research investment idea 18 mar 2017 icici...

PCG RESEARCH INVESTMENT IDEA 18 Mar 2017

ICICI Prudential Life Insurance Co. Ltd.

Private Client Group - PCG RESEARCH P a g e | 1

Industry CMP Recommendation Add on Dips to band Target Time Horizon

Life Insurance 371 BUY ON DECLINES 355-335 394-428 6 - 8 QUARTERS

HDFC Scrip Code ICIPRUE

BSE Code 540133

NSE Code ICICIPRULI

Bloomberg IPRU

CMP as on 17 Mar 17 371

Equity Capital (Rs Cr) 1435.3

Face Value (Rs) 10

Equity O/S (Cr) 143.5

Market Cap (Rs Cr) 53,171.6

Book Value (Rs) 37.16

Avg. 52 Week Volumes

2563757

52 Week High 377

52 Week Low 273

Shareholding Pattern (%)

Promoters 80.7

Institutions 7.6

Non Institutions 11.7

PCG Risk Rating* Yellow * Refer Rating explanation

Nisha Sankhala [email protected]

ICICI Prudential Life Insurance Company Ltd. (ICICI Prudential Life) is a joint venture between

ICICI Bank Ltd., one of India's largest private sector banks and Prudential Corporation Holdings

Limited.

ICICI Prudential Life began its operations in fiscal year 2001 and has consistently been the market

leader amongst private players in the Indian life insurance sector. The Company offer a range of

life insurance, health insurance and pension products and services to its customers. Every fiscal

year since fiscal 2002, it have consistently generated the most new business premiums on a retail

weighted received premium basis among all private sector life insurers in India.

We recommend ICICI Pru buy between 355-335 for the targets of 394-428 for the time period of 2

years.

INVESTMENT RATIONALE:

The penetration of insurance in the market is very low compared to other emerging economies. India presents

immense opportunities to expand the life insurance business given the vast untapped potential, favorable

demographics, rising prosperity, rising household income and the increasing awareness of the need for

financial protection.

Growth rate of total premium written by the insurance industry has outpaced the GDP growth rate over the

period of FY2002-FY2016. Going forward also we believe the trend will continue and Insurance industry has a

whole will have tremendous change and ICICI Pru is in best place to augur benefit.

ICICI Pru has consistent leadership in the private life industry with strong brand name. In terms of RWRP

market share of company was around 11.3% in FY16 which increased to 13% in 9MFY2017. It has leveraged

the strong and established brands “ICICI Bank” and “Prudential”, to build “ICICI Prudential” into a recognized

and trusted brand in its own right.

ICICI Pru has Experienced Senior Management Team which helps the company make timely strategic and

business decisions in response to evolving customer needs and market conditions. Company’s CEO, Mr.

Sandeep Bakhshi has been with the Company for over five years and carries 32 years of experience in the

finance sector.

The Company has Strong Financials and Healthy Balance Sheet. Its persistency ratio & solvency ratio are top

among the other players. Expense ratio is also very low with declining trend. ROE and Dividend payout ratio of

the company are also attractive.

mailto:[email protected]

PCG RESEARCH


ICICI Pru has diversified Multi-channel Distribution Network. They offer products and services through the

branches of bank partners, individual agents, corporate agents, employees, offices and website.

The Company has entered into a bancassurance relationship with ICICI Bank, Standard Chartered Bank,

Capital Small Finance Bank Limited etc. The annualized premium equivalent through bancassurance was

29.64bn in fiscal 2016, which constituted 58.6% of company’s retail annualized premium equivalent.

The company has adopted strategies like Expanding protection business, improving customer retention,

maintaining market-leading cost efficiency etc. to generate new business premium at high level of growth.

About the IPO:

In September, 2016 the Company came out with the Initial Public Offering (IPO) of Rs 5440.23 - 6056.79 Cr.

The issue was priced in a band of Rs300-Rs334 per share. Promoters - ICICI Bank had proposed to offer

181341058 equity shares of the company to the public by way of an IPO. Hence there was not any change in

the shareholders’ funds of the Company.

RISK & CONCERNS:

1. High Competition: Insurance industry is becoming highly competitive with 52 players operating in the

industry. Companies are competing on price and also using low price and high returns strategy for

customers to lure them.

2. Regulatory Hurdles: Changing laws, rules and regulations and legal uncertainties may adversely affect

the business and financial performance of the company.

