We are a country of savers, we are now trying to become one of investors: Rashesh Shah, chairman and CEO of Edelweiss group at Idea Exchange

The government’s ability to spend this Rs 10.5 lakh crore is key and having the right projects and execution of the same is very critical. I think we’ll know by the first half, how the pace of this execution is going. In a way, it’s a smart thing they have done because they have curtailed the amounts to the welfare programmes and the subsidies, which they can always scale back in the next year, which is also going to be election year. It’s a good calibration.

Sandeep Singh: You say that they’ll have to do it for one more year. For the last three years it is the government which has been doing it, thinking that crowding in will happen. Even the corporate tax was cut, expecting that they will spend, but we haven’t seen that happening. Do you think they will come in by the end of this year and what makes you so optimistic?

The corporate tax cut happened in 2019, then we had COVID immediately after that. So I would adjust for that. I personally think the corporate capex has already started, but in a very unique way. A lot of the corporate investments are happening through mergers and acquisitions which is brownfield.

If you see last year, a lot of brownfield expansions have already taken place. When you talk to bankers, they are seeing applications for expansion into existing units. You must have seen that for every good asset in NCLT (National Company Law Tribunal), there are at least three to four bidders and people fighting for assets and going to NCLAT (National Company Law Appellate Tribunal) and Supreme Court and each is looking to outbid the other.

So, I think the capex has already started. But currently corporates are allocating their capital to brownfield and existing assets which require maybe last mile funding or completion financing and which will be quick to get into operational mode. Then starting fresh, Greenfield projects. If you speak to any corporate, a greenfield is a last option, because it will take five years or more with all the uncertainty of business cycle and everything else.

Anil Sasi: Are investors taking a short-term view of India as a market and is that one of the constraints in the way of revival of the Capex cycle to the levels that we saw in the early part of the last decade?

I think it varies from industry to industry, but I don’t think large corporate houses or even overseas investors, who are investing via FDI, are really perturbed by the short-term uncertainty. Also, if there was any short-term uncertainty, it was in the last three-four years, with IL&FS and COVID. I don’t think that even the global recession is a big hurdle for people to invest in India. The last thing any corporate wants to do is invest in a greenfield. Nobody wants to do a greenfield steel investment or a greenfield power investment or a greenfield port but everybody wants to acquire and expand them. Having said that, corporates have also become very, very conscious about capital allocation. Earlier, there was a bit of easygoing-ness about rigour in terms of making investment because bank loans were easy to get. Post 2008 and the entire NPA crisis in Indian banks, the culture has truly changed.

However, optimism and animal spirits are back and corporates are looking to invest in new areas. There is a lot of interest in electronic assembly, semiconductor and even in defence equipment because these are the areas where India is trying to become independent. If you see the history of India, in the first 40-50 years we were trying to become independent on food and now we have started becoming independent on capital. That’s why when you see foreigners selling almost Rs 3 lakh crore in the stock market over the last two years, the stock market is still steady. That’s because the local capital now is almost on par if not higher than the foreign capital.

Anil Sasi: What do you make of the ongoing Adani sell off? Some four years back, Edelweiss had also come under attack, there was a sharp plunge in your stock, you were forced to sell your wealth management arm… So is there a parallel and are there any learnings from your experience?

The stock market and economy are correlated in the long-term and if you look at the returns in the market and corporate growth earnings over the last 30 years, they are both at around 14-15 per cent. However, in the short term, there is a lot of drama and which is also what makes stock markets exciting. So, as you said, even what happened with Edelweiss, we moved very sharply between 2011-12 to 2018. And as we had grown, earnings were kicking in, the business cycle was positive. Then in 2018, the earnings and the growth came under threat for all NBFCs (Non-Banking Financial Company) and credit. It happened to banks earlier, it happened to NBFCs after 2018. Along with that, I think there was a need to de-leverage. I think deleveraging from time to time is very important for every corporate to become stronger. But in the last four or five years have our earnings de-grown? Yes. Have we also reduced the amount of borrowings? We have done that.

Coming to the de-leveraging part and what we are seeing of late, broadly I would say, for any business house in India, when they cross aggregate borrowing of about Rs 2-2.5 lakh crore or bank borrowing of closer to between Rs 1-1.5 lakh crore, there is concern in the market. That’s because with Rs 1-1.5 lakh crore of bank borrowing, you become around 1 per cent of the total bank credit. That brings market pressure and it comes in an idiosyncratic way, there is a lot of drama, it comes with a lot of upheaval. It can be company wide, group wide and industry wide and it comes in its own way. I don’t think anybody can anticipate that.

