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INDIA

NBFC

Buy

Target Price: Rs585 CMP: Rs436 Upside: 29%

*as on 06 December 2012

Bhavesh Kanani bhavesh.kanani@centrum.co.in +91 22 4215 9636

Sum of the parts valuation

Reliance Capital

Reliance Capital

Initiating Coverage

06 December 2012

Phoenix rising again

Difficult business environment for equity linked businesses; sweeping regulatory changes in insurance (life & non-life) and a generally weak macro have led to significant erosion in return ratios of RCAP. However, the tide is gradually turning as individual business segments overcome sector specific challenges and macro is on the mend leading to improved outlook for capital market linked businesses. Current market price disregards long term value seen by strategic investors and under-appreciates a potent banking platform in making. We initiate coverage with a Strong Buy recommendation with an upside of ~30%.

Life insurance business: restructuring underway: RLIFE has undertaken restructuring of its business model after dramatic regulatory changes in 2010 with strong focus on profitability vs growth earlier. Shifted product mix, shedding of inactive agents, incremental focus on Tier I locations and potential bancassurance tie-up should drive productivity gains and hence improvement in profitability. Capital market business: better times ahead: A dominant market share (12%), gradually improving sentiments towards equity and better participation from retail investors brightens the medium term prospects of the asset management business. In addition, the 25 bps hike in expense ratio and leeway to recover service tax on expenses should allow asset management companies to increase commissions and in turn improve AUM inflows – especially so for large funds such as RCAM. Gen. insurance business on brink of profitability:

Dismantling of commercial third-party motor pool and anticipated firmness in insurance tariffs are expected to turn the fortunes of general insurance businesses. Effectively, the combined ratio (current industry average at ~120%) is expected to improve going forward. We expect RGEN to turn profitable in FY14 led by 1) absence of third party motor pool contribution in FY14 2) diversification of product mix and 3) gradual hike in tariff rates as PSU insurers aim profitability. Lending business gaining traction: Preference towards secured credit and niche focus on self-employed borrowers has endowed RCF with a healthy NIM and a strong hold on credit quality. We expect NIMs to improve going forward led by lower wholesale cost of funds (~50% of borrowings), which along with contained credit costs should drive expansion in return ratios even as loan book growth remains moderate (~15% YoY). Initiate coverage with Buy: Improving macro context and easing in business specific headwinds should drive expansion in return ratios for RCAP. In addition, unwinding of non-core investment to reduce debt should further improve profitability profile. At CMP, the stock is trading at a steep discount to its fair value of Rs585. We initiate coverage with a Buy rating.

fair value of Rs585. We initiate coverage with a Buy rating. Key Data Bloomberg Code RCAPT

Key Data

Bloomberg Code

RCAPT IN

Reuters Code

RLCP.BO

Current Shares O/S (mn)

245.6

Diluted Shares O/S(mn)

245.6

Mkt Cap (Rsbn/USDbn)

111.3/2.1

52 Wk H / L (Rs)

476/223

Daily Vol. (3M NSE Avg.)

3,559,125

Face Value (Rs)

10

USD = Rs54.1

Stock to Sector

Outperform

Sector to Market

Outperform

Shareholding Pattern

Others 19% DII 6% FII 21%
Others
19%
DII
6%
FII
21%

Promoter

54%

As on 30 September 2012

One Year Indexed Stock Performance 160 150 140 130 120 110 100 90 80 70
One Year Indexed Stock Performance
160
150
140
130
120
110
100
90
80
70
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
RELIANCE CAPITAL
NSE S&P CNX NIFTY INDEX

Price Performance (%)

 

1M

6M

1Yr

RCAPT

14.9

45.7

49.3

NIFTY

3.6

18.7

17.7

Source: Bloomberg, Centrum Research *as on 06 December2012

Company/Business

Method

Value (Rs mn)

Multiple

Stake (%)

Share of RCAP (Rs mn)

Per share

Contribution (%)

Life Insurance

Appraisal value

97,599

74

72,223

292

50

Asset Management

% of AUM

45,605

5.3%

65

29,735

120

21

Commercial Finance

PB

20,093

1.1 x

100

22,102

89

15

General Insurance

PB

5,932

1.0 x

100

5,932

24

4

Investments*

PB

12,000

1.0 x

100

12,000

49

8

Broking & Distribution

PE

2,817

7.0 x

100

2,817

11

2

 

Total

585

Source: Company, Centrum Research Estimates; * Quoted investments only

Please refer to important disclosures/disclaimers inside

Centrum Equity Research is available on Bloomberg, Thomson Reuters and FactSet

Shareholding pattern (%)

 

Sep-12

Jun-12

Mar-12

Dec-11

Promoter

54.1

54.1

54.1

54.1

FII

21.0

20.0

20.9

19.9

DII

5.7

5.7

5.4

5.0

Others

19.2

20.1

19.6

20.9

Total

100.0

100.0

100.0

100.0

Source: BSE

Organization structure

100.0 100.0 Source: BSE Organization structure Company Background Reliance Capital Ltd is one of the

Company Background

Reliance Capital Ltd is one of the largest financial services company in India in terms of net worth and offers multitude of services ranging from consumer finance to mutual funds, insurance (life & general) to asset reconstruction, stock broking to depository services. The company operates in all these sectors through the medium of subsidiaries namely

Reliance Mutual Fund, Reliance Life Insurance, Reliance General Insurance, and Reliance Money. Recently the company made its foray into the upcoming consumer finance field.

Core Businesses

Asset Broking & Life Commercial General Management distribution Insurance Finance Insurance Retail &
Asset
Broking &
Life
Commercial
General
Management
distribution
Insurance
Finance
Insurance
Retail &
Mutual Fund
Institutional
Exchanges
Broking
Distribution of
Offshore Funds
Third Party
Products
Finance and
Private
Investments
Equity
Wealth
Pension Funds
Other Businesses
Management
Managed
Investment
Accounts
Banking
Asset
Venture
Reconstruction
Capital

Key management personnel

Name

Designation

Profile

Sam Ghosh

CEO, RCAP

Mr. Ghosh joined the company in April 2008. Prior to that he was the regional CEO of Middle East and India Sub Continent region of Allianz after playing key role in various capacities and geographies for Allianz’s global operations. By qualification, he is a Chartered Accountant from England.

Amit Bapna

CFO, RCAP

Mr. Bapna. a chartererd accountant by qualification, has been with the company since 2004 and with the Group since 1999. His earlier experience includes stint as CFO of Reliance Capital Asset Management Ltd and Reliance Consumer Finance. He has over eleven years of experience in varied business environments—manufacturing and financial services.

