World could see a protectionism mega trend: Uday Kotak


are the themes to bet on, says Uday Kotak, MD of Kotak Mahindra Bank


Speaking to CNBC-TV18, Kotak said that the world could see a mega trend which is protectionism and in a changing global narrative there will be some slowdown in trade.

On the domestic front he said that real estate in India has its challenges lined up while the IT space is subjected to global volatility.

Commenting on the state of infrastructure he said that the investment cycle needs to come back.

“The problem in India is the traditional promoter-led model in infrastructure is broken and we need to move to a model which is an institutional model with professional promoters,” he said.

Below is the verbatim transcript of Uday Kotak’s interview to Shereen Bhan.

Q: The consensus is the good news was that there was no bad news, so it was a no shock Budget in that sense. Has it done enough though to be able to spur growth?

A: I think the Budget has been good for a number of reasons. One, you had fiscal arithmetic which was controlled. A 3.2 percent number is down from 3.5 percent though marginally above 3 percent which is what the earlier target was. Therefore fiscal discipline fundamentally in the Budget for the fourth year in the running continues and that is good news.

Two, the math adds up. So, that is also very important.

Three, no major surprises in the devilish detail.

Four, all the fears which people had whether it was capital gains tax, foreign portfolio investor (FPI) and issues like that, those have not fructified into actions which could have hurt sentiment and combine that with the fact that there is a focus on small and medium enterprises (SME), the fact that you are now seeing companies with turnover below Rs 50 crore, even if they go above Rs 50 crore the tax rate is 25 percent. So, it is acknowledging growth of new companies which are small today, which can become big tomorrow but will be taxed at 25 percent beyond being small as well. So, that is a positive in the medium term.

From the point of view of business in general, do no harm is as important a strategy as making sure that you give a lot of goodies. I would much rather from a policy point of view have focus on do no harm as an important policy plank in any policy in the future.

Q: Has corporate India now readjusted itself to the possibility that 25 percent isn’t coming anytime soon?

A: We have to be clear about tradeoffs. If we want fiscal discipline then revenue considerations must matter and in this tradeoffs between macro and micro you have to be clear given to some on the micro as long as the macro is under control and that is the tradeoff as I see it. I think it is about Rs 19,000 crore or Rs 20,000 crore for everyone percentage drop in corporate tax rate and that is a big number in the context of the current fiscal situation and I would believe that the centre has used its conservatism to make sure that we have kept the fiscal deficit under control because we have seen a rise in state deficits – thanks to movement of some of the deficits from the DISCOMs on to the state Budgets. Therefore, in totality on a state plus centre deficit we still have some way to go on fiscal discipline.

Q: Let us talk about the theme for the conference which is “Chasing Growth”. What does the environment look like today? Where do you see value, which sectors do you believe that we could see more value accretion. What are investors looking for today?

A: You were in Davos, so was I and some of the context which was caught there, you have a difficult global situation; you are seeing the world probably at the early stage of what could be a mega trend which is protectionism. You are also seeing situations where new leaders are focused on disproportionate attraction to what appears to be potentially populist. So in this changing global narrative you have to accept that certain level of global trade will slowdown and in this broader macro view my sense for investors worldwide is alpha, it is going to be more important than beta. Therefore playing the beta game which is macro themes will be more difficult for investors to make money versus focusing on specific companies and opportunities where you could make alpha. Therefore my advice to investors in general is do not catch or try to catch big macro trends around countries; focus on companies anywhere in the world.

Q: Since we are talking about opportunities and specific opportunities, I do not expect you to talk to me about individual stocks but sectors that you believe would actually emerge as value creators in 2017. Where would you place your bets?

A: In Indian context you have to divide first into sectors which are exposed to global risks like IT services is depended on what US policy is and similar challenge is for the pharmaceutical sector. Therefore, the volatility in those two sectors is linked to what potential global risks are. At this stage what I like in the Indian context from a sector point of view is primarily domestic focused sectors. So sectors which are dependent on the domestic India versus being subject to disproportionate global volatility, so one big theme is domestic sectors.

