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However, the Street’s reaction wasn’t in sync with the development. After rising on Thursday and Friday, almost all stocks lost the gains as trading came to a close for the week. On Monday, too, most stocks ended in the red. One reason could be the decline in broader markets — the BSE Sensex was down 1.5 per cent on Friday and another 0.23 per cent on Monday. Another reason was the Street had already factored in the event. Third, the near-term gains are likely to be limited, especially for larger players, say analysts.
In a recent report, analysts at Ambit Capital said, “We believe the consensus is fairly valuing the insurance business of large banks. Therefore, mere listing of these subsidiaries might not lead to any value-creation for stock holders and higher valuation for these businesses will only crystalise if business fundamentals improve significantly for these businesses.” The Street is valuing insurance businesses at 2-3.5 times the embedded value, similar to recent deal valuations of 2-2.7 times the embedded value, they add.
Experts say there could be a four-five per cent rally in banking and financial stocks such as those of ICICI Bank, HDFC and State Bank of India (SBI), as these move closer to value unlocking in their insurance businesses through stake sale and/or initial public offering (IPO) or a combination of both. While the estimated absolute gains appear significant, for larger players, the gains, as a proportion of their size, aren’t huge.
Analysts say the upgrades in the target prices of the stocks will be gradual, adding many will come into play. Vaibhav Agarwal, vice-president, Angel Broking, says, “Insurance businesses could witness value unlocking and provide a three-five per cent increase in the target prices of ICICI Bank and HDFC. The actual impact, however, will depend on deal valuations.” The upgrades will depend on the difference between the actual valuation of the deal and analyst estimates.
Here, companies such as Max India, Reliance Capital and Bajaj FinServ, which derive 40-82 per cent of their sum-of-the-parts (SOTP) valuation from their insurance businesses (life and general combined), might see relatively higher upsides and target price upgrades. SBI, HDFC and ICICI Bank derive only six-nine per cent of their SOTPs from insurance.
“So, ICICI Bank and HDFC could see four-five per cent upsides. Reliance Capital, Max and Bajaj FinServ could likely offer higher upside potential,” says Ganapathy. While it isn’t clear which route companies will take to unlock value, fresh capital infusion in the insurance business will provide more fuel to both big and small players to invest in growth. And, as this leads to higher business and profits for these companies, the gains could magnify.
On the other hand, though many companies provide basic financial data of their insurance subsidiaries every quarter, separate listing through an IPO should lead to better disclosures, which will help markets value them more accurately.
In the near term, however, some key events need to be monitored. For instance, the Insurance Regulatory and Development Authority of India is considering a proposal to allow banks to tie up with more than one company for bancassurance. This could provide additional strength to smaller insurance companies in the form of extended reach of products and, consequently, higher competition. But whether smaller players are able to garner market share from larger players remains to be seen. Analysts say some banks might not be keen on tie-ups with multiple companies. And, those willing to do will be more keen to distribute Life Insurance Corporation’s products, given its high brand equity and strong market share. An insurance company's market share and brand recall will be among the key determinants of additional bancassurance tie-ups.
That’s not all. Though the Bill provides more fund-raising avenues to smaller players (with less than one per cent market share), some might end up being acquired, leading to consolidation in the sector, say experts. The Bill also mandates management control be retained by the domestic player, which could be a sore point for companies such as Canara HSBC and Star Union Daichi.
The Street is, however, confident about the long-term prospects and potential for gains. Edelweiss analysts, led by Nilesh Parikh, say, “At the current juncture, players are standing tall and are ready to capitalise on the unfolding growth story. We believe the insurance Bill inculcates significant reforms that will ease the operating and regulatory environment for insurance companies (we await the fine print for further details). Though we don’t expect any earnings kicker in the near to medium term, given the increasing probability of improved operating metrics, we expect the structural value multiple to be re-rated.”
Reliance Capital is looking to rope in foreign investors in its general insurance business and is in talks with Nippon, its foreign partner in the life insurance business, to raise stake. While Bupa and Axa, the foreign partners of Max and Bharti, respectively, have announced plans to raise existing stakes, HDFC Life (a joint venture between HDFC and Standard Life) could come out with a mix of IPO and stake increase by Standard Life. The case could be the same with ICICI Bank, say analysts.
Exide owns 100 per cent stake in its life insurance subsidiary, which accounts for 7.3 per cent of its SOTP target price of Rs 206 a share. Thus, it could also witness value unlocking. But as it is a relatively smaller player (market share of 0.8 per cent in the private insurance space as of December 2014), it has to improve business growth for attractive valuations.
Deal valuations will be a function of multiple factors, such as market share and profitability. Most large players are making profits on a sustainable basis in the life insurance business and have high solvency ratios, indicating sufficient cash flow to service liabilities.
