Reliance Capital Ltd shares gained 20% over the past week, beating the broader market’s 6% gain. The company announced it will expand its tie-up with Nippon Life Insurance Co. to include businesses such as asset management, but there are a couple of other things that acted as triggers for the stock.
One is the finance ministry circular that insurance firms that have finished 10 years of existence can sell a stake. Reliance Life will turn 10 next January. The Rs 3,000 crore Nippon deal is a “strong stock catalyst as it will not only validate valuation for the insurance business, but also address liquidity concerns”, JP Morgan India Pvt. Ltd pointed out in a recent note.
Secondly, the Reserve Bank of India’s recent guidelines for banking licences are seen as a positive for Reliance Capital because it meets norms such as the broking business accounting for less than 10% of income or assets, etc.
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But while these developments are baked into the prices, there’s many a slip between the cup and the lip. For example, RBI will take another six months to finalize the banking licence guidelines. Even after that, it will use its discretionary powers; and there is no guarantee that this business house, or the other, will bag a licence even if it meets all the norms on paper.
Remember, investors had boosted the shares in March when the company first announced the Nippon deal. Since then the shares have dropped 19.4%, much more than the Nifty’s 7.45%.Fundamentally things have hardly changed, and Reliance Capital’s performance was not too impressive in the two quarters after that.
In the June quarter, profits after tax fell 54.8% from a year ago. Now consider the life insurance segment which typically makes for half the value of Reliance Capital, according to broker valuations. Although this business generated profits before tax of Rs 8 crore in the quarter (against a Rs 122 crore loss a year ago), things are shaky. Reliance Life lost market share of around 3.5 percentage points during the quarter, according to brokerage estimates. Its annualized premium equivalent fell 60% from a year ago as insurance firms, in general, struggled to improve revenue after the regulator introduced rules last year to prevent mis-selling. Therefore, unless the Nippon money comes in, or the insurance business improves, further upsides seem limited.
Graphics by Ahmed Raza Khan/Mint
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