Anil Ambani's Reliance Capital has undertaken a major restructuring-cum-value-unlocking exercise.
Anil Ambani's Reliance Capital has undertaken a major restructuring-cum-value-unlocking exercise.
After recently announcing that the financial services firm would list its housing finance arm, Reliance Home Finance, it now has a fund-raising plan for its commercial finance business as well, either in the form of IPO or stake sale.
Reliance Cap owns lending, insurance, asset management, broking and asset reconstruction businesses, among others.
In an interview with CNBC-TV18, the company's top management (Sam Ghosh, Executive Director and Group CEO at Reliance Capital; Ravindra Sudhalkar, CEO of Reliance Home Finance; and Rakesh Jain, CEO of Reliance General Insurance) talked about the firm's plans and growth prospects going forward.
Below is the verbatim transcript of Sam Ghosh, Ravindra Sudhalkar & Rakesh Jain’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Anuj: The first question is on the home finance business that of course is the next trigger. When is that going to be listed?
Ghosh: If you look at our home finance business at our annual general meeting (AGM) we had mentioned that we will be looking at listing the home finance business somewhere early next financial calendar year, so somewhere around March-April. As you know that Reliance Capital intends to hold 51 percent and 49 percent of the shares will be given to the shareholders of Reliance Capital itself.
Latha: Since we are talking about monetisation what about the commercial finance and the general insurance business? First commercial finance, commercial finance is doing so well would you want to list that earlier?
Ghosh: Our intention first is to de-merge commercial finance into a separate entity which is in the process. We hope to complete that by end of November. Then we would look at this point continue running the business, bring in a strategic partner at some point in time and maybe at a future date look at options of listing the company. It depends on how fast we grow the business. However, the business is doing well and our intention is to grow it.
Latha: Is that this year, this fiscal that we should anticipate all these developments in commercial finance?
Ghosh: In the end of this financial year or early next financial year we will look at the housing finance listing and then maybe in 12-18 months time we will look at doing something with the commercial financial business be it bring in a strategic partner or listing as appropriate.
Sonia: What kind of growth rates do you see for the home finance business and the assets under management (AUMs) currently are at a base of almost Rs 8,300 crore what kind of growth can we expect?
Sudhalkar: For Reliance the AUM is about Rs 8,300 crore. In the next 15-18 months we expect AUM to grow to a level of about Rs 20,000 crore.
Sonia: Can you break that up for us between a pure vanilla housing finance, what about the loan against property because that has become the big issue as well and construction finance how much would you be doing?
Sudhalkar: Currently, if you look at the portfolio which is closed to at about Rs 8,300 crore; loan against property forms a very insignificant part of our business currently which is about 15 percent of our total business. I would like to have the split of the book which is 75 percent would be construction finance plus home loans, majorly would be home loans which will be more than 50 percent and about 15-20 percent would be loan against property business as you move forward.
Latha: What are the growth prospects of the general insurance business? There is so much of limelight on life insurance after the HDFC, Max and the ICICI Prudential Life Insurance listing. How would your growth compare vis-a-vis life insurance?
Jain: General insurance of course follows the economic growth as well as the social evolution anywhere in the world. I think India is heading towards an exponential growth for general insurance. Just to contextualise the global average, the present average today is about 2.7 percent of gross domestic product (GDP). India has been around 0.7-0.8 percent. So, just to catch up with the present global average we need to grow anywhere between 17-18 percent for next 20 years. I think it is somewhere destined for us to grow.
It is just about how do we make it happen and at Reliance general insurance we are certainly prepared. We have a presence across, we have products sweets, we have customer focus and we should grow more than the industry growth rate, meaningfully which means with reasonable bottom line.
Anuj: Two part question. The gross return premium, what is the outlook on that because Q1 was a bit soft, of course, for the entire industry. And also, the combined ratio for Reliance General Insurance remains quite elevated and that needs to come down. Your outlook on that?
Jain: Two things. The growth for the industry this year will be very robust. It should be upwards of 20 percent largely because of the Pradhan Mantri Fasal Bima Yojana (PMFBY). There has been a structural shift to bring crop insurance into the bigger fold of general insurance and that itself will contribute about 15 percent growth of the industry. So, all of us are likely to grow quite well this year. For Reliance General Insurance, the growth will be upwards of 25 percent, maybe close to 30 percent.
Coming on to the financial performance, the combined ratio. Our financial performance is improving year-on-year (Y-o-Y). Combined ratio, partially for us looks skewed because of the interest which gets included in the third party claims. What we do not include of course is the investment income which we derive on the funds we hold. So, if net that off, then you will really see that the combined ratio for us is very close to Rs 100 which is a reasonable performance. Just to contextualise, on the overall financial performance of Reliance General Insurance, we can be compared to our peers at quite well, maybe better than many of our peers.
Latha: You have declared that you want to concentrate of finance and that you want to get out of media. So, really a two part question. Macro, do you really want to get out of media and secondly, is this deal done – Reliance Broadcast being purchased by Zee Media?
Ghosh: If you look at the clear strategic direction from our Chairman was that we should focus on financial services across all Reliance Capital platforms and therefore we have been trying to focus on all our core businesses of insurance, asset management and lending. And therefore, we also want to grow the lending business aggressively, both on the commercial finance as well as on housing finance.
