In a freewheeling interview at his home-cum-office at Alipore in Kolkata, Kanoria spoke to Moneycontrol about how his company has grown over the years.
The chairman and managing director of India’s largest infrastructure financing company, SREI Infrastructure Finance Ltd, Hemant Kanoria comes across as quite a simple person – affable and soft-spoken.
But his affability conceals a mind that soaks in everything. His analysis of situations is quick and razor sharp. As he puts it, he had to learn all the rules on his feet as none existed earlier. Everything had to be invented –principles, practices and protocols. Today this company accounts for a 30-35% market share of equipment finance in the country.
In fact, when one looks back, SREI has remained standing even while most infrastructure financing companies have fallen by the wayside.
In an exclusive interview at his home-cum-office at Alipore in Kolkata, Kanoria spoke to Moneycontrol's RN Bhaskar about how his company has grown over the years.
But when asked Kanoria why his share prices have tumbled, despite profits increasing, he merely smiled and said, “It means that we have not told our story well enough.”
We would like to know how your company has grown over the years.
Basically, for us, it has been a journey – when we started in 1989. Our family was in other businesses then – flour mills, animal feed, trading etc. That was in my previous birth. From the age of 17 to 26 I did all that.
Then my younger brother Sunil and I started this company – SREI (pronounced Shrey) Finance. First, we started with the financing of equipment -- construction and mining equipment. Then gradually we got into infrastructure.
Then in early 2000, we saw opportunities for getting into investments in telecom towers; then gradually we saw opportunities in power, roads, ports …That is how we diversified by making investments. It was also because we had IFC Washington investing in our company in the late 1990s. Then we got the German government, the Dutch government, through their financial institutions investing in our company. We learnt a lot from them. And that is how we got into the equipment financing and infrastructure business. We had no idea in 1989 that this is where we would be.
In 1989 if you had asked the government, or the policymakers or the developers, no one had any idea, But we knew it would be journey we would be embarking on … and that it would be a roller-coaster ride. You know it wouldn’t be smooth. It’s like going to Disneyworld with a lot of excitement. You don’t go because you are scared. And you know that the roller-coaster ride you are going to enjoy – that there is thrill on the way up, and thrill on the way down. If you know that what you are doing is fundamentally strong [there’s no ground for feeling scared]. So we went about building robust systems, processes, risk management systems and developing a very good team. It is this team that has allowed us to weather the storms of the past 30 years.
Most people say that you’ve been very innovative. How?
More than innovative, we have been entrepreneurial. And entrepreneurship and innovation go hand in hand. For us, it has been in our DNA. For instance, when we started the equipment finance business, there was no model that we could copy, because no one was financing the construction companies, or the contractors. They never had any balance sheet. The contractors were small. They used to get work from the government – the road, the power plant etc. They used to get a host of manual workers to do the work. So when we brought in the equipments, we were evaluating contractors who had no balancesheets. So we could not do balancesheet lending. We had to see their cashflow which would get generated from the equipment that we were financing. So everything was futuristic. So what we had was only our assessment of their capability, the entrepreneurship and the tenacity of the borrower.
So we had to be in his shoes, and we had to take a view – objectively – that if we were in his shoes, this is what we would do. But because we were not in his shoes, we had to intelligently evaluate where he could get into a problem, so that we don’t get into a problem. In other words, risk mitigation.
There was no text book that we could follow; there was no banker who could explain to us how to do a particular evaluation. That is why learning had to be done on the feet. So we had to be innovative. Then we had to raise money. So we went to the banks. Then we raised fixed deposits as an NBFC. Then after that we raised money from the development institutions. And for that we had to market to them the concept – we were the first private sector company in infrastructure financing, hence we needed their support.
We were always open-minded to learning. Every interaction we had with the customers – the contractors, or the government or the bankers, or the developmental institutions overseas was a learning, and helped us to write the textbook that did not exist earlier.
Therefore our journey of 30 years has been a learning from the environment and from each and every person with whom we interacted both individually and collectively as an institution.
You had development financial institutions and their way of doing business on one side. On the other you had a model that companies like IL&FS adopted. You chalked out a different path. How?
For us IL&FS was a government supported institution, in the sense that it had the hand of the government above it. We had no hand of the government on us. We knew that if we fell, we would be dead.
We were happy to suffer bruises; we did not want to break our bones or die. Thus we have created an environment of learning in our organisation. From the mistakes of others, and also from the good things that others are doing. We had to critically appraise the mistakes of others, and understand why it happened and how it should not happen to us. So if people don’t make mistakes, then we have a problem. We have nothing to learn.
