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Dilip Shanghvi enters Suzlon as a white knight

04 Mar

In three days of trading after it was announced on February 8 that Sun Pharma’s Dilip Shanghvi will buy 23 per cent equity in Suzlon, the troubled wind energy company’s stock came to life and rose from Rs 18 to Rs 25.

The deal does many things for Suzlon. It infuses Rs 1,800 crore of much-needed cash at a time its quarterly net loss is 17 times its sales. Secondly, it brings Shanghvi into the mix. 

The 59-year-old is much respected by peers for making Sun Pharma a force to reckon with. He is the second richest person in India, though The Times of India‘s calculations say he is the richest. The Sun Pharma stock, after flirting with a low of just above Rs 200 in 2011, has been on an incessant march upwards and is now above Rs 900.

But the stock market’s new-found confidence in Suzlon may have something to do with the expectation that Shanghvi may not be content to remain a white knight – someone who rescues a company from financial difficulties or a hostile takeover bid.

It is an expectation that will be corroborated by the old promoters of Taro Pharmaceuticals, in which Shanghvi first invested as a white knight only to take control later. Habil Khorakiwala, a fellow Mumbai-based pharma tycoon, may testify to the keen edge of aggression that peeks out of Shanghvi’s benevolent veneer every now and then. Few will be surprised if Shanghvi ended up taking control of Suzlon, which will shrink dramatically to nearly a third of its size once the deal to sells its subsidiary, Senvion, goes through.

Sudhir Valia, Shanghvi’s brother-in-law, is one of those who will be surprised. He is Executive Director with Sun. Usually a behind-the-scenes “numbers” guy, he first made headlines only in 2012 when his Lakshdeep Investments and Finance Pvt. Ltd. bought 26 per cent equity in Telewings, the India arm of Norwegian telecom firm Telenor, a stake he later sold back to Telenor.

“We, the family, are not viewing this investment as an entry into the renewable energy space by trying an acquisition, it is just a financial investment to deploy our family money,” says Valia. Tulsi Tanti, Chairman and Managing Director of Suzlon, seconds this. “We will remain in control of the company and DSA (Dilip Shanghvi & Associates)’s role will remain only as a financial investor.”

Contrary to the impression that Shanghvi bailed out Tanti because of their old friendship – both have roots in Gujarat – Tanti says Shanghvi came into the picture only recently. “We started talking to them only in early January.”

Valia says the family analysed various avenues of investment for its money – an amount that would be considerable considering that Shanghvi received more than Rs 1,200 crore in the last five years as dividend from Sun – and zeroed in on renewable energy, given its growth potential in India and the Narendra Modi government’s emphasis on it.

“Suzlon is the largest renewable energy company in India and it was a natural choice for a safe long-term investment,” says Valia. Shanghvi, too, seemed to be thinking long term when he said after the deal: “While we believe Suzlon has the potential to emerge as a global leader in the renewable energy space from India, it will take substantial and sustained effort on the part of the management team to achieve a significant operating performance improvement. We have strong faith in the leadership of Tulsi Bhai to achieve this and will continue as financial investors.”

Analysts see Shanghvi’s investment in Suzlon in tune with business families’ investment trends in the West. “I see this as an emerging practice of entrepreneur families investing their personal wealth in long-term, high-growth, safe businesses run by others, unlike the old practice of entrepreneurs redeploying their wealth into the same business or for diversifying into other businesses under a group umbrella,” says Kavil Ramachandran, Thomas Schmidheiny Chair Professor of Family Business and Wealth Management at the Indian School of Business, Hyderabad.

A senior pharma industry analyst, who requests anonymity, says the deal need not be seen as an attempt to acquire Suzlon. “He is trying to redeploy his personal money in businesses that give high returns, like what Ajay Piramal did after selling his pharma division.” Piramal has in the recent past invested big chunks of money in Vodafone India (which he sold back to Vodafone for handsome returns) and R. Thyagarajan’s financial services entity, the Sriram Group. Shanghvi, insists the analyst, is unlikely to enter businesses other than pharma in a big way.

Ramachandran, the ISB professor, says Shanghvi’s role will continue to be that of a strategic advisor even though he has almost as big a stake in Suzlon as Tanti. “The main attraction for him in Suzlon could be its growth potential.”

That potential is rated highly by stock analysts. “Suzlon has the best overall product offering and it lost market share primarily due to its funding constraints,” say Abhinav Sharma and Rahil Shah of HDFC Securities, in a report following the deal with DSA. “The Indian wind energy market is set for a big leap as accelerated depreciation and generation-based incentives have been re-introduced.”

The family’s focus, agrees Valia, will stay on its core pharmaceutical business, which can give more returns than most other sectors. “The only diversification we have in mind in the near future is financial services.” Both Shanghvi and Valia plan to enter the new business of payment banks. Shanghvi has applied for a licence; Valia’s Fortune Financial Services plans to acquire 51 per cent in one of the applicants, Pay Point India Network.

But that is not the whole story. Shanghvi’s son, Alok, with a friend of his, had started a solar panel-making company: PV Powertech. Suzlon, for its part, has put a proposal before the government to make solar power farms. Solar energy is an area in which the government has announced very ambitious targets.

The overlap, says Valia, is a coincidence. “We wanted Alok, once he completed his studies, to learn how to start and nurture a business from scratch. He chose solar energy and started the company along with a friend and successfully ran it for a year and then exited it to join Sun Pharma. It was to train him in business.”

For the time being, Tulsi Tanti can bask in the warm glow of the Sun’s rescue. But the fact remains that Shanghvi’s and Valia’s are perhaps no longer the only minds in the Sun family.

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Posted by on March 4, 2015 in Uncategorized

 

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