RELIANCE CAPITAL : Long Term Bet !!!

Scrip Code: 500111 / RELCAPITAL

CMP:  Rs. 437.40; Buy at Rs. 400 - 415 levels.
Short term Target: Rs. 475, 6 month Target – Rs. 550; STOP LOSS – Rs. 370.00; Market Cap: Rs. 10,751.04  cr; 52 Week High/Low: Rs. 882.30 / Rs. 388.40 ; Total Shares: 24,56,32,800 shares; Promoters : 13,29,82,274 shares –54.14 %; Total Public holding : 11,26,50,526 shares – 45.86 %; Book Value: Rs. 282.70; Face Value: Rs. 10.00; EPS: Rs. 9.31; Div: 65 % ; P/E: 46.91 times; EV/EBITDA: 13.46.

Total Debt: Rs. 11,958.14 cr; Enterprise Value: Rs. 23,213.03 cr.

RELIANCE CAPITAL LIMITED: RCAP was incorporated in 1986, in India. The company engages in lending, investing, asset management, insurance and broking activities. It operates as a Non Banking Financial Company. Reliance Capital Asset Management (RCAM) manages money under the New Pension Scheme (NPS), it has been selected to manage funds for both EPFO & NPS. Reliance Consumer Finance offers products like personal loans, auto loans, housing loans & SME loans. Reliance Money is one of the top leading brokerage houses in India serving 3o lakhs customers approximately. Reliance General Insurance is considered one of the top player in general insurance businesses in India. In the year 2008, Reliance Equities International its institutional broking arm and Reliance Asset Reconstruction business commenced its operation. Company has an initiative named Reliance Capital Services which cross sell its products to the other customers of Reliance ADAG which also got operational from 2008 onwards. RCAP subsidiaries include Reliance Capital Trustees Co.ltd., Reliance Gilts Ltd, and Reliance Capital Research Pvt. Ltd. among others.

Investment Rationale:

The Reliance Capital has an AUM size of Rs. 1,01,600 Cr with an income of around Rs. 250 -290 Cr. Income continues to be strong as the retail proportion in debt AUM is rising. Commercial finance to be a game changer which contributes around Rs. 269 Cr, its loan book grew 34 % YOY to Rs. 1,230 Cr with 97 % book fully secured. Loan books are expected to grow by 25 % - 30 % for next two years. The General Insurance has been slower which reported a loss of Rs. 309 Cr, this includes Reliance Capitals share of Rs. 183 Cr in the total motor pool provision of Rs. 7000 Cr which the entire General Insurance industry had to provide. It’s AMC, Commercial finance and broking & distribution business generated approximately Rs. 620 Cr of profit. The company could be a contender for the banking license as RBI is in the process of finalizing guidelines for issue of new banking license; it is believed that ADAG group through RCAP could bid for banking license. RBI is believed to give banking license to those corporate houses which have market capitalization of more than Rs. 10,000 Cr. RCAP is among others who has the eligibility to win the license as it has a market cap of over Rs. 10,000 Cr & also has strong professional management to its side. Debts will be a concern, but I believe that with good professionals on board it is taken care off. IRDA recently said that a 10 year lock in guidelines does not apply for Reliance life insurance’s 26 % stake sale to Japan based Nippon Insurance, RCAP is likely to peg $680 million or Rs. 3,062 Cr once the deal is complete it would be biggest offshore investments in an Indian insurance company. Under the insurance law promoters of life insurance companies looking to offload 26 % stake the maximum permissible limit of their holding can do it only after completing 10 years of operation. It’s heard that RCAP is in talks with Axis Bank and Syndicate Bank to sell 23 % in its life insurance business to boost distribution network. This will be the second deal after Nippon deal if approved by the regulators.

Outlook and Valuation:

As told RCAP deal with Nippon Insurance is awaiting approval and if capital gains from the deal are factored then ROE to be around 10 % - 11 % , but since the deal is not approved yet it is expected that ROE to be around 8 % - 9 %. It is believed that the core profit to grow at 25 % CAGR over FY11 – FY13E. Also post profit of the life insurance may also get consolidated with the parent RCAP like other subsidiaries. General Insurance has been a slower in overall profits for many quarters which is expected to have a turn around. Broking and Distribution combined generated about Rs. 223 Cr due dip in average daily volumes to Rs. 1,400 Cr leading to market share decline to 0.9 % with a profit before tax of Rs.34.5 Cr. In my view RCAP could report EPS in the FY11 FY12E of Rs. 11.60/sh and Rs. 26.30/sh, respectively. RCAP TO DECLARE ITS RESULT ON 13 AUG 2011. RCAP’s stock price has corrected from its recent high on the back of the bad news on US economy, but I maintain a positive view on the stock & believe that any further correction would be a good buying opportunity for long term holders, as for short term, stock could be bought with a price target of Rs. 475

KEY FINANCIALS	FY10	FY11E	FY12E	FY13E
SALES (Rs. Crs)	6,140.60	5,498.10	6,433.20	7,592.60
NET PROFIT (Rs. Crs)	434.60	291.50	646.20	739.70
EPS (Rs.)	17.70	11.60	26.30	30.10
PE (x)	34.90	53.10	23.50	20.50
P/BV (x)	2.0	1.9	1.7	1.6
ROCE (%)	5.70	3.70	7.70	8.20
RONW (%)	2.00	1.20	2.50	2.60

I would buy RELIANCE CAPITAL with a price target of Rs. 475 for the short term and Rs. 550 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 370.00 on purchase.