On the media and entertainment side, if you notice, we have been divesting slowly. We did the Reliance Media Works (RMW) deal, the theatre as well as the film and media services businesses. This is the next stage, the radio business. And I think you are referring to today’s newspaper article. Obviously, the intention is to complete the transaction and we are in advanced stages and as and when it is appropriate, we will obviously come out to the media and advise you of the progress. But certainly, the intention is very clear that the group will want to exit the media businesses and we are gradually doing that in a phased manner.
Latha: No, Zee Entertainment’s name has been doing the rounds for some time now. So, can we at least take it that the buyer is identified?
Ghosh: That I will leave to your speculation, but obviously we are in advanced stages to complete this transaction and we will obviously, make an announcement shortly.
Sonia: So, are you looking to complete it before the end of the calendar year?
Ghosh: Our aim is as early as possible, certainly before the calendar year end.
Latha: The entire media bit or only broadcast?
Ghosh: We are talking about Reliance Broadcast Network (RBNL) at this point and then obviously, there are small bits and pieces left that we will also try and exit by end of the financial year.
Latha: The mutual fund business that is by far one of your best performing businesses perhaps best performing in the industry as well. Would you look to list that monetise it in some fashion?
Ghosh: If you look at on our asset management business, it is doing very well and congratulations to the team. The market obviously has also supported it. I think the important thing is that we brought in Nippon Life in March and they have gone up to 49 percent, we want 51 percent. The company is well capitalised however, we always look for opportunities inorganic or organic to help us continue growing the business.
At this point there is no capital requirements, but at a future date if capital requirements are there and the business wants to go significantly then there is opportunity to look at listing. Currently, our aim is that we continue growing the business inorganic or organic growth.
Latha: When you say inorganic, that is what interested me. Are you looking to grow inorganically only in the asset management company (AMC), elsewhere as well?
Ghosh: If you notice there is consolidation happening in the insurance industry, there is opportunity of growth in our asset management business in our lending business significant opportunities as well as in our broking and distribution. So, I think we are always open to acquisitions if it makes sense and if it helps us grow our businesses as well as gives a strategic value add. So, I don’t see we should rule that out, but we keep evaluating what is available in the market.
Sonia: Anymore noncore assets that you will be looking to sell anytime soon in order to reduce your debt because you do hold stake in a lot of assets, Paytm, Yatra.com, Sula etc anything that you are looking to monetise?
Ghosh: First of all let me just re-affirm that from a debt to equity ratio today we are at 1.5 which is a very conservative debt to equity ratio for any non banking financial companies (NBFC). So, I do think there is worry about that. Obviously from a strategic perspective our chairman has always stated that we should be focusing on core financial services businesses. From that perspective we obviously would be looking at divesting all our non-core investments and plough that money back into our lending businesses which we would like to go at a significant rate.
That is the only business which requires capital as such. So that process of divesting will continue. We would like to complete as much as possible in this financial year. Some of it may stretch over to next financial year.
Sonia: What is the amount you are looking at?
Ghosh: If you look at our total investment books it is somewhere around Rs 2,000 crore, so we will gradually divest that entire amount in the next 12-18 months and plough that back in to our lending businesses.
Latha: Speaking of lending businesses Ravindra Sudhalkar just said that he expects the home finance will go from Rs 8,000 crore to Rs 20,000 crore that is ambitious what about commercial finance? How much will that grow, targets for a year- 18 months?
Ghosh: If we look at today commercial finance business is at about Rs 16,000 crore AUM. Our intention is to take it above Rs 25,000-30,000 crore. We would like to double the book every year 18-24 months and the opportunity is now there. Earlier we were trying to ensure that we were doing right thing. We were in the Small and Medium Enterprise (SME) space, SME is growing so now we feel that there is huge opportunity to grow that. As well as we want to look at the consumer finance space that is also huge opportunity area for us, so we would like to gradually get it to that space also.
Latha: What kind of margins will you be able to enjoy in the commercial finance and indeed in the home finance business? Will you do better in FY17 than you did in FY16?
Ghosh: FY16 if you look at our margins we were above 6 percent which is like very good margin. We would like to maintain that and try and improve on that. So, 6-6.5 is certainly where we will achieve in this six months plus. Let us see by March if we can get it close to 7 percent. I think very healthy business margin.
Latha: 6 percent is huge, we were just speaking to Gruh Finance, even IndusInd Bank, 4 percent is seen as the sky. 6-6.5 would that mean a lot of risk in the way you lend?
Ghosh: No, not necessarily. If you look at our focus is on the SME sector as well as self-employed sector. In that sector, yields are higher and net interest margins (NIM) are also higher. There is some amount of risk and for that if you look at overall terms our return on equity (ROE) tend to remain around 16-18 percent.
Sonia: For the home finance segment itself what could the margins be and what kind of gross NPAs?
Sudhalkar: In terms of gross NPAs we are currently at about less than 1 percent and we will continue to remain at about 75 basis points to 1 percent in next 15-18 months. As far as the margins are concerned there is squeeze on the margins as you move forward, but I clearly see the right product mix, the margins should be in the region of about 2-2.5 percent as far as the incremental business is concerned.
Anuj: How is the partnership with Sumitomo Mitsui Trust Bank of Japan going? Of course they picked up stake as well, in some of your business cards you started to put Sumitomo’s name as well. What is the next plan going forward from here?
Ghosh: I think you are talking about Nippon Life because Nippon Life has stake in our asset management life business so obviously we have also changed the name to Reliance Nippon Life Asset Management, Reliance Nippon Life Insurance.
However, on the Sumitomo Mitsui Trust Bank also they own up stake at about 3 percent at Reliance Capital level. There we work together on the SME lending sector.
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