Gaining ground in a downturn
What’s even better than growing at breakneck speed, piling up the profits and market share, and riding a boom in style? Well, quite simply, growing steadily, posting profits, gaining market share and climbing a position or two when your rivals are unable to do so.
To be sure, growth in gung-ho times is great, but not unexceptional—with a me-too business model, easy capital and eager consumers, you’re pretty much on your way. It’s not quite the same, however, when demand turns fickle, capital is scarce, and your business is enveloped by the dark clouds of an economic slowdown.
It’s during such downturns that yesteryear’s high fliers are prone to fall the hardest. It’s at such times that less risky and more stable business models focussed on profitable growth and long-term leadership come to the fore. Growth may not be spectacular, but often during a slowdown just the ability to hold one’s ground is enough to inch ahead—simply because many of the hot rods are falling behind the pace.
The companies that we talk about in the next few pages—all in financial services—have not just held their ground but also stolen a march on rivals who had raced ahead of them in the good times. They’ve been able to do so because of the uniqueness of their business models, because of their strategic decision not to chase mindless growth when it was there for the taking, and because they’re still in a position to keep their foot on the investment pedal. Read on to know more.
SBI Life has used the changed market conditions to its advantage to grab the #2 position in the private sector from Bajaj Allianz Life Insurance Company.
In the rah-rah days, they were considered the laggards for sacrificing growth for profits and for being slow in utilising the extensive branch network—perhaps, the largest in the world—of its parent, the State Bank of India. That’s why the perception in the market and amongst rivals was that SBI Life Insurance was content trailing as a distant #3 amongst the new life insurance players in terms of annual gross premium. The ongoing slowdown has, however, changed the game in life insurance.
So, what’s contributing to SBI Life’s arrival on centre stage? Clearly, a lot has to do with ULIPs— largest bread earner for private life insurance players in the last eight years—losing their glitter. “Of late, we are selling more traditional products like term policies than ULIPs,” points out U.S. Roy, Managing Director & CEO, SBI Life Insurance. For instance, last March, the ratio of ULIPs to traditional products was 70:30. Today, it is 60:40.
Also, when traditional products are the focus area, the spotlight naturally also shifts to the traditional players. “In today’s market scenario when consumers are shifting back to traditional products, SBI and LIC (Life Insurance Corporation) come first to mind as they are the two most trusted brands for long-term life insurance products,” adds Roy, who took over at the helm in January 2007. Unlike many other insurers, SBI Life has kept its group corporate business on the traditional platform. For instance, retirement funds have not been deployed in market-linked ULIPs,” explains Roy. That has gone a long way in bringing back the confidence of many long-term clients.
SBI Life’s other edge on its rivals is its multi-channel business model that includes bancassurance, an agency channel and a corporate group. This helps bring in a steady flow of business, even during a slowdown. Only a year ago, the company changed its reporting structure by shifting from a centralised head office arrangement to a more decentralised organisation. “We have divided our business operations into eight different regions, with each region covering two states, two SBI circles and an associate bank,” says Roy, who has over three decades of experience in India’s largest bank. “This cohesive approach resulted in the SBI network getting optimised to garner more business,” he adds.
SBI Life’s bancassurance model is also different from those of the others; at most insurance companies, the bank makes a referral and the agent follows up with the booking. So a customer ends up paying a commission to the agent as well as to the bank. “We at SBI Life have been empowering our bank staff to sell policies directly. So, we train our bank employees to sell insurance and that’s the reason why our bancassurance model is taking time,” reasons Roy. In fact, SBI Life’s French joint venture partner Cardiff SA has been a pioneer in selling insurance products through global commercial banks.
SBI Life has a few other aces up its sleeve. For one, it is the least-capitalised amongst the newer players; this offers more headroom for raising further capital. For another, the firm has also been profitable for the past three years, and has no accumulated losses on its balance sheet. Most other life players will take 2-3 years to make profits and 3-5 years to wipe out piled-up losses. “Profits are necessary in life insurance because the company has to sustain itself over the next 20 years to pay back,” says Roy. Being financially sound clearly has its benefits, which are magnified in rough times.
Religare Enterprises polevaults to top dog position in terms of market capitalisation amongst firms that have broking as their core business.
Headquartered in Nehru Place in South Delhi, Religare Enterprises is perhaps the only major Indian brokerage that has its base so far away from the hub of the capital markets in Mumbai’s commercial district. But that doesn’t seem to have marred its prospects; in fact, the distance from Dalal Street seems to have helped—the erosion in its stock price is the least compared to other brokerages.
There’s of course more to Religare’s out performance of its sector. More than distance, its relative success has plenty to do with a diversifed business model that goes beyond just broking. The 15-year-old financial services venture promoted by the Malvinder Singh family (of Ranbaxy fame) is in investment mode even as many of its rivals are tightening the purse-strings. “You need courage to put up money in these times,” says Sunil Godhwani, CEO, Religare Enterprises, a holding company for Religare’s businesses in equity broking, wealth management, asset management, life insurance, commodities and insurance broking. The money to be raised through a rights offer will be directed into non-market capital lending businesses such as consumer finance, invesmetnt banking and insurance.
Clearly, Religare sees an opportunity in the current adverse conditions. Late last year, at a time when liquidity conditions were at their tightest in the wake of the bust-up on Wall Street, Religare pounced on Rana Talwar’s Lotus Mutual Fund, which manages assets worth Rs 5,000 crore. Just a year ago, Religare was just another pretender amongst a new breed of broking and financial services firms that had listed on the stock exchanges. These include Edelweiss, India Infoline and Motilal Oswal. In terms of market capitalistion, Religare lagged behind all these names. Today, it’s a different story, with the market seemingly in a mood to give Religare’s appetite for growth a thumbs up.
