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How things are 'turning around' for RELIGARE
Care Insurance IPO, lifting of PCA restrictions for RFL, business structuring & experienced management bodes well for RELIGARE’s turnaround. We are LONG.
RELIGARE is a diversified financial services group having presence across three verticals – Lending (MSME, Home loans), Health Insurance and Retail Broking. The group is led by a professional management post restructuring in 2018 on account of corporate governance lapses and misappropriation of funds by promoters.
The Indian health insurance sector was valued at c. INR550bn i.e., 29% of total non-life insurance market in FY20. Non-life Insurance penetration is quite low in India at c. 0.97%, with health insurance being the fastest growing segment having an average growth rate of c. 35%. This is further estimated to grow by 19% CAGR by FY24. The broader MSME lending market seems quite favorable with policies such as capital subsidy to promote technology upgradation, CGTMSE guarantee cover, INR15,700cr budget allocation in FY 2022, INR300,000cr automatic loans for business, along with schemes like ASPIRE, ESDP, SFURTI. India’s home loan segment is expected to rise by 22% for FY 2021-26.
Calm waters following rough tides
RELIGARE has suffered over the years on account of mismanagement and misappropriation of funds devised under erstwhile promoters till 2018, following which the entire management was reshuffled. Multiple agencies were probing the case of siphoning of c. INR4,000cr.
In April 2018, the Burman Family (promoters of Dabur Group) acquired 9.9% stake in RELIGARE through warrants issued to three family investment vehicles. Their stake as of date stands at 14% owing to participation in the July 2021 preferential issue where RELIGARE raised INR570cr from various investors. The said funds are to be utilized towards business restructuring.
Since 2018, RELIGARE has been steadily rebuilding itself under the guidance of new management comprising industry experts and has paid back INR6,500cr to lenders to-date as part of its debt restructuring plan.
Growing segment & strengthening financials ensures a smooth sailing going forward
Revenue for FY21 stood at INR2,487cr, split across Health Insurance (75%), Lending (15%) & Broking segments (10%). Overall operations are recovering steadily, having reached c. 60% of the pre-2018 revenue.
RELIGARE’s health insurance vertical (Care Insurance) has been growing rapidly for some time now, registering a 41% CAGR between FY18-21. Combined operating ratio for FY21 stood at 87% while ROE stood at 9.3%. Plans of a INR2,000cr IPO for this vertical should unlock significant value in due course for the parent.
Religare Finvest Ltd (RFL) is the NBFC arm of RELIGARE. RFL came up with a debt restructuring plan in June 2021 after being barred from undertaking fresh business under RBI’s Prompt Corrective Action Framework (PCA framework) in 2018. Currently, the loan book is spread across SME loans (84%) and housing finance (16%). 52% of the SME loan book is secured, while housing loans are fully secured. Margins are yet to pick up in the former whereas the latter’s largely equity funded book recorded a NIM of c. 8% in FY 2021. In our view this should stabilize at c. 3-5% in the long run. With PCA restrictions expected to drop soon, the lending business is expected to pick up going forward.
Operations are yet to pick up pace in the broking vertical, although margins can be seen as improving with EBITDA/Net margin of 16%/3% in FY21 as against 13%/1% in FY18.
Expecting an uptick in valuation as operations across segments recover
Close comps ICICI Lombard General Insurance (NSE: ICICIGI) trades at 53x P/E and 8.3x P/BV, General Insurance Corporation of India (NSE: GICRE) trades at 13.7x P/E and 1.01x P/BV and Ugro Capital (NSE: UGROCAP) trades at 16.2x P/E and 0.9x P/BV on FY22F although not being an apple-to-apple comparison. RELIGARE currently trades at negative multiples but uptick can be expected considering ongoing structural improvements. Slower than expected recovery is one of the key risk factors to be watched closely.
Care Insurance IPO, lifting of PCA restrictions for RFL, business structuring & experienced management bodes well for RELIGARE’s turnaround. We are LONG and continue to remain positive, despite maintaining a cautious stance around the entire turnaround story.
Disclaimer: The views expressed above are the views of Arkvega Partners LLP, and are subject to change at any time based on market and other conditions. This is neither an offer nor solicitation for the purchase or sale of any security, and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. We strongly advise you to do your own research and consult an accredited investment advisor before investing based on what you read in a newsletter. Arkvega Partners LLP or its employees may have exposure in the financial instrument discussed above and can close positions in the future without prior intimation.