Business Today

The Rs 29,000-crore surprise

With a market value of Rs 29,000 crore and a net worth of Rs 8,000 crore, the eight-year-old Indiabulls group has sky-high ambitions. Property development and consumer finance are the current thrust areas. Retailing, insurance, banking, mutual funds, power and telecom are on the cards.

By Mahesh Nayak        Print Edition: October 21, 2007

With a market value of Rs 29,000 crore and a net worth of Rs 8,000 crore, the eight-year-old Indiabulls group has sky-high ambitions. Property development and consumer finance are the current thrust areas. Retailing, insurance, banking, mutual funds, power and telecom are on the cards. Chairman Sameer Gehlaut (34) and Co-founder Rajiv Rattan (35) are in build-up mode, but are the foundations strong enough?

February 2000: On a wintry morning in London, four gentlemen get into a huddle at the headquarters of Mittal Steel (now Arcelor-Mittal), the world’s largest steel manufacturer. It’s biting cold outside, but inside an air of warm optimism prevails.

Sameer Gehlaut and Saurabh Mittal, two of the co-founders of Indian stock broking upstart Indiabulls Financial Services Ltd (IBFSL), are in the last lap of negotiations for angel funding from steel baron Lakshmi N. Mittal (no relation to Saurabh Mittal). Present at the meeting are Mittal’s son, Aditya Mittal, then Vice Chairman on the board of directors of LNM Holdings, and Rishi Khosla, Mittal’s fund manager.

The three promoters of Indiabulls (the third is Rajiv Rattan), all alumni of IIT Delhi, had mandated a Mumbai-based investment bank, Avendus Advisors, to scout around for an investor.

Sameer and Rajeev
Gaurav Deepak, cofounder of Avendus, stumbles upon Khosla, who is sniffing for potential growth stories across the globe. Aditya Mittal and Gehlaut, from Mumbai, begin negotiations on the phone. Mittal obviously liked what he heard. The numbers—an investment of $1 million at Rs 5 per share—are agreed upon telephonically. The deal is signed in London.

“It was pure gut feel that made us invest in Indiabulls. We backed the individual after we were confident about his business plans (e-trade broking) and execution capabilities,” says Khosla. Adds Sameer Gehlaut, the “individual” Khosla is talking about, and the Founder & Chairman of the Indiabulls group: “Mittal saab came in as an angel investor in Indiabulls perhaps after seeing the success of similar business models in the US, of firms like Charles Schwab and E-Trade.”

The Early Days

It’s an investment Mittal won’t forget in a hurry. For one, it was his first in India. More importantly, it’s yielded him returns of a phenomenal 100 times. ‘Of all our global investments, Indiabulls has given us the highest return,” beams Khosla. Mittal was back seven years later to put more money into the Indiabulls group.

The difference? He was now investing at not Rs 5 per share but at Rs 531 per share (via an issue of global depository receipts, or GDRs). Mittal today has a net worth of Rs 1,200 crore in the group by virtue of LNM India Internet Ventures’ 1.85 per cent in flagship IBFSL and 1.60 per cent in a recently de-merged property developer, IBREL. In addition, the global metals magnate has committed Rs 120 crore to a multi-project special economic zone (SEZ) that IBREL is putting up at Raigad in Maharashtra.

Mittal is just one investor—albeit the one with the highest profile —for whom Indiabulls has created mind-boggling wealth. Others like hedge fund giant Farallon, which invested $1.5 million at Rs 25 per share in 2004 (just before the company’s initial public offering, or IPO), and Transatlantic Corporation, a fund that is promoted by Madrid-based Harish Fabiani, which put in $2 million along with Mittal, are just two other financial investors that made a killing in a relatively short span of time.

Gagan Banga/ CEO/ Indiabulls Credit Services
Gagan Banga
}Prominent foreign institutional investors (FIIs) like Deutsche Bank, Citigroup, Merrill Lynch, Goldman Sachs, Morgan Stanley and Fidelity have also picked up stakes in the two listed companies. And of course, along with these financial investors, the promoters themselves have raked in the moolah. Consider: Since listing on the stock exchanges in September 2004 at a price of Rs 25, Indiabulls has appreciated some 60 times.

