Enhanced “Management Focus”, surge in earnings growth expected. Post demerger of housing finance, Reliance Nippon Life AMC IPO saw huge demand and valued the company at 6.8x AUM. Factoring Reliance capital stake down to 42% from 46% in AMC and with the holding company discount rising to 20%, we get the SoTP valuation at |700 per share. We further reduce |40 per share of funded exposure to reliance communication Reliance Infratel. Accordingly, we value the stock at |660 per share. We maintain our BUY rating on the stock. Expected IPO of GI seen before March 2018. We expect PAT to grow at 19% CAGR in FY17-19E not factoring capital gains from IPO. We expect RoE to move to double digits by FY19E with improving RoE of individual businesses. Recent default by promoter group entity in one of its dollar bond payments have led to sharp correction in ADAG group stocks including Reliance capital. The stock is trading at 0.7x FY19E ABV.
We expect consolidated PAT to grow at 15% CAGR to | 1426 crore over FY17-19E not factoring in capital gains from IPO and other asset sale. The same can add | 800-1000 crore to capital gains. Improving RoE of individual businesses will push up consolidated RoE. FY18E may see ~12% RoE due to capital gains. However, normalised RoE is seen at ~7- 9% in the next couple of years. Based on higher general insurance and AMC valuations, we revise our SoTP target price to | 905 vs. | 775 earlier, with 10% holding company discount. At 1.3x for FY19E ABV valuations are still reasonable. We reiterate our BUY recommendation on the stock.
Reliance Capital’s (RCAP) Q1FY18 was characterised by steady performance across businesses. Key trends: a) Life insurance: Decline arrested, persistency improved, but sustenance key; b) General insurance: Growth sustained, combined ratio improved to 104% (115% in Q4FY17); c) Home finance: AUM up >50%, aims to sustain run rate; and d) Commercial finance: Business reorientation on track, AUM growth soft at 6% YoY; e) AMC: Robust growth. With operations spread across scalable businesses (benefitting from higher financial savings) and beefed up leadership team, focus is now on execution with an aim to build a profitable business and consequent improvement in RoE. RCAP’s focus on profitable growth with run down in non‐core assets is likely to not only enhance capital efficiency, but also improve core performance. Maintain ‘BUY’.