18 November 2014

Reliance Capital, Play on AMC, life insurance businesses… :: ICICI Securities, link

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Play on AMC, life insurance businesses…
• Consolidated PAT was reported at | 217 crore, up 20% YoY but
higher than our estimate (I-direct - | 169 crore) mainly due to stronger
capital gains and asset management profits. Q2FY15 total income
grew 11.5% YoY to | 2084 crore vs. our estimate of | 1894 crore.
• AUM grew 8% QoQ to | 122070 crore, with equity AUM surging 21%
QoQ to | 35570 crore, leading to strong PBT of | 114 crore
• The life insurance performance remained subdued with PBT of | 52
crore in spite of half year transfer from policyholders to shareholder’s
account due to lower Surrender profits.
• Commercial finance continued its strong performance with loans
growing 6% YoY to | 14050 crore and PAT rising to | 95 crore
Company structure evolves over time, expected to stay for now
Reliance Capital has built its core profitability over time from its subsidiary
businesses rather than earlier volatility of income or losses coming from
capital gain/loss. Also, life insurance was not consolidated until it made
losses, in spite of having 100% economic interest and direct ownership
was kept low. Now, with 48% consolidation of life insurance profit of | 348
crore (100%) in FY14, it is substantial and had large surrender profits in it.
We have factored in lower profits for life for FY15 factoring in a decline in
surrender profits. The AMC is expected to continue reporting strong
revenue with PBT to grow to | 431 crore by FY16E. Commercial finance
loan book had been consolidating in the last two years with no growth. We
now expect loans to grow at 15% CAGR to | 18074 crore.
Reliance Capital (RCap) had sold a 26% stake in both life insurance and
AMC business in FY12 and FY13, respectively, to Nippon Life insurance at
a substantial premium to valuations during that time. Huge capital gains
booked boosted profits in both years. It also helped in absorbing MTM
losses on the erstwhile equity investment book.
Exhibit 1: Revenue and PBT of various segments
FY14
Contribution to P/L (| crore) Revenue PBT consolidation in PBT Revenue PBT consolidation in PBT
Reliance Life * 1198.4 52.6 25.2 4257.0 358.0 171.8
Reliance general insurance 648.1 24.8 24.8 2441.0 64.0 64.0
Reliance broking (RSL+ Quant) 45.5 5.0 5.0 205.0 -23.5 -23.5
Reliance AMC 220.0 114.2 76.5 775.0 352.0 235.8
Relaince Money - distribution 25.9 -4.9 -4.9 144.7 2.8 2.8
Reliance commercial finance 579.7 95.4 95.4 2210.0 429.5 429.5
* Only 48% added in financials as associate profits
Q2FY15
Source: Company, ICICIdirect.com Research
Actions expected in near term to boost capital adequacy
• Stake sale in the general Insurance business up to 26% in the near
future and up to 49% for both general and life (as and when the limits
for foreign ownership are raised from 26% to 49%)
• Stake sale in the asset management business over a period of time
• Reduction in the proprietary investment book
• Capital raising via QIP and / or preferential allotment to strategic
investors
Consistency in profitability to be seen; recommend BUY
Stability in consolidated profits is coming and we expect consolidated PAT
to grow at 19% CAGR to | 1052 crore over FY14-16E. The stock is trading
at 1.1x for FY16E forward P/BV. We recommend BUY maintaining our
target price of | 562 on an SoTP basis.

LINK
http://content.icicidirect.com/mailimages/IDirect_RelianceCapital_Q2FY15.pdf

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