India will not go into slump for more than 18 months: Rashesh Shah
The current slump in the capital mkt provides a great opportunity to invest, particularly in the infrastructure sector, says Edelweiss' Rashesh Shah.
By Shilpy Sinha, ET Bureau | Updated:
The current slump in the capital market provides a great opportunity to invest, particularly in the infrastructure sector, says Edelweiss Financial Services chairman Rashesh Shah. Edelweiss, one of the leading financial services firms in India, has been less affected by the market downturn due to diversification of business. In an interview to ET, Shah speaks on insurance business and plans for portfolio growth. Edited excerpts:
How has the current market downturn impacted you compared with the slowdown of 2008?
Earlier, we were only focused on investment. We have expanded from capital markets to NBFC and insurance. We are three-fourths done into expansion, capital markets, wholesale credit, housing finance, asset management business and insurance. We have broad-based our revenue which is why this downturn in the capital market has not affected as much as in 2008-09 when we were only into capital markets.
We need three things to expand, capital, leadership and opportunity. Opportunity will grow in the country. We have a lot of employee ownership in the company that allows us to do multiple businesses. About 20% of the equity is owned by non-member management team. We had to cut headcount by 18-20% in 2008-09, but this time we did not have to do anything like this.
What has changed for the financial services industry?
Even if the market recovers, a few things will drive financial services, higher capital adequacy, stronger government regulation and consumer protection. The profitability structure for financial services has changed and all those heydays are over when there was easy money and easy profitability. In the last 10 years, financial sector profitability went ahead of the curve.
Which segment of your business will do well this year?
Currently, our NBFC is doing very well. We have a book size of 3,000 crore. If interest rates fall, spreads will expand. Currently, it is at 400 basis points. If it goes to 500 basis points, we will take a hit of 30 crore on our books. In housing finance, we have a base of 400 crore. Usually, when you get to a 1,000 crore-1,500 crore book size, then it will start becoming profitable.
By when do you think interest rates will ease?
Investment banking business is not doing good. What is your view?
How has the current market downturn impacted you compared with the slowdown of 2008?
Earlier, we were only focused on investment. We have expanded from capital markets to NBFC and insurance. We are three-fourths done into expansion, capital markets, wholesale credit, housing finance, asset management business and insurance. We have broad-based our revenue which is why this downturn in the capital market has not affected as much as in 2008-09 when we were only into capital markets.
We need three things to expand, capital, leadership and opportunity. Opportunity will grow in the country. We have a lot of employee ownership in the company that allows us to do multiple businesses. About 20% of the equity is owned by non-member management team. We had to cut headcount by 18-20% in 2008-09, but this time we did not have to do anything like this.
What has changed for the financial services industry?
Even if the market recovers, a few things will drive financial services, higher capital adequacy, stronger government regulation and consumer protection. The profitability structure for financial services has changed and all those heydays are over when there was easy money and easy profitability. In the last 10 years, financial sector profitability went ahead of the curve.
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Every financial sector company will have to focus on scale, diversification, efficiency and risk management. Savings rate in India is high, but what gets converted into investment in very low. Now, with housing finance, NBFC, insurance we are able to get more of the savings. Our estimate is that household savings are about $500 billon and by 2020 it is expected to be $1.30 trillion as the demography grows. Which segment of your business will do well this year?
Currently, our NBFC is doing very well. We have a book size of 3,000 crore. If interest rates fall, spreads will expand. Currently, it is at 400 basis points. If it goes to 500 basis points, we will take a hit of 30 crore on our books. In housing finance, we have a base of 400 crore. Usually, when you get to a 1,000 crore-1,500 crore book size, then it will start becoming profitable.
By when do you think interest rates will ease?
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I think interest rates will ease by April. The RBI will cut CRR in January, so liquidity will ease out. Investment banking business is not doing good. What is your view?
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Equity capital market (ECM) is on hold. In investment banking, total fee pool will be 2,000 crore that was 5,000 crore earlier. We are aiming at 4-5% of the overall pie. ECM is half the total pie, but no IPO is happening. Private equity has slowed down because of the rupee. A foreign investor, who is not hedged, has taken a 36% hit with the index falling 18-20% and the rupee falling by another 15-18%. Next year, our capital market can start recovering. By when do you see growth coming back?
We will have to wait for inflation to come down, which will happen in March. The RBI will have to ease liquidity. The government needs to open up supply side. Consumption is still driving the economy. If there is no investment, consumption will not happen. We need to revive investment.
In five years from now, which business will contribute most to your balance sheet?
All businesses should be equal. We want all businesses to contribute 20% each. Environment can change and government regulation can change. Financial services industry is the subset of economy. India will not go into slump for more than 18 months. For India, what is bad is 6.0-6.5% growth rate. The worst case for India is to stay at below 7%. Inflation and GDP growth rate are the two things that you have to see. The bad years are when inflation is more than the GDP rate. Right now inflation is at 9%, when growth is at 7%. My ideal situation is when inflation comes down to 7% and growth goes to 8%.
Do you think the capital market will revive by second half of next year?
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If something happens to Italy and Spain, there will be a shock. If the rupee keeps moving down, FIIs will keep selling. India will raise tax rates in this budget. The next 6-8 months have to be very careful. You have moved to a new office and started insurance business. Are you taking this downturn as a good investment opportunity?
It is a great time to invest. We have invested in infrastructure, technology. If you have the wherewithal to compromise on profit and loss account, then this is the best time to invest in infrastructure. We have opened a leadership centre in Alibaug. It is a 50-crore investment. We have invested 500 crore in retail-housing finance, retail broking, insurance.
One of the good things that have happened to Indian investment industry is that while a lot of foreign investment banks such as Credit Suisse and Nomura are cutting headcount but domestic firms have not cut headcount. So the general feeling is that it is better to be with an Indian I-bank. We are selectively hiring. We have added 200 people in this financial year. We will invest 1,000 crore equity in all our businesses. Another 2-3 years, a lot of this will get big. We need to get the execution right in the next 18 months. A lot of senior leaders are going through coaching so that they can think big.
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There are many players in the housing finance market. How do you differentiate yourself? Our idea is to cross-acquire and cross-sell. For this year, we want 3,000 customers out of 4,500 broking customers. The biggest cost in India is acquisition. We are trying to channelise different products through the same platform.
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In the current year, the housing market will disburse 1,80,000 crore. We want to get 1% of the annual disbursement. This is the largest retail credit market. In three years, it will become 3,00,000 crore. If we can make a 2.5% NIM, it is very good. Download
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