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Reliance Capital (RCAPT)
Banks/Financial Institutions
A mixed quarter. Reliance Capital continued to focus on building its businesses during
4QFY11. The insurance business was subdued—the loss in the general insurance
business affected consolidated earnings; the life insurance business reported lower
margins and growth. The NBFC business reported strong qoq growth; while asset
management and broking reported a stable trend. We retain ADD with price target of
Rs600
Life Insurance: Focus on participating policies pulls down NBAP margin
Reliance Life increased its focus on participating policies over the last 3-4 months. The share of
participating policies increased to 37% of overall business in the previous quarters. Consequently,
reported NBAP margins declined to about 13-14% for the quarter from 18% in the past. The
management expects the share of participating and non-participating policies to settle at 25% in
FY2012E; balance 50% will likely be contributed by unit-linked policies. The management has
guided for 18% NBAP margins in the medium term. APE growth will likely remain subdued in the
first half on the back of a high base of 1HFY11.
General Insurance: A drag on overall earnings
Reliance General Insurance reported net loss of Rs2.2 bn. The company made a provision of Rs1.8
bn towards commercial motor third party loss pool. Consequently, its combined ratio increased to
163% from 124% in 3QFY11. The losses in the third party pool are shared by all the insurance
companies in the ratio of their size. This item remains a risk on future earnings as well.
NBFC: Growth remains strong
RCAP’s retail lending loan book was up to Rs123 bn (up 15% qoq). Sharp growth in mortgages,
home equity loans and SME loans have likely driven high loan growth. Profitability of the secured
lending SBU was almost stable – the ratio of PBT/average assets stood at 3.4% as compared to
3.6% in 3QFY11. The management highlighted that gross NPL remains low – close to 1.5%. In
light of a high base and likely moderating outlook, we are modeling 18-20% loan growth in our
estimates.
In the past, RCAP followed a strategy of booking home loan and commercial loans in
independent subsidiaries. However, the company has merged these group companies
with itself. Thus, RCAP’s standalone loan book has increased sharply. According to the
management, the company enjoyed a tax write-back incidental to the transaction.
Consequently, the company (standalone) had a tax write-back during the period. We are,
however, not clear about the reasons for the tax break.
Asset management business in line
RCAM reported almost stable mutual fund AUMs and retained its #1 position in the
industry. PBT margins declined to 37% from 49% as the share of equity AUMs was
lower. RBI’s recent proposal to cap bank investments in mutual funds will likely impact
AUM growth.
Reliance Money and Securities: On improving trend
Reliance Securities reported PBT of Rs101 mn from Rs71 mn in 3QFY11. While its market
share declined to 0.9% from 1.2%, broking yields (calculated) increased to about 6 bps
from 2.5 bps in 3QFY11. Operating expenses were high (likely due to high share of
outsourced businesses).
Reliance Money (R-Money) reported PBT of Rs26 mn in 4QFY11 as compared a Rs37 mn in
3QFY11. The financials of R-Money now represent the earnings of the distribution businesswealth
management (distribution of mutual funds, life insurance etc.), money transfer
agency and distribution of gold coins. Reliance Money is the largest distributor for Western
India Money transfer. Gold coins are distributed through the network of India Post. After
making a transition from the previous operating model, R-Money’s business seems to have
settled down. The management is bullish on steady growth from the current base.
Retain SOTP-based price target of Rs600
We are revising down estimates by 3-12% to factor lower capital gains and somewhat
higher expenses.
While we roll over to FY2013E, we retain our price target of Rs600/share largely to factor
lower value of life insurance business.
We value the life insurance business at 2.3X invested capital, i.e. 10% NBAP margins and
13.6X NBV FY2013E. The deal with Nippon Life is still awaiting regulatory approval. The fair
value will increase by Rs20/share if we factor the cash received from this transaction. The RBI
has recently highlighted that NBFCs (along with group companies) cannot hold more than
50% in insurance companies. According to the management, this is applicable prospectively
and not applicable to Reliance Life.
While the business traction in most business is below expectations or in line, we retain ADD
on inexpensive valuations.
Key highlights of the quarter
Standalone PAT of Rs1.12 bn versus Rs46 mn in 3QFY11. As discussed, the tax write-back
of Rs255 mn boosted reported PAT. Higher earnings due to the merger of NBFC business
boosted PBT to Rs870 mn from Rs168 mn in 3QFY11.
