Rakesh Jhunjhunwala is one of India’s most well-known share market investors. Often dubbed as India’s Warren Buffett, Jhunjhunwala is renowned for his astute stock-picking abilities. In recent years, the billionaire who runs his own asset management firm named Rare Enterprises, has accelerated the pace of his private equity investments as well. Moneycontrol caught up with Jhunjhunwala to understand how he approaches his investments and what excites him about companies and of course, his investment philosophy. The following are edited excerpts from an interview during which Jhunjhunwala, also called Big Bull, weighed in on the equities market, his stock picks, his investment in Zydus Animal Health and Investments and more.
Welcome to our show Big Deal today, which has Big Bull Rakesh Jhunjhunwala of Rare Enterprises and Renuka Ramnath of Multiples. They are the consortium partners of a large healthcare deal. They bought Zydus Animal Health and Investments (ZAHL), a wholly-owned subsidiary of Cadila Healthcare, bought from Cadila Health for about Rs 3,000 crore. Let me begin with Rakesh Jhunjhunwala—what is the kind of potential that you saw in this particular asset?
Rakesh Jhunjhunwala (RJ): See, I look at external opportunities in an investment. Now today the production of eggs, milk, fruits and vegetables is far greater than that of cereals in India. Farming in India has some of the lowest yields in the world but with great scope to improve. Now, animal husbandry and poultry can be a big source of additional income for farmers. And government of India is very conscious of that, and has launched many programs to improve animal husbandry and poultry income. So I think the opportunity is still huge.
The second factor is driven by the fact that as per capita income rises, protein consumption goes up. The medicines for animals and poultry are primarily directed at protein consumption.
For these reasons, I feel the investment is great. We are the largest Indian player. The number one player is a multinational. It’s a business which requires a lot of products and distribution. There are big entry barriers, including brands.
Also this business is similar to a generic pharma business for humans. When we found that the management team is very capable, led by a very capable person, and that we will have good reasonable growth, we thought there is scope to improve profitability. With volumes, there could be acquisition opportunities. And we have paid a valuation of between 9-20 times EBITDA, which is the valuation of most generic pharma companies. Renuka knows better because it was her idea. And she’s the lead investor and she is leading the consortium..
Let me take the question to Renuka Ramnath. You’re the leader of the consortium, and I believe you have a controlling stake in this particular transaction, if you can give us the breakup of the consortium partners. Also what is the growth potential? Because as Rakesh Jhunjhunwala said that it has many entry barriers. So are you looking at inorganic opportunities to grow and beef up this business going forward?
Renuka Ramnath: I couldn’t have described the business better than Rakeshji. Rare Enterprises will have 30% of the company and the rest of it will be a consortium of Multiples’ own funds and that of its LPs. As far as growth opportunities are concerned, this company has the distinction of having launched about 10 products first to market. So clearly innovation engine in this company is very strong.
Second, they have an excellent distribution network and a direct connect with their customers through their own brands. There is also a pipeline of more than 10 products that the management team has been working on.
The immediate focus will be how do we expand the product suite and have a greater engagement and greater share of wallet for both therapeutic and food supplement business in all our chosen categories with our current customers and also probably new customers.
There is also a plan by the management to enter the aqua space in a more decisive way and we would be supportive of that. And over time, we would also look at whether we can have deeper penetration in some of the international markets, particularly the developing markets.
So the only thing I would add, in addition to what Rakesh bhai said is that the management team is extremely proven, highly entrepreneurial, highly capable and competent. And they have done extraordinary work in the last three decades in building this company to be the second largest animal healthcare company with some of the most dominant brands in the marketplace.
Combined all this with what Rakesh bhai said about the huge government initiative to double farmers’ income. Aanimal husbandry is at the centre of the government’s attention. So there are many, many initiatives that provide a fantastic tailwind in this industry.
In terms of valuations, can you reflect a bit, and do you think that in an eventual exit could be through an IPO?
Renuka Ramnath: Well Nisha, IPO is definitely a possibility if all of us shareholders decide that that’s the best course of action. Definitely, this company has characteristics that are absolutely appropriate for an IPO. But time will tell because we are going to nurture this company at least for another five years. And we’ll have to see what opportunities are there. As the company becomes much more dominant, I would definitely not rule that out.
RJ: As long as a company is earning and we get returns, I don’t bother with exit. The crux is the earning ability of the company and its talent. So we’ll cross the bridge when we come to it. As long as there is performance, you know, exit is not difficult. And I believe in India and time to come, you know, companies which have a dominant market share in any area are going to have gorilla valuations. Because you know, buyers will want companies with size, especially large players. Size gives us a lot of advantages, especially style.
So gorilla valuations is what you are expecting in this particular space. But Rakesh Jhunjhunwala, you made a very important point … that you have no exit barriers and restrictions. How are you going to take benefit of that?
RJ: Well, I mean, I would like to not only look at things from my point of view, but also from my that of my consortium partners. So we will build a consensus, grow the company over years and discuss what best form of exit is. I would like prioritise the requirements of my consortium partners.