Amitabh Mohanty

Head, Debt Strategies

After spending more than 7 years with Reliance Capital Asset Management Ltd. as Head of Fixed Income, he is now responsible for driving various debt related initiatives of Reliance Capital Limited and its subsidiaries. Prior to joining the group, he was Vice President (fixed income) at Alliance Capital Asset Management Ltd. By qualification, he is a management graduate from IIMA.

K. V. Srinivasan

CEO, Reliance Commercial Finance

He has been leading the commercial finance business since December 2007. Before joining Reliance Capital, he was the Financial Controller and Company Secretary of Citicorp Finance.

Sundeep Sikka

CEO, Reliance Capital Asset Management

He has been with RCAM since October 2003 and in that time he has been instrumental in expanding RCAM’s footprints in both domestic and international territories. Overall, he has more than fifteen years of leadership experience with NBFCs and Banks

Rakesh Jain

CEO, Reliance General Insurance

Prior to joining RCAP, he held the position of Director, Corporate Centre & CFO in ICICI Lombard. He has total work experience of over 17 years in leadership positions in corporate management functions.

Malay Ghosh

ED & President, Reliance Life Insurance Company

With over 27 years experience in the life insurance industry, Malay brings to the table, distribution acumen as well as rich exposure and knowledge of Life Insurance operations. He joined Reliance Capital in April 2008 as Deputy CEO of Reliance Life Insurance.

Vikrant Gugnani

CEO, International Businesses

He leads international business strategy across all lines of Reliance Capital businesses. A Chartered Accountant by qualification, he has over 19 years of extensive experience in the financial industry and has worked in various countries with global firms like Citibank and S. B. Billimoria & Co

Madhusudan Kela

CIO, RCAP

He was heading the Equity Investments at Reliance MF for nearly 10 years. In his 20 years of experience, he has served at UBS, Peregrine Securities & Motilal Oswal Securities.

Source: Company, Centrum Research

2

Reliance Reliance Capital Capital

Life insurance business: shifting gears Sweeping regulatory changes by IRDA in 2010 had a dramatic

Life insurance business: shifting gears

Sweeping regulatory changes by IRDA in 2010 had a dramatic effect on life insurance business growth momentum with APE de-growing materially for private players vs the heady growth prior to the reforms. On a positive note, the regulatory changes have forced industry players to shift focus from relentless growth in new business premiums to customer centricity and profitability. While the transition phase has been painful, it has helped remove inefficiencies associated with growth oriented business models: 1) short term products with limited profiling of customer needs and hence weak profitability 2) incentive structure of front-line employees skewed towards new business premiums and 3) weak persistency rates. However, a fair part of the transition is behind us, in our view, as reflected by a decline in opex and commission ratios and rebalancing of product mix in favor of traditional products.

Exhibit 1: Trend in APE (individual) growth

Exhibit 2: Trend in market share: LIC vs private players

40%

30%

20%

10%

0%

-10%

-20%

-30%

FY2009 FY2010 FY2011 FY2012 Oct-12 Private LIC Industry
FY2009
FY2010
FY2011
FY2012
Oct-12
Private
LIC
Industry

80%

70%

60%

50%

40%

30%

20%

10%

0%

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Private Insurers LIC
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Private Insurers
LIC

Source: Company, Centrum Research

Source: Company, Centrum Research

Exhibit 3: Trend in market share: private players 14% 12% 10% 8% 6% 4% 2%
Exhibit 3: Trend in market share: private players
14%
12%
10%
8%
6%
4%
2%
0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Bajaj Allianz
Kotak Life
Birla Sun Life
Max Life
HDFC Life
ICICI Pru
Reliance Life
SBI Life

Source: IRDA, Centrum Research

Exhibit 4: Trend in commission ratio Exhibit 5: Commission ratio: peer comparison 9% 20% 8%
Exhibit 4: Trend in commission ratio
Exhibit 5: Commission ratio: peer comparison
9%
20%
8%
15%
7%
6%
10%
5%
4%
5%
3%
0%
2%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Q1FY13
1%
0%
Bajaj
Allianz
ICICI
Pru
Reliance Life
Birla Sun Life
Kotak Life
SBI Life
HDFC Life
Max Life
Kotak
Bajaj
SBI Life
HDFC
Birla Sun
Max Life
Life
Allianz
Life
Life
ICICI Pru Reliance
Life
Source: Company, Centrum Research
Source: Company, Centrum Research
3
Reliance Reliance Capital Capital
Exhibit 6: Trend in branches Exhibit 7: Branch network: peer comparison

Exhibit 6: Trend in branches

Exhibit 7: Branch network: peer comparison

1,400 2,500 1,200 2,000 1,000 1,500 800 1,000 600 500 400 0 200 FY05 FY06
1,400
2,500
1,200
2,000
1,000
1,500
800
1,000
600
500
400
0
200
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Bajaj
Allianz
HDFC Life
0
ICICI
Pru
Birla Sun Life
Kotak Life
SBI Life
Max Life
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Reliance Life Br
Source: Company, Centrum Research
Source: Company, Centrum Research
Exhibit 8: Trend in expense ratio
Exhibit 9: Expense ratio: peer comparison
45%
100%
40%
80%
35%
30%
60%
25%
40%
20%
15%
20%
10%
0%
5%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Q1FY1
0%
Bajaj Allianz
Birla Sun Life
HDFC Life
SBI Life
HDFC
ICICI Pru
Bajaj
Max Life Birla Sun
Life
Kotak
Reliance
ICICI Pru
Kotak Life
Max Life
Life
Allianz
Life
Life
Reliance Life
SBI Life

Source: Company, Centrum Research

Source: Company, Centrum Research

Exhibit 10: 1 year persistency: peer comparison Exhibit 11: 5 year persistency: peer comparison 80%
Exhibit 10: 1 year persistency: peer comparison
Exhibit 11: 5 year persistency: peer comparison
80%
90%
70%
80%
70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
0%
HDFC
Kotak
SBI Life
Max Life
Bajaj
Birla Sun ICICI Pru Reliance
Bajaj
Reliance
Kotak
ICICI Pru
HDFC
SBI Life
Allianz
Life
Max Life Birla Sun
Life
Life
Life
Allianz
Life
Life
Life
Life
Source: Company, Centrum Research
Source: Company, Centrum Research

Life insurance industry at inflection point: With a large part of regulatory overhang behind us, the life insurance industry has stabilized its operations and has adjusted its business model to the new operating environment. Given that, we believe the industry is at an infection point, structural positives (rising incomes, higher share of working population and increasingly sophisticated customer needs) should drive the next leg of growth. Increase in foreign direct investment (FDI) limit will only act as a catalyst to this second phase of the decisively promising journey ahead. Life insurance business: restructuring underway: In line with the industry, RLIFE has undertaken restructuring of its business model after dramatic regulatory changes in 2010 with strong focus on profitability vs growth earlier. Product mix has shifted away from ULIPs to traditional products. Though this has lowered profitability in near term it should augur well in medium to long term in the form of better persistency. Shedding of inactive agents, consolidation of branch network and incremental focus on Tier I and 2 locations (vs current focus on Tier 3 centres) to tap the big-ticket market should lead to productivity gains. Moreover, RLIFE is exploring bancassurance possibilities aggressively given the lucrative cost-benefit equation offered as well as the proposed changes to regulations governing bancassurance channel.