The company reported consolidated loss in 4QFY11 of Rs41 mn as compared to PAT of
Rs1 bn in 3QFY11. The provision for third party motor loss pool has largely driven the loss.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Capital (RCAPT)
Banks/Financial Institutions
A mixed quarter. Reliance Capital continued to focus on building its businesses during
4QFY11. The insurance business was subdued—the loss in the general insurance
business affected consolidated earnings; the life insurance business reported lower
margins and growth. The NBFC business reported strong qoq growth; while asset
management and broking reported a stable trend. We retain ADD with price target of
Rs600
Life Insurance: Focus on participating policies pulls down NBAP margin
Reliance Life increased its focus on participating policies over the last 3-4 months. The share of
participating policies increased to 37% of overall business in the previous quarters. Consequently,
reported NBAP margins declined to about 13-14% for the quarter from 18% in the past. The
management expects the share of participating and non-participating policies to settle at 25% in
FY2012E; balance 50% will likely be contributed by unit-linked policies. The management has
guided for 18% NBAP margins in the medium term. APE growth will likely remain subdued in the
first half on the back of a high base of 1HFY11.
General Insurance: A drag on overall earnings
Reliance General Insurance reported net loss of Rs2.2 bn. The company made a provision of Rs1.8
bn towards commercial motor third party loss pool. Consequently, its combined ratio increased to
163% from 124% in 3QFY11. The losses in the third party pool are shared by all the insurance
companies in the ratio of their size. This item remains a risk on future earnings as well.
NBFC: Growth remains strong
RCAP’s retail lending loan book was up to Rs123 bn (up 15% qoq). Sharp growth in mortgages,
home equity loans and SME loans have likely driven high loan growth. Profitability of the secured
lending SBU was almost stable – the ratio of PBT/average assets stood at 3.4% as compared to
3.6% in 3QFY11. The management highlighted that gross NPL remains low – close to 1.5%. In
light of a high base and likely moderating outlook, we are modeling 18-20% loan growth in our
estimates.
In the past, RCAP followed a strategy of booking home loan and commercial loans in
independent subsidiaries. However, the company has merged these group companies
with itself. Thus, RCAP’s standalone loan book has increased sharply. According to the
management, the company enjoyed a tax write-back incidental to the transaction.
Consequently, the company (standalone) had a tax write-back during the period. We are,
however, not clear about the reasons for the tax break.
Asset management business in line
RCAM reported almost stable mutual fund AUMs and retained its #1 position in the
industry. PBT margins declined to 37% from 49% as the share of equity AUMs was
lower. RBI’s recent proposal to cap bank investments in mutual funds will likely impact
AUM growth.
Reliance Money and Securities: On improving trend
Reliance Securities reported PBT of Rs101 mn from Rs71 mn in 3QFY11. While its market
share declined to 0.9% from 1.2%, broking yields (calculated) increased to about 6 bps
from 2.5 bps in 3QFY11. Operating expenses were high (likely due to high share of
outsourced businesses).
Reliance Money (R-Money) reported PBT of Rs26 mn in 4QFY11 as compared a Rs37 mn in
3QFY11. The financials of R-Money now represent the earnings of the distribution businesswealth
management (distribution of mutual funds, life insurance etc.), money transfer
agency and distribution of gold coins. Reliance Money is the largest distributor for Western
India Money transfer. Gold coins are distributed through the network of India Post. After
making a transition from the previous operating model, R-Money’s business seems to have
settled down. The management is bullish on steady growth from the current base.
Retain SOTP-based price target of Rs600
We are revising down estimates by 3-12% to factor lower capital gains and somewhat
higher expenses.
While we roll over to FY2013E, we retain our price target of Rs600/share largely to factor
lower value of life insurance business.
We value the life insurance business at 2.3X invested capital, i.e. 10% NBAP margins and
13.6X NBV FY2013E. The deal with Nippon Life is still awaiting regulatory approval. The fair
value will increase by Rs20/share if we factor the cash received from this transaction. The RBI
has recently highlighted that NBFCs (along with group companies) cannot hold more than
50% in insurance companies. According to the management, this is applicable prospectively
and not applicable to Reliance Life.
While the business traction in most business is below expectations or in line, we retain ADD
on inexpensive valuations.
Key highlights of the quarter
Standalone PAT of Rs1.12 bn versus Rs46 mn in 3QFY11. As discussed, the tax write-back
of Rs255 mn boosted reported PAT. Higher earnings due to the merger of NBFC business
boosted PBT to Rs870 mn from Rs168 mn in 3QFY11.
The company reported consolidated loss in 4QFY11 of Rs41 mn as compared to PAT of
Rs1 bn in 3QFY11. The provision for third party motor loss pool has largely driven the loss.
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