LIC, HDFC Life, SBI Life: Emkay upgraded ICICI Prudential Life Insurance Company Ltd to 'Buy', maintained its buy rating on SBI Life Insurance, and suggested 'ADD' on HDFC Life Insurance Company Ltd.
Emkay Global stated on Thursday that the continuous underperformance of life insurance stocks appears to reflect an overreaction to potential regulatory changes, overlooking the robust franchise strength of listed players, including brand reputation, distribution channels, and market scale. The domestic brokerage has shifted to a positive outlook on life insurers for the medium term, driven by favorable demographic and economic factors. It upgraded ICICI Prudential Life Insurance Company Ltd to 'Buy' while maintaining a buy rating on SBI Life Insurance. Additionally, the brokerage recommended 'ADD' for HDFC Life Insurance Company Ltd, Life Insurance Corporation of India (LIC), and Max Financial Services Ltd.
Emkay highlighted anticipated challenges for life insurers in FY24, which were expected to impact growth and margins. A year later, life insurers have adapted to this new reality, yet current valuations appear to overlook the robust franchise strength and consistent performance of these listed companies over the past 5-7 years. Despite facing regulatory shocks during this period, they have demonstrated impressive growth in Embedded Value (EV) and Value of New Business (VNB).
"With significant regulatory changes largely in the past and supportive underlying structural factors, we are more optimistic about the sector's medium-term growth prospects. With a diversified product mix and distribution channels, ICICI Pru is well positioned for medium-term growth, as most of the previous growth challenges have now eased," stated Emkay.
The brokerage has proposed a new target price of Rs 700 per share for ICICI Prudential, up from the previous Rs 550, indicating a FY26E P/EV ratio of 1.9 times.
It has reaffirmed a 'Buy' rating on SBI Life with a target price of Rs 1,800, and a target of Rs 700 for HDFC Life. Emkay has set a target of Rs 1,200 for LIC shares and Rs 1,150 for Max Financial. Below are Emkay's remarks on the life insurance companies.
HDFC Life possesses a strong franchise and a history of innovation leadership, currently presenting appealing valuations. The recent promotion of HDFC Bank as its promoter signals positive prospects, particularly with HDFC Bank's branch expansion plans benefiting HDFC Life. Nevertheless, aligning growth and profitability with industry peers will cap valuation premiums. Cost efficiency remains crucial for HDFC Life to offer products that meet customer demands in the current market landscape. A notable upside risk lies in a significant uptick in business through HDFC Bank.
ICICI Prudential Life has experienced a turbulent history, which is reflected in its valuation metrics. Presently, it boasts one of the most diversified and risk-mitigated product portfolios, with minimal impact from changes in surrender regulations. Its distribution network is also highly diversified, with the largest distributor ICICI Bank contributing 13 percent of APE, and a distributor with open architecture contributing only one-third of the APE. With many growth obstacles now in the past, including stabilizing new business with ICICI Bank and the expected decline in high-ticket, non-linked business in FY24, the company is poised for growth relative to the industry. Margins are anticipated to stabilize around current levels, driven by volume growth and improvements in product mix, particularly in protection, annuity, and non-par savings. As sustained growth is achieved, gradual share re-rating is expected to continue.
Life Insurance Corporation:
LIC's expansion into non-par products indicates continued margin expansion. While challenges on growth and cost fronts have largely subsided, narrowing growth differentials with private peers and absorption of significant one-off costs over the past few years contribute to this outlook. However, higher sensitivity of its Embedded Value (EV) to equity market movements and an operating Return on Embedded Value (RoEV) remaining below the Cost of Equity imply that the stock will likely trade below its EV. "According to our fair value assessment, current pricing of LIC shares offers a promising upside of 20 percent," stated the report.
Max Financial:
With Axis Bank now serving as the promoter of Max Life, the franchise possesses all the essential elements for success in the Indian Life Insurance sector. However, a few short-term concerns may temper valuation multiples: i) Lack of clarity regarding the process and timeline of the Max Life structure collapse. FY25 might witness Birla Life and Tata AIA promoting their products at Axis Bank branches, although the CEO of Axis Bank has reiterated commitment to maintaining Max Life's share in their life insurance business at 65-70 percent. The perceived impact of surrender regulation changes remains higher for Max Life, as noted by Emkay.
SBI Life:
The formidable brand and extensive distribution network of SBI establish it as a powerful franchise in the sector. Its efficient cost structure enables SBI Life to offer products according to customer demand amid prevailing market conditions. With the strong 'SBI' brand and expansive distribution network, the company is well equipped to adapt to evolving regulatory frameworks.
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