Confident of achieving FY12 target of Rs 4700cr: Future Cap

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V Vaidyanathan, chairman and managing director, Future Capital in an interview to CNBC-TV18 said, the overall economic system credit growth has slowed down, but the company is well on track to achieve FY12 target of Rs 4,700 crore.

"For the half of year ending September we closed the books at Rs 3,800 crore and going to Rs 4,700 crore is not a problem," he said. He expects India's credit growth be 16-16.5% this year.

Further, the company is targetting a loan book of Rs 7,000 crore in FY13.

Below is the edited transcript of Vaidyanathan's interview with CNBC-TV18. Also watch the accompanying videos.

Q: A recent announcement on BSE credit rating by CARE the agency has downgraded your NCDs just by a notch, from CARE A+ to CARE AA-. Is there any stress in terms of what the rating agency has done?

A: You should be congratulating us, because our long-term credit rating has been upgraded from A+ to AA- which is a significant upgrade for us. It tells us that long-term liquidity and long-term profitability of the company is very good.

Q: How is business looking? You told us last time that perhaps Rs 5,000 crore will be tough but you would do Rs 4,700 crore by way of you total book. How is business looking now since we have got a lot of tell tale anecdotal evidence of a slowdown and people not wanting to borrow and certainly not wanting to lend as well?

A: In the overall economic system credit growth has slowed down. We used to talk of 17.5-18% earlier, but a fair guess for the credit growth for the country this year would probably be 16-16.5%. For our company, Rs 4,700 crore is still very much on. For the half of year ending September we closed the books at Rs 3,800 crore and going to Rs 4,700 crore is not a problem.

Q: Concerns have also been raised on the asset quality for the entire financial industry. You also have a pretty significant wholesale business where you do lend to real estate and manufacturing companies. Over there have there been any signs of stress? Have any clients requested for restructuring or any cash flow disruption?

A: At this point of time a significant amount of noise we are hearing about NPAs is because of those two or three sectors which are often talked about- project financing, oil, airlines, power. These are sectors to which we have not lent to. A significant portion of our lending is lending against property to small and medium enterprises.

Let me take you back in 2008, when the Sensex came down to 8,000 and things were looking very difficult those days. They were far worse than what we are looking today, I do not think of any large institution, an HDFC or an ICICI or any of these organisations reporting any problem in their mortgages portfolio.

So, the long and short is that to the portfolio that we are running which are significant portions we do not see an issue. Coming specifically to wholesale, I must reassure that there is no concern. Not a single client has reached us even for a rescheduling, so we are quite comfortable. I can assure your viewers that there is absolutely no issue to worry about.

Q: Your last loan amount was Rs 3,500 crore when we last spoke to you at the end of the second quarter. What is the division? How much goes to what you can call wholesale lending? How much goes to retail and within retail what is gold loans and what is the percentage of perhaps stock market related lending?

A: We have Rs 2,100 crore of wholesale financing out of total loan book of Rs 3,800 crore which is about 57% of our loan book. By end of this financial year, we expect to reach a balance of about 50-50 between retail and wholesale and that is what our attempt is. On the retail space a significant portion of our lending is as I said is before to SMEs against their property. We typically lend about 65% loan to value. So that's the rough mix of the portfolio we run today.

Q: How do you expect the margins to pan out from hereon? Could you also tell us what the cost of funds has been for Future Capital? Have you been able to maintain the margins?

A: Our cost of funds has moved up from the previous quarter, from 11.2% now to 11.4%. That is reflective of what's happening in the overall interest rate scenario. We have in a way taken a conscious decision not to pass this onto the customers. This is because we were concerned about what is really the ticking point for customers to begin to start defaulting even initially to the lenders.

We didn't want to increase the burden. For last two quarters we have not passed on any of these to the customers. So, one could imagine that the impact could be anywhere between 15-20 basis points. But all told put together to maintain about a 4.9-5% margin which is what we reported last year, give or take a percentage here or there is reasonably safe to assume.

Q: Is it difficult for a layperson to guess how the cost of money will go for people like you. Today call rate is at a 3 year high 9.6% and 10-year is at a 3-month low at 8.3%. How is cost of money likely to pan out? Do you see the tightness continuing and therefore cost remaining high or will you see absolutely a new cost for money in the fourth quarter?

A: The composition of the funds, most of the borrowing is largely from the banking system about 70% or 65% of the book and those are typically 5 year loans. If you have noticed even the banking system has not raised PLR for the last two quarter, certainly since August of this year. So, the composition in terms of short-term money which is the CPs have gone up quite sharply, I would agree from close to 8% to maybe 11% now. So that's what shifted the composition from us from 11.2-11.4%.

With regard to what is the indication, I would expect the RBI to reduce interest rates. Most people said expectations are between March-April. We would expect that to happen a little earlier and interest rates certainly cool off from here. I do not think that's an issue. With regard to liquidity it's certainly constrained and which is why probably you see the short-term rates go up so sharply. We talked of RBI doing OMO and releasing liquidity. In other words I am expecting both on the short as well as long, maybe the 25 basis point reduction over the next quarter, but certainly we are expecting that to happen.

Q: If you do about a credit growth close to about Rs 4,700 crore odd in FY12 that would mean a growth of close to about 60-65% odd. In FY13 what is that likely to look like and how soon perhaps if there is a slowdown which we see in the industries can the lending rate come down?

A: For us percentages may look high, but the base at which we are growing it's not that significant. So a Rs 4,700 crore if you were ask me to peep into the next year for 2013 and give you an estimate maybe close to about Rs 7,000 crore or maybe Rs 7,200 crore is what we would expect the loan book to look like at that point of time.

We are right now growing by about Rs 400 crore a quarter, so I think it's easy to sustain that. With regard to pricing power, that there is still pricing power but we would be cautiously watching that. I gave you an example that we have not raised rates to our customers for the last quarter or so even the 20 basis points that we have suffered. We are cautious about that and we should watch that closely over the period of time.

Q: You acquired a piece from Centrum Broking and Wealth Management. What are you telling your clients, HNI? Where should people be putting their money at all?

A: Debt certainly seems to be an area which should get the attention of investors at this point of time, because interest rates are high. We can quibble over February or March or later, but sooner or later we are certainly expecting RBI to drop the rates. So debt becomes a natural expectation or a much to the portfolio about 55-60%.

For equities, we must remember that though the things are looking quite difficult now but eventually all of these cycles change. You can take a one or two year view and you might find yourself that these equity levels were very attractive. So, about a 35% or so should stay in equities and that leaves about 10-15% which you might want to still have your position in gold. Particularly, since gold has corrected itself we do recommend commodities and within commodities gold. So, roughly a 65%-35%-10% is safe weight to have.

Q: When are we likely to see a change of promoter and any recent news, anything on the anvil on when the stake changes hands?

A: As and when there is anything significant we will let you know. I know that there is a lot of interest about this matter for last five or six months and people have repeatedly asked us these questions. But there is no significant development yet for us to announce anything at this stage.