- Shares of Religare Enterprises fell up to 10% after board approved insurance and financial services demerger
- Religare Finvest will be newly listed, absorbing the financial services portfolio in a 1:1 share swap
- Religare will retain 63.2% stake in Care Health Insurance, which remains a subsidiary post-demerger
Shares of Religare Enterprises have been under immense pressure following the announcement of its demerger of the insurance business and financial services arm, falling up to 10% following the board's recent approval. The stock has fallen by over 3% in trade on Thursday.
The pain in Religare Ent. shares can be linked to concerns over a persistent holding company discount and regulatory complexities.
Under the approved framework of REL's demerger, the company's financial services portfolio, which includes lending, broking and investing, will transfer to Religare Finvest, which will act as the newly-listed company. RFL will issue new shares to REL shareholders in a 1:1 share swap ratio.
Once the demerger is complete, REL is set to retain 63.2% stake in Care Health Insurance, which will continue to operate as a subsidiary.
The primary trigger for the stock's decline is the decision to not immediately merge Care Health Insurance directly into the parent company.
"May explore the merger of Care Health with REL later," the management said in an analyst concall.
Independent market analyst Ambreesh Baliga notes that despite the market reaction, the move is fundamentally positive. "See, typically whenever a demerger happens, it adds value to the shareholders," he said.
Highlighting the valuation gap, he explained, "Religare holds 63% of this [Care Health], so the valuation, as far as Religare is concerned, is about Rs 12,500 crores. And they also have the broking and the NBFC business in Religare, which is worth about Rs 3,000 crores. So, totally Rs 5,000 crores should be the value, but it's quoting at half that value. Look at the market cap, it's about Rs 7,350 crores."
Baliga expects the holding company discount to eventually reduce since Care will become REL's sole investment. However, a direct merger remains practically challenging. "One of the options going ahead clearly is to merge the insurance business into the holding company. But then it is easier said than done," Baliga added.
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