>RELIANCE CAPITAL LIMITED: CCI clearance for sale of 26% stake in MF arm to Nippon Life and reversal of interest rate cycle positive

Impressive Q4FY2012 results & sale of stake in MF and Life Insurance arms are major triggers for RCap


■ CCI clearance for sale of 26% stake in MF arm to Nippon Life and reversal of interest rate cycle positive for RCap: Recently, Competition Commission of India (CCI) approved the proposal of Japanese major Nippon Life to acquire 26% stake in Reliance Capital's (RCap) mutual fund arm Reliance Capital Asset Management (RCAML). CCI is of the opinion that the proposed combination is not likely to have any appreciable adverse effect on competition in India. The deal, (which took place on January 19, 2012) valued at an aggregate amount of Rs.1,450 crore, is the largest FDI deal in any Indian asset management company till date. The transaction pegs the valuation of RCAML at around Rs.5,600 crore ($1.1 billion) or about 7% of its overall assets under management (AUM) at the time of the transaction. This deal has been done at valuations which are better than some of the deals done in the recent past, at valuations of 1.5 - 3.5% of assets. Also, on April 17, 2012, RBI cut the Repo rate, after a period of 3 years, by 50 bps, signaling a reversal in the interest rate cycle, which will be positive for RCap.


■ Sale of 26% stake in Reliance Life Insurance another booster: Nippon Life has already invested $680 million in October 2011 for a 26% stake in Reliance Life Insurance Company (RLIC) pegging the total valuation of Reliance Life Insurance at more than to Rs.11,500 crore (at the then prevailing INR/USD rate). The deal value for a 26% stake in RCAML and RLIC amounts to Rs.4512 crore (according to the USD/INR exchange rate prevailing at the time of the deals), valuing these two businesses alone at Rs.17,100 crore. The market cap of the listed entity Reliance Capital is Rs.7,809 crore only. The proceeds from the stake sales have helped the company reduce its consolidated debt burden which has come down from Rs.20,000 crore in September 2011 to Rs.11,000 crore as on March 31, 2012. Another way to look at it is that based on the valuations of these two deals, the valuation of RCAML and RLIC alone comes to Rs.696/share whereas the stock of RCap, which has a range of other businesses in the financial services sector like broking, wealth management, private equity, etc, is trading at Rs.318/share only, which is a 54% discount to this valuation.


■ Impressive Q4FY2012 results indicate the worst is over for RCap: We believe that the worst is over for RCap. On the back of adverse corporate newsflows, the company’s stock price has been punished very severely, more than it deserves. Also, the company has posted impressive Q4FY2012 results. While total income has increased by 26% YoY to Rs.1995 crore, the company has posted a net profit of Rs.329.3 crore against a net loss of Rs.6.5 crore in the corresponding period of the previous year, mainly due to significant improvement in operating margins contributed by less net claims incurred during Q4FY2012. For FY2012, net profit increased 57% YoY to Rs. 457.8 crore while total income increased 22% YoY to Rs.6,577 crore. For FY2012, the life insurance business posted PBT of Rs.372.6 crore against loss before tax of Rs.129.3 crore in FY2011.


■ Other businesses provide further comfort: The other businesses of the company provide further value to the company. Reliance Securities had 6.85 lakh broking accounts as on March 31, 2012. The distribution business, Reliance Money, has a pan-India distribution network of 6,000 outlets. Reliance General Insurance (RGI) is amongst the leading private sector general insurance companies in India with a private sector market share of 8%. Reliance Commercial Finance had a loan book size of Rs.13,260 crore (USD 2.6 billion), as on March 31, 2012.


■ Risk to View: Any further steep slowdown in the industrial economy could impact its profitability adversely.


■ Valuations: We believe that the stock price of the company has seen significant correction, more than it deserves, of 48% from its 52-week high of Rs.612/, on the back of adverse corporate news flows. We believe that the worst is over for the company and its Q4FY2012 results have been impressive. At the current market price of Rs.318/, the stock is trading at 11.9x its FY2014E EPS of Rs.26.8 / and 0.62x its FY2014E BV of Rs. 512/. We continue to recommend BUY on this stock with a fair value of Rs.440 which is 16.5x FY2014E EPS and 0.86x FY2014E BV.


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