Reliance Capital

17th September 2010

CMP: Rs 810

Recommend: BUY

Target Price: Rs 868

Sector: Finance, NBFC Key Data Market Capital (Rs, mn) Market Capital (US$ mn) O/S Shares, mn Face Value, Rs 2 wk avg Vol, BSE 52 wk High 52 wk Low Rs/US$ Bloomberg Reuters NSE BSE

SIHL Smart pick

198936.0 4283.7 245.6 10 33k 973 611 46.44 RCFT IN RLCP.BO RELCAPITAL 500111 Q1 FY 11 result performance During the quarter ended June 2010 reliance Capital posted a consolidated total Income of Rs 12.6 billion which was down by 13.7% on Y o- Y basis and down by 26% on Q o- Q basis. The total income was down due to lower capital gains and reduction in topline of general insurance business. The company posted a net profit of Rs 770 million which is drastically down by 49% on Y o- Y basis but is up by 19.4% on Q o- Q basis. The profit was down due to fall in AUM and loss in insurance business. Strong contender for banking licence Reliance capital is interested in banking license for quite some time. The finance minister in the budget has announced to give new banking licence. Reliance capital is currently a key contender for the banking license, as it will be source of low cost funds which is key requirement for the growth of business. Strengthening broking business Reliance capital's subsidiary 'Reliance securities' is looking to increase its employees strength to 1,400 from 800 at present, the company is also targeting to reach 10,000 franchisees in next 2 years. The company having a customer base of 6,50,000 is planning to invest around Rs 30 to Rs 40 billion in coming 2 to 3 years to improve technology and risk management capabilities, and to introduce new retail equity products, the entire spending would come from internal accruals. Indias Largest mutual Fund Reliance mutual fund is currently the Indias largest Mutual fund with 15% market share. Reliance Capital Asset management currently manages Rs 1.4 trillion across MF, Pension funds, managed accounts and hedge funds.

Shareholding Pattern Q1 FY 10 Promoters 53.49 FII 22.41 Inst Inv 4.3 Public 19.8

(%) Q1 FY 11 54.0 20.7 4.5 20.8

Key Triggers Banking License Strong candidate Listing of Reliance money will act as a key trigger for the company Indias largest mutual fund and growing strongly

Valuation
We have done a SOTP based valuation for the company and valued the various business segment of the company on different parameters. We arrive at target price of Rs 868 for reliance capital. At current market price the stock is trading at 2.61x its FY 10 book value and at our target price it will trade at P/B multiple of 2.8x. We recommend BUY with investment horizon of 6 to 12 months.

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Reliance Capital
17th September 2010

Quarterly Performance Particulars, Rs mn Total Income Q1 FY 11 12669 Q1 FY 10 14681 Q4 FY 10 17162 Y -o- Y -13.7% Q -o- Q -26.2%

Staff Cost Other Expenditure Reinsurance Premium ceded Claims incurred Interest & Financial charges Depreciation Profit before tax Profit after tax NPM Diluted EPS Source: Company, SIHL

1239 3147 1881 2351 2944 128 977 770 6.1% 3.13

1282 3549 2158 2246 3672 143 1643 1510 10.3% 6.15

1220 6525 1513 4177 2587 205 936 645 3.8% 2.57

-3.4% -11.3% -12.8% 4.7% -19.8% -10.5% -40.5% -49.0% -49.1%

1.6% -51.8% 24.3% -43.7% 13.8% -37.6% 4.4% 19.4% 21.8%

During the quarter ended June 2010 reliance Capital posted a consolidated total Income of Rs 12.6 billion which was down by 13.7% from Rs 14.6 billion in same quarter last year and down by 26% from Rs 17.1 billion in the previous quarter last year. The total income was down due to lower capital gains and reduction in topline of general insurance business. The incurred claims in the quarter were down by 43.7% on Q o- Q basis but was up by 4.7% on Y o- Y basis. In the quarter the interest and financial charges stood at Rs 2.9 billion which was down by 20%from the same quarter previous year but was up by 13.85 from the previous quarter last year. The company posted a net profit of Rs 770 million which is drastically down by 49% from Rs 1.5 billion in the corresponding quarter last year but up by 19.4% from Rs 645 million in the last quarter previous year. The profit was down in this quarter due to loss of Rs 386 million in the insurance business In the asset management business also the company faced redemption pressure which has lead to fall in AUM. This has also impacted the profitability for the company.

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Reliance Capital
17th September 2010

Company Profile
Reliance Capital, a constituent of S&P CNX Nifty and MSCI India, is a part of the Reliance Anil Dhirubhai Ambani Group (www.relianceada.com). It is one of India's leading and most valuable financial services companies in the private sector.

