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Reliance Capital (RCFT)
Banks/Financial Institutions
A mixed quarter. Reliance Capital continued to build its core businesses during
2QFY11. Life insurance reported stable margins but the sudden ban on universal life
policies (ULP) will likely affect medium-term volumes. The NBFC reported about 10%
qoq loan growth while Reliance Money reported marginal profits. We reinitiate
coverage with a REDUCE rating. We believe regulatory clarity on ULPs and momentum
of business in lending and retail distribution will be imperative to drive stock
performance.
Life Insurance: Focus on traditional business, ULP to resume post regulatory guidelines
Reliance Life proposes to continue its focus on traditional business in order to support its
profitability in the new regulatory regime. A strategy to focus on low-ticket business (Rs10,000-
Rs12,000 per policy as compared to Rs25,000-Rs30,000 in case of most private players) has helped
the company improve franchisee in the traditional segment which contributed for about 50% of
incremental business. RCAP has focused on universal life policies (ULP) which contributed for half
the business in this segment. However, IRDA has recently imposed a ban on ULPs thereby affecting
RCAP’s business plans. The company expects IRDA to issue guidelines on ULP and will then likely
resume business in this segment. In the meanwhile, RCAP has launched new traditional policies as
well. During the quarter, RCAPT reported 8% growth in first year premium, reported NBAP
margins were stable at about 17%.
NBFC: Growing loan book
RCAP’s retail lending loan book was up to Rs100 bn (up 20% yoy) from Rs90 bn in 1QFY11
primarily on the growth in home loans and SME lending. Profitability (PBT/average loans) of the
secured lending SBU improved to 3.5% in 1QFY11 from 3.1% in 1QFY11 while provisions on
personal loan continued to pull down overall earnings.
In the past, RCAP has followed a strategy of booking home loan and commercial loans in
independent subsidiaries. However, the company now proposes to scale up in infrastructure
finance segment (to capitalize on ADAG group relationships) and hence will likely need to use the
large balance sheet of the parent company. As such, RCAP terminated the agreement (to transfer
assets) with its commercial finance (known as consumer finance till 1QFY11) subsidiary.
Consequently, RCAP booked FY2011YTD business for commercial finance SBU in the parent
company thereby driving earnings of the parent. The transfer boosted RCAP’s PBT by about Rs300
mn; after adjusting for the transfer, RCAP’s standalone PBT will decline to Rs319 mn in 2QFY11 as
compared to Rs505 mn in 1QFY11. Home finance assets continue to be hosted in a separate
subsidiary.
Reliance Money: Separating the distribution business
Reliance Money (R-Money) reported PBT of Rs25 mn in 2QFY11 as compared to a marginal
loss in 1QFY11. The company has stripped off its retail broking business in a separate SBU
(Reliance Securities) and 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 (in partnership with India Post). RMoney
(distribution business) has reported a loss in the last few quarters; according to the
management, high cost allocation on the back of high inventory of gold had affected
earnings in the past.
Reliance Securities: Retail broking focusing on commission yields
Reliance Securities has migrated its business to a new system and has done away with its
most of its older franchisees. The company proposes to focus on the cash segment of the
broking and improving broking yields. The company reported market share of 1.25% in
2QFY11 as compared to 2.1% in 1QFY11. However, reported commission moved up to 3.7
bps in 2QFY11 from 2.3 bps in 1QFY11. About 25-30% of its income is contributed by nonbroking
activities like margin funding etc. We believe that consistent MOM rise in cash
market volumes will drive earnings for brokerages; the restructuring trends in the company
need to be monitored.
Asset Management in line
RCAM reported 9% qoq increase in mutual fund AUMs and retained its #1 position in the
industry. PBT margins were steady at 40%. Management highlighted that they have not
booked any MTM losses in the business on the back of change in valuation norms of shortterm
debt instruments.
Reliance General Insurance remains in red
Reliance General Insurance reported 24% yoy and 14% qoq decline in gross premium
collections during 2QFY11. Combined ratio declined to 118% in 2QFY11 from 124% in
1QFY11.
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