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RELIANCE CAPITAL
Core businesses gaining traction
Reliance Capital (RCap) reported a profit of INR 1.06 bn in Q3FY11 (up 68% Y-o-Y,
down 5% Q-o-Q). Earnings traction in core businesses was strong—profitability in asset
management and consumer financing grew 30% Q-o-Q and for securities/distribution
business, it grew 40% Q-o-Q. Life insurance business reported profits due to sharp
decline in opex and increased share of high margin policies. However, earnings were
below expectations due to absence of capital gains and much higher interest expenses
(up 18% Q-o-Q). Due to high combined ratio of 124%, losses continued in general
insurance business (INR 242 mn vis-à-vis INR 282 mn in Q3FY11).
• In the asset management business, unconducive capital markets resulted in
AUMs coming off 5% Q-o-Q; however, focus on the retail segment continues and
yields improved 6bps sequentially.
• Life insurance business reported a profit of INR 230 mn as opex ratio declined to
22% (29% in Q2FY11) and NBAP margins improved sequentially due to increase in
high margin policies (traditional and single premium) in the product mix.
• In consumer financing, disbursement growth picked up (up 20% Q-o-Q to INR
23.4 bn); NIMs came off 5.4% (from 5.8% in Q2FY11) due to rising funding cost;
credit cost was lower due to decline in NPLs; no one-time standard asset
provisioning was required as it has been making general provisioning.
• In securities and distribution, IPO financing and gold coin distribution supported
profitability. Revenue improved 49% Q-o-Q to INR 666 mn (securities business up
9%, distribution grew three fold).
Outlook and valuations: Risk-reward favorable; upgrade to ‘BUY’
During the quarter, core businesses gained traction in terms of growth and
earnings and contribution of investment profit was zero to the bottom line.
Incrementally, consumer financing business is gaining relevance in the overall
earnings pie where growth traction is expected to continue. Asset management
continues to be a stable source of earnings. The stock has under-performed the
bankex by 70% in the past one year due to regulatory concerns in life insurance
and MF businesses and business restructuring. However, we believe the concerns
are largely priced in the current valuations and at this stage, the risk-reward ratio
seems to be more favorable. Our SOTP fair value for the stock stands at INR 563
per share. Hence, we upgrade our recommendation on the stock to ‘BUY’ from
‘HOLD’ and rate it ‘Sector Outperformer’ on relative return basis.
Business overview
Reliance MF: Focus on retail segment
• Reliance MFs AUMs came off 5% Q-o-Q (15% Y-o-Y) to INR 1.02 tn. Unconducive
capital markets resulted in AUMs moving in a narrow range of INR 1.0-1.2 tn over the
past six-seven quarters.
• Equity AUMs were more or less flat (at INR 380 bn) on account of new fund/SIP/MIP
launches. It continued to add 100k SIPs on an average every month and the number
of investors under SIP has increased to 1.9 mn.
• Management has increased its focus on the retail segment across asset classes (retail
in debt AUM has improved to 19% in current quarter against 6% in the previous year)
to improve yields.
• Supported by 6bps sequential improvement in yields (to 36bps), profit before tax grew
30% Q-o-Q, 23% Y-o-Y to INR 913 mn.
• We believe the asset management business is a stable source of earnings for the
company and expect it to garner profits of INR 2.0-2.5 bn over FY11-13E.
Reliance Life- business breaks even; new business volumes contract
• Reliance Life reported a PAT of INR 230 mn against a loss of INR 400 mn in Q2FY11
(INR 1.6 bn in H1FY11). Management believes profitability is sustainable.
• Reported NBAP margin for 9mFY11 came in at 18.02% against 17.9% in H1FY11
supported by high proportion of high margin traditional and single premium business.
