Mumbai: Vikram Limaye, executive director at Infrastructure Development Finance Co. Ltd (IDFC), joined the infrastructure lender in 2004 after a change in management. In an interview, Limaye said the company is planning for the second wave of growth after the targets that were set initially were met. Edited excerpts:
You are primarily an infrastructure finance company, so what was the logic of getting into brokerage and asset management?
Project finance is very capital intensive and (offers) lower RoE (return on equity) on a standalone basis, so we decided to surround that business with related businesses that would be lower capital and higher RoE, which were two broad themes. One is an investment banking and advisory business and the second is an investment business, broadly a private and public asset management business.
Setting targets: IDFC aims to double profit in 3 to 4 years, says Limaye. Abhijit Bhatlekar/Mint
These businesses were important because they provided a complete service to our clients and did not take up much capital and therefore the return on equity was significantly high.
And the asset management business?
The asset management business was developed in different stages. Private equity was the first product with the first fund in 2004. Today, with $2.3 billion in four different funds, we are the largest infrastructure-focused private equity fund in the country.
The objective behind the public markets asset-management platform, which we acquired in 2008, beyond diversification was that over time there was a need for a better retail intermediation of retail savings into infrastructure.
Our objective was to use the asset-management platform to launch infrastructure-focused funds and use that platform as a means to intermediate retail money into infrastructure products. But that has not happened as much as we would have liked it to. So, that business has an element that we believe long term would be very interesting from an IDFC perspective, given our experience.
Why have you chosen to buy broking and asset-management businesses rather than building them up?
Both these businesses are extremely difficult to build, ground up. Take the investment banking business. In order to be successful in capital raising, it requires a distribution platform which has relationships with the investor community. We had a debt-syndication business that we did organically, the platform that we bought had strengths in equity, whether equity research, equity sales, equity distribution and infrastructure-focused equity raising, whether in private-equity or public.
That piece is very difficult because the research distribution capability required and credibility required to be able to distribute products takes a long time. We got that platform at a very attractive price, a business that was more than 100 years in equity distribution and broking. That was a logical quick fix in terms of what we wanted to achieve in the investment banking space as a product that would be useful for our clients and takes zero proprietary capital.
Many people are trying to build asset-management businesses from scratch. Today, you have 40 AMCs (asset-management companies), many of which are sub-optimal still. The distributors are also more geared to sell an established platform than a new platform. When we bought, it had Rs 13,000 crore of AUMs(assets under management), which at 5.8% of AUMs was arguably a high price. But based on the transaction with Natixis announced not too long ago, we have generated value. We sold a minority stake of 25% at a valuation of Rs1,200 crore, which when we did the transaction was the same multiple when we went in. We have doubled AUMs now and grown our distribution to 40 cities from 16 cities without cash burn. It makes money.
Looking back now, have your objectives been met?
Absolutely. One of the matrix that we would follow would be non-interest income as a part of operating income. If I were to take FY08 as a point, we had almost a 50-50 mix between interest and non-interest. After that, the share of interest and non interest is going to 60-40 in FY11 but going forward, because the balance sheet growth is going to be so robust, the mix is going to be something like 70-30 and that’s not because our non-interest revenues are not growing. As I said, our assets under management have gone from Rs800 crore to Rs32,000 crore but our balance sheet has also gone from Rs7,000 to Rs50,000 crore, so the mix mathematically does not work although both streams are growing rapidly. But what is important in non-interest income is that everything drops to RoE. We have been telling shareholders to expect sustainable ROEs in the high teens and that delta I can get only because of these businesses, so they are important from that perspective which was our original strategy.
What are the challenges now?
Given the different types of businesses we are in, it is very talent-intensive. Infrastructure lending by definition is more technical and complex than consumer or retail lending, so the type of people you would see in our business would be engineers, MBAs. It therefore requires a different kind of DNA and culture to make it interesting for these people so that they continue. Today, we have the pieces in place that have got a certain size, scale, reputation and credibility. In my view, because we have that reputation and credibility we have a long way to go in achieving our full potential.
This universal financial services model has worked successfully globally. The reason why a Deustche Bank, JP Morgan and Citigroup made inroads into other areas was because they were trying to develop a universal banking model which said that we have a lending business and we want to capitalize on that and therefore penetrate and gain market share from the Goldman Sachses, Merrill Lynches and Morgan Stanleys of the world, which were pure investment banking trading platforms. They have combined the two and have done it quite successfully. In the domestic context, not too many people have done it successfully, so some have been successful in fee-based but not in lending, others have been successful in lending but not fee-based.
So, what are your plans in the next five years?
It is scale. So it is growing each of these pieces. For instance, when we outlined our strategy even last year, we said we still see the opportunity to triple our balance sheet in three to four years, including this year. We see the opportunity in infrastructure and gain significant scale from Rs30,000 crore to Rs1,00,000 crore, Rs30,000 crore has already become Rs50,000 crore in one year, so it still gives us confidence, although we can say that with rising rates and a potential slowdown the next 12 months could see some slowdown. But given that we are now at Rs50,000 crore, we are still maintaining that we can get to Rs1,00,000 crore in the three to four years timeframe because now we are talking about doubling from Rs50,000 crore to Rs1,00,000 crore in three years on the lending side and on the profitability side we have said that we would like to double our profits in three to four years, so tripling of balance sheets and doubling of profits in three to four years.
What will be the growth drivers for this target?
If in the next five years, $600 to $800 billion are required in infrastructure, we are talking of only $10 billion, which is not that hard. We have to do it in a measured way, in a way that protects asset quality. So far, our quality is pristine with a Rs50,000 crore balance sheet. Our net NPA (non-performing assets) is 0.1%, so we have to do it in a calibrated way so that it’s not resulting in some asset quality issues over time. We don’t believe it will, because infrastructure risk is fundamentally lower than corporate or industrial risk given the type of assets you are trying to finance in an environment that is massively short on infrastructure.
But are you worried about telecom and the controversies surrounding it?
Yes, in a macro sense. The ongoing 2G scam is worrying. Any kind of uncertainty is worrying. Beyond that I don’t see any major fallout. All these telecom players cannot survive profitably. There is not enough money there for all these players. There is only room for four to five players. No doubt the margins of existing players are also coming down. But they at least have an established business, market share, subscribers and cash flow. So that they can fund the period of consolidation that is likely to happen. In terms of our books and exposure, we are not worried because our exposure is to the highest quality assets. Our linkages are to the survivors and leaders of the industry who have sufficient cash flows, either in operators or the towers space. Even in the towers space, ultimately there will be only three.
What are the risks attached to generating resources?
Regarding resources, there are still some challenges. These are being alleviated to an extent because we are an infrastructure financing company. That give us access to external commercial borrowings (ECBs) of up to 50% of our net worth. Today our net worth is close to Rs12,000 crore. So that gives us automatic access to Rs6,000 crore. Beyond that we will have to take approvals. We have barely scratched the surface. Hopefully, this quarter we will do another $200 million and we could close that in a couple of weeks. We need to diversify our borrowing sources. Today, it is largely domestic institutional. We need to diversify into domestic retail and offshore sources. In the first two tranches of infrastructure bonds, we have raised Rs1,200 crore. And ECB markets could be interesting.
You have always kept away from seeking a banking licence.
Given the amount of opportunity, we are much better off in execution as an infrastructure financing company than a bank. In a bank, I could only spend 60 paise of every rupee that I have on infrastructure. Today, I can lend Rs100. Also, we have to keep SLR (statutory liquidity ratio), CRR (cash reserve ratio) and other priorities. Banks come with a lot of regulations.