Life insurance firms may see valuation spike

Analysts expect 7-10% re-rating in valuation in the next few quarters, but advise longer-term perspective

Following the HDFC Life-Max Life deal, Bank of India offloaded 18 per cent stake in Star Union Dai-Ichi Life to Dai-Ichi Life on Tuesday. While the two transactions have nothing in common, analysts suggest these are early signs of value-unlocking for investors in the life insurance space. In a few months from now, they expect these activities to gather pace given the likelihood of initial public offering of shares by ICICI Prudential Life Insurance by mid-FY17. With increasing investor interest in the life insurance sector, analysts say companies such as Bajaj Finserv, Aditya Birla Nuvo, Exide, and Reliance Capital, which are into the life insurance business, may also see gains on the valuation front.

"When there is a revival in investor interest by way of mergers and acquisitions, it is highly likely that candidates with exposure to life insurance business may see re-rating in their asking rates," says R Sreesankar, head of institutional equities, Prabhudas Lilladher. Others like Rahul Shah, vice-president, equity advisory group, Motilal Oswal Securities, have similar views. He believes investors were waiting for a standalone declaration of insurance business held by their holding companies. "Now we will see many of them making these details public and consequently their valuations could increase," Shah says. With stocks such as Aditya Birla Nuvo, Exide, and Reliance Capital gaining 1.5 per cent each after the HDFC-Max Life deal, the Street expects seven-10 per cent rise in their valuations over the next six-12 months due to their exposure to life insurance business.

  That said, Sreesankar advises investors to play the life insurance theme cautiously. "I expect valuations to go up from a longer-term perspective of three to five years and players with strong distribution network and ability to raise capital may stand to benefit more," he says.

Analysts say as most insurance companies (excluding the top four private players, ICICI Prudential, SBI Life, HDFC Life, and Max Life) are yet to prove their profitability, companies with a strong banking channel network may see a faster re-rating in valuations. Insurance companies supported by strong banking franchises such as Punjab National Bank, State Bank of India, Canara Bank, Bank of India, and Union Bank may gain more than smaller private players, given their strong distribution network. However, analysts feel investors looking to play the domestic insurance story should look at stronger entities with a longer-time horizon and not just value-unlocking opportunities.