Domestic brokerage firm Motilal Oswal Financial Services has initiated coverage on the stock of ICICI Lombard General Insurance Company (ICICIGI) with a 'buy', fixing a one-year target price of ₹1,500, implying a 17 percent upside in the stock.
The brokerage firm is positive about the stock due to its wide market share and a better outlook on the general insurance industry.
"The general insurance industry is all set to deliver a healthy 12 percent CAGR in premium over the next decade led by (1) healthy trend in auto sales, (2) sustained strong momentum in health insurance demand and (3) commercial insurance lines growing in line with robust economic growth," said Motilal Oswal.
"ICICIGI has emerged to be India’s largest private sector general insurance company post its merger with Bharti Axa (BAXA). Stronger correlation with new auto sales, investments into the health distribution channel, synergies from BAXA merger and expected results of past investments in technology are the key earnings triggers for ICICIGI," the brokerage firm added.
Motilal Oswal highlighted that during FY22-24, ICICI Lombard delivered a premium and PAT CAGR of 19 percent and 28 percent, respectively, and an RoE of 19.1 percent in FY24. The stock is trading closer to its trough P/E multiples post a 31 percent correction in the last 18 months.
The brokerage firm thinks ICICIGI is well-placed to capture the ensuing revival in auto sales and expects the company to report a 21 percent CAGR in the motor segment, led by a 19 percent and 23 percent CAGR in motor OD (own damage) and TP (third party) business, respectively.
In the health business segment, the company has a tremendous opportunity as India is highly underpenetrated in terms of the health business. Motilal Oswal pointed out that in India, only 4 percent of the population is covered under retail health insurance plans. This provides huge growth opportunities for players in the industry.
"To capture a higher share of growth opportunities emerging in the segment, ICICIGI has invested in building its individual agency channel, wherein it is hiring 1,000 agency representatives. The benefits of the same will be reaped in the near future. Its investments in technology (such as the IL TakeCare app) will aid growth going forward," Motilal Oswal said.
The brokerage firm expects the claims ratio to normalize to pre-COVID levels in FY23 and improve going forward as aggressive growth will lead to a much younger customer base. However, the expense ratio is likely to remain higher, restricting the improvement in the combined ratio for this segment, Motilal Oswal said.
Apart from the fundamentals, the stock looks attractive n terms of valuation too. As Motilal Oswal pointed out, the stock has corrected by 31 percent over the past 18 months, even as the Nifty remained flat.
"The steep correction has been on account of: (1) shift in the management’s focus to growth from profitability earlier, and (2) expected reduction in ICICIBC’s stake to sub-30 percent levels by Sep’23 as per RBI regulations from 48 percent at present. After the correction, the stock is trading near an all-time low one-year forward valuation. The stock should re-rate towards its historic valuation as it delivers profitable growth and clarity emerges on the stake sale," said the brokerage firm.
Disclaimer: The views and recommendations made above are those of the broking firm and not of MintGenie.