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Reliance Capital (RLCP.BO)
Upgrade to Buy on Sharp Stock Correction
Upgrade to Buy post sharp stock correction — We are upgrading Reliance
Capital to Buy (from Sell earlier) post a sharp stock correction (down 38% in last
3 months), making the stock cheap at current levels. We also revise our sum of
parts based target price to Rs500.
Core business still under competitive, macro pressure — RCap’s core
business segments continue to face challenges – both on increased competition
(lowering returns) and macro slowdown. Asset management: market share has
fallen to 13.6% recently (from 14.5% earlier), while it still remains industry leader,
we believe near-term growth prospects remain weak. Consumer finance: loan
growth has been strong (+42% yoy), and mix more towards secured loans,
however, given macro uncertainty – asset quality overhang likely to cap returns
and valuations.
Life insurance stake sale positive, but low growth a valuation overhang —
Sharp decline in APE (down 59% yoy in 1Q12) and profitability also under
pressure (expected margins down to ~15%). Stake sale to Nippon Life has
received regulatory clearance, while a positive for sentiment; we believe
valuations will remain challenged until industry growth outlook turns more
positive.
Quant View: Unattractive — Reliance Capital currently lies in the Unattractive
quadrant of our Value-Momentum map with weak momentum and weak value
scores, having been a resident there since the past 12 months.
Reliance Capital currently lies in the Unattractive quadrant of our Value-Momentum
map with weak momentum and weak value scores, having been a resident there
since the past 12 months. Compared to its peers in the Insurance & Other
Financials sector, Reliance Capital fares worse on the valuation metric and on the
momentum metric. Similarly, compared to its peers in its home market of India,
Reliance Capital fares worse on the valuation metric and on the momentum metric.
From a macro perspective, Reliance Capital has a high beta to the region so is
likely to rise (or fall) faster than the region. It is also likely to benefit from falling
Commodity (ex-oil) prices, falling EM yields, and a weaker US Dollar.
Reliance Capital
Company description
Reliance Capital is India's largest, diversified retail financial services company with
a presence in asset management, life insurance, non-life insurance, brokerage,
consumer finance and distressed assets. It is part of the Anil Dhirubhai Ambani
(ADA) group, which holds a 54% stake in the company. RCap has leveraged its
strong brand and large capital base, and has aggressively built a large distribution
network in the country. RCap is among market leaders in all its business segments.
Investment strategy
We rate Reliance Capital Buy/Medium Risk (1M). RCap's key strengths are: a) a
presence in under-penetrated, secular growth businesses; b) strong business
growth led by supportive capital markets; c) market leadership in most segments,
driven by its large distribution network, product focus and strong and aggressive
management. There are clear challenges in the capital market and financial
services segments (asset management, insurance, broking and distribution) – both
regulatory and competitive, which will weigh on profitability for the near to medium
term. However, parts of RCap's businesses are likely to grow at a healthy pace
(especially consumer finance) in this environment and profitability is showing signs
of stabilization. Moreover, its valuations have corrected sharply and it is now trading
at significantly low implied valuations for its individual subsidiaries and we believe,
will lead to upsides in the stock price as the economic momentum gathers pace in
the medium term.
Valuation
Our Rs500 target price for Reliance Capital is based on a sum-of-the-parts
methodology as it is present in diverse businesses, and each of these businesses is
valued based on a different methodology. As many of its businesses are still
growing or are not consolidated, we believe P/E or P/BV approaches are not
properly reflective of value. We value the AMC business at Rs156 per share (4.0%
of AUMs); the life insurance business at Rs204 per share (12x 1-year forward
NBAP; at par with peers); the non-life insurance business at Rs15 per share (0.75x
1-year forward P/BV, in line with peers); the retail broking business at Rs13 per
share (8x 1-year forward earnings, lower than peers due to lower its profitability)
and the consumer finance business at Rs87 per share (1.0x 1-year forward book
value, in line with peers). We also value the surplus capital at a 50% discount to
book value (due to sharp correction in capital markets) to get Rs24 per share.
Risks
We rate Reliance Capital Medium Risk in line with our quantitative risk model, which
tracks 260-day historical share price volatility. We believe a Medium Risk rating is
appropriate as RCap's businesses are strongly correlated to capital markets and
can be inherently volatile in nature. Key downside risks to our valuations and target
price include: a) sustained volatility in capital markets; b) continued tight liquidity
environment leading to higher funding costs; b) deterioration in asset quality
environment; and d) lower-than-anticipated growth and market shares in individual
businesses.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Capital (RLCP.BO)
Upgrade to Buy on Sharp Stock Correction
Upgrade to Buy post sharp stock correction — We are upgrading Reliance
Capital to Buy (from Sell earlier) post a sharp stock correction (down 38% in last
3 months), making the stock cheap at current levels. We also revise our sum of
parts based target price to Rs500.
