Taking the ‘contrarian' road to success

The corridors leading to Mr Ajay Piramal's office on the 10th floor of Piramal Towers are silent.

A stark contrast to when it hosted an impromptu press interaction with Mr Piramal, after the sale of Piramal Healthcare's Rs 1,800-crore domestic formulations business to Abbott for over Rs 17,000 crore in 2010.

Or more recently, when Piramal Healthcare picked up equity in telecom major Vodafone.

Poised now to become a conglomerate looking to invest across sectors, from real estate and finance to defence, with one foot still in pharmaceuticals – The Chairman of Piramal Group harks back to when it all started.

Having lost his father and elder brother in close succession, the then 29-year-old Mr Piramal inherited a loss-making textile company, at the peak of the textile strike.

Dealing with the legacy handed to him, he had to both overcome the challenge at hand and chart a course for growth, Mr Piramal recalls, giving an insight that has takeaways for young entrepreneurs, starting off on a clean slate, but facing challenges as they grow their ventures.

“My father used to run a textile business and the textile business was actually in steady decline…decline being because of the location in Mumbai, and also because of the Government policy that was skewed in favour of the powerloom sector,” he recalls.

Rattling off dates, he says, the textile strike in 1983 had a big impact on several companies that went through a sharp decline, and ran up losses.

“To add to all this, in 1979, my father died when I was young – I was only 24. And in 1982, we were three brothers and we split – two of us were together and one separated. To top it all, in 1983 my elder brother who was running the business died of cancer,” he says.

So in 1984, when Mr Piramal took charge – “My brother had passed away, his family had three young children, the youngest of who was three years old and the eldest was 10 years old ….we had a loss-making textile industry, which was also going through a textile strike and so there was a leadership crisis in the company – because here's this guy an unknown fellow like me had to take over. So in that sense it was a sort of difficult situation,” he recalls.

Trial by fire

Was he overwhelmed? “Fortunately, I have never been overwhelmed by challenge,” he says. Despite the backdrop against which he took over, he says, in 1984 they acquired what was then Gujarat glass. “We acquired the glass business because I was very clear we had to move out of textiles at that time, though more than 90 per cent of our turnover came from textiles. We had to convert that, otherwise there was no future.” In 1988, the company acquired Nicholas – marking its entry into pharmaceuticals. “It was a long process (that started in 1987) because at that time to acquire a multi-national company there was a fair amount of approval needed. So first you needed a price approval from the Controller of Capital Issues – then they fix the price….you cannot go higher or lower. And there were many people at that time who were proud and willing to pay higher than that through other means that we did not have,” he says, giving an insight into the business environment then.

“After that you needed Reserve Bank approval, and at that time the institutions also had a big shareholding …it was quite a complicated process,” he says, adding that the pot was further stirred by bigger groups in the fray, besides employees, some of who were backed by another investor.

“They (employees) were also willing to acquire, they actually filed, they said we were paying people on the side some black money …they raised a starred question in the Lok Sabha….so we had quite a few challenges,” he recalls.

The air did not clear even after Piramal signed the agreement with the seller. Government approvals were required and there was a time lag of about four months – “in that interim period …we were getting into the management but without the ownership translate …actually employees made quite a tough time for us …there were headlines in the paper that this is what these guys have done and so on,” he says.

All through this time, “we had in mind that what we were doing was right,” he says, recalling how he took tough decisions, despite pharmaceuticals being new for the company.

“So it was a difficult time. But we kept our values intact and one of the things that kept us in stead…in the whole textile strike, we were the only company that paid back all the banks. In India, in difficult times you can renegotiate and structure loans …we didn't do that,” he says.

“Later when we closed the mills in the 1990s we paid back every worker. We had tremendous goodwill in the market because we paid back the bank, we paid back the workers,” he says.

Dramatic and different

Did he envisage then, the company would grow to be among the biggest pharma players from the country? “I don't think too much ahead. I just know that you have to keep doing things and try to grow. Indian companies had entered in the 1970s, so they had a lead over us of 15–18 years. Our rank at that time was number 48…you can't be a player at the rank of 48. So we had to do something dramatic and different. That's the time we decided to grow organically and through acquisition.”

Again, organically there is a limit to growth. “It is difficult to catch up from 48 – so that's why we did a series of aggressive acquisitions as well as investment,” he points out.

Quite the contrary

So has Mr Piramal proved a point to nay-sayers he has encountered in life?

“That is for you to judge. We have grown. From a market cap of our business in 1988 was Rs 6 crore ….and if after 21 years, we could get almost Rs 18,000 crore on the branded generics, that's a compounded return of more than 40 per cent year-on-year...for 21 years. It's not small. So I guess that is a good return...we have always followed a strategy that is different from everybody else's,” he says.

“So no other person went from textile to pharmaceuticals. No other person grew through acquisition of several other companies in pharmaceuticals …at a time when people were leaving pharma. Global companies were leaving because of the DPCO (Drug Price Control Order) and there was no IP (Intellectual Property) protection …and that's the time we entered. Once having entered - Indian companies would have never acquired foreign companies because they thought the over-heads of the foreign companies, the labour etc was too high …so we acquired and grew by actually doing multinationals. Quite the contrary of what everybody else did.”

The company did not get majorly into exporting generic drugs (medicines not covered by patent exclusivity, or drugs chemically similar to an original medicine).

It chose to grow on branded products, besides doing custom manufacturing, where products are made for a client, usually a multinational. “We've always followed a contrarian approach and I think that has worked.”

Opportunity or affinity?

“I think this (Nicholas) was a business where we felt that there was potential, this was a good base to start with, and again, when we don't have any experience in that industry, you have to do an acquisition otherwise you have to start from scratch, it is a difficult thing…We felt that pharma can grow. … It was not like we identified pharma and looked out …it came opportunistically, but it seemed a good opportunity,” he says.

But in business there is never a bed of roses, he says, replying to a query, there is always a struggle.

In the beginning itself, there was a struggle. Acquiring Nicholas was a full-time job for almost 9-10 months and that was itself a challenge, he says. “How do you convince three sets of regulators, the Controller of Capital Issues, Ministry of Finance, RBI, institutions like the UTIs of the World — that's also a major challenge,” he points out.

“And even at that time we had only 24 per cent equity ….they did not allow us to increase our equity …so how do you manage to grow the entity over a period of time?” That was a challenge, so we used to take calls that were contrarian, he continues. “Our turnover when we acquired the company was Rs 18 crore. And the second year we invested Rs 18 crore in a plant (at Pithampur, Madhya Pradesh) ….so that was also a tough call. To increase from 140 people to more than 400 people...attracting high quality talent because we did not have so much experience …how do we get good talent into the company?”

“We acquired Boehringer Mannheim when it had a mix up of drugs and some people had died. This was before, we acquired, because once we acquired, we had to settle all the issues,” he recalls.

Build businesses

But after building the business, when you sell off a profitable chunk, what signals are you sending entrepreneurs?

“I believe that I am like a trustee for all my stake holders. My job here is to ensure that I get maximum value for my shareholders and look after my employees as well. So when we sold this business…I did a calculation the other day - the only way I could have broken even to get this value or to create it is ...if you assume that for the next 15 years, I grow every year my topline by 20 per cent. I have an operating margin of at least 30 per cent and I have no tax ….if I have a combination of all this, then I could have realised this value of Rs 18,000 (crore)…So therefore, rather than putting my own ego, many people say , this is a business you identify…how can you exit…I think my job here is a trustee and has to see what is in the best interest of my shareholders. That's how I believe in doing it. And to young entrepreneurs that's my comment ….that they have to build businesses.”

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