Company Update NBFCs India Research Reliance NVS Wealth Managers Capital Ltd CMP- 629 RELIANCE CAPITAL-The Strategist for Wealth Creation BUY Nifty 9,33 Sensex 29,943 Nifty PE 24 Sensex PE Stock Data Sector Banks/NBFCs BSE Code 5111 NSE Code FV 1 RELCAPITAL Market Cap (INR cr) 15,9 Market Cap (US$ mn) 2,446 Equity Share Cap. 253 22.78 Stock Performance (%) 52-week high/low Rs. 358/618 1M 6M 12M Absolute (%) 2.6 11.9 52.5 12 7 2 BSE Sensex RCL Reliance Capital Ltd(RCL), a part of Reliance ADAG, is one of the leading Financial services company with an AUM of more than Rs. 4,, Cr having interest in insurance (life and general), home finance, asset management, commercial finance, private equity,brokerage and asset reconstruction. RCL has now strategized to unlock value by creating separate companies, scaling up various businesses and implementing strong focus on individual businesses and as a first step, the company has already panned out listing of its home finance business in the next 3-6 months. Once the various businesses mature into substantially profit making units, company may follow the strategy of listing them separately, unlocking value for the shareholders and ultimately create huge wealth for the shareholders. In line with the Government impetus to healthcare, RCL has decided to carve out the Health Insurance business into a separate 1% subsidiary from the General Insurance business. The Company expects the health insurance industry in India to double to Rs 5, Cr by 22, we believe that the company will be well positioned through various strategic tie ups to capitalize on the same. RCL s Future looks very lucarative and promising with its plans to aggressively foray into consumer financing including White good Financing,Two wheeler financing, LAP etc and have started an aggressive team building process to kick start this business. Looking at monetization of assets by other groups in the similar businesses (SBI Life, ICICI Pru Life, ICICI Lombard, PNB Housing Fin, Can Fin Homes, etc), we expect RCL to follow suit and unlock value for its shareholders by divesting its stake in the various business Promoters arms like, Home Finance, Commercial finance, General Insurance over a period of next 3-5 15% 7% MFs years and that the Sum of the Parts Valuation (SOTP) could considerably swell in the future. 4% FPI 52% Banks In 9FY17, topline of the company grew by 74% to Rs.12,743 Cr (Rs.7,159 Cr -9MFY16), Insurance PBT grew by 5% to Rs.1,65 Cr ( Rs.1,1 Cr), and PAT remained flat at Rs.669 Cr on 14% Company 5% an equity base of Rs.253 Cr. For the Financial year 215-216 RCL rewarded its Individuals 3% shareholders with a very liberal dividend of 1% (Rs.1 per share). The company has Others been consistent in bestowing upon its shareholders with such dividends on a regular basis Shareholding Pattern (%) To further its value unlocking, the company is on strategy to monetise all of its non core Sensex & Stock Movement +91 22 6631 5511/12, info@nvswealthmanagers.com www.nvswealthmanagers.com 25 TH April, 217 assets by March 218 and focus on key Financial service vertical. Several non-core investments in movie exhibition business, film and media services, and radio and TV have already been monitised where a huge Rs.1,9 Cr was generated which was utilized to de-leverage the balance sheet. Also, Recently the company sold its stake in One97 Communication(Paytm) garnering around Rs.275 Crs (PBT- Rs.265 Cr), and is also in process to profitably monetize its stake in Yatra online, Sula Vineyards, Grover Vineyards and Mahindra First Choice etc. At CMP of Rs.629, the stock is trading at a modest P/E of 12.6x on FY17E EPS of Rs 5 per sharen compared to its peers, the stock is currently available at a huge discount to other NBFC companies like Bajaj Finance (FY17E PE-44x), L&T Financial Holdings ( FY17E PE-24x), Capital First (FY17E PE-38x) and the likes, making it an attractive buy. We believe that current valuations offers substantial opportunity for medium to long term growth & appreciation. We believe RCL is on the move to regain its lost glory. We recommend strong accumulation on RCL.
