Anil Ambani Controlled RCap’s businesses are strongly correlated with capital markets, but have lagged equity markets in recently due to regulatory and competitive pressures - especially in life insurance, asset management and broking. We believe growth in these segments will likely remain muted, capping valuations.
The Life insurance industry is transitioning to new regulatory norms and we believe RCap’s lack of a strong bancassurance partner can impact growth (as corporate agents are likely to be impacted more). The asset management industry has also started to see outflows (largely debt) in recent months as overall domestic liquidity has tightened. We expect growth to stabilize medium term, but likely at lower levels.
We reduce our sum-of-parts based target price on RCap to Rs788 based on a) Lower earnings estimates (down 39%/34% for FY11/12E, due to lower investment gains) and b) Lower multiple for life insurance (12x 1Yr Fwd NBAP now from 15x).