We looked at players like GE and studied their financing models. They came to India and competed with us. We have 30-35% of market share in the equipment finance business. Other competitors also emerged – Citi. ICICI Bank, many other banks. They’ve come in and gone out. Many other NBFCs have come in and gone out. But we’ve been steady.
We are the largest in the country on the equipment finance side. Today we have about 100,000 customers, and we have 70-80% of repeat business. This could be because we have never treated our customers with disdain. We have always prayed for the growth of our customers. Many of our customers have grown larger than us. That makes us proud. For us, a customer is always good.
Until he defrauds you?
That would be only a percent – though provisioning norms do make us report a higher rate. But at the end of the day 1-1.5 % is the losses that we make. Our policies are made for the 99%, not for the 1%. You can’t make your systems and your processes for that 1%. Unfortunately, in our country often policies are made for the 1% and not for the 99%. Which is very very unfortunate.
You have diversified. Why and how?
We have not really diversified. We have merely expanded our portfolio. So when we started financing of equipment, we went on to financing ports roads, power, projects. . .we thus got into project financing. We learnt from IFC and from other development finance institutions how to finance these sectors. That is how we expanded our portfolio. Then we learnt from them that we have to make some investments in equity as well because just giving debt does not give the right kind of return.
So we thought that if we have to invest in equity, let us have our own teams work on equity and develop the operational capability of – if things go wrong – taking over the project and running it. So if a road becomes an NPA, it does not mean that the road is bad. It just means that you have not been able to operate it efficiently. A power plant, port etc are assets.
So what you require is operational teams who can effectively run them. What is true of these assets is also true of equipment. When a client has defaulted, he may not have been able to use that equipment well. So you take the equipment and give it to Mr. B who may be able to utilise the equipment. You change the asset. You don’t destroy the asset. So we developed risk-mitigation teams.
Unfortunately, because of our laws, an asset is treated as a non-performing asset.
We have also applied to SEBI for an approval for a mutual fund. Because we have to manage our liabilities. We have to raise resources. So there is wealth management. So everything we have done – it is always related [to our core skills]. We have not gone into unrelated businesses.
On the investments side, each area where we are invested, we are looking at harvesting. So we had a telecom business which we have already harvested. Because it our duty to reward the shareholders. That can only come by improving the return on equity. That can only happen by harvesting the equity, because when something is ripe you have to harvest it. We also get interest income from the loans we give.
Now we are not taking any equity stakes. We took them in the early 2000. Then from 2007-08 we have stopped, because we had already investors in various sectors and segments of infrastructure. We have an Alternative Investment Fund (AIF). They do invest in equity. They manage third party money.
You were listed on the London Stock Exchange. How has that experience been?
That was a good experience. We got it listed in 2005. Last year we got it delisted. At that time, in 2005, the markets were very choppy in India. And we had to continually raise resources – from DFIs, public deposits, other innovative instruments – we came with a foreign guarantee local currency bonds; first mezzanine capital in India; we did the GVR issue which got listed on the London Stock Exchange. As they say necessity is the mother of invention. If you don’t raise money you cannot lend. So whether it be domestic markets or international markets – ECBs ECAs.
We delisted [because there was no need for further listing]. We saw that we had listed the stock, raised money. Moreover, most people with GDRs had already converted their shares into Indian equity. We had a nominal GDR amount left, so it was not viable to continue to be listed on the London Stock Exchange.
Now if you need money from overseas, instead of a GDR you can raise it through a QIP also.
How do you see stressed assets?
The trouble is that there are simple solutions. If the NHAI owes money to the developer it should be paid. If there is an arbitration award, don’t go to the courts thereafter as it drags for years till the asset becomes a liability. With power plants also, the problem can be solved in 5 minutes without any change in legislation, or law. These are administrative decisions that need to be taken. We have suggested this to the government. You just need simple administrative procedures to be laid down. It is as simple as that.
How do you see SREI’s future?
In the last 30 years, we have seen ups and downs. But we have grown – from just around Rs.5 lakh, today we manage a portfolio of Rs.50,000 crore.
Why has your share price not done very well?
Maybe, it is one of our limitations. We have not been able to the stockmarket very well that this is what we are doing. Plus there has been too much of bad news about infrastructure companies. So people ask that if all infrastructure companies are not doing very well, how can SREI do well?
So you are tainted by company
That does not bother us. We have to keep doing the right things. We have to keep the shareholders’ interests in mind, which we are doing. And among the stakeholders too, our pecking order is also clearly defined. The customer comes first, then the employees, then the shareholders, then the society at large.
Your return on new worth will continue growing?Definitely.