RBL Bank-A hidden gem

(Disclosure:I am market making in the shares of RBL Bank)

For most savvy investors, ‘hidden gems’ are companies which fundamentally disrupt markets in ways that the market may not be aware of. This typically gets facilitated through changes in business models and the use of technology. But for the disruption to be effective, the change has to take place in large markets. Think Google, and the way it created AdSense, combining search with advertising and turning the traditional rules of the game on their head.

“The dynamism of the founder, the experience he has and how he has been able to build businesses are often most important,” says Bharat Banka, CEO of Aditya Birla Private Equity, which is an investor in companies ranging from Coffee Day Resorts (which runs the Café Coffee Day chain) to the private sector RBL Bank (formerly Ratnakar Bank).

In a country like India, where capital markets are still not deep enough, investors closely scrutinise companies for governance standards. In many cases, they are ready to make a trade-off in terms of slightly lower returns if the companies are well run and transparent. “Governance is a strong differentiator,” says Banka, citing the case of the recently-listed search services company JustDial, a current market favourite. “There were many marquee investors there already, but with high governance standards, more investors will keep coming in.”

For an ordinary investor it may be inexplicable why someone would pay a hefty multiple for a company which is growing at 25-30 percent, but very often the premium is for transparency and strong governance systems.

This played an important role in tilting the scales in favour of RBL Bank when Banka’s firm was examining investments in the banking, financial services and insurance (BFSI) space.

Though a sleepy community bank till recently, the infusion of fresh energy by way of a spanking new management team, led by former Bank of America India boss Vishwavir Ahuja and former Citi India managing director Rajeev Ahuja, ensured that Aditya Birla PE entered in the second wave of new funding, with a stake of around three percent. What also worked was a professional board and widely distributed shareholding—this ensured no single shareholder or group of shareholders could stall policies.

–from Forbes India