For decades, commercial banks - representing the financial services industry - dominated the market cap game at the stock market. The journey started from public sector banks (PSBs) and later shifted to private banks.
As a result, in the past decade, the market has seen wealth creators such as HDFC Ltd, HDFC Bank, Kotak Mahindra Bank and SBI emerge in the Top 10 league, rubbing shoulders with the likes of Reliance Industries, TCS, ITC and HUL. This feat was achieved in part because of more institutional investors reposing their faith in these companies. But this pecking order is set to change in the next decade as new financial services companies are debuting at Dalal Street.
In the past two years, the life insurance industry, which earns close to Rs 2 lakh crore as annual premium, has made its debut with three listed players - HDFC Life, SBI Life and ICICI Pru Life. If state-owned LIC alone were to come up with an initial public offering (IPO), with assets under management of over Rs 30 lakh crore, it would top the market valuation charts. Similarly, the general insurance industry, with annual premium income of Rs 1.50 lakh crore, has opened its account in the market with ICICI Lombard and state-owned New India Assurance Company.
The re-insurer GIC Re, too, had a successful debut. More recently, the market saw two asset management companies (AMCs), HDFC Asset Management and Reliance Nippon Life Asset Management, get listed. The micro finance institution turned full scale bank, Bandhan Bank, and small finance banks have made an entry in the stock market.
"These new segments of financial services have a long history of profitable operations. Investors are happy to own these stocks," says Harendra Kumar, MD and Head-institutional equities and global research at Elara Capital. In Business Today's study of the top 500 companies in the stock market, the financial services sector is spread out and includes insurers, AMCs and micro finance institutions turned banks.
In fact, the banking, financial services and insurance (BFSI) sector rules the roost with five of its six debutants making it to the top 100 companies in terms of market cap. The combined average market cap of these five companies is Rs 3.42 lakh crore, which is almost half of the market cap of the largest private sector conglomerate, Reliance Industries. RIL is at the top position in BT 500.
In terms of ranking, too, the debutants are in healthy positions. HDFC Standard Life Insurance is sitting comfortable at No.32. SBI Life Insurance is at No.48 (parent SBI is at No.9). Bandhan Bank is at the 49th position, which is ahead of many established banks. A closer look shows that these three companies have moved passed veterans such as MRF, ACC, Colgate and Britannia. There are surprises from non-bank financial companies (NBFCs) too. Bajaj Finance, for example, has a current market cap of Rs 1.21 lakh crore, which is much bigger than that of some established banks.
So, what's fuelling investor interest in financial services sector? Experts suggest that the low penetration of financial services (banking, investment and insurance) offers a huge scope for growth in these businesses. Also, the economy has doubled in size in the past decade to $2.6 trillion, leading to more income in the hands of people. While household savings as a percentage of GDP was always high at 29-32 per cent, there was not much money flowing into the financial assets. This trend is gradually changing. Post-demonetisation, investments in mutual funds and insurance increased, which in turn fuelled a rally in the stock market.
The difficult period that the corporate world faced after 2015, with over-capacity and high leverage, saw financial services growing, especially in retail banking. The financial services sector is set to grow manifold as India's economy is expected to double to $5 trillion by 2022. Moreover, financial services such as payments, small finance banks, insurance, wealth management and AMCs are popular with private equity funds.
The growth in the businesses of the debutant companies shows the financial services story playing out in the market. In two decades, HDFC Life has created a business of Rs 1.06 lakh crore in terms of AUM and Rs 23,560 crore in terms of premium income. Similarly, general insurance company ICICI Lombard has earned a total premium of Rs 12,600 crore and net profit of Rs 862 crore last year. In 2017/18, HDFC AMC has clocked an income of Rs 1,867 crore and net profits of Rs 722 crore. The micro lender Bandhan Bank has done a business of Rs 66,208 crore, earned an income of Rs 5,508 crore and reported profits of Rs 1,346 crore in 2017/18.
These new players have many things in common - a long track record of performance, good promoter track record, differentiated business model, high promoter stake and top notch senior management team. "This is just a trailer of the future supremacy of these new businesses in the stock market," says a stock broker. There are over two dozen established players in life insurance and 33 in general insurance, including half a dozen pure-play health insurers. Similarly, there are 44 AMCs, with top players like ICICI, UTI, Kotak, and Birla Sun Life AMCs yet to tap the market. There are also payments and small finance banks that will enter the market soon. "There is variety. The pipeline is solid," says the broker.
The new segments, however, face challenges. In life insurance, LIC continues to have over 70 per cent market share. The higher share of market-linked ULIPs (unit-linked insurance plans) depends to a large extent on stock market performance. "If the stock market goes down or enters a bear phase, there will be impact on the businesses of life insurers," say analysts. ULIPs also compete with mutual funds as many insurers market their products as investment products. In general insurance, performance is linked to the industry cycle or the robustness of the economy. Recent entry of pure digital players like Digit, Acko and Toffee is creating new market segments such as insuring daily taxi rides or gadgets.
In the small finance segments, micro lending has inherent risk as loans are given to borrowers with little or no credible credit history. The market is yet to see the non-performing assets (NPAs) in these segments as banks kept themselves away. Today's lending will show NPAs in the future. Some also say that the promoter driven model of many of these new differentiated banks poses a risk in the future.
"The risk in a micro lending business is also linked with potential. It's a high-risk, high-reward segment. The banking sector has matured because of decades of experience. These new differentiated players will also pass through that phase," says Dinesh Rohira, Founder and CEO, 5nance.com , an online financial planning and management firm.
While the financial services party spreads and companies in these sectors consolidate gains in the stock market, the risks will also play out in their journey to maintain and reach the top of the table of market cap rankings.