RELIANCE CAPITAL The Financial Behemoth RELIANCE CAPITAL RELIANCE NIPPON ASSET MGMT RCL(51%) NIPPON LIC(45.57%) RELIANCE COMMERCIAL FINANCE (wholly owned subsidiary) BROKING & DISTRIBUTION/ ARC (wholly owned subsidiary RELIANCE HOME FINANCE (wholly owned subsidiary) (to be listed soon) RELIANCE GENERAL INSURANCE (wholly onwed subsidiary) RELIANCE NIPPON LIFE INSURANCE RCL(51%) NIPPON LIC(49%) RELIANCE HEALTH INSURANCE (step down subsidiary of RCL) I. Reliance Nippon Life Asset Management- Mutual Fund Industry set for exponential growth RCL s Asset Management division is one of the top AMCs in India and amongst the top 1 AMCs in the world with a cumulative AUM of more than Rs. 3,5, Cr. This segment contributes 7% to the topline and 33% to PBT. It stands as the 2 nd Most profitable AMC in Indian (PBT Rs 52 Cr). Total Income for Q3FY17 stood at Rs 36 Cr, PBT stood at Rs 15 Cr with PBT margins at 4%. With SIP count being the highest in the industry at 16 lakh accounts per month and an annual commitment of Rs.5,+ Cr fund flows, the company is poised to capture incremental growth. Exhibit 1-AUM (in Rs. Billion) Exhibit 2-Total Income (in Rs. Billion)
4 3 2 1 2614 2874 31 3216 3359 3.8 3.6 3.4 3.2 3 3.4 3.5 3.1 3.6 3.6 2.8 Exhibit 3-PBT (in Rs. Billion) No. of SIPs and STPs (in ') 2 1.5 1.5 1.4 1.5 1.5 1.3 1.2 16 155 15 145 14 135 13 1566 1489 1426 1429 1394 Key growth Drivers for the AMC Low Penetration- India has the least AUM/GDP ratio at 1% when compared to Brazil (38%), USA (91%), France (7%) and Cananda (78%), etc. This shows that the financial services sector is so underpenetrated giving it ample scope to grow and RCL being one of the top players is in a superior position to capitalize the growth. Small Investor base- Less than 4% of the Inidan population invests in Mutual Funds across asset categories and RCL with its wide distribution network and and a strong retail franchise is in a better position to tap the underserved market. Changing Investor preference- Capitalizing on the changing investment mindset of the Indian population from tradional avenues like Gold, Bank deposits & properties etc to financial products such as mutual funds, equity shares, bonds etc, RCL with its retail presence, integrated digital infrastructure and strong focus on alternative investments will be key drivers for the asset management segment s future growth. Leveraging on Nippon s global Network, RCL will further expand into different international markets, thereby giving the company an added advantage to diversify its market. II. Reliance Commercial Financing- 7 Year Vintage Reliance Commercial Finance (RCF) offers a wide range of products like SME Loans, Loan against property (LAP), Infrastucture financing, agriculture loans. The focus in this business continues on asset backed lending and productive asset creation.
The aim of RCF is not only credit growth, but also the quality of credit sourced. In alignment with this the company has been disbursing only secured asset backed loans, spread across 53,5 customers with presence in 43 cities and has wound up the unsecured loans. The company s focal point is on growth areas such as education, healthcare, food, engineering,etc. The disbursements for the year ended 31 st March 216 increased by 17% to Rs.8,138 Cr from Rs.6,967 Cr as on 31 st March, 215 and the AUM increased by 7% to Rs. 15,157 Cr as on 31 st March 216 from Rs.14,152 Cr. In Q3FY17, the total income increased by 4% to Rs 48 Cr (Rs.46 Cr Q3FY16) and PBT was flat at Rs 8 Cr. The company s NIM rose to 6% in FY16 and Gross NPAs were at reasonable level of 3.7% with adequate coverage. Exhibit 2-Total Income (in Rs. Cr) Exhibit 2-PBT (in Rs. Cr) 52 5 48 46 46 5 49 5 48 15 1 5 8 12 6 7 8 44 Exhibit 2-AUM (in Rs. Cr) Exhibit 2 Cost to Net income ( %) 17 165 16 155 15 145 14 15 151 1648 1574 1619 42 4 38 36 4.5 37.3 37.9 37.8 37.2 34 Key growth Drivers New Leadership to bring in growth- RCF has appointed Mr. Devang Mody as its new CEO, with over 2 years of experience in the financial sector. He led the huge escalation in Bajaj Finance as the President of Consumer business, which, under his leadership, witnessed a sharp growth. Continue to streggthen the SME Lending segment- Company has taken upon itself to aggressively develop high growth key segments- education, healthcare, industry focused clusters, agri and food sectors with focus on Small ticket and SME loans. New Customer initiatives- The company is expanding the target market by including retail and personal finance products which Strong focus on asset quality and profitability- RCL differentiates itself from peer by using a 1% secured portfolio (<8% for peers) with a Return on Equity of 12.2%. Digital Strategy- Increased usage of digital technology and automation for customer acquisition and management will lead to higher ROE s and yields.
