 "R-Cap arm's higher valuation a positive")
Reliance Capital (RCap)'s scrip rallied 3.7% on Tuesday to Rs 432.4 vis-a-vis a flattish Sensex following the news of its foreign partner raising stake in the life insurance business. While it was already known that the Japan-based Nippon Life Insurance (Nippon) will be increasing its stake in Reliance Life Insurance, it is the higher-than-expected valuations of the deal that has surprised markets.
As per the deal, Nippon will increase its stake from 26% to 49% at a cost of Rs 2,265 crore, valuing the life insurance business at Rs 10,000 crore - higher than street estimates of Rs 7,000-8,500 crore. Higher valuations should have a positive rub-off on RCap's sum-of-the-parts valuations (SOTP) and act as a catalyst for the stock, which has been an outperformer in the last six months rising 48%. While one may argue that the deal valuations are lower than in 2011 when Nippon had paid Rs 3,062 crore for a 26% stake, it is largely due to the headwinds the life insurance industry has gone through leading to lower valuations for most private players.
Besides, the latest stake sale, pick up in its lending business, consistent show of AMC business, purchase of Goldman Sachs' India AMC and increase of Nippon's stake in RCap's AMC business are other factors fuelling the rally. Any deal with regards to RCap's plan to sell a 26% stake in general insurance business could provide additional kicker.
There are other triggers as well. The life insurance business (about 30% of its SOTP) is currently undergoing some re-alignment. While this may take a couple of quarters, the company is re-aligning its portfolio towards traditional products and doing away with third-party distributors to owned work-force, which should lead to more stable growth. Sam Ghosh, CEO, Reliance Capital expects the traditional insurance portfolio to grow 10-15% this fiscal, excluding the ULIP business. Going ahead, a tie-up with a bank for distribution, if it happens, should boost business prospects as well.
Lending and AMC businesses (30% each of SOTP) are witnessing continued momentum with the former benefitting from focus on SME and self-employed segments. Going forward, hiving off of loss-making segments in its broking and distribution businesses should also lead to better profitability. Thus, analysts remain positive on the stock and expect upsides of 20-22%.
These could change for the better if only RCap could address a key concern of the street, which is its high proprietary book of about Rs 5,000-6,000 crore.
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Ghosh says, the company is in the process of exiting all non-financial investments gradually like it has done with the media and theatre businesses. "We have some short-term small stakes in new businesses such as Yatra, PayTM, amongst others and will exit them when the timing is right", he adds.
Although growth in general insurance business remains volatile and will be a key monitorable, it is just 6% of SOTP.