Call drop: Voda tax hit could be biggest test for Piramal

For Ajay Piramal, the soft-spoken head of the Rs 5,000 crore pharma to real estate Piramal Group, the latest spat between the Indian tax authorities and Vodafone could be the biggest test the man has faced in a long time.

Piramal now holds a substantial 11 percent stake in Vodafone’s Indian arm and has forked out around Rs 6,000 crore in two phases to reach this level, replacing the Essar group in the telecom company. The reason why Piramal chose the Vodafone play was because of the possibility of smart returns on his investment in a 12-18 month horizon. The stake buy, he was clear from the start, was an investment and nothing more: he would look at exiting Vodafone by mid-2013, by which time the British telecom giant would be looking to come up with an Indian IPO.

[caption id=“attachment_304963” align=“alignleft” width=“380” caption=“With the tax burden on Vodafone and the uncertainty surrounding it, getting another entity to pick up even a part of his stake will be a challenge for Piramal.”]  [/caption]

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However, India’s tax authorities may have upset not just Vodafone’s plans, but also those of Piramal.

While the finance ministry has stood firm on its plans to tax overseas deals involving Indian assets, even with retrospective effect, Vodafone also does not seem to be in any mood to give in without a fight. With a total tax bill of around Rs 20,000 crore set to be slapped on the telecom company, chances are that the IPO will not be top of mind for Vodafone right now.

The Vodafone-Piramal deal also envisages the possibility of Piramal selling his stake back to Vodafone in case the IPO does not materialise within two years, but given Vodafone’s current situation, that may be an altogether different challenge.

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Where does that leave Piramal? Hailed as a master of timing as far as exits and deals are concerned - he sold Piramal Healthcare’s formulations business to Abbott Laboratories of the US for a staggering $3.8 billion (over Rs 17,000 crore at the time) in 2010, a deal which left many in awe at the sheer strength of the valuation Piramal was able to command - the Vodafone tax problem will now leave Piramal looking for the best possible way to protect his investment and achieve the returns he sought.

In fact, Piramal raised the Rs 3,006 crore for the second tranche of the Vodafone purchase by bringing in Rs 1,800 crore by way of commercial paper and the remaining Rs 1,200 crore by way of cash in hand. Piramal had said the pharma company would not be left with cash on its balance sheet after the second round of purchase of 5.5 percent, which it completed in February 2012. At that time, he had said he was looking for a 17-20 percent return on his investments and wouldn’t look at investing in the telecom sector thereafter.

Says Anil Singhvi, founder of proxy advisory firm Institutional Investors Advisory Services (IIAS), and someone who had raised sharp questions on the structuring of the Piramal-Abbott deal: “It’s like playing a double-or-quits game. How does he plan to generate the returns he expects from the Vodafone investment? When ordinary IPOs are not being able to take place, where is the possibility of Vodafone being able to succeed with its IPO in this environment? It is a big problem Vodafone is facing now.”

While the IPO itself wasn’t planned until the middle of 2013, clearly, the Vodafone tax dispute - which has become an issue where international investors have also raised howls of protest against the government’s move of taxing deals retrospectively - will surely leave Piramal under sharp scrutiny of his shareholders.

Singhvi says his firm is keeping a close watch on the Piramal-Vodafone play, but laments that Indian shareholders still shy away from asking pointed questions to companies about the investments the companies make. “Piramal will probably need someone to bail him out now if he wants to exit Vodafone,” Singhvi says.

Says Sudhir Dash, CEO of Investec, a UK-based asset manager: “Given the current situation, Piramal may want to extend his investment horizon beyond 18 months to about four to five years.”

Piramal has a lot riding on the Vodafone investment and the returns it will generate. His group has already lined up ambitious plans to morph into a multi-diversified entity from a pharma-centric one, banking on drug discovery, global buyouts, buying R&D assets, and an aggressive strategy straddling homeland security, defence, real estate and financial services. And all these will need large investments.

But selling his Vodafone stake to another investor too may not be easy, given that the valuation he may command on the 11 percent stake may be quite different from what he paid out.

“It is doubtful whether anyone would want to invest in Vodafone until there is clarity on the tax and regulatory fronts,” says Dash.

With the tax burden on Vodafone and the uncertainty surrounding it, getting another entity to pick up even a part of his stake will be a challenge for Piramal. A challenge which his shareholders will be keenly watching him negotiate.