Shares of ICICI Lombard General Insurance Company slipped over 1 per cent on the BSE on Monday after the company inked definitive pact with Bharti AXA to combine their business. The latter’s business is to be demerged into the former’s through a scheme of arrangement under which the shareholders of Bharti AXA would receive two shares of Lombard for every 115 shares held by them.
At 11:16 AM, the stock was trading 0.88 per cent lower at Rs 1,275.25. In comparison, the S&P BSE Sensex was trading nearly 0.5 per cent higher at 38,613.66 levels.
In a statement to exchanges, ICICI Lombard said Bharti AXA’s existing distribution partnerships should help it increase its distribution strength. “The combined entity shall also benefit from continued partnerships with Bharti Enterprises, and AXA,” it said.
“At ICICI Lombard’s current market capitalisation of nearly Rs 588 billion (nearly 6.1x FY20 net written premium, 9.6x FY20 P/B), the share issue implies a valuation of nearly Rs 46 billion for Bharti AXA (~2.3x FY20 net written premium, 6.5x FY20 P/B—accounting for accumulated losses). Arithmetically, this arrangement dilutes
ICICI Lombard’s FY20 EPS as Bharti AXA made a loss of nearly Rs 2.44 billion. However, given the acquisition likely entails immediate cost overhauls, this may not be the best gauge of value creation from the merger,” say analysts with Edelweiss Securities.
The brokerage view the deal a significant step but not really game-changing ramp-up of ICICI Lombard’s distribution capacity. “We await detailed financials of the de-merged BAGI to build them in our estimates. Our chief concerns are twofold: Integration challenges and net capacity gain after elimination of redundancies and implications of this acquisition for its appetite and bandwidth for acquiring a monoline health insurance business, whose agency channel driven healthy indemnity capability could potentially drive its dominance in every business line that ‘matters’,” the brokerage says.
It retains a “BUY” rating on the stock with the target price of Rs 1,600.