III. RELIANCE HOME FINANCE- Tremendous macro opportunity driven by low penetration, favourable demographics and Government s push for affordable housing Reliance Home Finance(RHF) offers wide range of loan solutions like home loans, LAP and construction finance, flexi LAP and affordable housing. It has presence in 9 locations with over 28,2 customers, out of which approximately 18, relate to the affordable housing segment. RHF also provides solutions services that help customers find their dream homes/property along with financing. The disbursements for the year ended 31 st March 216 increased by 13% to Rs.3,922 Cr from Rs.3,475 Cr as on 31 st March, 215 and the AUM increased by a whopping 27% to Rs. 7,358 Cr as on 31 st March 216 from Rs.5,771 Cr with a very conservative Gross NPA ratio of.9%. In Q3FY17, the total income increased by 29% to Rs 268 Cr (Rs.28 Cr Q3FY16) and PBT was flat at Rs 34 Cr. Exhibit 2-AUM (in Rs. Cr) Exhibit 2-Total Income (in Rs. Cr) 15 689 736 826 922 966 3 1 2 28 223 236 265 268 5 1 Exhibit 2-PBT (in Rs. Cr) Exhibit 2- Yields and NIMs 36 34 32 3 28 33 34 3 31 34 Yields NIMs 4.3 3.9 3.2 3.3 3.5 13.2 12.5 11.9 12 12 Key growth drivers Unlocking Value by listing- The management has approved to list the home finance arm on the stock exchanges thus unlocking huge value for ithe company s shareholders. Significant growth tailwinds- With an increase in disposable income in the hands of aspiring middle class Indians, stable property prices and Government s focus on affordable housing will lead to high growth in the company s business. Focus on Target Customer- The company is enhancing its focus on the developing and high margin selfemployed and salaried segment which will contribute more than 7% of the incremental business. Alongside the main business, there is also a potential for cross-selling various financial products leading to better margins.
Digital Strategy- Increased usage of digital technology and automation for customer acquisition and management will lead to higher ROE s and yields. IV. Reliance Nippon Life Insurance- On the Cusp of a significant transformation Reliance Nippon Life Insurance (RNLI) arm currently offers a total of 35 products that fulfil the savings and protection needs of customers. RNLI is committed to emerging as a transnational Life Insurer of global scale and standard and attain leadership position within next few years. Although still at a nascent ( started in 26) stage, the Life insurance arm has garnered a market share of 4%, in terms of new business premium. This is primarily due to adoption of agency-driven distribution model which has led to an increase in its network to 77 branches and 1 crore indiviual policies. Also, Average ticket size increased by 6% to Rs.27,3. Nippon has invested Rs.5, Cr, valuing the business at around Rs.1, Cr. RNLI has seen an continous improvement in the business quality, though topline has seen a degrowth in Q3FY17. Persistency ratio improved from 57% in Q3FY16 to 61% in Q3FY17 and Renewel business premium witnessed a 1% improvement in Q3FY17 to Rs.7.8 billion. The Embedded Value of Life Insurance arm is Ra.3,74 Cr. Exhibit 2-PBT (in Rs. Cr) Exhibit 2-Average ticket size (in Rs.) 4 3 2 1 37 33 28 18 21 28 27 26 25 24 268 271 273 255 257 Exhibit 2-Total Premium (in Rs. Cr) 15 1 99 138 65 16 98 5
Key Growth Drivers Focus on Profitable and healthy growth- The Life Insurance arm has been focusing on profitable and healthy growth by weeding out unprofitable and poor quality business, resulting in right sizing the expense base and corresponding reduction in premium growth. Cost effective growth agenda- The business intends to combine similar channels to leverage supervisory cost towards increasing efficiency, and grow proprietary channels like direct marketing. Leverage Open architecture- The company is looking to partner with various banks and financial institutions with extensive and effective distribution networks through bancaassurance/ acquisition. Deeper emphasis on digital infrastructure- The company is placing extensive emphasis on building capabilities by integrating Aadhar into the underwriting tools to enhance customer experience. V. Reliance General Insurance- A very successful turnaround story Reliance General Insurance (RGI) is amongst the leading private sector general insurance players in India with a market share of 8.3% offering insurance solutions for auto, health, home, property, travel, marine commercial and other specialty products. RGI is one of the most consistent and profitable company of the group and has delivered a 24% CAGR since