Reliance Capital Ltd’s stock has declined some 6% since it declared its September-quarter earnings. Sure, it had posted a 10-fold increase in net profit over a year ago, but a large portion of that was owing to income from a stake sale in its asset management unit.
Note also that, like most life insurance business-led companies, Reliance Capital had run up since mid-September on hopes of reforms which haven’t materialized so far.
At the same time, the life insurance unit’s revenue growth didn’t inspire much hope. The total premium collected declined 21% from a year ago—a tad less than the 24% fall seen in the June quarter. The decline was sharper in new premium collected. Renewal premium also slipped 19%—the result of falling new premium collections in the past two years. Thus, the spurt in profit before tax in this business had to do with past revenue and cost-cutting measures.
For instance, Reliance Capital has slashed its distribution agency workforce by 23% in the past six months, as a result of which operating expenses as a proportion of premium collected fell to 29%, compared with 31% in the June quarter.
The other businesses do not offer much cheer either. The asset management business, where a stake was sold to Japanese company Nippon, saw an increase in money managed. However, there was a 12% decline in profits before tax from a year ago.
In the commercial finance business, while profits improved 31% from a year ago, a large portion of that was from cuts in provisions. However, disbursements picked up, growing 34% in the past three months.
The distribution and the general insurance businesses both booked losses, though it must be said for the latter that the firm has provided Rs.100 crore for third-party motor claim reserves. These are meant for the full year and the company has booked this fully in the September quarter.
On the positive side, however, Reliance Capital has used the one-time income from the stake sale to clean up its investments. Moreover, by making this provision for general insurance and also setting aside Rs.200 crore for other investments, profitability should improve in the coming quarters. That should sustain investor interest in the stock as they wait for the insurance business to pick up.