Reliance Capital -Signs of turnaround visible: Macquarie Research,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �


Reliance Capital
Signs of turnaround visible
Event
 Reliance Capital is a diversified financial group with a market cap of
US$3.5bn and interests in asset management, life insurance, general
insurance, retail broking, and consumer financing. While growth has been
sedate at life insurance, asset management and lending businesses,
profitability seems to have stabilised.

Impact
 Life insurance still absorbing the shocks. The recently revised guidelines
on ULIP, which have resulted in more than 50% of the products being re-filed,
are likely to affect new business margins. Recently issued guidelines on
ULIPs have lowered income on those products as well. A higher tax rate
under the new direct tax code is also likely to impact margins. The company
has tried to offset the decline in revenues by cutting down on costs. According
to management, NBAP margins could stabilise around 16%.
 Possible value unlocking in subsidiaries in FY11/12E. Management plans
to sell off their general insurance business by the end of FY11E. The life
insurance business stake sale/IPO might happen only in FY12E. Currently
they would like the business to stabilise post the onset of new regulatory
changes.
 Consumer finance business – large improvement in asset quality. The
profitability in the consumer finance business is rapidly increasing mainly on
account of lower losses in the consumer financing business. The Gross NPLs
have steadily decreased from a high of 5.2% to 2.5% currently.
 AMC business – profitability is improving: The improved profitability in the
AMC business is mainly on account of cost rationalisation as well as change
in product mix. The company has increased its exposure to the retail debt
portfolio where the charges/fees are 70-80bps. The retail debt portfolio has
increased from a mere Rs5bn 15 months ago to Rs150bn, constituting nearly
15% of AUM.
Action and recommendation
 We maintain our Neutral on the stock. While the life insurance business
continues to be under stress, profitability is improving in the AMC and nonbank
lending subsidiary.


Reliance capital Aide Memoire
1. 1What is the growth you are seeing post the new regulatory regime? What growth are you forecasting for FY11 and FY12?
2. How long do you think it will take to be ‘business as usual’ for the life insurance sector in terms of sales?
3. What is your strategy for changing the product mix now that Universal life policies have also seen their charges capped?
4. How big of a dip in margins have you seen post September 1 when the new regulations came into force? Where do you
think life insurance margins will stabilize?
5. What steps are you taking to cut costs at the life insurance subsidiary? What is the opex/gwp where you expect to
stabilize?
6. What are the plans on private placement/ IPO of the life business?
7. Are you seeing significant agent turnover as a result of the reduction of commissions? Do you see a challenge in attracting
good quality agents to the life insurance industry?
8. Are you seeing retail equity flows coming back in the AMC business?
9. Can you throw some more light on your strategy to cut costs and maintain profitability at the AMC business?
10. Do you see more regulatory changes under the new SEBI chief for the mutual fund industry?
11. What is the credit growth you expect in your lending subsidiary? The company has been aggressively reducing its
unsecured lending business. However yield on secured businesses have been under pressure. Do you see unsecured
lending to be something to consider in the next 6-12 months?