Two years ago, the group’s market cap was a little under Rs 3,000 crore. Today, the net worth of the three founders itself, by virtue of their collective 27 per cent holding in Indiabulls Financial Services and 24 per cent holding in Indiabulls Real Estate, is two times that figure. The group’s market cap as of last fortnight? Rs 29,000 crore,which pitchforks it into the top 20 business conglomerates in India, by market value.

Beyond Broking

Gehlaut is now set to create more value by taking the securities business out of IBFSL and spinning it off into a separate company, Indiabulls Securities Ltd (ISL). IBFSL will focus on businesses like personal loans, loans against property, home loans, lending to small & medium enterprises and used commercial vehicle loans. “The consumer finance business is 10 times the size of broking.

If corporate growth is expected at 15 per cent, financial services will grow at 30 per cent. And in the next 10 years we will grow 10 times in the consumer finance business from $3 billion to $30 billion (in market cap),” says Gehlaut, who after working with petroleum and energy giant Halliburton in the US came to India to start a mining and earth moving business. In October 1999, along with Rattan and Mittal, Gehlaut started Indiabulls after acquiring a Delhi brokerage.

Analysts tracking the group expect these three companies to rack up total sales of roughly Rs 3,600 crore by the year ending March 2008, with profits of around Rs 1,500 crore and a net worth of a little over Rs 10,000 crore.

That would be a mind-boggling growth of 228 per cent in profits (at the group level) over the previous year. Significantly, broking, the business that Indiabulls started out with, will account for just 10 per cent of revenues.

That’s not bad going at all for an eight-year-young upstart. “We were extremely lucky to be at the forefront of the India growth story. We did not have much clarity when we started with the broking business.

Divyesh Shah/ CEO/ Indiabulls Securities
Divyesh Shah

However, as we went about penetrating the retail market, we realised there was huge untapped potential in the consumer finance and real estate businesses,” says the 34-year-old Gehlaut. In real estate, IBREL has put together a land bank of 4,000 acres, at an acquisition cost of over Rs 2,250 crore. That makes it the country’s third-largest property developer, after DLF and Unitech—again, not bad for a company that came into being only six months ago.

The real estate push also gives Indiabulls an opportunity to diversify into another sunrise sector, that of organised retailing. Here, the promoters are exploring formats like hypermarkets and multiplex-cum-mall, and are busy acquiring properties for this purpose. Gehlaut has earmarked Rs 1,500 crore for this project, and has been busy acquiring land via auctions in cities like Madurai, Jodhpur, Hyderabad, Agra and Kanpur. “Financial services, real estate and retail are the key sectors for growth that will deliver double-digit growth over the next 20 years. Retail is a missing piece in our pie and we are seeing it as a definite business option as the sector coincides with the real estate story,” says Rattan, the 35-year-old CFO of the group, who worked as an operations manager for Schlumberger before cofounding Indiabulls.

To be sure, though, it isn’t just retail that’s on the drawing board of Indiabulls’s corporate office in South Mumbai (the company will soon move to the top three floors of the 25-storey commercial complex it is developing in central Mumbai on the land where Jupiter Mills once stood; Indiabulls had acquired the mill for Rs 400 crore).

Last fortnight, the top brass revealed to BT a clutch of proposed ventures. These include plugging gaps in the financial services portfolio. A foray into life insurance via a whollyowned subsidiary (although a foreign partner is also being mulled), a mutual fund, and a credit cards business are on the cards.

Rashesh Shah/ CEO & Managing Director/ Edelweiss Securities
Rashesh Shah
Regulatory approvals are pending for all these ventures. Indiabulls is also keen to merge with an existing bank by swapping shares, rather than applying for a new licence or throwing its hat into the ring whenever a bank is put under moratorium by the Reserve Bank—the company had earlier unsuccessfully bid for United Western Bank.

Outside of financial services, Indiabulls will be one of the many firms keen to redevelop the slum of Dharavi. It also has telecom in its sights—it has applied for licenses for 22 circles, although operating these circles will be a strategic partner. For its Nashik SEZ, Indiabulls has also lined up a 500 MW power plant. For all these new ventures, the group will invest a little over Rs 4,500 crore over the next couple of years.

