TARGET INR890.

00
Reliance Capital RCFT IN PRIOR TP
CLOSE
INR950.00
INR763.05
BUY
INDIA / DIVERSIFIED FINANCIALS UP/DOWNSIDE +16.6% FROM HOLD

HOW WE DIFFER FROM THE STREET INDUSTRY OUTLOOK Ï CHANGE IN RECOMMENDATION

BNP Consensus % Diff
Target Price (INR)
EPS 2010 (INR)
890.00
28.84
877.00
30.06
1.50
(4.0)
Risk-reward attractive
EPS 2011 (INR) 33.16 35.20 (5.8) ƒ Current price attractive; Upgrade to BUY, revised TP of INR890.
Positive Neutral Negative ƒ Two key catalysts – stake sale in general & life insurance.
Market Recs. 9 8 3 ƒ 26% stake sale in General Insurance in FY10, EV at USD300m.
KEY STOCK DATA ƒ SoTP value of INR890 – INR440 (life), INR246 (prop), INR182 (AMC).
YE Mar (INR m) 2010E 2011E 2012E
We upgrade Reliance Capital (RCFT) to
Operating profit 9,040 10,053 12,210 BUY as we see the upcoming stake sales
Rec. net profit 7,083 8,146 10,024 in two of its businesses making the risk-
Recurring EPS (INR) 28.84 33.16 40.81 reward equation more attractive.
Prior rec. EPS (INR) 31.91 35.08 39.77
Life insurance business
Chg. in EPS est. (%) (9.6) (5.5) 2.6 Earlier, the company had guided toward a
EPS growth (%) (30.1) 15.0 23.0 pre-IPO stake sale of 10% by FY10 but
this time frame has now been pushed out
Recurring P/E (x) 26.5 23.0 18.7
to July-Sep 2010. RCFT is looking at a Vijay Sarathi, CFA
Dividend yield (%) 0.6 0.7 0.7 valuation of 15-20x NBAP multiple. In line +91 22 6628 2412
vijay.sarathi@asia.bnpparibas.com
Price/book (x) 2.3 2.2 2.0 with our thesis of contracting NBAP
ROE (%) 9.1 9.7 11.0 margins, RCFT is now guiding toward a Abhishek Bhattacharya
+91 22 6628 2411
sustainable margin of 18%, down from abhishek.bhattacharya@asia.bnpparibas.com
ROA (%) 2.96 3.40 4.06
21% a year back. We are currently
(INR) Reliance Capital (%) factoring in a NBAP multiple of 15x on a sustainable NBAP margin of
Rel to MSCI India
18%. The IPO will now be pushed out to the 3rd/4th quarter of FY11
1,000 54 depending upon the regulatory hurdles. The ULIP revenue share is likely
800 34 to decline from 95% to about 85% over the next few years as the
600 14 company focuses on pushing traditional products in the smaller ticket
400 (6)
markets of three- and four-tier cities.
200 (26)
General insurance business
Feb-09 May-09 Aug-09 Nov-09 Feb-10
RCFT is planning to exit the general insurance business and it is in
Share price performance 1 Month 3 Month 12 Month advanced stages of negotiations with a strategic investor to sell a 26%
stake in 4QFY10. We expect a valuation of USD300m for the entire
Absolute (%) (16.7) (6.6) 100.0
business, implying 65% of the gross written premium for FY11.
Relative to country (%) (8.4) (4.7) 10.3
Next results/event July 2010 Asset management business
Mkt cap (USD m) 4,004 The company is exploring the possibility of a 20% stake sale to an
international AMC, but the plan is still in a very nascent stage. The
3m avg daily turnover (USD m) 42.9
company expects debt AUMs to be under pressure in FY11 if the current
Free float (%) 47 tax arbitrage available to corporates (vis-à-vis bank term deposits) is
Major shareholder ADAG & associates (54%) withdrawn in the upcoming Union Budget. Debt AUMs can possibly show
12m high/low (INR) 1,035.05/280.85 a decline of 10-15% for FY11 and equity AUMs are expected to grow at
15-20%. On a blended basis, we are looking at flat AUMs for FY11, down
3m historic vol. (%) 41.8
from the earlier growth of 20%.
Sources: Bloomberg consensus; BNP Paribas estimates
Valuation
Recent Company Research
We are lowering our TP to INR890 from the earlier INR950. Our TP
Upgrade; stock fully priced................................ 12 Oct 2009 consists of INR440 for life insurance at 15x FY11E NBAP, INR182 for
AMC business by applying 3.5% to FY11E AUM and INR246 for the
consumer finance/investment book at a P/BV of 1.8x to FY11E ABV. We
value Reliance Money at INR22 using a 15x multiple for FY11E earnings.
The key risk to our thesis is a big correction to the equity markets as
RCFT is a high beta play.

