Vedanta to pave way for HDFC Life in Nifty. Time to buy insurance stocks?

ICICI Securities expects that in the semi-annual change in the Nifty50 constituents, SBI Life Insurance will enter the index, replacing Zee Entertainment (ZEEL).

On Thursday, in an out-of-turn announcement, the National Stock Exchange (NSE) announced that life insurance player HDFC Life will replace the outgoing Vedanta Ltd in the Nifty50 index from July 31, as the latter got shareholders' approval on June 25 for delisting. Meanwhile, analysts at ICICI Securities expect that in the semi-annual change in the Nifty50 constituents to be announced by August-end, SBI Life Insurance will enter the index, replacing Zee Entertainment (ZEEL).  

These changes, according to the brokerage firm, will improve the earnings growth profile of Nifty50, and also increase the weight of non-lending financial services stocks in the index.

"Currently, Nifty50 exchange-traded fund (ETF) and index AUMs stand at Rs 91,400 crore. Vedanta currently has an estimated weight of 44 basis points (bps) in the index, while HDFC Life is expected to enter the index with a weight of 90 bps, entailing ETFs and index funds buying worth Rs 820 crore. Zee Entertainment and Bharti Infratel currently have an estimated weight of 36 and 42bps respectively and will be replaced by SBI Life (70bps) and Divi’s Lab (64bps)," ICICI Securities said in a report dated July 2. 

Given this scenario, should investors, too, add stocks of non-lending financial services / insurance stocks to their portfolio?

Analysts advise that the inclusion/exclusion of stocks to/from the indices should not be the criteria for the investors to buy/sell the stock. The investment decision, they say, should be made on the company's growth prospects, the company's balance sheet, management, stock valuation, as well as one's risk appetite.  That said, insurance, as a sector, has a huge potential in the country and investors should place their bets on "growth stocks" in the sector.

"Index inclusion/exclusion happens on the recent performance of the stock and also the potential of the sector. In India, insurance as a sector has a huge potential and that's the reason these stocks are being added to the indices," explains Deepak Jasani, head of retail research at HDFC Securities. Among the lot, Jasani is positive on SBI Life Insurance.

A K Prabhakar, head of research at IDBI Capital, notes that the private life insurance sector has been growing around 15 per cent over the last 17 years and currently, they have around 50 per cent market share. (rest 50 per cent is enjoyed by Life Insurance Corporation). The sector, Prabhakar says, is likely to grow given the low penetration. Additionally, the amount which is insured is also very low in India as compared to other countries. "As the country grows, life insurance is one sector that will do very well. One should invest from a long-term perspective," he says.

The analyst is bullish on all three bank franchises  - HDFC Life, SBI Life, and ICICI Prudential Life Insurance.

"HDFC Life may see a re-rating once it enters the index and it might not do well this year as many people have not paid the premium due to the crisis spawned by the Covid-19 pandemic; however, going forward it is expected to do well, " Prabhakar says.

SBI Life, on the other hand, has a different advantage. "The company has the lowest cost because the commission they pay for the agent is among the lowest in the industry and they have the advantage of 23,000 SBI branches. The last-mile connectivity also is one of the best in SBI. So, once that transforms into the business, it will do very well," says an analyst from a domestic brokerage.

Emkay Global Securities, too, remains positive on the sector on the back of a structural story and fair resilience shown even in the current environment, hit by the Covid-19 pandemic. This, it believes, may turn out to be a trigger for protection plans, pushing margin profiles of insurers higher.

It has a "buy" rating on HDFC Life, Max Financial Services, and SBI Life with the target price of Rs 568, Rs 531, and Rs 892, respectively. On ICICI Pru Life, it has maintained a "HOLD" rating with the target price of Rs 374.