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Buy ICICI Lombard, target Rs 1,150: JM Financial

ICICI Lombard is a largecap company, operating in finance sector.

Updated: Jul 23, 2019, 01.36 PM IST
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The brokerage has set a one-year horizon for the stock to hit the target price.
JM Financial has given a buy recommendation on ICICI Lombard General Insurance Company (ICICIGI) with a target price of Rs 1,150.

Shares of ICICI Lombard traded at Rs 1,060.3 around 1:20 pm on 23 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

Investment rationale by the brokerage-

Healthy gross premium growth in Q1FY20 at 17 per cent YoY ex-crop
In Q1FY20, ICICIGI recorded 17 per cent year-on-year (YoY) growth in gross premium (ex-crop) driven by fire (75 per cent YoY), motor TP (17 per cent YoY) and health (14 per cent YoY) lines.

Overall, gross premium declined 8 per cent YoY as the insurer did not secure any crop insurance tender for Kharif-2019 against 21 per cent of gross premium coming from crop insurance in Q1FY19.

Within motor, gross premium growth of 14 per cent YoY was driven by private cars (26 per cent YoY) and CV (14 per cent YoY) in Q1FY20.

Within health and PA, gross premium growth of 14 per cent YoY was driven by pure retail (8 per cent YoY) and group-others (20 per cent YoY). Overall, ICICI Lombard’s industry market share stood at 8.5 per cent in Q1FY20, down nearly 2pps YoY.

"We expect ICICIGI to record GDPI CAGR of 16 per cent over FY19-21E," said the brokerage.

Retail share of premiums improves to 48 per cent of gross premium in Q1FY20 against 39 per cent last year
During the quarter, the share of retail premium (motor as well as retail health) improved to 48 per cent led by an 8 per cent YoY improvement in premium share of motor which benefitted from SC ruling on long-term TP insurance and scale-up of virtual offices in T3/T4 cities which are currently offering only motor insurance.

Within property lines, the share of fire insurance in gross premium has increased to 17 per cent in Q1FY20 against 9 per cent in Q1FY19 owing to a combination of factors such as price hikes, market share gain from legacy players and good traction in SME business.

Within motor, PV and 2W continued to dominate the segment mix with 83 per cent of motor premium coming from these lines in Q1FY20.

In health insurance, share of group health (incl employer-employee and banca-sourced “others”) increased to 80 per cent of total health premium in Q1FY20 owing to price hikes effected in 2017-18 and SME focus.

"As is evident from its strict stance on crop insurance, we believe the insurer will continue to be selective and ROE focussed, making changes to the product mix as and when required," said the brokerage.

Combined ratio was stable YoY at 99.7 per cent (ex-cyclone Fani) as the improvement in loss ratio offset the higher total expense ratio
Loss ratio improved for most product lines except motor OD and engineering.

The overall loss ratio was down 146bps YoY to 75 per cent driven by significant improvements in PA (31 per cent against 56 per cent last year), fire (88 per cent against 115 per cent) and marine (59 per cent against 81 per cent) where the property lines were impacted by lumpy one-off claims last year.

On the expense ratio side, commission ratio inched higher from 1.8 per cent in Q1FY19 to 2.3 per cent in Q1FY20 while opex ratio jumped to 23 per cent in Q1FY20 against 20 per cent last year.

This is attributable to negative operative leverage as the insurer did not write any crop insurance this quarter, higher acquisition costs associated with retail business and brand campaign costs.

The brokerage expects COR to hover around 98 per cent by FY21E.

Investment leverage remained high in Q1FY20; the insurer has no exposure to IL&FS and DHFL groups
Reported investment leverage improved to 4.27 times (4.12 times pre-dividend) in Q1FY20 against 4 times in Q1FY19. The insurer is currently holding advance premium of Rs 1,865 crore from long-term motor policies. Management expects leverage to expand further to 4.5-5 times.

ICICI Lombard remains on track to deliver healthy PAT CAGR of nearly 20 per cent over FY19-21E
"We value the stock at 35 times Mar’21E EPS for a PAT CAGR of about 20 per cent over FY19-21E and ROE of 20 per cent by FY21E. Further, the insurer is well-capitalised for growth with a solvency ratio of 220 per cent," said the brokerage.

Disruptions in distribution and regulatory hiccups are the risks for the stock.
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