BNP Paribas Securities Asia research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://equities.bnpparibas.com. Please contact your
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10 February 2010
VIJAY SARATHI, CFA RELIANCE CAPITAL 10 FEBRUARY 2010

Consumer finance business Exhibit 1: SOTP Valuation For Reliance Capital

GNPL accretion will slow down significantly over the next year Total value (INR) 890
as the unsecured loan book runs off. We expect GNPL Outstanding shares (m) 246
numbers to remain flat over the next one or two quarters. The
company is following RBI's provision coverage norms for banks
Reliance Life Insurance
as it continues to pursue a banking license. De-emphasis on
unsecured loan products continues and loan against property APE FY11 (INR m) 38,886
will be a key focus segment. APE growth expected FY11E (%) 20
Estimated NBAP margin FY11 (%) 18
Reliance Money (broking / i-banking) Market cap to NBAP multiple (x) 15
This business is currently being restructured in terms of Reliance Capital stake (%) 100
platform integration, consolidation of the distribution network Contribution per share (INR) 440
and product pricing.

Plans are currently on to consolidate the distribution outlets to Reliance Capital Asset Management
2,500-3,000 from 10,000 outlets at its peak. FY11E mutual fund AUM (INR m) 1,266,015
Relative multiple (x) 3.5
This business is moving to a variable pricing model from the FY11E PMS/EPFO AUM (INR m) 386,855
current flat fee structure for retail trades. It is looking at moving
Relative multiple (x) 1.0
to a commission rate of 4-5bps from 2-3bps at present. RCFT
Expected offshore AUM (INR m) 9,045
currently has a customer base of 925,000 and it is looking at an
aggressive customer acquisition plan. It is also planning to Relative multiple (x) 1.5
focus more on developing its investment banking capabilities. Total market cap (INR m) 47,961
Reliance Capital stake (%) 93
Standalone investment book Contribution per share (INR) 182
On the standalone investment book, RCFT is looking at timing
its profit booking on INR4b-5b of unrealized gains. RCFT is Reliance Money
looking at paring the contribution from investment book to 20%
Expected FY11 earnings (INR m) 356
over the next two-three years from 85-90% at present. It might
Relative multiple (x) 15
consider using the stake sale proceeds for either bringing down
the debt on its books or investing in an active prop book. Market cap (INR m) 5,347
Reliance Capital stake (%) 100
Contribution per share (INR) 22

Reliance Consumer Finance/Investment

FY11E BV net of subsidiary investments (INR m) 33,023
Average ROE for FY11E (%) 17.9
Price to BV Multiple (x) 1.8
Reliance Capital stake (%) 100
Contribution per share (INR) 246
Sources: Reliance Capital; BNP Paribas estimates

