RELIANCE CAPITAL Core business metrics to the fore:: Edelweiss

Reliance Capital’s (RCap) Q3FY13 PAT of INR1bn was all about core
business operations – after being volatile in the past few quarters due to
one‐offs (stake sale in core businesses, investment write‐offs and third
party motor claim reserves in general insurance). General insurance
turned profitable in Q3FY13; however, NPLs in the consumer finance
space posted a slight uptick. AMCs revenues and expenses were volatile
due to new income recognition guidelines and upfronting of marketing
expenses. Profitability of other verticals was steady. Taking cognizance of
inherent value in its life insurance and asset management businesses,
coupled with scale up in consumer financing and stability in general
insurance, we maintain ‘BUY’.
• Commercial finance: Disbursements were steady, up 16% YoY, leading to just 4.2%
YoY increase in AUMs to INR160bn. While NIMs improved 10bps to 4.2%, gross
NPLs surged 30bps QoQ to 1.9% due to two accounts. Management tagged
Q3FY13 as an exception in asset quality and guided for recoveries going forward.
• Asset management: AUMs rose 5% QoQ to INR906bn led by 12% surge in debt
funds. Revenue increased after SEBI’s new guidelines on income recognition, but
upfronting of marketing expenses on retail debt kept PBT mute (up 1% QoQ).
• Life insurance: Weighted received premium came in flat QoQ (down 9% YoY), in
line with industry trend. NBAP sustained at 15%. Persistency in check at 54%.
• General insurance: Reported positive PBT of INR156mn for the first time as it had
provided for entire FY13 third party motor claim reserves in H1FY13 itself.
Outlook and valuations: Earning visibility improves; maintain ‘BUY’
RCap’s earnings have been volatile over the past few quarters due to stake sale and
consolidation of group entities. After being in consolidation phase, the company’s core
businesses viz., AMC and commercial financing, have stabilised a tad or improved.
Moreover, third party motor claim reserves in general insurance have been booked
upfront in Q2FY13 and adequate provisioning has been made on its investments,
thereby improving earnings visibility. The drag on earnings has been securities and
distribution business. We maintain ‘BUY/SO’ with SOTP of INR548.

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