Piramal’s definitive 3 pronged approach.

I initially bought into Piramal Healthcare as it was a cash bargain. At 360/- a share you actually got over 600/- of cash ( ignoring all the irrelevant stuff like management, brand company history etc 🙂 ). The logic was that even if Ajay Piramal lost/mismanaged or stole 50% of the cash, my investment would still be at book value, which was the worst case scenario. The best case scenario however was hard to predict as the future plans of the company were at best sketchy, but there was one strong reason to tend to this scenario. The Piramal family owned over 50% of the company & their first action was to buy back shares of 2,500 cr. This really got me hooked and I have been a shareholder ever since, only averaging upwards. Now, at a M.Cap of 16,000 i’d like to re-examine whether the cash bargain position is done with and if there is reason that one should hold on, and why. The company has 3 divisions

• Pharma Solutions
• Financial Services
• Information Management

Pharma Solutions The business unit operates in 4 verticals

1. Pharma Solutions – PPS (Piramal Pharma Solutions)
   1. Revenue – 2,000 cr
   2. Scenario – The Pharma industry is facing challenges and the Pharma companies  are actively re-strategising their path ahead as many block buster drugs are going off patent, the generic market is getting super aggressive, development and research costs are getting higher along with the regulations. This makes many companies concentrate on their core area and outsource a lot of manufacturing, research etc, essentially keep their core and outsource other functions to stay lean. Companies in India and China are to benefit hugely from this. Companies that are already outsourcing will continue to do so, but new companies will first look at company reputation, capacity and history and thats where the Piramal Pharma Solutions (PPS) business of PEL has a great advantage.
   3. CDMO ( Contract Manufacturing and Development Organisation ). These organisations offer services in the drug cycle, from research to manufacturing. PPS has a unique position as it now offers a complete set from research to off patent. There are just handful companies who are able to offer these services at the price that PPS can sustainably offer. PPS just won an award from CMO LeadershipAwards.http://cmoleadershipawards.com/index.php/winners  
      1. ADC – Anitbody Drug Conjugates https://www.youtube.com/watch?v=3sqc6l_6pic 
         1. The ADC market in 2014 was just 85 million USD, but is expected to grow to 1.1 billion USD by 2014 and PPS has been voted the WORLD LEADER In ADC CDMO. 
         2. PPS has a 30% marketshare in world conjugate manufacturing.
         3. Must read —- http://www.pharmafocusasia.com/manufacturing/antibody-drug-conjugates.
      2. Injectables-PPS already has a injectable facility at Mumbai. After the acquisition of Coldstream laboratories in Kentucky USA, their canvas has become much larger. Coldstream has differentiated expertise in manufacturing and formulating some niche ADCs.
         1. http://www.biospectrumasia.com/biospectrum/analysis/185561/why-pharma-busy-acquiring-injectables-firms
         2. http://www.rsc.org/chemistryworld/2014/02/deals-infuse-cash-injectables-business
2. Critical Care – The world inhalation anaesthetic market is estimated at 1.2 Billion USD in which PCC(Piramal Critical Care) is amongst the top 3 players. Today the company has a 12% market share globally.
   1. Revenue 757 cr.
   2. PCC has presence in over 100 countries with an estimated marketshare of 50% in emerging countries.
   3. The world inhalation anaesthetic basically consists of the 4 drugs
      1. Desflurane – General anestheric – replacing Isoflurane in all developed markets. Expensive, mild and effective.
      2. Sevoflurane – General anaesthetic – used for infants and children and in veterinary markets. Very fast onset and offset.
      3. Isoflurane – Most popular anaesthetic – use is gradually being replaced by desflurane and sevoflurane. Still very popular in the veterinary use.
      4. Halothane – Anaesthetic mentioned in the WHO list of essential medicines and is mostly used in developing economies.
   4. Basically Desflurane and Sevoflurane are the new kids on the block and are more effective and milder on the body, however their usage is restricted as the they are expensive and out of reach of the developing economies.
   5. PCC is a world market leader with 90% in Isoflurane and 60% in Halothane.
   6. PCC has also captured about 70% of the Sevoflurane market and is looking forward to the successful launch of Desflurane. The major other competitors are Baxter and AbbViie.
   7. Desflurane has only one competitor so the monopoly position can only be comprised by being a duopoly 🙂
3. Consumer Products – OTC (Over the counter) – The over all market size of the Indian self care is pegged at 15,000 cr. Rising education, income and awareness levels will only push the market forward consistently. OTC today is the 7th largest consumer drug company in India and the company wants to be within the top 3 by 2020.
   1. Revenue – 357 cr
   2. Distribution channels now cover 481 towns and over 1,40,000 chemist stores.
   3. Brands and their market position
      1. Saridon – largest oral analgesic in the market- sales crossed 100 cr. Super Brand.
      2. Lacto Calamine Lotion – Largest calamine lotion brand in India. Their supeior product RENEW, however seems to have bombed. – 46 cr
      3. iPill and iKnow – 2nd largest brand in the emergency contraceptive market. – 47 cr
      4. Polycrol – Antacid. Popular only in East India with Mary Kom as brand ambassador.
      5. Tetmosol – No 1 skin disorder related soap.
      6. Caladryl – Largest anti-allergic brand in the country.
      7. Equal – Artificial Sweetner No 2 brand in the country, the diabetic capital of the world. Sales and Distribution contract with Merisant.
      8. JV With Allergen India – Eye care pharma market with all major disease segments. The branding however is all allergen. http://www.allerganindia.com/index.php/eye-care
      9. http://www.livemint.com/Companies/Hgln5L38HnkGmMXKVaHI9I/Piramal-unit-eyes-OTC-brand-buyouts.html
4. Molecular Imaging –
   1. Launched its first product Neuraceq, for Alzeihmers and has entered into partnerships with CiCo Healthcare and  AC Immune SA and IBA Molecular.
   2. Beta Amyloid market to reach 1 Billion by 2025.
   3. Neuraceq has also been approved under most insurance schemes in the US.
   4. http://www.snmmi.org/AboutSNMMI/Content.aspx?ItemNumber=6433
   5. http://piramal.com/cms/data_content/press_release/Korean-Press-Release-GLO-FBB-0515-0068.pdf

