Deal Impact : Religare’s Corporate Restructuring – Landmark Acquisition

In April 2011, Religare Enterprises through its US-based wholly owned subsidiary, Religare Global Asset Management, acquired 55% stake in Landmark Partners for $171.5 million or Rs 770 crore. The deal valued Landmark at over 3.6% of its total assets. Religare funded the deal through a combination of internal accruals and debt of Rs 311 crore. The loan was repayable in 8 half-yearly installments starting
October 31, 2012.

Landmark Partners is a US-based private equity and real estate investment firm, focused on secondary transactions with assets under management worth $8.3 billion. The deal amount of $171.5 million values Landmark at around 7.6 times it’s EBITDA. This was much lower than the average industry valuation of 13-15 times EBITDA. Religare’s asset management strategy was to partner with “best-of-breed” asset management firms from around the world operating within a variety of asset classes and investment disciplines.

Benefits from the acquisition –Religare

  1. As a part of its expansion plan in the US, Religare will get access to several institutional investors in the US and Europe that invest in Landmark’s funds through this deal.
  2. Religare will benefit from Landmark’s investor base which comprises of the diverse US and international institutional investors like public and private pension companies, insurance companies, foundations, endowments, and family offices.
  3. Landmark Partners manages 27 private equity and real estate secondary funds-of-funds with more than $8.3 billion of committed capital.
  4. The Landmark acquisition will catapult Religare’s assets under management, including the money managed by Northgate and its Indian mutual fund, to almost $15 billion with $9 billion coming in from Landmark.

FINANCIAL PERFORMANCE

Revenue Breakdown – Religare Enterprises Ltd

Religare Enterprises – Revenue Breakdown (Consolidated)

FY15 % share FY14 % share FY13 % share FY12 % share FY11 % share
Income From Broking Operations 300 7.3% 236 7.1% 309 9.0% 479 15.2% 617 26.6%
Income From Lending Activities 2,060 50.2% 1,868 55.9% 2105 61.6% 1732 55.1% 979 42.2%
Income From Investment Mgmt 898 21.9% 657 19.6% 498 14.6% 419 13.3% 97 4.2%
Income From Advisory Services 12 0.3% 9 0.3% 17 0.5% 49 1.6% 150 6.5%
Income From Insurance Premium 384 9.4% 266 8.0% 192 5.6% 197 6.3% 169 7.3%
Income from other Operating Act. 451 11.0% 308 9.2% 298 8.7% 269 8.6% 305 13.2%
Total Income from Operations 4,105 3,344 3,419 3145 2318
Amounts in INR Crores (Source: Religare Annual Reports)

Note : Religare Enterprises Ltd (REL), Religare Capital Markets Ltd (RCML) and RHC HoldingPvt Ltd (a Promoter Group company) have entered into a tripartite agreement that places severe long term restrictions on RCML, significantly impairing its ability to transfer funds to REL. Owing to this restriction, REL’s investments in RCML (Advisory Business )have been fully provided for and RCML’s consolidated financial statements have been excluded from REL’s consolidated financial statements w.e.f. 1st Oct, 2011

Valuation Multiples – Religare Enterprises

Particluars Mar-11 Mar-12 Mar-13 Mar-14 Mar-15
Market price Per Share 395 313 308 370 315
Shares outstanding (crores) 14 15 15 15 18
Earnings per share (Diluted) -21 -10 -32 2 18
Market Cap (Crores) 5,506 4,673 4,598 5,535 5,616
Total Debt (Cores) 10,250 11,925 10,164 10,376 13,008
Net Debt (Crores) 7,094 9,448 8,169 8,627 11,433
Networth (Crores) 2,965 3,694 3,176 3,187 3,908
Enterprise Value( Crores) 12,601 14,122 12,768 14,162 17,049
Operating EBIDTA Margin (%) 18.9% 41.2% 56.8% 52.3% 51.0%
EV/ Sales (X) 5.4 4.5 3.7 4.2 4.2
EV/ EBITDA (X) 28.8 10.9 6.6 8.1 8.2
P/E (X) NM NM NM NM 17.5
Debt / Equity (X) 3.5 3.2 3.2 3.3 3.3
Debt / EBITDA (X) 23.4 9.2 5.2 5.9 6.2
Net Debt / EBITDA (X) 16.2 7.3 4.2 4.9 5.5
EBIT / interest (x) 0.4 0.8 1.1 1.1 1.2
(Source: Money Control – Religare Enterprise )

Note : NM- Not Meaningful

Key Financial Highlights:

  • Religare Enterprises :

    • Religare has shown CAGR growth rate of 15% in revenue over the last 5 years with Lending and Investment Management businesses generating around 75% of its revenue in FY15 as against 44% in FY11
    • Post-acquisition of Landmark, Religare has been able to enhance its share of income generated from Investment Management from 5% in FY11 to 22% in FY15.
    • Landmark’s share of contribution to Religare’s consolidated income from investments has increased from 55% in FY12 to 65% and 55% in FY15. Religare has benefited from Landmark’s diverse investor base and $9 billion of Landmark’s assets under management. Also, Religare has benefited from higher catch-up fees on the periodic closure of certain funds in Landmark.
    • Religare Enterprises has a debt of about Rs 600 crore. In addition, it has an operational debt of about Rs 15,000 crore in ReligareFInvest, which is engaged in lending.

