Is it safe to invest in SBI?

February 2, 2023

Is it safe to invest in SBI?

As SBI Holdings identifies in its own annual report, its key challenge for the next few years is to quickly incorporate fintech into all aspects of its business model. More specifically, it needs to incorporate the three most emerging and essential fintech technologies of artificial intelligence, blockchain technology and cloud computing. While SBI holdings already has begun the process of fintech integration into the company, and has acquired fintech exchanges in Japan, and other countries like Singapore and the UK, it needs to continue doing so in many other parts of the world. This report will first critically analyse 3 class presentations on fintech related expansion opportunities for SBI Holdings and then list final recommendations and justify them.

Analysis of Class Presentations

US Artificial Intelligence Growth Proposal (Aryam, Sally, Jun, Sam, Chrisvin, Kevin)

This group’s strategy is to increase SBI Holding’s exposure to the US market and to artificial intelligence. As outlined in my introduction, AI is one of the fastest growing Fintech areas. The global artificial intelligence market size was valued at USD 93.5 billion in 2021 and is projected to expand at a compound annual growth rate (CAGR) of 38.1% from 2022 to 2030.

The United States has historically been the leader in AI-related research output or producing AI-related start-ups, however now the competition with China is neck-to-neck. Their proposal is for SBI Holdings to partner with Y Combinator, a VC firm, wherein they can gain exposure to US Artificial Intelligence start-ups and technologies and maintain a position of limited risk.

However, the issues with this strategy are that there is a lot of competition in the US market when it comes to VC funds focused on tech start-ups that have a larger market share and a higher success rate like Sequoia Capital. There also exist companies that are specifically only investing in AI related firms, which perhaps is more towards SBI Holding’s strategy. For example, Andreessen Horowitz is a great venture capital company specialised in the field of artificial intelligence.

Moreover, while looking at the group financials, the assumption being made is that since they have invested in 3000 companies so far, with a 3.5% equity stake in each, the return on Invested Capital will be 3.5% of their collective market value. This however is an incorrect way of looking at their financials since, there is no beta value being considered as a measure of risk, since VC investing is highly risky. The return should be adjusted for risk. Since the Y Combinator financial projections are incorrect, so is the investment value that SBI Holdings will need to match. It would probably be lower.

Brazilian Expansion Proposal (Jessica, Lauren, Shefei, Shivam, Melodie)

This group’s strategy is for SBI Holdings to increase exposure to Latin America and hence partner with NXTP Ventures. The firm is located in Brazil, which my research shows is a the new breeding ground for fintech unicorns wherein venture capitalists are advocating for the potential of tech-driven innovation. Since Brazil has high income inequality, it drives a thirst for breakthrough technologies and innovative banking tools. Compared to North America which is already a highly saturated, mature market and a safe bet, Brazil has only recently started gaining momentum and hence perhaps more risky, due to high data security issues in Brazil. Currently, the architecture for fintech isn’t in place since Brazil consistently has been ranking top 10 globally for Cyber Security related attacks.

Specifically, NXTP Ventures focuses on investing in Cloud & SaaS, fintech and AI driven start-ups. They focus on NXT P’s investment in Arquivei, a software for automating collection, storage and management of e-invoices for enterprises/SMBs. They suggest that SBI Holdings should partner with NXTP and invest in fintechs like Arquivei through them. While this seems like a good suggestion, recently the Brazilian market is facing high inflation at 10.5% and this makes such a partnership more costly, due to higher prices. This is not profitable for SBI Holdings. Moreover, an economy with high inflation is not an ideal market to enter.

African Expansion Proposal(Justin, Sana, Leonard, Wajeeh, Mark, Michael)

This group’s strategy is for SBI Holdings to increase exposure to Africa through Nigeria, and acquire a majority stake in Kuda to focus on payment transactions services in Nigeria. After which they can form a joint venture with a telecommunications company to introduce the platform to their user base. The fintech landscape is expanding quickly throughout Nigeria, and consumers are migrating to digital transactions, increasing their use of digital and mobile banking services post-Covid-19. However, Kenya is close to Nigeria in terms of fin-tech growth and was the best African country for FinTech start-ups in 2021. Moreover, similar to Brazil, it turns out that Nigeria is one of the world’s most vulnerable countries to data security breaches. Moreover, the most recent UN report on Nigeria states that its progress as a country is backtracking with a weakening economy, rising insecurity and violent conflicts.

While the group has an innovative solution, for SBI Holdings to enter Nigeria, and acquire a majority stake in just one firm is extremely risky given its economic and political situation. Moreover, due to Nigeria’s large rural population, it would take a long while for Kuda to penetrate lower-tech rural areas with their services. Their sales would be low and would pick up only after there is greater digital adoption in the country.

Integrated strategic recommendations

Since SBI Holdings is a large firm with high liquidity, its go-to strategy is to either merge with the right companies or to acquire them. Hence, any strategy proposal should ideally be aligned with this thought process. The challenge is to identify the correct companies to acquire/ partner with. Moreover, the integration plan should be financially cohesive, and there should be a smooth integration process that leads to synergy. The strategies I recommend would ideally be implemented in the next 2-3 year horizon and I seek to strike a balance between risky strategies and risk-averse ones.

