Reliance Capital Ltd. — Maintain Underperform:: BofA ML

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Reliance Capital Ltd. — Maintain Underperform

Price Objective Change: Cut SOTP; 2H outlook weak on recent regulatory changes
We cut our SOTP-based PO to Rs780 to capture the cut in general ins., on
sustained losses in biz. on higher health claims, and AMC biz., to capture the
slowdown in AUM growth. This is partly offset by our increase in the consumer
finance biz. Value, as growth / profitability is getting better. But we retain our
Underperform rating, as we believe that the headwinds faced by the key biz.,
especially life insurance (35% of SOTP), will likely play out in 2HFY11, which was
also corroborated by the mgmt. in the earnings call when it further guided down
NBAP margins for life biz. to 16% (vs. 16.5% expectations as on 1Q) for FY11.
Hence, we believe that overall upside is capped at <2-3 to SOTP.


2Q: Reported earnings weak; core earnings in line
2QFY11 earnings came in at Rs1.1bn (down 28% yoy) on lower capital gains
booked and a loss in general insurance. But core earnings (up +200% yoy) were
in line with estimates, driven by consumer finance and a better handle on

operating costs (non-int. exp. related). Life insurance growth, at 11% yoy, as on
Sep’10 and NBAP margins at 17.9% (H1) vs. 17.7% in 1Q. AMC earnings higher
on higher retail participation and better yields, owing to a focus on long-term debt
(vs. liquid funds) and consumer finance earnings driven by rising disbursements
(up +43% yoy). Gen. insurance disappointed on rising health policies claims.

Cons. fin. to drive of earnings in FY12, but 15% of SOTP
We have tweaked earnings by ~1% for FY12, but we continue to see bigger
upside to earnings from the consumer finance biz., as growth momentum is
strong; however, consumer finance should still account for 15% of SOTP; hence,
limiting upside to our PO. Life insurance and AMC (facing headwinds) should still
contribute 65% of SOTP