Post the demerger of Sintex
Plastics Technology from Sintex Industries and the resulting gains that accrued
to shareholders of the pre-demerger parent Sintex Industries, there is
certainly merit in evaluating other companies which are going the same way. In
the case of Sintex, the Sum-Of-The-Parts (SOTP) was always going to be greater
than the whole as the market usually discounts the bundled company fairly
highly over the individual businesses. The same story is likely to play out in
the case of Reliance Capital (RC), ADAG group’s financial services flagship.
RC houses a lot of lucrative
businesses under its fold. These businesses individually would be valued way
more than what the whole of RC is currently valued at. This is where the SOTP
principle comes into play. And at long last, ADAG seems to have realized this.
To be fair, it is not easy to demerge an entire unit, much less list it on the
exchanges, unless it achieves a certain scale and has the ability to sustain
itself through its own earnings rather than relying on the parent. We have seen
this happening in the case of L&T Finance. Another recent case is that of Max
Financial Services. Both are promising businesses and have highly pedigreed
promoters and management. They are sure to stand credibly on their own in the
years to come after coming out of their parent’s shadow. A similar case is
likely to play out in the case of RC as well. 2 of the most promising
businesses that it houses are the MF (Asset Management) and Insurance (Life as
well as General/non-Life), both of which are now doing extremely well. This can
be gauged by the fact that Nippon of Japan holds half of the MF business and also
has a significant stake in both the Insurance businesses. And the names of all
3 companies reflect this. MF constitutes nearly 27%, General Insurance (GI)
nearly 11% and Life Insurance nearly 18% of the current RC. If they were to be
separately listed, the SOTP is likely to be way higher than the proportion
suggests. Of course it is too early to get into the numbers game right now
before the Investment bankers crunch the figures and bring out their valuation
reports.
The other silver lining is
that ADAG group has made its intention of listing both of these businesses
(only the General Insurance, GI, for now) in the near future, both having filed
DRHP with SEBI. That would be case of huge value unlocking here. That there is
appetite for both these areas in the market can be gauged from the fact that 2
other big groups also have shown interest in going in a similar direction
(ICICI with listing of ICICI Lombard, its GI subsidiary, and UTI with its MF
business).
Apart from the above key
businesses, RC still has other related business like Retail Broking, another hot
area which is picking up (look at Motilal Oswal and Geojit’s stock trajectory over
the 2-3 years), Consumer and Commercial Finance (look at where Bajaj Finance is
and still going strong), Commodity (trading in precious metals like Gold,,
Silver etc.) to name the key ones. Retail broking is a small part currently
constituting only about 3% while the Financing business is a large chunk of
about 28%.
This is only half the
story. While the above value unlocking of
the MF and Insurance businesses will happen over the next few months, the more
immediate gains are likely due to the demerge of the Housing Finance business
in the next few days. This is nearly 13% of the current RC. HF is one business
area which has caught the fancy of the markets with most stocks in this space having
doubled or tripled in the last 2 years (just look at DHFL, LICHFL etc.). Most
NBFCs in the HF business have handsomely rewarded their investors. And so too
will Reliance HF post its demerger and listing on the bourses.
With HF out of the way, rest
of RC as explained above still has a lot of value which will be unravelled over
the next few weeks and months. So it would be best to start SIPing this over
the next few weeks/months to gain the most from the market volatility and participating
in the value unlocking.
While short term gains are
certainly there for the asking, over a longer term also, these businesses are likely
to compound at healthy growth rates, thus giving everyone a choice as to their
holding period.
