Buy this financial sector stock with low leverage for 24% upside potential
1. Stock market outlook
The current market price of ICICI Prudential life insurance is Rs 520 each with its 52 week high at Rs 724.30 each and its 52 week low at Rs 430 each. According to BOB Capital, if you buy the stock at its current market price of Rs 520, it can reach its specified target price of Rs 645 each with a potential return of 24%. The stock has returned 37% in 2 years and 9.8% in 5 years.
2. Strong growth of APEs
IPRU APE in Q1FY23 increased by 25% YoY to Rs 15.2 billion, while Protection APE (22% share) increased by 22%. Savings grew 25% year-on-year to Rs 11.9 billion, driven by unrelated and annuity segments. We are factoring in a CAGR of 16% in APE growth in FY22-25 to Rs 120 billion due to IPRU’s emphasis on a balanced product mix. VNB grew 32% YoY to reach 4.7 billion rupees in the first quarter of FY23, validating management’s target to double the business by ~ 13 billion rupees during the year. EX19 at ~Rs 26 billion this year. Q1 VNB margin of 31% (vs. 28.0% in FY22) stems from focus on higher margin products despite faltering retail protection business (carrying the highest margins) . We expect absolute VNB to register a CAGR of 16% over FY22-25 at Rs 34 billion with VNB margins of 28-29% over the forecast period.
3. Moderate gross premium growth
Gross premium grew a modest 6% year-on-year, driven by 26%/18% growth in single premium/first year. The new business bonus (NBP) increased by 23% year-on-year, while the renewal bonus decreased by 6%. The surplus on the policyholders account more than doubled to Rs 3.9 billion and the company also reported profit for shareholders of Rs 1.6 billion (loss of Rs 1.9 billion in Q1FY22). The share of the bancassurance channel in total APE increased from 39% in Q1FY22 to 35% in Q1FY23, with the decline in the share of ICICI Bank being offset by the strong growth in the share of other banks (15% of total APE compared to 4% three years ago). The group’s channel posted robust growth, with its share rising to 21%.
4. High cost ratios
The operating ratio of 12.6% (11.2% in Q1FY22) looks high on a 20% increase in absolute operating expenses, but still below new business growth. The commission rate at 4.2% remained broadly stable. We assume operating ratios of 9.8%/9.7%/9.7% for FY23/FY24/FY25 and commission ratios of 4.5%/4.6%/4.6% .
According to BOB Capital, “The stock is trading at 1.8x FY24E P/EV. Given adequate solvency margins and high persistence, offset by declining market share (NBP), we rate the company at 2.2x FY24E P/EV – a 10% reduction from the long-term average – leading to a TP of Rs 645 with a 25% upside from the current price.”
6. About ICICI Prudential Life Insurance
It is promoted by ICICI Bank Limited and Prudential Corporation Holdings Limited. ICICI Prudential Life commenced operations in fiscal year 2001. Based on Retail Weighted Received Premiums (RWRP), it has consistently been among the top companies in the Indian life insurance industry. Our Assets Under Management (AUM) as of March 31, 2022 was 2,404.92 billion. It has a market capitalization of Rs 74,878 crore.
The stock was featured in the BOB Capital Markets Ltd brokerage report. Greynium Information Technologies, the author and the respective brokerage are not responsible for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.