Core business still under competitive, macro pressure — RCap’s core
business segments continue to face challenges – both on increased competition
(lowering returns) and macro slowdown. Asset management: market share has
fallen to 13.6% recently (from 14.5% earlier), while it still remains industry leader,
we believe near-term growth prospects remain weak. Consumer finance: loan
growth has been strong (+42% yoy), and mix more towards secured loans,
however, given macro uncertainty – asset quality overhang likely to cap returns
and valuations.
Life insurance stake sale positive, but low growth a valuation overhang —
Sharp decline in APE (down 59% yoy in 1Q12) and profitability also under
pressure (expected margins down to ~15%). Stake sale to Nippon Life has
received regulatory clearance, while a positive for sentiment; we believe
valuations will remain challenged until industry growth outlook turns more
positive.
Quant View: Unattractive — Reliance Capital currently lies in the Unattractive
quadrant of our Value-Momentum map with weak momentum and weak value
scores, having been a resident there since the past 12 months.
Reliance Capital currently lies in the Unattractive quadrant of our Value-Momentum
map with weak momentum and weak value scores, having been a resident there
since the past 12 months. Compared to its peers in the Insurance & Other
Financials sector, Reliance Capital fares worse on the valuation metric and on the
momentum metric. Similarly, compared to its peers in its home market of India,
Reliance Capital fares worse on the valuation metric and on the momentum metric.
From a macro perspective, Reliance Capital has a high beta to the region so is
likely to rise (or fall) faster than the region. It is also likely to benefit from falling
Commodity (ex-oil) prices, falling EM yields, and a weaker US Dollar.
Reliance Capital
Company description
Reliance Capital is India's largest, diversified retail financial services company with
a presence in asset management, life insurance, non-life insurance, brokerage,
consumer finance and distressed assets. It is part of the Anil Dhirubhai Ambani
(ADA) group, which holds a 54% stake in the company. RCap has leveraged its
strong brand and large capital base, and has aggressively built a large distribution
network in the country. RCap is among market leaders in all its business segments.
Investment strategy
We rate Reliance Capital Buy/Medium Risk (1M). RCap's key strengths are: a) a
presence in under-penetrated, secular growth businesses; b) strong business
growth led by supportive capital markets; c) market leadership in most segments,
driven by its large distribution network, product focus and strong and aggressive
management. There are clear challenges in the capital market and financial
services segments (asset management, insurance, broking and distribution) – both
regulatory and competitive, which will weigh on profitability for the near to medium
term. However, parts of RCap's businesses are likely to grow at a healthy pace
(especially consumer finance) in this environment and profitability is showing signs
of stabilization. Moreover, its valuations have corrected sharply and it is now trading
at significantly low implied valuations for its individual subsidiaries and we believe,
will lead to upsides in the stock price as the economic momentum gathers pace in
the medium term.
Valuation
Our Rs500 target price for Reliance Capital is based on a sum-of-the-parts
methodology as it is present in diverse businesses, and each of these businesses is
valued based on a different methodology. As many of its businesses are still
growing or are not consolidated, we believe P/E or P/BV approaches are not
properly reflective of value. We value the AMC business at Rs156 per share (4.0%
of AUMs); the life insurance business at Rs204 per share (12x 1-year forward
NBAP; at par with peers); the non-life insurance business at Rs15 per share (0.75x
1-year forward P/BV, in line with peers); the retail broking business at Rs13 per
share (8x 1-year forward earnings, lower than peers due to lower its profitability)
and the consumer finance business at Rs87 per share (1.0x 1-year forward book
value, in line with peers). We also value the surplus capital at a 50% discount to
book value (due to sharp correction in capital markets) to get Rs24 per share.
Risks
We rate Reliance Capital Medium Risk in line with our quantitative risk model, which
tracks 260-day historical share price volatility. We believe a Medium Risk rating is
appropriate as RCap's businesses are strongly correlated to capital markets and
can be inherently volatile in nature. Key downside risks to our valuations and target
price include: a) sustained volatility in capital markets; b) continued tight liquidity
environment leading to higher funding costs; b) deterioration in asset quality
environment; and d) lower-than-anticipated growth and market shares in individual
businesses.
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