Insurance bill: Who gains more?

Insurance pure plays such as Max India, Reliance Capital stand to gain more even as others could see relatively smaller upticks

Passage of the insurance bill could lead to about 4-5% rally in banking and financials stocks such as ICICI Bank, HDFC and SBI, amongst others. Notably, most of these entities have indicated that they are looking at value unlocking in their insurance business via stake sale and/or Initial Public issue (IPO).

The bill, which will increase the limit of foreign holdings in insurance companies to 49% versus the current 26%, will be a positive for all insurance companies. The actual quantum of stock rally though would be proportional to the insurance segment’s contribution to a company’s overall business. Thus, companies such as Max India (Max), Reliance Capital (RCap) and Bajaj FinServ which derive about 40.6% to 81.6% of their sum-of-the-parts (SOTP) valuation from their insurance businesses (Life and General combined), will witness stronger rally as well as higher target price upgrades post passing of this bill.

VALUE UNLOCKING
FY16 SOTP	Rs/share	TP	% of Sotp	Stake (%)	Brokerage	Date
HDFC- Life	103	1400	8.7	72	ESS	7th Jan 2015
HDFC-General	19			74
ICICI Bank -life	24	434	6.9	74	Angel	2nd Feb 2015
ICICI Bank -gen	6			74
Max-Life	373	500	81.6	72
Max-Gen	35			74	ESS	28th Jan 2015
Reliance Capital-Life	197	648	40.6	74	ICICISec	Feb-15
Reliance Capital-Gen	66			100
Bajaj Finserv-Life	626	1544	62.0	74	Sharekhan
Bajaj Finserv-Gen	332			74
SBI-Life	23	351	6.6	74	PL	14th Feb 2015
SOTP: Sum of the parts
Source: Brokerages

SBI, HDFC and ICICI Bank on the other hand derive just 6.6% to 8.7% of their SOTPs from insurance and hence their stock price gains will be relatively lower, believe analysts.

Suresh Ganapathy, financials analyst, Macquarie Capital, says, “Upsides will roughly depend on the insurance contribution to various businesses. So, ICICI bank and HDFC could see 4-5% upsides. Reliance Capital, Max and Bajaj FinServ could likely offer higher upside potential”. He believes Reliance Capital is the top play in the insurance sector.

Upgrades in target price though will come in gradually. Most analysts will raise the SOTP valuation of insurance business and consequently the target price of these companies only when a deal/IPO is actually announced. The quantum of upgrades will be subject to the valuation of the deal and the premium over analysts’ current estimates. 

Vaibhav Agarwal, vice-president, Angel Broking, says, "Insurance businesses could witness value unlocking and provide 3-5% increase in target price of ICICI Bank and HDFC. Actual impact would be dependent on deal valuations."

Reliance Capital is looking to rope in foreign investors in its general insurance business and is in talks with Nippon – its foreign investor in its life insurance business to raise stake. While Bupa and Axa the foreign partners of Max and Bharti, respectively have announced plans to raise their existing stakes, HDFC Life (a joint venture between HDFC and Standard Life) could come out with an IPO. Analysts believe, ICICI bank could also list its insurance business.

Adds Suresh Ganapathy, “We see a possibility that ICICI bank may list life insurance subsidiary or do a stake sale to its JV partner."