Three From HDFC's Top Brass Are Gone. What Will Its New Culture Be Like?

• <00:51> Three of HDFC's Top Brass Are Gone. What Will HDFC Bank's New Culture Be Like?
• <08:46> India's bank deposit profile shifts as people put money for shorter periods, An Analysis with M B Mahesh
• <20:47> Do You Have An India Strategy, the latest Bullish Report, From Academics This Time
• <26:14> Apple Hits $3 Trillion

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TRANSCRIPT

NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.

Good morning, it's Monday the 3rd of July and I'm Govindraj Ethiraj coming to you from Mumbai, India's financial capital and most rocking city in the world, when it is not pouring cats n dogs

Our top reports for today

- HDFCs Three Top Brass Are Gone. What Will HDFC Bank's New Culture Be Like?

- India's bank deposit profile shifts as people put money for shorter periods. Analysis.

- Do You Have An India Strategy, the latest Bullish Report, From Academics This Time.

- Apple Hits 3 Trillion.

HDFC's Culture

Many years ago, into my first job, I visited Ramon House the HDFC (now HDFC Bank) headquarters in Churchgate in south Mumbai. I was looking for a possible loan and to understand what it would take and whether I would qualify.

With some trepidation that I would be shown up for my lack of savings, I first asked around if anyone knew anyone. Turned out no one did and everyone, including senior journalists, told me the HDFC system of interacting with customers or potential ones was objective.

I visited Ramon House again as a customer two years ago and was struck that almost nothing in the building had changed in almost 25 years. The area where you wait to meet a loan officer, who is spread around is almost the same, except for a few spots of brightness and newness here and there. The loan officers were as friendly and efficient as before.

It did strike me that for all the wealth - billions of dollars - HDFC had created in the interim and pile of cash in hand, very little of it seems to have found its way back to building a swankier office.

By the way, the name board on Ramon House now says HDFC Bank, it was changed overnight on July 1 with the same being done across the country.

Click HDFC.com and it will take you to HDFCBank.com, so the transition has been swift and complete. Of course, it's been on the anvil for almost a year so everyone has had time.

Now, there is an interesting transition moment here which people may or may not have noticed.

The three senior people who helped, built and scaled HDFC are all out at one shot. Deepak Parekh was chairman emeritus and has stepped down, Keki Mistry, who ran the resource side of the business as well as vice-chairman and CEO has stepped down and so has Renu Sud Karnad, widely credited with the operational growth and excellence in service that HDFC is so well known for. All three have effectively retired.

Mistry and Karnad will however join the HDFC Bank board but as independent directors.

One story goes that since HDFC could not compete on the interest rate or scale with banks and other borrowers in the early 1990s, it decided to focus on trust by taking a gamble of sorts.

The move was led by then executive director Nasser Munjee, who later started and ran IDFC, and Deepak Satwalker who moved on to set up HDFC's insurance businesses, possibly, among others.

Basically, HDFC would give away deposit certificates to anyone who walked into their office and wrote out a cheque. This was obviously unheard of since others would take six weeks or so to mail the deposit certificates after obviously the cheque had cleared and there was an institution handing it out in advance before even the cheque cleared!

This, among other moves, laid and expanded the foundation for making trust the focus of the message and as a follow-on, the building of trust through word of mouth and experiences.

In the early 2000s, ICICI Bank, under KV Kamath had aggressively stepped up its home loan business, including using direct sales agents for home loans.

Somewhere in late 2003, ICICI Bank overtook HDFC in disbursements, a big development since till then HDFC had appeared unchallenged for a long time.

ICICI Bank went to town on the matter with advertisements saying they were number 1 in disbursements. HDFC insiders say a month or so later, they overtook ICICI again. Happy with the turn of events, a new campaign was created with advertising agency FCB Ulka and the teams trooped into Deepak Parekh's office.
Who promptly shot it down saying putting out advertisements, particularly in this context, was a waste of time, energy and money or words to that effect.

Parekh's approach was that when it came to HDFC, people and its customers had to recognise that it was the leader and not advertisements.

HDFC did and does its share of messaging and has worked with agents. It has 20,000 active ones and 50,000 in all but they all work on sourcing deposits and capital for HDFC rather than source customers. What their precise role will be now will be interesting since as a bank the process of raising deposits is different, though does need a marketing push.

To come back to the transition now. Culture, as illustrated partly by the above two anecdotes is a critical component of what makes HDFC and now HDFC Bank what it is.

The departure of the trio will surely mean a culture transmission gap, particularly through the transition.

