In an interview to CNBC-TV18, Raman said that currently, Future Generali's market share is around 1.72 percent and is likely to go upto 1.82 percent post the deal
It is not buying out anybody’s stake, it is combination of two existing businesses to form a larger entity
R Shankar Raman
Heavy engineering and construction major Larsen & Toubro has acquired 50 percent stake in Future Group's insurance business for around Rs 500 crore.
While explaining contours of the deal, R Shankar Raman, L&T's chief financial officer said that though the company's subsidiary, L&T finance will pick up stake from Future Generali India Insurance Company, it is the parent company (L&T) which will make investment and will also merge with the acquired firm.
The deal will be routed through L&T's general insurance arm and subsequently it will merge with Future Generali Indian Insurance Company.
In an interview to CNBC-TV18, Raman said that currently, Future Generali's market share is around 1.72 percent and is likely to go upto 1.82 percent post the deal. "Final valuation of the deal will be decided post due diligence," he said L&T is looking at a lock-in of five years for this transaction.
Raman further explains that L&T General Insurance started in 2012 and for the year ended FY12, the company has recorded gross premium of Rs 143 crnre, whereas Future Generali Insurance has gross underwritten premium of about Rs 1,000 crore. This merger will not only create a larger corporation but will also boost L&T to have a meaningful play in general insurance sector, he added.
Below is the verbatim tarnscript of his interview to CNBC-TV18
Q: Can you tell us how this entire deal will be rooted, the contours of it as well?
A: It has been widely reported in the media rather incorrectly today. It says that Larsen and Toubro (L&T) Finance is acquiring this business. I want to clarify that the investments of the group in L&T General Insurance is being held by L&T, the parent company. The parent company has sought to do is to merge and combine the business of L&T General Insurance and the Future Generali India Insurance Ltd together to form a larger corporation.
So, it is not buying out anybody’s stake. It is combination of two existing businesses to form a larger entity. Obviously this is subjected to all the regulatory approvals and all the attendant due diligence that we need to complete.
We have signed an indicative term-sheet on which we will go about combining these two businesses. As one might possibly know, L&T General Insurance has started in 2010. For the year ended FY12, we had a gross written premium of about Rs 143 crore and Future Generali Insurance has gross underwritten premium of about Rs 1,000 crore. It is a combination of company with about Rs 150 crore of gross written premium with Rs 1,000 crore of gross written premium.
To this combination, we could have a reasonably good market share of about 2 percent or thereabouts in the general insurance business area. Given the rich parentage of both the companies, we think we should be able to have a meaningful play in the general insurance sector.
Q: Will there be an initial investment as well that will be put into this joint venture in terms of creating a larger capital base? Also, at a later point in time, is there an option for L&T to increase its stake in this venture?
A: The way we are trying to conceive the transaction, which is of course subject to due diligence and the completion of those processes. Valuation will get finalised around that time, but the contours of the transaction as we have perceived it today is that L&T on its own team had planned a certain outlay for general insurance business over the next three-five years. We do expect through this combination that it is not going to be any significant increase to that planned outlay.
However, when we finalise the valuation process for both the businesses on completion of due diligence. My sense is that there could be some marginal top-up funding that might be required to ensure that L&T owns 51 percent of this business. Generali will have 26 percent and the Future Group will have about 23 percent shareholding.
So, I do not expect a significant funding that would be required over and above what we have contemplated for this business in its standalone basis. So far as options are concerned, there is a lockout period of about 5 years for this transaction that we are visualizing. Consequently the options of the partners will have to be reviewed post that period.
Q: Some of these insurance deals in the past have had some tricky put options, any such options that have been put forth either for Generali or for the Future Group?
A: We have signed an indicative termsheet. We have just agreed on the approach going forward and some of the detailed contours are to be worked out as we go ahead and get that due diligence completed.
So, it is premature for me to be able to confidentially mention all aspects of the transaction. However, I guess by the time we are done with the processes maybe the agreement will be in place. Of course this is all subject to the regulator’s approval as well.
Q: When do you think the regulatory approvals would come in terms of a timeline? What kind of market share growth and gross written premium growth can one expect for the merged entity?
A: Rs 150 crore that I spoke about is for L&T General Insurance. The Future Generali India Insurance has a gross premium of over Rs 1,000 crore. In any case this merger would be after the completion of the approval. Today the market share of Future Generali is about 1.6-1.7 percent and L&T General Insurance is just a start-up. It is possibly a 0.25 percent.
We do expect the combined share to be around 1.82 percent as we go forward. This market has been growing about 25 percent. Public sector undertaking has the lion share of this market in any case. I think they have close to 60 percent of the market share.
So initially, consolidation of individual market share into combined market share, the synergy benefit of both the organizations and parentage of both the organizations will provide some momentum to this business. However, it is still a long way to go. It improves the prospects of both the companies instead of squaring up against each other for the private sector non-life insurance space.
Also in some sense, it adds to the consolidation of an industry, which is almost seeing 20 players in the fray. So, to that extent, it would be a step in the right direction in both the organization.
Larsen stock price
On October 31, 2014, at 13:28 hrs Larsen and Toubro was quoting at Rs 1639.60, up Rs 42.45, or 2.66 percent. The 52-week high of the share was Rs 1774.70 and the 52-week low was Rs 912.30.
The company's trailing 12-month (TTM) EPS was at Rs 62.86 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 26.08. The latest book value of the company is Rs 362.65 per share. At current value, the price-to-book value of the company is 4.52.
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