• Impact of IRDA’s regulation capping the difference between gross and net yields
(DGNY) on ULIP policies was felt during the quarter on new business volumes; on
annualised premium equivalent (APE) basis, new business volume dipped 53% Y-o-Y
and 43% Q-o-Q. Management has revised its APE growth target for FY11 down from
5-10% increase to 10% decline.
• Tracking the industry trend, Reliance Life posted single premium growth of 127% Y-o-
Y and 77% Q-o-Q to INR 2.2 bn (forming 38% of NBP in Q3FY11 against 16% in
Q2FY11).
• Gross written premium growth declined sequentially by 10%. Conservation ratio
remained weak at 57% (64% in Q2FY11).
• While contribution of traditional business increased to 50% in Q3FY11 against 20% in
H1FY11, contribution of Universal Life (UL) policies declined to near zero against 50%
in H1FY11. Going forward management intends to maintain ULIP/traditional ratio at
50:50.
• Opex ratio declined sequentially by 7 percentage points to 22% on account of cost
rationalization measures initiated by the management, a key positive.
• No capital infusion is required in Q4FY11; INR 1bn of capital has been earmarked for
life insurance business in FY12.
Reliance Consumer Finance: disbursements strong; provisioning lower
• Disbursements jumped 20% Q-o-Q to INR 23.5 bn in Q3FY11. Traction remained
strong in auto (34% Q-o-Q), CV (14% Q-o-Q) and mortgage (12% Q-o-Q) while SME
remained flat sequentially. Unsecured personal loan book contracted more than 25%
Q-o-Q to INR 2.1 bn (~2% of loan book). Securitisation was zero during the quarter;
however on-book AUMs grew only 7% Q-o-Q to INR 107 bn due to run-down in loan
against securities portfolio (from INR 5 bn in Q2FY11 to INR 2 bn in Q3FY11).
• Net interest margins (excluding securitisation) are estimated to have come off to 5.4%
due to higher cost of funds which stood at 8.7% (compared to 8.4% in Q2FY11).
• Gross NPLs declined further to 1.5% (INR 1.9 bn) in Q3FY11 from 2.1% (INR 2.5 bn)
in Q2FY11. Provision coverage with write offs improved to 79% (from 72% in
Q2FY11). The company has been making general provisioning on standard assets
since the past two years and RBI’s provisioning requirement (0.25% of standard
assets) does not result in any additional one-time hit.
• We expect growth momentum in this business to continue and are building in
disbursement growth of 18% over FY11-13E. While margins will be under pressure in
a rising interest rate environment, they will be offset by lower opex and credit costs.
We expect RoEs to improve to 13% over FY12-13E.
Reliance Securities and Reliance Money: Distribution business buoys earnings
• Broking, wealth management, and IB business is reported under Reliance Securities
and distribution business (of insurance products, gold) and money transfer in Reliance
Money.
• Revenues improved 49% Q-o-Q to INR 666 mn (securities business up 9%,
distribution grew three fold).
• Average daily trading volume surged 20% Q-o-Q to INR 18 bn; AUMs in wealth
management grew 50% Q-o-Q to INR 1.8 bn; IPO financing during the quarter is
estimated at ~INR 27 bn.
• It sold ~445 kilos of gold during the quarter (compared to 214 kilo sold in H1FY11).
This coupled with continued momentum in money transfer led to strong traction in
distribution business. In line with industry, revenue from distribution of insurance
products was not encouraging.
• TPD reported profits (before tax) of INR 71 mn (against INR 25 mn in Q2FY11) while
securities reported profit of INR 37 mn (against INR 52 mn in Q2FY11).
Reliance General Insurance: Combined ratio up 6% points sequentially
• General insurance reported a loss of INR 242 mn at the PBT level (INR 282 mn loss in
Q2FY11), which on consolidated basis dragged down the profit substantially.
• Combined ratio inched up 6 percentage points sequentially to 124% due to provision
of nine months third party motor pool losses in Q3FY11, in line with change in the
accounting policy. Adjusting for this, combined ratio would have been 117%
(marginally lower Q-o-Q).