On the other hand, Arvind Kapil, who is HDFC Bank's country head of unsecured, home, mortgage & working capital loans is tipped to be taking over the home loan part of the merged entity, or as I could see Karnad's core portfolio. Kapil is also an old HDFC hand, having been around for 25 years, after joining GE Countrywide.

But Karnad's portfolio included overseeing HR, communication, customer relationship management and credit risk.

This will likely get split up between different hands in the new HDFC Bank.

One thing that most HDFC senior managers don't do is talk or engage freely with media, except on very specific, mostly product-linked announcements, as I noted for Kapil who has spoken on 10-second loans and 30-minute car loans, all products that HDFC Bank has launched and would have liked people to know about. At a later point, I will visit such products, the outcome of what seems to be pressure from collapsing fintech companies rather than genuine consumer demand.

HDFC has mostly spoken through Parekh and Mistry. Between the two, for more than a decade, it's been the latter who speaks on the company.

Karnad, who I have met a few times, seems to totally abhor any kind of formal media interaction, or even informal.

The same broadly goes for most if not all HDFC folk. Aditya Puri who built and took HDFC Bank to where it is today, rationed his public appearances and interactions and even post-retirement from HDFC Bank has maintained the same profile.

The new entity and more importantly the people in it, led by MD and CEO Sashidhar Jagadishan, who joined HDFC Bank in 1996, have roughly similar personas, at least optically and from my vantage point as a financial journalist.

Jagadishan said on Saturday that post-merger which came into effect on July 1, HDFC Bank would grow at an accelerated pace which could create a new HDFC Bank every 4 years and will add some 1,500 branches every year for some years.

The strategy with the combined entity is obviously to cross-sell and create deeper bonds and linkages with customers of loans and depositors and then to other services HDFC offers. How this will all play out is a little early to say.

​​According to Bloomberg data, the merged entity will have a market capitalisation of $172 billion, the most after JPMorgan Chase, Industrial and Commercial Bank of China (ICBC) and Bank of America. It will be the second highest in India after Reliance Industries which is at around $210 billion.

By the way, HDFC might seem like a giant because of its age, origin and pedigree but it has only 4,000 employees.

HDFC Bank, the child of HDFC since August 1994, having started in a single room in the Ramon House building on a different floor from the one I visited, today has over 140,000 staff, as per figures from last year.

India's Shifting Deposit Profile

It's early to jump to conclusions but something interesting is happening in the way Indians are putting their money in banks, or more likely not.

A quick background, banks have been a key vehicle for savings protection and small growth, mostly through fixed deposits, still trusted by most Indians.

India's aggregate savings rate for 2021-22 is at 30.2%, which peaked around 37% in 2010, went down and is now up again.

In recent years, financial savings have been seeing a shift with most households pouring their savings into mutual funds, equity and real estate, the last of which has seen a sharp jump. The share of mutual funds (MF) in households' financial savings stood at 6.3 per cent last year.

A report authored by researchers at the National Institute of Public Finance and Policy says that during the past five years, savings in physical assets ranged between 58-60 per cent of household savings. Last year, the share of savings in physical assets jumped to 65 per cent.

Now, let's look at another trend, term deposits.

Kotak Institutional Equities banking analysts looked say they are seeing a few unique trends: (1) deposit mobilisation by banks was skewed in the 1- 3 year window, unlike what we have seen in the past, as this bucket has the highest share in the overall deposits since we have been able to track this data;

Kotak analysts say they are surprised at the sharp change in consumer preference toward the 1-3 year bucket.

I thought I could use this opportunity to get some broader insights into the deposits landscape in India, what is changing and what is not and what we could take away at this point. To do that, I caught up with M B

Mahesh, Director at Kotak Securities and began by asking him to define the deposits landscape…

The HBR Report, Missing The India picture

I seem to find a bullish India report every alternate week, this time focussed on why MNCs must invest in India pronto. Does your company have an India strategy, ask a group of academics led by Vijay Govindarajan of Tuck School of Business and an executive fellow at Harvard Business School and also with Rajendra Srivastava, Anup Srivastava and Aman Rajeev Kulkarni. Rajendra Srivastava used to be the dean at the Indian School of Business earlier where I interviewed him.

As I pointed out last week when I spoke of P&G and Uniqlo stepping up investments, many already are and for broadly the same reasons.

And with the markets hitting new highs, well, what can you say? Just to refresh our memories, the BSE Sensex closed 803 points, or 1.26%, higher at 64,718.56 on Friday last week while the NSE Nifty 50 gained 217 points or 1.14%, to end at 19,189. All record highs of course.