2 BNP PARIBAS
VIJAY SARATHI, CFA RELIANCE CAPITAL 10 FEBRUARY 2010

FINANCIAL STATEMENTS

Reliance Capital
Profit and Loss (INR m)
Year Ending Mar 2008A 2009A 2010E 2011E 2012E
Interest income 9,188 17,191 16,544 14,880 16,506
Interest expense (4,139) (12,638) (13,649) (11,052) (11,601)
Net interest income 5,049 4,553 2,895 3,828 4,905
Net fees & commission 6,517 8,488 10,546 9,609 10,594
Foreign exchange trading income 0 0 0 0 0
Securities trading income 11,844 13,242 9,977 10,093 11,009
Dividend income 0 0 0 0 0
Other income 21,642 21,273 23,868 24,894 24,967
Non interest income 40,004 43,003 44,390 44,596 46,570
Total income 45,053 47,556 47,285 48,424 51,474 Operating expenses for
Staff costs (4,229) (5,541) (5,717) (6,367) (6,779)
Other operating costs (27,741) (28,737) (29,933) (31,003) (31,717)
consolidated entity
Operating costs (31,971) (34,277) (35,651) (37,370) (38,496) include costs of new
Pre provision operating profit 13,083 13,279 11,635 11,054 12,979 ventures like Reliance
Provisions for bad and doubtful debts (169) (1,225) (2,595) (1,001) (768) International Equity,
Other provisions (757) (12) 0 0 0 Reliance Capital Services
Operating profit 12,157 12,042 9,040 10,053 12,210
Recurring non operating income 0 0 0 0 0
Associates 0 0 0 0 0
Goodwill amortization 0 0 0 0 0
Non recurring items 0 0 0 0 0
Profit before tax 12,157 12,042 9,040 10,053 12,210
Tax (2,055) (1,811) (1,837) (1,804) (2,070)
Profit after tax 10,102 10,231 7,203 8,249 10,141
Minority interests (12) (74) (120) (103) (117)
Preferred dividends 0 0 0 0 0
Our FY11 EPS estimate
Other items 0 0 0 0 0
Reported net profit 10,091 10,157 7,083 8,146 10,024 doesn’t include the impact
Non recurring items & goodwill (net) 0 0 0 0 0 of possible stake sale in
Recurring net profit 10,091 10,157 7,083 8,146 10,024 life insurance
Per share (INR)
Recurring EPS * 41.08 41.25 28.84 33.16 40.81
Reported EPS 41.08 41.25 28.84 33.16 40.81
DPS 5.50 6.45 4.33 4.97 5.63
Growth
Net interest income (%) 67.2 (9.8) (36.4) 32.2 28.1
Non interest income (%) 120.6 7.5 3.2 0.5 4.4
Pre provision operating profit (%) 60.6 1.5 (12.4) (5.0) 17.4
Operating profit (%) 49.8 (1.0) (24.9) 11.2 21.5
Reported net profit (%) 43.5 0.7 (30.3) 15.0 23.0
Recurring EPS (%) 33.0 0.4 (30.1) 15.0 23.0
Reported EPS (%) 33.0 0.4 (30.1) 15.0 23.0
Income breakdown
Net interest income (%) 11.2 9.6 6.1 7.9 9.5
Net fees &commission (%) 14.5 17.8 22.3 19.8 20.6
Foreign exchange trading income (%) 0.0 0.0 0.0 0.0 0.0
Securities trading income (%) 26.3 27.8 21.1 20.8 21.4
Dividend income (%) 0.0 0.0 0.0 0.0 0.0
Other income (%) 48.0 44.7 50.5 51.4 48.5
Operating performance
Gross interest yield (%) 11.70 13.48 12.52 11.23 11.20
Cost of funds (%) 7.72 10.79 9.95 8.49 8.83
Net interest spread (%) 3.98 2.70 2.57 2.74 2.37
Net interest margin (%) 6.43 3.57 2.19 2.89 3.33
Cost/income (%) 71.0 72.1 75.4 77.2 74.8
Cost/assets (%) 24.72 16.08 14.65 15.41 15.41
Effective tax rate (%) 16.9 15.0 20.3 17.9 16.9
Dividend payout on recurring profit (%) 13.4 15.6 15.0 15.0 13.8
ROE (%) 16.9 14.4 9.1 9.7 11.0
ROE – COE (%) (7.0) (9.5) (14.8) (14.2) (12.9)
ROA (%) 7.81 4.80 2.96 3.40 4.06
RORWA (%) 8.89 5.43 3.34 3.84 4.54
* Pre exceptional, pre-goodwill and fully diluted
Sources: Reliance Capital; BNP Paribas estimates

