Reliance Capital (RCAPT)
Banks/Financial Institutions
Valuations inexpensive, performance in. Challenges in the financial sector (higher
rates, subdued insurance collections, provisions in housing finance, lower brokerage)
continue to affect profitability of Reliance Capital. The recently-concluded deal with
Nippon Life will boost its ability to deal with the aforesaid challenges. We upgrade our
rating to ADD (from REDUCE) on the back inexpensive valuations, retain SOTP-based
target price of Rs470. We believe that developments at the ADA Group and
simplification of intra-group holdings key would be catalysts for stock performance.
Life Insurance: APE remains weak
Reliance Life reported 54% decline in APE collections during 2QFY12 as compared to 40% decline
reported by the private sector. Traditional business contributed for about 60% of the incremental
collections; management expects the share of traditional business to decline to 50-55% by March
2012.
The conservation ratio (ratio of renewal premium to new and renewal premium collected last year)
declined to 59% from 70% in 1QFY12 and 48% in 4QFY11 but was almost stable yoy (64% in
1QFY11).
The company has not reported NBAP margins for the quarter but expects reported NBAP margins
to decline to 15% in 2012E (from 17% in FY2011). Reliance Life reported marginal profit during
the quarter; surplus of about Rs650 mn in the policyholders account will be consolidated by the
end of the financial year.
During the quarter, Reliance Life concluded its deal with Nippon Life thereby valuing the life
business at Rs115 bn. While the transaction is complete, management has highlighted that the
capital gains will be realized by the parent in next 1-2 quarters. Reliance Capital holds 100%
economic stake in the life business. The investment in life business has been made by Reliance
Capital though its own balance sheet and its affiliate companies viz. Viscount Management and
Viscount Management Alpha. The management proposes to merge these companies with itself in
the near future to realize the gains.
General Insurance: Combined ratio improves, net loss stable
Reliance General Insurance reported net loss of Rs287mn versus Rs301 mn in 1QFY12 and
Rs282 mn in 2QFY11. Competition in health and corporate business, provision towards
losses of third party motor pool pulled down earnings. Combined ratio was high at 123%.
We expect losses in the third party motor pool to be lower in 2012E thereby driving up
performance for the sector; nevertheless, overall performance will remain weak in 2012E as
well.
NBFC: Growth remains strong, higher borrowings cost pulls down earnings
RCAP’s retail lending loan book was up to Rs139 bn (6% qoq, 39% yoy). Sharp growth in
mortgages (9% qoq), autos (7% qoq) and lending to infrastructure (2% of loan book) has
buoyed business. We are modeling about 19% yoy loan growth in 2012E largely on the
back of growth in mortgages and loans against property.
Overall earnings were lower yoy – PBT of Rs547 mn in 2QFY12 as compared to Rs610 mn in
4QFY11 due to lower other income and higher borrowings cost.
Gross NPLs were at Rs1.8 bn , up from Rs1.5 bn in June. We expect provisioning expenses
for the year to decline sharply (0.55% of loans in 2012E as compared to 3.3% of loans in
2011) largely due to running down on the personal loan book.
Asset management business in line
RCAM reported almost stable mutual fund AUMs. PBT margins declined to 40% from
42% qoq.
Reliance Money and Securities: Subdued operating environment
Reliance securities reported PBT of Rs21 mn vis-à-vis Rs30 mn in 1QFY12 and Rs101 mn in
4QFY11. While its market share declined moderately to 0.8% from 0.9%, broking yields
(calculated) were stable at 4.6 bps qoq.
Reliance Money (R-Money) reported PBT of Rs21 mn in 2QFY12 – stable qoq. The financials
of R-Money now represent the earnings of the distribution business- wealth management
(distribution of mutual funds, life insurance etc), money transfer agency and distribution of
gold coins. Reliance Money is the largest distributor for Western India Money transfer. Gold
coins are distributed through the network of India Post. After making a transition from the
previous operating model, R-Money’s business seems to have settled down. The
management is positive on steady growth from the current base though its reported
financials have been weak for last few quarters.
Retain target price of Rs470, ADD
We are tweaking our estimates for FY2012E and FY2013E to factor higher standard asset
provisions on the housing business. We have not yet taken cognizance of the capital gains
(estimated at Rs21 bn before tax) from the deal with Nippon Life in our estimates.
We value the contribution of life insurance business at 2X invested capital i.e. 10% NBAP
margins and 13.6X NBV FY2013E after 20% holding company discount.
High leverage, group holding structure is a concern
We remained concerned on the high adjusted leverage of the company. Reliance Capital has
made equity investments of Rs55 bn in group companies in additional to propriety
investments of Rs41 bn (largely equity investments). As on September 2011, the NBFC
business had a loan book of Rs139 bn. The entire business is supported by net worth of
Rs71 bn (consolidated net worth of Rs79 bn). Capital gains from Reliance Life (estimated at
Rs21 bn before tax) will provide additional support. While Reliance Capital has 100%
economic stake in the life insurance business, this is held by itself and its affiliate companies.
The management proposes to merge these affiliates with itself in the near future.
Key highlights of 2QFY12 results
�� Standalone PAT of Rs93 mn versus Rs1.4 bn in 1QFY12 and Rs619 mn in 2QFY11. The
company merged the NBFC subsidiaries in the parent company in 4QFY11 and hence the
yoy financials are not comparable. The company earned dividend income of Rs1.5 bn
from Reliance Asset Management during the previous quarter. No capital gains, higher
tax liability (reasons not clear) have pulled down earnings.
