India: Aditya Birla Group bets big on financial services with demerger, listing plans

Visual from Aditya Birla Nuvo website.

The Aditya Birla Group’s interest in the financial services business predates the liberalization of the Indian economy. In 1986, the group, then headed by Aditya Vikram Birla, started Birla Growth Fund to finance the purchase of industrial equipment and consumer durables, and to trade in stocks. It launched a non-banking financial company (NBFC) in 1991 and in 1994, the business was rebranded Birla Global Finance Ltd.

Since then, the financial services division has grown to become a Rs.9,300 crore ($1.3 billion) business spanning at least 10 business lines, but it never reached a position where it could be called one of the flagships of the $41 billion Aditya Birla Group.

That could now change. A big part of the restructuring announced on Thursday involved spinning off Aditya Birla Financial Services Ltd (ABFSL) as a separate listed entity. It is an indication that the business is now of a scale where it can stand on its own.

“The business has reached a size and scale where it deserves to be a stand-alone entity,” said Aditya Birla Group chairman Kumar Mangalam Birla at a press conference in Mumbai. “The demerger and listing of the financial services business will unlock value for shareholders.”

While Birla declined to ascribe a value to the business, a person familiar with Aditya Birla Financial Services’ business said it could be upwards of Rs.25,000 crore ($3.7 billion). Indeed, a back-of-the-envelope sum of parts valuation of the three core businesses—asset management, life insurance and non-banking financial services—suggests that the company could be valued at anywhere between Rs.22,000 crore ($3.2 billion) and Rs.32,000 crore ($4.7 billion) depending on the kind of trading multiple that the markets choose to attach.

As of June 2016, Aditya Birla Financial Services had assets under management of Rs.1.96 trillion ($29 billion) spread across its asset management, insurance and private equity businesses, according to a group presentation. Its diversified NBFC had a lending book of Rs.28,700 crore ($4.2 billion), which includes both wholesale and retail lending. A payments bank, a joint venture between the financial services firm and Idea Cellular Ltd, is also on the way.

The restructuring will allow each of these individual businesses to grow more rapidly, said Ajay Srinivasan, chief executive officer of Aditya Birla Financial Services. “I am excited. Now we can unlock value for shareholders and build scale for each business.”

The group’s decision to convert its financial services business into a stand-alone entity comes at a time when other conglomerates such as the Piramal Group are also thinking along the same lines. In May, Piramal Enterprises Ltd signalled its intent to carve out its financial services business into a separate entity and eventually list it.

The two will join a growing list of financial conglomerates in the country, which includes Bajaj Finserv Ltd, Reliance Capital Ltd and L&T Finance. Of these, Reliance Capital is the largest. As of March 2016, it had revenues of Rs. 9,784 crore ($1.464 billion). Bajaj Finserv is the second largest with revenue of Rs.9,446 crore ($1.41 billion), followed by Aditya Birla Financial Services with revenue just under Rs.9,300 crore ($1.39 billion).

All these financial services conglomerates are banking on two things—that demand for financial services will continue to grow and that state-owned banks (which control 70 per cent of the market) will cede market share as they try and repair their balance sheets. If that happens, private banks and well-capitalized NBFCs stand to gain the most.

“NBFCs have been doing relatively better in terms of growth. Some of the issues that have been plaguing banks such as shortage of capital and bad loans are not big issues for NBFCs at this stage and will allow them to focus on growth,” said Saswata Guha, director, financial institutions, at Fitch Ratings. Guha was not commenting on any specific company.

According to the Reserve Bank of India (RBI)’s June financial stability report, loans by NBFCs expanded 16.6 per cent in 2015-16, twice as fast as the 8.8 per cent credit growth across the banking sector at an aggregate level. The gross non-performing assets (NPA) ratio for the NBFC sector declined to 4.6 per cent of total advances in March 2016 from 5.1 per cent in September 2015, according to the report. The gross NPA ratio of banks was 7.6 per cent.

Aditya Birla Financial Services sees big growth opportunities in both the NBFC business and the housing finance business, said Srinivasan. He added that it may also add a couple of new lines. In June, he said in an interview that the firm was examining a possible stressed asset venture.

It will also look to expand recently added verticals like health insurance. On 10 August, the firm said it had received regulatory approvals to provide health insurance through Aditya Birla Health Insurance Co. Ltd. The payments bank, a 51:49 joint venture between the financial services group and Idea Cellular, is also set to launch by early next year.

Is the end goal a banking licence? That might be tough given current RBI regulations. According to rules for on-tap banking licences released earlier this month by the central bank, large conglomerates cannot apply. An entity that has assets of more than Rs.5,000 crore ($748 million) can apply for a banking licence only if the non-financial parts of its business do not account for more than 40 per cent of total assets. That will likely rule out Aditya Birla Financial Services as a potential bank licencee.

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This story was first published on livemint.com

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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.