KRISHNA GOPALAN ;BUSINESSOUTLOOK:9 NOV 2013
How India’s affluent families are creating and growing their personal wealth
A visit to Rajesh Gandhi’s sprawling bungalow in Ahmedabad isn’t complete without ice cream. As he makes himself comfortable in the large, white leather sofa in his living room, the 55-year-old Gandhi urges you to have a second helping, and a helper rushes to bring you another bowl. Most Amdavadis love their sweets but in this household, the importance of the cold dessert can’t be understated: Gandhi is the managing director of the Rs 340-crore Vadilal Industries, the ice cream business started by his great-grandfather.
Gandhi and his brothers, Virendra and Devanshu, control over 65% of Vadilal’s ownership. But, like most businessmen from this part of India, there’s little about the man or his attire that gives any indication of the family’s wealth. The only visible sign is perhaps the house itself. Spread over 1.5 acres in Ahmedabad’s tony Santosh Park Society neighbourhood, storks pick their way across its lush, manicured lawns even as some half-dozen cars — including a BMW and an Audi — line up on the driveway. “We built this house a decade ago,” says Gandhi, explaining that he and his brothers believe firmly in real estate as an investment.
“Most people do not realise how difficult the ice cream industry is. It is capital-intensive in nature with a long gestation period,” he says morosely. Top that up with a mediocre 2-3% net profit margin that most players in this industry, including Vadilal, bring to the table and the result isn’t as sweet as you’d expect. “It is so challenging that there is not too much money available to the promoters,” says Gandhi with a wry smile. What is available, though, is far from insubstantial — Gandhi’s income is not restricted to just his salary or dividend from the approximately 22% stake he holds in Vadilal Industries. “There is also some money that comes through partnership firms and royalty from the Vadilal brand,” he says, without giving away details.
And most of it, since the early 1980s, has been invested in land. More precisely, agricultural land. “People might think this is an unconventional kind of investment but it is one that has worked for the family. It started off as an experiment the first time and now this is a big part of our personal portfolio,” he says. It certainly is: land accounts for 80% of the Gandhi family portfolio, with the rest distributed in more predictable avenues such as FDs or cash, with equity being the smallest component. “Equity is a volatile investment and my mindset is not in line with that. Land is more stable and offers a steady return,” rationalises Gandhi.
Gandhi’s views are just reflective of the state of the market that we find ourselves in: over the past five years, the Sensex has just about managed to yield around 16% return. As for the other asset classes, the recent National Spot Exchange fiasco has taken the sheen off commodities, while volatility has left investors with marked-to-market losses in fixed income as yields suddenly spiked when foreign investors pulled out money from the debt market. Against such a backdrop, the preference for real estate has continued, despite concerns of a bubble building up in the sector.
In the case of the Gandhis, at any point in time, the family owns at least 100 acres of agricultural land in Gujarat, at places such as Gota, Bardoli and Bavla. “We have sold about 10% of our holding to date for a reasonable return,” says Gandhi. “Reasonable” here is defined as 1.5 times the number of years the asset has been owned; that is, land held over a five-year period has given a return of close to eight times. The 10% that was sold was in the form of plots of 400-500 sq yards, apart from 15 fully constructed bungalows. Gandhi is no hurry to monetise the rest of his land holding. “It is not just about making money right away. This allows us the option of possibly looking at an area like property development at a later date. We want to keep our options open,” he says.
Gandhi is only one of the many wealthy entrepreneurs Outlook Business spoke with who were convinced of the merits of real estate, in one form or the other. Consider CK Ranganathan. “In the long run, I am convinced no asset class can beat real estate,” says the chairman and managing director of the Rs 1,000-crore FMCG rising star, CavinKare. As much as 95% of his personal wealth is in real estate, where Ranganathan prefers buying land to residential or commercial buildings. “Land offers the best returns,” he declares. The tilt towards this asset class came after he tried investing in stocks, financial instruments and commodities between 2005 and 2007. After the 2008 meltdown, the 52-year-old Ranganathan recalled his grandparents’ advice to him as a youngster. “They always advised me to buy land, and I decided that was the best thing to do. Asset allocation changed from 50% in stocks in 2007-08 to 95% in real estate,” he goes on to say. The remaining 5% is divided between gold and stocks.