4

Reliance Reliance Capital Capital

Product mix transition largely over: Given the regulatory changes, the life insurance industry has changed

Product mix transition largely over: Given the regulatory changes, the life insurance industry

has changed its product mix gradually in favor of traditional products. In line, RLIFE too has shifted away from ULIPs (forming 90% of premium at one point to 20% now). Focus on productivity: In addition to the change in product mix, RLIFE has adopted a multi- pronged approach to improve productivity and efficiency. For instance, the agency force continues to be trimmed as inactive agents are dropped. Also, RLIFE has not added new branches since FY2010 with a view to optimally utilize the existing infrastructure. A review of RLIFE’s operating expense ratio indicates that there still exists significant scope for operating leverage.

Exhibit 12: Reliance Life Insurance: agency force

250,000 200,000 150,000 100,000 50,000 0 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12
250,000
200,000
150,000
100,000
50,000
0
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13

Source: Company, Centrum Research

Exhibit 13: Reliance Life Insurance: branches

1,400 1,200 1,000 800 600 400 200 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11
1,400
1,200
1,000
800
600
400
200
0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12

Source: Company, Centrum Research

Incremental expansion in Tier I locations: So far, RLIFE’s 1230 strong branch network is in Tier

2 and 3 centres focusing on the middle class. With fairly strong presence in Tier 2 & 3 centres, RLIFE now intends to expand in Tier 1 centres (Top 15 cities) given the strong demand for term insurance and big-ticket nature of opportunity. Expansion in Tier 1 centres should augur well for overall productivity of the operations. Bancassurance channel - a distinct possibility: One of the key differences between RLIFE and close rivals is RLIFE’s strong dependency on agency channel due to the absence of bancassurance. Bancassurance has its obvious benefits such as: ready access to bank’s customer base, access to customer’s financial information, cost efficiency as there is no investment in physical infrastructure, repeat business due to customer loyalty. The absence of bancassurance channel has translated into lower persistency rates and higher commission and operating expense ratios for RLIFE. While most leading banks have promoted their own insurance companies (and hence no scope of tie-up), the remaining banks demand uneconomical terms (upfront payment + normal commission) rendering bancassurance channel unviable. However, IRDA has proposed new regulations governing bancassurance which is likely to open up bancassurance channel options for RLIFE. While such a development could be a little time away, addition of bancassurance to channel portfolio would be immensely beneficial for RLIFE from a profitability and productivity perspective.

5

Reliance Reliance Capital Capital

Asset management business: dominant position, improving outlook With over Rs1.5tn of assets under management (MF

Asset management business: dominant position, improving outlook

With over Rs1.5tn of assets under management (MF + others), RCAM holds a dominant position in domestic asset management business with 12% market share in mutual fund industry. RCAM has been focusing on promoting systematic investment plans (SIPs) and caters to a wide customer base of over 6.5 million. The dominant position and gradually improving outlook for equity asset class augur well for the asset management industry in general and RCAM in specific. The bright outlook for India’s asset management market is well brought out by the uptick in valuations of M&A deals in the industry.

Exhibit 14: M&A activity in asset management industry

Year

Acquirer

Target

Valuation (% of AUM)

2002

Franklin Templeton MF

Pioneer ITI

6.00

2003

Standard Life

HDFC AMC

5.20

2004

Societe General

SBI MF

7.70

2005

BNP Paribas

Sundaram AMC

7.10

2005

SBI, PNB, BOB, LIC

UTI Mutual

5.00

2007

UBS

Standard Chartered MF

5.00

2007

Robeco Group NV

Canbank MF

10.50

2007

Eton Park

Reliance AMC

~10

2008

IDFC SSKI

Standard Chartered MF

6.40

2009

Nomura

LIC Mutual Fund

2.50

2009

T Rowe Price

UTI AMC

3.60

2010

Natixis

IDFC MF

5.50

2011

Benchmark AMC

Goldman Sachs AMC

4.43

2012

Invesco

Religare AMC

6.40

Source: Media reports, Centrum Research

Positive equity outlook + dominant position: Domestically, equity asset class has performed well on CYTD basis with Sensex up ~27% as sentiment turned positive post announcement of reforms and drove in healthy FII inflows. Incremental reform announcements and anticipated revival in economic activity should keep the equity asset class in good stead. In turn, this should lead to improvement in participation from retail investors – who have avoided equity asset class in recent years. RCAM with its dominant market share and wide distribution network would be a key beneficiary and hence we expect the declining trend in MF AUM to reverse in FY2013.

Exhibit 15: Trend in MF AUM

Exhibit 16: Trend in MF AUM mix

(Rs bn)

1,200

1,000

800

600

400

200

0

FY2010 FY2011 FY2012 FY2013E FY2014E Total MF AUM % YoY
FY2010
FY2011
FY2012
FY2013E
FY2014E
Total MF AUM
% YoY

40%

30%

20%

10%

0%

-10%

-20%

-30%

100% 80% 60% 40% 20% 0% FY2008 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E Equity Debt
100%
80%
60%
40%
20%
0%
FY2008
FY2009
FY2010
FY2011
FY2012
FY2013E FY2014E
Equity
Debt

Source: Company, Centrum Research

6

Source: Company, Centrum Research

Reliance Reliance Capital Capital

Exhibit 17: Trend in market share

Exhibit 17: Trend in market share 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 FY2008

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

FY2008 FY2009 FY2010 FY2011 FY2012 Industry AUM (Rsbn) Market Share - RCAM
FY2008
FY2009
FY2010
FY2011
FY2012
Industry AUM (Rsbn)
Market Share - RCAM

18%

17%

16%

15%

14%

13%

12%

11%

10%

9%

8%

Source: Company, Centrum Research

 

 

Expense Ratio

AUM Slab

Earlier

Revised

<1 bn

2.50

3.03

1

bn - 3 bn

2.25

2.76

3

2.00

2.48

bn - 7 bn > 7 bn

1.75

2.21

 

Hike in expense ratio to improve profitability: Since the removal of entry load on mutual fund units, inflows into AUM pool have dropped sharply with aggressive distribution of mutual funds loosing steam. However, a hike of 25bps in expense ratio is being considered by the regulator with a view to revive the inflows into mutual funds. Currently, the expense ratio is capped due to the slab structure (refer to exhibit below). In addition, there is a proposal to recover service tax on the expense ratio from unit buyers, which currently is borne by mutual fund companies. A hike in expense ratio would allow asset management companies to offer higher commission to distributors which in turn would attract inflows. Importantly, since the expense ratio is the function of the total corpus, the benefit of the increase in expense ratio will be more for bigger fund houses than smaller ones. RCAM being a dominant player in asset management industry stands to gain substantially if the proposal gets accepted and implemented.