Battling Blemishes

Such aggression, such risktaking, such haste haven’t been heard of in a long time—certainly not from an eight-year-young wannabe mega-corp. Are Gehlaut and company for real, and are they here to stay? These are questions that sections of the market have been pondering for some time now. Competitors who’ve been around for decades privately wonder how Indiabulls has been able to grow at such a heady pace; others can’t hide their awe about the group’s marquee of investors. Blame it on envy or competitive rivalry, but most of Indiabulls’ competitors in the broking space have few kind words for them—all of them in anonymous whispers, needless to say.

The charges range from an expertise in “managing the environment” to trading with investor money, without their knowledge. Says the promoter of a Mumbai brokerage: “At times they’ve got away with murder (figuratively, of course) courtesy their financial muscle power and close proximity to 10 Janpath (the residence of Sonia Gandhi, President of the Congress party and Chairperson of the ruling UPA).” Adds a fund manager: “Corporate governance levels are very low at the group. I wouldn’t touch the stocks with a barge pole.”

Reinforcing such theories are a couple of facts: Market regulator, the Securities & Exchange Board of India (Sebi), came after Indiabulls not once, not twice but three times. This, argue detractors, is evidence of the malpractices taking place at the group. However, on all three occasions, Indiabulls emerged unscathed, getting away with just a rap on the knuckles (see Run-ins with Sebi). In fact, during last year’s IPO scam, when Sebi ordered a ban on Indiabulls for allegedly trying to corner shares during allotment, the order was dust-binned in less than 24 hours. The company top brass was apparently able to convince Sebi that the IPO shares heaped in their accounts were those of clients.

Ambareesh Baliga/ Vice President/ Karvy Stock Broking
Ambareesh Baliga

As one market man points out: “The day after the order was passed the doors of Sebi were opened as early as 6:30 in the morning for them.” This proves that their connections with people in power are adequate to override the regulators, say the Indiabulls baiters. Others explain that most of the capital raised by the broking firm was used to fund market operators— a decidedly risky business but one that’s paid rich dividends. Rajesh Boghani, a dealer with the Mumbai-based Parag Parikh Financial Advisors, says: “Funding trading activity in the market was the key reason for Indiabulls to do well. It is a risky business and they managed to excel in it.”

In case you’re wondering how such blue-blooded investors agreed to invest in an ostensibly dubious firm, the detractors point to some hanky-panky here too. Saurabh Mittal, the promoter based in the US, is a partner and portfolio manager at Noonday Asset Management in the US. Before that, Mittal had joined Farallon in 2001 (after co-founding Indiabulls), the same hedge fund that today has an exposure of Rs 365 crore in the group.

Mittal may no longer be with Farallon, but Noonday manages its money. Dalal Street veterans question the ethics of a promoter also being a manager of the funds that find their way into the same company.

The Indiabulls top brass attributes such perceptions—that’s all they might be as there’s little evidence of any malpractice—to resentment amongst sections of the broking community, many of whom have been at it for decades and are still smaller than the Johnny-comelately.

Gehlaut is exasperated by such aspersions and goes on to systematically decimate each of the charges. Let’s start with the political connections. “If we had those kind of links, why then are our licences for starting new businesses (such as insurance, credit cards, mutual fund) still pending with different regulators? Why was our bid for United Western Bank rejected (IDBI eventually got it)? Fact is people envy us for what we are today. They haven’t been able to achieve what we have done in just seven-eight years,” thunders the usually soft-spoken Gehlaut.

Let’s move on to the run-ins with Sebi. Consider the first one, during the penny stock scandal of 2005, when micro-cap stocks in the B2, S and Z categories were rigged up to ridiculous levels. Sebi came down on Indiabulls, amongst other brokerages, for contributing to the increase in turnover in a few penny stocks. This in turn could be construed as price manipulation by these brokerages. Indiabulls’ defence has been that it is not possible to keep a tab on such rogue clients, and the contribution to turnover from such stocks was a minuscule part of total turnover. However, since that scandal Indiabulls decided not to trade ever in such stocks; today they restrict themselves only to the large and midcaps in the A and B1 groups.

Continued on the next page...

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