ICICI Lombard General Insurance’s share price has tumbled more than 9% so far this year, largely in line with the headline indices. The stock has de-rated with growth deceleration, rising competition, and lower ROEs, said analysts at Credit Suisse. The global brokerage firm has initiated the coverage of ICICI Lombard General Insurance and is bullish on the stock. “The stock has derated from long-term mean of 40x fwd earnings to 25x currently. While the delayed ROE recovery warrants a discount to long-term multiple, we believe execution on growth and health franchise scale-up will drive re-rating for the company,” Credit Suisse said.
With an ‘Outperform’ rating, Credit Suisse has pinned a target price of Rs 1,400 per share on the scrip. This translated to a strong 10% upside from Friday’s opening price of Rs 1,273 per share. “We initiate with an OUTPERFORM rating and value ILGI at 32x 24-month forward earnings (20% discount to LT mean) to arrive at our target price of Rs1,400,” analysts said.
Premium growth pickup
ICICI Lombard’s growth has decelerated over the past three years due to the slowdown in motor premiums (~50% of ILGI’s premiums ex-crop) due to lower auto sales and intensifying competition. Analysts at Credit Suisse expect auto sales to improve going ahead which will help the insurance provider. Apart from this, ICICI Lombard’s management has stated its intent to improve market share in the high-growth CV segment, where it has not been a meaningful player in the past. The brokerage firm expects overall premium growth to recover to ~14% CAGR (ex-crop) over FY22-25.
“We expect FY23E loss ratio to improve ~200bp to ~73%, as health claims normalise post-Covid and could improve another ~100bp by FY25E, as the share of health climbs up to >24% in the mix (ex-crop),” analysts said. Further, the insurance firm is expected to gain from rising interest rates. “Even as underwriting surplus generation is delayed, investment income is expected to improve meaningfully, given the upward movement in yields,” said Credit Suisse. They added that stronger investment income and reducing underwriting losses (led by opex ratio improvement) will drive recovery in profitability over FY22-25E.
Business model resilient
Analysts noted that post-Bharti AXA acquisition, ICICI Lombard’s market leadership amongst private players has further strengthened, with an ~8.1% overall market share. “ICICI Lombard has strong relationships with dealer/brokers networks which make up ~50% of its premiums. Volume-wise, newer arrangements like point-of-sales agents are gaining share for ICICI Lombard,” Credit Suisse said.
The brokerage firm further noted that, on a large premium and capital base, ICICI Lombard’s profitability has been ahead of most large peers consistently over the past five years. “While the delayed ROE recovery warrants a discount to the long-term multiple, we believe concerns on growth and competition intensity should recede,” they added.
