ICICI Direct recommended hold rating on Reliance Capital with a target price of Rs 233 in its research report dated November 28, 2018.
ICICI Direct's research report on Reliance Capital
Reliance Capital reported an operationally stable performance with businesses being good; the pressure of related group accounts led to significantly higher provisions impacting consolidated networth (NW) significantly. Opening NW adjustment has been quite significant as NW as on Q2FY19 from March 2018 has gone down by ~Rs 8000 crore. In group exposure, provision seems to have been done on Rs 2500 crore of funded exposure and Rs 500 crore unfunded exposure, knocking off its old goodwill and revaluation reserves of ~Rs 3000 crore while other investments MTM valuation may have led to networth decline. In standalone the decline is not sharp led by simultaneous upward fair valuation of good subsidiaries.
Individual subsidiaries reported stable earnings and an improving trajectory. We factor in PAT estimates to grow at 5% CAGR in FY18-20E to Rs 1432 crore. We expect RoE to improve to 14.6% in FY19E largely boosted by lower networth post Ind-As. Improving RoE of individual businesses also holds key. Factoring in a sharp decline in consolidated NW, we revise downwards the stock valuation to Rs 233 per share on an SoTP basis. We factor in Rs 280 per share cut towards group exposures and also reduce our AMC, HFC and CF finance business valuation considering the weak environment for NBFCs in the near term. We revise our recommendation on the stock to HOLD from BUY earlier. The market had been already discounting this media and group exposure of ~Rs 10,000 crore. The large networth cut has taken care of that. The stock is trading at 1.1x FY20E BV and 4.3x FY20 P/E.
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