Asiamoney, Business, United Kingdom, Hong Kong, India - Tue February 14, 2012

Religare’s strategic soul-searching

The once-aspiring global emerging markets investment bank has scaled back its ambitions to India and Southeast Asia. The aims look more realistic, but it has several internal issues it must also address. Elliot Wilson reports.

When Martin Newson touched down in New Delhi in November to meet with his bosses at Religare Enterprises, he knew he had a decision to make: either relocate to Singapore from London, or quit the firm he had helped build over the previous three years.

The veteran banker ended up taking the latter option, despite his generous salary as head of Religare Capital Markets (RCM), the firm’s equities and investment banking division. His reasons were simple: he had young children he was loath to uproot from schooling in the UK.

Newson’s resignation has turned the page on a new chapter for Religare, India’s first (and so far only) globally-minded financial services group.

The company’s tale is fascinating. It began in earnest in 2007, when the billionaire Indian brothers Malvinder and Shivinder Singh began to disinvest from their family-run pharmaceutical group, Ranbaxy Laboratories.

The Singhs reaped US$7 billion from selling the business to Japan’s Daiichi Sankyo in 2008 and they quickly put their capital to use, transforming a sleepy in-house brokerage into a sprawling financial group.

Religare Enterprises grew rapidly, opening offices in New York and snapping up brokerages in London, South Africa, Hong Kong and Singapore. Investment bankers were hired wholesale in India and across emerging Asia. Joint ventures were signed with global insurance firms and asset managers.

This, in short, is not a company short on ambition, a point underlined to Asiamoney by group chief executive officer Shachindra Nath.

“Within three years we want to be one of India’s top-five financial services firms,” he told the magazine in September, during one of a series of conversations carried out over the past several months. “In five years we’ll have become one of the world’s leading emerging-markets financial services companies. We will be the first port of call for clients in emerging markets across the world.

“This is a lifetime opportunity for us,” he notes, adding: “If a large Indian financial services firm can’t see these opportunities, then that’s a pity. We want to be a leading emerging-markets financial-services company, based in India and seen as being Indian. We want to be the proxy for the emerging-markets growth story.”

Yet within a few short weeks after making these proclamations, Religare has quietly downsized its plan to create an Indian investment bank with aspirations in every leading emerging market, bridging China, Russia, Latin America, and South Africa, and with aspirations across Asia, Africa and the Middle East. Instead it is focusing just on India and Southeast Asia.

The company needs to demonstrate that its modest focus will work, most crucially in the core investment banking division once run by Newson. Key to doing that will be to bolster its financial markets presence in its home market, India.

Signs of the times

The first sign that something in Religare’s original strategy was amiss came on November 5, at the group’s annual performance review in Delhi.

First of all Newson, confronted with his geographic ultimatum, stepped down. Neither Nath nor Religare Enterprises chairman Sunil Godhwani expect his position to be filled in the near future.

Second was the upshot of the Delhi review. Coming at the tail end of a terrible global financial year for everyone, it amounted to a telling change in strategy. In short, Religare decided to surrender (temporarily at least) its global ambitions.

“When we started our capital markets business, we wanted to build an investment bank across all emerging markets and with London headquarters,” says Nath. “But increasingly [our] view was that this was not the right time, given the state of the [global financial economy] to expand across all emerging markets.”

By December Religare had decided to drastically slim its geographic portfolio. It has decided to focus, at least for the near future, on two key markets: India, its home market and where it has by far the strongest presence; and Southeast Asia, most notably Singapore, Indochina and Indonesia.

That means no expansion into Russia, the Gulf, Latin America, or China (although Religare expects to open a small representative office in Beijing in early 2012).

Religare’s retrenchment means that the first attempt by an Indian investment bank to create a global institution has been postponed. The key question is whether it will be revitalised, or if Religare has accepted that its global ambitions are over before they really began.

Internally, Religare is putting a brave face on the decision.

Godhwani, speaking to Asiamoney, says that the group is “realigning in a very pro-active way”, adding: “The real potential for now is in Asian emerging markets. When we have the option to jump back [into other emerging markets], we will jump back in.”

Calling the consultants

The strategic shift is sensible. The world has changed since 2007, when the Singh brothers tapped Godhwani, a family friend who made his money in the leather-making industry, to be chairman of the group.

Godhwani’s first move was to hire management consultants McKinsey & Company to map out an overarching strategy. It advised Religare in 2009 to do something that no Indian financial group had done before: expand quickly and aggressively overseas.

The idea was to profit from the outward spread of Indian capital, advising on India-led corporate mergers and acquisitions, underwriting Indian stock sales at home and overseas, and boosting revenues by channelling funds from global investors keen to profit from higher returns in leading emerging markets, directly into India-listed stocks.

