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Changing skyline

The US financial services sector may have been brought down to its knees, but back home, there’s a mad scramble by a host of players to get a piece of the action in high-growth segments that range from mutual funds to private equity.

twitter-logo Anand Adhikari        Print Edition: October 19, 2008

In 1997, when a string of South-East Asian economies hurtled into a tailspin after their currencies collapsed, a 49-year-old Korean, Park Hyeon Joo, chucked a cushy job at Dongwon Securities to start out on his own. Braving the storm, Park Hyeon set up an asset management company called Mirae, which means “the future” in Korean. And what a future it has proved to be: Mirae emerged from the turmoil to become one of the world’s largest investors in Asian equities, with offices in Hong Kong, Singapore, United Kingdom, India and Vietnam.

Numbers denote number of new players. (Sources: Sebi/ market)
Numbers denote number of new players. (Sources: Sebi/ market)
With the dark prospect of a recession staring most global economies in the face, the current crisis pales in comparison with that of 1997 in terms of its reach, if not intensity. Whilst the Wall Street crisis may not derail the long-term India growth story, it’s surely going to cast its shadow on Dalal Street in the nearer term. But, like Park Hyeon Joo, a clutch of entrepreneurs in the Indian financial services space isn’t letting the sub-prime triggered woes alter their growth ambitions.

“There is no good or bad time to start a long-term business. You just have to believe in the story,” quips Asit Koticha, Chairman, ASK Group. Koticha, whose current operations include wealth management and a real estate fund, has plans to start a mutual fund. For his part, he also knows when to exit a business—he sold his institutional equity trading arm to Nimesh Kampani’s JM Financials last May when the equity markets were still roaring.

Sameer Kamdar, CEO & Managing Partner, ASK Investment Holdings
Sameer Kamdar
Koticha isn’t the only player in financial services who is looking to enter new high-growth segments. At last count, there were over a hundred players—domestic and global—who were preparing to foray into mutual funds, life insurance, general insurance, portfolio management, private equity and investment banking.

Sid Khanna, the torch-bearer of management consulting in India in the ’90s, and the man who built the India operations of Accenture (formerly Arthur Andersen), now heads India Equity Partners, a private equity firm. He says there is a long-term structural shift of faster growth towards India, China and other Asian economies. “Investors and global funds that have long-term commitments to their investors—for example, pension funds in the US, the UK and Europe—are looking at high-growth economies for better returns,” adds Khanna. Over the next 5-10 years, the domestic savings pattern is also expected to undergo a change in India—from traditional avenues like bank deposits and postal savings to market securities.

Industry: Mutual Funds
Scenario: Thirty four players have combined assets under management of around Rs 5,45,000 crore. The top four players (Reliance, HDFC, ICICI Prudential and UTI Mutual Fund) manage half of those assets
Prominent new players: Indiabulls, Axis Bank, ASK Group, HDIL, Bajaj Allianz, Edelweiss, Bharti Axa Focus Area:The new players plan to focus on product innovations and improving service standards. Will introduce new asset classes such as gold, real estate and overseas equity
Seasoned Indian hands like Koticha and Khanna aren’t the only ones spreading their wings. A host of mega-corporations—including the Tatas, Reliance, the Aditya Birla Group, Bharti, Bajaj, Hero Honda, Dabur, Future Group, Rajan Raheja, Unitech, Apollo, HDIL, Indiabulls, Religare and DLF—has zeroed in on at least one if not more of these high-growth markets.

For instance, in mutual funds alone, there are currently already 34 players in the fray, and another 36 are waiting in the wings. Looks like a crowded house? Not really, the new entrants will tell you, pointing to the example of China, an economy twice the size of India, which has over 100 mutual fund companies slugging it out.

Says Sameer Kamdar, CEO & Managing Partner, ASK Investment Holdings: “The AMC (asset management company) space may look crowded in the short term due to the entry of several new players, but over the long term, there will be a large market for everybody to participate in.” Proof of this lies in the growth in assets under management (AUM) of the industry— of over 30 per cent in the last six years. A recent Dun & Bradstreet study projects growth of over 28 per cent between 2008-09 and 2011-12. “We expect the industry to mature. It’s a long-term business for us,” says Rujan Panjwani, President, Edelweiss Asset Management, whose twin liquid schemes mobilised over Rs 900 crore in September ’07.

Milind Chalisgaonkar, CEO, Bharti AXA General Insurance Co.
Milind Chalisgaonkar
The way forward is to diversify into new asset classes like gold, real estate and overseas equities; and also into sophisticated products like capital protection and indexlinked debentures. Kamdar believes that there is a vast market for newer asset allocation and capital preservation products in the high-net worth and mass-affluent segments.

Industry: General Insurance
Scenario: There are eight players in the private sector general insurance that generates premiums of over Rs 11,000 crore every year. The market is dominated by ICICI Lombard and Bajaj Allianz, while Reliance General Insurance has moved up fast to the third slot. The top three players have a 70 per cent share in the gross premium
Prominent new players: Rajan Raheja Group-QBE Insurance Group, Unitech Group, Shriram General Insurance, SBI General Insurance, Dabur India, Future Generali, Apollo DKV Insurance, Universal Sompo General Insurance Co. and Bharti Axa General Insurance
Focus area: Following detariffing last January, the rate war in motor insurance, which contributes the most in terms of premiums, has just begun. Health insurance is another big area for new players to explore
Product innovation will also be the mantra in the private sector life insurance industry. Over the past seven years, the process of change has already begun, with unit-linked insurance plans (ULIPs) completely overshadowing the traditional endowment plans that were the sole preserve of Life Insurance Corporation before the sector was liberalised.

