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FINANCE Can Uday Kotak Regain His Place In The Sun? He's cleaned up his balance sheet, is offering a bouquet of specialized retail services, and is hoping to bag a banking licence. By Brian Carvalho
He's been known for his ideas; his innovation; his penchant for opportunistic growth; his propensity for squeezing value out of his JV partners; his big-buck deals; and his ability to think a couple of moves ahead of the pack. These days, though, Uday Kotak's name also rings a bell for different reasons. Competitors-and there are plenty of them-are only too eager to point to the list of his investments gone sour, starting with ABCL, then Matrix Information Services, and now the publishing business, where he's still holding on in the hope that foreign media will be allowed into the country. There are also those who wonder why the 42-year-old awe-inspiring Vice Chairman of Kotak Mahindra Finance (KMFL) hasn't been able to prop up profits of the flagship-which fell by 19 per cent last year and by 9 per cent in this year's first quarter-he founded in the mid-eighties along with Harish and Anand Mahindra, when he was still in his late twenties.
What's more, despite consolidating the balance sheets of his other financial services companies into one annual report, with interests ranging from investment banking to broking to mutual funds to insurance (the latest), investors aren't willing to recognise the apparent depth in the group. Against a book value of Rs 85, it's difficult to see the KMFL stock bob above the Rs 40 mark (the stock had listed at Rs 1,300 in 1992). The price-earnings multiple is just about four. The industry average for finance companies is roughly seven, but Kotak anyway would be reluctant to associate himself with most of these companies. Whilst Kotak's p/e may still be higher than an ICICI, and roughly the same as DSP Merrill Lynch (its closest competitor), HDFC stands head and shoulders above the pack, with a p/e of 16. Kotak believes in benchmarking himself against the best, and what could help him in getting there is his proposal to put up a bank. But his application for a licence, made in March, is still pending, bringing the doomsayers out of the woodwork. And adding to his woes is a dull stockmarket, which has resulted in his once booming public issue business drying up. ''Kotak has been living with most of the disadvantages associated with the NBFC sector. The fact that he is still holding on is a great achievement. KMFL's valuations don't seem to reflect the grip he has on various markets, but there are significant gaps in his businesses, like home loans and banking,'' is how Harsh Vardhan Roongta, CEO, apnaloan.com, sums up his reading of the Kotak predicament. Evolving Strategies Ask Kotak whether the plot has gone wrong, and he's quick to dismiss the ''temporary hiccups that have to be ignored. We have sufficient capital to fund our growth ambitions which, in the long run, will be reflected in our valuations.'' Instead, he points to the consolidated Kotak balance sheet, and its size. ''The 'net' net worth-which means taking only the Kotak shareholding in the various group companies-is now Rs 1,000 crore-plus.'' What's more, the net worth of the low-margin corporate lending portfolio, which was as large as Rs 1,000 crore in 1996, has been shrunk to Rs 200 crore. In the process, the non-performing assets have been reduced from 5 per cent three years ago to 1.3 per cent last year. By 2002-03, says Dipak Gupta, Executive Director, KMFL, the size of the retail balance sheet could go up to over to Rs 2,000 crore. That indeed is the core of the Kotak blueprint: focus aggressively on retail activities like auto financing, broking, personal finance, distribution of financial products, insurance and, government willing, banking, even as the non-fund based activities like mergers and acquisitions and IPOs (once the market revives) continue to contribute their bit. And to provide further stability to earnings in the long-term, Kotak is also broad-basing his revenue streams. A foray into asset recovery is one such tentative attempt. It's unlikely that KMFL and most of its subsidiaries will have any jaw-dropping growth to show in the current year, but even if it manages to match 2000-2001 numbers-which is the aim in many businesses-that would prove a creditable achievement.
