Reliance Capital ended FY08 with an impressive top-line growth. In Q408, total income increased 97%. However, net income growth was relatively muted at 19%, due to high operating expenses.
While we expect a short term slowdown in growth, we remain confident about the medium-to-long-term prospects of the company.
Businesses such as brokerage, AMC, and Life Insurance are likely to witness a sharp slowdown in growth due to the recent fall in stock markets. Consumer lending is also losing momentum driven by high interest rates and soaring inflation.
We have valued Reliance Capital by using the sum-of-the-parts valuation methodology, valuing the consumer finance business at Rs152 by taking a discount rate of 12% and a terminal growth rate of 6.5% for the loan book.
The broking business has been valued at Rs79 on the basis of a target 15x earnings multiple. Reliance Life Insurance has been valued at a target new business achieved profit (NBAP) multiple of 20x.
This gives the life insurance business a valuation of Rs568. Assuming a target multiple of 20x, the general insurance division is valued at Rs41. The AMC has been valued at 8% of its AUM, leading to a valuation of Rs492. This results in a target price of Rs1,332 for FY09. We maintain BUY rating on the stock.