last 5 years. During Q3FY17 Gross written premium grew by 28% to Rs 86 Cr (Rs 67 Cr- Q3FY16) and PBT grew by 2% to Rs 18.3 Crs (Rs 15.3 Cr). The growth is premium was mainly driven by private car, travel and commercial lines. The company processes 1 Lakh claim annually and has the lowest complaint ratio amongst its peers Exhibit 2-GWP (in Rs. Cr) Exhibit 2-PBT (in Rs. Cr) 2 15 1 5 145 91 86 67 67 4 3 2 1 36 33 24 15 18 Key growth drivers Segregation of Health Insurance arm- A separate Retail health insurance arm will enhance management focus on Health insurance and provide flexibility to the company to unlock value by bringing in global leaders in this space as strategic and equity partners. Key Strategic alliances- RGI has formed strategic alliance with over 2 firm including IndusInd Bank, Bank of India, Andhra Bank, Catholic Syrian Bank, City Union Bank, Paytm and Freecharge among others. Growth through Diversification- The company has shifted its focus on high profit and growing segments viz. property, car, Agri and Government Health Business. Digital Strategy- The company is continuing its focus on online business model contributing 15-2% of the retail business. Premiums and Policies sold on the online platform increased by 63% and 65% in Q3FY17.
VI. Reliance Health Insurance- Opportunity to create a high-growth and profitable business RCL has announced its plan to separate out its Health Insurance business from its General Insurance business, into a standalone, wholly owned subsidiary company. RGI has a well eshtablihed portfolio of health insurance business that offers a comprehensive range of competitive products to customers. The business recorded Gross Written Premium of Rs.57 Cr as of 31 st March, 216 through its network of 175 branches. This proposal will enhance enhance management focus on Health insurance and provide flexibility to the company to unlock value by bringing in global leaders in this space as strategic and equity partners. Retail Health Insurance is one of the most under penetrated segments in the insurance space in India where Reliance Health Insurance will leverage on the strong work done by RGI to quickly eshtablish its presence. VII. Broking Distribution Business- Transformation in the last two years Reliance Securities Ltd (RSL) is a leading retail broking house in India that provides customers with access to equitiesm equity options and commodity futures, wealth management services, portfolio management services and mutual funds with primary focus on equity broking and wealth management. The company has clocked over 7,91, acconts in equity broking and over 71, accounts in commodity broking as on 31 st December 216 with an average daily turnover in equities reaching Rs.2,6 Cr and in commodities Rs.25 Cr. The segment s wealth management AUM grew by 68% to Rs.3,59 Cr as on December 216. 4 3 2 1 Exhibit 2-AUM (in Rs. Cr) 319 359 255 276 21 Exhibit 2-Total Income & PBT(in Rs. Cr) Total Income PBT 68 53 54 79 81.6.3 2.6 13.9-75.3 Exhibit 2-No of Accounts(in ) 1 5 768 775 781 787 792 63 64 66 68 71 Equity Commodity
VIII. FINANCIAL PERFORMANCE AT A GLANCE (in Rs. Cr) FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17E Equity 246 246 246 246 246 246 246 244 253 253 253 Share Capital Networth 5,32 6,61 7,453 7,74 7,79 11,768 12,487 12,935 13,993 15,591 16 BVPS 215 269 33 313 317 478 58 53 553 616 632 Revenue 2,158 4,724 5,89 5,925 5,433 6,577 7,448 7,467 8,9 9,941 17,32 PBT 815 1,215 1,24 588 354 518 83 847 1,276 1,732 1,826 PAT 73 1,9 1,16 433 291 458 812 747 1,1 1,11 1,259 EPS 28 4 4 17 11 17 31 29 35 4 5 PBTM(%) 38 26 21 1 7 8 11 11 14 17 11 PATM (%) 32.4 2.5 17 7.2 5.3 4.9 9.4 9.1 11.7 13.5 6.2 RONW 14.8 16.9 14.4 5.7 3.8 3.3 5.8 5.5 8.2 9.9 6.8 (%) P/E 23 3 9 43 49 21 9 11 11 8 12 P/BV 3.1 4.5 1.1 2.4 1.8.8.6.65.77.6.95 Critical Analysis The Company has seen strong and consistent financial performance over the last 1 years, where in total income has increased at CAGR of 19% from Rs.2,158 Cr in FY7 to Rs.9,941 Cr in FY16, PBT increased at CAGR of 9% from Rs.815 Cr in FY7 to Rs.1,732 Cr in FY16 and PAT grew at a CAGR of 5% from Rs.73 Cr in FY7 to Rs.1,11 Cr in FY16. Even though the Revenue growth was significant year after year, the Net Profit witnessed sharp de-growth in FY1 and FY11 after which the performance of RCL increased in a gradual manner. The profitability in FY1 and FY11 was affected mainly due to booking of lower capital gains. FY 211 was the worst year in recent history for RCL. The price of RCL plunged to a low of Rs. 226 in January, 212, market capitalization plunging to an all time low of Rs. 