Reliance Capital- Growth at cheap Valuations?


(Gagan) #1

Introduction

Reliance Capital has the following businesses:

  1. Reliance Nippon Assset Management - listed. Company holds 42% - Business doing fairly well, valuation @42% of 15000(Current Market cap)=6300 cr.

  2. Reliance Life Insurance - held with Nippon. Will be listed/demerged in the future-Nippon Life acquired another 23% stake at 2265 cr to 49%. Total value is =2265/0.23= 9850. The stake of Reliance Capital is 9850*51%= 5022 Cr.

  3. Reliance Money - rebranded from Reliance Commercial Finance. Has more tham 16000 cr loan book, Valuation: 15x 280 PAT FY18= 4200

  4. Reliance Home Finance - listed. Company holds 47% - Doing very well, valuation: 47% of 2958(Current Market Cap) = 1390 cr.

  5. Reliance General Insurance - held with Nippon. Will be listed/demerged in the future - Doing very well, 15x 165 cr PAT FY18 = 2475 cr.

  6. Reliance Securities - brokerage business, valuation: 12x 49cr (FY18 PAT) = 588cr.

Reliance Capital

Valuation:

Concerns/risks and causes for Huge undervaluation:

  • RCOM default related issue caused week sentiments: although the agreement was done with Jio, but still some delays due to court stay on proceedings. [EDIT] Supreme Court allowed the sale in a relief to RCOM.

  • Reliance Naval is in huge losses and excessive debt: another ADAG group co may go bank-corrupt and can cause further week sentiments on all group co’s, altough Managment stated clearly Reliance capital has no exposure to it.

  • Promoters pledge increased to 70.28% of holdings in Mar 2018 qtr, this may be due to stock price plunge and additional pledge might have been required in order to maintain the loan security.

  • Bad Managment: Anil Ambani is known for poor execution and poor debt management taking huge loans without proper plan or effort to repay them, Maybe his effect will diminish after RCOM & R-Naval debacles, also it is widely perceived that Govt pressure & NCLT has caused enough fear among such corporate to behave better.although one should not invest based on the hope of management behavior change, rather one needs to observe the actions of management.

Updates/Actions from Managment on the various concerns: snaps are form the concall apr-2018

  1. IPO of General Insurance: Managment want’s to time market and accordingly launch IPO :slight_smile: let’s see if they can.

  1. Regarding Non-Core Assest Monetization: which are said to be 14000cr, managment sticking to eariler statement and saying all 14000cr will be monetized, lets see.



  2. Reliance Naval no Exposure confirmation:

Rationale for Investment

  • Managment Change: Anmol Ambani is leading now, he officially inducted into Reliance cap, and a Father(Anil Ambani) is less like likely to mess up his kids future(Reliance Capital), probably Anmol is inducted in R Cap because this is the best business this family left with, and Anmol is coming with clean slate, rest as long as he is following advice from CEO’s of each business segment, businesses are expected to do well.

  • Devang Mody is heading Reliance Money (ex- Bajaj Finance): who was instrumental in building consumer finance business of Bajaj Finance.

  • In RNAM and R Life Insurance, Nippon is the equal partner, so it’s highly unlikely that Anil Ambani will be able to divert funds from these subsidiaries.

  • IPO of Reliance Life Insurance & General Insurance could give decent value boost.

  • Non-Core Asset Monetization: they already divested(Sula vineyard), in advance talks for other asset sales, will need to keep eye on this.

  • Businesses are coming with good numbers: This is the single most important factor of the investment thesis, most businesses are appointed with good Jockeys, and number are coming good, growth and profitability are reasonably decent.

Concluding Thought: legacy bad Managment track record is possibly the biggest cause of undervaluation.

What are the factors which can change market perception of management…?

  • Continous profitable growth across all vertical, which is as of now happening.

  • Taking care of minority shareholders by giving reasonable dividends, Managment already declared an 11rs dividend, which is quite a good yield of approx 2.5%.

  • Sticking with the guidance for non-core divestment, which is already started.

if management keeps delivering good results in the coming years(3-5 years), the market will have to re-access valuations, as in long run markets are weighing machine & all about Future.

In such contrarian investments, one should be against the herd and Correct.
in this case against the herd is for sure :slight_smile:, Correct…? only time will tell.

Disclosure: I am new to investing, this is an attempt to learn valuation and to refine the thought process and find mistakes in the thesis, Invested, avg price: 425 and significant part of PF.

