In the last one year, everything has got rebooted. There are decades where nothing changes and there are years when a decade changes. Last one year it felt like a decade has changed. Where do we stand?
Overall it has been a year of a huge amount of changes in a short period of time. We have seen tremendous hardship but we have also seen human resilience of a kind we probably haven’t seen before. The global policy makers have front-ended a whole host of responses to this crisis, having learnt from the global financial crisis. Though people expected the impact of the virus to be probably a little bit more severe then it actually turned out to be, because so much was front ended, it has given a big boost to markets, a big boost to asset prices and the lockdowns have also eased and things are getting back to normal. So it has been a year of the 3Vs — virus, the vaccine and at least in India — a V-shaped recovery.
You have an understanding of insurance, AMC and you understand retail credit as well as large corporate credit. How have these individual parts made a comeback?
I will talk about our business and maybe add a flavour of the industry as well. Let us start with insurance. A situation like this leads to a much greater focus on protection of life and health and it is not surprising that we have seen good growth in both life insurance and health insurance. In life insurance, we have grown faster than the industry. We were probably well prepared for the pandemic with a large host of digital initiatives in place that give us a good start when the lockdown started.
Overall, the life insurance industry has done reasonably well. I see that continuing. In the case of health insurance, we have seen very good growth there. We have grown at roughly twice the speed at which the standalone health insurance has grown. We have grown roughly 57% in that business in the nine-month period ended December. Health has become upfront and it is not surprising to see this traction in health insurance. We will see a lot more traction going forward.
In lending, it was a slower start for us. We were a little bit more cautious when the lockdown started originally because we really did not know what we were entering into. We have never been in this position before and therefore we were more circumspect but a couple of quarters into the lockdown, we had a better sense of what is happening our disbursement rates started picking up and collection efficiency got back to pre-Covid levels.
The disbursement buoyancy was reasonably strong in Q3 as well and collection efficiency was back. The recovery has been better than most people expected and the asset management business has been a beneficiary of the huge bull run that we have seen in the stock market. In general, liquidity that is available in the system had its own tailwind. So, I would say that partly as a result of the environment we are working in and partly as a result of the digital readiness that we have had, we have seen some very good growth through this year.
Last year, in two quarters we saw some decline in our growth rates. The last quarter of FY20 and the first quarter of FY21 were impacted by Covid. But in Q2 and Q3 of FY21, we grew year on year over pre-Covid levels. I look back at this whole thing with some satisfaction.
The general view in the market is Aditya Birla Capital’s lending business is a wholesale book and that book ran into rough quarters because of the IL&FS crisis. But that is not the reality. How would you go beyond this image which analysts are always stuck with?
I am not sure that image still holds. There are a lot of people who cover the stock and a lot of people who have seen the traction that we have built in retail and SME. About 40% of our lending business was retail plus SME back in FY17. In the first nine months of FY21, that number would be over 60%. So we have a largely retail franchise, much more than institutional. We do have an institutional business and that is an interesting area to operate in especially as we see the capex cycle coming back. We had our own share of credit issues but we have dealt with them and have been able to manage that situation and come out reasonably strong.
So if people look at the data, they will understand the business much better and will appreciate what a retail franchise we have. In fact across the board, I think we have over 21 million customers. The health insurance business has over 10 million lives insured; our life insurance business has a very large pool of retail policy inflows. Our asset management company has a very large retail portfolio. We have over 7 million folios in our mutual fund business and the biggest engine of growth in our lending business in the last few quarters has been the retail and SME piece. You can see it in the way the proportion changes, the margins change and ultimately in the way the return ratios pan out.
For the first time you have given out guidance. You are looking at a marked improvement in ROA and ROE. How are you planning to do it?
For nine months, we have been talking about our lending business. In the lending business, our ROE was about 8.6%. This includes Covid related credit costs that are sitting in the book. Over the next three years, according to the guidance we gave to the market, we are expecting the book to grow, we are expecting the mix to change and NIMs to increase from 5-5.25% to over 6.25%. Som the mix will drive the expansion in NIM. We are expecting some efficiencies in cost and some reduction in the cost to income ratio. We are also expecting some normalisation in credit cost from here. All of that would lead to an expansion in the ROA and the ROE getting to the 16-17%.
You have got 20 million customers and you have got the huge backing of the Aditya Birla Group. That is a differentiating factor which other NBFCs and other firms of your size do not have?
Yes, we have a large customer franchise. Coming from the Aditya Birla Group translates into advantages for us on the liability side. Our cost of borrowing remains one of the most efficient costs of borrowing in the sector we operate in. That is an advantage we have as a non-banking finance company.
The 20 million customers give us a very large opportunity to cross sell, something else that we spoke about after the Q3 results were announced. We look at the opportunity to sell more of our products to our existing customers and we have seen that over a period of time it happens almost automatically because as people spend more time with you, they do tend to buy more products from you.
In our asset management business we have almost like 1.6 products per customer; in our lending businesses, we have almost two products per customer and this is in spite of our customer base increasing but the focus is to try and see how we can increase our upsell to our customer base. That is one big plank.
The second big plank is to do cross business selling — to sell a say life insurance product to a mutual fund customer.
And the third piece I think is in terms of partnerships where again there is a fairly large opportunity. The recent product launch we had with Vodafone was an interesting idea because they have packaged our health insurance with the plan of theirs and therefore when you buy that plan, you also automatically buy health insurance cover with that. These kinds of partnerships give us the ability to acquire large numbers of customers and then to be able to do more with these customers over a period of time. This customer base and ecosystem that you talk about is a very valuable part of what we have with the Aditya Birla Group.
