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Monday, December 18, 2006

If London & NY can do it, then so can India!

She is one of the crop of Generation Next investment bankers who dabble in global depository receipts, GDRs, in the US, do some interesting mergers and acquisitions, M&As in London, sell equities to foreign institutional investors, FIIs and have a world of experience in a very short span of time. The managing director at Kotak Investment Bank, Falguni Nayar is one such bright spark.

She began doing her homework on stocks early when her father was investing in them, she would look up P/E margins in the newspaper. It was then she knew she wanted to go on to do an MBA course, so IIM - Ahmedabad beckoned. She liked everything in her course but soon decided to specialise in finance. She graduated and went to work with Ferguson & Consulting, which she credits for giving her "a very good, all-round experience in the aspect of management."

But all the same, she did move on to Kotak Investment Bank in 1993. She joined the M&A department. She told CNBC-TV18, "Around the early 90s, Kotak had set up an investment banking division and they were doing a lot of equity deals and they wanted to build a strong M&A department and they felt that I had the right skill set. So I had to build it from there. Fortunately for me, within six months I got transfered to London and I moved into the equity business. So I set up our London office to sell equities to FIIs as well as high networth individuals, HNIs."

"So I think it was a good call, otherwise for many years in M&A, I may have not seen enough action. I was fortunate because by then, Uday (Kotak) had probably seen potential in me, so he asked me set up our London office. Then when I moved to the US, I set up our US office. So my career continued to progress.

In the US, she did get some experience working with Goldman Sachs for about 6-8 months. She was particularly impressed with a big name on Wall Street back then - Abby Joseph Cohen. She elaborated, Around 1998, Abby Joseph Cohen was a big name on the street and listening to her was fascinating. I must say, that I do believe in growth and I do believe in secular growth and I was convinced with her story that the US was in for further growth, even in spite of high valuation."

"I think at that time, US price-earnings multiples were around the low 20s and I thought that their accounting system was so strong and she (Abby) used to constantly highlight that compared to Europe or Japan, the US accounting (practices) was so strong, that I thought that US multiples would expand even from there.

She has also seen the internet bubble days but she acknowledges "I saw the value creation so to speak during the internet bubble days. On hindsight, it was truly a bubble. But there are always risks and at that point it didn’t feel like that. The fact was that every merger was accruing value for these firms because they were trading at such high multiples, that once they acquired some earnings, that multiple created huge market cap growth. So, it was a virtual cycle that taught me a lesson that there are (business) cycles."

Then she came back to India in September 2001. Here, she started on the sell side of equities and came across a gamut of investors. She's dealt with and serviced so many investor relationships, she has developed a couple of investment philosophies. She explained, "There are value investors who go for value stocks. There are growth investors who like growth stocks, then there are macro-investors who take a macro theme - top-down investing."

"A top-down approach is selecting the sector and then winners within that sector. So that’s the third type of investors and then you have arbitrage investors, who always try to arbitrage. It could be arbitraging differences between convertible and equities or a special situation arbitrage, where a merger ratio is announced and the stocks don’t reflect that. So those are the special situations."

"We also had investors who were long-short investors. They take a call upstream and buy downstream. They want to be short even within the intra-sector. At every stage there is may be one philosophy which is more prevalent than others, but there are investors with different philosophies in all phases of the cycle."

"Unfortunately, on the sale side you don’t have the liberty of choosing any one philosophy and just sticking to up. You have to really know your client and see what investment will suit his style."

She describes her personal style as being an optimist and a bullish person. She is also a growth investor who sometimes thinks a contrarian investment strategy may work. She said, "I believe in the structural factors and the macro economic factors, which drive growth over a longer term. So since I have a such a long-term perspective, within that, I do believe in secular growth and I think there are countries like India and China, which will see a very long-term secular growth."

"However, I have to some extent, matured. I mean there was a time when I used to really believe only on secular growth and now I truly believe that even if it’s secular growth, there will be cyclicality."

In India, she quickly moved into the flow of things and was involved with the big Maruti Udyog, MUL, initial public offering, IPO. She explained, "There are simple rules by which we evaluate a stock. What we (Kotak) thought as an investment bank did add value in terms of fitting Maruti within a (financial) yardstick with regard to international investors. While the stock was priced at 20-times historical multiples, we had worked with the company for certain improvements to their earnings model, so it was a huge success. So I think you need to have that clear judgment about what investors will think based on certain yardsticks of finance."

She's also level-headed about PSU disinvestments and about the share prices going down. Falguni reiterated, "It’s a market and there will be buyers and sellers. I mean for everyday when there is buying, there is a seller out there. So I just felt that to a certain extent, to be concerned about stock prices going down or selling in those shares was not right."

"Bankers are always working in the interest of their clients and even the bankers in the (PSU) deals were also working in the interest of clients. But it is a market and there will be some investors who will sell a particular stock during the time, when they think that IPOs are coming out and they don’t necessarily always gain because the stock may outperform during the period up to the launch. So even if the deal happens at market or slight discount to market, the stock maybe 10%-15% higher."

Apart from such hi-flying issues, she has also pioneered the GDR market - by marketing them under her own brand name. She said, "That’s where my international experience came to use, the offices (she set up) as well as the legal and compliance aspects. So I knew how it works. So when I came back, I worked with my equity team towards being one of the first Indian investment banks to in fact, lead manage as well as participate in GDR transactions in our own capacity, and similarly even on a convertible. Kotak did one of the first convertibles ever done by an Indian investment bank."

"I think this business has been done by foreign banks, but as an Indian investment bank, we are one of the first who are also offering a full service product range to our clients. So clients don’t need to come to us for domestic offerings and go to foreign investment banks for ADRs/GDRs, we are trying to offer them an integrated package."

Since, she's also looking at M&As, she has a gameplan in mind. She said, "For a successful M&A banker, sector expertise is very important and I am going to be focusing on having sector experts in as many sectors as we want to service. It’s only when you have the expertise on your sector, then you can be a true advisor to senior corporates heads like CFOs/CEOs. They really need you to be able to give them ideas on how they can take their business forward through M&As. So, you need to be very knowledgeable on their sectors."

Falguni is foreseeing a huge record volume in the IPO markets. She elaborated, "I think we are going to see a lot of IPOs as well as secondary offerings because we are in that growth phase, so there is a need for growth capital and also infrastructure - related financing will start off. Also new sectors are coming into play. So I definitely think that the markets are positioned well."

She signs off on a buoyant note feeling that Mumbai has the potential to become a powerful and truly world class financial centre, like London or New York. She has some parting pearls of wisdom for anyone looking to follow her footsteps. She said, " I would say that customer needs are important. Everything needs to be done from a customer’s perspective and you have to give excellent quality of execution, to satisfy that need."

Written for www.moneycontrol.com

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