Another billionaire who thinks real estate is a good bet is Girish Patel. In late 2010, Patel sold his 30% holding in Paras Pharmaceuticals to Reckitt Benckiser for an impressive Rs 950 crore. A key reason why the 54-year-old Patel sold his holding in Paras was his son, Arpit’s lack of interest in the business. But the father and son have discovered a common interest these days — real estate — and as much as 50% of the sale proceeds of the Paras holding has found its way into this business, with the 28-year-old Arpit in charge of the new business. “This includes commercial projects that I am developing in Gujarat, Bengaluru and Pune. We see a huge opportunity in commercial real estate and will look at investing in real estate funds as well,” says the senior Patel. There is also a low-cost housing project coming up in Sanand, very close to Tata Motors’ Nano manufacturing facility.
In time to come, Patel will focus more on real estate and is already planning the construction of a new swankier office in Ahmedabad. The business model will be kept simple. “We will use the leased rental discounting model [where banks lend against rental receipts that come from lease contracts]. This is easy to implement and one can make returns of as much as 16%,” explains Patel.
And to achieve that, Nayar, along with husband Sanjay, who heads PE firm KKR’s Indian operations, believes in diversification of wealth classes. The couple also has substantial equity exposure through Esops, so the Nayars haven’t put any “significant incremental money beyond that” in equity. Still, equities account for another 40% of the Nayars’ net worth.
Indeed, after realty, equity is the preferred choice of many of India’s wealthy, volatile stock markets notwithstanding. Of course, for many of them, that simply means investing in their own companies.
Investment begins at home
For many rich Indians, equity investments still remain a key component of their portfolio simply because dividend income is a substantial part of their income. Harsh Mariwala, chairman and managing director, Marico, is a case in point, where dividend is the single-largest source of income: 100% in FY13 and 70% the previous year. Mariwala says his wealth philosophy is one that is “long term and necessarily open to risk”. So much so that he doesn’t even have an insurance policy. Not surprisingly, then, he is immensely comfortable with equity as an investment option. “Between 1996 and 2006, most of my earnings were invested back in the company. This was when I increased my shareholding in Marico, which was led by belief and trust in the company,” he explains. Today, Mariwala holds a 32% stake in the Rs 4,800-crore firm. Marico’s impressive performance at the bourses has been hard to miss and, on a market capitalisation of Rs 13,975 crore, Mariwala’s own holding is worth a shade under Rs 4,500 crore.
In 2006, though, the 62-year-old Mariwala decided to look at other investment options. “I felt I had too many eggs in one basket and that’s when I stopped buying more,” he says. Still, 95% of his portfolio is equity-based and most of that is in Marico. “It has delivered the best return thus far and I have not had to look at too many opportunities outside,” Mariwala says with a broad smile. “My philosophy has been to invest in equities with at least a three-year outlook. If it can deliver 20% return on an annualised basis, I would consider that a good investment.”
The remaining 5% of Mariwala’s portfolio is invested in avenues such as seed funds, private equity, real estate and a small part parked with New Horizon Wealth Management. The seed fund investment is through Blume Ventures, which focuses on early-stage tech-focused ventures. “I like the idea of working with individuals and that’s why I backed a seed fund,” he explains.
Clearly, with a high risk-taking mindset, more conservative avenues such as fixed deposits and bonds aren’t part of Mariwala’s approach. Even investment in the current favourite — real estate — has been limited to need-based purchases. “There are a couple of apartments here and there and that is only to address needs at a personal level,” says Mariwala.
Nor are precious metals on the radar. Rather, the investment here is restricted to his wife’s jewellery. “I think she understands precious metals better than I do,” he says wryly. “If I don’t understand an asset class, such as gold, I am happy not to make an entry there. I would rather stick to what I know best — Marico.”
That’s an attitude Jawahar Goel understands — and emulates. Goel’s investment philosophy is based on what he’s learnt from his father, Nandakishore Goenka: “He says never invest in assets that give you interest or rental income.” Add to that his unwillingness to invest in unfamiliar businesses and it’s easy to see where the managing director of the Rs 2,280-crore Dish TV is coming from when he says all his money has gone into the equity of Dish TV and other companies in the family’s Essel group. “With this kind of approach, I may not even be called a high net worth individual,” he exclaims.
