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Reliance Capital (RLCP.BO)
2Q12 Results: Lackluster Performance, But Valuations Low
2Q12 profits down 66%, well below estimates — RCap's 2Q12 profits were down
66% yoy and were well below our estimates. Key challenges: a) Asset management
business saw further market share erosion (13% now vs 14.5% in Mar 11); b) Life
insurance new premiums declined more than peers (-49% yoy vs 41% for other private
players); c) Non-life insurance continues to see high combined ratio (123%). The silver
lining came from the healthy growth in its consumer financing segment and possible
earnings upsides from the 26% life insurance stake sale to Nippon Life.
Asset management: Declining AUMs and Market share — RCap's market share
continues to decline, and is a cause of concern. While it still remains a market leader,
we expect weak industry flows and high competition make future gains difficult.
Life insurance: Stake sold, premium growth still slow, should stabilize ahead —
New business premium has continued to shrink for private insurers in India, however
RCap’s new premiums have fallen more than peers. However, with a lower base effect
going ahead, we expect new business growth to improve and NBAP margins to
stabilize at around 15% levels. RCap’s 26% stake sale is complete; management is
likely to shift it to a more direct subsidiary over time (RCap’s stake will remain at 74%).
Consumer Finance: Healthy growth but macro a key risk— RCap’s assets under
finance has seen healthy growth (25% yoy) and is predominantly secured (99% of
book). Growth has largely driven by SME and mortgage segments (78% of loans
collectively), though it has created some pressure on NIMs (4.1% now). Asset quality
has remained healthy, NPLs have declined to 1.2%, loan-loss coverage is healthy at
80% and management does not foresee meaningful risks ahead; however, given
continued macro challenges, will remain on watch.
Operationally still weak but valuations look cheap —RCap should continue to face
operational headwinds ahead, especially in capital market-related segments. However,
the stock has corrected sharply, underperforming Senses by 16% over the last 3
months; and valuations look cheap – a turn in macro could propel the stock higher
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 as Buy. RCap's key strengths are: a) a presence in underpenetrated,
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 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 Rs455 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.
Finally, we apply a 10% holding company discount to the above valuations.
Risks
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)
2Q12 Results: Lackluster Performance, But Valuations Low
2Q12 profits down 66%, well below estimates — RCap's 2Q12 profits were down
66% yoy and were well below our estimates. Key challenges: a) Asset management
business saw further market share erosion (13% now vs 14.5% in Mar 11); b) Life
insurance new premiums declined more than peers (-49% yoy vs 41% for other private
players); c) Non-life insurance continues to see high combined ratio (123%). The silver
lining came from the healthy growth in its consumer financing segment and possible
earnings upsides from the 26% life insurance stake sale to Nippon Life.
Asset management: Declining AUMs and Market share — RCap's market share
continues to decline, and is a cause of concern. While it still remains a market leader,
we expect weak industry flows and high competition make future gains difficult.
Life insurance: Stake sold, premium growth still slow, should stabilize ahead —
New business premium has continued to shrink for private insurers in India, however
RCap’s new premiums have fallen more than peers. However, with a lower base effect
going ahead, we expect new business growth to improve and NBAP margins to
stabilize at around 15% levels. RCap’s 26% stake sale is complete; management is
likely to shift it to a more direct subsidiary over time (RCap’s stake will remain at 74%).
Consumer Finance: Healthy growth but macro a key risk— RCap’s assets under
finance has seen healthy growth (25% yoy) and is predominantly secured (99% of
book). Growth has largely driven by SME and mortgage segments (78% of loans
collectively), though it has created some pressure on NIMs (4.1% now). Asset quality
has remained healthy, NPLs have declined to 1.2%, loan-loss coverage is healthy at
80% and management does not foresee meaningful risks ahead; however, given
continued macro challenges, will remain on watch.
Operationally still weak but valuations look cheap —RCap should continue to face
operational headwinds ahead, especially in capital market-related segments. However,
the stock has corrected sharply, underperforming Senses by 16% over the last 3
months; and valuations look cheap – a turn in macro could propel the stock higher
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 as Buy. RCap's key strengths are: a) a presence in underpenetrated,
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 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 Rs455 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.
Finally, we apply a 10% holding company discount to the above valuations.
Risks
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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