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ICICIGI de-rated over the past three years owing to stake sale

Post-merger with Bharti AXA, the stake of ICICI Bank in ICICI Lombard (ICICIGI) had reduced to 48.02% owing to the fresh issue of shares. As per the RBI regulations, ICICI Bank had to reduce the stake to 30% by Sep’23. However, in Mar’23, the RBI extended the timeline to Sep’24. This has been a key overhang for the ICICIGI stock since the merger announcement with Bharti AXA in Aug’20. We note that the stock has seen a massive de-rating in its valuations in P/E terms to 28x currently from 55x in Dec’20.

ICICI Bank plans to raise stake in ICICIGI by 4%; overhang removed

The Board of Directors of ICICI Bank has approved an increase in shareholding in ICICIGI, in multiple tranches, up to 4.0% additional shareholding as permissible under the applicable law. This is to ensure compliance with Section 19(2) of the Banking Regulation Act, 1949 and make ICICIGI a subsidiary of ICICI Bank subject to receipt of necessary regulatory approvals. ICICI Bank would acquire at least 2.5% stake out of the above 4.0% before 9th Sep’24. This removes a key overhang on the stock.

Precedence of HDFC Bank being allowed to increase stake in HDFC Life

Post-announcement of the merger between HDFC Bank and HDFC Ltd, the stake of the merged entity in HDFC Life would have stood at 48.65%. Akin to the reaction for ICICIGI stock, HDFC Life too underwent a de-rating. However, in Apr’23, the RBI offered relaxation to the HDFC-HDFC Bank merged entity to own more than 50% stake in HDFC Life. This sets precedence for ICICI Bank to enhance its stake in ICICIGI.

Focus back to the core business | Reiterate BUY with a TP of INR1,400

Going ahead, growth in the motor segment is likely to be back-ended with the company waiting for the rationalization of pricing in the OD segment. On the health segment, the benefits of price hike and improving efficiency of the agency channel should translate into improved profitability. Synergy benefits from Bharti AXA merger (technology-related), scale benefits, and improvement in mix on health business (higher share of retail health) should aid in improving the combined ratio and RoE over the next couple of years. We maintain our BUY rating with a TP of INR1,400 (premised on 29x FY25E).

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