Aditya Birla Capital: Will A Management Transition Breathe New Life Into The Business?

The Aditya Birla Group, like some of its peer corporate houses, entered the financial services business early. Aditya Birla Financial Services was incorporated in October 2007 and started operations in May 2009 as largely a corporate lending business.

Ajay Srinivasan, who cut his teeth in asset management, was appointed to helm the business. Nearly 15 years later, Srinivasan is preparing to move on to another role within the group, making space for ICICI Bank Ltd.'s Executive Director Vishakha Mulye to take over.

Over the course of his tenure, Srinivasan has seen the business grow into 13 entities consolidated under the umbrella of Aditya Birla Capital Ltd., which he took public in September 2017. On a consolidated basis, Aditya Birla Capital's net profit stood at Rs 1,256 crore in the nine months ended Dec. 31, 2021, with the largest contribution coming from Aditya Birla Finance, followed by asset management and insurance.

Yet, it is seen to have fallen behind in the constantly changing financial services sector, which has seen a sharp shift in focus away from corporate to retail lending. This has impacted the company's share price performance. Since listing on Sept. 1, 2017, shares of Aditya Birla Capital have fallen 51%. In contrast, the benchmark Nifty 50 index has risen 72%.

Mulye has the task of setting the non-bank lending business in order, said Arun Kejriwal, founder of advisory Kejriwal Research & Investment Services. "She has been credited with ironing out the problems at ICICI Bank's wholesale division and putting the house in order. The same will be expected of her once she takes over her new role at Aditya Birla Capital," he said. "The rest of the businesses will fall in place on their own, once this has been fixed."

Queries sent to Aditya Birla Capital on Monday and Tuesday were not answered.

Aditya Birla Capital has managed to build a strong franchise over 15 years, despite multiple hiccups on the way, said Suneet Maheshwari, founder and managing partner at Udvik Infrastructure Advisors.

"You had the global financial crisis, demonetisation, the IL&FS crisis as well as the pandemic... In this time, the group has taken some bets which worked and some that did not. But they learned from it and have constantly course corrected," Maheshwari said.

At the time of its listing, Aditya Birla Capital was a large wholesale financier focused on working capital loans, term loans, project finance, structured finance, construction finance and promoter finance.

During the quarter ended June 2017, Aditya Birla Capital had a lending book of Rs 41,066 crore, consisting of Rs 36,250 crore worth loans extended by Aditya Birla Finance, and a home loan portfolio of Rs 4,816 crore. About 68% of Aditya Birla Finance's book was geared toward large corporate, mid-corporate and promoter financing. Small and medium enterprises constituted 25%. Retail, which was at 7% of the loan book, largely consisted of loans against property.

Over the last five years, non-bank finance company Aditya Birla Finance has been shifting its book toward retail and small business borrowers, moving away from its corporate lending past. In December 2021, retail and small and medium enterprises loans contributed 60% of Aditya Birla Finance's loan book, compared with 53% a year ago.

According to a senior banker, who spoke on the condition of anonymity, while Aditya Birla Finance has been talking about growing its retail portfolio, its execution has left much to be desired.

For instance, checkout financing has become a popular business within unsecured retail lending. It is a product which has succeeded for many, including market leader Bajaj Finance. While it offers the product, Aditya Birla Finance's distribution network is not as strong as some of the other lenders active in the market, the person quoted above said.

The head of a digital lender working with Aditya Birla Finance, also speaking on the condition of anonymity, said that the company has not been able to capitalise on cross-selling opportunities either. Partnering with digital lenders gives the company immense amount of data on potential customers, which has not been put to much use at Aditya Birla Finance, this person said.

"The lack of a clear strategy has hurt Aditya Birla Capital's prospects," said Shriram Subramanian, founder and managing director, InGovern Research Services. Moreover, the large number of business verticals under Aditya Birla Capital act as a distraction. "This means that there is no one business which the company is known for," Subramanian said.

In terms of asset quality, the non-bank lender has seen bad loans rise in sync with the market, with non-performing assets at 3.9% as of December 2021.

The collapse of the IL&FS Group brought trouble for the NBFC sector, and Aditya Birla Capital was not immune. Apart from liquidity and funding strains faced by most non-bank lenders, Aditya Birla Capital had extended about Rs 1,700 crore worth of loans to the IL&FS Group.

The corporate lending vertical of the group also faced questions on its role in financing Gautam Thapar's Avantha Group.

In an order released by the Securities and Exchange Board of India in September 2019, the regulator highlighted transactions between Aditya Birla Finance and Avantha Group companies as "prima facie prejudicial".

According to details provided by SEBI in its order, Aditya Birla Finance had provided a Rs 190 crore loan to Blue Garden Estate Pvt., an Avantha Group company. This was for purchase of real estate property from CG Power & Industrial Solutions Pvt.

Once Blue Garden received these funds in February 2017, it extended the funds to CG Power, which in turn advanced this money to Acton Global Pvt., a company owned by former CG Power employees, for no interest. "Acton, in turn, utilised the aforementioned amount towards payment against the liability owed by BILT Graphic Paper Products Ltd. (BILT) to ABFL," SEBI said in its order.

While SEBI in its order did not assign any blame on Aditya Birla Finance, The Economic Times newspaper had reported in June last year that the regulator had sent a show cause notice to the lender in this matter. BloombergQuint could not independently verify this.

"NBFCs tend to get into riskier bets in corporate lending because their cost of funds are much higher than banks. To make any meaningful returns, the NBFC must have a tight credit underwriting process," said Hemindra Hazari, an independent banking analyst. "The fact that Aditya Birla Finance extended money to a shell company points to the fact that quality underwriting was totally missing from the company."

Mulye, an ICICI Group veteran, started her career as a management trainee at the bank in 1993. She has experience in wholesale banking as well as ICICI Group's general insurance and private equity businesses.

According to a person familiar with her management style, Mulye is strong at execution. However, there have been limited opportunities for her to implement any innovative long-term strategy in any of her roles at ICICI Group, this person said, while speaking on the condition of anonymity.

According to Asutosh Mishra, head of research at Ashika Broking, there will be hope that there is a turnaround with the entry of a new management, like in the case of Axis Bank Ltd. and ICICI Bank Ltd.

"We have seen these financial institutions turn themselves around with new blood coming in. We will need to see a change in strategy for Aditya Birla Capital and a bias for growth," Mishra said.

Mulye's banking background will also help Aditya Birla Capital transition towards the Reserve Bank of India's new regulatory framework for NBFCs.

"Mulye’s experience as a career banker comes handy as the NBFC transitions towards scale-based regulatory framework where prudential norms, processes, governance standards and disclosures of NBFC-UL (upper layer) are aligned to banks," ICICI Securities said in a note on Monday. "The experience in wholesale banking will have to be leveraged and reoriented towards retail, SME and housing as well."

According to Hazari, the new chief executive will need to overhaul underwriting and credit monitoring, and prevent attrition from the senior ranks at Aditya Birla Capital's NBFC. "That is the only way to fix the perception issues with this financial services group."