Well, no one who knows India Inc will make that mistake but Goel does have some views that differ from other HNIs in India. He doesn’t invest in real estate, for instance, explaining that service tax is a good reason to not enter the sector. “The appreciation in your investment should be greater than the service tax burden. That is too much of a risk,” he says. To his mind, a good investment is one that can return 18% each year and the investment in Dish TV, he says, is a bet for the future. But, “there is a limit to how much I can buy [in Dish TV], so the option then is to look at Essel group companies. It may seem like I have all my eggs in one basket, but these are good companies,” he says.
Interestingly, it is not only promoters who display such fierce loyalty to their organisations and, moreover, put their money where their mouths are. When Mohandas Pai decided to call it a day at Infosys Technologies in April 2011, all his money was parked in the firm’s stock. Pai, who was first Infosys’ CFO and then director of HR, sold a part of this to start a $100 million PE fund with Ranjan Pai of the Manipal Group. Two-and-a-half years later, the only stock he holds continues to be Infosys. “65% of my holding is in the company’s stock with the balance 35% in the fund that I have launched,” says Pai. Reputed to be one of the shrewdest financial brains in India Inc, Pai doesn’t believe in wealth managers and the like. “If there is a hotshot money manager advising people on how to maximise returns, he should be doing it for himself,” he says.
Going forward, more money will be invested into the fund but Pai is clear Infosys will continue to remain his biggest bet. According to him, the company is well-run with a sound bunch of people. “Now, with NRN back at the helm, things are starting to look up for the company. You know your investment is safe there,” he adds.
And if risk-taking is the hallmark of an entrepreneur, perhaps professionals are characterised by a more conservative approach — regardless of their industry.
Consider Shankar Mahadevan. The composer’s works may be modern and edgy but when it comes to investment, he is, by his own admission, “completely old school”. Mahadevan’s investments today consist of mutual funds, fixed deposits, gold, silver and real estate. Within real estate are investments in offices, land and housing. “Yes, I do invest in stocks though that is minimal and based on advice from friends,” he says. His wife, Sangeeta, handles all finances, working with Mahadevan’s manager and the family’s chartered accountant. “I have seen too many people in this industry who have planned their finances poorly. The long-term impact for them has been disastrous,” says the computer engineer who worked with Oracle before turning to music as a career.
While Mahadevan is out of IT for good, some like Ashok Soota have stayed the course. His approach to investing, though, is very similar. Of the 60% that is in equity, 50% is invested in Happiest Minds, a venture he started after quitting MindTree, with the rest in debt. Soota, who had a stint at Wipro as well, thinks he is fortunate to have a start-up to invest in. “There cannot be a more logical place than a start-up to invest when it comes to value appreciation and wealth creation. However, that has not been my sole objective,” is Soota’s thinking. His commitment to the investors is that Happiest Minds will go on to become the most successful tech IPOs in the country in five or six years. “In that sense, there is wealth creation for all stakeholders, which includes the employees and me,” he adds.
Soota confesses to not being a big fan of real estate since its liquidity can be a challenge. In the case of equity, which forms a chunk of his portfolio, he only invests in companies in which he has greater confidence. He likes to play it safe when it comes to other investments as well. “I am conservative and will not risk the capital,” he maintains. In sharp contrast, some of India’s wealthiest families have exactly the opposite approach when it comes to investing.
Seeking new avenues
“You know, it is exactly two years and an hour since we sold our paper business to the Americans,” says Shreeyash Bangur with a hearty laugh. It is mid-October and Bangur, who is a director at the Rs 1,000-crore LNB Group, is back in Hyderabad after some frenetic travelling across the country on work. All of 33, Bangur is a busy man, looking to grow his group’s existing businesses and make progress on the new ones. By his own confession, the sale of his family’s 53.5% holding in Andhra Pradesh Paper Mills to International Paper for Rs 1,430 crore was a windfall. That is evident, given that the buyer paid a 240% premium per share in addition to a non-compete fee as well.
Today, the LNB Group has companies such as Maharaja Shree Umaid Mills and The Peria Karamalai Tea & Produce Co in its fold. Bangur says the two key businesses — textiles and tea — did not require any fresh investments. “They make their own profits and are well funded. We were at liberty to utilise the proceeds from the sale of the paper business the way we wanted to,” he points out.
