>RELIANCE CAPITAL (NOMURA)

■ RLife loses market share for second consecutive month
Rlife’s market share in individual non-single new premium sales declined for a second consecutive month. It was 8.9% in August, down from 10.3% in July and 11% in FY09.

■ For the overall private sector, some slowdown in growth compared with July but still better than 1Q FY10
Overall private sector growth (y-y) in individual non-single new premium sales in August came in at (-) 4.1%, taking the cumulative growth rate in the year to August to (-) 14.6%. We note there is a significant base effect in play this year, as there was a structural decrease in growth rates in 2H FY09. Hence, we would advise investors not to focus too much on the negative y-y growth seen so far this year.

We would rather look at our de-seasonalised analysis of growth. On this measure, we believe that the August sales data is pointing to full year growth of around 21% in FY10F. This represents a decline from the data for the preceding month, which was tracking a full-year growth rate of 24%. However, it is clearly higher than the trend seen in 1Q FY10, which was hinting at full-year growth of 10-13%.

■ Overall private-sector growth masks sharp divergence among players
While overall private-sector growth was reasonably strong, we highlight that it masks a sharp divergence in growth rates among various players. This makes it hard to decipher whether the key driver of RLife’s performance in the past few months was on account of the overall sector trend or because of company-specific factors.

We note that growth in August came in almost entirely from three players – ICICI Pru Life, HDFC Standard Life and Birla Sunlife. Private-sector sales in August were up 9% on an m-m basis. However, excluding the above-mentioned three players, there was actually a contraction of 1%, highlighting the contribution of these three to the overall growth figure.

Historically, spikes in market share have been preceded by rapid expansions in distribution networks. Companies benefited from enhanced distribution networks and this was reflected in their market share. In this case as well, it seems that both HDFC Standard Life and Birla Sunlife are benefiting. However, this may not fully explain ICICI Pru Life’s performance, as most of its expansion was done by FY08. On the other hand, we are disappointed with the performance of RLife on this front. We note that RLife has been one of the most aggressive companies in terms of distribution network expansion over the past few years. Hence, we have been expecting RLife to gain market share this year. Performance so far has been disappointing on this count.

■ Increase in ticket size seen across players
We also highlight a clear trend of increases in ticket size across players, including RLife. This is an indication that it is unit-linked policies that are driving growth, in our view. We also note that the increase in ticket size of those players gaining market share has been even more pronounced and is in fact at the highest level ever.

■ Maintain REDUCE on RCFT
Using SOTP valuation, we value the company at Rs834/share (target and method unchanged; see Exhibit 8). FY10-11F earnings fine-tuned; REDUCE call maintained. We continue to believe that the risk-reward for RCFT is skewed to the downside. The key upside risk to our valuation: if margins in the insurance business come in higher than we are forecasting. Key to this scenario unfolding would be new premium sales growth coming in significantly higher than we are forecasting.

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