Lower debt cost to boost profit in Q4: Reliance Cap

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Lower debt cost to boost profit in Q4: Reliance Cap

Commenting on the results, Sam Ghosh, CEO of Reliance Capital said that profits were hit on a year-on-year basis on account of the higher interest rate regime. However, he pointed out that even as AUMs came down about 19%, they have been able to maintain their margin.

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Reliance Capital reported a 43% decline in net profit at Rs 60 crore for the third quarter ending December 2011. The financial services company had a consolidated net profit of Rs 106 crore in the October-December quarter of previous fiscal.

Commenting on the results, Sam Ghosh, CEO of Reliance Capital said that profits were hit on a year-on-year basis on account of the higher interest rate regime. However, he pointed out that even as AUMs came down about 19%, they have been able to maintain their margin.

Ghosh added that the company expects its profits to be substantially better in Q4 given the reduction in the debt costs.

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Below is the edited transcript of Ghosh's interview with Udayan Mukhrejee and Mitali Mukhrejee of CNBC-TV18. Also watch the accompanying video.

Q: Could you take us through your Q3 results?

A: I think sequentially we have improved; year-on-year there has been a slight reduction in terms of profitability. The primary reason for that has been obviously the higher interest rate regime we have been under up to Q3. Also, on the general insurance side, we have provided significantly higher for the motor third party business.

In the asset management business, we have had significant reduction in the AUMs across the industry primarily because of the RBI guidelines for banks that they cannot invest more than 10% of their net worth in AMCs. This means you may see an outflow of some of the debt portfolio. However, if you look at the equity side, we have been adding about hundred thousand SIP customers a month and we expect that to continue to grow.

Similarly, with the monthly income plans on the retail debt side, we have been adding customers and also we have added also customers in the gold fund. So, even though we have added customers, AUMs have come down therefore income levels had come down as well as the profit.

But even as AUMs came down about 19%, profits have come down significantly at a lower clip and much better than industry. So that has been our strength that we have been able to maintain our margin.
On the general insurance side, after IRDA came out with a circular talking about the motor third party pool, that reserving would be required to increase and that will happen in Q4 and how it will happen will also be advised. We also looked at the motor third party private car business which is underwritten by most of the private insurance also and there too, we have increased our reserves and we have made a provision being prudent. We feel that it is important to do that.

Going forward, that benefit will come through if the provisioning is not required. In the life insurance business, I think the big advantage we have had is that in the last quarter not only have profits gone up but we have also had a number of internal policies. We have been adding a large number of customers to our books, we have increased the number of policies compared to the last year.
However, the big book of business which is the traditional portfolio, which is nearly 70% of our business, we haven't taken into account the profits from that. We feel that we would like to take that into account in Q4 after the actuaries have certified it and the auditors have passed it, there obviously will show substantial profits.

On commercial finance, I think the main areas has been the high interest rate regime which has affected the profitability, yet the profitability has not been dented to that extent. There has been nearly 98% increase in interest costs however profits have come down marginally, compared to last year. Going forward, I think the biggest advantage we have is on our fixed book. For commercial vehicles, construction equipment and auto, interest rates have peaked, therefore, profits will flow out of that also.

We had kept the book fairly flat primarily because we felt that under high interest rate regime, it is not prudent to start growing the book very fast, however, now that we feel that the interest rates have peaked, we can again continue growing the book. Therefore, profits will continue flowing out of that. So all our businesses actually have been at the level where we have expected the profits to be; we expect profits to be substantially better in Q4, and with the reduction in the debt costs for the group as well as the overall debt level, which was over Rs 21,000 crore as of September 30, over 21,000 crore, today it is about Rs 18,000 crore as of December 31.

Q: The company has decided to merge Viscount Services Alphawith the company, you expect capital gains post the merger. Kinldy take out through the details?

A: Today, Reliance Capital holds about 16% of the life company, the balance was held by the two subsidiary companies of ours Viscount Management Services and Viscount Services Alpha. Viscount Services Alpha held 48% of the life company from which we sold 26% to Nippon Life.

What we are doing is merging Viscount Management Services Alpha into Reliance Capital so at the end of the transaction, Reliance Capital will hold directly 38% of Reliance Life Insurance. At that point, capital gains will be also processed; we hope that we conclude this in Q4.