 "Reliance Capital: Valuations capture negatives")
Reliance Capital’s stock has underperformed the S&P BSE Sensex and many of its peers in the financials space over the past year. It fell to a new 52-week low of Rs 318.6 on Friday, and on Monday, dipped further to a 39-month low, closing at Rs 285. The slowing of its life insurance business (one-third of sum-of-the-parts valuation), consolidation in the lending business (29% of SOTP) and delay in tying up with a Bancassurance partner are among the reasons behind this under performance.
While inexpensive valuations seem to adequately factor in concerns, some of its businesses such as consumer lending, asset management and general insurance are showing healthy prospects. Plus, there are a host of triggers for the stock going forward. One, both its general and life insurance businesses can witness stake sale to existing/new partners post increase in foreign holding limit in the insurance sector. Second, the company may look to raise capital in the near term which will enable it to fund future growth.
“Stake sale and monetisation will not only boost RoE (return on equity), but also help deleverage Reliance Capital’s balance sheet”, says Kunal Shah, Financials analyst, Edelweiss Securities, who has a Buy rating with a target price of Rs 638 on the stock.
Life insurance business is likely to be under pressure in the medium term, but it is more to do with the company re-aligning its distribution network away from third-party distributors to owned work-force which is relatively more stable. Going ahead, the company awaits regulatory nod enabling banks to tie up with multiple insurance players for distribution and believes it will be a key growth catalyst for its insurance businesses. Among other initiatives, it is also hiving off loss-making segments in its broking and distribution businesses that will lead to better profitability.
In this backdrop, most analysts polled by Bloomberg remain positive on Reliance Capital. Their average target price stands at Rs 586, double the Monday's closing price of Rs 285.
Analysts expect Reliance Capital’s consolidated net profit to grow at 18 per cent compounded annual rate over FY15-17. Given that most of the company’s businesses are linked to capital markets, any adverse movement in the same can impact its profitability. Whether Monday's fall becomes a larger downtrend is yet to be seen. Intense competition and successful execution of key strategies are other key monitorables.
While inexpensive valuations seem to adequately factor in concerns, some of its businesses such as consumer lending, asset management and general insurance are showing healthy prospects. Plus, there are a host of triggers for the stock going forward. One, both its general and life insurance businesses can witness stake sale to existing/new partners post increase in foreign holding limit in the insurance sector. Second, the company may look to raise capital in the near term which will enable it to fund future growth.
“Stake sale and monetisation will not only boost RoE (return on equity), but also help deleverage Reliance Capital’s balance sheet”, says Kunal Shah, Financials analyst, Edelweiss Securities, who has a Buy rating with a target price of Rs 638 on the stock.
More From This Section
Amongst key businesses, Reliance Capital’s lending business, for instance, has witnessed good loan growth (13%) in the June 2015 quarter after under-going consolidation in the past two years. Save for one-offs, asset quality trends remain stable and the company’s focus on lending to secured segments such as mortgages is a positive. The asset management (one-third of SOTP) and general insurance (5% of SOTP) businesses have been posting steady show in the past few quarters and the trend is likely to continue.
Life insurance business is likely to be under pressure in the medium term, but it is more to do with the company re-aligning its distribution network away from third-party distributors to owned work-force which is relatively more stable. Going ahead, the company awaits regulatory nod enabling banks to tie up with multiple insurance players for distribution and believes it will be a key growth catalyst for its insurance businesses. Among other initiatives, it is also hiving off loss-making segments in its broking and distribution businesses that will lead to better profitability.
In this backdrop, most analysts polled by Bloomberg remain positive on Reliance Capital. Their average target price stands at Rs 586, double the Monday's closing price of Rs 285.
Analysts expect Reliance Capital’s consolidated net profit to grow at 18 per cent compounded annual rate over FY15-17. Given that most of the company’s businesses are linked to capital markets, any adverse movement in the same can impact its profitability. Whether Monday's fall becomes a larger downtrend is yet to be seen. Intense competition and successful execution of key strategies are other key monitorables.