Business Operations The company has vast business operation in many financial segments 1) Reliance Capital Asset Management a. Mutual funds and portfolio management services 2) Reliance Life insurance a. Life Insurance 3) Reliance Consumer Finance a. Home, SME, CV, CE financing 4) Reliance Money a. Equity broking 5) Other Business a. Finance and Investment b. General Insurance c. Institutional broking d. Exchanges e. Private Equity f. Venture capital g. Asset reconstruction

Key Management

1) 2) 3) 4) 5) 6)

Sam Ghosh, CEO Reliance Capital Malay Ghosh, CEO Reliance Life Insurance Sundeep Sikka, CEO Reliance Capital asset management Madhusudan Kela, Chief Investment Strategist Reliance Capital KV Srinivasan, CEO Reliance Home Finance & Reliance Asset Finance Vikrant Gurnani, Executive Director Financial Services

3|Page Branch Office: Shah Investors Home Ltd.164-C, 16th Floor, Mittal Tower, Nariman Point, Mumbai-400021 PH: 91 22 22040782/83/84 Fax: 91 22 22040722 E-Mail:research@sihl.in Web: www.sihl.in

Reliance Capital
17th September 2010

Valuation
Based on SOTP Business Segment Reliance Capital Asset Reliance Life Reliance Broking Reliance Gen Insurance Reliance consumer fin & Others Equity Investments Total Source: SIHL Valuation % of AUM NBAP multiple PE Multiple of net Premium Percentage of sales Value Rs mn Value Per share, Rs 77000 313.5 99200 403.9 4150 16.9 3918 16.0 19461 79.2 9420 38.4 868

We have done SOTP based valuation for Reliance Capital Ltd and valued the different business segment on various parameters. We have valued the Asset management business of the company at 5.5% of its Average Asset under management. For companys life insurance business we have given a multiple of 16x to its NBAP (New Business Achieved Profits). We have valued the broking business on PE basis and for its consumer finance and other business we have taken 1x the multiple of sales. The Equity investment of the company is taken post 60% discount. We arrive at target price of Rs 868 on SOTP basis. We recommend BUY for Reliance Capital with upside potential of 7.2% from current levels with investment horizon of 6 to 12 months.

Financials
Profit & Loss Account Particulars, Rs mn Total Income Total Expenditure PBT Tax PAT EPS Source: Company, SIHL FY 09 56211 44170 12041 1810 10231 41.66 FY 10 57600 51320 6280 1977 4303 17.52 FY 11E 66550 53560 12990 2598 10392 42.31 FY 12E 68220 55066 13154 3025 10129 41.24

4|Page Branch Office: Shah Investors Home Ltd.164-C, 16th Floor, Mittal Tower, Nariman Point, Mumbai-400021 PH: 91 22 22040782/83/84 Fax: 91 22 22040722 E-Mail:research@sihl.in Web: www.sihl.in

Reliance Capital
17th September 2010

Technical Corner

Reliance Capital hit a high of 2798 in Jan 2008 and hence corrected sharply and made a low of 279 in March 2009. The Stock past few months is consolidating in the range of 826 to 748 levels. The stock is currently trading above its 50 and 200DMA. The Other key indicators like MACD and RSI are also showing positive trend with up surge in volumes. We expect 826 to act as a near term resistance for the stock whereas we expect the stock to find strong support around 749 levels.

5|Page Branch Office: Shah Investors Home Ltd.164-C, 16th Floor, Mittal Tower, Nariman Point, Mumbai-400021 PH: 91 22 22040782/83/84 Fax: 91 22 22040722 E-Mail:research@sihl.in Web: www.sihl.in

Reliance Capital
17th September 2010

Research Team:
Abhishek Jain Rekha Ahuja Vikas Jain Siddharth Rajpurohit Yogesh Tiwari Mitesh Panchal Harsh Mehta Vipul Thakkar Krunal mody Head of Research Research Analyst Research Analyst Research Analyst Research Analyst Technical Analyst Research Associate Institutional Sales Dealer abhishek.jain@sihl.in rekha.ahuja@sihl.in vikas.jain@sihl.in siddharth.rajpurohit@sihl.in yogesh.tiwari@sihl.in mitesh.panchal@sihl.in harsh.mehta@sihl.in vipul.thakkar@sihl.in krunal.mody@sihl.in

Contact: research@SIHL.in, +91-2204 0782/83 You can also access our reports on Bloomberg (SHAH <GO>) and Capitaliq.
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