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Reliance Capital
Step towards finality
Yesterday IRDA approved in principle the proposed stake sale of
Reliance Capital’s 26% stake in Reliance Life to Nippon Life. The deal
values Reliance Life at $2.6bn (c.15% higher than the entire market
cap of Reliance Capital). The company is expected to receive
$680mn from Nippon, with c.$615mn coming into Reliance Capital
and c.$65mn flowing to Reliance Life. Whilst Reliance Capital’s
fundamentals have improved substantially with higher profitability in
the core businesses and life insurance turning profitable, the stock
price has fallen 48% YTD driven by negative news flows around the
wider ADAG group. We stick with our view that there is significant
fundamental value in Reliance Capital and hence retain our buy
stance with a valuation of Rs.820, 98% upside from the current levels,
but with the caveat that the value realisation in the short run is
dependent on the ADAG group news flows.
Deal brings value to the company
Approval in principle the deal is a major step forward towards Nippon acquiring a
26% stake in Reliance Life and with only RBI approval now pending, we can expect
the deal to be finalised this calendar year. We expect this deal to be significantly
value accretive for shareholders:
• The deal brings c.Rs30bn into the company with c.Rs27 bn of cash added
to Reliance Capital’s Balance sheet, significantly improving the capital
position which was looking strained at Reliance Capital level given Rs.30bn
was infused in the life insurance business and was not available for other
businesses. Also, it helps reduce a proportion of debt and thereby
substantially reduce the interest cost (more than 200 crores for FY12) in
the current high interest rate environment. The company intends to use this
money for its core business and banking business if it gets the banking
license. This should also bring in more transparency in reporting since the
company can now consolidate the life insurance business without any
impact on the overall capital position.
• The deal brings in Nippon Life’s technical knowledge in the life insurance
space, which should help Reliance Life in better underwriting and
developing new products. Also, the deal has meant that Nippon and
Reliance Life are in longer term agreement and the MOU signed by
Reliance Capital on 2nd September clearly highlights the positives for
Reliance Capital with Nippon life willing to look at all other ventures
(including asset management) for partnership.
Core businesses performing well
• Although volumes have declined in the life insurance business in the first
half, we would expect volumes to start showing a positive a trend from
the third quarter with the base effect kicking in. Also, more importantly life
insurance has started making profits (Rs.1bn including profit from non
participating business to be transferred in Q4 to shareholder’s account)
and will not need any additional capital going forward.
• With most of the commercial finance book in secured loans the drag to
profits due to NPL provisions is no longer there. This should help
improve profitability by at least 50% on a YOY basis for FY12.
• Reliance AMC has been the outperformer so far in the asset management
space with growth in profitability and margins despite AUM declining YOY
in line with the industry, led by improvement in the quality of the book with
retail debt and equity forming around half of the AUM business.
Valuation
Our SOTP values Reliance Capital at Rs. 820 (98% upside) with Rs. 405 for life
insurance (EV+10x FY12 NBAP), Rs. 204 for asset management (4% of FY11 AUM),
Rs. 44 for general insurance (1.3x P/BV), Rs. 136 for the financing business (1.7x BV),
and Rs. 36 for the broking & distribution business (10x FY13E earnings).
Risk to the investment case:
Although we have highlighted that there is a great deal of value in this stock, clearly
in the shorter term it tends to react to news flow around the ADAG group and in
recent times that news flow has been consistently negative. We recognise that the
management has tried to ring fence the company from group concerns, implementing
a number of initiatives to highlight functional independence and minimal
intercompany linkages, but having a common promoter means there will always be a
perception of linkage, and clearly the quantum of the promoter’s stake means
considerable influence. Based on all our research and discussions with management
of most of the individual businesses and at the Reliance Capital level, we think that
the company has been professionally and relatively independently managed.