Nippon allocation could be game changer: RCAP had sold a 26% stake in Reliance Mutual Fund to Nippon Life Insurance for Rs 14.5bn during 2012 – in addition to 26% stake sale in life insurance business. Nippon Life Insurance, Japan's biggest life insurer, manages an AUM of over $600 billion in assets (highest in the world for any life insurer). RCAM should benefit from Nippon Life’s allocation to India’s equity opportunities. Refer to the exhibit below for a break-up of Nippon Life’s AUM. As evident, the foreign securities portfolio stands at ~$140bn of which even 1% equity allocation to India would mean ~Rs80bn (10% of RCAM’s MF AUM).

Exhibit 18: Nippon life insurance’s AUM breakup

Loans, 106.1 Domestic stocks, 73.9 Othe asset classes, 52.3 Corporate bonds, 39.2 Local govt bonds,
Loans, 106.1
Domestic stocks,
73.9
Othe asset classes,
52.3
Corporate bonds,
39.2
Local govt bonds,
19.3
Other securities,
National govt
4.5

bonds, 178.5

Foreign securities,

141.2

Source: Company, Centrum Research

7

Reliance Reliance Capital Capital

General insurance business: profitability in sight The general insurance industry, just like life insurance, has

General insurance business: profitability in sight

The general insurance industry, just like life insurance, has been going through tough times. At the heart of the widening losses of general insurance industry are two key factors – 1) Motor third party pool mechanism and 2) pricing bloodbath since de-tariffing. Given that motor third party pool has been dismantled and pricing sanity is gradually returning, we see the fortunes of general insurance industry turning positive over the medium term.

Motor third party pool dismantled: IRDA dismantled the third party motor insurance pool (initiated in 2007) given persistent losses for private insurers due to alleged mis-management of the pool handled by the General Insurance Corporation. Under the current set up, insurers are free to underwrite risks independently. This implies that pricing will gradually become risk- based and would be a function of claims, age, and frequency of accidents etc.

Pricing sanity returning gradually: The de-tariffing of general insurance premiums in 2007 had led to a bloodbath with cut-throat competition pushing down premiums sharply (as much as +50% on certain products). Lately, there has been an upward bias given the finance ministry’s instructions to PSU general insurance players to improve profitability and efficiency. Currently, the combined ratio for PSU general insurers is hovering around 120% with combined losses of 4 PSU general insurers at around Rs65bn for FY2012 and cumulative loss of Rs150bn since de- tariffication. Given the dominant share of PSU players in general insurance, upward revision in pricing will allow private players to price their products profitably.

Reliance general insurance: Turnaround ahead

Given the improvement in operating environment (dismantling of motor third party pool) and anticipated return of sanity in pricing of general insurance product, we expect RGEN to turn around in FY2014. The turn in fortunes would be driven by 1) lower contribution to motor pool losses (only ~Rs700mn remaining to be booked in FY14) 2) anticipated improvement in pricing to improve margins and 3) sustained healthy growth in gross written premiums. Exhibit 19: Trend in revenue & bottomline

Particulars (Rs mn)

FY2010

FY2011

FY2012

FY2013E

FY2014E

FY2015E

Gross written premium Premium Earned (Net) Profit / (Loss) Before Tax Net Profit /(Loss) After Tax

19,797

16,554

17,125

17,982

19,240

21,165

13,992

12,938

11,631

12,048

12,891

14,180

(905)

(3,098)

(3,415)

(522)

204

1,025

(504)

(3,116)

(3,432)

(552)

173

871

Source: Company, Centrum Research Estimates

Declining contribution to motor pool losses: Since the dismantling of the Motor third party loss pool, the contribution of RGEN to the pool has been on the decline. For FY2012, RGEN contributed Rs2.2bn to the motor third party loss pool while in FY2013 the share of Rs1.8bn has been up-fronted in Q2FY13 itself. This leaves incremental loss share of just Rs600-700mn to be booked in FY2014. The dramatic reduction in the contribution should boost RGEN’s profitability.

Exhibit 20: Trend in RGEN’s share in motor pool losses (Rs mn)

0.0

(500.0)

(1000.0)

(1500.0)

(2000.0)

(2500.0)

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E (310) (370) (360) (650) (1,840) (1,840) (2,160)
FY2008
FY2009
FY2010
FY2011
FY2012
FY2013E
FY2014E
(310)
(370)
(360)
(650)
(1,840)
(1,840)
(2,160)
Focus on diversification: While the premium mix remains heavily skewed towards motor third party, RGEN

Focus on diversification: While the premium mix remains heavily skewed towards motor third party, RGEN has been consciously trying to diversify its premium flow mix. As evident in the table below, the share of Motor segment for RGEN stands at 55% compared with 48% for private players and 41% for the industry. As against this, RGEN lags the industry and other private players in the health insurance segment. With a view to balance its premium mix, RGEN is focusing on fire and engineering product segments given its big ticket and relatively less risky business profile.

Exhibit 21: RGEN - Premium %YoY (June’2012) Exhibit 22: Industry - Premium %YoY (June’2012) (%)
Exhibit 21: RGEN - Premium %YoY (June’2012)
Exhibit 22: Industry - Premium %YoY (June’2012)
(%)
(%)
200.0
50.0
40.0
150.0
30.0
100.0
20.0
10.0
50.0
0.0
0.0
(10.0)
(50.0)
(20.0)
Marine
Cargo
Marine
Motor OD
Per
Accident
Motor
Health
Grand Total
Engineering
All Others
Marine Hull
Motor TP
Fire
Liability
Aviation
Aviation
All Others
Marine Hull
Health
Marine
Marine
Cargo
Engineering
Grand Total
Liability
Personal
Accident
Motor OD
Motor
Fire
Motor TP

Source: Company, Centrum Research

Source: Company, Centrum Research

Exhibit 23: Premium mix (June’2012) - RGEN vs industry

Product Segment (%)