There are two big changes which currently are happening in the financial world; one, financial firms are trying to become fintech companies and tech firms are trying to move towards finance. How do you see things changing?
In my view, the best model is a model of collaboration between these two worlds because I think when you look at the kind of effort and the kind of platform that somebody like us has across businesses, the scale that we have already built across every business in which we operate, for us to be able to leverage the nimbleness and the innovation of a startup is a great benefit. But it is also a great benefit to the start-ups who get this large ecosystem and this large scale with which to collaborate. So we launched a specific programme called BizLabs about a year ago. Under that programme, we identified areas that we wanted to work with fintech.
We have actually got almost 12 or 13 partners now and are working in different areas. Some of those may help us in risk management, some people may be able to help us in customer service, other people may be able to help us in terms of reaching out to segments that we are not reaching out to as of now. The space is so wide you can pick and choose areas in which we can work with them. I really think this collaboration is going to be a win-win for both people like us who are more traditional financial services players but also with a very strong focus on technology because for us, technology is a very important part of what we do. So we will continuously invent and innovate and up our technology game. But there are fintechs which are very specialised and they do a very good job in these areas. The combination is a win-win for both.
Some would argue that the jewel crown in your portfolio is the AMC business. The company has indicated that it is looking at monetising that business or an IPO is coming. Would it happen in FY22?
We at Aditya Birla Capital which is the holding company, have given the AMC the in-principle approval to explore an IPO. We will have to wait to see how that process moves ahead. I cannot say anything more than that at this point in time.
But is that the five-year view? As your various businesses mature, could you be looking at listing your various subsidiaries?
These are matters where the board will get involved and the board will have a view. After our Q3 results, the board believes that there is opportunity to unlock value given the scale of our various businesses and we will continue to evaluate various alternatives but it will depend on timing and on each individual business. There are a number of factors the board will take to take that call.
Do you think people are not able to understand the true embedded value of your company?
Our job as the management is to make sure that we deliver the full potential of each business that we have. I think markets will look at different assets differently and will ascribe values differently. We just hope that they realise the value of what we are building over a period of time because we have a fairly broad and scale platform across the piece. We are present in lending, in the investing space through our mutual fund business, in protection both through life insurance and health insurance businesses. We have a tremendous tailwind.
The financial services business is directly linked to the growth in the economy. We are very bullish about the growth prospects of India. As India grows, we see per capita incomes rising and as per capita incomes rise, the financial services businesses tend to rise faster. There is a long road ahead for us to continue to build value in these businesses.
When we met last, India was recovering from the IL&FS crisis. I specifically remember you said that it is not the time to bat on the front foot. Is it time now to bat on the front foot?
Yes it is. The policymakers have done an amazing job in India and globally as well. RBI has done a phenomenal job, maintaining financial stability and normalcy in markets. And with the last Budget, a very clear signal has gone out about growth being very important metric that is the focus of the government. The latest Budget will ensure we are going to see multi-years of growth and that is really going to help us get back to the levels that we need which is the 8-9% growth rates which will lead to a rise in our per capita income. I am very bullish and the timing is right. This is really the time to be able to grow.
If you are batting on the front foot now and the delta for financial services is always greater than that of the GDP. Are we at that big turn now where growth could surprise everybody?
When Covid hit, and nobody knew what to expect when the lockdowns were started. Nobody knew that play book. The natural position at that point was to be more cautious than we are now. I am now as bullish as I was pre-Covid because I really believe that the India story is just starting to play out in terms of economic growth in financial services. We have a phenomenal demographic advantage in India and it is not just a young population in terms of the workforce, but it is a population that is very tech savvy. That combination makes a big difference.
Global liquidity is going to be a strong tailwind for India and we know liquidity is going to stay easy around the world for some time to come and that money is going to search for a home and India is going to be a natural place for them to look. India has taken a large number of reforms already and those reforms will definitely help us grow in a more sustained and more strong way than we have seen in the past.
Lastly, in technology, India has really done a great job with many things — be it a payment system, be it aadhaar. and the whole identity system. We really have a strong tech background and backing today and a platform that will allow us to leverage a large number of things that we could not do before. So I really think that we are going to see very different times going forward and I am very bullish.
For this decade, if you have to pinpoint the transformational business for Aditya Birla Capital. which one would that be?
You will continue to see growth across the platform that we have. Let me explain to you why that is the case. On asset management side you are now at a position like I say where the product is very well known, accepted and everybody today knows about mutual funds as an option to invest that has been one big change that we have seen over the past. As the economy grows, as liquidity keeps rising you will continue to see a growth in the asset management business. That business will just continue to grow. Insurance will grow because protection has become a very important part of everybody’s thinking and as we all know India protection is still low. It has been a savings and investment market so far in the insurance business. The shift to protection is what we have seen in the past and that shift will continue as we go forward. Health insurance is a relatively nascent sector and still much smaller.
But with where we are in terms of health awareness and what needs to be done, the out of pocket expenses that people still spend on in terms of health, we are going to see many years of very strong growth in health insurance as well. So you pick that item separately. When you look at lending, if India is going to grow 8-9%, you are going to see a very strong growth in credit and you are going to need the suppliers of credit. So even from a lending perspective you are going to see a lot of demand for people who have access to money and who have the ability to manage risk and therefore able to lend out that money prudently. It is very difficult to pick out one business because each one has a very strong tailwind that backs it and those tailwinds sometimes are common and sometimes tend to be different but they all seem to have that tailwind backing them.
Do you see a fear of disruption even in the lending space?
So you will see some amount of disruption but in the near future, traditional forms of investment will continue for some time to come. I still think in India, lending is a business where the physical format is still a large piece and will continue to remain for some time to come.
