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Reliance Industries finds another use for its cash pile

Reliance Industries finds another use for its cash pile
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First Published: Sun, Jun 12 2011. 09 08 PM IST
Updated: Sun, Jun 12 2011. 09 08 PM IST
One man’s poison is another man’s food. Bharti Enterprises Ltd seems to have gotten tired of the wait for an increase in foreign direct investment (FDI) limits. It announced late last week that it is exiting its life insurance and general insurance joint ventures with France’s AXA Group by selling its majority stake to Reliance Industries Ltd.
Reliance, which is flush with cash, wouldn’t mind the wait. The two companies disclosed in a joint statement that the deal includes an option which will allow AXA to acquire a 24% stake from Reliance, as and when FDI rules are relaxed. Reliance could, potentially, make a killing on that deal.
Of course, this is not to say that this insurance venture is only about a regulatory arbitrage trade. Penetration in the insurance sector is still low and leading operators should be able to extract significant value in the long term.
At least in terms of finances, Reliance clearly has the wherewithal to support the capital-intensive insurance business. As pointed out earlier, the company is flush with cash, and a worry for analysts has been that the firm may not find enough good avenues to deploy excess cash.
Unless there are further regulatory shocks, the insurance sector will provide a decent opportunity to earn a return on capital that is far higher than the return its cash is currently generating.
Of course, all this is provided it hasn’t overpaid Bharti for the 74% stake in the life insurance and general insurance companies. That’s unlikely. The Bharti AXA ventures weren’t doing all that well, ranking 20th among the total of 23 life insurance companies in India, and 15th among 19 general insurance companies.
Besides, the deal is unlike transactions such as Nippon Life Insurance’s purchase of a 26% stake in Reliance Life Insurance, which was at a premium to street estimates of the latter’s value. Deals such as those are typically in favour of selling shareholders because of the restrictions on foreign ownership. Bharti, of course, has sold its stake to another Indian shareholder.
While the two companies haven’t disclosed the valuation, it certainly wouldn’t dent Reliance’s cash pile of over Rs 40,000 crore.
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First Published: Sun, Jun 12 2011. 09 08 PM IST