Beating The Heavy Odds Still, the retail finance business is cut-throat, what with the major institutions and banks in the fray. What chances does an NBFC have against such pedigree? Kalpana Morparia, Executive Director, ICICI, agrees it's not going to be easy. ''The entire model of an NBFC being in the credit business is good if it is a niche player serving a geographical area or a customer class. But on an all India basis, the high cost of funds of NBFCs increases the overall cost of credit delivery to the retail sector and becomes an asset quality issue,'' says Morparia. Helping Kotak beat those heavy odds is his core group of head honchos, who've been with him virtually from the start. There's Shivaji Dam who heads the insurance business, C. Jayaram, Executive Director in charge of the group's wealth management business (broking, mutual funds), Dipak Gupta, ed who heads the asset finance prong, and Shanti Ekambaram, head of investment banking. Below this top rung, Kotak has also been able to build an able second rung at the various businesses, like S.A. Narayan, who spearheads the retail broking thrust, Shekar Sathe, who runs the mutual fund, and K.S.S. Manian, who's responsible for the banking proposal. ''We all know that Kotak is street smart, but one of his biggest achievements is to succeed in making the entire orgainisation think that way,'' says an awe-struck competitor. Gearing Up For competition Let's start with broking, where Kotak Securities (KS, the broking company in which KMFL has a 75 per cent holding and Goldman the rest) is gunning for growth in a market that's shrunk dramatically. Turnover on the BSE and the NSE has fallen by 75-80 per cent from the peak, to Rs 2,500 crore. But Kotak is using the resultant shakeout to his advantage. C. Jayaram, Executive Director, KMFL, points out that in the past year and a half, KS has been able to increase its market share from 1 per cent to 3.5 per cent. ''We're targeting 5 per cent by the year end. More important, once the markets start moving up, then we'll be well placed to make some serious money,'' adds Jayaram.
But the gains in market share don't necessarily mean an increase in profitability-not when competition is fierce and brokerage commissions are being slashed. That's why S.A. Narayan, Director, KS, says it's imperative to get to a market share of 5 per cent ''as we will be then be as profitable as we were when we had a lower market share in a higher market.'' To get there, KS is opening up branches in smaller towns, which are-after several busts-realising the importance of ''branded'' brokers. So far the company has entered 14 cities, with a multiple presence in the major cities (six outlets in Mumbai, and two in Delhi and Bangalore). The online trading channel notches up revenues of Rs 6-7 crore a day, which isn't too bad, considering that the entire online market does volumes of not more than Rs 40 crore a day. Then, KS is also going after high-net worth portfolio clients (Rs 50 lakh and above), and has been able to register 175 of them so far. The retail thrust is also being witnessed in the auto finance business, where Gupta says that Kotak Mahindra Primus and Ford Credit India (the two joint ventures with Ford) have been at the No 2 spot (ICICI is currently No 1) with an 8-9 per cent share of cars sold. According to Roongta of apnaloan.com, Kotak may be a distant No 2 to ICICI (Kotak does about Rs 110 crore of car finance business a month as against ICICI's Rs 200 crore) and holding on to that position by a whisker (Stanchart is a close No 3; No 2 sometimes), but he's got no doubt about who's the most profitable. ''Kotak is extremely cost-conscious and bottomline-oriented, and Kotak's books are more profitable than ICICI and Stanchart,'' says Roongta. In commercial vehicle finance, where kmfl is currently No 4, there's a huge opportunity given that Tata Finance which controlled 20 per cent of the market is no more in the fray. Gupta says that the CV business has already registered a 75-80 per cent growth this year. Meantime, KMFL has rejigged its k-value brand of consumer finance to make it a personal loan product. Simply put, whilst earlier loans were doled out against an asset (white goods, consumer electronics etc), now you can take a loan and do what you want to with the money. ''This eliminates the administrative and sales-related issues for us, as well dealer-discount hassles,'' says Gupta, who says that the personal loan business has leapfrogged five-fold to Rs 100 crore in a year. 1 | 2 |
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