• Gross written premium declined 19% Y-o-Y and rose 12% Q-o-Q to INR 4.2 bn.
Company Description
Reliance Capital (RCap) has been actively pursuing growth opportunities in the Indian
financial services sector, post the demerger and reorganisation of the Reliance Group, to
become a leading financial powerhouse. It has undergone significant strategy changes in
the past one to two year, with focus shifting to fast-growing segments in the financial
services space, viz., asset management and insurance business, from leasing and
infrastructure financing. RCFT is the leader in its existing businesses—the largest mutual
fund (in terms of AUMs of INR 1.02 tn), and the third-largest general insurer (in terms of
gross written premium of INR 20 bn in FY10). The company has also forayed into retail
broking under the brand Reliance Money (acquired ~7 mn broking accounts) and retail
financing under Reliance Consumer Finance (outstanding loan book of INR 107 as on
December 31, 2010). It also commenced operations in asset reconstruction and
institutional broking business.
Investment Theme
We expect RCFT to become a leading financial powerhouse offering a plethora of
products including mutual funds, life insurance, general insurance, retail broking, and
consumer financing. We believe it is a pure play on fast-growing segments of the Indian
financial services space. We expect sustained growth in the company’s asset
management business and hyper growth in life insurance and broking. Our confidence in
RCFT is underpinned by ADAG’s execution capabilities, competitive skills, and its ability
to create new markets.
Key Risks
Execution failure is the key business risk.
We have assigned 100% value to its life insurance and broking business in our valuation
estimates based on our discussions with the management. Though RCFT has 100%
economic interest, technically it holds only 16% in Reliance Life.
Growth in asset management, life insurance, and broking businesses is highly dependent
on the conditions in capital markets. Sustained non-conducive market conditions may
hamper our growth assumptions and consequently impact valuations negatively.
Intense competitive pressures in any business segment may affect the expected market
share and/margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RELIANCE CAPITAL
Core businesses gaining traction
Reliance Capital (RCap) reported a profit of INR 1.06 bn in Q3FY11 (up 68% Y-o-Y,
down 5% Q-o-Q). Earnings traction in core businesses was strong—profitability in asset
management and consumer financing grew 30% Q-o-Q and for securities/distribution
business, it grew 40% Q-o-Q. Life insurance business reported profits due to sharp
decline in opex and increased share of high margin policies. However, earnings were
below expectations due to absence of capital gains and much higher interest expenses
(up 18% Q-o-Q). Due to high combined ratio of 124%, losses continued in general
insurance business (INR 242 mn vis-à-vis INR 282 mn in Q3FY11).
• In the asset management business, unconducive capital markets resulted in
AUMs coming off 5% Q-o-Q; however, focus on the retail segment continues and
yields improved 6bps sequentially.
• Life insurance business reported a profit of INR 230 mn as opex ratio declined to
22% (29% in Q2FY11) and NBAP margins improved sequentially due to increase in
high margin policies (traditional and single premium) in the product mix.
• In consumer financing, disbursement growth picked up (up 20% Q-o-Q to INR
23.4 bn); NIMs came off 5.4% (from 5.8% in Q2FY11) due to rising funding cost;
credit cost was lower due to decline in NPLs; no one-time standard asset
provisioning was required as it has been making general provisioning.
• In securities and distribution, IPO financing and gold coin distribution supported
profitability. Revenue improved 49% Q-o-Q to INR 666 mn (securities business up
9%, distribution grew three fold).
Outlook and valuations: Risk-reward favorable; upgrade to ‘BUY’
During the quarter, core businesses gained traction in terms of growth and
earnings and contribution of investment profit was zero to the bottom line.
