Buy ICICI Prudential Life Insurance Company Ltd. For Target Rs.479 - HDFC Securities
We believe India’s highly underpenetrated life insurance space is still at a very nascent stage and is attractively positioned to capture the huge growth opportunity. Large private players especially sponsored by banks are in better placed to take advantage given their ability to push protection business by leveraging strong brand and existing network. They have access to adequate capital and can invest in online platforms. Also, insurance industry’s inherent nature of long gestation period to break-even (9-10 years) and need for bancassurance partnership provides a very bleak visibility for a new entrant which in turn is extremely positive for well-established larger bancassurance players. We feel that this COVID-19 situation could be blessing in disguise over the medium term for the industry as it will create renewed push for insurance coverage by Government and increase need for coverage felt by the general public.
We like ICICI Pru’s re-engineered business model which is focused on a more diversified product mix along with an increased protection share. We however remain wary of the current Covid-19 situation and believe that outlook for FY21E remains hazy. Lower than expected growth in FY21E may delay goal of doubling VNB by FY23E.
Valuations and Recommendations:
We expect FY21E to be a challenging year for the ICICI Pru. We expect the company to deliver flat CAGR for New Business Premium (NBP) and a decline of 3.6% in Value of New Business (VNB) over FY19 to FY22E. Embedded Value (EV) is estimated to grow by 12.7% CAGR over same time frame. We have incorporated RoE improvement by 310bps between FY20-22E. Despite significant price appreciation from recent lows, ICICI Pru is still trading at significant discount to other peers like HDFC Life and SBI Life. For FY22E the company is trading at 2.0x Embedded Value.
We feel that investors can buy ICICI Pru Life on dips to Rs.406-410 band (2.0xFY22E EV) and add more on dips to Rs.365-369 band (1.8xFY22E EV). The Base case fair value of Rs.448 (2.2xFY22E EV) and the Bull case fair value of Rs.479 over the next 2 quarters.
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