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Are Reliance Retail and Religare worth investing at current value – 10.06.2020

The discussion stocks for the article are:

1. Reliance Retail, and
2. Religare Health Insurance

Before we explain why these two stocks are over-valued, just look at the price movement in the last one year. In that period, the price has appreciated ~70% in both the scripts. Price appreciation is not the problem, but buying at these levels can prove to be risky, as the Risk/Reward ratio is not favorable.

Price Reliance Retail Religare
01.06.2019 560 38
01.06.2020 950 65

Reliance Retail

In the month of Nov-19, Reliance Retail was valued around 3-3.25 lakh cr, when Reliance Industries, the parent company of Reliance Retail has offered to swap its shares with Reliance Retail in the ratio of 1:4. At that time, the fair value of Reliance Retail share came out to be 600-650. However, that price was eventually rejected by the shareholders in the AGM on 21.01.2020. From thereon, in the unlisted market, the price of Reliance Retail is on the upsurge and currently, trading at 950 per share, valuing the company at 4.75 lakh cr.

Now question is, whether Reliance Retail is worth buying at 4.75 lakh cr of value?

Let us check out!

The best indicator to value the retail business is to calculate EV/EBITDA and then compare it with the peers in the listed space to know the real value. We have taken Dmart as a peer from the listed space.

Parameters (cr) Reliance Retail Dmart
EV 5,00,000 1,55,016
EBITDA 9600 2189

The EV/EBITDA of Dmart is slightly on the upper side but then we have to factor in the superior margins of 8% in the case of Dmart and only 4% for Reliance Retail. The 2x margins and management prowess give Dmart edge over Reliance Retail in the valuation front. Therefore, we can conclude that the Reliance Retail is fully valued at the current market price of 950.

The fair value for investment is somewhere around 700-750, where we will get valuation comfort and margin of safety, both.

Religare Health Insurance

The health insurance businesses are valued by comparing the market cap of the company with Gross Written Premium (GWP). Last year HDFC ERGO bought 49% stakes in Apollo Munich at 1347 cr and had given a value multiple of 1.2 times the gross written premium of FY19. Therefore, in the Insurance business, the value multiple below 2 is considered as fair value.

The Religare Health Insurance in the first 3 quarters of FY20 has collected a GWP of ~1700 cr and we are expecting an annual GWP of ~2000 Cr. On the basis of HDFC ERGO and Munich deal, the Religare Health Insurance may get valuation around 3000-3500 cr. As of 31.03.2019, the paid-up equity of Religare Health Insurance stands at 688.54 Cr. The fair value per share would be somewhere around 45-50.

Below is the valuation table showing the value multiple at which Apollo Munich deal has been done and Religare Health Insurance at current market price of 65.

Parameter Apollo Munich Religare Health
Mcap/GWP 1.25 2.21

Therefore, the current unlisted price of 65 looks costly.

The business models of the above two companies are excellent but the present valuation is not giving comfort. Therefore, as an investor, you should be careful in buying these scripts at current levels.

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