Coming to the operations of Crisil, last year you broke into newer markets such as rating of educational institutions and subordinated debt of foreign banks. So how would describe your target market and do you see this changing in the foreseeable future?
The target market for all businesses will have to keep changing if they have to grow. And in market like ours it's only that much that we can do. Today most of the easily rateable companies or for that matter even the more difficult companies have already been rated. So they have to comeback with fresh programmes which will give us business.
So what will drive your business from hereon?
We have to therefore create new segments and open up new segments for ourselves. Very clearly that's the picture. And that's what we've been doing. If you look back, infrastructure rating was not there two or three years back, we created that. The rating of municipalities was opened by us. State government rating was not there, we created that segment too. Four or five years back, banks were not being rated. We rated them, now others (other rating agencies) have come in.
Securitisation is another big area. If I look at the financial system in the country one of the major challenges is capital adequacy. And for which there are two variables. Either you put more capital for the assets that you are carrying or you reduce the assets on your books and live with the existing capital and achieve capital adequacy. And clearly where there is a pressure on not being able to recapitalise on a regular/recurring basis all the time, you have to do both. We can't see how the Indian financial system can sustain a growth of 20% that they want and they can't not grow because of the NPA (Non Performing Asset) problem. They really have to keep growing the asset side to lessen the impact of the NPAs. For any financial institution growth is life. If you don't grow, you're dead. Even the strongest financial institution globally cannot afford to not grow. But if you're going to grow 20%, you have to have a way of growing your capital 20% every year. If you are able to charge margins of such nature that you can add 20% to your reserves every year that's great. But with the competition level being where it is and with the globalisation coming in there is no way to charge that kind of margins to be able grow your capital at 20%. Assuming a 5-6% growth in the reserves you have to look at 10-15% growth in fresh equity which is not going to come from the market, nor from the owners. So we are saying there is no alternative but to securitise your assets and reduce your risk weighted assets. There is no way that the Indian financial system can do without securitisation.
Among educational institutions we are finding the better educational institutions are strongly entrenched and future looks stable. Their future fee potential is imminent even though there is no contract but behaviourally we can say that there are good prospects for them to continue to get future fees which we are saying that why don't you bring forward and make a bond issue now so that you can accelerate your facility building and repay out of future fee.
When do you revenues from these businesses flowing into your books?
Though these businesses are new businesses they need not take long. But issues like securitisation are taking long not for business reasons but for various other reasons. We have gestated with securitisation for the last four years. But we've not made much headway so far. May be the impetus to do that has not been felt by the Indian financial system so far.
In terms of our own growth rate, I am not very bullish, because ultimately ratings have a big linkage to investment activity. And investments in this country are some time away both due to overcapacity and lack of capital. So huge borrowings programme for funding fresh plants is going to take some time.
But I see three growth avenues. First, securitisation, where we've done one deal. We've done the rating, it will be opening up sometime in June. If that is success then others will follow. Then there will be a regular flow. What is encouraging is that RBI and other regulatory bodies are realising that this is a good thing and they are putting in a lot of efforts to streamline legal issues. The same is the case with investment in infrastructure. That is the one investment activity we are looking forward to. It has been flattering to deceive. The main reason for that is policy. It is possible to envisage a policy miracle that could happen so that a huge number power projects, road projects, port projects could come, then the fund requirements would be huge which would translate into ratings for us. This also is a bus we've waited for the past four years.
And third is insurance. This will also not happen in the current year. This year by the time insurance companies come in, it will be the end of this year. These are the upsides in the medium term. We should grow without these big ticket items at a more sedate rate of 10-15%.
Where do you see Crisil 5 years down the line
Five years down the line Crisil will be very different. Infact, I would say that the domestic rating business would only contribute 50% of Crisil's revenues.
We have taken two major diversification initiatives, both predicated on our existing strengths only. One we feel that our existing strengths are our analytical ability, our credibility and our recognition in the market place. Most of our clients, those who use our ratings or our research reports are global players. We have a very strong working relationship with Standard and Poor. We want to leverage all this and replicate what we are doing for the Indian market to other markets also. So that will be a major growth engine.
The issues that I've talked about are also the reason that if we continue to remain India focused, we would always be bumping against something like this or the other. Today our entire top management (which includes the Director level and the Head level) has done assignment's abroad, worked with S & P or somewhere else. We basically wanted to pit ourselves against our counterparts, in terms of competency, where do we lack, what should be done. Today, we are very confident, very comfortable that we can do what an S & P does, what a JP Morgan does, whether in equity analysis, business analysis, industry analysis or debt rating. So we have been working with S & P and done our first assignment for them.
Five years down the line, our intention is to be a 100% global company in whatever we do. The same goes for our research side and also for our advisory side where we have tied up with NERA of the USA for advisory assignments in other parts of the world. That will be a major focus of growth.
The other would be the work on the medium of the web. We are very serious about it. But just because it's the net (Internet) the business fundamentals don't change. So if I make an investment, I want to see returns one year down the line or one and a half years down the line. I am also very much convinced that when you bill a brand below what you think the market price for that product is you are actually destroying the brand. Which means in simple terms that if you're giving away your product free at some point in time when you want to charge, the price of inflexion is going to be very high. And your comfort level that you will be able to retain most your customers in my opinion will not be very high. We feel that net customers or eyeballs are also a commodity and at some point in time we'll see that price elasticity of demand will be very high. Because the industry is trying to spoon-feed them at below price. You may want to charge but there is another guy who looks like you but who is willing to give it free.
We want to leverage on what we've done but we don't want to restrict ourselves only to that. We have struck deals with brokers and other portals especially a lot of horizontal portals and some vertical portals also. We charge our fees and if they want to disseminate the information free that is for them to decide. We would like to see if those can be turned into more enduring partnerships and then based on that develop other business models.
We would off course have our face to the world, which is our site crisil.com. We have a separate team headed by Mr. Mukaram Bhagat who was Editor of the Economic Times apart from being in the equity market also. We are serious about that business and we think that it has a lot of potential. It will make money on its own strength only some years down the line. So we want to leverage that by doing these bulk deals of information sale.
These are two new engines we have thought for ourselves.
A word on any of the personalities that have influenced you...
Mr Vaghul. I learnt a lot of value systems from him. These include business value systems, which are central to the way I function today. They have given me a lot of strengths in terms of the ability to face upto challenges. A lot of self confidence, that whatever we do is good. A lot of insights as to how to look at business. These value systems have also been good in terms of my ability to deal with people and that in our business is very important. So, I would say that he's been a major mentor for me.
Your favourite books...
In the functional domain, I was very impressed when I read, long back, 'The Mind of A Strategist' by Kenichi Ohmae. I read a lot of books quite regularly but that was something that actually philosophically changed the way I started looking at businesses, long back and I still keep reading it quite often. But my favourite readings are light readings Jeffrey Archer, Ken Follet, John Grisham.
To me every rating note is a story book. It talks about a strategy, it talks about leadership, it talks about people, it talks about business. So I get a lot of managerial insights by reading our rating notes itself. I read some of these books on investment strategies by George Soros, which again I quite liked. but as a rule I read more of the light stuff.
Back to the first part of the interview