August 2011 | Shubha Madhukar

Racing ahead

 
Tata Capital commenced business operations in 2007 and has today evolved into a full-service non-banking financial company catering to the diverse financial requirements of retail and institutional customers. In spite of the economic turbulence of 2008-09, the company closed fiscal 2011 with an asset book of Rs164 billion and Rs1.03 billion profits before tax. Managing director and CEO Praveen Kadle talks about the goals, strategies and challenges before this Tata company

Tata Capital's financial performance in 2010-11 has been steady and robust. What were the critical factors that affected Tata Capital's growth and performance?
At the start of 2010, we drew up a five-year plan called RACE 2015, a strategy leading up to 2015 with set goals: Revenues of Rs60 billion; Assets size of Rs500 billion; Contributing net profit of Rs10 billion; and a sharp focus on business excellence and highly Engaged stakeholders.

Once we all agreed to pledge our commitment to RACE 2015, we did an extensive communication campaign to create adequate awareness and comprehension on what RACE 2015 means and how each employee can and should contribute in this exciting journey. Today when I interact with employees, I get the conviction that this ground work has really put us in good stead.

We have successfully institutionalised key business enablers like a differentiated brand strategy, good people practices, strong IT backbone, wide range of products and services, robust customer relationship management platform and adequate branch network.

All this has led us to improve our total asset book by more than Rs45 billion, starting the year with close to Rs110 billion and closing it at a little under Rs157 billion. We also significantly improved the quality of our book, reducing both gross and net non-performing assets. Our revenues improved by about 20 per cent.

Tata Capital has concentrated on investing in Tata companies and some Tata associates. Investing in Tata companies would also mean conflict-of-interest issues for Tata Capital. How do you resolve these?
We have introduced a private equity fund called the Tata Opportunities Fund. The fund will predominantly invest in unlisted Tata companies that need capital support. We will provide supplementary capital support through this private equity route to Tata operating companies.

Traditionally Tata companies do not invite investments from private equity players in their unlisted ventures (except perhaps Tata Sky and Tata Teleservices) and hence many such investors lost the opportunity to participate in the value growth of Tata companies in their early stages. Under the fund, we invite the large players, ie pension funds, sovereign funds, large banks, large institutional investors, etc rather than individual private equity players, to invest in these unlisted Tata companies through our Tata Opportunities Fund. It's a win-win proposition for both the Tata companies and the investors.

Will there be a conflict of interest? No. The decision-making will be controlled by the investment committee that is under majority control by the investors, not Tata Capital representatives. We will have a very minority role as far as the investment decision goes. I think we can keep enough independence and at the same time provide a great opportunity to investors to invest in and harvest value in the invested company.

Japanese investors seem to constitute a substantial chunk of Tata Capital's customers. Why and how did you look to Japanese investors?
When we started our private equity business, we were looking for new non-traditional investors. By this time, the global financial crisis had hit the markets and the traditional investors in private equity, the North American and European investors, were wary of private equity funds, particularly the new ones. We turned to the uncharted Asian markets, particularly Japan, which had enough depth and liquidity. It was a leap of faith, both in our strategy and the Japanese investors’ commitment to make it work. We teamed up with Mizuho, our strategic partner in Japan, to enter the Japanese market. The focus of the alliance has been largely in the area of private equity business but it also supports other areas such as investment banking and securities broking.

Overall, at the start of 2010, we had aimed to raise about $1 billion by December 2011, and by March 2011 we have already raised $800 million.

What challenges does Tata Capital face in the days ahead?
In the immediate future, we are expecting a slowdown in the industry. High inflation has resulted in the Reserve Bank of India raising interest rates steadily in the last 18 months. Experts believe that industrial production may get adversely affected as a consequence, and this phenomenon may have a bearing on our growth targets. The slowdown could also impact the quality of our assets, and we will have to be extra careful in monitoring and controlling the quality of the book.

