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Indian MF space remains attractive

Posted by fairval on March 10, 2008

IDFC takes one more step in the direction of becoming a full service financial house with the StanC MF deal. Indian PSU banks could take some inspiration

Standard Chartered Bank finally managed to get rid of its mutual fund business, after more than a year long effort. IDFC appears to have closed the deal at a reported $205mn or close to Rs 800 crore. This is around 5.7% of assets under management (AUM). This was a fairly aggressive price.

While the Standard Chartered may chosen to exit, the fact remains that the Indian market is an attractive place for mutual fund business.

The equity capital invested in Standard Chartered MF is around Rs 22 crore, according to its Mar’06 annual report. So this has appreciated around 36x. UTI MF, which reportedly has a valuation of around Rs 7000 crore, has a equity capital of Rs 50 crore. So clearly, there is a lot of value creation going on, in the AMC business. That is why new entrants continue to line up. In recent months, AIG and Mirae have entered the Indian markets, while Schroders is in the process of setting up an India office. There are many Indian outfits with fund management aspirations as well.

One set of players, which have missed the mutual fund party so far, is PSU banks and smaller private banks. This bull run was an excellent time for them to have build a substantial business quickly. Now, with the bull run more or less over, they may well have to wait for the next bull cycle to build scale, even if they do enter now.
First let’s check this IDFC transaction again. What IDFC gets immediately is a profit making, mid size MF business. The Association of Mutual Funds of India (AMFI) lists 32 active players. In AMFI’s Jan’08 report, Standard Chartered MF ranked 16th in AUM. Amongst PSU banks, SBI is much ahead in AUM and PNB has about a similar size. The only two other PSU banks which seem to have an MF business – Canara and Bank of Baroda – are much smaller.

The acquisition also takes IDFC one more step forward into becoming an integrated financial house. IDFC, apart from its main mandate of infrastructure lending and advice, also has a substantial PE business and an institutional broking arm. What perhaps remains for IDFC now is insurance, a commercial banking business. Both are substantial gaps, but already, IDFC ranks way ahead of all PSU banks other than SBI in market cap. It has also almost caught up with Kotak Bank. Its price earnings ratio is above 30, and comparable to banks which are considered aggressive growth players like ICICI, HDFC Bank and Axis Bank.

Contrast this to the valuations of PSU banks, all of which are much older, have better access to funds, and larger physical presence. Apart from SBI, which quotes around 16x PE, all PSU banks quite at well less than 10x PE and just around 1x book value. This is because only SBI has a sizable insurance, MF and investment banking business (though not commensurate to SBI’s position in the commercial banking business). Even SBI has limited presence in alternate assets. Most PSU banks have been forced to remain largely commercial banking entities, and have not been able to build much presence in other financial sectors like broking, insurance and asset management areas like the PE or the MF business.

IDFC’s rapid progress in the market cap sweepstakes underscores the need for most of these PSU banks to diversify into more profitable and valuable areas of the finance business. Even Axis bank, which has hobbled by the presence of UTI in the MF business, could soon be looking to become a full service bank. The idea is – atleast 25% of market cap of a bank should come from non banking activities like investment banking and broking, insurance and asset management. The higher this figure, better can be the market cap and ratios like PE and price to book. For
A recent report by ICICI Securities placed the value of non-lending businesses by IDFC at almost 20% of its current market cap. That is over Rs 4500 crore, or almost equal to the market cap of the likes of Syndicate Bank and Corporation Bank, and more than Central, Vijaya and Dena Bank. Perhaps IDFC will acquire one or more of these in the days to come.


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