Moneycontrol Bureau
Morgan Stanley has initiated coverage of ICICI Prudential Life Insurance Company with overweight rating and target price of Rs 365, citing likely multi-year improvement in profitability.
"While valuations are significantly higher than regional peers', we believe this is justified by ICICI Prudential's superior operational metrics and distribution tie-ups (allowing it to gain market share and improve profitability in still nascent Indian insurance market), fast growing protection premiums, low balance sheet risk and high capital, even as higher focus on ULIP could keep growth volatile," the brokerage reasoned.ICICI Prudential is a subsidiary of India's largest private sector lender ICICI Bank.
According to its research note, key catalysts include strong growth in protection premiums and continued strong equity market performance.
Morgan Stanley has a positive view on Indian life insurers with strong distribution and good operational metrics, saying ICICI Prudential Life Insurance is one such strong franchise, helped by its well-balanced distribution mix (including a captive bank tie-up with ICICI Bank) and a sharp improvement in cost and persistency ratios in recent years.
The insurance company has a high focus on selling unit-linked insurance products (ULIP contributes 80 percent to its premiums and has 35 percent industry share) in relatively high income segments.
"This would drive growth amid improving equity and debt market conditions. ULIPs, over the medium term, compete well with mutual funds because of expense loadings declining to levels even below what regulations allow," the brokerage house said.
Despite industry-leading persistency and cost ratios, ICICI Prudential's margins have been lower than peers'. Morgan Stanley expects the gap to narrow in FY17-19 because of a rising share of protection mix, improving persistency ratios, and higher economies of scale.
According to the brokerage house, key downside risks include weak equity markets; more competition in the protection business; weaker persistency ratios; a potential tie-up by ICICI Bank with other insurers; and an increase in corporate income tax rates.
ICICI Prudential announced its first quarterly earnings last month after listing on exchanges. Profit during July-September quarter grew by 3.4 percent sequentially and 0.91 percent yearly to Rs 418.78 crore and total income increased 2.9 percent quarter-on-quarter and 97.3 percent year-on-year to Rs 9,144 crore.
The company said it had registered a year-on-year growth of 17.1 percent in retail weighted received premium for April-September period of 2016 and achieved private market share of 24.2 percent. It 13th month persistency ratio has improved to 82.1 percent in H1FY17 from 81 percent in H1FY16.
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