The idea was good, the timing less so. Back in 2007 the world was still in bull market mode. But since 2008 it has experienced the global financial crisis and its after-effects into 2009. While 2010 offered something of a capital markets resurgence, the past 12 months have been bleak indeed, courtesy of a moribund US economy and a European sovereign debt crisis that seems set to run for some time to come.

The past year was particularly miserable for India’s markets. Few local corporates have sought new capital, either to fund organic expansion or to buy foreign assets. In the year to December 10, Indian companies raised a total of US$9.8 billion via 104 equity capital markets (ECM) transactions, versus 198 deals worth $30 billion for the full year 2010, and 133 deals worth $22.2 billion in 2009.

Moreover, the world has gone cold on the India story. In November 2011 alone, foreign institutional investors (FIIs) pulled INR32 billion (US$600 million) out of India-listed stocks, as economic growth and retail sales slow.

In the eight months to end-November 2011, FIIs pumped just US$134 million into Indian stocks, against net inflows of US$20.8 billion in both of the Indian financial years to end-March 2011 and end-March 2010.

No Indian financial services firm has fared well during this period, but Religare’s international reach has left it particularly vulnerable.

That has hurt its bottom line. In the full year to end-March 2011, the group posted a consolidated net loss of INR2 billion (US$38 million), having swung from a profit of INR2 billion the previous year, although total income over the period nearly doubled, to INR30 billion.

Kotak Mahindra, probably India’s best-run and sleekest investment group, by contrast turned a profit of $155 million in the Indian financial year to end-March 2011.

A positive mindset

Religare CEO Nath remains bullish. While he declines to estimate exactly when the group will swing back into the black, Nath predicts that “next year [2012] will be drastically and positively different in terms of our financials” and that Religare will be profitable again “in the short term”.

While he declines to estimate exactly when the group will swing back into the black, Nath predicts that “next year [2012] will be drastically and positively different in terms of our financials.”

True, several Religare divisions are motoring profitably along, notably the group’s commodity-broking division. It posted earnings after tax in the financial year to March 31 2011 of INR121 million, a 31% year-on-year rise.

Its Finvest arm, which parcels out loans to small businesses and commercial vehicle owners, saw profits inch up 12% over the period to INR1.15 billion, while Religare Securities, for all of the year’s uncertainties, remains (marginally) in the black. It posted earnings of INR58 million in 2010-2011, down from INR742 million the previous year.

Others are underperforming, notably Religare Asset Management, where losses rose to INR500 million in the year to end-March 2011. Religare Macquarie Wealth Management, a joint venture with Australian bank Macquarie Capital, saw losses more than double over the same period, from INR202 million to INR426 million.

And there are several divisions causing severe financial heartache to Religare. Its four-year-old life insurance joint venture AEGON remains dispiritingly in the red, net losses widening in 2011 to INR3.2 billion. The mutual fund unit, Religare AMC saw losses rise to INR502 million over the period.

Meanwhile Religare’s new insurance broking and global asset management arms have started life in the red.

RCM’s struggles

Then there is its capital markets operation, Religare Capital Markets.

The net loss of RMC’s ‘Indian’, or local operations, was INR464 million in the 2011 fiscal year, compared to a profit of INR29 million in 2010. The overseas segment did much worse. It lost INR2.8 billion in the year ending March 31, 2011, more than 10 times the INR211 million loss it registered the previous year.

The performance of this division strikes particularly close to the heart of the company’s strategy. RCM is Religare’s foremost international division, and it is meant to be at the cutting edge of its global emerging markets coverage.

It’s also an operation that the company has spent a great deal of time and money trying to expand.

There are two reasons for RCM’s poor performance. First, investment banks are in trouble across the world, pummelled by soggy markets, higher regulatory costs, and cautious corporates sitting on piles of unused cash. India has been particularly hard hit.

Second, RCM has spent a lot of money expanding its investment banking capabilities. And this investment has yet to bear much return.

Over the past three years, RCM has hired at least 35 investment bankers in India alone, plus another 35 in London, New York and the rest of Asia.

Compare that to Goldman Sachs and UBS, longer-established and more-respected international financial brands, which employ 12 and 15 bankers in India, respectively.

Religare knows that it has far from a bare bones investment banking operation in India. Speaking to Asiamoney before his resignation, former RCM chief executive Newson admitted: “The global bulge-bracket banks do indeed have a lower [India investment banking] headcount than we do… [but] these banks also commit a lot of additional resources to India via global sector teams, hence…you are not really comparing like with like.”

