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"Reliance Capital trades at an attractive valuation of 0.79 times its FY14 estimated adjusted book value compared to 2.7 times for L&T Finance. Considering the potential for further value unlocking from its various businesses and the prospect of it bagging the Banking License, we have a Buy recommendation on the scrip”, says Bhavesh Kanani, analyst at Centrum Capital. As per Bloomberg data, the consensus one-year target price on the scrip is Rs 520 translating into significant upside from current levels.
| STRONG GROWTH | |||
| In Rs Crore | FY12 | FY13E | FY14E |
| Total Income | 4,377 | 5,095 | 5,945 |
| % chg y-o-y | 7.5 | 16.4 | 16.7 |
| Net profit | 458 | 573 | 727 |
| % chg y-o-y | 57.4 | 25.0 | 26.9 |
| P/BV (x) | 1.0 | 0.9 | 0.8 |
| Diluted PE (x) | 25.2 | 15.4 | 13.5 |
| Source: Company, Brokerages reports |
Amongst the key concerns, dependence on stock markets and tighter regulations could have a bearing on RCap’s AMC and Broking businesses. Deven Choksey, Managing Director, KR Choksey Securities , says, " Reliance Capital's each business is passing through its own specific challenges. I think today the market may not give due weightage to the stock due to these concerns. Given that large part of savings funds are going into bank deposits is clearly a concern for the company. I think Reliance Capital requires a better environment for a significant re-rating and current price reflect its true valuations". While its AMC revenues in December 2012 quarter were boosted by SEBI's new guidelines on income recognition, the profit before tax (PBT) margins contracted from 45% in the December 2011 quarter to 26% prevailing which is lowest in the past four years due to change in accounting norms for the AMC fees.
The company's life insurance business' new business premium is likely to post 10-15% growth from the June 2013 quarter, believes the management. This figure is significant given that this metric has fallen by 35-45% over the last two years. Notably, the company has moved away from ULIP business and traditional life insurance policies now form about 80% of its product mix. Going forward as well, analysts expect the company to be a key beneficiary of reforms related to the life insurance sector.
| SOTP VALUATION | ||
| Business | Stake (%) | Rs Per share |
| Life Insurance | 74 | 292 |
| Asset Management | 65 | 120 |
| Commercial Finance | 100 | 89 |
| General Insurance | 100 | 24 |
| Investments* | 100 | 49 |
| Broking & Distribution | 100 | 11 |
| Fair Value | 585 | |
| Source: Company, Centrum Research Estimates | ||
| * Quoted investments only |
Lower combined ratio (which is claims and expenses divided by the premium earned), an expanded agent base and improving pricing enabled RCap's general insurance business return to profitability after four years. The company is now focussing on high-margin businesses such as commercial lines, fire and engineering insurance and plans to reduce its exposure to the motor segment from 65% prevailing to 60-62%. The company will account for the last leg of motor pool losses after paying about Rs 63.5 crore in FY14. All these developments should rub off positively on the profitability of this business. The management aims to grow this segment at industry rate of 20% in the current fiscal. The company is also planning to sell 26% stake in this business to a strategic investor.
After a slight uptick in the gross non-performing assets (NPAs) of its NBFC to 1.9% in the December 2012 quarter due to two assets going bad, the management expects to improve this metric to 1.7% due to recoveries in one of these. Going forward, the management aims to improve return ratios in this business. Says Sam Ghosh, CEO, Reliance Capital, "We plan to improve our margins and expect the return on equity ratio in the lending business to improve from current levels of 12% to about 18%. Focus on small and medium enterprises (SME) and loan against property segments will enable us to achieve this target. We expect to grow the loan book by 5-10% this fiscal". He expects the distribution business to turnaround in the March 2013 quarter. Notably, the business reported losses worth Rs 40 lakhs in the December 2012 quarter, down 43% sequentially.
