Company poised to build on its leadership position; ‘Buy’ retained with TP of `1,300
ICICI Lombard’s Q1FY20 earnings were in tune with consensus. While PAT grew 7.1% y-o-y to Rs 3.1 bn, gross direct premium income (GDPI) dived 7.6% y-o-y on account of discontinuation of crop insurance (21% of Q1FY19 GDPI). Net earned premium (NEP), however, grew 21% y-o-y due to low crop insurance retention rates. Investment leverage has now reached 4.3x net worth, ~20bps improvement q-o-q. We expect the 5x threshold to be breached by FY21. Combined ratio stood at 102% (75.5% loss ratio), ensuring RoE of 23%. Maintain Buy and TP of Rs 1,300.
We believe, the company is poised to further consolidate its leadership led by:
(i) scale-driven operating cost & pricing edge; (ii) sustained ramp-up of profitability-critical retail product distribution; and (iii) investments to sustain technology leadership. Key risks are growth/scale-agnostic focus on earning too high RoE, structurally lower interest rates for India and under-investment in tomorrow’s differentiators, retail distribution & technology.
Distribution investments remain key focus: The company has added close to a third of its agency distribution force of 39K in the past 12 months. Management believes benefits of this investment have started flowing in the past six months.
Outlook: We believe, ICICI Lombard can grow at 20% for the next 20 years while maintaining 20% RoE. Under-penetration assures the high-growth phase will endure while altered sector landscape and improved economics ensure growth acceleration. High float levels, scale-led cost/pricing edge, distribution investment and technology leadership are key moats for sustaining this 20% RoE. High granularity of risk exposure and diversification benefits of nation-wide scale provide comfort. We maintain ‘BUY/SO’. At CMP, the stock trades at 7.7x FY20e P/BVPS and 40.2x FY20e PE.