What makes Gujaratis such successful businessmen? You would expect Rashesh Shah to ponder over the question. But he doesn’t. Clearly he has given the matter enough thought. “There are,” he says, “two reasons for that. One, there isn’t too much focus on education. And two, they believe in the postponement of gratification.” Shah is the chairman and CEO of Edelweiss Financial Services, and is worth almost Rs 600 crore — a successful businessman, by any yardstick. The story of his life may be one of postponement of gratification but it is certainly not about “unnecessary” education; he studied at the Indian Institute of Foreign Trade in New Delhi and the Indian Institute of Management in Ahmedabad.
There was no compulsion for him to study, though. His family was in the business of notebooks — a small but steady business that kept the Shahs in reasonable comfort. Everybody in his family was educated in Gujarati schools, till Shah decided to break out of the mould. Now, of course, he is a firm believer in the virtues of a good education. His teenaged son, Shah says, will have to study at least five to seven years more before he can join Edelweiss. “My wife and I have both agreed to it.” Shah’s wife, Vidya, is a Kannadiga.
Shah started his career with ICICI Bank in 1989. During those days, he dealt directly with the new-generation companies that were coming up — the likes of Infosys, Bharat Forge and United Phosphorus — and got to interact with their leaders. Most of these companies were drawing up global business plans, and this gave Shah first-hand knowledge of the capital markets, especially how to raise funds for startups in the technology space. “The liberalisation process had just started and it was a heady time for entrepreneurs. My job allowed me to interact with quite a few of them and I learnt different things from them: from how to spot business opportunities to how to build organisations.” In addition, NR Narayana Murthy of Infosys taught him “not to part with equity cheaply, which entrepreneurs sometimes tend to do, especially at the start-up stage”. As of today, employees (including the promoters) own 55 per cent of Edelweiss.
The desire to set up his own business finally overpowered Shah in the mid-1990s. To become a category 1 merchant banker, he needed to have capital of Rs 1 crore. The timing couldn’t have been worse — interest rates had climbed, lower import duties had started to hurt corporate sector earnings and the markets went into a downward spiral. The investors Shah had lined up began to shy away. So Shah convinced his father to mortgage his Peddar Road home in south Mumbai to raise the seed capital of Rs 1 crore. However, by the time this money arrived, the Securities and Exchange Board of India had raised the bar for category 1 merchant bankers to Rs 5 crore.
Shah decided to use the unexpected crisis to his advantage. (“One should never waste a crisis,” he says). Instead of helping companies do large public issues, he decided to help technology companies raise money from private equity and venture capital funds. These companies were anyway too small to do IPOs. Edelweiss started in 1995 with two partners (Shah and Venkat Ramaswamy who now heads the investment banking arm), three employees and a small grubby office in the Flora Fountain area, next to Akbarallys. Some of his first clients were Daksh (owned now by IBM), rediff and Grey Cell.
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From investment banking, with special skill in the technology domain, Edelweiss diversified into institutional broking with the acquisition of Rooshnil Securities in 2001. It now has six strategic business units — credit, capital markets, commodities, asset management, housing finance and life insurance — and 18 lines of business; none is allowed to grow to more than 30 per cent of the company’s turnover so that the risk against slowdown in any one is adequately hedged. Shah hopes to end the current financial year with a turnover of Rs 1,700 crore.
In the last couple of years, Shah has tried to expand Edelweiss’ retail footprint. The move is prompted by mathematical logic, not gut feel. Out of the total annual savings pool of $300 billion, almost half is invested in real estate and gold; of the other half, about 20 per cent goes into insurance, 4 per cent into wholesale capital markets, another 4 per cent into retail capital markets and the rest is put in bank deposits. With just wholesale capital markets, Edelweiss was addressing only 4 per cent of the pie; but with new verticals like retail capital markets (it acquired Anagram two years back and now has 296 offices in 150 cities), asset management and life insurance (with Tokio Marine), that pie has increased to 30 per cent. Housing finance adds further to it. Shah calls these expansions moves to “adjacent spaces”.
With the diversification into retail, Edelweiss’s dependence on wholesale capital markets has come down from 60 per cent to 25 per cent in the last five years. Retail is still in investment mode and hence does not contribute to the company’s profits. Shah hopes to break even in two years. And since the focus is on retail, Shah discloses that he prefers to give interviews to the regional media which reaches potential customers in under-banked smaller towns and cities.
For his personal investments, Shah favours equity over others like bonds, real estate and gold. “Long-term returns of 14-15 per cent are not bad when the (country’s) GDP has been growing at 7-8 per cent,” he says. “Annual rentals are just 3 per cent of the value of property; so the returns in real estate are lower. But you need to add the capital appreciation to it.”
Shah has the ability to break every business decision down to numbers. His turnover per employee is in excess of Rs 65 lakh. It is, of course, higher in capital markets — Rs 1 to 3 crore. It is only when an employee fetches a turnover that is four to five times his cost that the company makes excellent profits, he says. Of the 296 offices (140 of which are owned by Edelweiss), as many as 100 are profitable. The cost of acquiring a retail customer — Rs 8,000 to 9,000 — is upfront but the returns flow over a lifetime, mainly through cross-selling of products. That’s why Shah looks at the “embedded profit” in each customer.
Shah is perhaps aware that others, Indian as well as overseas financial companies, will get into retail sooner than later. “But who knows them in smaller towns and cities,” Shah names a few global marquee banks. To build the Edelweiss brand, Shah has been investing up to Rs 25 crore every year in advertising and promotions. With life insurance kicking in, he plans to bump it up to Rs 45 crore. “Our (aided) brand recall has gone up from scratch to 100 per cent in Mumbai,” Shah says, but admits that it is lower in other cities like Delhi, Bangalore and Ahmedabad.
Meanwhile, Shah is practising hard these days to run a full marathon. In the last three years, he has done the Mumbai (thrice), Puducherry and Delhi marathons. “You can start by doing two-, four- and six-kilometre runs every week, and then raise it to three, six and nine km and finally take it to 8, 12 and 16 km.” The obsession with numbers is unmistakable, even when it comes to running. Shah could count this as another reason why Gujaratis have a high success rate in business.