ICICI Lombard Shares Swing After Credit Suisse, Motilal Oswal Initiate Coverage
Here’s what the analysts have to say about ICICI Lombard.
Shares of ICICI Lombard General Insurance Co. rose after Credit Suisse and Motilal Oswal initiated coverage on the stock, citing its focus on growth, benefits from Bharti AXA merger and normalising claims ratio. The stock, however, has erased all its gains.
Credit Suisse has recommended an ‘outperform’ rating on the general insurer, with a target price of Rs 1,400 apiece, implying an upside of 19%. Motilal Oswal suggested a ‘buy’ with a target price of Rs 1,500, an implied return of 17.33%.
According to the analysts, improvement in motor growth with pick-up in auto sales, investments into health distribution channels, and expected results of past investments in technology are other growth triggers.
Shares of ICICI Lombard rose nearly 1% in intraday trade before erasing gains. The stock was 1% down as of 12:08 p.m. on Friday, and is on course to snap its six-session winning streak.
Of the 30 analysts tracking the company, 23 maintain a ‘buy’, two suggest a ‘hold’ and three recommend a ‘sell’, according to Bloomberg data. The 12-month consensus price target implies an upside of 20.2%.
Here’s what the analysts have to say about ICICI Lombard:
Credit Suisse
Expects premium growth to recover to around 14% CAGR (vs about 7% CAGR over FY19-22) led by improvement in motor growth with pick-up in auto sales, reducing pricing pressures and improving market share in commercial vehicle segment; and continued strength in health premiums as agency network scales up over FY23.
Expects improvement in loss ratios as health claims normalise post Covid.
Expects a combined ratio of 101% by FY25 (vs 109% in FY22) and return on equities to recover gradually to 19% by FY25 and stay on a normalisation path (>20%).
Post the Bharti AXA acquisition, ICICI Lombard’s leadership strengthened—200 basis points ahead of the next player.
The company has among the most diversified portfolio across products and claims outcomes have been consistently ahead of the industry.
Its strategy to target specific profit pools have consistently yielded superior market share in private-sector profit (45% in FY22) vs its
share in premium (14%).
Its large assets under management (60% ahead of the next player) provides as stable investment income, which shields profitability during periods of volatile macro.
The company has de-rated with growth deceleration, rising competition, and lower ROEs. Retail health scale-up has also been slow.
While the delayed ROE recovery warrants a discount to long-term multiple, execution on growth and health franchise scale-up will drive re-rating.
Motilal Oswal
Stronger correlation with new auto sales, investments into health distribution channel, synergies from Bharti AXA merger and expected results of past investments in technology are the key earnings triggers for ICICI Lombard.
Auto segment
The company is well placed to capture revival in auto sales.
Its auto segment has a relatively stronger correlation with new auto sales when compared to that of the industry (60% v/s 40%).
Additionally, the mix is skewed towards passenger cars and two-wheelers, where the revival is likely to be stronger.
Technology initiatives, leadership in electric vehicle segments, commercialisation of sandbox products, and incremental original equipment manufacturing partners through its merger with Bharti AXA will be additional tailwinds for ICICI Lombard.
Health segment
To capture a higher share of growth opportunities emerging in the retail health segment, ICICI Lombard has invested in building its individual agency channel, wherein it is hiring 1,000 agency representatives. The benefits of the same will be reaped in the near future.
In the group health segment, the management aims to grow the profitable small and medium enterprises segment compared to the loss-making large corporate segment.
Expects the claims ratio to normalise to pre-Covid levels in FY23. The expense ratio, however, is likely to remain higher, restricting the improvement in the combined ratio for this segment.
Merger with Bharti AXA
The merged entity, after acquisition of Bharti AXA, is the largest private general insurance company in India.
Key synergies out of the merger include consolidation of branches (already implemented), technology integration (in process), optimisation of the organisational structure, new OEM partners for the motor segment and new banca partners in distribution.
Shift in management focus
The management’s focus will be on growth than profitability.
Expects company to deliver a gross premium/PAT CAGR of 19%/28% over FY22-24.
Stock trading near all-time low one year forward valuation
The stock has corrected by 31% over the past 18 months.
The steep correction has been on account of a shift in the management’s focus to growth from profitability earlier, and expected reduction in ICICI Bank’s stake to sub-30% levels by September 2023 as per the RBI regulations from 48% at present.
The stock is trading near at all-time low one-year forward valuation. The stock should rerate towards its historic valuation as it delivers profitable growth and clarity emerges on the stake sale.