Analyst Call Tracker: Why Bajaj Finserv earned street's optimism while HDFC Life faced highest downgrades in February

The insurance sector took a hit last month when the finance minister proposed in her budget taxation of high-value policies (excluding unit-linked products) with an annual premium of over Rs 5 lakh.

HDFC Life Insurance received the most number of downgrades last month, while peer Bajaj Finserv got the most upgrades. What caused the divergence?

The insurance sector took a hit last month when finance minister Nirmala Sitharaman proposed in her budget taxation of high-value policies (excluding unit-linked products) with an annual premium of over Rs 5 lakh.

HDFC Life Insurance was hit particularly hard because it has a higher share (over 10 percent) of the business of non-unit-linked policies with an annual premium of over Rs 5 lakh than its peers. The company’s stock price has tanked 15 percent since then.

According to Deepak Jasani, head of retail research at HDFC Securities, “[HDFC Life has a] very high dependence on a product which may go out of fashion or may have to be revamped or relaunched based on the new budget proposals.”

The company was the most expensive insurance stock, which could have also led to increased downgrades, he added.

Diverse offerings

Why wasn’t Bajaj Finserv impacted as much, with analysts having just the opposite sentiment?

While the budget proposal was certainly a “dampener,” as Bajaj Allianz Life’s CEO Tarun Chugh called it, the optimism stems from Bajaj Finserv’s interests beyond insurance.

“Bajaj Finserv is a more diversified business,” said Abhay Agarwal, founder of Piper Serica Advisors, a portfolio management services firm. “It has more than 50 percent shareholding in Bajaj Finance that is its biggest value driver and then it has a very wide business portfolio. It has life insurance, it also does non-life insurance. It has just got its mutual fund licence. So it has a very varied portfolio compared to HDFC Life, where only the life insurance business is there and even that is under pressure now.”

Bajaj Finserv holds 52.49 percent in Bajaj Finance. While it offers insurance through Bajaj Allianz Life Insurance and General Insurance subsidiaries, it also offers other financial services including lending (Bajaj Finance), and asset and wealth management (Bajaj Finserv Asset Management).

The company received a regulatory license to start its mutual fund business on March 2. Bajaj Finserv said it now offers the full range of financial services for customers through their lifecycle.

“Healthy pick-up in lending assets under management and selective approach in insurance business coupled with a focus on digitisation remain positive,” ICICI Direct said about Bajaj Finserv.

Bajaj Finance itself was the street’s favourite, with the highest upgrades by analysts over the last quarter.

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“The company’s digital initiatives and business transformation are key positives and are currently progressing well,” said Axis Securities. The digital transformation is likely to be completed by FY23 and is expected to make a meaningful contribution to overall growth, it added.

Bajaj Finserv shares gained 0.71 percent to Rs 1,353.05 at the close on the National Stock Exchange on March 3. Bajaj Finance added 0.18 percent to Rs 6,094 and HDFC Life climbed 1.52 percent to Rs 490.15.