After paying the mandatory tax outgo, there was a handy Rs 1,100 crore left on the table. “We were clear that we would deploy the funds in a phased manner and had broadly decided that it would be a combination of equity, private equity in real estate and infrastructure,” recalls Bangur. After some contemplation, about Rs 200 crore made its way into equity. According to Bangur, he, his father, LN Bangur, and brother, Yogesh, have invested Rs 100 crore as direct equity, with an equal sum parked in large MFs. The interest in equity, while revolving around higher returns, is driven by another factor as well. “This is an investment option that gives us a good chance to be a part of an industry we think is interesting. Often, we like an industry but cannot get in because of the lack of bandwidth,” he says.
It is really this philosophy that has driven the family’s interest in equities. One company, for instance, that has caught the Bangurs’ fancy is the Chennai-based VA Tech Wabag, a Rs 1,600-crore company that specialises in water treatment. “We met the management and liked their pure-play water model,” explains Bangur. Similar levels of involvement and interest are present across all 60 investee companies. “We will slowly reduce the number and expect this to be around 40 over the next three years,” he adds.
The family’s investment decisions are managed by a three-member team in Kolkata that does a detailed study on every investment option. About Rs 25 crore has been invested in portfolio management services, while the rest is kept for investment as and when new opportunities arise. “It could be short-term fixed deposits for instance,” says Bangur. What would be a good rate of return? At least 16%, he says. “That’s how much we make on our existing businesses.”
The origin of the 16% IRR figure goes back to when the deal was concluded with International Paper. “I remember someone telling us then that debt instruments could not fetch more than 8%. That is when we decided that any investment of ours should make at least twice as much,” he adds. That includes new business opportunities, which is where the largest chunk of the windfall gains is likely to be invested. The family has already made a start. “We like the rural consumption story and plan to build warehouses across the country,” says Bangur. This venture, through group company Navjyoti Commodity Management Services, opened its first warehouse in June this year and already has another 70 across 12 states. “To date, the total capacity is 175,000 tonne and by 2017, we should have a capacity of 1 million tonne. We already have clients such as ITC, Cargill and Olam, with agri-warehousing being the key business for us,” he points out.
Other businesses where baby steps have been taken include renewable energy, where a 30 MW wind power project went operational in April this year. This is under a holding company called LNB Renewable Energy and the focus will be on wind and solar power. “The plan is to have 20 MW projects in other states and a 6 MW solar energy facility in Rajasthan,” says Bangur. “A little money” has also gone into sister Sheetal’s spa venture, Soul Beauty and Wellness Center. And there is a proposed foray into the plantation business, though Bangur says it is too early to talk about it.
The Bangurs have also moved on the private equity front, albeit slowly, and, a couple of months ago, picked up a minority stake in a dairy business. “We think there will be some interesting opportunities in the private equity space. We do not want to be angel investors but would like to invest seriously in infrastructure,” maintains Bangur.
Another promoter who has cashed in his stake and is looking at private equity as an investment option is Paras’ Patel. Sipping a glass of cola in his office at Ahmedabad, Patel declares he understands private equity better than equity, having worked very closely with Actis and Sequoia, which had invested in Paras. That lack of comfort in equities is obvious when Patel says his investment in restricted to about 10 stocks, which he estimates will be worth just Rs 7-8 crore. Clubbing his FMCG experience with his preference for PE, Patel has now invested Rs 30 crore, according to media reports, in Access India Advantage Fund, where he functions as the anchor investor and advises on the FMCG sector. As it happens, Patel’s involvement with this fund dates back to 2006 — around the time Aureos Capital first invested in Paras — when he committed Rs 4 crore to Nilesh Mehta and Sangeeta Modi to run the fund, which was focusing on mid-sized companies in sectors such as infrastructure services and healthcare.
Patel points out that the key to success in private equity investing is an understanding of the business. “My expertise is FMCG and I think my returns will be better if I put my money there,” he says.
Patel spends less than five hours a day at work now, compared with his earlier 14-hour, six-day work week. The rest of the time is devoted to his family and the newly-created family office. “For now, I am only looking for more opportunities. The family office is my new business,” he grins. He’s clearly come out the winner when it comes to the biggest reward in the investment game: satisfaction.
By Krishna Gopalan —With inputs from Kripa Mahalingam