Why Indian Investors Are Betting On Financial Services Firms

Shares of financial services companies have surged over the past one month amid rising investor interest, driven by value-unlocking deals by these firms and growing inflows into Indian equity markets.

Shares of Aditya Birla Money Ltd. and Centrum Broking Ltd. rose up to 75 percent during the period, and are trading at 52-week highs along with their peers. That compares with a 2.1 percent rise in the NSE Nifty 50 Index in the same period. These companies are expected to gain as investors pump more money into equities.

Indians have largely stopped saving through gold and real estate and that $400 billion that went into physical assets, a lot of that – maybe three-quarters of that – is coming back to the financial system, said Saurabh Mukherjea, chief executive officer at brokerage Ambit Capital. The big banking and financial services industry opportunity is not in lending, it’s in savings products – mutual funds, general insurance, life insurance, wealth management, broking, he said.

Domestic institutional investors, largely insurance and mutual fund companies, invested more than Rs 56,500 crore into the equity markets in the last financial year, a little higher than the foreign institutional investors. More than Rs 70,000 crore flowed into equity-oriented mutual funds, making it the third successive year of net inflows.

Mukherjea said exploding financial savings is one of the reasons stock and bond markets are running up. “I reckon, by 2020 we’ll save a trillion dollars a year through financial savings.”

A Flurry Of Deals

Recent transactions signal increased investor interest in these businesses amid value-unlocking by the companies.

Promoters Jaspal Bindra and Chandir Gidwani in December increased their holding in Centrum Capital by 4.7 percent to 37.25 percent. In February, the company’s board agreed to sell a 30 percent stake in wholly owned subsidiary Centrum Direct to New York Life-backed Jacob Ballas as part of the group’s expansion plans to raise $50 million at a valuation of about Rs 1,000 crore, according to reports in The Economic Times and Mint.

Fairfax Financial Holdings Ltd., via its Mauritius arm, increased its holding in IIFL Holdings Ltd. to 26.65 percent in February.

Earlier this month, Edelweiss Financial Services Ltd. said the Insurance Regulatory & Development Authority of India (IRDAI) had accepted its application for setting up a general insurance company in India. Also, bad loan resolution could boost Edelweiss Asset Reconstruction Company Ltd., the country’s largest bad loan buyer in terms of assets under management.

Earlier in April, shareholders of Grasim Industries Ltd. and Aditya Birla Nuvo Ltd. and Aditya Birla Financial Services approved the merger of AB Nuvo and Grasim Industries, which would be followed by the demerger of the new entity’s financial service business. The group plans to list Aditya Birla Financial Services Ltd. by May or June. Aditya Birla Money is a part of Aditya Birla Financial Services.

Motilal Oswal Financial Services Ltd. subsidiary Aspire Home Finance Corp. was also in talks with private equity investors to raise Rs 500 crore, valuing the housing finance arm at Rs 4,000 crore, the Economic Times reported on Friday.

CLSA’s India strategist Mahesh Nandurkar too is bullish on the prospects of financial services industry as Indians move away from physical assets. “We now have a reasonably growing financial services sector in India. There are some financial services conglomerates, the local/domestic financial conglomerates. They are well-positioned to tap into growth opportunities that this trend might throw up,” he said.