Buy ICICI Lombard For 17% Gain, Corrected Over 31% In Last 18 Months: Motilal Oswal

Motilal Oswal has given buy rating to the stock of ICICI Lombard General Insurance Company Ltd. (ICICIGI) for 17% gain if you purchase it at its current market price of Rs 1277 apiece. ICICIGI has emerged to be India's largest private sector general insurance company post its merger with Bharti Axa (BAXA).

Stronger correlation with new auto sales, investments into health distribution channel, synergies from BAXA merger and expected results of past investments in technology are the key earnings triggers for ICICIGI.

1. Stock Outlook

The current market price of the stock is Rs 1276 apiece with a 52-week high of Rs 1675 apiece and 52-week low of Rs 1071 apiece, respectively. According to brokerage firm Motilal Oswal, if you buy the stock at the CMP of Rs 1277, it has the potential to surge to Rs 1500 apiece with a gain of 17%. The stock has fallen 18.67% in 1 year and has given a return of 87.35% in 5 years.

2. ICICIGI well-placed to capture the ensuing revival in Auto sales

Following a muted growth in auto sales over the past couple of years, we expect a revival led by: 1) the easing of supply-side issues as the global economy opens up, 2) relatively stronger economic growth and Infrastructure investments driving demand for CVs, and 3) the opening up of offices and colleges, which will drive 2W demand. ICICIGI auto segment has a relatively stronger correlation with new Auto sales when compared to that of the industry (60% v/s 40%).

3. Investing in the Health business to gain market share

To capture a higher share of growth opportunities emerging in the segment, ICICIGI 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. Its investments in technology (such as the IL TakeCare app) will aid growth going forward. In the Group Health segment, the management aims to grow the profitable SME segment as compared to the loss-making Large Corporate segment. We expect the claims ratio to normalize to pre-COVID levels in FY23 and improve going forward as aggressive growth will lead to a much younger customer base.

4. Synergies from Bharti AXA merger will drive improvement in combined

ICICIGI merged with Bharti AXA in FY22 following the receipt of all requisite approvals. The merged entity is now the largest private General Insurance Company in India. Key synergies out of the merger include: 1) consolidation of branches (already implemented), 2) technology integration (in process), 3) optimization of the organizational structure, 4) new OEM partners for the Motor segment and 5) new banca partners in distribution. So far, the company has reaped INR0.7b in benefits in FY22 and expects further benefits of INR1.3b in the near term. These should translate into strong improvement in combined ratio for the merged entity from 109% in FY22 to 101.4% by FY24.

5. Valuation

The stock has corrected by 31% over the past 18 months, even as the Nifty remained flat. The steep correction has been on account of: 1) shift in the management's focus to growth from profitability earlier, and 2) expected reduction in ICICIBC's stake to sub-30% levels by Sep'23 as per RBI regulations from 48% at present. After the correction, the stock is trading near at all-time low one year forward valuation. The stock should re-rate towards its historic valuation as it delivers profitable growth and clarity emerges on the stake sale. We initiate coverage on ICICIGI with a Buy rating and a one-year TP of INR1,500 (35x FY24E P/E).

ICICI Lombard Overview

ICICI Lombard General Insurance Company Limited is one of the leading private sector general insurance companies in India with a Gross Written Premium (GWP) of ₹185.62 billion for the year ended March 31, 2022. The company issued 29.3 million policies and settled 2.3 million claims as on March 31, 2022. It has a market capitalisation of Rs 62,664 crore. 

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal Financial Services. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decisions.