These are the ups and downs of the market. As you grow you have to keep raising equity and debt and a company has to balance it. Sometimes you go a bit out of balance and that is what has happened.

Every corporation in India, which has come under this situation, what is called ‘you’re over-leveraged’, the answer has been to either slow down growth and/or raise equity.

Sandeep Singh: While Adani group share prices are under pressure, how challenging is it going to be in the current scenario to raise equity?

It’s hard to say because it’s not one company, there are about eight or nine companies — port, cement and a lot of them are very good with good operating cash flow. Promoter holding is high, which is always a good thing when you want to raise equity as then raising equity becomes easier. If there are good underlying businesses which have operating cash flow, positive EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation), it becomes easier to raise equity.

P Vaidyanathan Iyer: In the Budget there seems to be a nudge to the taxpayer to move towards the new tax regime, which is completely exemption free. It seems to suggest that insurance companies, which have been selling insurance for years as a tax saving instrument, will no longer be able to do so. Do you think it is a good idea that people do not save, particularly in a country where social security is not really provided by the state?

I would say what they’ve done is very smart and I wholeheartedly endorse it. And I’ll tell you three-four reasons why I think it is better. One is they have not tried to force anybody, they’ve given both options. Ideally, I think all of us have been saying that rather than have this complication of deductions and keeping tabs and all that, it’s just easier to have very simple slab rates and just pay the tax. Also, while they are not forcing them to move immediately. I think, in the next couple of years, almost everybody would have moved to the new one.

If you are earning somewhere between Rs 15 lakh to Rs 25 lakh annually, moving to the new one is a lot better. And the third thing, I think people save for various reasons, this arbitrage between various instruments of saving is just an unnecessary complication because half of our household savings go into bank deposits. So, I think we are a country of savers and we are trying to become a country of investors. The last part of India’s growth is going to be how well we convert our savings to investment. At the current 30 per cent savings rate, at a $3.6 trillion economy, our savings is $1.2 trillion, which is a lot more than what any foreigner will invest in India in any year.

Hitesh Vyas: We have seen a credit growth of around 16 to 17 per cent. While a lot of it is coming from the retail sector, do you think this will continue?

As the corporates start investing, the corporate credit growth will also balance out. A lot of retail got impacted by COVID, so their borrowing needs have gone up — gold loans, agri loans, or even home loans. Home buying has gone up because the housing sector has revived. Corporate credit growth will also pick up but I would say retail growth will be about 1.2 to 1.3 times the nominal GDP growth. As nominal GDP is expected between 10 to 11 per cent, we should see a 13-14 per cent retail growth and half of that will always be housing.

In the next four or five years, housing looks very strong. For almost 10 years it underperformed, but post COVID there’s a revival in housing. As a result of that, the home loan part of retail will be fairly stable.

Sukalp Sharma: While it is expected that the new tax regime would eventually leave a lot of extra money at the hands of the taxpayer, do you expect a lot of that to flow into the equity markets?

I think it will come to equity markets whether it comes in the short term or not because what we are seeing on the ground is that currently the mood is more in favour of yielding instruments because people think interest rates are high and almost everybody believes one year down the line, interest rates would come down from where they are now. So given this high interest rate, currently people want to lock in rates at a higher level. Also, I think there is a little bit of uncertainty around equity markets because of the global recession. I think equity market confidence will come back once the hikes are over and the interest rate cycle starts to come down. Then we will see revival of confidence and higher allocation to equity markets.

Harish Damodaran: When do you think the private corporate investment cycle will start? When you talk to your colleagues and others in India, what is stopping them now?

The real greenfield capex will start from 2024 onwards, but again, historically we have always associated private sector capex with greenfield investment, because that is how it has been. In fact, in a very perverse way, for many years for an entrepreneur or a promoter putting up a greenfield project was a lot more profitable than acquiring an existing asset through M&A (Mergers and Acquisitions). There were a lot of practices which favoured a greenfield project. I think that has structurally changed. Most corporates we speak to are more keen to buy an existing asset. Nobody wants to start from greenfield and in the last 18 months we have seen that.