Note: there are other threads on the forum on reliance cap, one thread is closed and other is generic on Adag group, I wanted to have a separate focused thread so the discussion can be focused and can learn and seek guidance for seniors.

Reference: All the data is collected from publically available information, below are the references, I have copied/edited data from below reference, if this violates the forum norms, Admin may please delete the post.

http://content.icicidirect.com/mailimages/IDirect_RelianceCap_Q4FY18.pdf
https://www.alphainvesco.com/blog/reliance-capital-anil-ambani.
ADAG Group - Investment opportunity or not?.
http://www.reliancecapital.co.in/pdf/Conference-call-transcript-for-FY-2018.pdf


(sumit680) #2

The stock is very much undervalued when compared to the industry…however i have realised that markets are generally correct and to grab a price mismatch, we need to have a deep insight into the industry which may not be feasible for many of us…so its better to align with the market and go along with the excellent and strong businesses…

Other than this i feel comany has a low ROE of 8 pcnt while for its peers, ROE is ranging between 13-23 pcnt…i believe in case of financial institutes, ROE and ROA are important…
however few positives about the company are strong sales growth and earning growth in past years…

I also see a lower debt to equity of 2.5 for the company which is generally arnd 5-6 in the industry…is it a good positive sign or negative sign…im not sure and request other members to throw light…overall stock is very attractive in terms of the valuation…

regards


(Jiten Parmar) #3

Gagan. Very good post. I broadly agree with the valuations. Investments, I think they will be able to realize more. It’s good you have taken conservative figure. Keep it up.


(Siddharth) #4

Thanks for sharing your analysis. It seems that have you ignored the size-able debt which is sitting on Rel Capital balance sheet ( and not on the various subsidiaries b/s). If we adjust for the debt- the safety cushion in your SOTP valuations would decrease significantly.


(Gagan) #5

@jitenp, Thank you sir…! Your encouragement means a lot! yes, I think I put conservating values just to widen the margin of safety for the lack of my understanding.
regarding non-core investments, if they can realize more that will be a very good scenario.

@sumit680,
Yes, markets are generally right from the short-term perspective, as its kind of reflection of current market sentiment, which is generally based on some truth.
Normally markets tend to extrapolate current event to the future, in this case, maybe markets are extrapolating RCOM, R Naval events further to RCAP as well…
so the same fear/panic seems to be creating excess and stock is getting punished.
but no one knows the future…
and one must base the decision on rational indicators not based on greed and fear.

While Price (-40%) has fallen, earnings (22.74%) have increased over the last year, is market correct…? may or may not be.
to me, it doesn’t sound correct, and hence I bought stock, but obviously, there could be other factors which I am not aware of, and the same I would like to find out with the help of member’s this forum.

rest regarding financial parameters(ROA), I really don’t have a good understanding.
as I understood a simple matrix to value financial business is with book value:
we are getting a growing book, on the price which is almost half of the current book value
which didn’t sound bad to me.

rest below is management guidance on ROA for your reference.

@sagarwal04 thank you for bringing the debt part, actully as I understood debt it leverages or may be input for financial business, although RCAP has many businesses, out of which some may need leverage and some may not, so it was hard to judge for me, so I took comfort in the fact that RCAP leverage is less than of most Financial business(debt to equity is 2.56 where as most other are in 4-5 range.), as I understood leverage works both ways for a financial institution, in case of falling interest rate scenario highest leverage financial business will make highest profits, but in case of interest rate are rising lower leverage seems to be better, but I am not sure of my undestanding and would really appreciate if anyone can elaborate the debt part for a financial institution and correct my understanding.


(Siddharth) #6

Rel Cap at holding level is a core investment company which holds stake in various listed/unlisted business including financial services and media. Each of those financial services business have debts on their own balance sheets ( high or low- have to be judged at individual business level) but at Reliance Capital standalone level- there is no direct financing business ( as far as i know), so for any SOTP valuations we should account for this and this is a large enough (18k cr) to ignore in the scheme of things.


(Jiten Parmar) #7

What about the book of Rel Money. It’s about 15000 crore.


(learning) #8

another irritant is the high pledge (70% of the total promoter holding). So market today is right in assigning cheap valuation currently. So any investment in rel cap requires faith on management to walk the talk.


(lastgenesis) #9

Hi everyone - new on the group, some extremely interesting discussions happening here and great to be part of the same. Broadly my views on this is that a long term call on a company is essentially a call on the management. A poor management can flub be best market opportunities and strategic advantages and RelCap is a prime example of that.

