The head of India’s biggest infrastructure finance company retains an unexpected optimism for the India story
He is an economist by training who slipped into the corner office. In between there was private equity punditry as a partner in Warburg Pincus and even a stint at the World Bank. But when it comes to career choices, Rajiv Lall, the CEO and MD of the storied IDFC, is somewhat like Paul Krugman. If the Nobel Prize-winning theorist and Princeton professor can become the most controversial newspaper columnist in the US and a conservative gadfly, why can’t Lall become a banker, writes Arijit Barman. Even in our not-so-shining India, anybody can become anything.
A lunch appointment with him turned out to be a long gestation affair, much like some of the projects he bankrolls as the boss of the country’s biggest infrastructure finance company. After several postponements for which I am equally to be blamed, we finally settle for a Monday meal of Dim Sums at Yauatcha (pronounced yau-aatchaa), the swish Mumbai outpost of London’s Michelin-starred uber-trendy dumpling and tea house, conveniently located next to the IDFC headquarters in Mumbai’s uptown Bandra Kurla financial district.
A first meeting, that too over a meal, can be a little awkward. The restaurant, too, seemed impersonal and empty when I saunter in. Fortunately, given that the infrastructure sector is snowed under execution and regulatory challenges, there’s enough and more to chew over.
Thus far, IDFC under Lall has managed to ride out turbulent phases. Even the 2008 Lehman collapse and global financial meltdown failed to hobble its growth and on his watch, both revenues and assets have grown more than six-fold in less than a decade. Along the way came successful diversifications into fee-based debt financing, asset management, equity broking, alternatives like private and project equity, investment banking, catapulting IDFC into a financial powerhouse with a balance sheet worth Rs 60,000 crore and growing.
I get down to business straight away. Will IDFC’s growth be a millstone? And with telecom and power accounting for half its lending book, will the current regulatory uncertainty also make IDFC cower before the macro malaise?
Lall appears nonplussed at my volleys. “We are usually much more discriminating and calibrate our underwriting. In 2008, we actually stopped lending for a quarter and our conservatism paid off. This time, too, we are slowing down intentionally. Last year, 60 per cent of our business was refinancing,” he replies.
So that also means shying away from greenfield ventures, from imported coal-fired thermal projects that do not have fuel pass-throughs in their sale contracts with the state electricity boards; and instead focussing more on captive units, renewable power where construction risks are lower.
Lall can take pride in the strategy that has yielded an over 30 per cent CAGR for IDFC in the last seven or eight years. There have been blips but profits, too, have grown a handsome 26 per cent. “That’s the ultimate test of how we have grown by building in fair bit of cushion in our credit risk analysis,” Lall looks as much professorial as pleased.
Still, the sectoral stress is simply too large to shun and Lall is pragmatic enough to tweak his blueprint and curb IDFC’s ambition. To start with, loan disbursal is projected to grow by 15 to 20 per cent versus the earlier 25-per cent mark. The 2010 vision, of trebling assets to Rs 100,000 crore in three years, has been pushed back by another two, to end 2015. It’s inexplicably linked to the governance deficit and the reforms paralysis, but at this point Lall makes a motherhood statement, “If you believe, despite the current dysfunctional state of being, India will grow at six per cent, then our 20 per cent target is quite manageable.”
The soft-spoken Lall is already looking at widening IDFC’s eco-system to exploit the revised definition of “infrastructure” provided for in this year’s Budget to aggressively pursue opportunities in health care and education. Additional possibilities include, supply chain, vendor and equipment financing, water and urban infrastructure. And if that means, digressing from Lall’s hitherto exclusive “elephant hunting” efforts of engaging with a select group of 20 large borrowers – 66 per cent lent to these top two-dozen rated companies – to broaden the client pool and diversify risks, so be it.
But what worries him more than asset quality is growth. “It depends on the risk-taking aptitude and appetite of our borrowers. With the regular shifting of goalposts, their equity return projections go haywire and then it curbs new investments,” he says.
Our entrées provide a break from our intense conversation: the much-recommended pork and prawn shui mai and Shanghai siew long bun with chicken – soupy dumplings for the uninitiated – along with Four Seasons oolong, a blue tea from Taipei.
In this all-pervading doom, I am intrigued by Lall’s latent optimism. Where does he muster all the courage? I ask while he deftly manoeuvres his chopsticks and offers some epicurean tips on using the right condiments.
It’s a two-pronged thesis. In the next 18 to 24 months, at least in power, Lall sees pass-throughs, involving imported coal and LNG. “The impact will be staggered but 12 states have already raised tariffs and out of them 10 have included fuel pass-throughs in their tariff orders.” Second, the demographic shift makes him hopeful. “If you cannot bridge the aspirational gap, then you will be booted out of power. A new evolving polity and market realities will induce a widespread behavioural change among the electorate and even the ruling class.”
The cynical journalist in me is still not convinced and I quickly remind him of the draconian legislations relating to land and environment and the taxman’s ongoing witch-hunt against Vodafone that belie any sentiment upswing. It must be doubly challenging for IDFC, currently on the road to raise an additional $2 billion from global investors to double its assets under management (AUMs) to $4 billion. It’s also rooting for global institutional money for long-term Indian infrastructure paper or short-term equity. “The ethical call that the government is taking is very sound. But the application of it is questionable,” he is quite categorical. The timing, too, has been especially bad, he adds. Looking at the current account deficit, we clearly need foreign direct investment.
As we start on our somewhat spartan main course of chicken claypot with szechuan pepper corn; baby pak choi with oyster sauce, garlic and ginger and plain sticky rice, Lall fully acknowledges investor apprehensions but thinks Indian infrastructure is the instrument to allay them. “If you can give the pension investor an instrument that is risk-mitigated but offers a return that is higher than fixed income returns anywhere in the world coupled with lower volatility of public equity markets, then there are still many takers,” he confidently tells me.
A 10-12 per cent return in a decade. That’s still a compelling story.
This “cautiously positive” India hypothesis has also encouraged IDFC to pursue its Rs 25,000-Rs 30,000 crore borrowing programme for the year, to refinance the balance sheet and to expand it, from large institutions.
IDFC does not want to be as ubiquitous as many of its larger peers. Rather, it wants to position its new, emerging identity of a specialised knowledge-driven financial services company for the “affluent, sophisticated professional”. Bereft of management speak, it means breakout products offerings like hybrids that give some “private market exposure with public markets in a portfolio management format”. They are still very niche, with small AUMs but the economics works out a lot better. Similarly, even for the newly set up infrastructure debt fund, IDFC is planning an “experimental offerings for high net worth individuals through a mutual fund idea”.
As we end our meal, I ask Lall if he wants to return to academics and teaching. “Some day, eventually.” But the way I looked at it, the beauty of managing a dynamic team at IDFC means he gets the best of everything: the occasional lecture tour, the heady finance bit and also incubating the next level of people and thought leadership. “It’s taken me 30 years to unlearn my PhD,” he jokes, “but it’s been very satisfying.”
At IDFC, Lall’s mission statement is sustaining project 20:20 — 20 per cent growth in balance sheet and in profits. But as the next level of management gets empowered, Lall says, “I want to gradually make myself redundant.”
That’s a hard task to achieve in a 15-year-old organisation. But he feels the need to do so. Perhaps only then can he enjoy more films like Invictus or find time to research Nitish Kumar’s development agenda or even write a “breezy and eminently enjoyable economic travelogue” like Ruchir Sharma. Already, he is two years behind schedule for a book project.