections. That is why most brokerage houses on Dalal Street have stopped tracking the company.

Their dilemma: is Piramal Enterprises a pharma and healthcare company (like it once was), or is it a mindlessly diversified company with a promoter who seemingly can't make up his mind whether to invest to build the business or just to rake in returns?

"Analysts do not understand a conglomerate like this," complains Piramal. So he's decided to stop speaking to them. "Maybe I will do so next year," he ventures. To be sure, 2014 may be a good year to beckon the analyst community because Piramal would have exited Vodafone, giving the enterprise a less fuzzy look (and even more money).

Piramal says he has three options to exit Vodafone. One the other promoters can increase their stake in the telco buying up his stake; two, cash out when Vodafone India goes public (though there's no clarity on when that will happen); and in case these two options don't work out, Piramal will have no other choice but to find a buyer. "We have spent a fair amount of time looking at new ideas," says Piramal. "Now we know where we are going."

In case you're wondering where he is headed, Piramal has no plans to go too far away from his core. He asserts that Piramal Enterprises will not enter any more businesses, and will focus on the existing pil-lars of drug discovery, contract research and manufacturing, OTC drugs, information management and financial services. In the recent past he has spoken about investing in defence and infrastructure, but seems to have decided against both.

Piramal as Buffett
The stage may well be set for the emergence of a new avatar of Piramal: from takeover tycoon to value investor. A sector expert from one of the Big Four audit and advisory firms feels Piramal is building a model similar to that of Warren Buffett's Berkshire Hathaway.

The expert, who doesn't want to be quoted as he expects to do business with Piramal, says: "This is a contrarian strategy. You will have to look at him 10 years down the line." At the heart of Buffett's strategy is to invest in the underlying fair value of a business based on its future earnings power. "So investors will have to look at the sum of all his investments to value the company," adds the consultant.

Piramal, for his part, sends out confusing signals about his transition from a strategic to a financial investor. Consider, for instance, the 10% stake he's bought in Shriram Transport; he insists that this stake can be increased, depending on how he gels with the Shriram management.

Shriram has applied for a banking licence and with AK Purwar, a former SBI chairman among Piramal's top honchos, the partnership does seem to have possibilities.

Piramal also has a non-banking finance company (NBFC) in his fold, which has three arms: one provides debt funding to firms in real estate, education, hospitals and medical equipment; another is focused on funding infrastructure projects over $100 million; and the third is a real estate venture capital fund. "Our NBFC will increase in size, and we will invest more in Shriram," says Piramal.

Clearly, Piramal's business model is work in progress; and if investors are impatient, he is in no mood to appease them. Piramal is no stranger to irate investors, or at least those who represent them.

After the sale to Abbott, the Anil Singhvi-led IIAS, a proxy advisory firm, described it as a "slump sale" and criticised Piramal for not demerging the business before selling it and retaining the cash within Piramal Enterprises. And in February this year Bangalore-based InGovern opposed the merger of Piramal Enterprises with PHPL a promoter group company, alleging inadequate disclosures about why this merger was done.

But he has got votes of confidence too. The largest shareholder in the company outside the promoter group is Aberdeen International India Opportunity Fund, which held 4.82% of the company before the sale to Abbott. As of the quarter ended June 2013, Aberdeen had taken its holding up to 9.45%.

In Semi-retirement Mode?

Any promoter who sells a core business and then begins making financial investments will inevitably be asked whether retirement is around the corner. Ask Piramal that, and he's quick with his retort. "I am busier these days. Earlier it was a set business; now we are developing new ones." Although he is not at the flagship, Piramal sees bright prospects for the business his son Anand heads, Piramal Realty.

"Piramal Enterprises has a head start but realty can be big." Real estate is something the elder Piramal knows a thing or two about. "I had started Peninsula Corporate Park and I had led that business before we did a family division of the group and (that property) went to the other side (Peninsula is now led by Urvi Piramal, wife of his elder brother, the late Ashok Piramal). We had also built Ashok Towers and Crossroads," says Piramal. Crossroads was one of India's first retail malls launched in the late '90s; the land on which it was built was before that home to the operations of Swiss pharma company Roche India, which Piramal had acquired in the early '90s.
Today, Piramal Realty has around 30 mn sq ft under development; Anand has plans to go up to 80 mn sq ft by 2015, a task that should keep him busy along with the 14-odd projects that are under way in the financial capital. That may give Piramal more time to play granddad — daughter Nandini has just delivered a boy — and to take leisurely strolls with his horses. But clearly he's in no hurry to hand over the reins just yet.