Second, I do not see private investment recovering till earliest being end of the year, maybe sometime in the October to December period, we probably see the early signs of that because capacity utilisations are still to go up. So if private investment is a theme which is little further away, it is consumption which is going to be an important part of the growth. Therefore, domestic sectors, consumption and post demonetisation we have seen a significant movement to formal versus informal. Therefore, sectors which are more formal benefit in the post demonetisation world. Let us take the sector which is closest to my heart which is the financial services sector. It is domestic; there is fair amount of consumer angle to the financial services sector.

Third, a big boost to formal financial services sector and I am using financial services in the broader sense beyond just banking. Therefore, banking, insurance, asset management where you have seen significant movement of money away from real estate and gold into formal financial savings. So those sectors like financial services similarly consumption benefits. I think real estate will have its challenges; IT is subject to global volatility and pharma as I mentioned.

However, on infrastructure you need the investment cycle to be back and on infrastructure, I have said this earlier, the problem in India is the traditional promoter lead model in infrastructure has broken and we need to move to a model which is institutional capital with professional promoters to make infrastructure happen and this disproportionate weight lifting supposedly by government and government alone in infrastructure will work only up to a point. It needs support from private investment in many areas including the last miles.

Q: You have spoken of several important themes there, so let me start by talking to you about the business that you understand the best and that is financial services business. The big theme of 2017 seems to be consolidation whether we talk about telecom or cement; the government in fact is talking about consolidation in large parts of government entities and oil being the one that the finance minister spoke about in his Budget speech. Do you see the possibility of consolidation, not just within the banking sector but banking and microfinance institutions (MFIs) for instance, because that seems to be the big buzz at this point in time?

A: I do believe that consolidation will happen. In many cases it will happen out of necessity because there is a potential mortality risk in many parts of the financial services industry and significant amounts of distress in the balance sheets of a few entities as well, in general it could be banks, non-banks, MFIs across, so consolidation will happen because of the challenges and opportunities in the sector and there could be consolidation for growth. I see both these happen in various sectors and I believe financial services is no exception over the next couple of years.

Q: Do you actually see this business of banks picking up MFIs; the buzz is around IndusInd Bank

  and Bharat Financial Inclusion

  for instance at this point in time. Do you see that being real possibility?

A: We have done a very small acquisition in the MFI space, a company called BSS Microfinance a few months ago, so we think it does make sense and having said that when you are doing large bites, I am sure the various players on either side are doing the diligence thoroughly.

Q: What kind of appetite do you have? You just spoke about the small acquisition that you did in the MFI space. Post ING, do you have the appetite for large bites or small bites?

A: On that I want to first share the good news. Our major and integration with ING Vysya, which was amongst the largest mergers, has gone through pretty well. We were fortunate that bulk of our integration on the ING Vysya Bank merger was done by end of September that is before the demonetisation challenges came up for the banking sector. Therefore, we feel good about the way the merger and integration of ING Vysya Bank into Kotak Mahindra Bank has happened. There has been tremendous amount of learning which we have got out of that. Therefore, our view is we are in a good position with a sound balance sheet and good capital and we are always open to options provided they add value and make sense for all.

Q: What kind of options would you consider?

A: When we are ready. We will make an announcement and let you know.

Q: What would make sense strategically for you at this point in time?

A: I think the entire gamut of financial services which makes value enhancing proposition and something which we believe that we have the ability of fully comprehending what we are getting into and being able to execute well.

Q: Since we are talking about your business specifically, let me ask you about the short-term outlook. We saw your numbers coming and the big surprise was on the loan growth front which came in at a little over 12 percent year-on-year. Is that sustainable post the exceptional demonetisation era that we have just been through?

A: One of the reasons is our loan growth for the Q3 was lower than what we had guided in October, was the fact that there was a slowdown due to the process of demonetisation which is why we came in at 12 percent for the December quarter. We think we are in a good shape and our approach to lending is unlike most other banks. Very focused, risk adjusted return which means if certain amount of risk we take, we must get appropriate returns. Therefore, we do not chase loan growth for the sake of loans. For the level of risks we are taking; we must get our returns because that is what we owe to our shareholders. Therefore, our approach to loan growth is very different from what you are seeing in the banking industry and despite that approach which is a disciplined risk adjusted return approach, we actually see opportunity as we go into the future because there is a big challenge which the state owned banking system is going through and as the economy gradually moves towards growth and the normalisation post demonetisation is happening faster, we see an opportunity to grow our balance sheet more positively in the future.