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Reliance Capital - Diversified Financial Services

Reliance Capital is focused on businesses across the spectrum of financial servces, including life insurance, asset management, retail broking and distribution.Its strong parentage and large capital base will help it achieve a substantial market share over time.

Reliance Life insurance (Rs453) and asset management businesses (Rs199) account for 74% of target price of Rs.875,though once can expect the fair value of other businesses to appreciate over time. Focus on wide reach, superior pricing strategy across businesses Reliance Capital's market position in asset management and life insurance has remained strong despite the slowdown in the industry during FY2009. After setting up a large network for broking and distribution, RCAP has begun to focus on asset reconstruction, private equity and institutional equities.

Despite its late entry into most segments, it can become a sizeable player over time given its (1) focus on expanding beyond metros, (2)technology support and (3) superior pricing strategy.

Financials:
Most of RCAP’s businesses are currently in nascent stages and reporting losses / marginal profits. Capital gains from its large equity investment book (Rs19 bn in March 2009) have largely supported earnings in the past. However, RCAP’s reported profits will likely decline by 16% CAGR in FY2009-11E due to lower capital gains, even as the earnings of its core businesses increase.

Key risks.
(1) RCAP is yet to establish itself as a sizable player and demonstrate long-term profitability.
(2) The company will likely face competition from banks (that have lower costs of funds and the ability to cross sell) and established NBFCs (niche-focused players with proven performance for several business cycles).

However, RCAP’s large capital base and parentage of ADAG are comforting.
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