5,56 cr. FY 28 was a milestone year for RCLwith overall improvement in operational areas and financial performance. This was the first time RCL achieved PAT of more than Rs.1, Cr, PBT of Rs. 1,171 cr, accomplishing an all time high market capitalization of little under Rs.72, Cr. RCL has continued its thrust for optimim utilization of funds by better fund management. This is seconded by the fact that RCL s short term debt funds have been assigned a A1+ rating by ICRA and CRISIL presenting the lowest credit risk in the short term. IX.VALUATION & RECOMMENDATION RCL is in the final stages of completing its value unlocking process and clean up of its balance sheet by monetising all of its non-core business by March 218 and focus on key Financial service vertical. Several non-core investments in movie exhibition business, film and media services, and radio and TV have already been monitised where a huge Rs.19 Cr was generated which was utilized to de-leverage the balance sheet. Also, Recently the company sold its stake in One97 Communication(Paytm) garnering around Rs.25 Crs, and is also in process to profitably monetize its stake in Yatra online, Sula Vineyards, Grover Vineyards and Mahindra First Choice etc. RCL crashed from high of Rs. 2,925 per share in January, 28 (little under Rs. 72, cr in market capitalization) to a low of Rs. 25 per share in August, 215 (Rs. 6,325 cr in market capitalization) and is currently around Rs.629 per share
(around Rs. 15,955 in market capitalization). RCL has currently the BV per share of Rs. 616 per share as against the CMP of Rs. 629, making it available at an attractive valuation of only 1x the BV- A MUST ACCUMULATE FOR ALL INVESTOR. It will be interesting to note that Capital First, Bajaj Finance and L&T Finance Holdings Ltd, few of the peers, have currently trading a P/ Bv at a 4x, 8.8x and 2.9x its BV respectively, indicating that RCL has strong potential for appreciation from the present level. We believe that post demerger of the home finance business into a separate listed company, along with appointment of a new leader for the consumer finance business, demerger of health insurance business from the general insurance business and attaining leadership position in the AMC business will lead to the company achieving strong financial performance, in turn leading to the stock reaching new highs. In line with the improved margins and return ratios, we believe : RCL - BEST IS YET TO COME Disclosures and Disclaimers: This report has been prepared and issued by NVS Wealth Managers Pvt. Ltd. "SEBI registered Investment Advisers". NVS Wealth Managers (NVS) is a subsidiary of NVS Brokerage Pvt. Ltd. (Stock Broking member of Bombay Stock Exchange, registered with SEBI). This report is prepared and distributed by NVS for information purposes only and neither the information contained herein nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment or derivatives. The information and opinions contained in the Report were considered by NVS to be valid when published. The report also contains information provided to NVS by third parties. The source of such information will usually be disclosed in the report. Whilst NVS has taken all reasonable steps to ensure that this information is correct, NVS does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and NVS does not accept any liability as a result. Securities markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication to future performance. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax and financial advisors and reach their own conclusion regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. In no circumstances it is to be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. The information contained in the research reports may have been taken from trade and
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Risk Description Low risk Medium risk High risk Predictability of earnings/ Dividends; Price volatility High predictability / low volatility Moderate predictability / volatility Low predictability / High volatility Total expected return matrix Rating Low Risk Medium Risk High Risk Buy Over 15% Over 2% Over 25% Accumulate 1% - 15% 15% - 2% 2% - 25% Hold % - 1% % - 15% % - 2% Sell Negative returns Negative returns Negative returns Neutral NA NA NA Not Rated NA NA NA Please Note: Our recommendations are for a minimum period for one year. Contact Details: Corporate Office Address: 72, Embassy Centre, Nariman Point, Mumbai 4 21 Tel.:+91 22 6631 5511/12, Fax: +91 22 66519134 Email: info@nvswealthmanagers.com Website: www.nvswealthmanagers.com.