Reliance

Private

Public

Industry

Personal Accident

2

3

2

2

Marine Cargo

2

4

3

4

Marine

2

4

7

6

Higher than industry

Misc

3

3

10

7

Lower than industry

Liability

4

3

2

2

Engineering

6

3

4

4

Fire

13

14

14

14

Health

14

20

26

23

Motor TP

24

17

18

18

Motor OD

31

31

17

23

Source: Company, Centrum Research

Operational restructuring to aid profitability: In addition to the improving dynamics for the general insurance industry, RGEN has undertaken operational restructuring to improve productivity and efficiency. For instance, RGEN has minimized the use of written cover notes for motor insurance and shifted the activity to a centralized system with a view to contain frauds and ensure a tight leash on claims etc. As evident below, the claims in motor (own damage) were unusually high at 88% by the end of 1 year (vs 50% for third party) pointing to potential fraud or malpractices in operations. Increased productivity of operations and streamlining of processes should aid improvement in profitability. Exhibit 24: Product wise trend in claims (cumulative basis)

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

0 day 30 d 31 d to 6 m 6 m to 1 yr Fire
0 day
30 d
31 d to 6 m
6 m to 1 yr
Fire
Marine
Motor OD
Motor TP
Engineering
Health
Miscellaneous

Source: Company, Centrum Research

9

Reliance Reliance Capital Capital

Lending business to gain traction The commercial finance business has been focusing on growing only

Lending business to gain traction

The commercial finance business has been focusing on growing only secured assets – loan against property (LAP), mortgages, commercial vehicles (CVs) and business loans (SME). As evident in the exhibit below, the mortgages (LAP+Mortgages) constitute ~50% of the loan book. RCAP has adopted a calibrated approach in the lending business since FY2012 (refer to chart below) with loan growth across segments moderating. During H1FY13, while the loan book remained largely flat, mortgages (LAP+home loans) and auto segments grew at a healthy pace at the cost of CV and SME segments. RCAP intends to grow the commercial lending book at ~15% YoY for FY13 and FY14.

Exhibit 25: Trend in RCF’s loan mix

Exhibit 26: Trend in segmental loan growth

100% 150% 80% 100% 60% 50% 40% 0% 20% -50% 0% -100% Home Loan LAP
100%
150%
80%
100%
60%
50%
40%
0%
20%
-50%
0%
-100%
Home Loan
LAP
CVs
Auto
Infra financing
SME
Others
Loan growth
Mortgages
CVs
Auto
SME
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13

Source: Company, Centrum Research

Source: Company, Centrum Research

Niche positioning = healthy pricing power: The commercial lending business is focused on self-employed customers, a segment better served by NBFCs rather than banks. Dissecting further, RCAP typically serves relatively low risk and high ticket customers in the self employed segment as reflected by the loan yields (~15% vs 18-20% for many NBFCs). The niche positioning has endowed RCAP with a healthy pricing power given the low interest rate sensitivity of self-employed customers.

Exhibit 27: Segmental yield comparison (%)

16

14

12

10

8

6

4

2

0

15 15 14 14 13 13 Home Loan LAP CVs Auto Infra- financing SME
15
15
14
14
13
13
Home
Loan
LAP
CVs
Auto
Infra-
financing
SME

Source Company, Centrum Research

Declining wholesale funding costs to boost NIMs: Due to the skewed borrowing profile towards wholesale-funded coupled with tight liquidity in recent quarters, NIMs for lending businesses have seen material contraction. The NIM has contracted from ~6% in Q1FY11 to 4% in Q1FY13. However, the benefit of easing in wholesale funding costs is beginning to flow in with Q2FY13 NIMs witnessing a 10bps uptick as cost of funds have eased gradually. We expect NIMs to improve further in FY13 and FY14 led by further easing in wholesale funding costs.

10

Reliance Reliance Capital Capital

Exhibit 28: Trend in Yields, cost of funds and NIM

Exhibit 28: Trend in Yields, cost of funds and NIM

15%

14%

13%

12%

11%

10%

9%

8%

Yield Cost of Funds NIM RHS Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13
Yield
Cost of Funds
NIM RHS
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13

6.00%

5.50%

5.00%

4.50%

4.00%

3.50%

Source Company, Centrum Research

Exhibit 29: Trend in wholesale funding costs

12.0

11.5

11.0

10.5

10.0

9.5

9.0

8.5

8.0

3m 6m 12m Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12
3m
6m
12m
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12

Source Company, Centrum Research

Strong hold on asset quality: RCAP’s niche positioning (relatively low risk self employed profile of customers) along with robust underwriting processes have ensured a strong asset quality matrix. As evident in the exhibit below, %GNPA stand at a healthy 1.5% (90 day basis) at the end of Q2FY13 while the provisioning coverage has been shored up to 70% in recent quarters. The healthy asset quality matrix (relatively better than many leading banks), despite limited access to supplementary data on borrowers available to banks, speaks volumes about the robust underwriting standards and processes put in place. Given the calibrated approach towards lending since FY2012 and clear focus on secured products, we expect asset quality to remain healthy.

11

Reliance Reliance Capital Capital

Exhibit 30: Trend in %GNPA & coverage ratio

Exhibit 30: Trend in %GNPA & coverage ratio

2.50%

2.00%

1.50%

1.00%

0.50%

0.00%

%GNPA Coverage ratio Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13
%GNPA
Coverage ratio
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Source Company, Centrum Research

Better macro should unleash growth potential: After robust loan book expansion during FY2011 and H1FY12, RCAP has dramatically lowered its loan book expansion with % YoY growth in lower single digits for the past three quarters. The shift in growth pattern is driven by the focus on maintaining robust asset quality matrix and the endeavor to build a profitable book. In line, we believe that gradually improving macro scenario and positive sentiments should pave the way for improvement in the growth momentum for lending business. The management has already guided for a higher growth rate (~15% YoY) for FY13 and FY14. Importantly, the unlocking of capital from investment portfolio and anticipated dividend flow from subsidiaries over medium term should ensure sufficient capital flow for expansion of the loan book.

Exhibit 31: Trend in loan book, % YoY

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0

Loan Book (Rsmn) Loan growth Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13
Loan Book (Rsmn)
Loan growth
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13

60%

50%

40%

30%

20%

10%

0%

Source Company, Centrum Research

12

Reliance Reliance Capital Capital

Investments cleanup, dividend to lower leverage Besides the core businesses, RCAP holds a mammoth investment

Investments cleanup, dividend to lower leverage

Besides the core businesses, RCAP holds a mammoth investment portfolio of ~Rs130bn on cost basis (including investment in subsidiaries). Dissecting further, ~50% of the investment portfolio is for subsidiaries and associates while the remaining portion represents other investments (quoted & unquoted). The quoted equity portfolio (after provisions & booking losses in Q2FY13) currently stands at ~Rs12bn, which is close to the market value of the portfolio. Given the huge portfolio, RCAP has appointed officials to focus on liquidating the investment pool over next 24 months with a view to unlock capital. The proceeds from the liquidation of investment portfolio as well as dividends flow from various subsidiaries should help RCAP lower its leverage materially.

