The recent news of M&M’s decision to invest 417 Crore rupees in RBL bank has divided opinions. Allocating capital is as important for a business as running operations. One would think investing in a retail bank to earn returns would be prudent, given India’s growth and the growth trajectory of the financial services sector.
However, the question here isn’t one of valuation but of strategy. Regardless of the outcome of the investment, the question is long-term: is there a strategic rationale for a company that is an automaker to invest in a retail financial services company? The moot point here is what edge does M&M have allocating capital to a bank. We think not much!
The capital Allocation strategy of any corporation, including M&M, should be based on investing in adjacencies that they have an edge in identifying, evaluating and executing. This could be via horizontal integration, vertical integration, seeding new markets in the supply chain, seeding new companies in the supply chain, or using capital sitting at another point on the supply chain to generate capital. In a rapidly evolving automotive world going through the most rapid transformation through hardware, software, green energy, and dynamically moving profit pools, a business of M&M’s scale has much better repeatable capital allocation plays to look at.