>RELIANCE CAPITAL (CITI)

Sell: Life Valuations Not Assured

■ Capital markets have bounced, but so has the stock — RCap's businesses are highly levered to capital markets, and recent equity performance should result in higher growth/earnings of individual segments. We revise our target price to Rs821 but maintain Sell (3M) as we believe RCap's earnings/operating growth will lag the sharp increase in its stock price (+137% outperformance in last 3 months), thereby making the stock expensive at current levels.

■ ...But the business will grow with a lag — While equity market performance has a strong correlation with RCaps' businesses, we expect growth in most businesses to lag the rebound in broader markets – in particular, we expect relatively moderate growth in life insurance, non-life insurance and consumer finance segments.

■ Implied valuations for life insurance appear to be at a significant premium — RCap is seeking to sell up to a 26% stake in its life insurance business, including likelihood of inducting a strategic stakeholder. The transaction does not come under current FDI cap (100% owned) but requires other regulatory approvals. However, current stock price implies valuations of 20x 1Yr Fwd NBAP multiples, which is at 30-40% premiums to our benchmark values for peers.

■ Asset management, equity broking likely first to rebound — RCap's asset management and brokerage segments should be the first to rebound. While AUMs in the domestic business have grown 46% over Dec'08, retail equity inflows so far, have been modest. We expect brokerage revenues to grow but led by institutional segment as retail investors participate with a lag.

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