Mumbai: Reliance Capital Ltd (R-Cap), the financial services arm of the Anil Ambani-led Reliance Group, posted a 65% growth in net profit to ₹ 165 crore for the quarter ended 31 December.
Revenue rose 10% over a year ago to ₹ 1,889 crore as R-Cap’s life insurance, general insurance and commercial finance businesses improved significantly year-on-year (y-o-y).
A Bloomberg poll of analysts had pegged R-Cap’s revenue at ₹ 1,395 crore and profit at ₹ 163.80 crore for the quarter.
Chief executive Sam Ghosh attributed the high increase in net profit vis-a-vis revenue to the 140-basis points expansion in the commercial finance business’ net interest margin (NIM) to 5.6%.
NIM, a key indicator of profitability, is the difference between the firm’s cost of funds and the interest rate at which it lends money to customers. One basis point is one-hundredth of a percentage point.
On a sequential basis, R-Cap’s revenue grew 1.56% and net profit fell 8.3%.
Overall, the firm’s cost of funds dropped because R-Cap received low-cost and long-term funds from the Employee Provident Fund Organisation and could borrow money from Life Insurance Corp. of India at a “low cost", Ghosh said.
Yields on the funds that R-Cap lends through its commercial finance portfolio rose to 15.4% from 14.2% a year ago as the firm targeted more retail customers, including home loan borrowers, in small cities.
R-Cap’s asset management business was a drag on the firm’s overall revenue in the December quarter as turnover from this business fell 16.16% y-o-y and 3% sequentially to ₹ 166 crore.
This business, however, saw the most significant improvement in operating profit among all of R-Cap’s businesses, growing 188% y-o-y and 50% sequentially to ₹ 75 crore.
Ghosh blamed the lower revenue on a shift in the firm’s focus towards debt-oriented mutual funds, away from equity-linked ones. Equity funds typically witness higher revenue, Ghosh said.
R-Cap’s general insurance business, on the other hand, grew 26.6% y-o-y and 7% sequentially in turnover to ₹ 747 crore. But operating profit from the business fell 26.6% over a year ago and 31.25% from July-September quarter.
According to Ghosh, R-Cap had to contribute around ₹ 16 crore to the so-called “third part motor declined risk pool"—an industrywide corpus mandated by the Insurance Regulatory and Development Authority (Irda) to third-party motor insurance claims, which hurt the general insurance business’s profit.
R-Cap’s debt as at 31 December was ₹ 22,000 crore, including ₹ 16,500 crore on account of its commercial finance portfolio.
Ghosh said while the debt on account of the commercial finance business (these funds are lent onwards and earn returns for the firm) will rise as the portfolio grows, R-Cap wants to bring down the remaining debt of ₹ 5,500 crore to ₹ 4,000 crore in the next two-three quarters.
“R-Cap reported stable results, which were in line with our expectations," said a financial services sector analyst with a Mumbai-based brokerage. He declined to be identified as he is not authorized to speak to the media.
“The good part is there is a pick-up in the commercial finance portfolio, which was declining sequentially, and margins from this business have expanded. In the life insurance business, growth is moderating, but that was expected as R-Cap was growing at a much higher rate than the industry. Also, in the general insurance business, profitability should improve going forward once the company completes provisioning for the third party motor pool," the analyst added.
R-Cap shares rose 1% to ₹ 321.55 apiece on BSE on Friday, while the broader market ended nearly unchanged.