ICICI Pru fully valued versus Asian peers: HSBC

MUMBAI: ICICI Prudential Life Insurance’s shares are fully priced compared to its Asian peers, said HSBC, which initiated coverage on the stock with a ‘hold’ rating and a price target of Rs 300. The stock, which listed on September 29, closed about 2% lower at Rs293.40 On Thursday, about 12% below its initial public offering (IPO) price of Rs 334.

HSBC said the country’s largest private insurer is trading at a price to enterprise value of 2.9 times, compared to AIA Group’s 1.7 times.

“Despite sector leading persistency rates and cost ratios, ICICI Pru has the lowest NBV (new business value) margin among its Indian peers –8% in March 2016, vs a sector average of 13.9%,” said HSBC’s analyst Vinod Rajamani, in a client note. “This can be largely explained by its focus on low-margin unit linked insurance plan (ULIP) products, which represent 82% of new sales”.

Shares of ICICI Prudential Life, the first life insurer to list, has drifted lower after its listing on worries about rich valuations and business focus on low-margin products despite strong growth prospects.

HSBC said the insurer will be able to grow 25% on a compounded basis in its new business value if it sells more protection products, improves sales quality and cut costs.

“To catch up with the Indian average margin, the company will have to meet its strategy targets and also navigate a series of upcoming regulatory changes,” said Rajamani.

The stock is also vulnerable to changes in valuation calculations by investors as seen in other countries.

“We will consider adjusting our valuation methodology weights if reported EV becomes discredited in the eyes of investors, which has happened in Europe, Korea, and to a lesser extent in China,” said Rajamani. “Valuation methodology migration is a key risk for ICICI Pru’s share price given that fair value under P/BV and P/Comp BV approaches are materially lower than EV-based methods”.