Transforming IDFC
Charmed Circle
Most people agree that Lall has been able to assemble a great team. His pinch-hitters are Vikram Limaye (executive director), M.K. Sinha (president and CEO of IDFC Project Equity) and Luis Miranda (president and CEO of IDFC Private Equity). The soft-spoken Limaye has spent ten years in New York with Citibank and Arthur Anderson. Sinha, an IIT-IIM alumnus, worked with GE for almost a decade in the US. Miranda was in HDFC's start-up team and later worked with Ashish Dhawan at Chryscapital before he helped found IDFC Private Equity in 2002.
What Lall and his A-team have brought to the company is a desire to chase and an ability to close deals. Today IDFC has financed some of the best infrastructure projects in the country because of its close access to the corridors of Delhi and the expertise of its senior management.
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Image: Vikas Khot
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SPEARHEADING THE MODEL: Executive Director Vikram LImaye is part of Lall's core team | |
But the team may not amount to much if the business model is all wrong. Successful financial conglomerates work on the principle of cross-selling. So Macquarie would want a client that has taken a loan from it to also buy its investment banking services for mergers or capital markets operations, accept its equity fund investment in risky projects and if the client has excess funds then Macquarie would want that money in its savings account.
Unfortunately for Lall, the options are limited. He tried many times to get a banking licence but the RBI turned its request down. Lall then has his eyes on Centurion bank where he thought there were synergies, but failed to take it over. The lack of a banking licence meant that IDFC cannot accept low-cost public deposits and his cost of funds would remain high.
All Roads To One Door
Lall has made some bold moves to diversify. He paid Rs. 800 crore to buy the mutual fund business. “Everybody said that we purchased the mutual fund at a high price. I agree to that. But look at it this way I actually managed to buy ten years of growth. Today at around Rs. 25,000 crore worth of assets, I do not regret my decision at all”, say Lall.
Up next was investment banking. He bought SSKI for Rs.400 crore and got two things from it. The first is Tapshej Mishra, head, SSKI, who is an investment banking veteran. The second is a rich portfolio of infrastructure clients because SSKI has done a lot of business in this sector.
A significant element of IDFC's portfolio is its private equity operation. Miranda has scaled up this business quite significantly. Today, he manages almost $1.8 billion in capital. He has also been quite smart in sort of re-defining infrastructure for a greater flexibility in investment. “Everything that is a bottleneck in this country is infrastructure,” he says. So while he has done classic infrastructure — ports, airports, gas pipelines — he has also put money in Hotel Leela, Manipal Universal Learning and Manipal Healthsystems.
An unnoticed piece of IDFC is the project equity division where the big investors are Citibank, IDFC and CDC. This division will take stakes in infrastructure projects on a very long term basis and later on package these assets into listed funds. Just like how Macquarie makes the bulk of its fee income through tolls on bridges and roads, IDFC will also be able to do that through REIT-like (real estate investment trusts) structures.
REITs are similar to mutual funds where retail investors can start owning real estate through mutual funds, just like equity. These type of funds will pay a management fee to IDFC. That is how Macquarie drives its growth. So will it be for IDFC, once REITs open up in India. That will be the biggest opportunity for IDFC.
With the new model in place, IDFC clients can now get equity financing from one of its funds. The investment bank can raise equity or debt from a third party and IDFC mutual fund can hold the stock of the same firm. And the client can invest its treasury into IDFC mutual fund.
For example, IDFC is a core lender to GMR. Now IDFC can offer different services to GMR. IDFC-SSKI can provide advisory services or provide i-banking activities like raising debt, IPO, QIP or even private equiry placement for GMR. IDFC private equity has invested into GMR.
“The relationship with IDFC has greatly benefited us. We save both on time as well as costs because IDFC is now a full fledged financial house. The company knows GMR very well and we don’t need to look for similar relationships elsewhere”, says A. Subbarao, group CFO, GMR.
Through a simple module of cross selling, IDFC plans to use fund-based activity to drive in fee-based growth. Thus, the company can add a steroid to its loan-based activities through a fee-based model. The company wants to keep 50:50 share in operating income through this model.
Now that he has the people and a reasonable business model, can he make IDFC like Goldman or Macquarie – firms that he admires?
Let us begin with what he hasn’t got. He doesn’t have a great return on equity (13 percent) as of now. And that’s because of two reasons. The first is that his acquisitions are very recent and Lall has not been able to mesh all the acquired assets into a larger whole. The second reason that pulls down his returns is that IDFC’s income is “lumpy” or volatile. Many brokerages have termed the lending business lumpy because the company caters to infrastructure and is not well diversified. Lall disagrees violently. “The word lumpiness is a curse. I don’t like it. I think people are misinformed about IDFC. We are not at all lumpy,” says Lall.
But the one thing that he still has to do is to lower his cost of funds, which at 9 percent (according to Kotak Securitities) is a good two percentage point higher than other banks. At the moment, there seems to be no clear plan on how to tackle this.
Banks and NBFCs are watching the IDFC model closely. IDBI, has also decided to use this balanced approach going forward. Axis bank is also studying the model seriously and analysts believe that if they go and buy an investment bank or even build their own, they will be a formidable competition for IDFC.
Of all entities, even L&T Infrastructure now wants to become a mini-IDFC! So yes, IDFC may not be a Macquarie or a Goldman as yet, but many firms want to be like IDFC.
Now only if Crisil were to upgrade IDFC ratings, Lall may perhaps let go of the stare and catch a smile instead.
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