P Vaidyanthan Iyer: I understand your point that NCLT-based acquisitions and M&A have happened quite a bit. But none of them have really resulted in jobs. Are we seeing growth without jobs?

My take on this would be, as a country, you have to decide, do we want to just put up greenfield projects because they create more jobs, or you want to take the stuck projects or the distressed projects and revive them and turn them around, because even that is creating jobs, or at least protecting jobs of another kind. I would say, more importantly, the real job growth in the corporate sector will happen when manufacturing takes off in India. And I think it is not a function of the investment cycle. Of the 500 million jobs in India, half of them are in agriculture, half in non-agriculture, almost half of that is in retail and construction, like housing. Housing is starting to take off so I’m sure jobs are getting created in housing.

Anil Sasi: We’ve seen a lot of consolidation happening, a lot of acquisitions through the NCLT route and otherwise, but is there alongside a concentration risk that we’re seeing across multiple sectors where you see one or two people come in and dominate the whole landscape? And is that healthy?

I was reminded of one quote that an economist once told me — the interesting thing about India is that everything you see is true, and the opposite of that is also true. So, we are at this stage seeing consolidation, because the strong are getting stronger. Earlier what was happening, anybody could start a greenfield project — you could go and get bank loans and start a project. Now, after the last 8-10 years, the culture of credit has changed and there is a lot more scrutiny. So, obviously, the strong are getting stronger because they’ve got access to capital, they’ve got access to opportunities, they can acquire, consolidate. What is also true is that there is this whole long tail of new entrepreneurs, new people coming into newer areas. Now, we are seeing entrepreneurs coming from everywhere and small towns with access to information, access to opportunity, scale, all of that started to really filter down. We saw that in cricket in the ’80s… earlier all cricketers came from Bombay, Delhi, Bangalore, Chennai. Then in the ’80s with Kapil Dev and all, we started getting people like MS Dhoni…talent truly became all India and really democratised it. I think we are seeing that in entrepreneurship.

George Mathew: Foreign investors are in a selling mode in the last several months. Are they concerned about something in India or is it because Indian markets are overvalued?

I don’t think they are concerned about India. If at all, they’ve been talking about the valuations, because the Indian stock market has a higher value than other comparable emerging market peers. Also remember, in the last few years, global investors have been reducing their investment in China because of the COVID and the lockdown and as China is opening up and with their cleanup of the stock market. But now when I talk to investors, they’re relocating some money to China.

When you see foreign transactions in India, it’s not just the India story. While half of the story is India, the other half is global flows, global liquidity, global interest rate and relative attractiveness of India. I think that has been what has been at play for the last couple of years.

Sandeep Singh: India’s story has always been of domestic consumption but with consumption at the bottom of the pyramid staying weak, how big a concern is it?

After COVID, the lower end of the segment, rural India and the poorer people, their balance sheets, their financial reserves, really got stretched and impacted. Urban India managed COVID well but the lower half of India got impacted. This will continue to be an area which we’ll have to watch. And I think the only answer to that is growth. But also every time there is a global recession, in a perverse way it has been good for India. So we are all hoping if you have only two outcomes, let us say, global inflation or global recession, because in order to kill inflation, the US Fed will usher in a recession. In that sense, if you have to choose between inflation and recession, I always believe that we should choose global recession rather than global inflation, because global inflation has a lot of other issues with India — oil price, cost of capital, and interest rates go up. When there’s a global recession, it does shave off some part of our growth, but oil prices, capital cost, and interest rates come down. So historically, India has done well, when there is a short lived global recession, and I’m hoping this year we might see that.

P Vaidyanthan Iyer: You said you would want global recession over global inflation but, domestically, what are the challenges?

I would see more consolidation here for the next one and a half years, towards the second half of this year, if we start seeing private capex coming in, interest rates are trending down and if there is an RBI interest rate cut, let us say around end of 2023, or early 24, that will be good news. So I will wait for all of that for the growth phase of India to start.

Why Rashesh Shah

Rashesh Shah is Chairman and CEO of Edelweiss group, one of the largest diversified financial services firms, which has interests across credit (retail and corporate), asset management, asset reconstruction, insurance, and wealth management among others. An alumnus of
IIM-Ahmedabad, Shah, who co-founded Edelweiss in 1996, is one of India’s finest financial minds and someone who keeps a close tab on the economy.