�� Reliance Capital reported consolidated PAT of Rs334 mn as compared Rs348 in 1QFY12
Banks/Financial Institutions
Valuations inexpensive, performance in. Challenges in the financial sector (higher
rates, subdued insurance collections, provisions in housing finance, lower brokerage)
continue to affect profitability of Reliance Capital. The recently-concluded deal with
Nippon Life will boost its ability to deal with the aforesaid challenges. We upgrade our
rating to ADD (from REDUCE) on the back inexpensive valuations, retain SOTP-based
target price of Rs470. We believe that developments at the ADA Group and
simplification of intra-group holdings key would be catalysts for stock performance.
Life Insurance: APE remains weak
Reliance Life reported 54% decline in APE collections during 2QFY12 as compared to 40% decline
reported by the private sector. Traditional business contributed for about 60% of the incremental
collections; management expects the share of traditional business to decline to 50-55% by March
2012.
The conservation ratio (ratio of renewal premium to new and renewal premium collected last year)
declined to 59% from 70% in 1QFY12 and 48% in 4QFY11 but was almost stable yoy (64% in
1QFY11).
The company has not reported NBAP margins for the quarter but expects reported NBAP margins
to decline to 15% in 2012E (from 17% in FY2011). Reliance Life reported marginal profit during
the quarter; surplus of about Rs650 mn in the policyholders account will be consolidated by the
end of the financial year.
During the quarter, Reliance Life concluded its deal with Nippon Life thereby valuing the life
business at Rs115 bn. While the transaction is complete, management has highlighted that the
capital gains will be realized by the parent in next 1-2 quarters. Reliance Capital holds 100%
economic stake in the life business. The investment in life business has been made by Reliance
Capital though its own balance sheet and its affiliate companies viz. Viscount Management and
Viscount Management Alpha. The management proposes to merge these companies with itself in
the near future to realize the gains.
General Insurance: Combined ratio improves, net loss stable
Reliance General Insurance reported net loss of Rs287mn versus Rs301 mn in 1QFY12 and
Rs282 mn in 2QFY11. Competition in health and corporate business, provision towards
losses of third party motor pool pulled down earnings. Combined ratio was high at 123%.
We expect losses in the third party motor pool to be lower in 2012E thereby driving up
performance for the sector; nevertheless, overall performance will remain weak in 2012E as
well.
NBFC: Growth remains strong, higher borrowings cost pulls down earnings
RCAP’s retail lending loan book was up to Rs139 bn (6% qoq, 39% yoy). Sharp growth in
mortgages (9% qoq), autos (7% qoq) and lending to infrastructure (2% of loan book) has
buoyed business. We are modeling about 19% yoy loan growth in 2012E largely on the
back of growth in mortgages and loans against property.
Overall earnings were lower yoy – PBT of Rs547 mn in 2QFY12 as compared to Rs610 mn in
4QFY11 due to lower other income and higher borrowings cost.
Gross NPLs were at Rs1.8 bn , up from Rs1.5 bn in June. We expect provisioning expenses
for the year to decline sharply (0.55% of loans in 2012E as compared to 3.3% of loans in
2011) largely due to running down on the personal loan book.
Asset management business in line
RCAM reported almost stable mutual fund AUMs. PBT margins declined to 40% from
42% qoq.
Reliance Money and Securities: Subdued operating environment
Reliance securities reported PBT of Rs21 mn vis-à-vis Rs30 mn in 1QFY12 and Rs101 mn in
4QFY11. While its market share declined moderately to 0.8% from 0.9%, broking yields
(calculated) were stable at 4.6 bps qoq.
Reliance Money (R-Money) reported PBT of Rs21 mn in 2QFY12 – stable qoq. The financials
of R-Money now represent the earnings of the distribution business- wealth management
(distribution of mutual funds, life insurance etc), money transfer agency and distribution of
gold coins. Reliance Money is the largest distributor for Western India Money transfer. Gold
coins are distributed through the network of India Post. After making a transition from the
previous operating model, R-Money’s business seems to have settled down. The
management is positive on steady growth from the current base though its reported
financials have been weak for last few quarters.
Retain target price of Rs470, ADD
We are tweaking our estimates for FY2012E and FY2013E to factor higher standard asset
provisions on the housing business. We have not yet taken cognizance of the capital gains
(estimated at Rs21 bn before tax) from the deal with Nippon Life in our estimates.
We value the contribution of life insurance business at 2X invested capital i.e. 10% NBAP
margins and 13.6X NBV FY2013E after 20% holding company discount.
High leverage, group holding structure is a concern
We remained concerned on the high adjusted leverage of the company. Reliance Capital has
made equity investments of Rs55 bn in group companies in additional to propriety
investments of Rs41 bn (largely equity investments). As on September 2011, the NBFC
business had a loan book of Rs139 bn. The entire business is supported by net worth of
Rs71 bn (consolidated net worth of Rs79 bn). Capital gains from Reliance Life (estimated at
Rs21 bn before tax) will provide additional support. While Reliance Capital has 100%
economic stake in the life insurance business, this is held by itself and its affiliate companies.
The management proposes to merge these affiliates with itself in the near future.
Key highlights of 2QFY12 results
�� Standalone PAT of Rs93 mn versus Rs1.4 bn in 1QFY12 and Rs619 mn in 2QFY11. The
company merged the NBFC subsidiaries in the parent company in 4QFY11 and hence the
yoy financials are not comparable. The company earned dividend income of Rs1.5 bn
from Reliance Asset Management during the previous quarter. No capital gains, higher
tax liability (reasons not clear) have pulled down earnings.
�� Reliance Capital reported consolidated PAT of Rs334 mn as compared Rs348 in 1QFY12
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