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India Equity Research Reports, IPO and Stock News
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Reliance Capital (RCFT)
Banks/Financial Institutions
Nippon Life to invest in Reliance Life. Reliance Life has proposed to sell 26% stake
to Nippon Life at Rs30 bn. Subject to regulatory approvals, the transaction values the
life insurance business at Rs115 bn, i.e. 32% premium to our valuation estimate. While
the near-term business outlook for the life insurance industry remains hazy, the deal
provides a positive signal to stakeholders. We await more details on the deal to revisit
our earning estimates. Retain ADD.
Nippon Life proposes to invest in Reliance Life Insurance
Nippon Life, Japan’s largest life insurer, has proposed to pick up 26% stake in Reliance Life at Rs30
bn. According to the company press release, the agreement is ‘definitive’ for the parties though
subject to regulatory approvals. The complete details of the deal are not yet available. Reliance
Capital’s management has highlighted that a small part of the proposed investment will be on
account of primary infusion in the company and the balance will flow to Reliance Capital (which
currently holds 100% stake in Reliance Life). The insurance business will not require capital after
the deal.
Valuation at 32% premium to our estimate
The deal with Nippon Life values Reliance Life at about Rs115 bn (subject to complete details of
the deal), i.e. at a 32% premium to our fair value estimate of Rs87 bn. Our fair value estimate for
Reliance Capital can increase to Rs750/share, i.e. about 17% above our current price target, if we
benchmark the value of life insurance business with the valuation of the deal.
Reliance Capital has infused Rs31 bn in Reliance Life. The company can recognize maximum pretax
capital gains of Rs22 bn (if we assume the entire proceeds to accrue to the parent) which can
be deployed to fund the NBFC business. We await more details to factor the transaction in our
estimates.
Backdrop of significant changes in operating environment for insurance companies
Private players have reported about 40-50% decline in APE collections over the past 2-3 months as
the companies adjust their business models to the new regulatory regime. A simultaneous change
in product structures, sharp reduction in distributor commissions and operating expenses and
tighter regulations have made near-term business outlook hazy. In this backdrop, this deal is a
positive signal.
Deal to be executed by 1HFY12E
Reliance Capital expects the transaction to be completed in 1HFY12E. The management has
highlighted that Nippon Life has completed its due diligence. The deal was signed on
Monday morning in Mumbai (despite the natural catastrophe in Japan). The transaction is
‘definitive’ and binding on both the parties though subject to regulatory approvals in Japan
and India.
Life insurance and asset management business add most value
�� We value Reliance Life at Rs87 bn, i.e. 2X EV FY2012E and 2.6X invested capital. The deal
values the insurance business at 2.6X EV FY2012E and 3X invested capital.
�� We value the asset management business at Rs30 bn, i.e. 2.5% of AUMs or 14X PER
FY2012E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Capital (RCFT)
Banks/Financial Institutions
Nippon Life to invest in Reliance Life. Reliance Life has proposed to sell 26% stake
to Nippon Life at Rs30 bn. Subject to regulatory approvals, the transaction values the
life insurance business at Rs115 bn, i.e. 32% premium to our valuation estimate. While
the near-term business outlook for the life insurance industry remains hazy, the deal
provides a positive signal to stakeholders. We await more details on the deal to revisit
our earning estimates. Retain ADD.
Nippon Life proposes to invest in Reliance Life Insurance
Nippon Life, Japan’s largest life insurer, has proposed to pick up 26% stake in Reliance Life at Rs30
bn. According to the company press release, the agreement is ‘definitive’ for the parties though
subject to regulatory approvals. The complete details of the deal are not yet available. Reliance
Capital’s management has highlighted that a small part of the proposed investment will be on
account of primary infusion in the company and the balance will flow to Reliance Capital (which
currently holds 100% stake in Reliance Life). The insurance business will not require capital after
the deal.
Valuation at 32% premium to our estimate
The deal with Nippon Life values Reliance Life at about Rs115 bn (subject to complete details of
the deal), i.e. at a 32% premium to our fair value estimate of Rs87 bn. Our fair value estimate for
Reliance Capital can increase to Rs750/share, i.e. about 17% above our current price target, if we
benchmark the value of life insurance business with the valuation of the deal.
Reliance Capital has infused Rs31 bn in Reliance Life. The company can recognize maximum pretax
capital gains of Rs22 bn (if we assume the entire proceeds to accrue to the parent) which can
be deployed to fund the NBFC business. We await more details to factor the transaction in our
estimates.
Backdrop of significant changes in operating environment for insurance companies
Private players have reported about 40-50% decline in APE collections over the past 2-3 months as
the companies adjust their business models to the new regulatory regime. A simultaneous change
in product structures, sharp reduction in distributor commissions and operating expenses and
tighter regulations have made near-term business outlook hazy. In this backdrop, this deal is a
positive signal.
Deal to be executed by 1HFY12E
Reliance Capital expects the transaction to be completed in 1HFY12E. The management has
highlighted that Nippon Life has completed its due diligence. The deal was signed on
Monday morning in Mumbai (despite the natural catastrophe in Japan). The transaction is
‘definitive’ and binding on both the parties though subject to regulatory approvals in Japan
and India.
Life insurance and asset management business add most value
�� We value Reliance Life at Rs87 bn, i.e. 2X EV FY2012E and 2.6X invested capital. The deal
values the insurance business at 2.6X EV FY2012E and 3X invested capital.
�� We value the asset management business at Rs30 bn, i.e. 2.5% of AUMs or 14X PER
FY2012E.
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