Financial Services Don’t proceed without watching this. https://www.youtube.com/watch?v=BuIZpVBBXE4 Just for those who do better with text than video “ You don’t win by predicting the future; you win by getting the odds right. You can be right about the future and still not make any money.” This is the crux of the entire financial business.  Ajay Piramal has the ability to wait and the calculated aggression to attack when the odds are overly in his favour. He is a master hunter ! The business is divided into 3 units

• Wholesale Lending
• Alternative Asset Management
• Strategic Stakes

Real Estate Lending – ( Wholesale and Alternative Asset Management)

1. Piramal is India’s largest deployer of capital in the residential space across the entire life cycle of residential projects. It deploys both internal as well as third party capital and today has deployed over 17,000 cr in this space. It operates under PFM ( Piramal Fund Management ). They are one of the few companies in the space that can mix and offer Debt and Equity deals to the same borrower/investee.
2. CPPIB ( Canadian Pension Plan Investment Board ) manages 265 Billion $ and has provided 250 million $ in rupee denominated debt for Piramal to deploy in the the middle class real estate market. Together this JV will deploy 500 Million or about 3,250 cr.
3. Examples of deployment
   1. 575 cr to Ozone Urbana township in Benfaluru – http://www.urbana.ozonegroup.com
   2. 225 cr to Ganesh Housing in Ahmedabad – http://www.ganeshhousing.com
   3. 1200 cr to Omkar Developers in Worli, Mumbai – http://articles.economictimes.indiatimes.com/2015-03-30/news/60643970_1_piramal-fund-management-central-mumbai-400-crore
   4. 66 cr to Ashiana Housing – http://www.dealcurry.com/2015032-Ashiana-Homes-Raises-Funds-From-Piramal-Fund-Management.htm
   5. 500 cr in the IndiaREIT apartment fund.

