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Published on 13/06/2019 11:19:53 AM | Source: ICICI Securities Ltd

Update On Reliance Capital Ltd By ICICI Securities

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Rating downgrades, auditors resigning signal pain to stay

Price Waterhouse & Co Chartered Accountants LLP (PWC), has resigned as one of the statutory auditors of Reliance Capital and Reliance Home Finance. PWC has said that as part of the ongoing audit for FY19, certain observations were noted. In its assessment, if not resolved satisfactorily, this may be significant or material to financial statements.

Also, it did not receive a satisfactory response to its queries. The resignation of the auditors creates uncertainty related to the financials of the company. Recently, on April 26, 2019, rating company Icra downgraded short-term rating on two Anil Ambani-led entities – Reliance Home Finance and Reliance Commercial Finance. Rating on Reliance Commercial Finance's commercial paper programme of | 1,200 crore, has been downgraded to junk grade of D from A4 with rating watch on negative implications.

Reliance Commercial Finance’s CPs has also been downgraded to D from A4 due to debt servicing issues. In addition, on May 18, 2019, CARE rating has downgraded Reliance Capital’s long-term debt and subordinated debt rating by three notches from “A” to “BBB” due to reasons of defaults by two of its subsidiaries — Reliance Home Finance (RHFL) and Reliance Commercial Finance (RCFL). The agency also said it would keep the firm on credit watch with developing implications.

 

Outlook

Post the recent rating downgrade of subsidiaries to default, the resignation of auditor comes as a major setback for the parent company.

In the current scenario, when all group companies are facing stress, recovery from loan/exposure to group companies looks tough. Though investment in media sector (e.g. Big FM sale to Jagran Prakashan) has been undertaken, the recovery does not seem to be enough. Selling a stake in good subsidiaries like AMC, general insurance, etc to pay off debt that has emerged due to group exposures, corporate loans and investment in media sector remains negative for existing equity shareholders.

Post stake sale in subsidiaries

1) majority stake in HFC (listed market cap - | 823 crore),

2) up to 49% in general insurance and

3) complete exit in AMC (listed market cap - | 13300 crore), the businesses left will have a nominal stake in HFC, 100% small commercial finance business and 51% stake in life insurance (cannot sell due to FDI cap of 49%). Given exits from businesses generating strong RoE, Reliance Capital, the holding company, will be left with a low earning portfolio. This is seen as a setback for existing shareholders. Therefore, we DROP COVERAGE on Reliance Capital.

 

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