Aiming To Go Global, Will It Succeed? - Religare

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For Malvinder Mohan Singh change is the only constant when it comes to business. In mid-2008, he shocked the corporate world by off-loading the entire promoter’s holding in Ranbaxy Laboratories in favour of Japanese Pharma major Daiichi-Sankyo for about Rs 10,000 crore. That deal came as a real shocker as everybody was speculating about Ranbaxy acquiring some big pharma company to expand its pharma business in the global space. Not many realized that the Ranbaxy promoters were willing to offload their core business and risk entering into newer business areas. Also there was a lot of sentimental value involved as Ranbaxy was started by their grandfather Bhai Mohan Singh and nurtured well by father Parvinder Singh. Yet business sense prevailed over sentiment to drive the value proposition for the stakeholders.

When we look at the way the Singh brothers are doing business, we find a lot of similarity between them and Rajiv Bajaj of Bajaj Auto. When Rajiv Bajaj decided to discontinue scooters from Baja Auto’s portfolio of products it surprised many including his father Rahul Bajaj. Here, again, sentiment did not cloud pragmatic and sound decision making. Recently, Rajiv Bajaj announced that he would be doing away with the Bajaj brand name for motorcycles, another shocker from Bajaj.

Something similar was done by Singh brothers on April 06, 2010 when they announced that they would step down from the board of Religare Enterprises (REL), the largest listed company from the Singh brothers having a market cap of Rs 5,000 crore. Not only did they step down from the board, they also handed over the management control to one of their close friends Sunil Godhwani. In Indian corporate history, there are not many examples where promoters have handed over control of their business (that too in a company having highest market cap) in the hands of independent professionals. It requires courage of conviction and is a big risk not many Indian promoters are willing to take.[PAGE BREAK]

But, as happens in such cases, speculation was rife about Singh brothers doing it to meet legal obligations to start banking operations. Quashing the speculation, Malvinder was quoted as saying, “These are very large agendas in terms of where we want to be. We are restructuring the board to bring in people of global calibre in financial services to add value and to work with the management team.”

These incidents describe the unconventional way of thinking and the unheard of style of the group’s working which has now an objective of making Religare Enterprises the first Indian global financial services brand.

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In fact, the uniqueness of the decision to renounce control by the promoters in favour of professionals triggered an interest about Religare and DSIJ decided to meet the top officials of the company. After the meeting, we found that the team of professionals now running the show seems to be very much clear about its goals and is determined to make it happen. “The board is largely driven by our growth objectives, expanding and achieving the goal of building India’s first globally trusted financial services brand as nobody from India has tried to achieve it,” announced Shachindra Nath, the newly-promoted Group CEO, Religare Enterprises.

Today, the new team is on the mission to make Religare a global brand and it is committed to make it to the Top-3 in the years to come. “No matter what business we get into, we must be the market leader. We need to drive the agenda for that industry,” Malvinder Singh had declared few months back to one of the business publications.[PAGE BREAK]

This aspiration of Religare does hold some weight in the light of the Indian growth story which is likely to be robust in the coming decades. Indian companies do have the advantage to capitalize on this growth momentum, just like foreign companies capitalized on the growth phase of Western economies and grew manifold, especially between 1960s and 1990s. Just to name one, HSBC has grown to become the world’s largest banking group today due to the growth strategies it adopted in 60s and 70s. Till after the Second World War, this 145-year-old bank had just two branches in Hong Kong and Shanghai but in the 1960s it acquired some valuable institutions such as Mercantile Bank, Hang Seng Bank and British Bank of the Middle East, and also formed a merchant banking arm called Wardley. The strategy of expansion through acquisition and formation of self-sustainable subsidiaries with their own expertise in 70s paid off rich dividends and catapulted HSBC to the numero uno position. More or less, this strategy was also adopted by other institutions, including Goldman Sachs which shifted its focus away from trading to investment banking after 1930 and strengthened this segment during the 60s. It did wonders for the company and helped it to become a financial giant.

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The same opportunity is also now available to Indian companies such as Religare which have strong pedigree and promoters who are willing to innovate. Also, besides the Indian growth story, technological advancements have created an enabling environment for companies to achieve growth many times faster than they could in the past. Besides, the financial crisis of 2007-08 has thrown up lot of opportunities in the financial world in the form of well-established and performing companies going up for sale. So any company with loads of cash in its coffers and the will and the business acumen to make it big can do so with ease.

Perhaps that opportunity is what Religare has already identified and the company is in the process of reorganizing the board so that a select band of board members would have a bigger role to play in taking Religare global. “The experience that they (new board members) come with will play a key part in driving Religare into becoming not just a stronger pan-India player but a recognized and well-respected global financial services player having Indian parentage,” asserts Sunil Godhwani, the CMD and the new face of Religare Enterprises.