He also claimed that “a number of domestic investment banks employ more investment bankers than Religare”, and that “coupled with our very strong global distribution our clients now have access to the best that domestic and bulge-bracket firms can offer”.

League table lag

Employing a large posse of bankers wouldn’t matter if the team was pulling in a commensurate level of business. But it isn’t.

RCM’s India mergers and acquisitions team ranked 36th in the year to December 13, 2011. Over the past year it was responsible for US$305 million of deal flow through five completed transactions, according to data provider Dealogic. It views the deal volume as too insignificant to estimate the fees Religare would have earned.

Compared to this, Morgan Stanley leads the India completed M&A league table having been responsible for 13 deals worth US$24.05 billion and making US$11 million in fees; Goldman Sachs follows with 10 deals worth US$23.09 billion and US$16 million in fees; and Citi comes third, completing 11 deals worth US$15.78 billion and US$12 million in fees.

It’s a similar tale in equity- and debt capital markets (ECM and DCM). RCM ranks 30th in the DCM market 2011 year-to-date, while its ECM team completed just six deals all year, a motley collection of convertible bonds and follow-on placements in the UK and Hungary, worth a miserly US$57 million. Its India ECM team had yet to complete a single deal in 2011, when Asiamoney went to press.

This deal flow weakness is not new, particularly in M&A. The six largest M&A deals completed by RCM between 2007 and 2011 year-to-date were all in some way related to either Religare Enterprises or Fortis Healthcare, a company chaired by Malvinder Singh. And of the eight advisory roles completed by RCM in 2011, the five largest were also related to one of the two corporates. (The remaining three deals were worth a combined US$7.4 million).

Singh also owns 13.76% of Religare Enterprises, the largest shareholder alongside his brother as of March 31, 2011, and he chaired the group until handing over the reins to Godhwani in April 2010.

In other words, acquisition-heavy Fortis Healthcare (it has bought hospitals and healthcare assets across Hong Kong, India and Singapore) is funding the only regularly active division of RCM.

Rival heads of investment banking are dismissive of RCM. “I’ve never seen [their] bankers in any line-up for an IPO or an M&A deal,” says one.

Another calls it “that Delhi bunch”, highlighting the bafflement many feel that Religare Capital Markets has its headquarters in India’s political hub rather than in its financial heart, Mumbai.

View from the inside

As things stand Religare has a large, expensive team of bankers, none of whom – at least in India – produce much business.

From an outsiders’ viewpoint it makes for a poor strategy.

As losses in RCM mount, everyone is feeling the pressure. But it appears that it’s the wrong people being placed under the most scrutiny.

“A junior banker in 2008 would have been told, ‘don’t worry, just make the money when you can,’” says one insider at Religare. “Now, they are told to bring in US$2 million in annual fees, which in this market is impossible. When they don’t, they are put up against the wall and given a mighty bollocking.”

RCM has targeted the appointment of specialist origination bankers in three key areas – metals and mining, natural resources, and pharmaceuticals and healthcare – yet some of those quickly become unsettled when they realise how little there is to do.

A few have left. Some others, speaking to Asiamoney on basis of anonymity, say that they are treating RCM as a stopgap in between jobs at investment banks with stronger brands and higher league-table rankings.

Solid staffers

When confronted with the firm’s record in deal-making, rival criticisms, and some insider comments, Nath protests that there are “many things that we are doing very well”.

He refers to the company being “very transparent”, and “highly entrepreneurial”, with “management that will hold it in good stead in global terms”.

He maintains that he is “very happy” with the firm’s roster, adding: “Our team is very credible as they have all come from large global banks. We have neither over-hired nor under-hired.”

Nath adds: “I’m not a schoolmaster running Religare, watching whether all the kids are reading their books and doing their work. I expect people to be hard working, and if they aren’t they will have to go.”

Godhwani stresses that Religare “needs all those investment bankers. You can’t decide halfway [through a project] that you don’t need those people any more.”

To be fair, RCM has made some solid hires, notably snapping up bankers in Hong Kong and Singapore to drive its Asia ex-India operations.

Many have come on board from UBS. John Sturmey, the former co-head of capital markets, Asia, at the Swiss bank, was tapped to head up global equity capital markets, while Phil Hodey joined as global chief operating officer (COO) within Religare’s equities business.

Sutha Kandia, another UBS alumni, came on board in 2010 as global head of investment banking, while Robert Munro was hired as Religare’s global COO. Martin Robinson, based out of Singapore, heads up corporate finance in Southeast Asia.

