Bajaj’s insurance arm betters parent

BAJAJ Auto’s seven-year-old insurance business has overtaken the 60-year-old parent company in market value. The higher valuation fetched by Bajaj Finserve is an indication that despite the March’08 slowdown, insurance is still seen as a high-growth area. On Friday, Bajaj Auto ended the day with a market capitalisation of Rs 8,311 crore. In comparison, the market value of Bajaj Finserve was Rs 9,340 crore. Bajaj Finserve owns 52% in Bajaj Auto Finance and 74% each in Bajaj Allianz Life and Bajaj Allianz General Insurance. In addition, Bajaj Finserve has around Rs 800 crore in cash and investments. If the value of Bajaj Finserve’s holdings in Bajaj Auto Finance (Rs 502 crore) and its investments were to be taken out, the residual value would be around Rs 8,000 crore—the value assigned by the market to the Bajaj holding in the insurance business. Although Bajaj holds 74% in both the ventures, a deal with Allianz allowing the German insurer to hike its stake to 74% in life and 49% in the non-life business gives Bajaj a limited upside in both. Since it is known that Bajaj is likely to hold only 24% in the long term, the value assigned by the market would be for only the 26% stake in life and 51% stake in the non-life business. Analysts have valued Bajaj Allianz Life at over $5 billion. Going by this estimate, the value of the insurance company would be more than the value of all the Bajaj group businesses put together. Insurance still sunrise sector THERE have been instances where the value of a new division or a subsidiary has overtaken the market value of mature companies in a business group. For instance, TCS has turned out to be more valuable than all the other companies in the Tata group. Similarly, Aditya Birla’s telecom business is worth more than the rayon business, which was the promoter company. Although insurance is considered a mature industry in the West, it is seen as a sunrise sector in India since the sector has been opened up recently. Since insurance penetration is less than 5% of the gross domestic product, there is a scope for it to grow faster than the economy. Though several listed companies have insurance subsidiaries, Bajaj is the only one to have derived the market value of its insurance business. In the case of ICICI Bank, there is an indicative value—the value at which investors were willing to buy a 5% stake in a proposed holding company. However, the deal did not materialise as RBI refused permission. While the market is bullish about the prospects of private insurers, the foreign partners feel differently. According to them, the valuation reports have incomplete data. For instance, the level of lapsation (of policies where customers stop paying the premia) for each company and the long-term impact of these is not known. The foreign partners claim the market would get a true idea of the valuation when the FDI limit is raised to 49% and deals are struck for selling the additional 23% stake to the foreign partner. Most valuation reports came in the wake of 100% growth recorded by the industry in 2006-07. Though the industry has been recording doubledigit growth, the trend has changed in the past quarter—particularly in March’08—which saw a slowdown in the sales of new products. Conservative insurers say growth is getting skewed by sales of unit-linked plans, which bring in chunky investments when the stock market does well. However, a crash results in premium income drying up.

Source: The Economic Times