Motilal Oswal Maintains Buy On This Large Cap Insurance Stock, Sees Robust 26% Gains

Motilal Oswal maintains "buy" call on ICICI Prudential Life Insurance Company Limited (IPRU) with a target price of Rs 600/share. Considering the given target price, investors can expect gains of up to 26% if the stock is purchased at the current market price. IPRU is a large-cap insurance sector company with a market capitalisation of Rs 68,452.97 crore. IPRU carries on the business of providing life insurance, pensions and health insurance products to individuals and groups.

The brokerage recently organized an interactive session with the top management of IPRU - CFO Mr. Satyan Jambunathan and Deputy CFO Mr. Dhiren Salian - to discuss the various regulations being introduced by the regulator, the industry, and its growth and margin outlook.
Key insights from the discussion are highlighted below:

Stock Overview

On NSE, IPRU's stock traded at Rs 476.20/share, gaining 1.08% as compared to its previous close. The current market price of the stock is trading 10% up from its 52 week low level. Its 52-week low is Rs 430, which was recorded on 8 March 2022 and its 52 week high is Rs 648.85, which was recorded on 18 January 2022, respectively.

It has given 3.5% positive returns in a week. However, in 1 and 3 months, it has fallen by 5.17% and 19.91%, respectively. In 1 year, the stock has fallen 19.7% and in 3 years, it fell by 5.22%, respectively. In 5 years, the stock gave 26.67% positive returns. 

Growth trend stays modest; focus remains on growing the sum assured

Growth for IPRU has remained modest over the past few months, led by sluggish growth in ULIP, impacted by increased market volatility and weak trends in the Protection business, primarily Retail Protection. The festive season in Oct'22 impacted volumes. However, the same is likely to see an uptick going forward. IPRU is focused on growing its sum assured as it feels it is a more important metric for the profit pool rather than just APE growth. It is not targeting any product mix, and the focus remains on growing revenue. Overall, the management expects premium growth to be in line or slightly higher than peers, barring select names.

VNB growth remains the key business metric; margin to stay steady

The management indicated that growth in absolute VNB is the most important metric, even ahead of VNB margin. It is not targeting any specific margin level, and the focus remains on growing in a profitable manner. Growth in APE picks up and an improving product mix will keep margin steady and drive VNB growth.

Well-diversified distribution franchise; increase in tie-ups and commission rates to have a limited impact

IPRU's distribution franchise has become fairly diversified and will incrementally compensate for the drag created by ICICIBC's banca channel. It has entered into a partnership with UCO, which is its first tie-up with a public sector bank. The management believes that the softness in growth of ICICIBC's banca channel should not impact VNB growth going forward. While the recent increase in the number of distributors by the regulator aims to provide a free market operation, IPRU doesn't expect a meaningful impact as distributors expect to work with a few players, given the procedural complications and services associated with multiple entities. On commission rates, most insurers, barring a few top names, are working near the regulatory limit, and thus the management does not see heightened competition-led by higher commission rates.

Solvency to improve by 5-10% on revised ULIP regulations; transition to risk-based solvency to provide a significant boost

The recent change in solvency ratio guidelines, with respect to ULIP, is likely to increase the solvency ratio by 5-10%. This change indicates a possible shift towards risk-based-solvency, which will provide a significant boost to solvency ratio (to over 350% v/s 201% at present).

Recent regulations by IRDAI aim to improve penetration and facilitate the ease of doing business

The guidelines issued by IRDAI provide a regulatory direction for Insurance companies to improve penetration and achieve its vision of Insurance for all by CY47. These guidelines are likely to raise awareness about the sector and aims to facilitate the ease of doing business by providing operational freedom, release of capital, and increased leeway being given to insurers. Another important objective of the regulator is to create an inclusive technology-led platform, with the introduction of Bima Sugam, which can be a game changer. By providing sales and offer customer services, it will offer a better proposition to consumers. Bima Sugam can work as a repository of Insurance and further disseminate product information, which can aid in customer acquisition. These benefits are likely to accrue over the next 12-36 months.

Valuation and view

IPRU has maintained a steady traction in VNB growth, led by a healthy product mix and APE growth. The share of banca (excluding ICICIBC) has risen to 14% from 4% in FY19, aiding growth and diversification in the distribution mix. The increase in agent recruitments and strong pace of adding new partnerships will continue to aid premium growth. The strategy of approaching customers, with a wider product bouquet through all channels, will boost premium growth. "We expect IPRU to deliver 23% CAGR in VNB over FY22-24, led by a combination of premium growth and a slight improvement in margin, thereby enabling operating RoEV ~17% in FY24. We maintain our Buy rating with a TP of INR600 (premised on 2x FY24E EV)," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective 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 making any investment decision.