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Re-rating to follow growth acceleration

We initiate coverage on ICICI Lombard General Insurance (ICICIGI) with a Buy rating and a September 2023 TP of Rs1,470 (+21.1% upside). Our TP implies September 2024 PE multiple of ~30x, a minor discount to its historical average multiple. After being driven by profitability-first strategy for many years, the company is currently pursuing the growth-first strategy and, rightly so, now by protecting its market share in its turf of motor and commercial lines, while charting plans to grow retail health. With Covid-19 turbulences behind and auto market outlook (PV, CV, and 2Ws) looking much brighter (post muted and declining past three years), the private sector market leader is well poised to grow. The new growth-first strategy would mean that profitability in the near run would be suboptimal than pre-Covid trend, but this is the right strategy to protect its market position and make the business future ready.

* Growth-first strategy to protect turf and grow in newer segments: After treading on the path of profit above market share and growth, ICICIGI has changed its strategy to growth first and protect its market share in core turf (motor and commercial lines). Further, the company plans to grow in the structural growth segment of retail health. The changed strategy will result in: 1) FY22- 25 premium CAGR of 15% (vs. 2% in FY19-22); 2) Motor premium growth of 12% in FY22-25 (vs. 4% in FY19-22), supported by improved outlook for auto sales and the company making inroads in CV; and 3) Health GDPI to grow at 23% over FY22-25, driven by initiatives in retail health – which would lead to an increase of 5 ppts in health share in the company’s GDPI mix.

* The return to sub-100% combined ratio and ~20% RoE will be a gradual journey: The company’s profitability-focus strategy led to it delivering >20% RoE and a ~100% CoR every year post its listing until the Covid-19 delta wave jolted the industry in FY22. In this profitability quest, the company vacated crop and government health segments and was careful in motor CV segments. With its feet firmly placed on the accelerator by competing with aggressive players in the motor segment and widening its distribution to grow the so-far underwhelming retail health segment, the company will be operating at a slightly suboptimal (versus its own past) profitability ratio. Further, return to a ~100% CoR and 20%+ RoE will be a multiyear journey, depending upon digital and other distribution-related investment delivering efficiencies, and improving competitive environment that would lead to better pricing. Additionally, higher capitalization (Solvency at ~260% vs. 180-200% optimal) artificially suppresses the RoE figure.

* External environment looks favorable now: Auto sales (PV, CV, and 2W) growth outlook is looking brighter after a multiyear slowdown and decline, interest rate moving up (helping investment income), motor TP seeing a hike after the pause of two years, and the likely hope of pricing discipline in motor OD mean that the external environment is looking far more comfortable for ICICI Lombard than it has been in recent years.

* Initiate with Buy and a TP of Rs1,470: Muted growth, deteriorating industry dynamics, and some specific non-operating concerns led to ICICIGI’s shares de-rating to the recent ~25x 2Y-forward EPS versus average of ~32x in the preceding three years. Now, with growth returning for the company and industry dynamics likely improving, we expect performance delivery to drive the gradual re-rating back to earlier levels. We Initiate Coverage on ICICIGI with a Buy rating and a TP of Rs1,470 (implying ~30x Sep’24 EPS). Key risks: Downside: Sustained intense competition; Slower economic growth; Widespread pandemic; Upside risks: Faster consolidation in the industry; and Sustained strong economic growth.

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