Mission global
Today, with its eyes firmly set on making a global foray, the group’s geographical expansion would happen through acquisitions. Its other group company Fortis acquired substantial stake in Parkway Holdings, a Singapore-listed healthcare company. Religare, the financial arm, also wants to spread its wings globally and that process has already started.[PAGE BREAK]

While Religare is a well-known brand in the country, it is a relatively unknown brand in the global financial market. Realising this, Shachindra Nath, Group CEO, states that they need to sell hard themselves to convince prospective targets why they need to sell their business to Religare. The first step towards establishing a global footprint came through the acquisition of UK’s oldest broking house Hichens, Harrison & Co on April 9, 2008 for Rs 468.3 crore. Hichens was engaged in five principal areas of activities: private client stock broking, institutional broking and sales, corporate broking, corporate finance and contracts for differences. Hichens has 10 international offices with two in London, two in Singapore, one in USA, one in Brazil, one in Dubai, one in Qatar and two in South Africa. This acquisition ensured that the Religare group gets a headstart to do business (with requisite licences) in the global market. Hichens reported revenues of Rs 159.88 crore for the year ended March 2009.

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The group made another big stride in February this year when it acquired Northgate Capital, an international PE company having offices in London and San Francisco. It is believed that Northgate Capital manages assets worth about USD 3 billion.

Religare has already dedicated USD 1 billion fund for strategic investments in diversified asset management businesses globally. The company has recently applied for regulatory licence in Japan and has hired a high profile team of professionals to set up an asset management company as well as sales and distribution business in Japan.
These strategic acquisitions have given the company a footprint stretching from the US, UK, Middle East, India right up to Japan. The aim is very clear: building a diversified global financial company.

How serious the company is about making its global foray a success can be gauged from the fact that in September ‘09 it made attempt – albeit an unsuccessful one – to acquire AIG Investments, the investment management arm of the troubled American Investment Group. This abortive attempt gave some good learnings for the company and reinforced its determination to expand the business globally. “Before the AIG episode, we never realized that asset management business can be so big, so vibrant, so diversified and can be made so successful,” reveals Shachindra Nath. The failure has not deterred the team from pursuing its global ambitions and it is all the more determined to expand the business globally, mainly through the inorganic route.[PAGE BREAK]

At the same time, on the domestic front, the company has tied up with some of the best financial institutions like Macquarie for wealth management business, AEGON for life insurance business and Milestone for healthcare and education private equity fund. These JVs are providing good insights and experience of running a global financial conglomerate.

Aspiring for emerging market investment bank
The company, at the same time, is aiming high to build a global investment bank, a territory never explored before. “We want to build an emerging market investment bank. That involves combination of both inorganic and organic,” informs Shachindra Nath.

The investment banking arm of Religare has in the past advised the group successfully in the Ranbaxy-Daiichi Sankyo deal. Soon after that deal, global

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meltdown hit the financial world and Ranbaxy share plummeted to an all-time low of Rs 133 in March ‘09 as against the Rs 737 per share price paid by Daiichi. Very recently, the investment bank arm advised Fortis to freeze deals with Wockhardt Hospitals and also Parkway Holdings, both of which are now appreciated for sheer timing and acumen.

Boosted by these successes, the company has now decided to go out full throttle in global investment banking space and acquiring companies to get access to the global markets. Considering that it is very difficult to get fresh licences in different part of the world, acquisition is much easier option. Today, the revenues from the international market is not substantial. “Our revenue from overseas operations is in early double digit figure,” reveals Anil Saxena, Group CFO, Religare Enterprises, and also a board member.

Indian operations are in expansion mode too
A company started from a 1,500 square feet office in 1996 by acquiring a small stock broking firm called Empire Finance is now a Rs 1,194.51 crore turnover conglomerate. In fact, in a very short span of time, the company has gained leadership position in various segments like stock broking and commodities. On the other hand, the company is continuously gaining ground in consumer finance and asset management business. This is not enough as the company has expanded into areas like arts, insurance, health insurance, mutual fund etc. which would give the company opportunities in new business horizons.

Currently equity space is the bread and butter for Religare, contributing 50-60 per cent of the total revenue. In the first nine months of FY10 itself, Religare Securities (100 per cent subsidiary of Religare Enterprises) has clocked over Rs 460 crore revenue and has a market share of 3.62 per cent (as on December 09) with average daily equity broking turnover of Rs 3,559 crore. This arm today has a pan-India presence of 1,686 branches and a customer base of 6,55,089.[PAGE BREAK]

The company is ramping up its lending business and results of the same should be visible in coming months. “Consumer book is increasing every month and we are also considering some acquisition. So if we look at one year from now,  then equity-related revenue would be much less than 40 per cent of total revenue,” informs Saxena, spelling out the company’s derisking strategy.

In addition to equity broking, commodity is also another segment in which the company is making a foray. The company claims that they are the biggest commodity broker in the country with a total market share of 4.42 per cent, with revenue of Rs 51.52 crore till December 09.

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NBFC will be the next bet
After equity broking, the next bet for the company is certainly consumer and capital markets finance business run by Religare Enterprises subsidiary Religare Finvest. In the first 9 months itself, this business contributed a whopping Rs 375.6 crore to the topline and is giving good growth to the overall business. In Q3 alone, consumer finance has grown by 34 per cent to Rs 39 crore on Q-on-Q basis. On the other hand, lending against securities (LAS) has also clocked a growth of 3.7 per cent to Rs. 32 crore in Q3. In Q3 alone, the average yield in consumer finance remained at a healthy 18.19 per cent for SMEs, 13.9 per cent for commercial assets and 15 per cent for mortgages, with 74 per cent of the lending in the form of secured assets.

