Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ICICI PruLife: A tightrope walk
We cut target price for ICICI Bank by 5% as we lower valuation for ICICI
PruLife by 25% factoring in lower growth and margin pressures. Recent
management interaction suggests that even as ULIP sales have slowed
down across the board, ICICI has been one of the worst hit due to higher
proportion of ULIP and pension products (that faced greater impact) in
their business mix. We expect new business to fall by 12% in FY11 and
then grow at a Cagr of 14% over FY11-14. Margins are likely to contract
from 19% in FY10 to 16% in FY13, but will still be higher than smaller
players (where it can fall to 11-12%) due to economies of scale. A lower
than expected conservation ratio can lead to downside risk to margins.
Sharp slowdown in new business
We believe ICICI PruLife will report a 12% decline in new business premium
in FY11 following the recent regulatory changes to ULIP. The negative impact
of new norms is higher for ICICI PruLife due to (1) high share of Ulips in new
premiums (96% in FY10) and (2) higher share of pension products (~50%),
where requirement to provide guaranteed return of 4.5% has made it riskier.
The sharp decline in commission rates on ULIPs has resulted in agents selling
more traditional products, where ticket size is much lower. On a lower base,
we expect the new business premiums to deliver Cagr of 14% over FY11-14.
Margins will contract, but will be higher than peers
We expect NBAP margins for ICICI PruLife to contract from 19% in FY10 to
16% in FY13 due to lower revenues under the new regulatory framework. The
contraction would have been higher but for aggressive cost control measures
that the company has taken (employee strength is down ~30% from peak,
commission rates on ULIPs have halved). ICICI’s NBAP margins will remain
higher than most peers due to a) economies of scale (Opex ratio of <16% is
amongst the lowest) and b) low commission rates due to its brand value and
product-mix (commission/ premium ratio of 4% is also amongst the lowest).
Conservation ratio is critical for maintaining margins at +15%
We believe that improvement in conservation ratio will be key to maintaining
NBAP margin +15%. Its conservation ratio of 68% in FY10 was marginally
higher than private peers, but significantly lower than LIC’s 93%. Lack of
improvement in this ratio can lead to a significant downside risk to margins.
Lowering valuations to US$6.6bn based on 12x FY13 NBAP
We value ICICI PruLife at Rs305bn (appraisal method)– FY13 embedded value
is estimated to be Rs173bn and value of goodwill (for new business) is
Rs133bn (based on 16% NBAP margin and 12x FY13 NBAP multiple). This
implies a value of Rs157/share for ICICI Bank’s 74% stake in this business,
after a 20% holding company discount.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ICICI PruLife: A tightrope walk
We cut target price for ICICI Bank by 5% as we lower valuation for ICICI
PruLife by 25% factoring in lower growth and margin pressures. Recent
management interaction suggests that even as ULIP sales have slowed
down across the board, ICICI has been one of the worst hit due to higher
proportion of ULIP and pension products (that faced greater impact) in
their business mix. We expect new business to fall by 12% in FY11 and
then grow at a Cagr of 14% over FY11-14. Margins are likely to contract
from 19% in FY10 to 16% in FY13, but will still be higher than smaller
players (where it can fall to 11-12%) due to economies of scale. A lower
than expected conservation ratio can lead to downside risk to margins.
Sharp slowdown in new business
We believe ICICI PruLife will report a 12% decline in new business premium
in FY11 following the recent regulatory changes to ULIP. The negative impact
of new norms is higher for ICICI PruLife due to (1) high share of Ulips in new
premiums (96% in FY10) and (2) higher share of pension products (~50%),
where requirement to provide guaranteed return of 4.5% has made it riskier.
The sharp decline in commission rates on ULIPs has resulted in agents selling
more traditional products, where ticket size is much lower. On a lower base,
we expect the new business premiums to deliver Cagr of 14% over FY11-14.
Margins will contract, but will be higher than peers
We expect NBAP margins for ICICI PruLife to contract from 19% in FY10 to
16% in FY13 due to lower revenues under the new regulatory framework. The
contraction would have been higher but for aggressive cost control measures
that the company has taken (employee strength is down ~30% from peak,
commission rates on ULIPs have halved). ICICI’s NBAP margins will remain
higher than most peers due to a) economies of scale (Opex ratio of <16% is
amongst the lowest) and b) low commission rates due to its brand value and
product-mix (commission/ premium ratio of 4% is also amongst the lowest).
Conservation ratio is critical for maintaining margins at +15%
We believe that improvement in conservation ratio will be key to maintaining
NBAP margin +15%. Its conservation ratio of 68% in FY10 was marginally
higher than private peers, but significantly lower than LIC’s 93%. Lack of
improvement in this ratio can lead to a significant downside risk to margins.
Lowering valuations to US$6.6bn based on 12x FY13 NBAP
We value ICICI PruLife at Rs305bn (appraisal method)– FY13 embedded value
is estimated to be Rs173bn and value of goodwill (for new business) is
Rs133bn (based on 16% NBAP margin and 12x FY13 NBAP multiple). This
implies a value of Rs157/share for ICICI Bank’s 74% stake in this business,
after a 20% holding company discount.
No comments:
Post a Comment