Incrementally, consumer financing business is gaining relevance in the overall
earnings pie where growth traction is expected to continue. Asset management
continues to be a stable source of earnings. The stock has under-performed the
bankex by 70% in the past one year due to regulatory concerns in life insurance
and MF businesses and business restructuring. However, we believe the concerns
are largely priced in the current valuations and at this stage, the risk-reward ratio
seems to be more favorable. Our SOTP fair value for the stock stands at INR 563
per share. Hence, we upgrade our recommendation on the stock to ‘BUY’ from
‘HOLD’ and rate it ‘Sector Outperformer’ on relative return basis.
Business overview
Reliance MF: Focus on retail segment
• Reliance MFs AUMs came off 5% Q-o-Q (15% Y-o-Y) to INR 1.02 tn. Unconducive
capital markets resulted in AUMs moving in a narrow range of INR 1.0-1.2 tn over the
past six-seven quarters.
• Equity AUMs were more or less flat (at INR 380 bn) on account of new fund/SIP/MIP
launches. It continued to add 100k SIPs on an average every month and the number
of investors under SIP has increased to 1.9 mn.
• Management has increased its focus on the retail segment across asset classes (retail
in debt AUM has improved to 19% in current quarter against 6% in the previous year)
to improve yields.
• Supported by 6bps sequential improvement in yields (to 36bps), profit before tax grew
30% Q-o-Q, 23% Y-o-Y to INR 913 mn.
• We believe the asset management business is a stable source of earnings for the
company and expect it to garner profits of INR 2.0-2.5 bn over FY11-13E.
Reliance Life- business breaks even; new business volumes contract
• Reliance Life reported a PAT of INR 230 mn against a loss of INR 400 mn in Q2FY11
(INR 1.6 bn in H1FY11). Management believes profitability is sustainable.
• Reported NBAP margin for 9mFY11 came in at 18.02% against 17.9% in H1FY11
supported by high proportion of high margin traditional and single premium business.
• Impact of IRDA’s regulation capping the difference between gross and net yields
(DGNY) on ULIP policies was felt during the quarter on new business volumes; on
annualised premium equivalent (APE) basis, new business volume dipped 53% Y-o-Y
and 43% Q-o-Q. Management has revised its APE growth target for FY11 down from
5-10% increase to 10% decline.
• Tracking the industry trend, Reliance Life posted single premium growth of 127% Y-o-
Y and 77% Q-o-Q to INR 2.2 bn (forming 38% of NBP in Q3FY11 against 16% in
Q2FY11).
• Gross written premium growth declined sequentially by 10%. Conservation ratio
remained weak at 57% (64% in Q2FY11).
• While contribution of traditional business increased to 50% in Q3FY11 against 20% in
H1FY11, contribution of Universal Life (UL) policies declined to near zero against 50%
in H1FY11. Going forward management intends to maintain ULIP/traditional ratio at
50:50.
• Opex ratio declined sequentially by 7 percentage points to 22% on account of cost
rationalization measures initiated by the management, a key positive.
• No capital infusion is required in Q4FY11; INR 1bn of capital has been earmarked for
life insurance business in FY12.
Reliance Consumer Finance: disbursements strong; provisioning lower
• Disbursements jumped 20% Q-o-Q to INR 23.5 bn in Q3FY11. Traction remained
strong in auto (34% Q-o-Q), CV (14% Q-o-Q) and mortgage (12% Q-o-Q) while SME
remained flat sequentially. Unsecured personal loan book contracted more than 25%
Q-o-Q to INR 2.1 bn (~2% of loan book). Securitisation was zero during the quarter;
however on-book AUMs grew only 7% Q-o-Q to INR 107 bn due to run-down in loan
against securities portfolio (from INR 5 bn in Q2FY11 to INR 2 bn in Q3FY11).
• Net interest margins (excluding securitisation) are estimated to have come off to 5.4%
due to higher cost of funds which stood at 8.7% (compared to 8.4% in Q2FY11).