Exhibit 32: Trend in Debt : Equity ratio for RCAP (standalone) 3.0 2.7 2.5 2.0
Exhibit 32: Trend in Debt : Equity ratio for RCAP (standalone)
3.0
2.7
2.5
2.0
2.0
1.7
1.7
1.5
1.5
1.0
0.4
0.5
0.3
0.3
0.1
0.1
0.0
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
FY2011
FY2012

Source Company, Centrum Research

Exhibit 33: Trend in investment portfolio

Exhibit 34: Trend in segmental loan growth

(Rs bn) 140 120 100 80 60 40 20 0 FY2005 FY2006 FY2007 FY2008 FY2009
(Rs bn)
140
120
100
80
60
40
20
0
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
FY2011
FY2012
Quoted Investments at cost
Unquoted Investments at cost
(Rs bn) 50 40 30 20 10 0 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011
(Rs bn)
50
40
30
20
10
0
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
FY2011
FY2012
Quoted Investments at cost
Quoted Investments at mkt. val.

Source: Company, Centrum Research

Source: Company, Centrum Research

All geared up for banking license

RCAP has declared its intention to apply for a banking license to RBI. While RBI has openly expressed its discomfort over giving banking licenses to the corporate sector, we believe that suitable amendments to the Banking Regulation Act should allay RBI’s concerns. Importantly, the new banking licensees are being considered with a view to improve penetration of financial services in areas not covered by banks currently. Given this objective, the potential new banking players would have to commit substantial capital in building the infrastructure with a willingness to navigate the long gestation period in the light of lower profitability potential in rural and semi-urban locations. In this context, involvement of corporate houses becomes inevitable as they have deep pockets and the management bandwidth required for successful foray into banking while meeting RBI’s objectives.

13

Reliance Reliance Capital Capital

Valuation discount unjustified Over last 12 months, Reliance Capital has sold 26% stake each in

Valuation discount unjustified

Over last 12 months, Reliance Capital has sold 26% stake each in Reliance Capital Asset Management and Reliance Life for Rs56bn and Rs117bn respectively. The deals imply a combined value of ~Rs175bn for the life insurance and asset management businesses – significantly above the current market cap of ~Rs100bn even if we were to ignore the value in other businesses: general insurance, consumer finance, broking & distribution and investments. The disconnect between the current market price of Reliance Capital and the implied valuation from these deals could be because: (i) investors believe that what Nippon has paid for these businesses is much higher than their fair valuation and (ii) other issues surrounding Reliance ADAG group. However, given the steep discount the risk reward appears favourable at these valuations.

Conservative valuation approach

Our valuation assumptions are significantly conservative compared with the valuation implied by stake sale transactions over the past one year. The below tables show that for life insurance and asset management businesses, our valuation estimates are ~40% lower than the deal implied valuations. Hence we have taken a balanced approach and assigned 50% weight to our estimates and 50% weight to deal implied valuations.

Exhibit 35: Conservative estimates

Business

Deal Based Value

Centrum Estimate

Variance (%)

Weighted

Valuation

Life Insurance

117,769

 

77,428

(34)

97,599

Asset Management

55,769

35,441

(36)

45,605

Total

173,538

112,869

(35)

143,204

Source Company, Centrum Research Estimates

 

Exhibit 36: Valuation - Reliance Life Insurance

 

Particulars (Rs mn)

FY2011

FY2012

FY2013E

FY2014E

FY2015E

Opening balance of VIF

18,819

25,242

30,829

37,811

45,848

APE

23,597

14,737

14,737

15,768

17,345

APE growth (%)

(36)

(38)

0

7

10

NBAP margin (%)

16.7

15.6

16.0

15.0

14.0

Value of New Business (Calc)

3,941

2,299

2,358

2,365

2,428

In-force unwinding

21,642

29,029

35,453

43,482

52,725

Estimated VIF

25,242

30,829

37,811

45,848

55,153

NAV

2,930

9,059

10,401

11,701

13,001

Embedded Value

28,172

39,887

48,212

57,549

68,154

Structural Value

18,408

18,870

19,343

19,879

20,432

Appraisal value

46,580

58,758

67,555

77,428

88,587

Source Company, Centrum Research Estimates

 

Exhibit 37: Reliance Life Insurance

Weighted Value (Rs mn)

Weight (%)

Value

Weighted Value

Deal based Appraisal Value Method Weighted Value Economic Interest (%) Shares Outstanding Contribution per share

50

117,769

58,885

50

77,428

38,714

 

97,599

74

247

292

Source Company, Centrum Research Estimates

 

Exhibit 38: Reliance Capital Asset Management

 

Weighted Value (Rs mn)

Weight (%)

Value

Weighted Value

Deal based % of AUM Method Weighted Value Economic Interest Shares Outstanding Contribution per share

50

55,769

27,885

50

35,441

17,721

 

45,605

65

247

120

Source Company, Centrum Research Estimates

14

Reliance Reliance Capital Capital

Exhibit 39: Commercial finance & Broking/Distribution business Commercial Finance (Rs mn) FY12 FY13E FY14E

Exhibit 39: Commercial finance & Broking/Distribution business

Commercial Finance (Rs mn)

FY12

FY13E

FY14E

FY15E

Assets (loan book)

125,383

144,190

165,819

190,692

% YoY

2

15

15

15

RoA (PBT) (%)

0.92

1.00

1.00

1.00

PAT

1,348

1,550

1,783

Networth

21,064

22,008

23,093

24,341

GNPA

2,200

2,700

3,000

3,000

Adjusted NW

18,864

19,308

20,093

21,341

Broking & Distribution (Rs mn)

FY12

FY13E

FY14E

FY15E

Broking & Distribution PBTl

553

581

610

640

PAT @ 34% tax

365

383

402

423

PBT growth (%)

5

5

5

Source Company, Centrum Research Estimates

~30% upside still

Despite very conservative valuation approach, the current market price implies a significant 30% upside to our fair value estimate of Rs585.

Exhibit 40: Sum of the parts valuation

Company/Business

Method

Value (Rs mn)

Multiple

Stake (%)

Share of RCAP (Rs mn)

Per share

Contribution (%)

Life Insurance Asset Management Commercial Finance General Insurance Investments* Broking & Distribution

Appraisal value % of AUM PB PB PB

97,599

74

72,223

292

50

45,605

5.3%

65

29,735

120

21

20,093

1.1 x

100

22,102

89

15

5,932

1.0 x

100

5,932

24

4

12,000

1.0 x

100

12,000

49

8

PE

2,817

7.0 x

100

2,817

11

2

 

Total

585

Source Company, Centrum Research Estimates; * Quoted investments only

Risks to our call

Weakness in capital markets: All the businesses of RCAP including (life insurance) are inherently linked to the state of capital markets (directly or indirectly). Hence weakness in capital markets can impact business performance and alter the earnings trajectory we have envisaged.

