The bombshell that Piramal dropped
The annual report of Piramal Healthcare for the 12 months ended March 2010 starts with the vision statement to become the most admired Indian pharma company with leadership in market share, research and profits etc. Among the several stated objectives, is being the partner of choice for global pharma companies. One does not know whether the company achieved its intended goal, but Ajay Piramal delivered a coup of sorts when he translated a part of his vision into reality by announcing the sale of the company's domestic pharma portfolio for US$ 3.7 bn to Abbott Laboratories. Abbott was one of the many MNC suitors for the business, and paid top dollar for the acquisition. Piramal Healthcare will now consist of its pharma export sales, including the production units catering to pharma exports, and the consumer goods portfolio and, bulk drug production.
Many M&As make it what it is today
For those not in the know, the mellifluous company is today an amalgam of many pharma, and some non pharma companies too - including Roche, Nicholas, Rhone- Poulenc, Boehringer Manheim, Hoechst Marrion Roussel Research Centre, Aventis Research, ICI Pharma, Sarabhai Piramal, Rhodia UK, Minrad USA, Sumitra Pharma and, Gujarat Glass at some point. And, full marks to Ajay's bushwhacking entrepreneurial spirit in putting it all together and creating value from these acquisitions. Some would say that he was lucky to be in the right place at the right time. The company is still a pygmy by international standards though. Its plans to also become an MNC operationally, if any, seem to be fluctuating wildly. In FY10 sales billed outside India by Piramal Healthcare was a mere 14% of all sales, down from 25% in the preceding year. Simultaneously, there is also a significant drop in carrying amounts of segment assets outside India. Its international operations too merit little attention. And, its attempts to become an international player by setting up pharma manufacturing units abroad are as yet a non starter. Piramal's entrepreneurial skills also plumb the depths of probity but more of that later.
Significance of outsourced sales
The fact of the matter is also that, inspite of all the M&As engineered by the management over the years, the significance of bought out sales in overall sales is a growing factor. Apparently, given the cost structure it is cheaper to outsource from more cost effective smaller manufacturers. Bought out sales of creams, vials, tablets, liquids and the like accounted for 37% of all sales of Rs 27 bn in the latest accounting year, against 29% in the preceding year. Bought out sales from its subsidiaries and associates was only a mere 2% of all sales. Not that the company is lacking in subsidiaries. Like all Indian multinationals Piramal Healthcare has a passion to 'procreate' them and ends up with a surfeit of them. How many subsidiaries it has depends on which page of the report one is looking at, partly because there are subsidiaries of subsidiaries to contend with.
Subsidiaries by the dozen
The best estimate is that there are 20 subsidiaries, including subsidiaries of subsidiaries, not including another 7 companies which come under the category of other related parties and, 3 joint ventures. It appears to have set up manufacturing facilities in the UK, France, The US, Canada, and other 'abroad' country. Many of the subsidiaries can be classified as no gooders with no transactions to boot. Quite some others belong to the investment company fraternity, incorporated in exotic locales, and live off on moneys borrowed from the parent and who then invest in the immediate group. The parent has been kind enough to give the brief working details of 15 of the subsidiaries and also of their offspring. Fully half of them have no revenue or have revenues which are laughable. Of the remaining, barring one, none of the others could report positive bottom line figures. So who cares anyway?
Where some of these subsidiaries excel is, in being active participants in the juggling of group's cash flow, which as one may have guessed is fairly one sided. During the year the finance including loans and equity granted by the parent to its siblings came to a neat Rs 19 bn, against a marginally higher Rs 20.5 bn in the preceding year. It earned an interest of around 6% on this advance on a rough basis, which is slightly lower than the 7% that it got in the preceding year. What other business revenues the parent company generated if any from this exercise is not readily known. The real trick here is that during the year the parent advances large sums primarily to its subsidiary, PHL Fininvest, and at year end it is returned by PHL to the parent, and the cycle commences all over again at the start of the next year. Having subsidiary companies also implies having to foot other costs too. The guarantees given by the parent on behalf of subsidiaries and on performance guarantees at year end was a cool Rs 14 bn (against Rs 8.6 bn).
Paltry returns on equity investments
Its return in the form of dividends from its investments in subsidiaries and JVs etc are another sore point. On a rough equity investment base of Rs 1.6 bn, it earned a return of Rs 78 m in the latest year. It will be of help if the directors' report is a little more forthcoming on the need for its myriad investments and how the numerous interest free loans and other freebies extended to its subsidiaries is going to help the company on an ongoing basis. Managements should not be allowed to run riot like our state governments and the Union Government.
Piramal now says his vision is to become one of the world's top five contract research and manufacturing companies by 2015. The company's buyout compass will now be centred on niche global companies will the moolah that it got from the sale of its domestic formulation business, with a focused revenue of over a billion dollars he adds. Given his past record that does not appear to be a very tall order but it may imply having to dismantle his present operations strategy on the foreign front which appears totally unfocussed.
Disclosure: Please note that I am not a shareholder of this company
This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.
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