We at Stallion Asset have learned that the valuation of an NBFC depends on 4 main things 1) Management Perception 2) ROE 3) Credit Quality 4) Growth.
Reliance Capital is Anil Ambani’s only good asset and he knows that, lately he had kept an analyst meet and our analyst did participate in it. We all know that Reliance Capital has a Anil Ambani Discount to it, Lets understand how much Anil Ambani Discount is there in the Price.
Reliance Capital can be divided in 5 Main Business’
1. Asset management – Mutual Fund Business 51% Stake
2. Life Insurance – 51% Stake owned rest owned by Nippon
3. General Insurance – 100% Stake Owned Reliance Capital
4. Housing Finance – 100% Stake Owned expect to be demerger
5. Commercial Finance – 100% Stake Owned expect a turnaround here.
6. Other Non Core Asset and Broking – Non Core expected to be Divested
Asset Management Business Valuation- In October 2015, Nippon Increased stake in Asset management business from 35% to 49% valuing the company at 8500 Crores. Reliance Asset Management will do a PAT of 340 E for FY 2017, ROE of 50%, if it were listed it would trade at 30x or valuation of 10,200 atleast. We value Reliance Asset Management business’ 51% Stake at 5100 Crores.
Life Insurance Business Valuation – We Value Life Insurance using embedded value multiple, HDFC Max Life is trading at 4.3x Embedded value, whereas ICICI Prudential Life trades at 3.4x Embedded value. Reliance Life Insurance has a embedded value of 3074, if it were listed it would definitely trade at 3-3.5x. Therefore the fair value of Life Insurance Business would be about 10,000 crores, since RCap has 51% stake in it, we value it at 5100 Crores. This Valuation has been confirmed with Nippon investing 5,327 crores in 2016 for a 49% of Life Insurance business valuing the company at 10,871 crores.
General Insurance Business Valuation – Reliance General Insurance business has grown at 25% for last 5 years and now commands a private sector market share of 8.3%. Its expected to report profits of 70 Crores in 2017 and has equity invested of 1200 Crores. We believe margins can improve considerably here and value it at 3,000 crores.
Housing Finance – The current AUM is ~10000 Cr with a conservative Gross NPA ratio of 0.9%and by FY20E expect it to be ~50000 Cr . The Equity Invested in HFC business is 885 crores.The HFC business has grown 30% over last year and it’s expected to do a profit of 90 crores in FY2017 with an ROE 10%. We value this HFC at 3xbook at 2650 crores. They are into affordable housing with average ticket size of less than 10 lakhs and may command higher valuations.
Reliance Commercial Finance – There has been appointment of Mr Mody as CEO, who was the erstwhile President of the consumer finance business of Bajaj Finance and leverage on his expertise in tapping SME lending segment. The current AUM is 16000 Cr . The Equity Invested in RCF business is 2195 crores. The business has grown 10% over last year and its expected to do a profit of 200 crores in FY2017 with an ROE 9%. We value this RCF at 2xbook at 4400 crores.
Other excess investments are valued at 3,000 crores and will be liquidated soon.
Conclusion – Reliance Capital if owned by someone else would trade at about 920/per share with current financials. NBFC is in a bull market, and at the end of the bull market the PIGS run faster than the Horse. Investors with high risk appetite can have a serious look at reliance capital on dips. Worse case investors lose 20%, best case you get a 1 bagger.
Disclosure – Amit Jeswani and Family have no positions
This is not a recommendation and just for Education Purpose.