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India Equity Research Reports, IPO and Stock News
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Reliance Capital (RCFT)
Banks/Financial Institutions
Operating challenges priced in, upgrade to ADD. Reliance Capital continued to
build its core businesses during 3QFY11. Cost controls and fee income have driven its
consolidated earnings. While regulatory changes affected growth in insurance business,
the NBFC business reported moderate loan growth qoq. The stock has corrected
significantly likely due challenges in the operating environment across its businesses and
general concerns in ADA Group. Despite factoring in lower earnings across businesses,
we estimate fair value at Rs600, upgrade to ADD.
Sharp correction of stock price
Reliance Capital (RCAP) has corrected significantly over the last few weeks likely reflecting the
challenges in the operating environment for its business - regulatory changes in insurance, ongoing
pain in general insurance, higher borrowings cost for NBFCs, lower equity market volumes
for broking business. Concerns on ADA Group companies have also affected the stock price
though RCAP is not directly linked in any of these rumors.
…ex-AMC business, stock trading at 1X PBR, upgrade to ADD
We believe that the nascent stage of most businesses of RCAP affects its stock price performance.
All businesses (except the AMC business) are yet to break even or achieve optimum profitability.
Excluding the value of RCAM (at 14X PER FY2012E or 2.5% of FY2012E AUMs; explained later in
the report), RCAP currently trades at 1X PBR FY2012E. Thus, the current market price is not
assigning any value-add from other business (life insurance, securities, NBFCs). Despite reduction in
our price target, we upgrade our rating to ADD. ADA Group has issued clarifications on the
various rumors on its group companies. We believe that investor’s confidence on the ADA Group
would be crucial in driving stock performance.
Revision in price target
We are revising our SOTP based price target to Rs600 (from Rs800) to factor lower value
across business.
Life insurance. We now value Reliance Life Insurance at 2.0X invested capital FY2012E.
IRDA’s recent move to ban universal life policies (ULPs) with immediate effect in 2QFY11
will likely affect Reliance Life’s growth traction in the medium term. The company
reported 53% decline in APE collections in 3QFY11 (40% growth for 9MFY11); the
management expects the traction to pick up in 4QFY11E and has guided for about 7-8%
APE decline for FY2011E. We are modeling NBAP margins of about 10% as compared to
18% reported by the company in 9MFY11.
NBFC business. RCAP proposes to merge its NBFCs in the parent company. Incrementally,
the NBFC business is carried from the balance sheet of the parent. We are revising our
estimates for the standalone company to factor the NBFC business. We are valuing the
residual net worth (which can be utilized by the NBFC) at 1.1X PBR for about 2-2.5% RoA
and 15-16% long-term RoEs.
Equity investments. We are valuing the equity investments at book value. In the
conference call, management has highlighted that the investments book does not have
significant unrealized losses or gains.
Asset management business. We value Reliance Capital Asset Management (RCAMs)
at 14X PER FY2012E or 2.5% of FY2012E AUMs. We expect RCAM’s earnings to grow by
5-10% yoy in light of the subdued markets. We believe that higher growth multiples for
the industry provide an upside risk on these multiples.
Key highlights of 3QFY11 results
Consolidated PAT of Rs1 bn versus Rs632 mn in 3QFY10.
Standalone PAT of Rs46 mn versus Rs412 mn in 3QFY10; the company did not book any
capital gains during the quarter.
Mutual fund AUM declined 19% yoy and 10% qoq to Rs978 bn. PBT was up 17% yoy to
Rs913 mn. PBT margin in the AMC business increased to 49% from 39% in 2QFY11 due
to lower expenses and higher long-term debt AUMs.
Life insurance reported NBAP margin of 18%. Conservation ratio for 3QFY11 ratio was
low at 57%.
Gross underwritten premium in general insurance was down 19% yoy. The combined
ratio increased to 124% from 118% in 2QFY11 likely due to contribution to the 3rd party
pool for prior periods.
Reliance Money and Reliance Securities reported buoyant results due to income from IPOs
and distribution of gold coins. Higher fee income from these segments lifted the
consolidated earnings.
NBFC’s loan book was up 7% qoq and 37% yoy. Mortgages/ home equity was the key
driver even as SME loans were down qoq as the compact went slow on equity backed
loans. The company did not sell down loans; in the absence of securitization income, PBT
from secured loan book was down 2% yoy. The company makes standard asset
provisions of 30 bps and hence the recent RBI regulation (25 bps standard asset
provisions for NBFC) did not have any significant impact of its financials.