3 BNP PARIBAS
VIJAY SARATHI, CFA RELIANCE CAPITAL 10 FEBRUARY 2010

Reliance Capital
Balance Sheet (INR m)
Year Ending Mar 2008A 2009A 2010E 2011E 2012E
Gross customer loans 102,803 120,674 100,493 112,899 126,588
Total provisions 0 (1,350) (3,075) (3,129) (3,692) Life insurance business is
Interest in suspense 0 0 0 0 0
Net customer loans
not consolidated into
102,803 119,324 97,418 109,770 122,896
Bank loans 0 0 0 0 0 books – it is carried as
Government securities 6,405 13,190 21,170 23,287 25,616 investment into
Trading securities 0 0 0 0 0 associates
Investment securities 25,622 42,835 38,159 38,159 38,159
Cash & equivalents 10,563 11,675 41,159 20,467 19,798
Other interest earning assets 0 0 0 0 0
Tangible fixed assets 2,020 3,018 3,018 3,018 3,018
Associates 28,537 42,718 32,324 36,324 40,324
Goodwill 0 0 0 0 0
Other intangible assets 0 0 0 0 0
Other assets 8,487 9,214 11,621 9,189 9,724
Total assets 184,437 241,975 244,869 240,214 259,536
Customer deposits 0 0 0 0 0
Bank deposits 0 0 0 0 0
Other interest bearing liabilities 93,262 141,087 133,287 127,096 135,768
Non interest bearing liabilities 24,571 25,521 30,256 24,973 27,900
Total liabilities 117,833 166,608 163,543 152,069 163,668
Share capital 2,462 2,462 2,462 2,462 2,462
Reserves 63,635 72,072 77,912 84,629 92,234
Total equity 66,097 74,534 80,374 87,090 94,695
Minority interests 507 833 952 1,055 1,172
Total liabilities & equity 184,437 241,975 244,869 240,214 259,536
Supplementary items
Risk weighted assets (RWA) 160,060 216,498 214,657 215,286 231,680
Average interest earning assets 78,549 127,495 132,185 132,456 147,418
Average interest bearing liabilities 53,646 117,175 137,187 130,191 131,432
Tier 1 capital 66,056 74,458 80,298 87,014 94,619
Total capital 74,899 86,277 91,417 91,942 108,220
Gross non performing loans (NPL) 0 2,000 5,125 4,228 4,615
Per share (INR)
Book value per share 269.09 301.11 327.21 354.55 385.52
Tangible book value per share 269.09 301.11 327.21 354.55 385.52
Growth
Gross customer loans (%) 173.9 17.4 (16.7) 12.3 12.1
Average interest earning assets (%) 193.7 62.3 3.7 0.2 11.3
Total assets (%) 148.4 31.2 1.2 (1.9) 8.0
Risk weighted assets (%) 138.4 35.3 (0.9) 0.3 7.6
Customer deposits (%) 0.0 0.0 0.0 0.0 0.0 Consumer finance
Leverage & capital measures business started reporting
Customer loans/deposits (%) 1,028,033,9 1,193,243,0 974,176,05 1,097,702,9 1,228,963,3 NPLs from FY09
Equity/assets (%) 35.8 30.8 32.8 36.3 36.5
Tangible equity/assets (%) 35.8 30.8 32.8 36.3 36.5
RWA/assets (%) 86.8 89.5 87.7 89.6 89.3
Tier 1 CAR (%) 41.3 34.4 37.4 40.4 40.8
Total CAR (%) 46.8 39.9 42.6 42.7 46.7
Asset quality
Change in NPL (%) 0.0 NM 156.2 (17.5) 9.1
NPL/gross loans (%) 0.0 1.7 5.1 3.7 3.6
Total provisions/gross loans (%) 0.0 1.1 3.1 2.8 2.9
Total provisions/NPL (%) 100.0 67.5 60.0 74.0 80.0
Valuation 2008A 2009A 2010E 2011E 2012E
Recurring P/E (x) * 18.6 18.5 26.5 23.0 18.7
Recurring P/E @ target price (x) * 21.7 21.6 30.9 26.8 21.8
Reported P/E (x) 18.6 18.5 26.5 23.0 18.7
Dividend yield (%) 0.7 0.8 0.6 0.7 0.7
Price/book (x) 2.8 2.5 2.3 2.2 2.0
Price/tangible book (x) 2.8 2.5 2.3 2.2 2.0
Price/tangible book @ target price (x) 3.3 3.0 2.7 2.5 2.3
* Pre exceptional, pre-goodwill and fully diluted
Sources: Reliance Capital; BNP Paribas estimates

4 BNP PARIBAS
VIJAY SARATHI, CFA RELIANCE CAPITAL 10 FEBRUARY 2010

DISCLAIMERS & DISCLOSURES

ANALYST(S)
Vijay Sarathi, CFA, BNP Paribas Securities India Pvt Ltd, +91 22 6628 2412, vijay.sarathi@asia.bnpparibas.com.
Abhishek Bhattacharya, BNP Paribas Securities India Pvt Ltd, +91 22 6628 2411,
abhishek.bhattacharya@asia.bnpparibas.com.
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Recommendation structure

All share prices are as at market close on 9 February 2010 unless otherwise stated. Stock recommendations are based on absolute upside
(downside), which we define as (target price* - current price) / current price. If the upside is 10% or more, the recommendation is BUY. If
the downside is 10% or more, the recommendation is REDUCE. For stocks where the upside or downside is less than 10%, the
recommendation is HOLD. In addition, we have key buy and key sell lists in each market, which are our most commercial and/or actionable
BUY and REDUCE calls and are limited to at most five key buys and five key sells in each market at any point in time.
Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may
cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation.
*In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't
think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ
from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our
assessment of current fair value.
Should you require additional information please contact the relevant BNP Paribas research team or the author(s) of this report.

© 2010 BNP Paribas Group

5 BNP PARIBAS