Uday Kotak: India’s Mr finance

"We understand the lie of the land better than any global player. We are India" Uday Kotak, Kotak Mahindra

Kotak has accumulated this wealth not in the sexy and fast-growing areas of technology and telecoms but in the staid and tightly controlled field of Indian banking. His firm, Kotak Mahindra, in which he and other promoters hold a 55% stake, is one of the country’s leading private-sector financial institutions.

Founded in 1985 and originally called Kotak Capital Management Finance, the firm started life as a trade finance boutique. It had just two employees.

More than 20 years later, Kotak Mahindra is involved in every aspect of Indian financial services from commercial banking, to stockbroking, to mutual funds, to life insurance, to investment banking, to private equity, to real estate. Now it employs more than 12,300 people, 4,500 of whom were added over the past 12 months.

In 2003, Kotak Mahindra gained one of only two commercial banking licences to be awarded by the central bank. As a result it became the first company in India to convert to a bank.

The firm boasts a market capitalization of $6.4 billion. At the end of June, it reported a year-on-year 40% increase in its consolidated net profit for the first quarter of fiscal year 2008. The level of profit was Rs1.46 billion ($36.1 million). Total income for the same period was up 79% again on a year-on-year comparison to hit Rs13.92 billion.

"[Becoming] India’s leading financial institution is our aim," says Kotak.

A tough nut

It is late June and Uday Kotak is in the UK as part of an 11-member delegation of senior Indian businessmen to strengthen Indo-UK trade and investment links. Other delegates include Sunil Bharti Mittal, multi-billionaire chairman of the Bharti Group, India’s biggest mobile phone operator; Vijay Mallya, billionaire chairman of the United Breweries Group and Kingfisher Airlines; and CK Birla, a member of one of India’s leading business families and chairman of Hindustan Motors.

Kotak is a quietly spoken and unassuming man. He may be India’s most successful self-made banker but he has no airs and graces. He commands tremendous respect and affection from his colleagues, one of whom says that everyone who works for him has the utmost faith in him. Rivals describe him as savvy, ethical, dapper, shrewd, engaging and a tough nut.

"Uday’s never been one to follow the beaten track and has a sixth sense about spotting hidden opportunities," said tractor manufacturer Anand Mahindra in an interview with Forbes last year. Anand, together with his brother Harish, took a 15% stake in Kotak Capital Management Finance in 1986, which saw the company renamed as Kotak Mahindra Finance Limited. Now, their stake is 4%.

For all its success, what Kotak Mahindra has achieved so far would be peanuts compared with the riches that could befall the firm if India’s potential were realized. Kotak knows that India can become one of the biggest and most dynamic financial centres in the world.

At the moment, India’s financial might pales in comparison with other leading economies. China, for example, is home to three of the world’s top 10 banks by market capitalization. The total capitalization of China’s financial services sector is close to $1 trillion. In India, it is $80 billion. Kotak, however, believes that India is the land of opportunity.

"I’m a big believer in the India story, of India as an asset class," he says.

A transforming economy

He mirrors global investment bank chief executives and fund managers when he says that India "has never felt like this".

One of the big changes is that, supported by an economy growing at an average of 8.5% a year, India’s burgeoning middle class is becoming more financially active. "So you’re seeing a nation of savers become a nation of investors. That is one big transformation taking place. The other is that a nation of savers is also becoming a nation of spenders." For a banker these changes are gold dust.

Lending levels in India are buoyant, with personal loans growing by 34.9% in 2006, according to the central bank, loans to the services sector by 32.4%, agricultural loans by 31.2% and loans to industry by 27.8%.

Little wonder then that what Kotak would like to do more than anything is to buy one of India’s public-sector banks, which dominate the retail market.

"The single biggest investment opportunity today is Indian public-sector banks," says the 48-year old Kotak. "It’s the most undervalued asset in the world." Indian state-owned banks hold more than 75% of total assets of the banking industry, according to a report by Icra Limited, a rating agency. This compares with 18.2% held by private banks and 6.5% by foreign players.

Unfortunately for Kotak, despite the partial liberalization of financial services, the Indian banking industry is still held back by the state. Selling majority stakes in public-sector banks to the private sector is not on the government’s agenda. "There has to be a long-term solution for this," says Kotak, although he is not hopeful of any big change in policy in the near term. "Considering the government framework is based on coalition partners, I think it will be difficult to make it happen."

Freeing up the banking industry is critical in ensuring India is attractive as an asset class. He cites the example of the US and Europe, whose leading banks have gone on to achieve global dominance because of strong home markets.

"If you look at the success of the global investment banks, it has been achieved on the back of a huge domestic market. Look at all the US firms. They’ve become global firms because the US as an asset class has become sought after. The size and strength of your domestic market determines whether you can build a sustainable business model," says Kotak.