India’s life insurance space could be shaping up as a massive investment opportunity over the coming decade.
India’s life insurance space could be shaping up as a massive investment opportunity over the coming decade. Ambit Capital says that it does not subscribe to the narrative that India’s life insurance space will grow solely because of under penetration but rather opines that opportunity lies in protection and annuity. “Our study reveals protection could grow 8x in 10 years and Rs 29 lakh crore of retirement corpus is estimated to grow at 15% to drive annuity at 20% CAGR,” Ambit said in a recent report. This implies that private insurance could grow 14.5% CAGR over the next decade, according to Ambit.
Life Insurance sector stocks slipped in February owing to the government of India’s announcement of making section 80c of the income tax act optional. Despite that life insurance stocks have outperformed the market. Insurance space could also be he helped by the pandemic which is expected to drive up the opportunity in protection.
ICICI Prudential Life
Stocks of ICICI Prudential Life Insurance have jumped 69% since March 23. “We believe the market is implying a much lower VNB growth trajectory of 10-11% CAGR over the next 10 years. We see upside to these estimates given ICICI Prudential’s strong foothold and ability to scale its retail protection franchise and increasing presence into newer product/customer segments,” Ambit said. Annuity segment is also seen as a growth opportunity for the stock which trades at 2x FY22E P/EV. Ambit has increased the target price to Rs 576 with a ‘Buy’ call.
SBI Life Insurance
Valuations have turned attractive for SBI Life. The stock was trading at 3.2x FY21E P/EV back in November 2019 and now it trades at 2.3x FY22E P/EV. Recent results of the company showed growth through non-core channels. Ambit expects annuities to clock 25% CAGR over the next decade. Being linked with India’s largest public sector bank, poses an additional benefit for SBI Life. Target price has been increased from Rs 728 per share to Rs 1,009 apiece.
Ambit sees the tie up between Max Financial and Axis Bank as the key driver that will give the company a distribution edge. Axis Bank contributed 56% of total APE, a fallout this deal could impact Max disproportionately. Ambit said that the current valuations of Max are pricing in more negatives than positives. “We value Max using appraisal value, implying valuation of 2.2x FY22 EV. Stock trades at 1.8x FY22E EV, 27% discount to peers despite comparable operating metrics owing to lack of certainty of deal and overhang of promoter leverage,” it said. A target price of Rs 751 per share is being pegged on the stock. Currently Max Financial Services trades at Rs 589 apiece.
Upside – 20%
Industry leading profitability and knack for identifying opportunities makes HDFC Life a mighty player in this segment. HDFC Life, Ambit said, also has a high propensity to cross-sell given access to affluent customers base and presence across products. “Complementary product suite makes HDFC Life stand out vs competition. Protection APE of 17% renders hedging comfort to annuity business whilst non-par savings compliments ULIPs to extend cross selling,” the report said. Currently trading at Rs 588 per share, Ambit has a target price of Rs 677 apiece on the stock, implying a double digit upside.