Wednesday, May 23, 2012

>RELIANCE CAPITAL: One-time gains on stake sale provide fillip…

Barring general insurance, all subsidiaries including life insurance, AMC and commercial finance have reported profitable trends. The life insurance company made a profit of | 370 crore in FY12, of which | 346 crore was achieved in Q4FY12. The AMC also made its highest profit at 308 crore. General insurance reported a loss at the PBT level of  341 crore for the full year. As life insurance becomes fully profitable, the company Viscount Management Alpha, holding a 22% stake in Reliance Life, has been merged with the parent leading to the consolidated entity now holding a 38% stake directly against 16% earlier. This gives 38% share in Life’s total profit i.e. | 136 crore, adding to consolidated profit.

Consolidated PAT in FY12 surged 100% YoY to | 457 crore lower than Idirect estimate of | 565 crore, due to higher GI losses. Capital gains, from the life insurance stake sale, to the tune of ~| 450 crore only was routed through P/L as estimated. Rest of the gains, revaluation & merger effect was routed through reserves leading to total reserves surging by ~| 3890 crore in Q4FY12. Hence, total net worth has now reached | 11700 crore.

Lower forward return ratios and higher book value are due to inflated reserves on account of merger. We remain positive on the stock.

Other key highlight at consolidated level
Reduction in debt via life insurance stake sale proceeds to cushion PAT…
Capital gains proceeds to the tune of | 2700 crore have been used to repay debt. Both transactions merger increasing reserves and debt payment improved the debt equity ratio from 2.14x in FY11 to 1.56 x in FY12. The benefit of the same should accrue in FY13.

As profit starts accruing from all businesses, the outlook turns quite positive for the stock. We have revised our profit estimates to incorporate insurance. However, the share of AMC is declining. Hence, factoring in reduced economic interests in both life and AMC businesses, we have revised our SOTP target price to | 381 from | 419 on FY13E basis. Rolling all valuations to FY14 can offer further upsides up to | 435. We recommend a BUY rating on the stock with a strong conviction.