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Reliance Capital Downgraded to EqualWeight

August 20, 2008

In a report today, Morgan Stanley has downgraded Reliance Capital to Equal Weight and has also cut the target price citing near term pressures as all the businesses of the company are capital markets-linked.The sharp slowdown in market activity is likely to result in slower growth in RCap’s businesses and contraction in multiples.

RCap reported robust volume growth in 2007 as markets were strong, but growth has moderated in the last few months. The continued weakness in market activity can cause growth across businesses for RCap to be moderate, which can drag down valuations.

General Insurance:
RCap reported an accounting loss in F2008 due to higher claims and operating expenditures. The company showed some improvement in its combined ratio in F1Q09, although it continued to report a loss on the insurance business. The growth rates for general insurance should slow as the company is also focusing on better underwriting to minimize claims cost and operating expenditures.

Life Insurance:
RCap’s new business premium on an APE basis has recorded a CAGR of around 375% in the last couple of years. This is significantly ahead of private players’ growth of 93% and overall industry growth of 60% in the same period. RCap’s market share increased from 1.1% in F2006 to around 6.6% in the same period.

AMC:
RCap is the largest player in the domestic asset management business with AUM of around US$22bn on June 2008. However, AUM growth for the industry will be under pressure in current market conditions: The growth in AUM is dependent on broader capital markets.

Sum of Parts Valuation:
Life Insurance 505
Asset Management 250
Brokerage & Distribution 45
Consumer Finance 95
General Insurance 25
Listed Equity – Unrealized Gains 120
Total Rs 1,040 – Near Term Price Target

However, in long term India is expected to report a fantastic GDP growth and financial sector will benefit from the same. RCap’s presence in all the growth segments will be of tremendous advantage.

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