• Gross NPLs declined further to 1.5% (INR 1.9 bn) in Q3FY11 from 2.1% (INR 2.5 bn)
in Q2FY11. Provision coverage with write offs improved to 79% (from 72% in
Q2FY11). The company has been making general provisioning on standard assets
since the past two years and RBI’s provisioning requirement (0.25% of standard
assets) does not result in any additional one-time hit.
• We expect growth momentum in this business to continue and are building in
disbursement growth of 18% over FY11-13E. While margins will be under pressure in
a rising interest rate environment, they will be offset by lower opex and credit costs.
We expect RoEs to improve to 13% over FY12-13E.
Reliance Securities and Reliance Money: Distribution business buoys earnings
• Broking, wealth management, and IB business is reported under Reliance Securities
and distribution business (of insurance products, gold) and money transfer in Reliance
Money.
• Revenues improved 49% Q-o-Q to INR 666 mn (securities business up 9%,
distribution grew three fold).
• Average daily trading volume surged 20% Q-o-Q to INR 18 bn; AUMs in wealth
management grew 50% Q-o-Q to INR 1.8 bn; IPO financing during the quarter is
estimated at ~INR 27 bn.
• It sold ~445 kilos of gold during the quarter (compared to 214 kilo sold in H1FY11).
This coupled with continued momentum in money transfer led to strong traction in
distribution business. In line with industry, revenue from distribution of insurance
products was not encouraging.
• TPD reported profits (before tax) of INR 71 mn (against INR 25 mn in Q2FY11) while
securities reported profit of INR 37 mn (against INR 52 mn in Q2FY11).
Reliance General Insurance: Combined ratio up 6% points sequentially
• General insurance reported a loss of INR 242 mn at the PBT level (INR 282 mn loss in
Q2FY11), which on consolidated basis dragged down the profit substantially.
• Combined ratio inched up 6 percentage points sequentially to 124% due to provision
of nine months third party motor pool losses in Q3FY11, in line with change in the
accounting policy. Adjusting for this, combined ratio would have been 117%
(marginally lower Q-o-Q).
• Gross written premium declined 19% Y-o-Y and rose 12% Q-o-Q to INR 4.2 bn.
Company Description
Reliance Capital (RCap) has been actively pursuing growth opportunities in the Indian
financial services sector, post the demerger and reorganisation of the Reliance Group, to
become a leading financial powerhouse. It has undergone significant strategy changes in
the past one to two year, with focus shifting to fast-growing segments in the financial
services space, viz., asset management and insurance business, from leasing and
infrastructure financing. RCFT is the leader in its existing businesses—the largest mutual
fund (in terms of AUMs of INR 1.02 tn), and the third-largest general insurer (in terms of
gross written premium of INR 20 bn in FY10). The company has also forayed into retail
broking under the brand Reliance Money (acquired ~7 mn broking accounts) and retail
financing under Reliance Consumer Finance (outstanding loan book of INR 107 as on
December 31, 2010). It also commenced operations in asset reconstruction and
institutional broking business.
Investment Theme
We expect RCFT to become a leading financial powerhouse offering a plethora of
products including mutual funds, life insurance, general insurance, retail broking, and
consumer financing. We believe it is a pure play on fast-growing segments of the Indian
financial services space. We expect sustained growth in the company’s asset
management business and hyper growth in life insurance and broking. Our confidence in
RCFT is underpinned by ADAG’s execution capabilities, competitive skills, and its ability
to create new markets.
Key Risks
Execution failure is the key business risk.
We have assigned 100% value to its life insurance and broking business in our valuation
estimates based on our discussions with the management. Though RCFT has 100%
economic interest, technically it holds only 16% in Reliance Life.
Growth in asset management, life insurance, and broking businesses is highly dependent
on the conditions in capital markets. Sustained non-conducive market conditions may
hamper our growth assumptions and consequently impact valuations negatively.
Intense competitive pressures in any business segment may affect the expected market
share and/margins.
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