My first recommendation is that partnering with Y Combinator is a good strategy for SBI. The company has a great model for investing small sums of money in a wide range of tech start-ups, with a strong focus on AI and machine learning. In 2017, it introduced YC AI: a vertical of Y Combinator dedicated to funding AI companies. I believe that Y Combinator’s investment strategy is to be risk averse and maintain a diverse portfolio, and this does align with SBI’s strategy and investment goals. When a company is accepted into the YC batch program, they invest a standard total of $500,000. This standardized investment protocol allows Y Combinator, and hence SBI Holdings to invest little in many companies and thus, hold a diverse portfolio to minimize risk and to invest in more blockchain and SDG initiatives. Partnering with Y combinator is a safe strategy since the company has been established for many years, and so is the US market for AI. Moreover, SBI Holdings currently lacks exposure to AI compared to its other fintech initiatives like investing in Crypto related firms. Hence, this would be a good addition.

My second recommendation is that instead of acquiring a majority stake in Nigerian firm Kuda, SBI Holdings can expand its current subsidiary SBI Africa Co Ltd into Nigeria, since it currently operates in. One key role of this subsidiary is venture capital investments in the African region. While it currently focuses on developing financial services such as automobile finance, it can now invest in fintech in the African region. This VC fund does not have to be limited to Nigeria, but can invest in Kenya and other African Fintech start-ups. Investing through venture capital into various firms instead of one would diversify its risk in an extremely emerging economy like Africa.

My final recommendation that I would like to emphasize most is SBI Holdings looking to India. India is a high growth fintech industry, more established than Brazil or Nigeria but emerging in comparison to the USA. Hence, the market is safe and stable to expand into. SBI currently has been acquiring Crypto-exchanges in various countries for example, SBI Financial Services has acquired cryptocurrency trading platform B2C2 in the UK. Since they are currently focused on Crypto, our group proposed they acquire CoinDCX: An Indian Crypto Exchange. CoinDCX India’s first crypto unicorn, has announced its plans to go for a public listing, once regulations permit it to do so. CoinDCX remains hopeful about its IPO plans and thinks such a move would help it gain a much higher level of funds. Investing in a pre-IPO company can allow for huge returns, and acquiring it would be even more profitable. Hence we believe that the perfect time for SBI Holdings to acquire CoinDXC is within a year’s time and shortly after that, we expect CoinDCX to go public.

SBI being such a large financial institution with a market capitalization of 5.65 B USD, can provide CoinDCX with huge capital funds to expand its services and improve its platform. Whereas, CoinDCX allows SBI to expand its cryptocurrency portfolio more so as to benefit from the growing crypto demand in the Asia-Pacific region and cater its services to regulated institutions. India is a densely populated country adapted to tech, and CoinDCX allows SBI to take advantage of the cryptocurrency boom. Especially once the IPO is launched, SBI can gain a first mover advantage of being the largest crypto-exchange in India. Our group ran financials and believes that CoinDCX would be an undervalued stock when IPO is launched and would gain traction over time, making it profitable for SBI.

Besides this one strategy, CoinDCX can consider India for other fintech opportunities as well. India’s large consumer base of tech-savvy millennials is seeking personalized services from the convenience of their phones. As a result, the financial services sector is evolving from a transaction-based approach to a customer-centric approach. The backbone of India’s FinTech infrastructure has been fortified by a selection of options available to participants such as Bharat Bill Payment System (BBPS), India Stack, Bharat QR and UPI.

Not only this but Government initiatives and support have been a catalyst in shaping FinTech startups in India. Government programs like Digital India, Start-up India, Jan Dhan Yojana, India Stack, UPI, etc., have accelerated the progress of FinTech startups in the country. FinTech is bringing efficiency in processes through e-KYC, digital loans, digital signatures, biometric identity verification, etc.

As a result, the strong and expanding digital infrastructure is generating tailwinds for the FinTech start-ups in India. SBI could very well partner with a VC fund in India that targets investing in such Start-ups in the Fintech space.

Conclusion

In conclusion, I believe the two strong recommendations are for SBI Holdings to invest in fintech in the Indian Market. Acquiring Coin-DCX over a two year horizon, when crypto is still up and coming is a strategy that aligns with SBI Holding’s current plan of action. Moreover, it should tap into other fintech opportunities in India as well by investing through some funds in Indian fintech startups. I also believe partnering with a VC firm in North America that targets AI startups could be beneficial, if it chooses a firm that is a strong market leader like Y-Combinator. I do hold my reservations about the Brazilian and Nigerian markets due to a lack of technology infrastructure, unstable economies and political instability.

References

https://medium.com/nxtp/our-investment-process-a7a1403ddc90

https://www.zdnet.com/article/security-spend-to-reach-1-billion-in-brazil-in-2022/#:~:text=In%202020%2C%20Brazil%20ranked%20ninth,3%2C8%20 million%20 ransomware%20 attacks.&text=According%20to%20the%20SonicWall%20report,seen%20in%20the%20prior%20year.