Reliance Capital - Strong traction in insurance businesses - Centrum

RCap reported healthy set of numbers for Q1FY14 with insurance businesses (life & general) witnessing healthy traction in premium flows. Commercial finance saw smart NIM expansion while the company has contained balance sheet growth. Voluntary stoppage of gold related businesses has impacted distribution business and may hit FY14 earnings. We maintain our positive stance on the stock led by easing of sector specific challenges for each business.

Commercial finance: Net Interest Income grew by a robust 23% helped by sequentially higher NIM (+100bps) though loan book was flattish YoY. From a segmental perspective, SME was the key driver (4% YoY), while the Auto segment saw loan book contracting by 14% YoY. Asset quality challenges persisted as GNPA inched up higher by 50bps sequentially to 2.2% (90-day basis) and by 30% on absolute basis QoQ. A large part of the incremental stress is coming from CV&CE portfolio, which the company is confident, will recover shortly.

Asset management: Led by favourable response to debt schemes, the debt AUM surged by 38% YoY and 9% QoQ. Total AUM grew by 22% YoY and 3% QoQ to Rs1.8bn though rise in income was far steeper at 39% YoY. Expenses shot up by 44% YoY. Consequently, PBT grew by 32% YoY.

Life insurance: The life insurance business continued to face tough operating environment though Q1FY14 saw 105% growth in new business premiums resulting in higher market share of 10.5% (among private players). Notably, RLife has stepped up efforts to protect its market share and penetrate Top 10 cities as is evident by the second consecutive quarter of agent additions.

General insurance: Q1FY13 saw ticket size coming down as GWP growth of 25% trailed 40% growth in policies issued. While the business remains profitable for the last three quarters, PAT saw a decline of 40% QoQ; however, the combined ratio has been maintained at ~113%. For FY14, RGEN's share in motor pool losses is limited at Rs650mn (vs Rs1840mn in FY13) and would represent the last obligation. Given this, the management expects the combined ratio for FY14 to head towards 100% from 115% currently.

Broking and distribution: The performance of broking business was weak as Q1FY14 was impacted by weakness in volumes as well as lower deliveries. Bottomline reflects a 92% YoY drop as expenses remain sticky. Meanwhile, distribution business saw a strong 104% growth in topline (low base effect) though it was down 28% QoQ. Importantly, gold distribution moderated by 36% QoQ as the company has taken the product off-market on a temporary basis. Consequently, the distribution business registered a loss of Rs8mn for the quarter.

Maintain Buy: RCap's earnings have been volatile over the past few quarters due to gains from stake sale and consolidation of group entities. Post the consolidation phase, the core businesses (AMC, commercial financing) have seen reasonable stability with general insurance turning profitable since Q3FY13. We maintain Buy with SOTP based fair value estimate of Rs550 per share.

Source : Equity Bulls

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