Insurance and Capital Markets
Brokers and asset managers are expected to post a stronger 1QFY21 than general and life insurers.
* Asset Managers. 1QFY21 was a challenging quarter for the domestic mutual fund industry as active equity flows declined 52.4/84.4% YoY/QoQ to Rs 39bn. The Nifty index delivered 37.1% in 1QFY21, leading to healthy MTM gains for equity AUMs. This was also reflected in active equity AUMs, which improved 6.7% QoQ to Rs 9.77tn. Strong MTM gains are expected to aid AMC revenues. Inflows into debt mutual funds improved to Rs 78bn vs. Rs (509)bn in 4QFY20 as credit market conditions eased May-20 onwards. Equity MTM gains on treasury are expected to boost other income for the companies. MOFS: The AMC business is showing traction despite a difficult environment. MOFS is also expanding its broking business, and ADTVs are supportive. We downgrade the stock to ADD with an increased target price of Rs 715, i.e. P/E of 12/30x broking/AMC business Mar-22E EPS.
* Broking. We expect increased cash ADTVs (+64.1/36.5% YoY/QoQ) in 1QFY21 and market volatility is expected to contribute positively to broking revenues and earnings in 1QFY21. Cash share in total ADTV has increased to 4.7% (+157bps YoY). We believe this to be a cyclical phenomenon and, as volatility reduces, ADTVs are expected to reduce. Over the medium to long term, we do believe that the industry will consolidate and large brokers will survive. Distribution income will get negatively impacted by lower equity prices, lower insurance sales and lower upfront revenues from the sale of PMSs. ISEC: We downgrade the stock to REDUCE with a revised target price of Rs 530 (i.e. 25x FY22E EPS). We have marginally increased our multiple on account of strong earnings growth expectations in FY21E.
* General Insurance. The private multi-line insurers’ GDPI declined 9.7% YoY in 1QFY21. The lockdown through most of Apr/May-20 impacted new vehicle sales drastically resulting in a much lower premium collection. Additionally, renewals were also impacted as vehicle usage reduced considerably. We expect strong premium collection in health, driven by increased awareness of COVID-19. Increased pricing for property is expected to drive topline growth. The overall premium growth is expected to remain weak. CORs are expected to improve as claims ratios will decline for most segments- motor, property and other miscellaneous segments. ICICIGI: Over FY21E, we expect the lockdown and partial working conditions to result in lower topline growth, but improved CORs. We retain our SELL rating on ICICIGI with a target price of Rs 1,042 (Mar-22E P/E of 26.2x and a P/ABV of 5.5x) as valuations are high and market is ignoring risks on any potential de-tariffication action of motor TP.
* Life Insurance. The private life insurers individual NBP/APE declined 14.7/18.2% YoY as a result of the lockdown. This is expected to result in lower toplines for the companies. We expect protection and NPAR share to grow materially in the mix as consumers look for security and certainty. We expect VNB margins of most insurers to improve, given a higher share of protection. We will be keenly watching out for commentary around persistency and new sales outlook. SBI LIFE and MFSL are our top picks with target prices of Rs 975 (+13.4%) and Rs 645 (+14.9%) respectively
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