Stock Review: Religare Enterprises

THE acquisition of Landmark Partners might take Religare Enterprises a step forward in its plans to form a multi-boutique asset management platform. However, investors may have to wait for at least four quarters for Religare to reap full benefits from its inorganic growth strategy. Religare's management has indicated that the consideration of $171.5 million (approximately . 770 crore) values Landmark at around 7.6 times its earnings before interest, taxes and depreciation (EBITDA). This is much lower than the average industry valuation of 13-15 times EBITDA. While this shows that Religare acquired LP at a discount to market valuations, it may raise concerns about the quality of assets managed by the latter.

   Another concern is that even though Reliagre would consolidate Landmanrk's existing earnings immediately, it might take the company some time – 18 months, according to experts – to benefit from LP's ability to generate incremental earnings.

   Religare plans to fund the all-cash deal through a combination of internal accruals and debt. Raising debt could increase interest costs. But, the company's bottom line may not be hit much. In the industry, debt usually forms about a fourth of the total value of any deal. For Religare, the deal would result in a debt of about $42.7 million. If the company's average cost of debt is taken to be 8% to 9%, then the interest cost would come to about $3.8 million. This is much less than LP's EBITDA of around $22.5 million.

   Religare will benefit from the additional client base. Post acquisition, it would get access to 450 institutional clients. This will increase Religare's institutional client base three times. The deal will provide the company an entry into the secondary market of private equity. This would help in providing its existing private equity (PE) clients more options to liquidate investments. Religare plans to retain Landmark's management team. This is a positive sign in a business that thrives on relationships. The Landmark team will help the company acquire more clients and retain higher percentage of existing clients.

   The company seems to aggressively pursue an inorganic growth strategy. Media reports have indicated that Religare has a $1-billion plan to build its global asset management business. The company has spent only a third of that amount till now. The company has extensive experience in the Indian market. It needs to be seen how well it can capitalise on its acquisitions and develop similar capabilities in other emerging markets.