SBI to sell 3.9% stake in SBI Life Insurance for Rs 1,794 crore

Below is the verbatim transcript of Arijit Basu and Dinesh Kumar Khara's interview to Surabhi Upadhyay and Nisha Poddar on CNBC-TV18. Surabhi: If you could start by giving us the basic deal breakup and the details? Basu: SBI has decided to sell 3.9 percent of its total stake of 74 percent and the company has been valued at Rs 46,000 crore. So, that comes to Rs 460 per share. So, the amount that will come into SBI is close to Rs 1,800 crore. Surabhi: Can you share with us the details of the buyers who are the entities picking up? Basu: It is two buyers actually, picking up in equal percentage of 1.95 percent each. So, one is an affiliate of KKR and the other one is an affiliate of Temasek. Surabhi: Those are exactly the names that we had been picking up as well and that is what CNBC-TV18 had been reporting earlier. Are you happy with the valuation of Rs 46,000 crore? Basu: I would think this makes us the most valuable company currently in the private sector space because if you see our competitors who have listed, their current market value is lower. And even in terms of the multiple over the embedded value, this is at 3.54 which is way above what any of the other companies, at the moment, who have declared have. Surabhi: What was the rationale behind selling this 3.9 percent equity? Basu: SBI for two reasons. One is, we are looking forward to finally listing and this would be a good way to set a benchmark this year and so, they wanted to start with a small amount and then we will take it forward in 2017-2018. If market conditions are conducive, then we will go for and initial public offering (IPO). Surabhi: Can you give us some kind of a rough timeframe for that? I understand there is a lot of turbulence and volatility right now. But typically, around what time in calendar year 2017 are you aiming for an IPO? Basu: That has actually not been decided. So, it is not that we have worked backwards from the IPO date and done this. We have done this first and then, depending on how the market is, we will consider an IPO in the calendar year 2017-2018 subject to all the concerned stakeholders being on the same page. Nisha: Of course, we can do back of the envelope calculations very quickly, but then what is the total equity valuation of SBI Life as per this deal? Basu: That is something which is slightly different from what you had given. So, the value of SBI life has been put at Rs 46,000 crore. Nisha: That is quite a premium to what the market was expecting and no wonder SBI’s stock was also on a high today. But can you take us through the details, the basic valuation parameters because of which you have landed up with Rs 46,000 crore of valuation instead of close to about Rs 43,000-44,000 which the market was expecting? Basu: That is for the investors to answer except that they were very happy that the franchise that SBI Life has built up is indeed very strong. It is very valuable and we have been performing exceedingly well over the last few years. We are growing at a pace which is much faster than the market as also much faster than any of the competitors. And that is how I think they would have valued the company in that light. And also, the growth prospects in the industry in the future. And the fact that SBI Life would be well poised to take best advantage of that. Surabhi: Your thoughts. We just heard Mr Basu tell us that the deal basically means that SBI Life gets about Rs 1,800 crore as part of this stake sale of 3.9 percent. What is the bigger game plan for the life insurance business? We were just discussing the possibility of a listing. How are you looking at the life insurance business? Khara: We are very optimistic in terms of what the life insurance business can be as far as SBI is concerned. We feel that we have a whole lot of potential which probably needs to be further tapped and to that extent, we are in a position to create value for the potential investors who are likely to join.Surabhi: Are you open to the idea of further equity dilution or further stake sales even before a public listing or will these two deals one with Temasek and the other with KKR - - are these two pretty much it before a public listing? Khara: I think much of it will depend upon how the market pans out and whether we are taking decision in this matter at appropriate point of time depending upon the market conditions. Surabhi: These pretty steep valuations that you managed to garner from these two marquee investors Rs 46,000 crore. Do you think the going rate in the market, the listed space itself you will be able to fetch this kind of premiums as well? Basu: We have not set the benchmark or the prices. It is what how investors have viewed the franchise and what is the intrinsic value that they have discovered after going through our financials and the potential. It is not something that we have held and if they have found that this is something which is reasonable, I am quite sure that if and when we do take any other course of action like an initial public offering (IPO) I am sure that we will get similar results and we hope that we will continue to deliver. The most important thing that both in quantitative parameters and qualitative parameters the company continues to deliver, if we do that then we don’t foresee any problem. Nisha: Wanted to understand Rs 1,800 crore coming into your kitty by way of this transaction in this particular quarter. How is that going to really impact your balance sheet and every quarter there has been an offloading of some stake or the other or some non-core assets also to buffer against the provisioning hit that the bank takes, so how is this going to pan out? Khara: As far as impact on the balance sheet is concerned that to our investors to the extent of 3.9 crore gets offloaded and to the investors we are booking some profit about almost about Rs 1,700 crore - - that is the kind of situation it is and this profit will be subject to long term capital gains subject to indexation benefit that with broad impact of this on the balance sheet. Nisha: What made you come down from about 10 percent that you had set out to offload in SBI Life to just about 4 percent, why did you sell only this much? Khara: Eventually, we would like to go to market for the IPO and we have the other joint venture (JV) partner who has got a dial-up option card if our JV partner right from the beginning award a dial-up option, so we wanted to keep enough stock with us if at all we have to go for IPO and if at all we so decide to go for the IPO on our own, after this kind of divestment also we should have adequate stock available offering it in the IPO - - that is a reason why we have reduced the number to 3.9 percent. Nisha: So Rs 46,000 crore what is the kind of now targeted equity valuations that you are looking at for IPO? Khara: That to be dependent upon what will be the market pricing at the material point of time when we go for IPO. Apart from that the company of course keeps on adding value to it to it franchise by really adding up the product offering and also their distribution network which they have - - they keep on strengthening on these very critical pieces on the life insurance and I am sure that at the material point of time, we will be taking a very objective view of the company’s competitor strength and also their distribution strength and depending upon that we will have our expectation in terms of valuations. Surabhi: You mentioned joint venture partners, so what is their view on the transaction and the discussions and the understanding that you might have right now with them. Do they intend to continue even after a public listing or their might some sort of a further shareholding change in the coming months? Khara: As of now we have not heard anything to the contrary from them - - I presume that they will continue to be on board and our relationship with all our joint venture partners have been of excellent orders. I feel that I expect that they will stay on, we creating value for their investment too - - there is no reason for us to really thing otherwise. Surabhi: This incentivisation of digital transactions, now public sector insurance companies are going to be offering these small discounts on premium, just your thoughts on the move and basically who is going to foot the bill and if at all it is going to be slightly detrimental just purely from a numbers standpoint or do you think this is too insignificant as now? Basu: This we need to examine how we can sort of look at it in the private sector, but just to explain that when we price our products, similar kind of product like protection products which are sold through distributors and which are sold through the online channels there already is some elements of difference in the way we price the product - - it is a little cheaper possibly if you come forward directly online. However, we don’t have as of now any specific product which is both identical product which is there in the offline channel and the online and give a discount in the manner that the government proposes to do in LIC. We need to examine this, the idea of the government is that they want to give a boost to digital transaction, it is in that context that the finance minister has make this announcement and since we are in the private sector we have to take a call as to how it impact us, but as of now our online sales is fairly small - - therefore it may not impact so much immediately, but we certainly need to take a call as to whether we can take this up on ourselves.