Piramal Says India’s Response to Corruption Makes Him Hopeful

India Real Time interviewed Ajay Piramal, chairman of Piramal Healthcare Ltd., part of the Piramal Group, about the challenges of investing the more than $2 billion in cash received from the sale of his generics business in 2010–and where he’s now decided to invest the money. Here are edited excerpts of the interview with Mr. Piramal.More In Q&AQ&A: Aashish Kamat, CEO of UBS IndiaQ&A: Adi Godrej, Chairman of Godrej GroupQ&A: Vodafone Lawyer's Take On Tax CaseTeju Cole on Why Photography Beats LiteratureMeet Vinay Rai, India's Censorship CrusaderWSJ: Every company head dreams of suddenly having a ton of cash, and yet I imagine this presents its own set of difficulties. Tell us about the challenges you’ve faced since receiving $2.12 billion–plus $400 million annually for four years, from the sale of your generic pharmaceutical business to Abbott Laboratories in 2010?Mr. Piramal: One of the challenges has been figuring out should we maintain our pharmaceutical-focused company or should we go beyond that? That has taken some time for us to be clear on. Because, as you said, one of the biggest challenges if you have money is not to waste it. If there is too much money, you don’t have the same discipline. The whole 23 years that we’ve been in Piramal Healthcare, only once did we raise equity. We had one equity raising and one rights issue. We always believed it’s better to be frugal. We’ve grown 35% year-on-year for 23 years. It’s because we were always frugal with our capital. And that’s been one of the reasons for our success. Others we’ve seen, when they have too much capital, they waste it. So we are now in the opposite situation–we have a lot of capital, so what do we do with it?WSJ: What made you decide to expand beyond pharmaceuticals?Mr. Piramal: The first question we examined was: “Do we go beyond pharmaceuticals?” We realized with this sort of capital, we need to go beyond pharmaceuticals. We could easily acquire new businesses in pharmaceuticals, but we didn’t know if we could add significant value. So that’s been the way we’ve looked at it.WSJ: As you look to enter other sectors, are you focusing on India or globally?Mr. Piramal: Beyond pharmaceuticals, we’ve been looking at what are the other opportunities to grow. So a thesis we have is that as far as India is concerned, India is a place which we understand by and large. India is also a place where we enjoy a brand which goes beyond pharmaceuticals. Also, we do know how to set up projects in India, we do know how to run effective supply chains in India. And we believe that the India growth story will continue. As GDP grows, there will be demand for newer products in India as well, so that was the thesis. We started looking globally as well as in India.WSJ: What made you consider but initially reject going into infrastructure?Mr. Piramal: One of the biggest demands in India in the future is going to be infrastructure. But when we started investigating infrastructure, we found it was not a very transparent business. This was before the 2G scam and all of this. We realized there are a lot of challenges in the sector, whether power or coal. We got a lot of proposals to go into power or mining, but then we felt that yes, we could do all of these things because of our capital and experience and team, but we felt it was not transparent enough and therefore we remained aloof from that.WSJ: What has made you think now that you would like to invest in infrastructure?Mr. Piramal: Now the situation is different. I think now there will be transparency with all that has happened–the 2G scam and the other corruption scandals. This is the time when we will start looking again. At the time when we started considering it, when we sold the generics business in September 2010, that was the worst time.WSJ: What will make you finally invest in infrastructure?Mr. Piramal: There should be certainty. What we are hearing about in power is the (government) gives you approval and then they pull back.WSJ: What investment possibilities are you considering in infrastructure?Mr. Piramal: One of the things that has happened is the availability of funding for many companies is not there. By and large, it’s difficult to raise funds in capital markets. Banks are going to get stretched more with all the banks needing capital. Government doesn’t have that much. Banks will find it difficult to lend money. With inflations on one side and the huge fiscal deficit on other side, projects will be starved for cash. Those projects that have approvals but still need cash–that’s what we’ll look for. We think there can be an opportunity there. This is where one can acquire some projects.WSJ: What are your other India-focused investment possibilities?Mr. Piramal: One is financial services. It’s about markets and it’s competition that will determine if you succeed. It’s a transparent thing. If you have an understanding of finance and a good brand name, then you can do that. So that’s one of the areas. The second is in defense. There we believe India will have a huge budget in the future, and there’s a government rule that talks about requiring that part of the product must be manufactured in India. Now the government is starting to put this offset rule into practice, so as India places huge orders, 30% will have to get manufactured in India.WSJ: What types of global acquisitions are you considering?Mr. Piramal: We are looking globally at businesses we can acquire that have some India angle to them. Either those companies have products for which India can be a big market in the future, or there can be some sort of manufacturing done in India. Or if it is a new drug in discovery, we have a big presence in India, we understand the Indian market, we understand how to do clinical trials, we can acquire global companies which have molecules and do the part of the development here. So we have two strong views. One is to look at in our existing businesses, pharmaceuticals, making some investments. And we’ll look at investments that can have the India advantage somewhere.WSJ: What makes you optimistic about India now?Mr. Piramal: The whole 2G process–from the CAG (Comptroller and Auditor General) coming so strongly to the Supreme Court giving guidelines for 2G–makes me hopeful. I’m optimistic about the fact that transparency will come. Now both the bureaucrats and the politicians have to be careful. This is the first time when ministers are behind bars, whether they get convicted or not is another story. Secretaries are behind bars. I feel the system will now on its own not expect any (bribes).WSJ: What worries you about India?Mr. Piramal: I’m concerned about the decision making. One of the worries is that to avoid any future problems, (people in power) will not take a decision. That’s my concern. I think there will be more transparency but decisions need to be taken faster. At a policy level, across the board, in the bureaucracy, there is a real slowdown in decision making.WSJ: Do you think the government paralysis will end?Mr. Piramal: I’m overall optimistic that after a complete slowdown people (in government) will start moving. They’ll realize growth has to go on. The country has to move forward. Whenever India is pushed to the wall we start moving things.WSJ: Which companies in India are your role models as you diversify more?Mr. Piramal: We’ve always found our own identity. What we’d like to be known as is a group that has a strong set of values, which go across all of our different businesses. One of those values is that when we act, we act as trustees for all of our stakeholders, whether it’s our shareholders, our employees, our society. That’s what we want. Our way has always been different. So we moved from textiles to pharmaceuticals. We entered pharmaceuticals after all the Indian companies were there for 15 years. We rapidly grew through acquisitions at a time when most people would say that’s not the right way to grow. When everybody else was doing generic exports, we concentrated on intellectual property. We’re always following a contrarian strategy. But always, being a value-based group, that’s been our strength.WSJ: You’ve been in healthcare for more than two decades and seen many national budgets. In the upcoming budget, do you think the government will invest substantially in public health as promised?Mr. Piramal: I don’t see a huge increase in public health spending. Even during the Congress Party-led coalition’s first government, in the manifesto they said they wanted to significantly increase healthcare spending. It’s not happening because I don’t see the government having too much of excess funds this year.