In the longer term, as a relatively new entrant in the arena, we face the challenge of catching up with those that came before us mainly in terms of creating our own identity. While we have the Tata DNA, we have to go beyond that to establish the Tata Capital identity, create our own distinctive corporate culture and a strong brand value among our customers and other stakeholders. Being an NBFC, we are also constrained by certain regulatory requirements like the capital adequacy norms. When we started in September 2007, the required capital adequacy was only 10 per cent; today, it is 15 per cent. Alongside, there is the factor of the debt to equity ratio. Also, an NBFC does not have the cost advantage that a bank typically has.

You’ve talked about the challenges; what about your strengths?
Our principal strengths lie in the strong Tata brand and its DNA, with its inherent stamp of credibility and transparency, and the advantage of having holistic, seamless support for all financial services requirements under one reliable roof.

We also have the advantage of the Tata ecosystem. All business partners, customers and vendors of Tata companies provide a big universe of opportunities, especially in the corporate customer segment, an advantage that no other NBFC has. The Tata companies per se account for less than 20 per cent of our business and the Tata ecosystem another 30 to 40 per cent.

Another advantage is that, as an NBFC, we can provide acquisition financing and promoter funding, which banks cannot offer. There are no restrictions on the number of branches that NBFCs can set up, and NBFCs, being customer-focused, have a faster turnaround in servicing customers than banks.

We have also created an intrinsic advantage in our business model unlike most NBFCs which focus on retail or B2C business; we have an equal emphasis on corporate clients. Tata Capital was the first NBFC to have this B2B focus. This gave us an added advantage in terms of the pace of growth as the B2C business has a longer gestation. In this segment, we should break-even or even make a small profit this year. This would be quite an achievement, given the tough environment.

How does the company see itself evolving its international footprint over the next five years?
We’ve established our first footprint in Singapore, creating a subsidiary, Tata Capital Pte, to facilitate our private equity and investment banking businesses in particular. We’ve also set up another subsidiary, Tata Capital Plc, in London.

Going forward, we aim to create another international subsidiary company focusing on wealth management and private banking services. We also have plans for international private equity, investment banking and fund management businesses, maybe even private banking and institutional broking businesses. And we have our sights firmly set on expansion in Japan, West Asia and even North America.

The money tree
Tata Capital offers a complete basket of financial services for its corporate and retail clients, including commercial finance, infrastructure finance, investment banking, private equity, securities, wealth management, consumer loans, credit cards, travel-related services and foreign exchange. The private equity funds include:

  • Growth Fund: Sector-agnostic; looks at opportunities across sectors. Specifically seeks transactions in consumer-led sectors (urbanisation), discrete manufacturing, specialised services and infrastructure-linked growth opportunities.
  • Healthcare Fund: Looks at all aspects of healthcare, from drug development to healthcare delivery (diagnostic labs, pathology clinics, hospitals, etc).
  • Innovation Fund: For proven innovation ideas where the focus is on commercialisation of the idea and subsequently commercialisation of the business (through IPOs etc).
  • Special Situations Fund: Targets distressed companies, mainly in the manufacturing space, and attempts to turn them around and exit.
  • Tata Opportunities Fund: Provides long-term investors the ability to participate in Indian private equity investment opportunities both from within the Tata companies, as well as from outside the Tata group.

This interview is a part of the cover story of the August 2011 issue of Tata Review in which ten Tata CEOs talk about the past, present and prospects of the companies they head:

Overview

Gearing up for growth: RS Thakur, Tata AutoComp Systems

‘We’re bigger and better’: R Mukundan, Tata Chemicals
‘We have to keep doing different things’: N Chandrasekaran, Tata Consultancy Services
‘Jaguar Land Rover has been the big positive’: Carl-Peter Forster, Tata Motors
Powering up for the future: Anil Sardana, Tata Power
True mettle: HM Nerurkar, Tata Steel
The challenge of transition: N Srinath, Tata Teleservices
Perfect timing: Bhaskar Bhat, Titan Industries
Building on the positives: Sanjay Johri, Voltas