Reliance Capital- Life insurance remains stressed, lending business improves ::Macquarie Research,

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Reliance Capital
Life insurance remains stressed,
lending business improves
Event
 Insurance pain, lending gains: Reliance Capital posted reported PAT of
Rs348m for 1Q12. The life insurance business showed a sharp slowdown in
sales but there was positive momentum in the financing business. .
Impact
 Life insurance – slowdown continues, management confident of closing
stake sale in near future: New business premium sales declined 60% YoY in
the quarter. The product mix was ~70% traditional (mainly par policies) and
remaining unit linked policies. Management also indicated that new business
margins remain under pressure. In 4Q11, margins had declined 430bp QoQ
to 13.6% on a calculated basis. However, it believes with cost cutting and a
push to non-par policies, which earn higher margins, it can recover lost
ground in 2H FY12. 2H is a seasonally strong period for sales. Accordingly, it
is guiding for a ~15% NBAP margin and 10–15% YoY growth in FY12
compared to our estimates of 12% NBAP margin and ~10% growth.
 Regarding the stake sale to Nippon Life, it is confident of closing the deal
under revised IRDA norms in the next couple of months. The 26% stake sale
in Reliance Life to Nippon Life is expected to earn Rs27bn for the parent on a
pre-tax basis.
 Commercial/consumer finance – asset quality improves further: NPLs
were down 6% QoQ. Almost 98% of the book is secured. Incremental gains
from lower credit costs may be limited. However, management is confident of
maintaining gross NPLs at ~1.1–1.2% of loan book. Coverage is healthy at
~82%. NIMs compressed ~20bp QoQ to 4.3% due to higher cost of funds.
However, the company has increased rates by ~150–200bp recently and that
should support margins.
Earnings and target price revision
 We have included FY11 actual numbers in our model, which has led to FY12
and FY13 earning estimates being down 26% and 17%, respectively. Our TP
does not change as it is based on a sum of parts valuations on which the
impact of earnings estimate changes is minimal.
Price catalyst
 12-month price target: Rs600.00 based on a Sum of parts methodology.
 Catalyst: Further increase in profitability of consumer finance business, stake
sale deal to Nippon being closed
Action and recommendation
 We maintain our Outperform rating on the stock with a target price of Rs600.