Change in regulatory regime: As seen in past, RCAP’s insurance and asset management businesses are exposed to regulatory changes. Any major regulatory changes by SEBI and IRDA can impact the asset management and insurance businesses meaningfully.

Intense competition: Reliance Capital faces intense competition in almost all the businesses– life insurance, asset management, general insurance and broking. Inability to cope with the competition by offering better products at competitive prices could impact growth. Undercutting by new entrants could also impact profitability and our assumptions.

15

Reliance Reliance Capital Capital

Financials (Consolidated)

Exhibit 41: Income Statement

Y/E March (Rsmn)

FY11

FY12

FY13E

FY14E

FY15E

Interest income Interest expense Net interest income Non interest income Total income Operating expenses Pre-provision op (PPOP) Investments written off Provision for NPA Provision for std debts Total provisions Profit Before Tax (PBT) Tax Net Profit (Pre minority) Minority & Associates Reported Net Profit

22,320

28,220

29,913

32,306

35,537

14,640

22,500

22,725

23,180

24,338

7,680

5,720

7,188

9,127

11,198

33,040

38,050

43,758

50,320

57,869

40,720

43,770

50,946

59,447

69,067

35,590

36,060

39,738

45,774

52,491

5,130

7,710

11,208

13,673

16,576

(110)

1,300

1,300

1,300

1,300

2,200

1,130

1,243

1,367

1,504

140

90

95

100

105

2,230

2,520

2,638

2,767

2,909

2,900

5,190

8,570

10,906

13,667

570

1,900

2,914

3,708

4,647

2,330

3,290

5,656

7,198

9,020

580

1,290

(70)

(70)

(70)

2,910

4,580

5,726

7,268

9,090

Source: Company, Centrum Research Estimates

 

Exhibit 42: Balance Sheet

 

Y/E March (Rsmn)

FY08

FY09

FY10

FY11

FY12

Share Capital Reserves and Surplus Total shareholders' funds Minority interest Total Borrowings Other current liabilities Other liabilities Total Liabilities Total fixed assets Total investments Total loans Deferred tax assets (Net) Other non current assets Other current assets Total Assets

2,460

2,460

2,460

2,460

2,460

75,440

115,220

118,083

121,717

126,262

77,900

117,680

120,543

124,177

128,722

1,630

1,310

1,310

1,310

1,310

203,740

195,900

199,763

213,342

224,799

37,170

38,120

41,170

45,287

49,815

430

420

441

463

486

320,870

353,430

363,227

384,579

405,133

2,140

2,810

3,091

3,400

3,740

123,010

147,590

152,018

156,578

161,276

157,420

168,670

183,850

202,235

224,481

700

450

450

450

450

13,160

11,410

11410

11410

11410

24,440

22,500

12,408

10,505

3,776

320,870

353,430

363,227

384,579

405,133

Source: Company, Centrum Research Estimates

16 16

Exhibit 43: Segmental details

Research Estimates 16 16 Exhibit 43: Segmental details Y/E March (Rsmn) FY08 FY09 FY10 FY11 FY12

Y/E March (Rsmn)

FY08

FY09

FY10

FY11

FY12

Revenue Finance & Investments Asset Management Commercial Finance Broking & Distribution General Insurance Others Total

17,077

18,752

11,813

10,886

17,090

4,728

3,907

6,460

6,619

5,640

3,946

12,052

13,252

13,741

19,450

0

563

2,585

3,109

4,661

23,440

23,114

23,862

21,809

21,920

0

2,386

6,211

3,178

3,490

49,191

60,776

64,184

59,342

72,251

Revenue mix (%) Finance & Investments Asset Management Commercial Finance Broking & Distribution General Insurance Others

35

31

18

18

24

10

6

10

11

8

8

20

21

23

27

0

1

4

5

6

48

38

37

37

30

0

4

10

5

5

PBT Finance & Investments

11,913

10,375

3,426

1,204

3,700

Asset Management Commercial Finance Broking & Distribution General Insurance Others Total

1,931

1,147

2,303

2,241

2,100

361

922

1,350

2,693

2,540

0

140

149

332

554

(1,628)

502

(906)

(3,098)

(3,420)

0

115

(274)

(68)

280

12,577

13,201

6,048

3,305

5,754

PBT mix (%) Finance & Investments Asset Management Commercial Finance Broking & Distribution General Insurance Others

95

79

57

36

64

15

9

38

68

36

3

7

22

81

44

0

1

2

10

10

(13)

4

(15)

(94)

(59)

0

1

(5)

(2)

5

Source: Company, Centrum Research Estimates

Reliance Reliance Capital Capital

Appendix A Disclaimer Centrum Broking Limited (“Centrum”) is a full-service, Stock Broking Company and a

Appendix A

Disclaimer

Centrum Broking Limited (“Centrum”) is a full-service, Stock Broking Company and a member of The Stock Exchange, Mumbai (BSE) and National Stock Exchange of India Ltd. (NSE). Our holding company, Centrum Capital Ltd, is an investment banker and an underwriter of securities. As a group Centrum has Investment Banking, Advisory and other business relationships with a significant percentage of the companies covered by our Research Group. Our research professionals provide important inputs into the Group's Investment Banking and other business selection processes. Recipients of this report should assume that our Group is seeking or may seek or will seek Investment Banking, advisory, project finance or other businesses and may receive commission, brokerage, fees or other compensation from the company or companies that are the subject of this material/report. Our Company and Group companies and their officers, directors and employees, including the analysts and others involved in the preparation or issuance of this material and their dependants, may on the date of this report or from, time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. Centrum or its affiliates do not own 1% or more in the equity of this company Our sales people, dealers, traders and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. We may have earlier issued or may issue in future reports on the companies covered herein with recommendations/ information inconsistent or different those made in this report. In reviewing this document, you should be aware that any or all of the foregoing, among other things, may give rise to or potential conflicts of interest. We and our Group may rely on information barriers, such as "Chinese Walls" to control the flow of information contained in one or more areas within us, or other areas, units, groups or affiliates of Centrum. Centrum or its affiliates do not make a market in the security of the company for which this report or any report was written. Further, Centrum or its affiliates did not make a market in the subject company’s securities at the time that the research report was published.