Special Situation Investments

1. India is at a stage where every one seems to have a solid valuation but very few the liquid cash to buy at the valuation. This gives Piramal a unique opportunity to take a lions share of the pie with low risk probability. Yes, heads i win, tails i do not loose much. – Monish Pabrai are you listening ? Infrastructure is still going though an extended period of uncertainty and the PE funds who invested are desperate to get out. Tons of these deals are available and up to the investment team to choose.
2. Vodaphone –  invested 5900 crores and exited at 8,900 cr. They had an option to get into the Vodaphone IPO too but chose not to take it.
3. 425 crores into Convertible Debentures in Navayuga Road Projects – http://www.necltd.com/cp_epc_bot.htm
4. 500 cr into Convertible Debentures in Green Infra – http://www.epcengineer.com/directory/company/9748/green-infra-ltd  IDFC and Singapore’s Sembcorp and key investors into Green Infra.
5. APG – JV
   1. Total commitment to invest 6,500 cr into mezzanine investments into Indian Infrastructure Companies. This is to be invested into companies that are operational or near completion with low execution risks and and high cash flow visibility.
6. The modi government is planning to spend 1 trillion by 2017. This team is super busy at the moment.

Strategic Investments in the Shriram Group India is underbanked and under financed. There are just a handful companies in the NBFC space that have an impeccable record in financial prudence as well as integrity. These companies too are under financed, why then bother to build another institution when one can just plug and play ?

1. Shriram Transport Finance – 10 % for 1,600 cr. Current MCap – 19,450 cr.
2. Shriram City Union Finance – 10% for 801 cr. Current MCap – 10,900 cr.
3. Shriram Capital – 20% for 2,150 cr.

  Ajay Piramal now sits on the Board as Chairman of Shriram Capital.  Shriram group will eventually be owned by the Shriram Group and employees, The Piramals and the Sunlam Group from Africa. Both emerging economies and the companies are in

• Transport Finance
• Equipment Finance
• Retail Lending
• MSME Lending
• Insurance
• Chit Funds

All this action for a meagre 4,500 cr and getting to sit on the Chairmans seat. Genius !         Information Management Healthcare is many things, but it is not cheap. Profitability in healthcare is almost as important as the cure as no company can continue to cure unless it is profitable. Funny how this sounds, but patient health is in many ways directly linked to pharma company financial health. Piramal’s information management business DRG (Decision Resources Group) is a decision support platform in the healthcare information services sector. This infographic explains what the company has been doing, where it is and where they plan to be. Since Acquisition of DRG the following companies have also been acquired :

• Abacus International – Evidence Based Research – http://abacusint.com/services/
• Relay Technology Management – Data Analytics for Life Sciences – http://www.drg-analytics.com
• Activate Networks – Network and Realtionship Analysis – http://activatenetworks.net/#
• HelathHiway – Data integration and solutions to Indian Health providers
• Helathcare Business Insights – Provider – Training provider for over 1,400 hospitals across the US – http://public.healthcarebusinessinsights.com/pages/services

The information management business of DRG is the most impressive yet the least lucrative of all the businesses today. We have just been given a birds eye view of whats happening and not enough information to figure out where the company is heading. Thats the irony, no information about the information management business 🙂 Anyway, when a company is the best provider of contract research and manufacturing, i dont think it could hurt too much to own the information providers that 50 of the major drug companies look to while making critical decisions. Cash flow timing is unknown but the advantage of this position is undebatable. Piramal Enterprises has now clearly changed structure from a cash pile to 3 well defined businesses. The company seems to love to dominate niche futuristic markets and grow while the market expands. I still do not think the financials make too much sense to be able to draw predictable conclusions from them, but the conclusive part is this:

• The company is in avenues of major uncertainty, which have a huge range of outcomes.
• The risk of permanent loss of capital is low, given the immense opportunity ahead as well its ability to take advantage of distressed situations with its cash pile.
• Mistakes will be plenty – like NCE, BST – CarGel etc
• and most importantly , Ajay Piramal is NOT A SCIENTIST, he is a businessman in a field of science, profitability is more important than cure. If you are an investor, you will love this line, no matter how politically incorrect this may sound.

More on the financials after the AGM and Q1 results.