AB Capital, the financial services arm of Aditya Birla Group, is present in various verticals including NBFC, AMC, life and general insurance. The company which listed in 2017 is now gearing up to launch the IPO of its AMC business. Ajay Srinivasan has been at the helm of the company since its listed avatar and has been associated with Aditya Birla Group since 2007.
In an exclusive interview with Moneycontrol, Srinivasan talks about the company's strategy to boost profitability, its IPO plans, and his views on the government's move to privatise PSU banks.
Q: Ajay, what’s the strategy to increase the profitability, especially because you have the advantage of lower cost of funds and credible parentage?
A: I think our approach across all our businesses and lending in particular has been to be able to find the right risk-return trade-off, and you know I think you have to look at it that way, you can't look at risk without looking at return and you can't look at return without looking at risk. And I think we've always tried to find that place which gives us that right balance which is why you'll see our performance will always be steady, will be consistent and as we change our mix we've always said that retail and SME are a focus area for us. We want to increase our mix in that area because it has higher yields, it has higher margins and we think that leads to better returns as well. You've seen that play out in the last quarter, as we continue to do that going forward you will see that flowing through the return metrics for sure; but I think it's still a question of always understanding the risk-return trade-offs and I think we will always take that into account when we build our book.
Q: One metric that defines the stock price movement as well as the shareholder value is the return on asset which is more in line with the banking space than necessarily with the NBFC space. Why will any investor shift to AB Capital for value creation?
A: So, I'll answer your specific question on the NBFC and then answer the broader question as well. I think like I was saying as we increase our mix you will see that translating into NIM, you will see that translating into return on assets. I'm again pointing to our Q4 number with the return on assets at 2.2 percent that is very comparable with most of our peers in the NBFC space. We expect that to increase even further as we increase this mix because as we increase this you will see the increase in the ROE which is what we've guided for, for FY24. But getting back to your question, I think when you're looking at an equity investment and you know we have some businesses that do that as well what are the factors that we look at?
We look at the sector that you're operating in, we look at the quality of the brand and the quality of the management and we look at the quality of the earnings and the earnings potential to grow. Those are the simple factors that we would look at when we look at any such investment opportunity. I think financial services is probably the fastest-growing opportunity still in India because we still have a lot of headroom to grow in any one of the businesses that we operate in. We believe we have a reasonable brand and a reasonable management team that has proven its track record over a period of time. Over the last five years through various cycles our PAT has grown 18.5 percent, over the last year it's grown by 22 percent. So we do believe we've got earnings momentum and mobility as well. So I’m saying what else do you look for in an investment other than the sector in which you operate, the brand, the management team and the earnings profile.
Q: What’s the strategy for cross-selling across the company, how is that materialising? And how will you harness the benefits of the large group that you are part of because you have a large telecom company as well?
A: The question on cross-sell is really much more an issue of how you monetise and how you get more from your customer base and I think that's a journey we've embarked on for some time and a lot of work has happened. We've increased our products per customer which is really as a result of what we call upsell, which is selling more of the same product to a customer, very significant over the last few years, all our businesses are doing that in different ways, leveraging analytics and increasing that. We're looking at different ways in which we can own, increase our cross-ownership of products and you will see a lot of progress on that as well. And you talked about partnerships you know we've just launched a product with Vi, where we are selling health insurance product along with a telecom package you know and that's a pilot and that's already done very well. I think there'll be many more opportunities like that. We have a very significant customer base, I think that's a fairly significant customer base when you're building retail financial services. So, I think when you look at scale and the opportunity to be able to touch a large number of people across the country we've got everything that it takes to do that.
Q: What is the kind of value unlocking you expect from the ABSL AMC IPO?
A: I think what we've done is we've filed the DRHP for our asset management company, it's an offer for sale that will lead to the listing of the asset management company, so that is you know the first step in value unlocking that we've spoken about last time. I think the board will constantly look at different opportunities and avenues to be able to unlock value and we've decided that the AMC opportunity is a great place to do that.
Q: What is the timeline for the ABSL AMC IPO and the valuation expectation? I hear, close to about Rs 22,000 to Rs 24,000 crore for the AMC business, for an offer for sale opportunity?
A: You know I can't comment on that. These are all things that will go through a process and we will see that as it goes through.
Q: Two aspects of AMC business, better cost to income ratio and higher equity portfolio, are the main trigger points which can add more value over and above what SOTP already has incorporated, what’s the projection on these?
A: If you're talking specifically about the asset management company, I think we've taken some steps in the course of last year to rationalise cost that's been one of the factors that has led to an improvement in profitability in the last year. And I think you'll see if you look at basis points to AUM, that's expanded from something like 26 basis points to 28 basis points in the year, partly as a result of some of the cost initiatives we've taken. As far as equity is concerned as I said we're really looking at building up our equity mix as a percentage of the total mix that mix also changed last year, so it moved from 35 percent in the previous year to 36 percent this year and that journey will continue. We believe our growth story is based on increasing equity, increasing our retail participation and going into the much smaller towns in India, where we think the ownership of mutual funds is still building and therefore that gives us the ability to build a new customer base for the mutual fund industry as a whole.
Q: What’s the M&A opportunity AB Capital is eyeing?
A: We keep evaluating several opportunities as a group. We look at either filling some strategic gaps that we have or to enhance our financial profile. So far we haven’t found anything that meet that need and we will continue to look. If we find something that meets that objective, we’ll be very happy to look at it.
Q: What about the company’s banking dream? What's your view on participating in the government’s plan of privatising the PSU banks?A: We are waiting for the final guidelines, based on that we will take a call. It is based on the way the regulations take shape, based on that we will take a call.