This report is for information purposes only and this document/material should not be construed as an offer to sell or the solicitation of an offer to buy, purchase or subscribe to any securities, and neither this document nor anything contained herein shall form the basis of or be relied upon in connection with any contract or commitment whatsoever. This document does not solicit any action based on the material contained herein. It is for the general information of the clients of Centrum. Though disseminated to clients simultaneously, not all clients may receive this report at the same time. Centrum will not treat recipients as clients by virtue of their receiving this report. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Similarly, this document does not have regard to the specific investment objectives, financial situation/circumstances and the particular needs of any specific person who may receive this document. The securities discussed in this report may not be suitable for all investors. The securities described herein may not be eligible for sale in all jurisdictions or to all categories of investors. The countries in which the companies mentioned in this report are organized may have restrictions on investments, voting rights or dealings in securities by nationals of other countries. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Persons who may receive this document should consider and independently evaluate whether it is suitable for his/ her/their particular circumstances and, if necessary, seek professional/financial advice. Any such person shall be responsible for conducting his/her/their own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this document. The projections and forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections and forecasts were based will not materialize or will vary significantly from actual results, and such variances will likely increase over time. All projections and forecasts described in this report have been prepared solely by the authors of this report independently of the Company. These projections and forecasts were not prepared with a view toward compliance with published guidelines or generally accented accounting principles. No independent accountants have expressed an opinion or any other form of assurance on these projections or forecasts. You should not regard the inclusion of the projections and forecasts described herein as a representation or warranty by or on behalf of the Company, Centrum, the authors of this report or any other person that these projections or forecasts or their underlying assumptions will be achieved. For these reasons, you should only consider the projections and forecasts described in this report after carefully evaluating all of the information in this report, including the assumptions underlying such projections and forecasts.

The price and value of the investments referred to in this document/material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance. Future returns are not guaranteed and a loss of original capital may occur. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. Centrum does not provide tax advice to its clients, and all investors are strongly advised to consult regarding any potential investment. Centrum and its affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Foreign currencies denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies effectively assume currency risk. Certain transactions including those involving futures, options, and other derivatives as well as non-investment-grade securities give rise to substantial risk and are not suitable for all investors. Please ensure that you have read and understood the current risk disclosure documents before entering into any derivative transactions. This report/document has been prepared by Centrum, based upon information available to the public and sources, believed to be reliable. No representation or warranty, express or implied is made that it is accurate or complete. Centrum has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. The opinions expressed in this document/material are subject to change without notice and have no obligation to tell you when opinions or information in this report change.

This report or recommendations or information contained herein do/does not constitute or purport to constitute investment advice in publicly accessible media and should not be reproduced, transmitted or published by the recipient. The report is for the use and consumption of the recipient only. This publication may not be distributed to the public used by the public media without the express written consent of Centrum. This report or any portion hereof may not be printed, sold or distributed without the written consent of Centrum. This report has not been prepared by Centrum Securities LLC. However, Centrum Securities LLC has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform

Neither Centrum nor its directors, employees, agents or representatives shall be liable for any damages

themselves about, and observe, any such restrictions.

whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

This document does not constitute an offer or invitation to subscribe for or purchase or deal in any securities and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. This document is strictly confidential and is being furnished to you solely for your information, may not be distributed to the press or other media and may not be reproduced or redistributed to any other person. The distribution of this report in other jurisdictions may be restricted by law and persons into whose possession this report comes should inform themselves about, and observe any such restrictions. By accepting this report, you agree to be bound by the fore going limitations. No representation is made that this report is accurate or complete.

The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of Centrum Broking and are given as of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this report and there can be no assurance that future results or events will be consistent with any such opinions, estimate or projection.

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This document has not been prepared by or in conjunction with or on behalf of

This document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company or any of its directors or any other person. Information in this document must not be relied upon as having been authorized or approved by the company or its directors or any other person. Any opinions and projections contained herein are entirely those of the authors. None of the company or its directors or any other person accepts any liability whatsoever for any loss arising from any use of this document or its contents or otherwise arising in connection therewith.

Centrum and its affiliates have not managed or co-managed a public offering for the subject company in the preceding twelve months. Centrum and affiliates have not received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for service in respect of public offerings, corporate finance, debt restructuring, investment banking or other advisory services in a merger/acquisition or some other sort of specific transaction.

As per the declarations given by them, Mr. Bhavesh Kanani, research analyst and and/or any of his family members do not serve as an officer, director or any way connected to the company/companies mentioned in this report. Further, as declared by him, he has not received any compensation from the above companies in the preceding twelve months. Our entire research professionals are our employees and are paid a salary. They do not have any other material conflict of interest of the research analyst or member of which the research analyst knows of has reason to know at the time of publication of the research report or at the time of the public appearance. While we would endeavour to update the information herein on a reasonable basis, Centrum, its associated companies, their directors and employees are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent Centrum from doing so.

Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or Centrum policies, in circumstances where Centrum is acting in an advisory capacity to this company, or any certain other circumstances

Key to Centrum Investment Rankings:

Stock to Sector Sector to Market Stock to Market Outperform Buy Outperform Neutral Buy Underperform
Stock to Sector
Sector to Market
Stock to Market
Outperform
Buy
Outperform
Neutral
Buy
Underperform
Accumulate
Outperform
Neutral
Neutral
Neutral
Neutral
Underperform
Neutral
Outperform
Reduce
Underperform
Neutral
Sell
Underperform
Sell

Accumulate: Add on decline; Reduce: Sell on rise

Stock to Sector – This is the relative rating of the stock to the sector and reflects its relative attractiveness vis-à-vis other coverage stocks in the sector.

Sector to Market – This is the relative rating of the sector vis-à-vis the other sectors in the coverage space. This is derived based on the conviction of the analyst on a sector and macro view outlined in market strategy.

Stock to Market – The final rating on the stock is obtained as a combination of the “stock to sector” and “sector to market” view as outlined in the table above.

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Member (NSE, BSE, MCX-SX), Depository Participant (CDSL) and SEBI registered Portfolio Manager Registration Nos. CAPITAL

Member (NSE, BSE, MCX-SX), Depository Participant (CDSL) and SEBI registered Portfolio Manager

Registration Nos. CAPITAL MARKET SEBI REGN. NO.: BSE: INB011454239, NSE: INB231454233 DERIVATIVES SEBI REGN. NO.: NSE: INF231454233 (TRADING & SELF CLEARING MEMBER) CDSL DP ID: 12200. SEBI REGISTRATION NO.: IN-DP-CDSL-661-2012 PMS REGISTRATION NO.: INP000004383 MCX – SX (Currency Derivative segment) REGN. NO.: INE261454236

Website: www.centrum.co.in Investor Grievance Email ID: investor.grievances@centrum.co.in

Compliance Officer Details:

Mr. Praveen Malik; Tel: (022) 4215 9703; Email ID: compliance@centrum.co.in

Centrum Broking Limited

Centrum Broking Limited

Registered Office Address

Bombay Mutual Building , 2nd Floor, Dr. D. N. Road, Fort, Mumbai - 400 001

Bombay Mutual Building , 2nd Floor, Dr. D. N. Road, Fort, Mumbai - 400 001

Correspondence Address

Centrum House 6th Floor, CST Road, Near Vidya Nagari Marg, Kalina, Santacruz (E), Mumbai 400 098.

Tel: (022) 4215 9000

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