Liquidity woes make Reliance Capital risk-reward unfavourable for investors

Even if the situation could change for good, for investors, it raises questions whether RCap's non-banking businesses are the early victims of the liquidity squeeze post the IL&FS defaults

With the Anil Ambani or ADA group’s debt piling up with every passing quarter, its flagship company Reliance Capital (RCap), too, has been under significant pressure. Over the past year, the RCap stock has seen a 66 per cent erosion in its market value. What’s worse is that market experts say that adverse developments over the last weekend involving two key subsidiaries —Reliance Home Finance and Reliance Commercial Finance — could lead to the RCap stock opening trade on a weak note on Tuesday.

Explaining the genesis of the problem, Amit Bapna, CFO, Reliance Capital, says the delay in conclusion of certain securitisation transactions has triggered the rating downgrade (of debt of RCap and its arms by rating agencies). He is hopeful that with these loan buyouts materialising soon, liquidity should normalise. “Replacing liability with liability has become difficult for NBFCs on the whole,” says Bapna.

Even if the situation could change for the better, for investors, it raises questions whether RCap’s non-banking businesses are the early victims of the liquidity squeeze after the IL&FS default. Also, with the company planning for a  Rs 10,000-crore stake sale exercise in the coming months, investors of RCap stock should perhaps question what businesses they will be left with and whether a ‘wait-and-watch’ stance will do them any good. Among its divestment plans, RCap has announced its intention to exit one of its most prominent businesses — RNLAM, sale of which is anticipated to fetch about Rs 6,000 crore. Simultaneously, efforts are on to prune stake in non-core arms such as media and entertainment. Meanwhile, the RCap stock, too, has turned out to be a value destroyer even for the long-term (5-10 years holding period) investors. Its value unlocking exercises — listing of Reliance Nippon Life Asset Management Company (RNLAM) and Reliance Home Finance — haven’t been a happy outing for investors as these stocks are trading below their listing levels.

“From a worthy holding company, RCap stock is now a motley of divestment opportunities. Life and general insurance businesses hold potential and NBFC arms, too, may do better once money comes back into the system. But, we don’t know how long each of these verticals will remain with RCap and that’s the larger worry,” says a fund manager.

In fact, after the December 2018 quarter results, analysts at ICICI Securities recommending ‘hold’ on RCap slashed their target price from Rs 233 to Rs 145 due to inter-corporate exposures apart from steeply reducing expectations from the housing and commercial finance arms. Given the uncertainties, experts such as Sanjiv Bhasin, executive vice-president, IIFL, are advising that “investors should trim their losses and move on to better stocks”.