The 47-year-old Godhwani, for his part, doesn’t give much importance to market cap rankings. “They are not always the best barometer to gauge the true underlying value and fundamentals of an integrated business model like ours,” he explains. “We are not a broking house but an integrated financial services player.”
That explains why investors rate Religare higher than its peers. To be fair to Religare’s rivals, most of them, too, are moving from pure-play broking towards being integrated players. Yet, Religare has been more successful at using the headwinds of the downturn to its advantage. “There is no holding back,” gushes the CEO.
The positions amongst the new private sector banks have come in for some re-arranging. Axis Bank has leapfrogged into third place.
Last October, Volkswagen overtook Exxon Mobil to become the world’s most valuable company, in the wake of luxury car maker Porsche’s attempt to acquire a majority stake in VW. The flare-up was, of course, temporary, caused by a shortage of common shares in the market, as Porsche had gobbled up three-fourths of VW’s shares. As sanity returned in a matter of a few minutes, Exxon reclaimed its top dog status, and today is once again the world’s biggest company by market capitalisation with a value of $357.5 billion. V W trails at $87.2 billion.
Around the same time—after Lehman Brothers collapsed—a similar fleeting change in the value rankings took place in the Indian market (albeit for totally different reasons). The country’s top two private sector banks, ICICI Bank and HDFC Bank, exchanged positions with the latter, for the first time, outperforming its hitherto more illustrious counterpart. But as fears of ICICI Bank’s exposure to the sub-prime crisis in the US proved unfounded, it duly bounced back. These days, both banks are neck and neck, with ICICI Bank once again grabbing the lead, although the gap isn’t as yawning as before.
The bigger story, however, of changing positions in Indian banking has played out at #3 and #4, with formerly fourth-placed Axis Bank inching ahead of Kotak Bank to grab third position. And it’s now six months since Axis has been holding on to that rank.
“Ours has been a purely organic story. We have shown that organic growth can also be fast-paced. Last year, we grew our balance sheet size by 50 per cent,” says P.J. Nayak, Chairman & Managing Director, Axis Bank. During the boom times, Axis was valued much lower than Kotak despite having a larger balance sheet. In terms of network too, it’s the third-largest in the private sector (after ICICI Bank and HDFC Bank), with 749 branches and 3,171 ATMs. Yet, Kotak always enjoyed a higher valuation because of its non-banking operations like mutual funds, broking and investment banking. However, when the stock indices tanked, these capital market-related businesses also took a hit, which has, in turn, dampened the valuation of the banking arm.
Axis Bank’s valuation, for its part, is clearly being driven by its rock-solid standalone banking model. In a year marked by a slowdown in retail credit, net profit zoomed by 82 per cent in the first half of 2008-09, while fee income rose by 84 per cent.
Axis is slowly spreading its wings into other areas. “Today, we are a full-service commercial bank, and it has taken us some years to achieve this,” says Nayak, who is due to retire in June. The bank is now steadily building the asset management, private equity and private banking businesses. “We have raised a first tranche of $148 million, and are in the process of mobilising a second tranche of about $400 million, largely overseas, for our private equity fund for infrastructure,” says Nayak.
The initial theme of the private equity arm is infrastructure, but over time the company will explore other themes as well. It has received regulatory approval for asset management. “We hope to do the first NFO (new fund offer) of our mutual fund, which we will launch by the middle of the next calendar year,” adds Nayak. The game plan is to leverage the bank’s customer base and its strong brand and distribution network. The bank is also in the process of firming up a joint venture with N.M. Rothschild for private banking. “Rothschild has a huge amount of experience in managing wealth. We, at Axis, will be the front end and the asset management will be done by Rothschild,” says Nayak.
All these operations should rub off on Axis Bank’s valuations once the markets look up. By then, of course, it may have already become a challenger for the second slot in private banking.
Piling on the assets
HDFC MF rockets from # 4 to # 2 in terms of assets under management.
One big reason why winning in a downturn is a completely different game from hitting the jackpot in the boom times is because there’s one crucial ingredient missing during a slowdown: Momentum. That’s amply evident in the tale of India’s two leading fund houses, ICICI Prudential Mutual Fund and HDFC Mutual Fund.
For a long time, the two asset management firms ran neck and neck in terms of Assets Under Management (AUM). Until 2004, when the stock market indices began heading northwards. That’s when ICICI Pru broke out, and over the years, it built up a significant gap over HDFC MF. At the peak of the boom, when the benchmark Sensex touched 21,200 points last January, ICICI Prudential MF’s AUM had hit a staggering Rs 64,045 crore—a lead of a little over Rs 20,000 crore over HDFC MF. In fact, HDFC MF was relegated to #4, with Reliance MF and UTI MF squeezing past it.
But that was then. With the stock market 60 per cent off its peak, the top 4 of the deck have got reshuffled. Leading the pack is Reliance MF. But the more spectacular story is how the # 4 player —and one of the country’s most conservative fund houses—HDFC Mutual has moved up into second position. In fact, over the last six months, HDFC MF’s AUM has never plunged below that of ICICI Pru.
Clearly, caution in bullish times would seem like looking a gift horse in the mouth. But its strategic value is immense when the going gets tough. HDFC MF stayed away from launching too many new schemes to boost its AUM as small investors tend to subscribe for new so-called innovative schemes at par rather than investing in well-performing existing schemes. ICICI MF today services 78 more schemes than HDFC MF. “We followed a strategy of launching only one equity scheme a year,” says a top official of HDFC MF. HDFC MF also scores over its rivals on the profitability parameter. Profits stood at Rs 117 crore last year, as against ICICI Pru’s Rs 82 crore. The reluctance to run after assets has helped here too, with distribution expenses being reined in. Chasing growth works in the good times, but pursuing profitable growth works all the time.