Now may be the time for more innovation. Says Kapil Mehta, CEO, DLF Pramerica Life Insurance Co., which soft-launched in Delhi recently: “New product forms can be introduced, customers’ needs can be segmented more finely (by geography, income or occupation), and large affinity groups can be identified.” There is also an untapped opportunity in smaller towns. “We are fully exploiting the bancassurance model as our key promoters have an extensive network of branches in the country,” says G.V. Nageswara Rao, MD& CEO, IDBI Fortis Life Insurance, which commenced business in April this year. IDBI Fortis surprised the market when it mobilised Rs 100 crore premium in just six months. “This is the fastest by any private sector insurance company,” beams Rao.

Industry: Life Insurance
Scenario: There are currently 15 companies in the private sector life insurance industry who collect annual premiums of over Rs 30,000 crore. The top two players—ICICI Prudential Life and Bajaj Allianz Life Insurance—dominate the market with a premium share of over 40 per cent. The existing players have been mainly hawking ULIPs that account for more than 80 per cent of the annual premium collection
Prominent new players: Fortis-IDBI, Future Generali, Religare-Aegon, Canara-HSBC-OBC Life Insurance, DLF Pramerica Life Insurance Company
Focus area: The traditional endowment and term plans are not marketed aggressively by the private sector players as buoyant stock markets attracted investors to ULIPs. But when markets cool down, demand for endowment products picks up
The ongoing crisis in the US, which announced a $85-billion bailout for insurance giant AIG, isn’t lost on domestic life insurers. Caution is the buzzword, along with growth. “It is becoming increasingly important for life insurers to remain steadfast in taking a long-term perspective,” says Mehta of DLF Pramerica. Jayant Khosla, MD of Future Generali Life, says: “If life insurers can ensure that they are selling the longterm savings idea to customers, volatile or tempered equity markets may actually work in our favour.” Unlike most other financial services, life insurance is a highly capital-intensive and long-gestation business. For instance, even after seven years, except SBI Life, nobody makes a net profit in the life segment.

Kapil Mehta, CEO, DLF Pramerica Life Insurance Company
Kapil Mehta
The mood in the not-so-high-flying general insurance industry, which has been growing at 14-15 per cent annually, is also upbeat. “Even in these tough times, the growth rates are sustainable,” says Milind Chalisgaonkar, CEO, Bharti AXA General Insurance. The reason for the high confidence is the low level of penetration in the non-life segment. “All the players are investing in building capacities for distribution and service over the next 4-5 years,” he adds. The biggest incentive for new players is the falling rates since -detariffing last January.

Industry: Investment Banking
Scenario: There are over a dozen players in investment banking, focussing on advisory services or fee-based services. There is no great use of balance sheet
Prominent new players: Anil Dhirubhai Ambani Group, HDFC Bank, Motilal Oswal, Edelweiss, India Infoline, Almondz Global Securities, Religare
Focus area: Fee-based services like loan syndication, M&A and restructuring advisory services
Harish Engineer, Executive Director, HDFC Bank
Harish Engineer
Also sniffing out opportunities in these turbulent times are private equity players and investment bankers. They argue that the way global events are panning out, the shift of wealth towards India will only accelerate. “The current market conditions offer an excellent opportunity for M&A and buyouts.

The corporate sector will emerge leaner and fitter once the dust settles,” believes Shirish Saraf, President, Samena Capital, a special situation fund. Ajay Relan, who recently quit Citi’s private equity arm to start CX Advisors, is looking at a fund size of close to a billion dollars. Today, Indian companies offer a good investment opportunity in every stage of evolution of a company, right from early-stage to growth to late-stage to PIPE (private investment in public equity) to buyout.

Industry: Private equity
Scenario: There are over 300 players in the Indian private equity space, who collectively did deals worth $17-18 billion last year. The industry is dominated by big foreign players like Warburg Pincus, Blackstone, Temasek, Chrysalis Capital, Actis and a few Indian players like ICICI Ventures
Prominent new players: Morgan Stanley Private Equity, Axis Private Equity, YES Bank Private Equity, Reliance ADA and foreign players like Apollo Global Management, Morgan Stanley Private Equity, Bain Capital etc.
Focus area: There are opportunities galore in the latestage and buyout space. The SME sector also offers a big opportunity for PE players. The other big opportunity is in large infrastructure projects in roads, ports and airports
Ajay Relan, Founder & Managing Partner, CX Partners
Ajay Relan
“I think conditions are right for more PIPE and growth-stage transactions,” says Saraf, whose “special situation” fund has mobilised $200 million (Rs 920 crore). “There are sectors with huge demand-supply gaps like power, ports, education, healthcare and housing. There are also new areas like water and waste management, etc,” adds Khanna of India Equity Partners.

Meanwhile, even as the Wall Street banks lose their place in the sun in the West, they are still in growth mode in India (see Hello, Dalal Street, page 120). Domestic I-banks also see the current churn as a good opportunity to grow. “In India, investment banking is a very different concept at this stage,” says Ashutosh Maheshvari, CEO, Motilal Oswal Investment Advisors. The woes of the global I-banks have also provided their domestic counterparts with an opportunity to poach some experienced hands.

Ashok Wadhwa, CEO& MD, Ambit Corporate Finance, recently hired Nikhil Puri, a former Managing Director of Bear Stearns in US, and Andrew Holland, till recently Managing Director of Proprietary Trading at DSP Merrill Lynch, to build his institutional equities and investment banking operations.

Also, just as ICICI Bank did in the past, IDBI Bank and HDFC Bank, too, have taken the plunge into Ibanking. Says Harish Engineer, Executive Director, HDFC Bank: “I believe it is better to start investment banking operations by arranging debt rather than equity, especially in the current context.” The recent blood-letting on Wall Street will hopefully ensure that for the desi I-banks, proprietary trading and balance sheet risk-taking are too hot to touch.

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