The boom in the Indian economy has benefited several financial services firms during the past few years. Among them is Kotak Mahindra, a major Indian investment bank, which has expanded its operations rapidly. As the Indian and global economies slow down, however, Kotak Mahindra is modifying its growth strategy, notes Ravilochan Pola, CEO of the U.S. operations of Kotak Mahindra. India Knowledge at Wharton spoke with Pola about market opportunities and risks during the recent Global Partnership Summit organized in Washington, D.C., by the U.S. India Business Council. Business and political leaders from both countries participated in the event, which also marked the U.S. IBC’s 33rd anniversary.
Knowledge at Wharton: Kotak Mahindra is a household name in India, but outside of India it’s not that well known. Could you tell us a little bit about the company as well as about the U.S. operations?
Pola: Kotak as a group has grown enormously over the last seven to eight years in every aspect of the financial services business in India. We are fairly India centric; we are specialists on India and the Indian financial services offered there. Back in India, we swamped the entire capital market space. We are one of the largest investment banks. We are the largest domestic stockbrokers in the country. We manage about eight to nine percent of the market volumes. We are fairly large as a diamond business. We manage about $14 billion of assets there, both in equities and debt.
We have a life insurance business, which is among the top five in the country, and a car financing business. Internationally, we have been focusing mostly on a couple of areas of businesses. One is the Institution Equity Sales, which is a fairly research-driven business and focused on all large institutional investors who compete in India. In that business, we are almost in the top five in India.
To give you a [sense of the] volume of business there, the total of FII [Foreign Institutional Investors’] investments have quadrupled over the last three years in India and a number of participants are also growing significantly. In the U.S., we have a desk which does only institutional equity sales and we are a fairly dominant franchise in that business.
In the second part of the business, what we do is distribution of various types of sectorial and thematic funds into India. The fully managed funds and also separate accounts for larger investors like institutions and others who want to invest into India, we cater to them. Apart from very high net worth, we also have individual and family offices and we have some of the “who’s who” families who invest through us into the country.
The third part of the business is we provide platforms for people, like hedge funds and large institutions to plug in and to trade into India. So, those are the three different businesses we have. So, you don’t have a retail presence, like a bank, for instance, which you need to have more branding across the place. Anyone and everyone who would want to invest into India knows that Kotak is one of the larger players.
So, on a more specialized area of India investing and Indian capital markets, Kotak is fairly known in that community.
Knowledge at Wharton: The Indian economy has been booming for many years. And, from what you just said, it sounds like that boom has been measured in Kotak Mahindra’s growth. But, now, the Indian economy seems to be slowing down. What is your strategy with dealing with that new situation?
Pola: I think, the Indian economy, the growth path, the directional change is clearly going to be growing at a very significant rate. The minister was talking today about growth coming down to the 8.4% level. We just did an analysis of the entire growth scenario and found that, essentially, Indian growth will come down because of the U.S. position and other things, and the global flow is coming down to 8.4%.
In the worst case scenario, we did an assessment where we said that if there’s a global recession, if there’s a monsoon or drought in India, and if there’s a global liquidity-flow dry-out, what happens to India? And we found that it’s going to be from 8.4% it comes down to 6.4%. Now, 6.4% plus 8% of the inflation, at a nominal growth, you’re looking at plus-14% growths there, which is still significant on the world economic scenario. So, essentially, what you’re saying is that though there is somewhat of an affect on the growth because of global events, economy wise, we’re fairly decoupled to the world economy.
Look at exports. A total of exports [as a percentage] of GDP is approximately worth 16% to 18%. The exports to the U.S. are 20% of that, which basically means that impact, if the U.S. exports growth becomes zero, we found that it would impact the GDP by about 20 business points. It’s nothing significant in terms of the impact there.
But, overall impact on the capital markets is clearly seen, as we’ve seen the corrections that are happening there in the market…. So, you’re seeing a clear correction happening there, apart from the sentiment and liquidity flows coming down significantly from the past. So, the fear that you have on the capital market side is that … you’re coupled into the world markets there. On the economy side, you’re decoupled.
[Inaudible] So, the growth of the country will be there. It might not be significant to 9%, but to 8% levels there. On the capital market side you will see impact of capital flow coming down, which will have an impact, overall, on the stock markets.
Knowledge at Wharton: What is your biggest concern about the Indian economy?
