Reliance Capital Ltd
(R-Cap), the financial services arm of the
Anil Ambani
Group, on Tuesday reported a higher-than-expected 68% increase in net profit for the quarter ended 31 December to

101 crore, largely on account of a turnaround in its general insurance business.

Other businesses, including commercial finance and life insurance, contributed to the profit growth at the company, which posted a 7% increase in revenue to 1,716 crore for the quarter from a year earlier. Revenue growth was “driven by increase in topline" of general insurance, commercial finance and asset management businesses, a company statement said.

The company’s earnings in the October-December quarter beat analysts’ expectations. A Bloomberg survey of analysts had pegged the company’s profit at 80.95 crore on revenue of 1,165 crore.

Shares of Reliance Capital fell 1.78% to close at 468.45 on the BSE on a day the exchange’s benchmark Sensex lost 0.56% to close at 19,990.90 points. Over the last one year, the stock has gained 36.8% outpacing the Sensex’s 16% gain.

On a sequential basis, the December quarter earnings look less spectacular. A one-off gain from the sale of a stake in the mutual funds business to Japan’s Nippon Life Insurance Co., which took place in the July-September quarter, had helped R-Cap post a net profit of 401 crore on revenue of 2,431 crore in the preceding three months.

Reliance Capital’s profit received a boost from its general insurance business, which swung to a profit of 15 crore in the quarter from a loss of 35 crore a year ago. In the September quarter, the non-life insurance business had posted a loss of 105 crore because, among other things, it had to make one-off provisions for the industry-wide third-party motor insurance pool and strengthen its own reserve for meeting motor vehicle insurance claims, said chief executive officer Sam Ghosh.

A decline in claim ratios and better pricing of insurance products in the motor and health segments helped the general insurance business, Ghosh said. Reliance Capital’s general insurance portfolio now has a greater share of commercial line policies (like policies against fire) that earn better margins.

Profit from the company’s life insurance business almost quadrupled from a year earlier to 40 crore. For the quarter ended 31 December, the total premium earned by the company (net of reinsurance) was 930 crore, and the life insurance business’s funds under management increased 17% to 19,366 crore from a year earlier.

The commercial finance segment achieved a profit of 84 crore for the quarter, up 29%, “driven by higher yields and improved cost efficiencies," the company statement said.

The only core business that witnessed a decline in profit was the asset management business. Profits from the mutual funds business fell 42% from a year earlier.

As Reliance Mutual Fund sold more of long-term retail debt products, it was required to pay the commission on these portfolios to distributors upfront, said Ghosh, outlining the reasons for the dip.

Another reason, he said, was that the cost of acquiring new business in the mutual fund industry was becoming more expensive because of changes in regulations. New regulations allow the entire entry load charged to the retail investor to flow to the asset management company. Earlier only a portion of the entry load could flow to the company, and the balance would stay with the fund in which an investor invested. Expenses like payment of commission to distributors would have to be met from the fund itself. The changed regulations empower mutual fund managers to pay bigger commissions to agents to attract new business.

“This has led to an increase in the intensity of competition in the business," Ghosh said.

Reliance Capital’s management has said over the years that it would like to water down the contribution of returns from its non-core investment activities to the overall profitability of the company and focus on profit and revenue growth from core business like insurance, mutual fund and commercial finance; it appears to have achieved that with its December quarter results.

The company has seen its net profit fall from a year earlier in eleven of the last 16 quarters. In the March 2012 and September 2012 quarters, net profit grew by 335.46 crore and 368 crore, respectively, but that was on account of gains from stake sales in the life insurance and asset management businesses to Nippon.

The 68% growth in net profit in the December quarter is its best operational performance since the December 2010 quarter where net profit had grown by a similar percentage.