Brokerage firm Macquarie Research has turned cautious on the insurance sector, while downgrading the ratings of HDFC Life, ICICI Prudential Life and SBI Life to neutral from outperform. The brokerage firm has also lowered their target prices, based on a weaker growth outlook for the insurance industry.
While the target price for HDFC Life Insurance has been cut to Rs 556 from Rs 655 earlier, ICICI Prudential Life target price has been slashed Rs 486 from Rs 580 and SBI Life Insurance target price to Rs 1,306 from Rs 1,580 a share. Additionally, the firm has cut FY25 value of new business (VNB) estimates by 2-6 percent. It now forecasts a lower VNB CAGR (value of new business) at 9-15 percent for FY23-26E vs 16-22% for FY22-25E.
TP and Reco change summary
| Company | Earlier | New | TP change (%) | Reasons for TP and Reco Change | ||
| TP | Reco | TP | Reco | |||
| HDFC Life | 655 | OP | 556 | N | -15% | VNB mutliple cut from 25x (FY24E) to 15x (FY25E) |
| IPRU Life | 580 | OP | 486 | N | -16% | VNB mutliple cut from 16x (FY24E) to 9x (FY25E) |
| SBI Life | 1,580 | OP | 1,306 | N | -17% | VNB mutliple cut from 19.5x (FY24E) to 12x (FY25E) |
Change in VNB estimates
| VNB (INR bn) | Earlier | Now | Change (%) | |||
| FY24E | FY25E | FY24E | FY25E | FY24E | FY25E | |
| HDFC Life | 39.3 | 47.5 | 39.6 | 46.5 | 0.8% | -2.1% |
| IPRU Life | 29.2 | 34.0 | 29.0 | 32.0 | -0.6% | -5.8% |
| SBI Life | 56.7 | 67.9 | 56.0 | 63.6 | -1.2% | -6.2% |
Macquarie said that near term catalysts are missing and unless growth picks up meaningfully, sector performance will lag.
"Valuation support implies limited downside. We remain concerned on longer term growth prospects due to the regulatory overhangs. Also, premium growth is impact due to the change in tax rule. There is 15-20 percent of overall premiums due to change in 80C deductions," it said.
Why the downgrade now?
Since the last 12 months, the insurance sector has underperformed the benchmark Nifty by ~13 percent and valuations now are trading at 1-2 standard deviations below historic averages. While valuations look compelling, unless the sector delivers ~20 percent+ VNB growth, Macquarie said it believes markets won't be enthusiastic about a sub-optimal 9-15 percent VNB growth this cycle.
"Consequently, multiples could remain depressed. We think growth is the single biggest catalyst for the sector. April 2023 numbers have been weak, but we won't read too much into one month number," it said.
First Published: Jun 9, 2023 1:52 PM IST
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