Actually, in the last one-and-half year, the company has deliberately diverted its focus from capital market financing to non-capital market portfolio. The reason is simple: it wants to have a chunk in the ever-growing market of consumer finance in India. This has made the management to look more aggressively at the NBFC space. “Certainly, we want to make a strategic shift from a pure margin finance to full-fledged NBFC and so we have appointed a full management team. Today, our total non-capital market portfolio at the end of Q309 stands at Rs 1,200 crore and, on the other hand, our margin portfolio was of Rs 800 crore,” informs Shachindra Nath.

But the next big thing from the group would be a foray into the banking sector. It’s just a matter of time before the group goes into banking either by acquiring a new licence or by taking over any of the existing bank. Nath informs that the entire company is working in a manner the banks operate in terms of systems and procedures to get ready for banking operations as and when the group forays into banking.[PAGE BREAK]

Insurance: Long way to go
As far as insurance business of Religare is concerned, like many financial and other groups, the company has also forayed into this space. First, it has tested itself into distribution of insurance products through its subsidiary Religare Insurance Broking and now it has entered into life insurance space with AEGON and Bennett & Coleman with Religare holding 44% stake in the company called AEGON Religare Life Insurance. Till February, insurance business netted a first year premium of Rs 108.29 crore and accounted for revenue of Rs 42.21 crore in the first nine months of FY10

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But Religare is very much serious about this business and within a year-and-half of its inception, the company has appointed BCG to do a strategic review of the life insurance business, again quite unheard of. When enquired about it, Nath replied, “We want to review our action before we have done the damage, so that we can change it. This is forward thinking.”

Mutual Funds
Very few would recollect that Singh brothers surprised everyone when they took over Lotus AMC at the fag end of 2008 when the complete financial world was grappling with subprime crisis. The group paid less than two per cent of the AUM to take over, quite a low consideration payout compared to some of the deals that took place post-Lotus acquisition. The same AMC today manages assets of Rs 15,900 crore as against acquired assets of Rs 3,500 crore.

But miles to go…
Religare is not leaving any stone unturned to achieve its goals, but it is an uphill task. It would become tougher for Religare in the wake of its performance in the domestic market. Of course, market sentiments were down and that could be the reason for poor performance. Its financial performance was not so impressive in the last couple of years. In FY09, the company’s consolidated revenue was at Rs 1090.22 crore, 31.32 per cent above FY08 figure of Rs 830.14 crore, but real shock came in the form of sharp decline in its bottomline. The company’s PAT declined from Rs 90.15 crore in FY08 to a net loss of Rs 48.56 crore in FY09. Though performance of the company improved in the first nine months of FY10 with revenues of Rs 1029.46 crore and net profit of Rs 65.21 crore.[PAGE BREAK]

Due to this performance, the company’s recently concluded rights issue, which was pitched at Rs 355 per share, got a moderate response from the shareholders. The issue was somehow saved by the promoters netting 62.31 per cent shares of the total issue of Rs 1,814.31 crore, wth public shareholders subscribing just 37.69 per cent shares. By doing so, promoters’ stake in the company increased from 53.82 per cent to 57.14 per cent as on March, 31, 2010.

At the same time, the company’s market share in broking space is on decline. It was 3.90 per cent in FY2008, but it has declined to 3.59 per cent in FY09. It improved marginally to 3.62 per cent for December 2009.

One of the reasons for falling market share could be slowing down on client additions in the retail broking segment. For the year ended March 2008, it added 2.66 lakh clients but declined to 1.46 lakh in FY 09.

In the asset management business, Religare is relatively a small player. It ranked 12 out of 37 players in terms of AUM. Of course, Religare is relatively new player, but it needs to scale up operations as other players have strong presence and have good amount of experience.

DSIJ believes that the aspiration of Religare Enterprises to become a glob-al financial brand holds promise, but the company should be very careful about its efforts and need to integrate them for a steady growth. Of foremost importance are the steps and strategies which Religare adopts while expanding its business. Though the company has acquired many companies around the globe, so far these acquisitions have not contributed much to the financial numbers, an area that the company needs to look very closely.

Also, the kind of empire that the company wants to establish requires a huge team of best talents as financial services is a people business and needs years to gain trust and confidence. Religare has already realized this fact and is wasting no time to have people on board. “We have identified a pool of people who come with a great deal of experience and who are well respected in the world of asset management and investment banking by their peers in the financial services domain,” informs Sunil Godhwani, CMD, REL when asked on expansion of board.

In the end, it’s just about how effectively the company executes the plans formulated by it in its pursuit of becoming a global financial services brand. The company has taken few steps, but there are many more giant steps it needs to take before it can emerge as  a global financial brand. We would say it would take at least 5-10 years to achieve this dream. We would be waiting for this to happen.