Analysts bullish on ICICI Lombard outlook; rich valuations may limit upside

Scale benefits, a favorable product mix, and improvements in efficiencies across channels, analysts said, should help ICICI Lombard General Insurance improve its financials going ahead

The stock price of ICICI Lombard General Insurance hit a fresh 52-week high level of Rs 1,747 on the BSE on Thursday, surging 6 per cent intraday, as analysts remained optimistic on the company's near-term growth prospects post its healthy March quarter (Q4) result for fiscal year 2023-24 (FY24). 
 

Scale benefits, a favorable product mix (higher share of retail health), and improvements in efficiencies across channels, analysts said, should help ICICI Lombard General Insurance improve its combined ratio and return on equity (RoE) over the next couple of years.
 

"We believe growth in the Motor segment is likely to be back-ended going ahead, with the company waiting for the rationalisation of pricing in the own-damage (OD) segment. In the Health segment, the benefits of price hikes and improving efficiency of the agency channel should translate into better profitability," said analysts at Motilal Oswal Financial Services.
 

The brokerage expects FY24-26 net profit growth to rise at a compounded annual growth rate (CAGR) of 25 per cent, with RoE reaching 20 per cent in FY26 and combined ratio improving to 101.5 per cent. It has maintained 'Buy' rating on the stock price with an increased target price of Rs 2,100.
 

On Wednesday, the largest private sector general insurer ICICI Lombard reported an 18.9 per cent increase in Q4FY24 net profit to Rs 520 crore. For the whole fiscal, the company reported an 11 per cent growth in the profit after tax at Rs 1,919 crore.
 

The gross direct premium income (GDPI) grew 22 per cent to Rs 6,073 crore for the reporting quarter, while the combined ratio came at 102.2 per cent. 
 

Moreover, the solvency ratio was 2.62 times at March 31, 2024, as against 2.57 times at December 31, 2023, and 2.51 times in the year-ago period.
 

Q4FY24 claims ratio improved 559bp year-on-year (Y-o-Y) and 137bp quarter-on-quarter (Q-o-Q) to 68.6 per cent, primarily due to reduced loss ratios in motor OD (58.4 per cent; down 1,100bp Y-o-Y and 650bp Q-o-Q), health (75.4 per cent; down 10bp Y-o-Y and 380bp Q-o-Q), and motor third party (TP) (73.4 per cent, down 1,310 Y-o-Y and 1,180bp Q-o-Q.
 

Other segments such as property, crop also posted improvements in loss ratios.
 

On its part, the Management said that there was improvement in motor CoR by 300bp in Q3FY24 to 118.9 per cent and 400bp in H1FY24 to 119.4 per cent. Motor combined ratio for private players improved mildly by 110bp to 110.7 per cent. 
 

That apart, the Management guided for OD loss ratios in range of 60–65 per cent and TP loss ratios in range of 65–70 per cent, with overall motor loss ratio likely at 64–66 per cent. Management said it was not building any price hikes in motor TP. The Management stayed hopeful of improvement in combined ratios and guided for exit CoR of 101.5 per cent; mild improvement from its previous guidance of 102 per cent (full year) for FY25.
 

"Thus, we remain optimistic on the company’s plans to grow in a calibrated fashion. We raise net profit estimate for FY25 by 3.4 per cent and by 3.9 per cent for FY26," said those at Nuvama Institutional Equities with a 'Hold' rating a target price of Rs 1,790 for the stock.
 

That said, analysts at Kotak Institutional Equities has assigned 'Reduce' rating to the stock as it believes rich valuations leaves little upside for the stock.
 

"While near-term profitability improvement may be visible, we expect growth aggression to keep medium-term profitability rangebound. However, the motor sector has fewer moats, and hence the performance of even the best-performing player is not insulated when industry aggression increases," it said, adding "While its premium valuations reflect superior performance, the scarcity premium (if any) may be at risk from listing of motor insurance peer". 

Over the past one year, stock price of ICICI Lombard GI has moved up 46 per cent on the BSE, while in three months, it has advanced 14.5 per cent. By comparison, the benchmark S&P BSE Sensex has added 22 per cent in the last one year.
 

The brokerage, nonetheless, has revised its estimates upwards by 3-4 per cent, with an increased target price of Rs 1,550.