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‘Insurance cos can rally further, and not because of FDI’

Despite the heady run-up insurance stocks have seen in expectations of the foreign direct investment (FDI) limit being hiked (the bill finally passed in Parliament on Friday), Societe Generale BFSI analyst Santosh Singh said many still have further room for rally.

In an interview with CNBC-TV18’s Anuj Singhal and Ekta Batra, Singh, who has a buy rating on Max India , Bajaj Finserv  and Reliance Capital , with 12-month expected upsides between 21 percent and 53 percent, spoke about his outlook.

“On the operational side itself, the business is changing quite a lot on the positive side,” he said.

Below is the transcript of the interview on CNBC-TV18.

Anuj: A word on this Insurance Bill being passed. You have seen stocks already run up quite a bit but do you think there is still some room for rerating?

A: The passing of the Insurance Bill is a positive, that is for sure but at the same time I don’t think for the larger life insurance company it is changing their operations quite significantly because none of them need capital. So, it is more from a benchmarking point of view if you are looking from the markets point of view.

However, on the operational side itself the business is changing quite a lot on the positive side. There have been certain positive changes around the longevity of the policies and even the growth, there is slight growth this particular year for the entire market and the larger ones have seen quite good growth. So, growth coming back is very good for the sector.

This space makes sense even on the valuation front. Max India despite this huge run up is trading at 2.3-2.4 times embedded value [embedded value = book value + future value of profit]. At 2.4 times EV, it is a 16 percent sort return on embedded value generating company and my expectation is that the return on embedded value will move up from here.

Look at the banks which are 16-17 percent return on equity and here you don’t have those restructured assets or anything, there is nothing like the EV is itself more because of any reason. So, at 17 percent banks are trading at almost like 2.7-3 times. So, there is some potential to rerate as well. The likes of Reliance Capital they are trading at 1 time EV.

Ekta: I wanted to ask you about HDFC Life because there were reports this morning that Standard Life may hike their stake to 35 percent which is already known but the valuations doing the rounds is maybe Rs 105 per share so that would give you maybe an equal valuation to what Azim Premji Trust also did the stake buy at, at 0.95 percent stake. Is that good enough or too high or too low in terms of the total valuation?

A: If I look at my valuation, it is totally inline with that. We value it at USD 3.3 billion, HDFC Life business and it is almost like USD 3.3 billion. The deal is happening at around USD 3.3 billion if we are not talking about any huge capital infusion in the company.

It is almost like 2.7 times trailing EV and around 2.2-2.3 times forward EV. So, the deal is at fair valuation but you can say that given the quality of the business going forward the valuations can be much higher than this.

Anuj: We have seen a big run up in Max India already, but at current price how would you be placed on that stock?

A: We have a buy rating on Max India. The reasons are that the return ratios are going to improve from here. There is huge operating leverage in the system and if at all the financial savings everyone is thinking or maybe the entire run up has happened because we think that gross domestic product (GDP) growth will happen and financial savings will improve, if that were to happen then our expectation is 15 percent CAGR for the market on new business premiums is a given.

Max India should definitely do better than 15 percent, around 20 percent sort of a growth in new business premiums. So, at around 2.3-2.4 times EV we think it is a good opportunity to invest in at these valuations as well.

Ekta: You think ICICI Prudential deserves higher valuations of USD 6 billion as compared to HDFC Life at over USD 3 billion and why is the difference?

A: We value it at around USD 4.6-4.7 billion. However, it is the largest life insurance in India as of today. The three top life insurance companies have been ICICI Prudential, HDFC Life and Max India. So, definitely these are all high quality companies so they will trade at a premium.

ICICI Prudential has never disclosed their EV so we can’t talk about what valuations on EV they are. However, they are doing more than Rs 1400-1500 free cash flow to equity. So, on that basis even if you value company at 5 percent yield, free cash flow it almost looks like Rs 30,000 crore.


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