Reliance Capital: decent results, but other factors weigh on stock

Reliance Capital: decent results, but other factors weigh on stock

Most of the stocks of Anil Ambani’s Reliance Group have fallen by over 75% from their highs in early 2008. Reliance Capital Ltd (R-Cap) is no different. Its shares have lost around 82% from their highs in January 2008. And they have underperformed even in the past one year, falling around 20%, while the broader market has risen by 10%.

This is despite the company reporting fairly decent results in the core businesses in fiscal 2011 (FY11). Excluding a one-time provision made on account of a change in provisioning norms for commercial motor third party pool loss in its general insurance business, net profit rose 9% to Rs470 crore. This is in spite of a 10% fall in revenue, owing to a decline in general insurance premium and lower investment income. In fact, the contribution of investment income was negligible in FY11.

Also see | Capital Loss (PDF)

R-Cap’s life insurance and asset management businesses are the largest contributors to its overall value. According to the sum-of-parts valuation of the company put out by Edelweiss Securities Ltd, the two businesses account for 80% of the firm’s value. Both these businesses did fairly well last year.

In the asset management business, although the average assets managed were flat at FY10 levels, the profitability of the business improved, leading to a 10% increase in pre-tax profit to Rs294 crore. Profit rose due to an increase in the proportion of debt schemes sold to retail investors as well as cost-cutting.

In the life insurance business, losses more than halved to Rs130 crore in FY11 and the company reported profit in both the December and March quarters. The amount collected through renewal premium increased by 32%, offsetting the drop in new premium collections.

R-Cap’s financing business also did fairly well, with the company focusing on bringing the unsecured part of its loan book down. Personal loans accounted for only 1.5% of the book last year compared with 6% in FY10. Non-performing loans fell sharply and provisions for bad debts more than halved, leading to a near doubling of profit from the business to Rs269 crore.

The broking and wealth management business reported a 23% drop in revenue and a 20% drop in profit to Rs22.1 crore, which was more than offset by the distribution business. Reliance Money, which distributes financial products, reported a profit of Rs12.4 crore against a loss of Rs12.6 crore in FY10.

The general insurance business reported a huge loss of Rs310 crore last year, primarily owing to the earlier mentioned one-time provision worth Rs184 crore. But even without the write-off, the business continues to suffer due to a high claims ratio. A good sign from last year’s results is that the company isn’t chasing business as aggressively as in the past and the gross premium written last year declined by 16%.

Therefore, results in FY11 were fairly decent. But just like other Reliance Group firms, R-Cap also seems to be suffering because of the regulatory overhang on the business group.

Graphic by Yogesh Kumar/Mint

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