To the latest report. It starts by pointing out that at the end of the financial year 2022, the price-to-book (P/B) ratio for European consumer products giant Unilever PLC stood at six.

The same number for its subsidiary in India, Hindustan Unilever, was twice that, at twelve. This difference is not because the Indian subsidiary is a young or small company - on the contrary, the Indian subsidiary is a 90-year-old company with a market cap of $76 billion. Nor is this an isolated instance.

Nestle SA, the world's largest food and beverage company giant based out of Switzerland, has a P/B ratio of six, while its subsidiary in India has a whopping 82; 3M USA has a P/B of 4.2, its Indian subsidiary has a P/B of 12.7; the German parent of BASF, a global leader in speciality chemicals, has a P/B ratio of just one, its Indian subsidiary has four; the German parent of Siemens, a heavy industry leader, has a P/B ratio of two, its Indian subsidiary has ten.

These differences are so vast the authors argue that in some cases the Indian subsidiary may be valued more than the parent on a standalone basis.

The chasm - their words, not mine - is because Indian firms have better growth prospects, higher profitability, and more efficient asset utilisation, all the while when the parent languishes in its home market.
That's why every multinational must have an India strategy, or else it will miss out on one of the most promising market opportunities in the world today, they say.

Switching to growth, over the last five years, the Compounded Annual Growth Rate (CAGR) in revenues for Unilever India was 9.6%, which is four times faster than that of 2.2% of Unilever's parent.

Note that the parent's growth rate includes that of the Indian subsidiary, without which, its growth rate would be even lower. Turning to profitability, the return on assets for the Indian subsidiary is 11% against 8% of the parent.

What is surprising is the higher profit margin for the Indian subsidiary, of 17%, against 13% of the parent.

It is surprising because Unilever's products are priced cheaper in the Indian market, because of the lower purchasing power of its target segment.

Higher profits could be due to higher market concentration and pricing power, but that seems unlikely because of fierce competition from several sources including other multinationals such as Colgate, innovative local competitors like Patanjali Ayurved, and the availability of numerous cheaper alternatives addressing the same market, including from the informal sector.

The higher margin is therefore most likely because the cost of production and distribution is lower in India, which is indeed the case.

The same story plays out for other multinationals. Nestle India earned a profit margin of 14.2% as against that of its parent of 9.8% and did so while generating a sales-to-assets ratio of 196% as against just 69% for its parent. Siemens India had a profit margin of 10.6% against 4.8% for its parent, and a sales-to-assets ratio of 91% as against 51% for its parent.

These numbers show that almost on all fronts - that is, market growth, asset utilisation, and profitability - the Indian market offers more attractive prospects than the home market for multinationals.

In order to make hay while the sun shines, so to speak, the authors argue MNCs must do three things. First, make significant resource commitments to India, second, customise products and services to local culture, values etc and third, leverage the India stack, for payments and digital payments.

All of this is obviously being done by the examples mentioned earlier and which is why they are where they are and is reflected in the performance.

I would add to that one more factor, which is the governance premium which MNCs clearly enjoy in the stock markets.

I would also add some general caution, something all MNCs who have had an on-ground presence for a few decades understand very well, the Indian market can deceive in size versus actual buying power.

The way to approach it is to grow with it over time rather than throw money at it to bribe consumers as many now collapsing venture capital-funded companies have done and quite likely are yet to come to terms with the reality that is the Indian market.

...

And before I go, Apple, just in case you missed it, on Friday became the first company in the world to close with a market value above $3 trillion dollars, close to India's GDP as it happens, though these figures are, quite literally, apples and oranges.

Apple is now worth about double the value of longtime rival Google and seven times that of energy giant Exxon Mobil which was the world's most valuable company for many years, the WSJ said.

Finally, good news. The presumptive 20% tax on international credit card spending, subsequently relaxed to above Rs 7 lakh, has been put on hold by the government.

The detailed and somewhat confusing notification as I could read it still leaves the door open to do it later, but overall resistance including from banks who said their systems could not manage this now, has worked.

India would have mostly been the only country in the world to tax its citizens for using their credit cards overseas, although they could have netted it off at the end of the year.

Most business people complained that the 20% tax was an added headache also because the reason for this was not at all clear to anyone. They of course were generally alluding to all the other regulatory headaches they had to face.

That's it from me for today, have a great Monday and a week ahead. See you tomorrow!