Attaining a critical scale and diversifying the revenue stream in fee-based income business appear to be the key reasons for L&T Finance acquiring Fidelity's Indian mutual fund business.

In an interview with Business Line , Mr Y. M. Deosthalee, Chairman and Managing Director, L&T Finance Holdings, explains the reasons behind the deal.

Excerpts from the interview:

Will you be able to expand your distribution platform after the takeover of Fidelity?

Fidelity's platform is very complementary to our current distribution channel. The channel which we use is predominantly the Independent Financial Advisors or the IFA channel and Fidelity has a significant presence in the banking channel, primarily foreign banks.

But we have not acquired Fidelity for distribution alone. We wanted to make sure that we have equity assets and retail presence.

Yes, we can, on our own, go to the banks. But banks, especially the large foreign banks, who are large distributors, need a certain minimum size. They find it difficult to take on business below a certain size. That is why it is very important for assets to cross a threshold limit, which we have done through this acquisition.

L&T Finance is already present in many lending activities with big growth opportunities. And mutual fund business takes time to scale up. So why is L&T Finance interested in the fund business?

The lending business is very important from a scale perspective and it also provides tremendous opportunities for growth.

However, considering the competition and the cost, the ability of NBFCs to generate superior returns to shareholders, to some extent, gets constrained if you are only in the lending business.

Therefore, it is important to supplement the lending business with some fee-based activity.

And, therefore, in all our businesses we are increasing the fee-based activity. In L&T Finance, we started distribution of financial products three years ago, including insurance and other products.

So this is a step in that direction. If you are able to give 16 per cent return on equity (RoE) through your lending business, then on a consistent basis if you want to give 18-19 per cent returns to your shareholders, you need to have a stable, sustainable fee-based income too. And that is why it is important for us to be in AMC business.

An important point as far as the financial services business is concerned is that once you acquire a customer, you need to take care of the customer's entire needs. We are present in rural India and the semi-urban market and have a large number of customers.

So when we are lending, we also need to make sure that we are able to tap their savings through the asset management business. So using the presence in almost 800 points in India, we hope to garner the savings of customers.

And for you to be in this business, scale is important. You can break even and be profitable only when you have scale.

But the mutual fund business is tightly regulated in terms of a cap on expenses, regulation on distribution, and so on. Will that be a constraint to attaining higher RoE in this business?

First point is that all financial services are regulated, which is good. It is a fact that over the last few years, regulation in the mutual fund industry has become stricter. But if you have the scale and the right mix of debt and equity products, once you attain a critical size, it is a profitable business.

And, as I said earlier, it is not a capital-intensive business. So it will provide reasonably good returns over the medium to long term.

This acquisition is important from that point of view, as it will give us Rs 13,000 crore of assets under management. That will allow us to go to the market and address the customer's requirements. So once you reach a certain scale, it is on auto pilot mode.

Fidelity's cost structure was quite high in FY-11. Will it now take longer for your mutual fund business to break even?

We have prepared a detailed integration plan and we do not think that this is going to create any problem.

The first point is that they themselves have looked at the cost and it was expected that in this year or early next year, the cost would have come down, even if this transaction did not happen. That is what we understand.

The second thing is that we have mapped our organisation versus their organisation and we believe that there is scope for optimising costs. So we don't think this will elongate the break-even.

And we being in financial services business, wherever we find that the skill sets (they have a very highly talented team) can be utilised in other areas we will definitely do that. So cost structure will not be a major problem.

>vidya@thehindu.co.in

>akrishnan@thehindu.co.in

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