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The Reliance Capital-Nippon Life deal for the latter to pick up a 26 per cent stake in Reliance Life Insurance values the insurance venture at Rs 11,500 crore. That is higher than the entire market capitalisation of the Reliance Capital stock at Rs 10,100 crore, creating significant potential for value unlocking in the stock.
Apart from the insurance business, the company has significant operations in broking, home finance, general insurance, mutual funds and consumer finance.
Reliance Capital will realise cash of Rs 2,700 crore from the stake sale with another Rs 360 crore being raised through fresh equity issue in the insurance venture. The Reliance Capital stock gained 3.3 per cent after the announcement.
IRDA clearance
Though Reliance Capital and Nippon Life signed this agreement six months ago, the stake sale has only now got the go-ahead from insurance regulator IRDA.
There was uncertainty regarding whether insurers could divest stakes within the first ten years of their operation. Reliance Life Insurance completes ten years of operation in January 2012. RBI approval for the 26 per cent infusion is pending.
The deal which predominantly involves divestment of stake by Reliance Capital would give a much needed capital support to it. The Rs 2,700 crore that Reliance Capital receives from this deal can be used to fund its other capital intensive businesses such as consumer finance, housing finance as well as Life Insurance business in the future.
The company's consolidated debt-equity ratio as of March was 2.66 and may come down after the stake sale.
In the short term, the cash realised from Nippon Life may be deployed in more profitable financing businesses where return ratios are currently better than in life insurance. Had this deal not come through, the company may have had to raise fresh equity for its financing business, which may have been difficult in the current environment.
Reliance Capital has till date infused Rs 3,100 crore into the insurance company. Reliance Life has posted profits over the past three quarters, suggesting that capital requirements for this business may reduce for now.
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