All these men are well regarded. They are also, insiders say, on generous (US$1 million-plus per annum) guaranteed multi-year contracts that are set to run out in mid-2012 or early 2013. Given that much of the M&A work Religare has done has stemmed from Southeast Asia, they seem to be earning their keep.

A Mercedes banker

The level of staffing quality is more muddied when it comes to RCM’s India operations. The investment bank brought in Tarun Kataria from HSBC as its India CEO, to work alongside India head of investment banking Nalin Nayyar.

Both learned the banking ropes outside India: Kataria in London and New York; Nayyar in New York, Singapore and Hong Kong. However in India’s parochial market, many bankers are respected more for their long links to local corporate founder-promoters and politicians than for their global contacts and executional prowess.

Kataria is viewed as a really good guy – “sensible,” notes one peer, and “with his feet on the ground” – but he is also gently teased for his Westernisms, his foreign tailoring, and a perceived distaste for hitting the road to wear out shoe leather and meet new contacts.

“There is a saying here,” says one Religare insider, “‘On Indian roads you can’t drive a Mercedes’. That is what promoters [families that own and run major corporates] say about Tarun. They can’t relate to him.”

When quoted this opinion verbatim, Nath offers an interesting response: “I am happy that people consider him [Kataria] a ‘Mercedes’, which has quality and experience, and I am sure that everyone knows that road conditions are improving every day. You cannot expect an old Indian Ambassador to drive on new-generation roads.”

It’s a cute response that continues nicely with the metaphor. Unfortunately it misses the implicit criticism of the original statement: that a Mercedes is not necessarily the best-suited car for India’s road conditions.

Religare Enterprises rejected requests by Asiamoney to interview Kataria and Nayyar, as well as several Asia ex-India bankers.

Banking on a licence

As things stand Religare Enterprises has an uncertain future. Some parts of the group – most notably its NBFC and commodity broking divisions – are holding their own in a tough market. Others are not.

Insiders who have been at the group since the start believe that from early on in its life the Singh brothers aimed to build a financial group, but they were prepared to exit if losses mounted or a good bid came in for parts of the business.

Religare declined requests by Asiamoney to speak to the Singh brothers for this story.

Many Indian financial groups, from Kotak Mahindra to Motilal Oswal to Indiabulls, have profited from this bulking-up-slimming-down business model.

But then the financial crisis started, and then failed to end, making a division, or the group as a whole, difficult to sell.

For its part, Religare Enterprises declines to state whether it is seeking to sell a division or two. But chairman Godhwani appears willing to hint at it. “I won’t lie to you. If something is not working, I’m not so foolish as to see [company divisions] as decorations on a shelf. If there are changes [that need to be made], we will make them,” he says.

The group also covets one thing above all else: a retail banking licence. The Reserve Bank of India (RBI) intimated in early 2011 that it was getting ready to hand out a handful of these permits.

It hasn’t happened yet, but Nath remains hopeful. “If we have one wish, it is to get a banking licence,” says the group CEO. “This is critical in order for us to create an integrated banking group operating out of India.

“We are a very strong contender,” he adds. “We aren’t owned by a heavyweight promoter; the board is not controlled by the family; we have independent directors; and we are overseen by regulators around the world.”

A crucial two years

Religare has some tough challenges ahead. Its decision to phase out its global expansion plans in favour of focusing on a new India-Southeast Asia strategy – Newson’s last decision before leaving, according to Nath – is a seismic shift, and one that must work.

“Martin’s view was that this was not the right time, given the state of the global financial economy, to be stretched across all emerging markets,” says Nath. “So we decided to focus on only those markets that were able to generate sustainable profits.”

To support those efforts Religare’s RCM division looks set to invest even more into personnel.

“We are going to hire more people across Asia, in banking, research and equities,” Nath states. “Our equities market share in Hong Kong, Singapore and India is growing,” he adds, declining to divulge at what rate of growth, or to what level of volume, “and our research team now covers 250 stocks across Asia.”

You cannot ever fault this company for ambition.

For Nath, the coming two years will be crucial to Religare’s ability to return to its original objective of global emerging markets coverage.

“Our ultimate strategy of becoming a global emerging markets investment bank still holds good,” he says. “It hasn’t changed, it’s just a matter of when. I think we will be one by 2015 and maybe earlier, that all depends on how the next 18 months [pan out].”

Nath’s positive attitude is important to Religare’s future. Yet optimism alone is not enough. The company’s desire to become India’s first global investment bank, focused on emerging markets, would have been a tough task even in favourable years, and these have been anything but. Refocusing on Asia alone makes sense.

But Religare needs to get its expensively assembled coterie of bankers to start producing, soon. Or all the positive talking in the world won’t stop them following Newson out the door.

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