Event Update Rating matrix Rating : Buy Target : 466 Target Period : 12 months Potential Upside : 41% Key Financials (Consolidated) crore FY10 FY11 FY12E FY13E Revenues 6141 5499 6452 7129 PBT 592 287.3 473.2 679 PAT 444 229 384 547 Valuation summary FY10 FY11 FY12E FY13E Net Profit ( crore) 444.4 291.5* 383.9 547.0 EPS (( ) 18.1 9.3 15.6 22.2 % Growth -58.9-48.5 67.8 42.5 P/E (x) 18.3 35.6 21.2 14.9 ABV 303.2 316.5 325.9 335.3 Price / Book (x) 1.1 1.0 1.0 1.0 Price / Adj Book (x) 1.1 1.0 1.0 1.0 RoNA (%) 2.0 0.9 1.3 1.7 RoE (%) 5.9 3.0 4.9 6.7 Stock data Market Capitalisation 8142 crore Net worth (Q2FY12) 7 crore 52 week H/L 634/225 Equity capital 246 Crore Face value 10 DII Holding (%) 4.9 FII Holding (%) 20.3 Price movement 7,000 5,000 3,000 1,000 Jan-11 Analyst s name Apr-11 Jul-11 Reliance Capital (R.H.S) Kajal Gandhi kajal.gandhi@icicisecurities.com Jaymin Trivedi jaymin.trivedi@icicisecurities.com Oct-11 Jan-12 Nifty (L.H.S) 200 0 January 19, 2012 Stake sale provides valuation momentum Nippon Life Insurance has agreed to buy a 26% stake in Reliance Capital AMC at 1450 crore ($290 million). Reliance Capital AMC is the second largest AMC in India with an AUM of 83,206 crore as on January 12, 2012. The AMC continues to be a top contributor with 86% share in the consolidated PBT ( 75 crore in Q2FY12) of Reliance Capital as other businesses continue to make marginal profits or have losses. As of now, Reliance Capital has 93% ownership in Reliance AMC whereas 5% is held by Eton Park, acquired in 2007. Nippon Life manages assets of over $ billion. It is one of the largest FDI in the Indian mutual fund sector till date and its second investment after deploying funds in Reliance Life in 2011. We maintain our BUY rating on the stock with a target price of 466. Valuation seems attractive The valuation done at ~ 1450 crore for a 26% stake in the AMC pegs the company s worth at 5 crore ($1.1 billion). The current market capitalisation of the consolidated Reliance Capital entity is 8142 crore, pegging the AMC s business share at 68% of the current total market cap and 211 per share of Reliance Capital. Nippon Life seems to have valued Reliance Life at 6.7% of the current AUM, which is higher than deals done in the recent past. We believe that as Reliance AMC s equity proportion is higher at 32%, the valuations are fair. The Nomura-LIC AMC and L&T- Cholamandalam deals were fairly cheap between1.5% and 5.7% of AUM due to their lower equity proportions and smaller AUM sizes. We have assumed an 18% increase in FY13E AUM to 1,05,948 crore, against a 12% dip in FY12E AUM from FY11 AUM of 1,01, crore. Based on FY13E estimates, we have valued the AMC at 5% of AUM to 200 per share. Exhibit 1: AMC P&L Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 YoY (%) QoQ(%) Gross Income 164.2 177.3 177.3 185.7 167.4 163.1-8.0-2.6 PBT 57.7 70.0 91.3 52.6 70.9 65.6-6.3-7.4 Source: Company Quarterly Presentation, ICICIdirect.com Research We expect Reliance AMC to report a profit 211 crore for FY13E and 178 crore for FY12E based on expected AUMs. We have not factored in capital gains arising from the current AMC stake sale as the transaction is subject to regulatory approvals and there remains uncertainty of year in which gains will be booked. Exhibit 2: Deal at current AUM levels (12 th January,2012 closing AUM) ( crore) Current AUM' 83206 Value for 26% stake 1450 Value derived for 100% stake 5577 Valuation as a % of AUM 6.7 Value per share of Reliance Capital (Rs) 211 Reliance Capital (RELCAP) 331 Source: Company, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research
