Insurance Bill positive for Reliance Capital

Return ratios and profitability are expected to improve

Reliance Capital scrip has outperformed the S&P BSE Sensex in the past month on news suggesting the company's plans to exit non-core businesses and the possibility of Nippon Life raising its stake in the life insurance venture with the company. There could be more fireworks.

The sale of Reliance MediaWorks' multiplexes business to Carnival Cinemas on Monday is part of this.

The move will enable RCap to cut its Rs 7,000-crore (Rs 70-billion) debt pile by Rs 700 crore (Rs 7 billion).

Recent reports suggest RCap could sell its 16 per cent stake in Yatra.com for Rs 500 crore (Rs 5 billion), which RCap did not confirm.

While these appear to be generating small bits of sum for the company, they are in the right direction.

Notably, RCap had proprietary investment book of Rs 2,000 crore (Rs 20 billion) as on end-March and owns stake in a host of companies.

On a collective basis, these moves could help cut its debt meaningfully. More importantly, the likely nod to the insurance Bill allowing higher foreign stake in domestic firms will be a key catalyst for companies such as Reliance Capital.

Ambareesh Baliga, a market expert, says, “Passing of insurance Bill will be a much bigger trigger for the stock.

"While its balance sheet is a bit stressed, economic revival and improving market sentiment mean that Reliance Capital's assets and investments will get a good value.”

The potential value unlocking can be gauged from recent events.

In November, Japan's largest private life insurer, Nippon, raised its stake in RCap’s asset management business to 49 per cent from 26 per cent, valuing it at Rs 7,300 crore (10-14 per cent higher than analysts' estimates).

RCap is looking to sell a minority stake in its general insurance business and enable Nippon to raise its existing 26 per cent stake in the life insurance business to 49 per cent, after passage of the insurance Bill.

These two businesses are worth around Rs 10,000 crore (Rs 100 billion).

“We expect stake sale in insurance, AMC and monetisation of investments to not only boost RoE (return on equity), but also help de-leverage the balance sheet and lead to value unlocking in the stock,” Edelweiss Securities analysts write in a recent note, according to which, the stock’s fair value is Rs 625, after adjusting for the holding company discount.

Fundamentally, improving the performance of the life insurance business, turnaround of general insurance business, which reported first full-year profit (Rs 64 crore or Rs 640 million) in FY14 and a pickup in economic growth are key positives for RCap.

For its lending business, analysts expect loans to grow at a healthy clip of 15 per cent in FY15.