The stock's valuations had become absurd during the bull-run.
In January 2008, the stock had made a high of 2924.
FY 2008 consolidated eps for the stock has been Rs 41.
At 2924, the stock was trading at 71 timesits eps.
At the current price of Rs 1118, the stock is available at 27 times FY 2008 earnings.
This is fairly valued - neither cheap nor expensive. (The company is growing fast and thus will get some premium valuation).
However, if markets correct further, Reliance Capital will also go down.
Reliance Capital's asset management and stock broking businesses depend a lot of overall market conditions. A bearish/consolidation phase in the markets, will mean a growth slowdown for Reliance Capital.
Its consumer finance business will also get impacted in this inflationary period.
Even at current prices, I am not comfortable giving a buy call for this stock.
I suggest investors wait for a price around Rs 900.
The margins are lower because their businesses depend on retail participation. Currently, the retail participation is very low. If the retail participation picks up, their margins will increase.
My guesstimate is that they won't be able to reach the margins they got in 2006, but they will be able to substantially improve their margins. So, if one has to buy this stock, one has to assume that retail participation will surely come back to the markets in the coming years.
As of now, I do not have a view on Reliance Capital. I will have to look at the financial statements in detail before I can comment further.
Some points that I would like to add:
There is value in Reliance Capital if one looks at it from an assets perspective, but
1. Reliance Capital is unlikely to sell-off its insurance business.
2. Also, many experts feel that Nippon has overpaid for the insurance business.
“Though it’s not fair to comment on the valuation as Reliance Life is a not a listed entity, we believe the valuation is a little inflated,” said Bhishma Maheswari, an official at Edelweiss Insurance Broker.