Sundaram Finance, one of the leading NBFCs and predominantly a commercial vehicles (CV) financier, gets a boost from divesting a portion of its stake in its non-life insurance business, at a reasonable price. Ageas Insurance International will acquire 40 per cent stake in Royal Sundaram General Insurance for Rs 1,520 crore. Sundaram Finance that currently holds 75.9 per cent stake in Royal Sundaram, proposes to divest 25.90 per cent, retaining 50 per cent of its holding in the non-life insurance business. The deal values the insurance business at about Rs 3,800 crore, around 1.1 times its one year forward gross written premium (GWP) and 28 times one year forward earnings (based on annualised half year FY19 performance). In 2015, Sundaram Finance had acquired an additional 26 per cent stake in Royal Sundaram from RSA Group, UK at a consideration of Rs 450 crore, which had then valued the business at 1.1 times GWP.

Given Royal Sundaram’s market standing and performance, the current deal with Ageas appears well priced and bodes well for Sundaram Finance by way of value unlocking from its non-life insurance business.

The transaction is subject to regulatory approvals and is expected to close in the first quarter of 2019.

Reasonable valuations

Non-insurance players are generally valued at 1-2 times their one year forward gross written premium. ICICI Lombard-- that ranks number one in the general insurance space among private players—trades at about 2.4 times one year forward gross written premiums and 32 times one year forward earnings. The other listed player, New India Assurance, trades at lower 1.3 times GWP and 18 times one year forward earnings. While the company is the largest general insurance player in the country in terms of gross premium, its return on equity is lower at about 16 per cent (as of FY18) than that of ICICI Lombard (21 per cent).

Royal Sundaram ranks ninth in terms of GWP as of September 2018 among private players, according to IRDAI data and had an ROE of 8 per cent in FY18 (as per annual report).

Sound businesses

Royal Sundaram is one of the leading players in the general insurance space and recorded a net profit of ₹83 crore in FY18 and Rs 67 crore in the half year ended September 2018. The insurer reported a gross written premium of Rs 1,732 crore as of September 2018, a growth of about 36 per cent over the previous year. The company has a good distribution network and brand name thanks to its parent, Sundaram Finance.

Sundaram Finance also has stakes in other businesses, such as home loan (Sundaram BNP Paribas Home Finance) and mutual funds (Sundaram Asset Management Company) which add good value to the company’s underlying business.

Sundaram Finance’s core lending business has also been a sound footing. Catering mainly to the new commercial vehicle segment, the company has been able to maintain its asset quality and earnings growth at a healthy clip. The NBFC registered 11 per cent rise in net profit for the first half year ended September 2018, with loan disbursements growing 15 per cent year-on-year.

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