Mumbai: Surging interest costs hurt the profitability of Reliance Capital Ltd (R-Cap), the financial services arm of the Anil Ambani-led Reliance Group, for the second quarter in a row.

R-Cap posted a 43% year-on-year (y-o-y) decline in net profit to Rs 60.17 crore for the three months ended 31 December. Revenue increased 14.2% to Rs 1,545 crore.

Facing headwinds: Sam Ghosh, chief executive, R-Cap.(Abhijit Bhatlekar/Mint)

Although hurt by rising interest rates, the company’s earnings were better than expected. A Bloomberg poll of analysts had estimated profit at Rs 37 crore and consolidated revenue at Rs 1,422 crore

R-Cap’s earnings were also a significant improvement on a sequential basis. In the September quarter, R-Cap posted a net profit of Rs 33.45 crore.

A 6 January report by Mumbai-based brokerage, ICICI Direct, had forecast R-Cap to post a subdued quarterly performance with “lower growth and continued consolidation”. Cautious lending, declining assets under management in the mutual funds business and sluggish insurance premium collections would make it a lacklustre quarter for the company, the report said.

The company’s share on BSE ended at Rs 409.85 on Friday, down 3.28%. The benchmark Sensex fell 0.46%.

R-Cap’s earnings were also hurt by widening losses in its general insurance business. The general insurance segment posted a 42% increase in losses to Rs 34.40 crore, mostly on account of “strengthening the third party (non-pool) motor claim reserves,” a statement issued by R-Cap said.

Around Rs 25 crore was provided for claim reserves on account of insurance extended to private vehicles, said Sam Ghosh, chief executive of R-Cap.

“As more clarity emerges on the amount of claims that we have to incur on account of business booked in previous years, we have had to provide more, in accordance with the changed provision norms set out by the regulator” Ghosh said.

With a further upward revision in the premium charged for providing third party insurance to private vehicles imminent in the following months, R-Cap may have to make such additional provision in the March quarter as well, Ghosh said.

The interest burden on R-Cap will come down in the fourth quarter as the company has repaid a significant amount of its debt with the Rs 2,700 crore received by the parent company from Nippon Life Insurance Co. as part of a deal to sell a 26% stake in its life insurance business in October, Ghosh said .

With the Reserve Bank of India signalling a pause in the rate hike cycle by cutting the cash reserve ratio, the amount of money that banks have to keep with the central bank, by 50 basis points on 24 January, R-Cap’s commercial finance business will stand to benefit in the coming quarters, Ghosh added. One basis point is one-hundreth of a percentage point.

The commercial finance division reported an 18% year-on-year decline in profit before tax to Rs 65 crore in the December quarter, “despite 98% increase in interest costs”, R-Cap said. In the same period, revenue from the business increased 43% to Rs 494 crore.

R-Cap’s mutual fund business showed a 19% decline in assets under management in the three months ended 31 December to Rs 82,306 crore, which led to revenue from the business falling by 16% to Rs 155 crore. Profitability from the asset management division stood at Rs 44.67 crore, against Rs 77.30 crore in the same period last year.

Ghosh said that there was an around 10% year-on-year reduction in the asset management business’ operating profit margin, which was proportionately lesser than the fall in assets under management. This was achieved by keeping costs under control, he said.

aveek.d@livemint.com