Exhibit 3: Reliance Capital AMC s AUM 1 1200 1000 702 809 1008 1181 1200 1104 1013 1087 1021 1016 1013 936 832 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 ( Billion) Q1FY12 Q2FY12 Jan'2012 Source: Company Quarterly Presentation, ICICIdirect.com Research Exhibit 4: Share of Equity AUM in total AUM of top domestic mutual funds Higher the equity proportion of AUM, the greater the probability of better valuations since equity AUM provides better margins than the fixed income portfolio. This is mainly on account of a large part of the fixed income AUM being short-term in nature and remaining volatile. AMC Name Total AUM (Cr.) Equity (Cr.) Fixed income (Cr.) Others (Cr.) Equity proportion in total AUM (%) HDFC Asset Management Company Limited 88395.0 34474.5 41440.5 12480.0 39.0 Reliance Capital Asset Management Limited 83206.1 26460.0 45338.1 11408.0 31.8 ICICI Prudential Asset Management Company Limited 68219.8 14192.3 46214.7 7812.9 20.8 Birla Sunlife Asset Management Company Limited 60349.5 9295.6 42498.7 8555.2 15.4 UTI Asset Management Company Private Limited 58121.9 20982.6 34350.9 2788.4 36.1 SBI Funds Management Private Limited 42174.8 13454.0 25177.7 3543.1 31.9 IDFC Asset Management Company Limited 25856.2 3680.8 19948.4 2227.0 14.2 Kotak Mahindra Asset Management Company Limited 24790.4 2613.7 20784.7 1392.1 10.5 Tata Asset Management Limited 19063.2 3986.2 15116.2-39.2 20.9 Sundaram Asset Management Company Limited 13807.3 6177.4 6427.9 1202.0 44.7 Religare Asset Management Co. Private Limited 11922.2 504.0 11007.9 410.3 4.2 Axis Asset Management Company Ltd. 9087.2 923.4 7035.4 1128.3 10.2 Canara Robeco Asset Management Company Limited 7388.2 1359.3 5544.8 484.1 18.4 IDBI Asset Management Ltd. 6166.2 186.7 5999.2-19.7 3.0 L&T Investment Management Limited 4706.1 215.0 4098.6 392.5 4.6 LIC Nomura Mutual Fund Asset Management Company Limited 4211.2 737.5 2912.5 561.1 17.5 Source: ACE MF, ICICIdirect.com Research Exhibit 5: Valuation of AMC deals done in recent past Deal value Deal date AUM Deal date Equity AUM Equity as a % of AUM Date Buyer Seller % of AUM Mar-08 IDFC Standard Chartered AMC 5.7 820 14141 7202 23.9 Sep-09 L&T Finance DBC Cholamandalam AMC 1.6 45 2817 2120 9.2 Jul-09 Nomura LIC Mutual Fund 3.0 280 24741 10208 2.5 Source: Company, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 2
Valuation We expect the operational performance to improve gradually with life insurance also turning profitable and expected to get merged soon. Capital gains from both life insurance and expected AMC stake sale to Nippon Life should boost the FY12E PAT. We believe valuations remain attractive at these levels and maintain our BUY rating on the stock with a target price of 466. Exhibit 6: Valuations Business Segment FY13E /share Reliance Life 175 Reliance general insurance 12 Reliance broking 16 Reliance AMC 200 Reliance consumer finance & others 63 Value per share of Rcap 466 Source: ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 3
ICICIdirect.com coverage universe (NBFC) IDFC NP ( Cr) EPS ( ) PE (x) P/ABV (x) RoNA (%) RoE(%) Idirect Code IDFC CMP 120 FY11 1281.0 8.8 13.7 1.6 3.0 14.0 Target - FY12E 1494.8 10.2 11.7 1.4 2.8 12.7 Mcap ( Cr) 17493 Upside (%) - FY13E 1794.0 12.3 9.8 1.3 2.9 13.8 LICHF Idirect Code LICHF CMP 239 FY11 974.5 20.5 11.7 2.9 2.1 25.8 Target 232 FY12E 1069.7 22.5 10.6 2.3 1.8 23.2 Mcap ( Cr) 11359 Upside (%) -3.1 FY13E 1246.6 26.3 9.1 1.9 1.7 22.5 Rel Cap Idirect Code RELCAP CMP 331 FY11 291.5* 9.3 35.6 1.0 0.9 3.0 Target 466 FY12E 426.2 17.3 19.1 1.0 1.4 5.4 Mcap ( Cr) 8142 Upside (%) 40.9 FY13E 567.2 23.0 14.4 1.0 1.8 6.9 Exhibit 7: Recommendation History 900 700 500 300 200 Jan-11 Mar-11 Apr-11 Jun-11 Jul-11 Sep-11 Oct-11 Dec-11 Jan-12 Price Target Price Source: Bloomberg, ICICIdirect.com Research Exhibit 8: Recent Releases Date Event CMP Target Price Rating 2-Jun-11 Q4FY11 Result Update 512 631 Buy 5-Jul-11 Q1FY12 Result Preview 609 631 Hold 18-Aug-11 Q1FY12 Result Update 392 577 Buy 5-Oct-11 Q2FY12 Result Preview 323 579 Buy 14-Nov-11 Q2FY12 Result Update 343 546 Buy 6-Jan-12 Q3FY12 Result Preview 247 479 Buy Source: ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 4
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Strong Buy: >15%/20% for large caps / midcaps, respectively, with high conviction; Buy: >10%/15% for large caps / midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 093 research@icicidirect.com ANALYST CERTIFICATION We /I, Kajal Gandhi CA Jaymin Trivedi MBA-CM research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc. 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