After a long series of M&As, Piramal gets down to the business of consolidation. And helping him to do it is The Firm.

By Abir Pal

As contrasts go, it's a fairly striking one: below is the neo-modern glass, steel, and concrete structure that's become the gold-standard for malls across the country, Crossroads; on top is an office that houses a minimalist Japanese rock-garden. There's another contrast that sort of segues into the first: the tranquillity of the setting belies the frenetic quality of the deal making it played host to not so long back. For, this is office of Ajay Piramal, the Chairman of Nicholas Piramal, the flagship of the Piramal Enterprises Group (projected turnover for 2000-01: Rs 2,300 crore).

The 45-year-old Piramal, who set off on the M&A trail in 1988 with the acquisition of Aspro Nicholas, believes there was nothing else Nicholas Piramal could have done to establish a foothold in the pharma domain: ''When we came onto the pharma scene in 1998, we were virtually unknown. M&A was the fastest growth option open to us. Organic growth has its limitations.'' There's no arguing with Piramal: size does matter in the pharmaceuticals business. It has a role to play in everything from recruiting and retaining the best people to investing in R&D to leveraging scale economies to competing on costs.

With the December-2000 acquisition of Rhone-Poulenc India for Rs 236 crore (that's the deal referred to at the beginning), Piramal seems to have achieved the critical mass he so desires. Now the man is mouthing the usual consolidation-bytes every CEO with a case of acquisition-dyspepsia does: ''We are examining our entire business strategy to identify the businesses we need to commit further resources to, and those we need to exit.'' To help his group through this process, Piramal has sought the assistance of corporate witch-doctors McKinsey & Co. The firm's detailed report will be ready sometime between May and July this year, but it has already presented an initial blueprint of growth to the Nicholas Piramal India (NPIL) brass.

The Firm Suggests

McKinsey's recommendations span three business 'horizons'. In the first phase, NPIL has been asked to concentrate on its existing businesses. These include its core formulations business, where McKinsey suggests NPIL focus on marketing so as to optimise profit and the Return On Invested Capital (ROIC). Horizon 2 requires the company to tap areas like pathology labs, exports, and herbal products that aren't top priority right now, but where it has committed some resources. The objective, explains Vijay Shah, the Chief Operating Officer of NPIL, is to grow revenues and volumes that will, in turn, result in an increase in cash flows over the next two-to-four years. The third horizon (four-to-six years) will see the company's investments in research and development pay off. Expectedly, succeeding in each horizon will require a unique set of skills.

It isn't just its own businesses, or those of the companies it acquires that will help NPIL grow; its joint ventures will play a part too. These include alliances with Boots of the UK to market Strepsils, Sweetex, and other best-sellers; Scholl, again of the UK, to market a range of foot-care products; and Allergan of the US, for a portfolio of eyecare products. NPIL boasts similar JVs with companies like Reckitt Benckiser to market OTC products like Dettol, Disprin, and Saridon, and Ambalal Sarabhai Enterprises to develop offerings for the neuropsychiatry, aids, and dermatology segments.

The JVs have been doing brisk business by the looks of it: in 1999-2000 they accounted for Rs 458 crore (27 per cent) of the group's turnover. Says Piramal: ''Our alliances help us access technology, brands, new products, and new markets. We bring to the table our manufacturing expertise, marketing network, and understanding of the Indian market.'' Adds Shah: ''We will add another 200-300 people (to the existing sales and marketing team of 2000) over the next 18 months.''

NPIL's acquisitions have provided it, at least on paper, with R&D skills that it doesn't have. Explains an analyst at a credit rating agency: ''Companies like Roche and Boehringer Mannehiem are leaders in the healthcare and diagnostics business. NPIL benefits from the strong research wings of these companies and has access to the latest products.'' And that should help the company when the product patent regime goes live in 2005. There are other strands in the logic behind NPIL's acquisitions: the latest one, of Rhone-Poulenc, for instance gives it access to strong brands (Phensydyl, Phenergan) and reduces the total proportion of its drugs that fall under the Drug Price Control Order (39 per cent before to 29 per cent after). Not surprisingly, there are common threads that run through Piramal's acquisition-targets: largely multinational in origin, and with 'clean' balance sheets and strong brands.

A Bitter Pill

Strong brands, an extensive marketing network, and aggressive growth haven't helped Nicholas Piramal command respect within the tightly-knit pharma community and in the stock market (its 52-week high was Rs 666; low, Rs 291). Reasons an executive from another Mumbai-based pharma major: ''The general perception is that they're trying to do too much, too soon. So, even though it's growing pretty fast, Nicholas Piramal can't really be equated to Ranbaxy or Dr Reddy's.'' The market seems to think along similar lines: Ranbaxy's 52-week high was Rs 1,055; its low, Rs 476. And the corresponding figures for DRL were Rs 1,803 and Rs 1,002. And at the time this article went to press (January 29), the prices of NPIL, Ranbaxy, and DRL were Rs 342.80, Rs 605.75, and Rs 1,283.60 respectively.

Piramal readily accepts that R&D is a stumbling block for NPIL: ''Compared to other Indian pharma majors we still have some way to go. But these things take time. '' The Quest Institute of Life Sciences, the R&D wing of NPIL, is working overtime trying to develop five new products, including an anti-malarial one and another to fight cancer.

But as an analyst at a Mumbai-based brokerage points out: ''NPIL still relies on acquisitions and alliances for new products. That can prove costly as often these products can be reverse engineered by Indian companies at a far lower cost.'' That's valid criticism. Thanks to existing loopholes in Indian patent laws that recognise only process patents, Indian pharma companies can reverse engineer molecules with impunity till 2005.

NPIL doesn't particularly seem to be interested in exports either: profit margins in export markets are between 1.5 and 2 times those in domestic markets, and although the gestation periods are longer, several Indian companies, including small pharma hotshops, have established beachheads there. Piramal, however, doesn't believe exports present a viable growth-channel: ''I don't feel exports are economically viable right now.''

Other Businesses

Exports, though, are very much on the cards for Piramal Enterprises' textile business. In 1999-2000, this accounted for 18 per cent (Rs 360 crore) of the group's turnover. Piramal's strategy is to focus on niche segments. To this effect, he has already divested two of his textile units and reduced capacity from 7.5 million metric tonnes a month to about 2.5 million metric tonnes. Still, textiles hasn't been a money spinner for the group: its flagship textile company Morarjee Goculdas registered cash losses of Rs 6.88 crore last year.

Retailing is another area where the group made a high-profile entry with the setting up of the 150,000 square feet Crossroads shopping mall in Mumbai. Similar malls are planned at Nariman Point, Mumbai, and other cities. Crossroads, which has been in existence for the last 15 months, hopes to break even by the next year. Although he is quick to deny it, the street-smart Piramal has always had a sharp eye for prime real estate. NPIL inherited the Crossroads property when it took over Roche. And with the recent takeover of Rhone-Poulenc, it will also acquire prime real-estate in Mumbai valued at between Rs 100-120 crore. Strangely, the only other company in the group that has some synergy with the pharma businesses is Gujarat Glass (expected 2001 revenues: Rs 300 crore), which manufactures glass bottles.

None of these other businesses generate the profits the group's pharma businesses do. The Rhone-Poulenc acquisition will result in about Rs 200 crore of debt for NPIL. To service this, Piramal will have to manage his cash flows intelligently. That's the least of his worries. To translate its stellar growth record into peer-and market-respect, the company will have to invest in R&D and in efficient management systems. That traditional nostrum may just work.

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