‘Detachment’ is not a characteristic one would normally associate with a ‘fanatic’. The picture that comes to mind when one hears the word ‘detachment’ is someone who has renounced the world.
It was a friend and mentor who pointed out the surprising fact that some entrepreneurs, in fact some of the most successful ones, have this quality in abundance. And curiously, over the course of my investment journey, it is the quality of detachment that I have come to admire the most in some of the entrepreneurs I respect.
Ironically, it has become so that I become most excited when I detect detachment
Detachment towards the outcomeKarmanyeVaadhika-raste, MaaPhaleshuKadachana
This probably is the most popular verse in the sacred Indian text ‘Bhagvad Gita’, which loosely translates to ‘You have a right to perform your prescribed duty, but you are not entitled to the fruits of action.’ The Gita advises us to attach ourselves to the process but not to the outcome, as the outcome is never in our control. And there are quite a few businessmen who operate based on this principle.
Take the example of Cera, promoted by Vikram Somany, which is a leading home solutions player in India. It started off as a sanitaryware player before cautiously expanding its circle of competence to faucets, tiles, etc. Despite being a late entrant to an industry dominated by giants like Hindustan Sanitaryware and Parryware, it has become a formidable player over the years led by a brilliant management team with excellent capital allocation and execution skills. Sales have grown from 37cr ($6 million) in 2002 to 1000cr ($154 million) in 2017, while the return on capital employed has remained more than 20% since 2006 and more than 30% since 2011.
Over the years of its evolution, while Cera was continuously outpacing the industry growth rate, Mr. Somany was oft asked a question, ‘When do you think Cera will become the largest player in India?’
Mr. Somany’s response across time, was consistent:
'We have no aspirations to be No. 1 or No. 2. If our growth is good, our service is good and our quality is good, then I think our results will be a consequence of this growth and innovation.'
While other skills are equally important, the consistent focus on the right thing over a long period of time is a vital reason for the company’s success over the long term.
A pattern we find in exceptional entrepreneurs is that their personality percolates into the organization they lead. This can be observed in Cera as well. In concalls across different years, the top management responds similarly to questions on market leadership - that the focus is manufacturing good products, marketing them well and ensuring they are available when the customers need them; and then the outcome will take care of itself.
Ajay Piramal - "My greatest learning from the Bhagvad Gita is that if you are dispassionate you will win."
Piramal Enterprises has the rare distinction of generating annualized shareholder return of 30% over 29 years till 2017. And the architect behind this stunning performance is Ajay Piramal.
Any interview of Mr. Piramal is peppered with words like culture, values, relationships, trust, governance, win-win relationships. This is not surprising given that Mr. Piramal considers the ‘Bhagvad Gita’ to be the best management book ever written.
It is from the Gita that Mr. Piramal derives the concept of trusteeship - he considers himself to be the trustee of his shareholders’ wealth and considers it his responsibility to manage that wealth in a way that creates maximum value for them.
It is from the Gita that Mr. Piramal learnt detachment and dispassion.
It is this combined belief in trusteeship, and detachment, coupled with his exceptional entrepreneurial capabilities allowed him to enter diverse businesses like textiles, pharmaceuticals, drug discovery, real estate among others. And these qualities also gave him the ability to exit when he realized he couldn’t add more value or if he felt something was not working out.
While there are many examples of his dispassionate approach to running businesses, the most illuminating one is his decision to sell his flagship business to Abbot in 2010. To understand why, it is necessary to go back in time and understand the journey of Mr Piramal.
Ajay Piramal, the youngest of three brothers, was part of a business family which had interests in manufacturing, textiles, luggage, etc. He was just 24 years old when his father passed away suddenly. Barely two years later his brother Dilip wanted to go separate ways; Dilip got the luggage business, while Ajay and his eldest brother Ashok got textiles and manufacturing. Immediately after the split, the textile industry in Mumbai was struck by a crippling strike which lasted for 18 months. Ashok and Ajay had no office to go to during that period. And then, soon after that Ashok was diagnosed with cancer and passed away in 1984.
Ajay Piramal was 29 when his brother passed away and the chairman of a century old business group in a bad shape with difficult workers and an indebted balance sheet. He also had the additional responsibility of ensuring the well-being of his brother’s wife and their three children.
It was in this setting that Ajay Piramal chanced across an MNC pharma company, Nicholas Lab, which wanted to exit India and was looking to sell its operations. Despite having no history with pharma or related businesses, he decided to bid for the company. Though it was the most difficult deal in his life, through luck and grit he was able to complete the deal. The acquisition of Nicholas Lab was his springboard into the pharma industry, where in a span of 22 years, through a series of astute acquisitions (majority of which was done at less than 0.5x sales) and strong operational capabilities he built the third largest pharma business in India (from a position of #48 in 1988).
And then in 2010, Abbott expressed their interest in buying the flagship business, though Mr. Piramal was not looking to sell it. But after considered thought, he sold the business for $3.7 billion (though he was initially offered $2 billion) at a valuation of 9x sales, making it the richest valued pharmaceutical M&A ever. It is a testament to his operational capabilities and integrity that Abbott has neither sacked any of the people in the business nor changed many of the systems that Piramal had put in place.
To understand the special nature of Mr. Piramal’s decision to sell, it is necessary to remove our analytical hats and put on our empathy hats. Empathy, the capacity to understand or feel what another person is experiencing from within their frame of reference,is an important tool for an investor.
Human beings are deeply emotional on average and develop attachment to certain objects. Consider things like our first vehicles, inherited jewellery, our homes, etc; many of us develop sentimental attachments to them and would never part with them.
In case of Ajay Piramal it was at a time of great uncertainty that he ventured into the pharma business. Guided by the principles of the Gita and helped by serendipity, he built the business to its position as the #3 player in the industry. Let us try to put ourselves in his shoes (as much as possible) and imagine what the business would have meant to us if we had gone through the struggle he did.
- The business was an integral part of what led his family from a period of turmoil and uncertainty to a period of stability and certainty. It would not have been surprising if there was emotional attachment to the business.
- The business made his name in the business circles of India, and brought recognition to the Piramal family as an industrial house to be reckoned with.
- Piramal is a parent of two smart kids - one of whom was on the board then (both are currently on the board today). He would have very well wanted to hold on to the business as his legacy for his kids.
- Piramal was 52 years old then. At that age, after going through the struggle he had gone through, selling the core business and starting from scratch in other businesses is not exactly an easy thing to do.
Human beings are emotional beings and thus, it would have been understandable if Mr Piramal had deep emotional and psychological attachment to the business. Most people would have found it easier and more natural to convince themselves not to sell the business. Their mind / psyche would have constructed enough believable reasons to justify the decision to not sell.
Instead, at the age of 52, Mr Piramal sold his crown jewel based on his dispassionate assessment that the value he was getting for it then was more than what he would be able to generate for his shareholders otherwise.
Ajay Piramal’s operational capabilities are uncommon, his capital allocation abilities are even rarer, but it is his dispassionate approach to business that puts him in a league of his own.
Sources:Cera - youtube, concall transcripts
Piramal – Outlook Business (Mar 2018 edition), interviews of Ajay Piramal, news articles
Disclaimer: We may/may not have positions in the companies mentioned in the blog. This case study/article is not a stock recommendation. We are not SEBI registered investment advisors. Our Intelligent Fanatics Case Studies and Articles are meant to retell the stories and strategies used to create exceptional businesses so that we can learn from them.