Mahindra & Mahindra Financial Services (MMFS) has approved 12.37% stake sale in its wholly-owned subsidiary, Mahindra Insurance Brokers Limited (MBIL) to Inclusion Resources, a subsidiary of Leapfrog Financial Inclusion Fund. MBIL is engaged in insurance broking operations, sourcing 85% of customers from the Mahindra Group. The pre-tax inflow to MMFS will be INR643mn valuing MBIL at INR5.2bn (INR50 per share for MMFS). Given the strategic nature of the investment with investment horizon of 5-7 years the sale has taken place at 38P/E on FY12 basis. Further Leapfrog will participate in fresh equity infusion of 2.63%, increasing stake in MBIL to 15% and thereby also providing funds for expansion.
The transaction has been concluded at very lucrative valuations, in our view. Further, equity infusion of ~INR140mn will take care of expansion needs of MBIL which was recently awarded a Composite Broking License, enabling it to undertake Reinsurance broking in addition to its existing insurance broking for Life and Non-Life products. We view this as long term positive as MBIL will expand to clientele outside of Mahindra Group.
About Leapfrog: Focused on bottom of pyramid
Leapfrog is a private equity firm with expertise and focus on delivering insurance products to bottom of the pyramid segment. This explains the investment in MBIL which operates in the semi-urban and rural areas of the economy. Prior to this, the investor had also picked up a 10% stake in Shriram CCL, a financial services distribution company. Along with India, it has a presence in South Africa as well, catering to the same segment of customers. The investment horizon in all cases spans 5-7 years.
Our view: Early days to substantially contribute to consolidated PAT
For FY12, MBIL contributed ~2% of the consolidated PAT of MMFS, i.e INR135mn with Net Premium generated of INR4.1bn spread over 0.7mn policies. While we view the stake sale positively given the high valuations awarded to the entity, substantial scale up of the business (hence higher contribution to earnings) will likely pan out over the next 2-3 years. We maintain our positive stance on MMFS, trading at 2.6x FY13E P/ABV for RoA/RoE of 3.8%/24%. Maintain ‘BUY’.
Regards,
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