If you rewind to 7-8 years ago, think of where companies like Bajaj Finance, Capital First (or even smaller guys like Aditya Birla Cap or Edelweiss) were. If one had to take a bet on who had the best chance to be India’s leading financial services conglomerate most would have picked Reliance Capital. In spite of possessing one of (if not the best) brands in the country, in spite of an early entrant in the business and Anil bhai’s reputation as a financial stud the company has totally missed out on the fastest growing business in India in the last decade. While I have not checked the comparative figures I believe that other than the MF it is not in a top 3 position in any of it’s verticals. In retrospect if Anil had not gone into any of his other businesses and only done this one the ADAG group market cap would probably be many multiples of what it is today!

There is still a lot of growth left in the industry, financing is still at the early leg of a multi year growth phase but given group difficulties and a tattered reputation, I would not bet on RelCap turning into the next Bajaj Finance. That said there may be a trading opportunity here, even taking the holding company discount aside it trades at a book value in the 0.6-0.7 range while it’s compatriots are in the 3-5 bracket, which is surely not warranted.

Solely from a trading perspective one may look at a 25-30% play here but i would not really think of it as a multi year fundamental story.


(learning) #10

I agree.

However, I always wonder in hindsight we feel that Bajaj finance, Edel etc has generated returns - but if we go back to 2010-11, I am sure there would have been apprehension on the business sustainability, management capability etc.

Of course it’s wrong to categories Rel cap in the league as BF or Edel, but we don’t yet know the future.

with recent changes in management in new businesses, it’s a “bet” that the past sins would slowly pass away and business would start to contribute meaningfully to bottom line generation. Recent trend indicate that happening somewhat.

It is still an evolving picture - now we have to see if it is a superhit or a flop. No one knows that. As for me, I would be happy even if its a moderate hit. Not expecting a multibagger from this.

Disc: Invested good amount of my portfolio.


(lastgenesis) #11

@learning - At anywhere close to current levels I think there is a high margin of safety. If you are already invested probably the worst phase is done.

On this point you made “but if we go back to 2010-11, I am sure there would have been apprehension on the business sustainability, management capability etc.”

That is precisely what I was trying to say that in that seemingly uncertain (yet in hindsight very promising) scenario, these chaps flunked very badly. Now it is much more difficult for them, with competitors building large networks and brand equity in the last decade. Truly this is one of the great lost opportunities in Indian business, if RelCap had shown alacrity on this, the industry was theirs for the taking. I would be very glad if he picks up his game and makes it from here on. Wishing you the best on this.


(learning) #12

I guess the growth seen by such players is very very good as compared to Relcap - but let’s see, India is supposed to grow and even if management delivers a better than average (Not great per se) and they also remove the unnecessary investment - it can be a value play, that is what i am hoping for. Growth would be something which would be incremental and may help in a faster re rating.


(jayantmum) #13

Hi,

A low price to book attracted me to this stock but the contingent liabilities of almost 5600 cr appears to be one of the reasons for this.

What is even more scary is that these have almost doubled as compared to last year. The qualification from Auditor obviously appears to state that they are relying on Management for complete disclosure.

image

I have tried to dig into the annual report but could not find much details apart from the fact that these are in the nature of bank guarantees on behalf of third parties. I could not find any other details in con-call transcripts as well.

Anyone who can provide more clarity on this.


(learning) #14

There investor dept is non responsive - still woulp pose this question.

Based on non disclosure - it might be related to either their subsidiary business , if that is the case then i am ok…however if it is for any of there sister concerns than it is a red flag. But mgmt has categorically expressed total libality towards other adag stocks to be 1500 cr…so looks unlikely that management would lie about this.


(jayantmum) #15

Thanks. Will keep digging to see if I can find more on this.

Please bear in mind that ‘technically’ contingent liabilities are not same as liabilities. So, Management may not be wrong when they say that liabilities are limited to 1500 cr.


(learning) #16

well - it seems price action in the stock suggests that market is not happy with Rcom being dragged to NCLT and JIO stake sale may be delayed.

Let’s see how long this overhang will persist. Its more of a sentimental thing rather than having any major tangible impact on Reliance capital ( as max exposure should be 1500 cr.) - which was already factored in the earlier prices.


(learning) #17

Disc : This is not a buy or sell recommendation. I am invested but if facts change I will change my views.