Foreign investors should invest in India's digital sector, Asia's richest banker says

Private banks’ loan books grew at an annual 11.3% as of March, according to RBI data

A gauge of private banks’ shares fell about 20% in the past year, half as much as the 41% loss in state-controlled banks’ shares on the National Stock Exchange in Mumbai. EPA

Overseas investors should look to invest in Indian digital to consumer sector companies now as the economic fallout of the coronavirus pandemic makes valuations of businesses attractive, Asia’s richest banker said.

“I have always believed you have to invest in India when things look more challenging,” Uday Kotak, the managing director of Kotak Mahindra Bank said in a conversation with David Rubenstein, the co-founder of Carlye Group at the Bloomberg India Economic Summit Thursday. “That’s the best time to put your money to work.”

With half a billion Internet users and growing, overseas investors had been pouring money into Indian companies in sectors from e-commerce to digital payments -- similar to the early days of China’s digital boom. The sector’s importance has only increased this year as the Covid-19 pandemic pushed the South Asian nation to impose the world’s biggest lockdown in late March.

Mukesh Ambani, who’s Asia’s richest man, raised more than $20 billion this year, selling 33 per cent of his technology venture Jio Platforms to investors including Facebook and Google. His Reliance Retail Ventures has embarked on its own fund raising spree, mopping up $5.1 billion from private equity and sovereign wealth funds in the past two months.

The “right sectors” to invest in India now include digital, e-commerce, technology, pharmaceutical, and consumers, Kotak, founder of Kotak Mahindra Bank said. The health care sector is already seeing a surge in investments. KKR & Company said in July it would acquire a controlling stake in JB Chemicals and Pharmaceuticals, while Carlyle Group purchased a 20 per cent stake in Indian billionaire Ajay Piramal’s pharmaceutical business.

“The best place to invest in the world outside of the US over the next ten years or so are certainly going to be India and China,” said Mr Rubenstein. “India has not had as much capital from outside as China has had, but I do think in the next ten years that would change, and India is increasingly seen as an attractive place to invest for foreign capital.”

The nation’s strongest private banks had skirted the shock waves that struck the state-owned banks and the shadow lenders in recent years, and which have left those sectors struggling under mountains of bad debt. Private sector banks have been garnering market share at a rapid pace with faster loan growth when compared with their state sector peers, which have avoided stepping up new lending due to a legacy of bad debt.

That out performance has also reflected in the lenders’ shares. A gauge of private banks’ shares fell about 20 per cent in the past year, half as much as the 41 per cent loss in state-controlled banks’ shares on the National Stock Exchange in Mumbai. In comparison, the index of the top 50 firms on the NSE rose about 2 per cent during the period.

The banking sector is “ripe for significant structural change,” Mr Kotak said. The market share of private sector banks in India will rise to about 50 per cent from the current 35 per cent over the next decade, according to Mr Kotak.

Private banks’ loan books grew at an annual 11.3 per cent as of March, more than three times the pace of state-controlled banks, according to RBI data. If asset quality starts to deteriorate, their bad-loan ratios could rise from the 4.2 per cent recorded in March, which was well below the 11.3 per cent for state lenders.

Mr Kotak also addressed questions about succession. There are no rules as of now that cap his tenure at the Mumbai-based bank’s helm, he said, adding that the lender has measures in place for long-term succession planning. At a later stage, and “not in the near future,” he might consider a role as a non-executive director of the bank he founded and manages, Mr Kotak said.

The Reserve Bank of India has proposed a 10-year cap for bank founders who remain as CEO or full-time director. That could mean Mr Kotak, 61, has to step down from his current role in Kotak Mahindra Bank by as early as 2022 upon the date of implementation of the final rules.

The billionaire banker has been the chief executive of the bank for 17 years. Mr Kotak had also cut his stake to 26 per cent from nearly 30 per cent, settling an unprecedented court battle with the RBI earlier this year.

In the bank, “we are 26 per cent shareholders as a family, and we are very committed to continuing as long-term owners, shareholders and value creators for all shareholders,” Mr Kotak said.