Pola: The biggest concerns are pretty clear: The economy deficit ballooning thanks to the oil bill and the food crisis; inflation, thanks to the impact of these things, it’s looming really largely. You’re almost looking at it touching double-digit inflation levels, which is probably true with many of the emerging market economies.
The inflation is a concern [for] a large economy like in the U.S. But, for India, it’s a much bigger concern. So, the impact of current economy deficit and the inflation will clearly have an impact on the economy itself.
Knowledge at Wharton: It’s not just the Indian economy that faces difficulties; the world economy also has its own problems. What is your strategy for dealing with the global slow down?
Pola: I think, basically, with the growth still being strong in the domestic market and a lot of interest from international players coming to India, we see a clear slow down happening but we don’t see a significant negative growth happening there. So, in that way, the business will be fairly fine.
Your 40-60% growth of your company’s corporate gains in India will come down probably to 25-30% growth there, which is still significantly okay. So, we are very positive in the medium-term to long-term. Though, on the short-term, we have concerns there.
Knowledge at Wharton: What is your biggest fear?
Pola: Our biggest fear would be liquidity-flows into the country drying out because of global liquidity factors. That would be the biggest impact that India will see. The capital required for all these corporations to fund their expansion, the money that is required by the government and the corporations for infrastructure financing — we’re talking $450 billion to flow in the next four and a half years. … If the global liquidity-flows go down, [there will be] fears for [the availability of] funding …, [and] you will see a significant impact in medium-term to long-term [and] also on the growth pattern for the country itself.
Knowledge at Wharton: So, to flip the question around, where do you find the biggest opportunities?
Pola: The biggest opportunity is, once you come out of this — the temporary immediate concerns of the liquidity-flows, and the inflation, and the current account deficit — the biggest opportunity, obviously, is infrastructure as one big space for the country where so many world players are looking for investment into the country.
And, that’s the biggest opportunity for all Indian corporations, be it in banking, infrastructure services, and the government itself — an opportunity to attract capital from abroad. That’s a fairly large opportunity that we have there.
Knowledge at Wharton: During the course of your career, what is the biggest leadership challenge you have faced? How did you deal with it and what did you learn from it?
Pola: I’ve been in the U.S. for the last eight years and before that I worked for a long time in India. The biggest challenge we all face is manpower, skilled manpower, the recruitment of these people. Recruiting the right guys and the right people has been the biggest challenge for us. You need to get the right guy for the right job and the right skills and the right training. Probably that’s been the biggest challenge for me.
Knowledge at Wharton: And then, once you recruited them, retaining them.
Pola: Absolutely. Retaining them…. Luckily for us, for the last five years growth has been so phenomenal, in India and abroad, [that] remunerations were not a problem. They quadrupled for the last, probably, six, seven years. We’ve seen the benefit of that, so we’re not having a problem of remunerating people when they really deliver.
The problem has been training them for a particular task, because specialization has become very important now. And to get the right guy for the right job has always been a tough challenge for us, especially in the international part of it because you need a person, when you’re recruiting internationally, with a much broader knowledge, and not just specific product knowledge, to be able to serve your customers and clients. And to get that right expertise with a dimension that is much broader than a person who is just doing U.S. centric work has been an issue for us.
Knowledge at Wharton: Where do you expect Kotak Mahindra’s U.S. business to be in the next four or five years?
Pola: We are expanding now, on the cross-border side, in the U.S. That’s been one … initiative we’re taking up. We see a lot of opportunity in that space, a lot of companies in the U.S. who are looking for opportunities in India, be it a joint venture, be it getting a space into the existing corporations in India, taking a stake, buying out, joint collaborations. So, you have various options which U.S. and international companies have to go into India [for] if they want to be a part of the growth that’s happening there.
Also, Indian corporations who have raised money for the last five years are sitting on a fairly good amount of cash on the balance sheet, which is good for acquisitions. At one estimate — and again, it’s a rough estimate of money — it’s closely worth $300 billion to $350 billion available for acquisitions abroad which will be unleashed over a period of time there. … A principle developing agent there, we’re looking at much more than that in acquisitions to happen there.
Many of the corporations have become much more confident and cleared their strategies there and are pursuing this kind of global footprint. So, they have options of buying into companies which are much cheaper now than what they were in the past.
Knowledge at Wharton: Thank you so much for joining us today.
Pola: Thank you so much for giving me the opportunity.