(To Jhunjhunwala) Most of your investments has been more of financial sponsorship and minority in nature while rest of the private equity funds have moved on to buyout situations as well. Is that also on the anvil?
RJ: That is not right. I promoted one KPO (knowledge process outsourcing) company, in which I own the majority stake. I think revenue should be around Rs 300 crore. So it’s a fairly large company. And I am the principal promoter. I’m also a promoter of Star Health.
(To Renuka Ramnath) Are you done with the funding that you’re seeing and probably make some exits, given the valuations in the market?
RR: Well, we have had an excellent year last year, both in terms of exits, and in terms of investments. So it’s an ongoing journey. And while market factors are very, very important, I’d like to highlight that for a private equity player, the company factors, the preference of the management teams, and the entrepreneur behind the show is probably even more important.
We have exited several of our companies. With respect to investments from our third fund, so one of the thesis I have been talking about for a long time is ownership realignment. Increasingly, it is becoming center stage for most corporates to ask the questions: which is my core business, which is the business that I want to really nurture, and which are the businesses that I’m happy to divest. Even the Zydus Cadila deal is one such opportunity.
The beauty is that in 15 years back when I did these transactions, these were businesses that they were disinterested, or did not grow, or, or did not probably have a very robust future perspective. Currently, what is happening is corporates would sell very well nurtured, very mature, excellent profitability characteristic businesses because they are making a conscious choice of what is strategic and what is important for them to take forward. And what they would like to divest.
If you look at the current transaction, it’s a market leadership combined with fantastic management tailwinds. The district characteristics of a business and the government initiatives are potent examples of many, many such transactions that will happen in the Indian market. Besides their results, other big pieces that seem to play out in the Indian market is transfer of ownership from families to financial investors as it happened in the west. You could have partners who want to go different way. You could also have businesses in which people are divesting a portion to secure and pare down the debt for the rest of the business. I would think that Multiples has the right formula to win, manage, successfully opportunities of this nature.
What about Rare Enterprises, Rakesh Jhunjhunwala? What’s in the pipeline? Tell us about your private equity strategy.
Rj: I will tell you about exits. If I make a very good investment, and maybe in three years, I double triple my money. But that doesn’t mean that I should sell that investment. You’ll see the target in my portfolio, that is 18-20%. If even after tabling the investment can give 18% return under the new value, I will not like to (exit).
But I feel that as companies get size, they get knowledge. I would like to retain my investment. As far as my private, I have really no style. I mean most of my deals have been done without bankers. Most of my deals have been done by people who have approached me.
I’m in the process of negotiating 2-3 deals at the moment. I mean, as soon as you as soon as any of it is finalized, I do that.
This animal healthcare business is a fairly large deal of over nearly $100 million I’m putting in. I have no limited partners. It’s all my money.
I will be doing further private investments—surely about two investments in the next six months. And my investment Nazara got listed recently. Four of my large investments will be listed in the next 12 to 18 months. So you will see as a property comes, that’s just me and my partner, Rupal, and Amit (Goela). I want to make large investments or investment with good potential.
Star Health is also a dressing up for an IPO. Can you give us some sense of the timeline and also how COVID has impacted Star Health business?
RJ: I cannot speak much about Star because of regulatory reasons. I have four large ones, one is Star, one is Metro Brands, one is Concord Biotech in Gujarat and one is in Inventurus Knowledge Solutions. I can’t have say anything about these. Regulatory reasons are why.
So you have IPOs lined up …
RJ: Whatever you conclude, whatever you want, but for regulatory reasons, I cannot talk about these investments. I just made an investment.
RJ: I did an investment this year in a company called Minosha India, formerly known as Ricoh India Limited. We took that company—a friend and ̛I in partnership—out with NCC that is doing well. Then Concord set up one of the largest fermentation plants in the world. And Inventurus is doing well. I might have made a total of 25 investments, of which I think seven or eight are gone and forgotten.
Seven or eight will just return the principle, 5-6 will give mid-term returns, five will give multiple returns—10 times, 20 times, 30 times, 40 times. So overall my portfolio has done well.
And it has taught me a lot because when I first made a private investment in 2000, when I looked at those companies and worked with them, I realised what the blockage to growth is. It has really improved my skills as an investor.
Also, I think it’s very taxing to do investment. But it’s very interesting. I have invested for about 10 years. You might think you have no emotional relationship with the business and especially with the entrepreneur. But I always respect the entrepreneur, and whatever will be my ownership, it is his business and his dream.
But investments are taxing because I don’t have a large team. So I would like to join up with people who can actively manage and I’m going to make one or two more further investments in the current year and am under the process of analysing, negotiating and concluding.
So two more investments in six months. Can you give us a sense of how much money are you putting aside for these investments? And second, which sector are they in?
RJ: One is in education, one is in the hospital business. I do a deal and I somehow get money because god is kind. Indian banks and NBFCs are alive. I feel the multiple edition Rs 500 crore debentures are a very safe business. Growth may not be spectacular, but the downside risks are very low.
Catch the full interview with Rakesh Jhunjhunwala here