Reliance Capital - Q3FY13 Result Update - Centrum

Q3FY13 Result Update

Reliance Capital

Buy

Target Price: Rs585

CMP: Rs469         

Upside: 24.7%

Beats estimates on lower opex

R Cap’s Q3FY13 results came in well above our estimates (PAT at 1010mn, 68% YoY) even as topline was largely in line. The earnings beat can be traced to significantly lower operating expenses. General insurance and commercial finance business continue to report high growth trajectory along with improved profitability. We maintain our positive stance on the stock led by anticipated improvement in broader macro and easing of sector specific challenges for each business.

m  Commercial finance: Despite a 16% growth in disbursements, loan book contracted by 4% YoY partly led by higher securitization during the quarter. From a segmental perspective, Auto and SME were key drivers (11% and 5% respectively). While NIMs expanded by 10bps due to higher securitization, asset quality took a knock with GNPA increasing by 24% QoQ to 1.9% of loans.  Despite higher provisions (up 62% YoY), the bottom-line grew by a healthy 29% YoY. The management guided for stable-to-improving trend for GNPA going forward while expecting loan growth to match industry (~16% YoY).

m  Asset management: Notwithstanding a healthy 16% growth in avg AUM, the bottom-line de-grew by 17% YoY as operating expenses doubled YoY. AMFI has allowed fungibility of expenses between AMC charged and other expenses which along with higher commission expenses led to the spike in expenses. Among asset classes, debt and gold scheme AUMs grew by healthy 12% and 20% YoY respectively.

m  Life insurance: Reliance Life gained market share during the quarter (4.9% vs 4.8% QoQ) though new business premium continued to witness de-growth trend (15% in Q3FY13). Importantly, profitability for life insurance business improved dramatically with bottom-line of Rs402mn vs Rs101mn in Q3FY12 likely led by tight leash on opex as agency force came off by 6% QoQ.

m  General insurance: Performance of general insurance business was key highlight of the quarter with profitability returning after 12 quarters led by absence of burden from third party motor pool losses. For FY14, RGEN’s share in motor pool losses is limited at Rs630mn (vsRs1840mn in FY13) and would represent the last obligation. The management expects the profitability in general insurance business to sustain in future.

m  Broking and distribution: The performance of broking and distribution business was stable (flattish PBT QoQ) primarily due to continued investment in expansion of footprint for the distribution business.

m  Maintain Buy: R Cap’s earnings have been volatile over the past few quarters due to gains from stake sale and consolidation of group entities. Post the consolidation phase, the core businesses (AMC, commercial financing) have seen a reasonable stability with general insurance turning profitable in Q3FY13. In the light of the substantial inherent value in life insurance and asset management businesses, ramp up in consumer financing and stability in general insurance business, we maintain Buy with SOTP based fair value estimate of Rs585 per share.

Thanks & Regards, 

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