Anil Ambani-led group's financial services arm, Reliance Capital, posted a 43 per cent decline in net profit at Rs 60 crore for the third quarter ending December 2011. The company said that factors like 47 per cent rise in interest costs and a loss of Rs 34 crore from general insurance business have dented profits in the quarter under review.

In an interview to NDTV Profit, Sam Ghosh, CEO, Reliance Capital, said that the general insurance segment showed higher than anticipated loss in the third quarter, but it will turn profitable going forward. He also sees margins to go up in the near future.

“Our net debt reduced to Rs 18,000 crore from Rs 21,000 crore in the third quarter. We see substantial savings in the interest costs in next few quarters,” he added.

He further said that they have deliberately slowed down consumer finance business.

As far as fixed maturity plans (FMPs) are concerned, he said that they have not seen any decline. “We are growing at the fastest rate in the industry in the segment of systematic investment plans (SIPs),” he said.

Below is the complete interview. Also watch the accompanying video.

Your profits have dipped year on year, what is the reason for the same?
 

Yes. If you look at our profits, they have gone up sequentially. But if you see the last year compared to this year, profits have come down primarily because of two areas; one is because of high interest cost and the second is because the general insurance section has shown a slightly higher loss than what we are anticipating. But otherwise, our business profits have gone up and though our assets under management (AUMs) have come down, profits have gone up comparatively. 

If you look at our commercial finance business, the only major hit has been interest cost otherwise profits have more or less gone up sequentially. It has come down slightly on year to year basis because of the high interest rate regime. If you look at our life insurance business, again profits have gone up compared to last year as well as this quarter and we as yet haven’t booked the profits on the traditional product that we expect. Once we have the certificate done in the fourth quarter, then we will show profits from the initial portfolio which is substantial.

On broking and distribution also compared to last quarter, profits have gone up though in the equity side the profits have more or less remained flat. On the equity and commodity side, profits have remained flat. But on the distribution front, gold and money transfer did very well, so profits have gone up. On the general insurance side, we have increased the provisioning in the motor third party pool, private car side anticipating that there will be increase in the in the motor third party pull. And that is the only place where we have actually taken a slight increase in reserve and requirement. 


The topline has been more flat or declined compared to last year, but profits (bottom-line) have gone up from Rs 34 crore to Rs 64 crore and we expect that profits for the fourth quarter to be slightly higher for all our businesses as well as if you look at life insurance, which will also show substantial profit in the fourth quarter.

How are the margins like in the life insurance segment, margins were facing pressure earlier. Has the picture improved? Also how were the premiums during the quarter?
 

In terms of life insurance margins, the important issue is that we have now been focusing on traditional products. Last year we had about 50 per cent unit link, 50 per cent of the same quarter and this year it is about 70 per cent traditional business and 30 per cent unit-linked. On that basis, margins would be more or less steady because on the power type product though it is the 90-10 type of product, but margin is high because you only get 10 per cent of it.

Overall, we feel that margins will remain steady for us going forward also, but more importantly the company is showing profit and the profits are growing if you look at the traditional portfolio of the profits. They are very significant, which we haven’t as yet taken into account and they will be reflected in the last quarter’s results.

In terms of numbers policies, there has been a decline of about 10 per cent or so in the last quarter. However, what we feel is that in the fourth quarter, our number of policy we sell will be more what we sold last year in a quarter, but because we are selling more traditional products in fourth quarter, the total premium size may not be as high as what we had in the last year fourth quarter. In terms of number of policy, we will be selling more and more traditional products; 75-80 per cent products.

We are in a very good position as a company because productive agents are improving; numbers of policies have started growing because we have started buying more traditional products. The average ticket size is falling but that is okay with us because as long as we are selling more and more policies, we know that going forward our profits will continue to increase.

General Insurance is still in negative, but IRDA has finally put an end to third party motor pool, will that benefit you going forward?
 

Yes. In the fourth quarter, we will get to know what the total motor pool reserving requirement is, whether it is all going to be reserved in the fourth quarter of this year or is it going to be staggered over the next few quarters or next few years. But at least we know that there is an upper limit to the motor third party reserving requirements. IRDA is also looking whether there should be another hike in the party premium and if that happens, it will be good.

So, we are coming to a situation where we know we are coming to the top-end of reserving requirements for the motor end party pool as well as the third party private car and going forward we know that there as a company we can start showing profit excluding this motor third party, show profits on our rest for business and this reserving will be one off, and weather we do it this year or next year it depends on that idea. So, I think we are coming to a situation where we know that going forward for the general insurance business it will be a profitable business.

Proceeds from reliance life insurance have been used to bring down debt, now how much does the debt stand at and going forward do we expect the interest cost to come down substantially?
 

Our net debt position is significantly better than it was a quarter back. Our net debt has reduced from Rs 21,000 crore to Rs 18,000 crore in the last quarter. We have Rs 15,000 crore of retail lending book, very healthy book on the asset side. So currently, our debt position is around Rs 3,000 crore and with the asset management transition closure, we would try and reduce Rs 3,000 crore further down to Rs 1,500 crore which is nothing. We are seeing interest savings, substantial savings over the next few quarters.

How was the performance in AMC business did the sentiment pick up post the announcement of the deal? When are these funds expected and by how much will it bring down your debt by?
 

On the AMC side, we are in the process of getting the approvals, if it through then only this transaction will be closed as you may be aware the transaction was pegged at Rs 1450 crore at 26 per cent stake, which valued the AMC at Rs 5500 crore, nearly over 6 per cent in terms of percentage of AUMs. So it may be one of the best transactions in the market; in fact, the largest transaction in the market in the asset management industry and one of the largest in financial service industry. 

If you look at our asset management business, AUMs have come down as of December 31, primarily because of one or two reasons. The banks had to bring their investment in the mutual fund industry down 10 per cent of their net worth, which has had a significant outflow out of the mutual fund industry issue. However, the marks have picked up in the month of January, AUM's have also increased but our focus continues on the SIP (systematic interest plan) type customers, retail debt customers; you want to add more and more customers there.

Our gold fund is doing very well and if we can continue to focus on those sorts of products where we can target customers and customers can continue giving us money for three to five years, then for an asset management company we are building a very solid base going forward, which will also be very profitable. So in terms of profit also, we still remain as number one and we want to continue as being number one in terms of profitability.

Has there been a decline in sales of fixed maturity plans (FMPs)?
 

Not really. In fact, due to the high interest rates scenario, currently there would be a lot of people who want to lock in for a longer period of time into FMPs. So you have 12 months, and I think it is a good investment opportunity for a lot of people in the FMPs today.