Mumbai: It may have been hit hard by the ongoing credit crisis in the US but Lehman Brothers Holdings Inc. is betting big on India.
The publicly traded investment bank sees tremendous opportunity for private equity (PE) deals in Indian markets in the next 6-12 months even as the outlook for the Bombay Stock Exchange’s benchmark Sensex index continues to remain uncertain. Sensex has lost around 24% since 10 January when it hit its lifetime high of 21,206.77. The index closed at 16153.66 on Tuesday.
“We are at a stage in this particular business where we are in the virtuous cycle of seeding and harvesting. Having harvested some parts of our portfolio in December and January, and successfully managed the public part of our portfolio through the market drop of the last three months, we look forward to reloading over the next few quarters of this year,” said Tarun Jotwani, chairman and chief executive of Lehman Brothers India, in an exclusive interview with Mint on Monday.
The market meltdown does not seem to have unnerved Lehman and there is no change in its strategy for investment in growth capital. Even though BSE’s Mid-Cap Index (a grouping of firms with mid-sized or medium market capitalization) is down 40% from its January highs, a sharper fall than the Sensex, Lehman is convinced that the underlying growth story is intact and that there will be continued need for capital.
“We are now starting to see some excellent investing opportunities, at both the project level and company level,” Jotwani said. “We anticipate margin compression and a slowdown in earnings growth overall, yet the best of the mid-caps with strong business models will sustain their high growth in Ebitda (earning before interest, tax, depreciation and amortization) over the next few years,” he added.
Lehman started its India operations in January 2007 out of two rooms in a five-star hotel in south Mumbai, moving out the beds and replacing them with tables and chairs. It said its revenues in the first year itself was something that it would have been happy to achieve in four years. And, in the first quarter of the current year, it said that it has crossed the target for the entire year.
Growth story: Lehman Brothers India CEO Tarun Jotwani says India can play a big role in global capital markets in the next 5-10 years. (Abhijit Bhatlekar / Mint )
Lehman follows a December-November financial year.
The firm has deployed around $2 billion (Rs8,000 crore) in India and is preparing to raise its first dedicated India fund this year. “It will be for real estate, and a companion to our Global Real Estate Fund,” Jotwani said.
Lehman manages several global private equity funds with allocations for India. The proposed fund will be “large enough to give us significant firepower in a sector that is experiencing a capital crunch, but small enough and flexible enough to allow us to build a highly discerning, top quality portfolio,” Jotwani added.
Jotwani, who came back to India after working for eight years with Morgan Stanley in New York and 11 years with Lehman in New York, Tokyo and London, said he sees the opportunity in Indian financial markets through a “unique lens”. Private equity or growth capital is just one of the four legs of businesses of the 15-month-old entity in India. The other three legs are investment banking, fixed income securities and equity brokerage, the platform for which was built through acquisition of the institutional trading desk of Mumbai-based Brics Securities Ltd.
The investment management division of Lehman comprises principal investing and private equity. It supports large companies for their financing needs and offers advice on mergers and acquisitions.
Lehman has already brought in $100 million for its primary dealership unit that started buying and selling government bonds in December and $300 million for the non-banking finance business that kicked off in March. Globally, the equity business accounts for roughly 25% of Lehman’s business portfolio and fixed income securities, for the remaining 75%. Lehman also plans to float an asset management company but Jotwani declined to comment on it.
The model for the non-banking business of Lehman in India is different from that used by others such as GE Money and CitiFinancial. Instead of plain-vanilla lending, the company plans to focus on trade in financial instruments and institutional business such as mezzanine financing and repackaging debt for mutual funds and insurance firms. “Most of the other NBFCs (non-banking finance companies) are either appendages to brokerage firms providing share financing, or focus on retail which involves bricks-and-mortar to get to the last mile. Our focus is institutions: both corporate and investing institutions, and to build a real onshore credit business,” he said.
Lehman said it thinks Indian companies will continue to grow. “We believe, as does corporate India, that the high corporate growth rate is sustainable over the next many years at 15-25% CAGR (compounded annual growth rate). As a result, corporate India has great global aspirations and strong capital requirements. We want to play a central role for corporate India through their growth cycle,”Jotwani added.
The 158-year-old firm’s mission in India, says Jotwani, is to become “a local investment bank with global infrastructure.” Indian corporations, he said, are at a stage where they are “hungry for ideas”, and Lehman’s focus will be on large-caps and large mid-caps.
Confidant to large-caps
“Our mission is to be a strong local investment bank with close linkages to the firm’s global teams and capabilities. We want to be a confidant and adviser to large-cap companies; and mobilize the most efficient capital available globally for them as well as for select mid-cap companies to facilitate their growth,” Jotwani said.
On the investment banking side, Lehman has had its “share of deals” in the past 15 months. Among other deals in 2007, it helped India’s largest realtor DLF Ltd tap equity markets and managed the qualified institutional placement (QIP) of GMR Infrastructure Ltd, the largest last year. It is now advising Tata Teleservices Ltd on divesting equity in its tower business.
Jotwani said he sees enormous opportunities in Indian capital markets. Citing the Raghuram Rajan committee’s draft report on financial sector reforms, he said India’s financial system and the growth of the capital markets hold the key to the country’s future growth trajectory and with a consistent pace of liberalization and reform in both the equity and fixed income markets, India has the potential to play a large role in the global capital markets in the next five to 10 years. “Indian markets are at the early stage of their evolution, and for us it’s time to scale up, deepen roots and build long-term relationships.”
The decision of the Indian capital market regulator to offer direct market access (DMA) to foreign institutional investors will also help Lehmans’ equity brokerage business. “We are well positioned for the market upturn, whenever that may be. DMA will give us that extra edge for our clients.”
A senior executive, who did not want to be identified, at another global investment bank that also entered India recently, said Lehman is doing substantial business here and that its business model is very different from that of its peers. Jotwani said Lehman is different as it offers “a very very integrated platform horizontally across various businesses in India, and vertically across every business globally.”
“...We are part of an enormously successful Asian business which is the fastest growing part of the firm. So we are able to get a lot of attention and resources from our global colleagues,” he added.
In the first quarter of the current financial year, the global net revenues (total revenues less interest expense) of Lehman were $3.5 billion, representing a 31% drop from the $5 billion reported in the first quarter in the previous year, but its Asian operations have put up the best ever performance, with India and China emerging the two biggest growth markets in Asia.
In his last assignment as co-head, fixed income division, Europe, Jotwani used to head a team of 900 professionals. The Indian operation, started with six people, has now grown to 180 and the office has moved from the hotel to the swank Ceejay House in Mumbai’s Worli area that Lehman shares with several other foreign finance firms.