ICICI Lombard note: Buy- Growth levers exist for higher profits


The strong growth potential of the non-life segment is a key investment argument for equities; upgraded to ‘Buy’ with a revised TP of Rs 1,675

The strong growth potential of Indian non-life insurance remains the main investment argument for ICICI Lombard (ICICIGI). The company’s RoE and market share remain stable and there are several levers available that could potentially result in a positive earnings cycle over the next two years. We are upgrading the stock to buy with a revised target price of Rs 1,675 (formerly: Rs 1,755) based on 40x FY23e EPS of Rs 41.9 (formerly: Rs 39.3) as ICICIGI will be a major beneficiary of the positive cycle in non-life insurance.

The company’s stable business model and exemplary track record remain solid investment theses for us. ICICIGI earnings registered a 24% / 22% CAGR in the last 5 years / 8 years up to FY21. The stability of the activity is illustrated by the fact that the RoE was less than 18% only twice between the 2012-21 financial years despite the cyclicality inherent in the underwriting activity. Profits from investments provided structural support as they increased from Rs 4 billion in FY12 to Rs 10 billion in FY16 and to Rs 21.5 billion in FY21 . In addition, multisectoral insurers have certain advantages, such as the possibility of cross-selling between different groups of SME, healthcare and automotive agencies. On the damage side, the company has already been able to establish multiple product and risk management offerings that contribute to better customer traction. The scale also allows for better cost management and better rates with reinsurers.

The concerns about competition are overblown: we say this for two reasons (i) The opportunity in non-life insurance is huge, as evidenced by underpenetration, which is sure to bring competition and ( ii) ICICIGI has been able to maintain market share in key segments. The recalibration of the distribution leading to a loss of healthcare market share will be addressed in the short term.

We see important growth levers to come, in particular (i) the resumption of registrations of new motor cars, (ii) the increase in engine public works rates (iii) the realization of organic health initiatives and (iv) the achievement of synergies through the acquisition of Bharti Axa. In addition, there is a low base of FY22 for ICICIGI. We take into account the CAGR of 13% of PIBI between fiscal years 22 and 24 E. ICICIGI GDPI CAGR has been 12% in the last two years 5/10.

Car sales recovery: New car sales figures, as seen in FY22, include the impact of many unfavorable factors that may gradually reverse over the next two years. Major OEMs expect a gradual resolution of the semiconductor shortage problem. Auto TP rate hikes have not happened since June 2019 and are expected to occur over the next two months to counter cost inflation.

Benefits of the upcoming merger: We believe cost synergies with Bharti AXA would likely be realized within the next 12 months, while revenue synergies will take 24 months. As such, we can expect a combined ratio of 100 to be reached by FY24 if other metrics remain favorable.

Road to recovery in the healthcare segment expected during FY23-24E: at a strategic level, the company is doing two things (i) investing in healthcare distribution with the hiring of 1,000 agents in S1FY22 and ( ii) try to establish a strong connection with IL Take Care Application. The company expects success with the POD (Prevention, Outpatient and Digital) strategy for health. In our opinion, these should start to lead to higher growth from T4FY22.

Expect a 17% CAGR on FY22-24e: this can be broken down into a subscription loss of Rs 8/6/5 billion and an investment profit of Rs 37/40/43 billion in FY22E / 23E / 24E. We maintain our estimate of investment leverage below 4.3x during FY22 / 23 despite the fact that it may increase with a positive cycle as seen in the past. In addition, we do not take revenue synergies into account in our estimates.

Risk: The only risk to earnings is if there is a change in strategy to accommodate higher growth through lower margins. This strategy is possible but depends on the competitive intensity.

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