Unsecured (personal) loan book declined to Rs5 bn (from Rs7 bn in 2QFY11). Provisions
declined to Rs169 mn from Rs278 mn in 2QFY11.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Capital (RCFT)
Banks/Financial Institutions
Operating challenges priced in, upgrade to ADD. Reliance Capital continued to
build its core businesses during 3QFY11. Cost controls and fee income have driven its
consolidated earnings. While regulatory changes affected growth in insurance business,
the NBFC business reported moderate loan growth qoq. The stock has corrected
significantly likely due challenges in the operating environment across its businesses and
general concerns in ADA Group. Despite factoring in lower earnings across businesses,
we estimate fair value at Rs600, upgrade to ADD.
Sharp correction of stock price
Reliance Capital (RCAP) has corrected significantly over the last few weeks likely reflecting the
challenges in the operating environment for its business - regulatory changes in insurance, ongoing
pain in general insurance, higher borrowings cost for NBFCs, lower equity market volumes
for broking business. Concerns on ADA Group companies have also affected the stock price
though RCAP is not directly linked in any of these rumors.
…ex-AMC business, stock trading at 1X PBR, upgrade to ADD
We believe that the nascent stage of most businesses of RCAP affects its stock price performance.
All businesses (except the AMC business) are yet to break even or achieve optimum profitability.
Excluding the value of RCAM (at 14X PER FY2012E or 2.5% of FY2012E AUMs; explained later in
the report), RCAP currently trades at 1X PBR FY2012E. Thus, the current market price is not
assigning any value-add from other business (life insurance, securities, NBFCs). Despite reduction in
our price target, we upgrade our rating to ADD. ADA Group has issued clarifications on the
various rumors on its group companies. We believe that investor’s confidence on the ADA Group
would be crucial in driving stock performance.
Revision in price target
We are revising our SOTP based price target to Rs600 (from Rs800) to factor lower value
across business.
Life insurance. We now value Reliance Life Insurance at 2.0X invested capital FY2012E.
IRDA’s recent move to ban universal life policies (ULPs) with immediate effect in 2QFY11
will likely affect Reliance Life’s growth traction in the medium term. The company
reported 53% decline in APE collections in 3QFY11 (40% growth for 9MFY11); the
management expects the traction to pick up in 4QFY11E and has guided for about 7-8%
APE decline for FY2011E. We are modeling NBAP margins of about 10% as compared to
18% reported by the company in 9MFY11.
NBFC business. RCAP proposes to merge its NBFCs in the parent company. Incrementally,
the NBFC business is carried from the balance sheet of the parent. We are revising our
estimates for the standalone company to factor the NBFC business. We are valuing the
residual net worth (which can be utilized by the NBFC) at 1.1X PBR for about 2-2.5% RoA
and 15-16% long-term RoEs.
Equity investments. We are valuing the equity investments at book value. In the
conference call, management has highlighted that the investments book does not have
significant unrealized losses or gains.
Asset management business. We value Reliance Capital Asset Management (RCAMs)
at 14X PER FY2012E or 2.5% of FY2012E AUMs. We expect RCAM’s earnings to grow by
5-10% yoy in light of the subdued markets. We believe that higher growth multiples for
the industry provide an upside risk on these multiples.
Key highlights of 3QFY11 results
Consolidated PAT of Rs1 bn versus Rs632 mn in 3QFY10.
Standalone PAT of Rs46 mn versus Rs412 mn in 3QFY10; the company did not book any
capital gains during the quarter.
Mutual fund AUM declined 19% yoy and 10% qoq to Rs978 bn. PBT was up 17% yoy to
Rs913 mn. PBT margin in the AMC business increased to 49% from 39% in 2QFY11 due
to lower expenses and higher long-term debt AUMs.
Life insurance reported NBAP margin of 18%. Conservation ratio for 3QFY11 ratio was
low at 57%.
Gross underwritten premium in general insurance was down 19% yoy. The combined
ratio increased to 124% from 118% in 2QFY11 likely due to contribution to the 3rd party
pool for prior periods.
Reliance Money and Reliance Securities reported buoyant results due to income from IPOs
and distribution of gold coins. Higher fee income from these segments lifted the
consolidated earnings.
NBFC’s loan book was up 7% qoq and 37% yoy. Mortgages/ home equity was the key
driver even as SME loans were down qoq as the compact went slow on equity backed
loans. The company did not sell down loans; in the absence of securitization income, PBT
from secured loan book was down 2% yoy. The company makes standard asset
provisions of 30 bps and hence the recent RBI regulation (25 bps standard asset
provisions for NBFC) did not have any significant impact of its financials.
Unsecured (personal) loan book declined to Rs5 bn (from Rs7 bn in 2QFY11). Provisions
declined to Rs169 mn from Rs278 mn in 2QFY11.
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