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Sundaram Finance has acquired an additional 26 per cent stake in Royal Sundaram, its non-life insurance joint venture with RSA Group, UK. With this acquisition, the company owns 75.9 per cent stake in Royal Sundaram.
Aside from its core business of lending to the commercial vehicle space, Sundaram Finance also has a presence in home loans, mutual funds and non-life insurance, among others. Increasing stake in Royal Sundaram will help the company in several ways.
For one, Royal Sundaram is one of the leading players in the general insurance space. The company recorded a net profit of ₹68 crore in 2013-14, a growth of about 25 per cent over the previous year. The company has a good distribution network and brand name thanks to its parent, Sundaram Finance.
The promulgation of the ordinance on the Insurance Bill , which proposes to increase FDI in the insurance sector from 26 per cent to 49 per cent, is a positive signal as it implies that insurance players can soon get additional funds from overseas. Parent companies such as Sundaram Finance are likely to see substantial unlocking of value in their insurance subsidiaries.
TT Srinivasaraghavan, Managing Director, Sundaram Finance, says that with the ordinance in place, there are many positives in the offing for the general insurance space. “In this backdrop, the timing of our acquisition is opportune”.
The increase in stake in Royal Sundaram will add about ₹50 per share to the fair value of Sundaram Finance. From about 7 per cent, Royal Sundaram will now account for about 11 per cent of Sundaram Finance’s current market price of ₹1,534.
The deal consideration of ₹450 crore for the 26 per cent stake is also in line with industry trends, implying a price to earnings of about 14-16 times its estimated one-year forward earnings.
“The deal pegs the enterprise value of the insurance business at about ₹1,800 crore, which is a fair value for the business. Globally, insurance players are valued at 1-1.5 times their one year forward gross written premium. At about 1.1 times Royal Sundaram’s current year GWP, the deal is reasonably priced,” says Srinivasaraghavan.
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