    Consolidated Income statement – Religare Enterprises

    Particulars FY11 FY12 FY13 FY14 FY15 CAGR %
    Net Sales 2,318 3,145 3,418 3,343 4,104 15.3%
    YoY Growth (%) 35.7% 8.7% -2.2% 22.8%
    EBIDTA 437 1,295 1,940 1,749 2,091 47.9%
    YoY Growth (%) 196.1% 49.8% -9.9% 19.6%
    Depreciation & Amort. 98 84 60 34 37 -21.6%
    EBIT 340 1,211 1,880 1,714 2,054 56.8%
    YoY Growth (%) 256.4% 55.2% -8.8% 19.8%
    Finance cost 783 1,457 1,716 1,579 1,652 20.5%
    YoY Growth (%) 86.0% 17.8% -8.0% 4.6%
    PBT -198 -96 -257 183 485
    YoY Growth (%) -51.3% 166.5% -171.0% 165.9%
    Provision for Tax 96 53 223 156 164 14.5%
    YoY Growth (%) -45.0% 324.9% -30.2% 5.4%
    Minority Interest 6 65 73.41 96.29 167.52 130.0%
    Net Profit After Minorty Interest -301 -259 -65 11 154
    YoY Growth (%) -13.9% -75.0% -117.5% 1259.8%
    Cah flow earnings -203 -175 -5 46 191
    YoY Growth (%) -13.7% -97.4% -1113.7% 318.0%
    Financial Year ended March (Figures in INR Cr) (Source: Money Control / BSE)
  • Landmark Properties :

    • Revenue in Landmark enhanced to Rs 604 crore in FY15 from Rs 233 crore in FY12 (CAGR 33% in the last four years. Landmark contributes 75% of revenue from foreign operations in FY15.
    • Net profit has seen CAGR growth rate of 45% over the last 4 years.
    • Landmark Partners closed a $ 6 billion fund raise in FY15, a testament to its stellar performance record. RGAM has now become a meaningful contributor to Religare’s consolidated profits.

    Landmark Partners – Financial Highlights

    Particulars FY12 FY13 FY14 FY15 CAGR %
    Sales 233 258 366 604 37.3%
    as % of Religare Turnover 7.4% 7.6% 11.0% 14.7%
    PBT 98 101 168 318 48.0%
    Provision for Tax 0.2 0.7 0.5
    PAT 98 101 168 317 48.0%
    Reserves / (Acc. Losses) 44 58 129 204 67.2%
    Total Assets 104 117 165 277
    Total Liabilities 104 117 165 277
    % Shareholding 53.5% 53.5% 53.5% 53.5%
    Financial Year ended March (Figures in INR Cr) (Source: Religare Annual Reports)

RECENT NEWS :

  • Nov 2015:
    Religare Enterprises is set to exit from the Indian asset management company (AMC) that it controls. The company has entered into a binding agreement to sell its 51% stake in Religare Invesco Asset Management Co., which manages assets worth Rs 21,594 crore, to foreign partner Invesco for 6% of assets under management (AUM) or Rs 660-700 crore. The money from the divestment will be used to reduce debt at the holding level besides infusing funds in the lending businesses.
  • Dec 2015:
    Religare Enterprises has sold its entire 44 percent equity stake in life insurance JV to Bennett, Coleman and Company (BCCL) for Rs 971.45 crore.

SCOPE FOR CORPORATE RESTRUCTURING AT RELIGARE ENTERPRISE

Religare Enterprise Limited (REL) is a well-diversified business conglomerate with businesses across Lending, Stock Broking, Corporate Finance, M&A, Insurance, Trading & Asset management and has adopted a step-down subsidiary model across all its businesses to run its business operations.  Over the years, Religare has developed very strong credentials in its lending & broking business in the domestic market and has continued to see accelerated growth in these two businesses.

However, it can be said that the strategy to diversify and expand across many businesses under one roof has not paid rich dividends to Religare Enterprise as managing growth and expanding businesses under one roof has been a major challenge for the management. This also is evident from the fact that promoters (Malvinder and Shivinder Singh) have been looking to exit the group for the last 6 months but have found few takers as PE investors are mostly interested in some of the businesses and not the entire entity. Also, investors have been skeptical whether Religare can replicate its accelerated growth seen in lending business across other businesses given the fact that several businesses are at different stages of growth and bring different risks to the table.

With the intention to scale back some of its investments across several businesses and to focus on its core business of lending, REL is also currently
monetizing some of its assets. In this context, Religare has exited its domestic asset management business and life insurance business recently. Some of the proceeds will also be used to reduce its debt at holding company level of Rs 600 crore apart from investing in its lending business.

In the light of some of the factors mentioned above, REL’s market at Rs 5,500 crore is at the same level as it was four years back. We feel for value
unlocking to happen at several businesses. Religare will have to take a re-look at its business model and undertake a restructuring exercise by demerging some of its capital-hungry businesses mainly the lending business from others. Demerging and creating separate legal entities will also allow Religare to have a dedicated approach to managing its business and significant value unlocking can happen through this restructuring.

CONCLUSION

Landmark acquisition has contributed significantly to the growth of REL’s global asset management business resulting in growth of REL’s international operations. Landmark has seen CAGR growth of 48% in its net income of Rs 317 crore in the last four years and this is also at 210% of the consolidated net income of REL. Also, the strategy to retain the management team at Landmark to handle the day to day operations and execute their growth strategies at Landmark has paid rich dividends as Religare has been able to leverage on the experience and credibility established by Landmark’s management team in operating variety of asset classes and investment disciplines across the globe and possesses huge client base and relationships. In this context, the deal has certainly created value at the holding company level.

We feel Religare might continue with its strategy of buying multi-boutique asset management businesses abroad to facilitate growth in its global asset management business, given the fact that the company has exited its domestic asset management business selling its stake to foreign partner Invesco. If Religare can help the global asset management businesses to grow in emerging markets like India, then that would certainly create a lot more value for REL’s shareholders. Also, not many firms in the financial services domain have been able to grow their global asset management platforms. In that context, there is an opportunity available for Religare to create a competitive edge in the market by expanding its global asset management business and value creation.

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