However, ADAG group has been so widely perceived as having corporate governance
issues that investors remain inclined to tar Reliance Capital with the same negative
governance brush.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Capital
Step towards finality
Yesterday IRDA approved in principle the proposed stake sale of
Reliance Capital’s 26% stake in Reliance Life to Nippon Life. The deal
values Reliance Life at $2.6bn (c.15% higher than the entire market
cap of Reliance Capital). The company is expected to receive
$680mn from Nippon, with c.$615mn coming into Reliance Capital
and c.$65mn flowing to Reliance Life. Whilst Reliance Capital’s
fundamentals have improved substantially with higher profitability in
the core businesses and life insurance turning profitable, the stock
price has fallen 48% YTD driven by negative news flows around the
wider ADAG group. We stick with our view that there is significant
fundamental value in Reliance Capital and hence retain our buy
stance with a valuation of Rs.820, 98% upside from the current levels,
but with the caveat that the value realisation in the short run is
dependent on the ADAG group news flows.
Deal brings value to the company
Approval in principle the deal is a major step forward towards Nippon acquiring a
26% stake in Reliance Life and with only RBI approval now pending, we can expect
the deal to be finalised this calendar year. We expect this deal to be significantly
value accretive for shareholders:
• The deal brings c.Rs30bn into the company with c.Rs27 bn of cash added
to Reliance Capital’s Balance sheet, significantly improving the capital
position which was looking strained at Reliance Capital level given Rs.30bn
was infused in the life insurance business and was not available for other
businesses. Also, it helps reduce a proportion of debt and thereby
substantially reduce the interest cost (more than 200 crores for FY12) in
the current high interest rate environment. The company intends to use this
money for its core business and banking business if it gets the banking
license. This should also bring in more transparency in reporting since the
company can now consolidate the life insurance business without any
impact on the overall capital position.
• The deal brings in Nippon Life’s technical knowledge in the life insurance
space, which should help Reliance Life in better underwriting and
developing new products. Also, the deal has meant that Nippon and
Reliance Life are in longer term agreement and the MOU signed by
Reliance Capital on 2nd September clearly highlights the positives for
Reliance Capital with Nippon life willing to look at all other ventures
(including asset management) for partnership.
Core businesses performing well
• Although volumes have declined in the life insurance business in the first
half, we would expect volumes to start showing a positive a trend from
the third quarter with the base effect kicking in. Also, more importantly life
insurance has started making profits (Rs.1bn including profit from non
participating business to be transferred in Q4 to shareholder’s account)
and will not need any additional capital going forward.
• With most of the commercial finance book in secured loans the drag to
profits due to NPL provisions is no longer there. This should help
improve profitability by at least 50% on a YOY basis for FY12.
• Reliance AMC has been the outperformer so far in the asset management
space with growth in profitability and margins despite AUM declining YOY
in line with the industry, led by improvement in the quality of the book with
retail debt and equity forming around half of the AUM business.
Valuation
Our SOTP values Reliance Capital at Rs. 820 (98% upside) with Rs. 405 for life
insurance (EV+10x FY12 NBAP), Rs. 204 for asset management (4% of FY11 AUM),
Rs. 44 for general insurance (1.3x P/BV), Rs. 136 for the financing business (1.7x BV),
and Rs. 36 for the broking & distribution business (10x FY13E earnings).
Risk to the investment case:
Although we have highlighted that there is a great deal of value in this stock, clearly
in the shorter term it tends to react to news flow around the ADAG group and in
recent times that news flow has been consistently negative. We recognise that the
management has tried to ring fence the company from group concerns, implementing
a number of initiatives to highlight functional independence and minimal
intercompany linkages, but having a common promoter means there will always be a
perception of linkage, and clearly the quantum of the promoter’s stake means
considerable influence. Based on all our research and discussions with management
of most of the individual businesses and at the Reliance Capital level, we think that
the company has been professionally and relatively independently managed.
However, ADAG group has been so widely perceived as having corporate governance
issues that investors remain inclined to tar Reliance Capital with the same negative
governance brush.
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