RBI policy, earnings to drive markets; see growth returning to NBFCs: Edelweiss

There is growth in the capital market too, with mutual funds and insurance firms contributing, he told the channel.

Meanwhile, the asset and wealth management were also a growth areas and the Indian wealth management was growing at 30 percent every year.

Shah highlighted that the firm had allocated capital for the next four years in the asset reconstruction company (ARC). Furthermore, he expects partnership to be with foreign capital-based firms.

On mergers and acquisitions, Shah said he was not looking at acquisitions currently. He highlighted that the firm had just completed the integration with JPMorgan AMC. The focus will be more on organic growth.

Below is the verbatim transcript of the interview.

Sonia: Before I ask you about your own business that has seen a big leap over the 6-12 months, I wanted your view on the market because we are sitting at new highs, we have a lot of participation coming in from a gamete of heavyweights. What are you seeing on the domestic retail end? Is there fresh money being pumped into the market and a lot more optimism since the last time we spoke?

A: In the last couple of months, inspite of the US Fed hike and all of that, optimism is fairly high and we are also seeing fair amount of improvement in the underlying conditions. The economy after demonetisation has bounced back very significantly. It just shows that the underlying resilience is very strong in the economy, the last quarter earnings were not so bad as expected, I think even this quarter we think is going to be a fairly good quarter overall.

If you see, even globally growth is coming, all the economies are bouncing back and liquidity conditions have been as good as they have been. We have a lot of surplus liquidity. Along with that, a lot of retail investor’s especially Indian households, have started significantly shifting away from real estate and other hard assets into equity markets. So, we have all heard about SIPs now hitting Rs 40,000 crore a year.

So, I think both through the primary markets, as well as through the mutual fund segment, we are seeing more and more retail investors coming in. Global liquidity is strong, FII flows have also been very robust, so, given all these conditions, I think the market seems set for a fairly strong base right now.

Of course now everybody is going to wait for the Reserve Bank of India (RBI) policy in the coming couple of days as well as the Q4 earnings which will be out in the next few weeks.

Anuj: What would that mean for NBFCs. You yourself had a big NBFC now and we have seen some of the stock prices double or triple over the last six months or one year. Do you think with so much emphasis on financial assets, do you think this space could growth even from here?

A: If you see overall, the credit market is growing though we all look at only bank credit. However, I think in the last two years, what has significantly changed is credit has moved away from bank credit. In fact recently there was a report which said only about 25 percent of incremental credit comes from the banking segment and we are seeing NBFCs, we are seeing the bond market also becoming very robust.

I think in a way it is a good thing because NBFCs are able to capture the new emerging segments where credit is required because we have the conventional segments where there is easy credit available. However, there are a lot of new emerging segments in terms of microfinance, in terms of SME, in terms of rural finance, in terms of even individual loans which are hard to get. So, I think the emerging segments are showing a lot of robust growth.

The surplus liquidity augurs very well for NBFCs because NBFCs cost of funding can come down which they can pass on to the consumers and all along with that the growth of the bond market, bond market last three to four years, has been growing at more than 20 percent a year and that also augurs very well for NBFCs.

So, I think increasingly we are seeing all the signs which are being setup and I do think that the Indian credit growth will continue to be at about 13-14 percent a year which is very low than historic numbers. However, even a 13-14 percent a year, NBFCs should be able to grow at 18-20 percent a year and what we have seen last three to five years, the growth of NBFCs has been in that range.

Sonia: Tell us what the future looks like in terms of growth? The parameters over the last couple of months have been very strong, especially loan growth, 32 percent, etc. However, going ahead, what kind of expectations can one have?

A: Going forward, as I said earlier, we do expect credit growth to remain robust in India and especially credit growth which is outside of the banking system because we are seeing a little bit of the bank disintermediation, largely grove of the bond market, the excess liquidity that is available is making it easier. However, along with that, we are seeing a fair amount of growth coming back in capital markets as flows into both insurance companies and mutual funds have been very strong FII activity has been strong.

So, we are seeing a fair amount of activity in capital market, both equities and bonds. Along with that, asset management, wealth management also another very big growth areas; we estimate that the Indian wealth management market is growing at about 30 percentage here because as asset prices are growing and the affluence is growing, we are seeing more and more people, HNIs, UHNI, even the mass affluent segment in the wealth management is growing.

So, I think we are at that sweet spot where credit is growing in an organic way, but the non-credit segments like asset management, wealth management capital markets are also showing a fairly high amount of growth. In fact some of them are growing even faster than the credit markets.

Latha: I wanted to ask you about asset reconstruction company (ARC). Starting today it will be 50 percent that you all will have to buy of an asset. How is the growth likely to be affected, will the business go down?

A: I think it will be very asset specific because in a lot of cases where we have seen that banks have already provided for that asset, if they have already marked it down to 50 percent because the 50 percent only applies to the provisioning norms. You can still do 85 and 15 with the banks, but if the banks own 85 then they have to follow the provisioning norms that they would have to follow as if the asset is still on their books.

So, I think it is a provisioning issue and what we are seeing we are already in conversation with lot of banks. In quite a few assets there have been fairly fully provided assets, fairly marked-to-market has been done and in those cases I think there might be still opportunity for 85-15. If it goes to 50-50 also I think it is a pricing issue.

We on our side in Edelweiss because we have allocated about Rs 4,000 crore of our own capital for the next four years and we have another Rs 5,000 crore of capital available from our partners CDPQ we have a fair amount of capital cash available that can be deployed. So, even in the 50-50 scenario as long as the pricing is right as you know what happened when we moved from 5:95 to 15:85 a lot of transactions got done, but the pricing had to be adjusted. I think we are seeing the same thing. We are going to see again the same thing in this.

Latha: Uday Kotak recently said that he is very keen on building a big ARC business and that he is looking for partners in that. Are you all speaking to each other? Will we see some kind of joint venture (JV)?

A: No, because here a partnership with an Indian company, an Indian company may not bring a lot of real value. I think Indian company with foreign capital especially pension funds, insurance companies brings a lot of value because Indian companies have the skill set, the foreigners have the capital and as we have done with CDPQ, we expect quite a few more of those will come out.

I think overall it will be a good thing because we think over the next three years the ARCs and the other capital providers will need to provide about Rs 150,000 to 200,000 crore of capital, not just for buying out the bad assets but also for the priority funding and the additional funding that is going to be required to revive a lot of these assets. We are seeing a lot of growth area in that area of giving additional capital to the companies to increase their capacities utilisation and revive them.

Anuj: You yourself are known for looking at some merger & acquisition (M&A) candidates, anything that stands out, anything that you are eyeing right now in terms of any big business faces?

A: As of now as you know we just acquired the JP Morgan Asset Management last year so we have just completed the integration of that. Our approach to M&A has been that if it is strategically important and if there is a right size, we like a lot of smaller acquisition rather than one very large big one.

Currently, we are not seeing any in the horizon, but we are always open to scaling all our business through acquisitions and all as the opportunity arrives.

As of now our idea this year is to focus on a lot more organic growth because as you know last year we have been clocking more than a 40 percent growth on a year-on-year basis we want to continue with that.