Will Strategic Acquisition of Free charge revive Axis Bank from Declining Profits?

Strategic Acquisitions have become the order of the day in the recent corporate world. Corporate Players who estimate their future survival in the market through current earnings, investor’s confidence and changing customer base are becoming prudent enough to strategize their investments in highly probable winning deals.

Axis Bank which is reputed as India’s third largest private lender is no exception to this. The bank has been choking to sustain its profit margins with increasing bad loan provisions which had resulted in a steep decline of its asset value. As a cascading impact, the bank had ended up reporting 16.06% decline in net earnings in the first quarter of the year despite a marginal increase in the top line revenue by 1.45% during the same quarter of last year. The lender’s asset quality has also worsened by a steep increase in Gross Non Performing Assets (NPA) to 5.03% during FY17 Q1 compared to 2.54% for the same quarter of previous year. The market has instantly reacted to this discouraging trend of financial performance by 3% fall in stock prices on the same day which reflects the loss of investor’s trust.

However, the Board has now come with a new strategy of venturing and broadening their presence into the digital space by acquiring Snapdeal’s ‘Free Charge’. The Bank was desperate to close this deal as they have offered an attractive price compared to ‘PayTm’ which was also competing to acquire this asset. This deal also gives a big sigh of relief to Free Charge’s parent, ‘Snapdeal’, which is already in talks for selling itself to its rival ‘Flipkart’ due to its declining fortune since the beginning of this year and struggling for independent survival. Free Charge was acquired by Snapdeal in early 2015 for $ 400 million. However, it has now been sold to Axis Bank at a massively discounted valuation of 85% at $ 59 million (384 Crores INR).

This clearly indicates a strategic acquisition with great anticipated outcomes. Axis Bank would get a popular digital payment brand backed up by a high-quality technology platform, which can be leveraged towards tapping into current market opportunities that are booming in the digital space. The benefits of this acquisition will begin to bear fruit in the next couple of years. Another big competitive advantage which the bank would gain on this acquisition is access to small value transactions and Utility Bill Payments which are the key customer service segments of Free Charge.

It is also quite rational to think that the Bank already has a significant presence in the Digital Space through ‘Axis Pay’ and there was no need for the acquisition. However, the digital market of India is in its boom days buoyanced by the ‘Demonetization’ Move of the Government last year. Telecom Giants like ‘Reliance Jio’ have further intensified this growth by their rapid penetration into the Digital markets by making Internet Connectivity as the common man’s amenity in India. A recent survey published in ‘The Economic Times’ on 27th May’17 says that the Debit Card transactions have surged to 1 billion at Point of Sales of merchant locations in January 2017 compared to 817 million during the same time last year against the ATM transactions which was almost static at 700 million. This clearly substantiates the fact that the Indian Economy is rapidly shifting towards ‘Digital Cashless Mode’ and people prefer to make more cashless payments compared to cash transactions. It has also been evidenced by the annual report (2016-17) of Axis bank that the bank had reported 66% share of digital transactions in India in FY17 Q4 compared to 51% during last year. Also, the spends on Credit/Debit Cards of Axis Bank have increased to 47% in 2016-17.

Image Source – Annual Report of 2016-17 (Axis Bank)

The above facts and figures substantiate that this acquisition is a focused strategy of Axis Bank towards an inorganic expansion into the Digital Payment Space without duplicity of efforts on the customer acquisition and emerging as a ‘Key Contributor’ to the ‘Digital India’ drive amongst the BFSI Sector. The appetite of the market is so large that the bank cannot afford to spend time and resources on building a new platform from scratch, rather it is wise to leverage the market opportunities as a forerunner amidst other competitive market players. The integration of Free charge with Axis Pay would further increase the ease of the payment by the customers as Axis Bank already has a mobile wallet ‘LIME’ which has been interfaced for UPI Payments with Axis Pay.

The bank also needs to focus on retaining the acquired customers by offering them loyalty programs and cross selling products by understanding their needs. As per one of the updates that was given by Free charge late last year, the number of registered users on its platform has peaked at 30 million and 20% of them for utility bill payments. Also, the market leader ‘PayTm’ claims to have 122 million active users and hosts 90 million transactions per month on its platform. The other rival ‘Mobikwik’ has reported 35 million users and 45 million monthly transactions during the same period last year. Also, a market research throws light on the fact that India’s Digital Payment Segment has handled almost 600 million transactions in the year 2015-16 whose mean economic value rising to 400-450 INR.

Another ray of hope is that the digital payments industry in India is expected to grow by 10 times to $500 billion by the year 2020 as per the recent study by Google and Boston Consulting Group. It also predicts that more than 50% of India’s Internet users are likely to use digital payments by 2020, and the top 100 million users are likely to drive 70% of digital payments by value. If the above mentioned promising predictions turn into reality, Axis Bank can significantly tap this humungous market opportunity with its unique ‘FinTech’ flavor and competencies.  This would eventually pour in into its revenue bucket and would help the bank with some breathing air to compensate for its massive bad debt provisions eating into their bottom line, while RBI figures out a sustaining solution for increasing menace of NPAs. Though this was primarily aimed at market penetration, the bank can think of stepping into other niche products in digital space apart from payment service based on the customers’ expectations and demands. This acquisition would be the first step for building a better brand equity for the bank and an opportunity to explore and serve more customers as a ‘Digital Player’.

 

Author: Yogesh Sundararajan

PGDM, Class of 2018, Great Lakes, Gurgaon

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