Mumbai: Marking a clear shift of strategy, Reliance Capital Ltd, or RCap, has decided to drastically reduce its dependence on the sale of securities to shore up earnings and instead focus on five core businesses—asset management, brokerage, consumer finance, life and general insurance.

New businesses, including private equity (PE), mortgages and asset reconstruction, remain peripheral.

Driving profitability: Reliance Capital CEO Sam Ghosh. Abhijit Bhatlekar / Mint

The flagship financial services firm, owned by the Reliance- Anil Dhirubhai Ambani Group, is looking to close at least two divestment deals in 2011 fiscal, besides ensuring that both its life and general insurance businesses break even—a critical milestone for RCap if its “core businesses" have to turn in sizeable profits.

Speaking to Mint hours after a conference call for analysts on Monday, RCap’s chief executive Sam Ghosh said: “We earlier made most of the profits from our investments to make sure there was dividend payout" for the shareholders. The objective now is earn-it-and-distribute-it and ensure “superior return" to shareholders.

“We now want to generate most of the profits on a sustainable basis from our core businesses," he added, referring to RCap’s interests in asset management, brokerage, consumer finance, life and general insurance. The key word is “driving profitability".

The numbers bear out this strategic change. A 3 May note put out by Alchemy Share and Stock Brokers Pvt. Ltd’s sector analyst Shashin Upadhyay has analysed that the “finance and investment" segment in the last quarter contributed merely 14.1% to overall revenues, down from 16.1% in the immediately preceding quarter and 38.7% in the March quarter in 2009.

Graphic: Ahmed Raza Khan / Mint

Ghosh, however, remains unperturbed by the numbers. He agrees the period is transitional, but “not painful", saying this was in line with the carefully thought-out strategy.

RCap lost 0.84% to close at Rs733.05 even as the benchmark index of the National Stock Exchange, the 50-stock Nifty, closed at 5,222.75 points, 1.05% lower. In the last year, the Anil Ambani firm has gained 29.53%, lagging the 43% gain of the Nifty, of which RCap is a constituent.

The core verticals, the company anticipates, should double this year and touch Rs1,000 crore in the next few years. Meanwhile, both life and general insurance businesses are expected to break even this fiscal.

“The focus is on the core businesses and we will do whatever needs to be done to make them profitable," Ghosh said.

“There will be a divestment announcement in the next one quarter and by the end of this fiscal, we should close two divestment deals. This will reduce our capital investment and improve our returns on equity," Ghosh explained, but refused to comment on which specific verticals could sell a stake, to whom and at what valuation.

RCap’s life insurance venture is expected to sell 26% stake to the Zurich-based reinsurer, Swiss Reinsurance Co. Ltd while its general insurance unit—a laggard in RCap’s portfolio that nearly doubled its losses last year—is also in talks to hammer out a deal to partner British firm RSA Insurance Group Plc after Sundaram Finance Group exits the Royal Sundaram Alliance Insurance Co. Ltd.

The claims under the health insurance portfolio are a drag on the general insurance segment’s profits, but RCap says it has “significantly reduced its exposure to group mediclaim products" and has received the insurance regulator’s nod to re-price its retail product some 150% higher.

RCap has also started a spate of new businesses such as corporate lending, mortgages, PE, merchant banking, asset reconstruction and a commodity spot exchange.

These businesses, with less than 5% contribution to overall revenue and even less to profit, were currently supplementary to RCap. None of these businesses, started in the last 12-18 months, have really taken off.

RCap’s corporate loan book is now around Rs2,500 crore and that of mortgages Rs2,300 crore. The PE fund, which has raised about Rs1,000 crore from domestic institutional investors and high networth individuals, wants to raise funds overseas.

It has also started buying and selling government bonds in a small way as it prepares to set up a primary dealership. Its application seeking a licence for primary dealership has been pending with the Reserve Bank of India (RBI).

RCap also wants to set up a bank. RBI will release a discussion paper on new bank licensing norms by July and an external committee will be appointed to vet the applications.

A Mumbai-based analyst with a domestic brokerage said he was having trouble crunching numbers and arriving at a sum-of-the-parts valuation for RCap as the company was “restructuring and reorganizing so much, but RCap (and its profits) is certainly through the trough".

The restructuring seems far from over, especially with the divestments, a probable initial public offering for the life insurance business and a banking licence that RCap is avidly looking for as soon as RBI clearly spells out who can make the cut.