Tuesday, September 02, 2008

Where rewards are risk free

Indiabulls’ diversification into unrelated businesses could hamper its stock broking business
The growth trajectory of the Indian insurance sector is all set to soar high. All thanks to liberalisation, competition and now diversification that has forced biggies in the financial domain to look towards this highly untapped sector with great interest. No doubt, its low penetration level (at 3% of the GDP) coupled with the fact that only 20% of the total insurable Indians have a life insurance cover provide players a perfect launch pad for growth. Considering the fact, broking firm Indiabulls, which entered the fray recently through a joint venture (74:26) with French insurance major Societe Generale, aims to tap 2-3% of the domestic life insurance market by 2010. A good move when the thriving insurance sector (growing at a CAGR of 175%) is all set to reach Rs.2 trillion by 2010 from Rs.500 billion at present (Assocham). Even their target to collect Rs.10 billion as premium in their first year and Rs.50 billion in next three years looks achievable when one takes into account expected growth of 140% in the private sector insurance business.

But, as Indiabulls diversifies into large scale growth areas, one is left pondering on the fate of the mother business of securities? “Diversifying into high value added products and services is another way to maintain our leadership position,” is what Sameer Gehlaut, CEO, Indiabulls has to say. As regulations don’t allow a capital market arm in the insurance business, Indiabulls necessarily will have to demerge its stock broking business. However, the primary question doing the rounds is whether or not their diversification into related as well as unrelated business domains along with such demergers will finally pay off.

Actually, there is another critical logic besides maintaining leadership. The company has been focusing on building multiple businesses to mitigate cyclicality in earnings and as the demand for financial products grows, Indiabulls is further expected to unlock the value of the securities business. While all these seem to be good, the company has to be wary of the extremely competitive insurance sector, where there is little scope for product differentiation in insurance.

Certainly their real estate venture has been doing well (thanks to expected sectoral CAGR of 25-30% over the next five years); but what about insurance? “We have a strong distribution network and this will help us operate on a large scale with efficiency,” remarks a company official. Also Societe Generale, its partner, is not new to the Indian landscape; its long standing JV with SBI can be leveraged by the new entity. In fact, the company is planning to be amongst the top three by 2010. Comments S. Rao, Sr. Analyst, Arihant Capital, “they plan to emerge as an integrated financial service provider. Considering their distribution network and experience with Max New York, diversifying into insurance is definitely a rational decision.” Insurance is capital intensive, but for Indiabulls, whose PAT has witnessed a y-o-y growth of 82%, it shouldn’t be a problem. Even analysts are betting big on Indiabulls’ insurance business and seem to be keenly looking forward to their other proposed new ventures.

Still, Indiabulls must tread with caution. With well established incumbents and many more queuing in, even this relatively mundane (as compared to their stock broking business) insurance sector can offer many more thrills than they assume they are ready for.

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Source :
IIPM Editorial, 2008
An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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