Reliance Unaffected by Insurance Foray

By Sudeep Jain

The decision by Reliance Industries Ltd. to branch out into insurance has got a lukewarm response from investors, who tend to get nervous when the company steps away from its core energy business.

Late Friday, RIL said it had agreed to buy Bharti Enterprises’ majority stakes in its life and non-life insurance ventures with French insurance group AXA SA for an undisclosed amount. RIL didn’t give any indication of how much it plans to invest in the ventures.

RIL’s stock fell to a one-week low when markets opened Monday. In afternoon trade, RIL was down 1.6% at 929.40 rupees ($20.83), while the 30-share benchmark Sensex had edged up 0.1%. RIL got a similar reaction last August when it said it would buy a 14.12% stake EIH Ltd. at a more than 20% premium to the hotel firm’s market price, sending its shares down 3.1%.

Analysts point out that RIL has huge cash reserves – about 424 billion rupees ($9.5 billion) – and the insurance venture acquisition is too small to have an impact on its finances for the next few years at least.

According to a report by television channel ET Now, RIL paid $700 million for the stake. But this figure hasn’t been confirmed by the company.

Insurance in India has seen tremendous growth since 2000, when the government allowed private players into the sector and permitted foreign companies to take up to 26% stakes in insurance ventures. RIL said Friday that AXA has the option to buy up to 24% more in the two ventures when local rules permit.

An April report by the Boston Consulting Group and an Indian industry body said India is likely to be one of the world’s top three life insurance markets and top 15 non–life insurance markets by 2020.

But Bharti Axa is an insurance lightweight – its life insurance business has a market share of less than 1% while the general insurance business has a market share of about 1.3%, according to data from India’s insurance regulator.

The acquisition therefore is unlikely to help or harm RIL’s finances for the next few years at least.

“Given the anticipated size of the deal and revenues from the deal, we do not expect material impact on Reliance Industries financials’ over the next few years,” Angel Broking said.