>RELIANCE CAPITAL (INDIABULLS)

Downgrading to Hold after the recent price performance
For the FY 2009, Reliance Capital (RCap) reported a moderate 21.6% yoy growth in the operating income; however, net profit growth was relatively muted at 0.7%, primarily on account of increased general insurance claims and a higher cost of funds in the consumer finance business. We have a positive outlook on the Company based on its diversifying business profile, under-penetration in financial services segments along with aggressive approach towards expanding the business segments. However, we are downgrading the stock from a Buy to Hold after the recent share price performance, although we are raising our fair value to Rs. 897 per share based on our SOTP valuation methodology.

Growth in life insurance premiums decelerating; however, profitably in general insurance looks likely For the FY 2009, Reliance Life’s new business premium increased 27.7% yoy to Rs. 35.1bn against the decline of 6% for the industry. The NBAP margin for the FY 2009 increased to 20.9% compared to 18.8% for the nine months ended December 2009. For FY 2010, we do not expect the insurance business to see a faster growth as ULIPs - which account for a large chunk of the total insurance sales - are presently not a preferred form of investment because of the volatility in the capital market. We have assumed a growth of about 25%-30% in FY 2010.

During the year, GWP decreased 1.6% yoy to Rs. 19.1bn mainly due to economic slowdown and the ongoing focus on improved profitability and not topline revenues. Despite the increase in the claim ratio, the Company’s combined ratio declined from 129% to 114%, primarily on account of several cost-cutting measures initiated by the management.

Maintaining market share but AUM witnessing a slowdown
Average AUM decreased by 11% yoy to Rs. 809bn against the industry’s decline of 7%. Further, the proportion of equity in the total AUM declined, from 35% in FY 2008 to 29% in FY 2009, given that the retail investors are moving away from the market led by market volatility. However, with the sharp rise in capital market post elections, we expect equity proportion to increase. This may positively impact the Company’s bottom line as equity funds command a higher fee income vis-à-vis debt funds. Thus, for FY 2010, we expect the AUM to increase by around 35%-40%.

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