This story is from November 24, 2007

Uday's working for a Kotak moment

Charles Assisi / TNN / Nov 24, 2007, 00:00 IST

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One day, Uday Kotak wants to leave behind an institution that can rub shoulders with global giants. He has the pedigree and a plan to make it happen. Question is, how far will he go?

One day, Uday Kotak wants to leave behind an institution that can rub shoulders with global giants. He has the pedigree and a plan to make it happen. Question is, how far will he go?
To get a sense of why Uday Kotak is important, understanding events that transpired over the last eighteen months is essential. Two veterans in the Indian financial services business - Nimesh Kampani and Hemendra Kothari - took a few tough calls.Kampani’s JM Financial parted ways with long time partner Morgan Stanley.
In return, the American powerhouse paid JM $455 million. The capital in hand is being deployed by Kampani to build an Indian financial services player of consequence.
A little before that, Hemendra Kothari agreed to offload his holding in DSP Merrill Lynch to his partner from Wall Street for a consideration of $500 million. He continues to play a leading role in the firm.

Around the time that both these events unfolded, Uday Kotak, the youngest veteran in the pack, was staring a similar situation in the eye. Some say Goldman Sachs, his partner for years, wanted out of the relationship. Apparently, they wanted to set up business on their own.
Yet others say that Uday Kotak wanted out. Whatever the truth be, eventually, unlike Kampani and Kothari, Kotak bought his partners’ stake in the joint venture for $72 million. By any measure, it was a pretty damn good deal. But that isn’t the point here.

The point is this: Kothari has for all practical purposes logged out of the race to build a pure Indian play. Kampani is smack in the middle of a plan that is still playing itself out-rebuilding the investment banking business; making a bigger play out of asset management; if the RBI permits, get into banking; take a crack at insurance; and look for growth opportunities abroad.
Uday Kotak, on the other hand, already has his fingers in all of these businesses. To that extent, he seems best positioned to build a financial edifice out of India with a family’s name embedded into it—in this case, Kotak—a dream he has nurtured for over two decades now. While opinion is divided, we would like to believe that is also the reason why he had the gumption to buy his foreign partner out.
All of this, therefore, begs the next question: Does Uday Kotak have the spunk in him to one day become India’s version of Goldman Sachs or JP Morgan? Unlike Kampani, he doesn’t have the luxury of capital at his disposal. And on the face of it, there are two arguments that can be brandished as reasons why Uday Kotak will not make it.
Reason 1: The way the world is
For a moment, let’s go back a few decades to the ‘seventies when the American economy was booming. It was the kind of environment that created mega corporations with the potential to straddle the world. But to create these corporations, the American economy also needed financial institutions with depth. This necessity was the reason why America today is home to an ecosystem with companies of the kind Kotak one day aspires to rub shoulders with.
India today, in many ways, resembles the America of the ‘seventies. The economy is booming and Indian companies are snapping at everything in sight to build scale. If history be a precedent, Kotak is smack in the middle of a place from where he can go nowhere else but up.
But here’s the catch. American financial institutions that made it big in the ‘seventies are now as much a part of the Indian milieu as Kotak is; they have been around for over a decade; they are run by Indian managers tutored by Kothari, Kampani and Kotak; and they’ve learnt the ropes enough to now strike out on their own. If evidence be needed, then consider this. All the big ticket deals that have happened out of India like Tata Corus and Hindalco Novelis have had foreign banks playing significant roles. Indian entrepreneurs had bit roles at best. Coupled with the kind of financial backing foreign banks come with, Kotak should be easy meat.
Reason 2: Historical precedents
Look around the Indian landscape. Whether it is automobiles, consumer durables or cement, the stories are similar. As the economy started to mature, Indian entrepreneurs in these businesses started selling their stakes to foreign players who had either come in as joint venture partners or were simply sniffing around for a piece of the Indian story. It has come to a point where save a handful of Indian entrepreneurs, the businesses are run by companies with interests in every part of the world. When juxtaposed with how the business has evolved until now, there is no reason to believe something similar may not happen in the Indian financial services space.
The Uday Kotak Response:
If there’s one thing you can be sure about Uday Kotak, it is this. He doesn’t think much of these arguments. “You’ve got to ask one fundamental question,” he says. “At global financial firms operating in India, where is the decision making? The answer is New York. So the Indian CEO is in charge of the backyard. For me, this is centre stage. The ability of players who see this as centre stage for their life is different from others who operate in many countries.”
Does this mean he isn’t worried about the threat they pose? “Sure, there will be global players. But for them to emerge as significant players here that support the Indian economy, they will need the latitude to make decisions here,” he continues. You get the feeling he’s being a little too harsh on competition there.
In any which case, says Kotak, the nature of the business is such that the macro variables are in his favour. “If something is important for the nation, it will precede globalisation,” he argues. For instance, even if a Chinese bank is willing to pay more than what any American can pay for an American bank, the government there would be uncomfortable with the idea of a
Chinese bank running an American entity. “Every nation state will want its financial services business onshore, not offshore. That is because this business is very closely linked to the economy,” he concludes.
Given these macro variables, Kotak has put into motion a business plan for the company that has evolved over the years. As he sees it, there are four different spaces he can take aim at. The most obvious one is creating Indian products for Indian consumers. Whether it be a small investor, high net worth individuals, or an Indian institutional investor, Kotak has products from retail banking to life insurance to serve them.
The second space he is playing around in includes Indian products for global customers. For instance, asset management for overseas clients or the investment banking business, he’s got a team working there. The third area that he has gotten into is getting global products for Indian customers. So, if a retail Indian investor wants to participate in the global stock markets, Kotak has a suite of solutions for them.
And then there’s the final element—global products for global customers. “If Dubai Port wants to bid for a Chinese port, I would like to be a player in the game,” he says. “But for the moment, we’re focussed on the first three.”
“In India, the business and the Indian customer are still in a very early stage of evolution,” he says. Once critical mass has been achieved, he reckons each of the businesses will have to be spun off into different entities. “A call to separate them can be taken in the future. But right now there is hockey stick growth and we need to take advantage of it.”
Building the future:
So how long will it be till Kotak starts aiming for the fourth piece of the matrix? “It depends on how the first three evolve,” he says. “We will look at growing both organically and inorganically. But as a service sector, we are still some distance from making big bets.” Push him a little and he’ll tell you that when he manages to tip to a point where his market capitalisation is the region of $50 billion, things ought to be in place for the final plunge. Given where Kotak is right now though, that sounds like an awfully long road to travel. “I’d day in 3-5 years,” he counters.
If that sounds optimistic, then consider this. The market capitalisation of the Indian financial services business put together is $100 billion while India’s GDP is roughly $1 trillion. As against this, Chinese firms have a market capitalisation of $1 trillion in a country with a GDP of $3 trillion. “Why should the difference in valuations be so huge?” asks Kotak. “Either Chinese firms are overvalued or Indian firms are undervalued.”
People who have seen Uday Kotak from close quarters reckon he’s being conservative with his words. “My guess is Kotak will not wait five years to make a play for the big time,” says an analyst who declined to be named.
“I wouldn’t be surprised if he has already started planning how to raise capital from overseas markets,” he says. “Maybe, he will work at building a strong base in an upcoming financial centre like Dubai and get a foreign partner,” he adds.
Yet another option Kotak has is to give up a small part of his equity to foreign investors desperate to buy into companies with assets uncontaminated by the subprime mess in the US. Kotak isn’t telling. But rest assured, watch this man.

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