ICICI Lombard: 5 key reasons why Jefferies sees nearly 20% rise in the stock

ICICI Lombard General Insurance Company shares have been up just around 10 percent in the last one year as against an over 20 percent jump in benchmark Nifty. In January as well, while the benchmarks have hit multiple new peaks, the stock is up just 2 percent, still around 3 percent away from its 52-week high of 1,491.95, hit on December 1, 2023.

Despite the muted returns, global brokerage house Jefferies has a ‘buy’ call on the insurance stock with a target price of 1,730, implying an over 19 percent upside.

The brokerage elevated ICICI Lombard to one of its top picks, citing five compelling triggers for optimism. Firstly, the sector is expected to witness robust premium growth of 14 percent. Secondly, competitive pressures are easing, attributed in part to EOM norms. Thirdly, the combination of these factors along with network expansion is anticipated to propel ICICI Lombard to achieve a premium growth rate of 17 percent CAGR and concurrently reduce the Combined Ratio (COR) by 100-200bps between FY24 and FY26. Additionally, Jefferies notes that ICICI Bank is obligated to acquire a 2.5-4 percent stake in ICICI Lombard by September 2024. Lastly, the transition to IFRS accounting is projected to lower COR by 400bps, contributing to enhanced profitability for the firm.

“Over the past 4 years, ICICI Lombard stock price has been flat whereas EPS has risen by 60 percent over FY20-24e. In 2023, the stock was up 10 percent vs 20 percent for the market. We believe that these five triggers can be positive for the firm and we rate the stock as Buy with a PT of Rs1,730 based on 33x FY26 PE,” it said.

The brokerage noted that ICICI Lombard is the leading private general insurer in India, with a track record of robust profitable growth. It expects ICICI Lombard to post a gross direct premium income (GDPI) CAGR of 16 percent and an average CoR of 103 percent between FY23 and FY26E, which should drive an earnings CAGR of 15 percent during the same period. Moreover, capital-starved state-owned enterprise (SOE) insurers should continue to cede market share to nimble private players and ICICI Lombard should be a key beneficiary, added Jefferies.

Five Triggers in 2024

Sector to see healthy growth: The brokerage believes that the general insurance sector is well-placed to see 14 percent CAGR in premiums over FY24-26 with private players growing by 17 percent. This is better than life insurers where there is some pressure from high bank deposit rates, hike in tax rates, and a recent proposal to lower surrender charges, noted Jefferies.

Competition is easing partly thanks to EOM enforcement: As per the brokerage, the competitive intensity is easing partly reflecting the push from the regulator to meet the Expense of Management (EOM) limit of 30 percent (Cost/Premium), forcing insurers forming 11 percent of sector & 17 percent of private premiums to moderate growth/ improve profits. Growth of many smaller players has slowed between FY23 and 9MFY24, the brokerage pointed out.

ICICI Lombard to deliver healthy growth & improved profitability: In the backdrop of healthy sector growth, easier competition and investment in franchise (agency for health insurance, distribution for motor, expertise in commercial/ property insurance), Jefferies sees the stock growing premiums at 17 percent CAGR over FY24-26. Its profitability will gain from the extraction of synergies post-merger with Bharti Axa GI, some improvement in pricing (easier competition), and a smaller hike in global reinsurance costs for property catastrophe that was raised by 3% for 2024 after 37 percent for 2023 (Reinsurance Rates Rise Again), it added.

ICICI Bank to buy minimum 2.5 percent stake by September 2024: The brokerage informed that ICICI Bank is the parent and will need to buy min 2.5 percent stake in ICICI Lombard by September 2024. With the company well capitalised at 259 percent, Jefferies sees the chances for secondary purchases being higher. The exit of Bharti (owns 4 percent) needs to be watched. Still, this offer demand-tailwinds for the stock, noted the brokerage.

IFRS accounting change nearing: According to Jefferies, the Indian general insurers will move to IFRS norms from FY26 which can lift profitability as costs will be amortised, instead of being charged upfront. Volatility in income may rise as MTM gains will booked through P&L, rather than adjusted in the balance sheet. Management had indicated that this can reduce CoR by 400bps, implying a 27 percent lift in profit. Although the details are yet to be finalised by regulators, auditors and the company, the brokerage believes this can lift profit & reduce the PE ratio which is currently at 31x FY25 PE.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision

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Published: 17 Jan 2024, 05:22 PM IST

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