3. Dependence on Bancassurance partners: The Company has entered into the agreement with ICICI

Bank, Standard Chartered Bank and Capital Small Finance Bank Limited for selling its Products. Which

constituted 58.6% of company’s retail annualized premium equivalent so company is heavily dependent

on the Bancassurance partners.

4. Investment Risk: Company’s ULIP product heavily depend upon the performance of capital market so

any major down fall in the equity market will lead to negative impact on Company’s fund under

management and also profitability.

PCG RESEARCH


VIEW & VALUATION:

Embedded Value FY17 FY18 FY19

Total Shareholder's Fund 5998 7168 8733

Net Profit 1896 2461 2939

Present Value of Net Profit 2743 2238 2429

Embedded Value 8741 12148 16143 Source: Company, HDFC sec Research

The embedded value of ICICI Prudential in FY19 stood at Rs.16.1bn which gives per share value of 115. If we

value with the multiple of 3.5x the Fair value of the company arrives at 394 and giving it multiple of 3.8x

derives target value at 428.

Assumptions:

Cost of capital has been taken as 10%.

We expect the PAT will have a compounded annual growth of 25% in FY17-19.

We assumed that the new business will have 27% CAGR in FY17-19.

We have taken 2 multiples (3.5x and 3.8x) for price targets till FY19.

The Insurance Industry of India has been under penetrated compared to other emerging markets so India

presents immense opportunities to expand the life insurance business given the vast untapped potential,

favorable demographics, rising prosperity, rising household income and the increasing awareness of the need

for financial protection. At Company level also ICICI Pru has market leadership, strong financial position and

Diversified Multi-channel Distribution Network. The company has also adopted strategies like Expanding

protection business, improving customer retention, maintaining market-leading cost efficiency etc. to

generate new business at high level of growth.

The valuation of the Company has improved recently but looking at the future potential of the Company it

seems well justified. We recommend ICICI Pru buy between 355-335 for the targets of 394-428 for the time

period of 2 years.

PCG RESEARCH


BUSINESS BACKGROUND:

ICICI Prudential Life Insurance Company Ltd. (ICICI Prudential Life) is a joint venture between ICICI Bank

Ltd., one of India's largest private sector banks, and Prudential Corporation Holdings Limited.

ICICI Prudential Life began its operations in fiscal year 2001 and has consistently been the market leader

amongst private players in the Indian life insurance sector. The Company offer a range of life insurance,

health insurance and pension products and services to its customers. Every fiscal year since fiscal 2002, it

have consistently generated the most new business premiums on a retail weighted received premium basis

among all private sector life insurers in India.

The Company also has a wholly owned subsidiary, ICICI Prudential Pension Funds Management Company

Limited, which is registered as a fund manager with the Pensions Fund Regulatory and Development

Authority of India.

ICICI Prudential Life has an extensive multi-channel sales network across India including through the

branches of bank partners, individual agents, corporate agents, employees, offices and website.

ICICI Prudential Life is the first private life insurer to attain assets under management of 1 trillion and In-

force sum assured of over 3 trillion. ICICI Prudential Life is also the first insurance company in India to be

listed on NSE and BSE.

Shares Holding pattern of ICICI Prudential Life (as on Dec 2016)

Share Holder Share Holding %

Promoter group 80.7

ICICI Bank 54.9

Prudential Corporation Holdings 25.8

Institutions 7.6

MF 2.8

FPI 4.6

Non-institutions 11.7

Azim Premji 4

Compass Value Investments 2

Source: Company, HDFC sec Research

PCG RESEARCH


INDUSTRY OVERVIEW:

The size of the Indian life insurance sector was ~ 3.7 trillion on a total premium basis in FY16, making it the

10th largest life insurance market in the world and the 5th largest in Asia. The total premium in the Indian life

insurance sector grew at a CAGR of approximately 17% between FY01 and FY16. Despite this, India

continues to be an underpenetrated insurance market with a life insurance penetration of 2.7% in fiscal

2015, as compared to other part of the world. At $43 in fiscal 2015, the insurance density in India also

remains very low as compared to other developed and emerging market economies. According to Swiss Re,

Economic Research & Consulting “Mortality Protection Gap Asia-Pacific 2015”, the Protection Gap for India

was approximately US$8.5 trillion as of December 31, 2014, which was much higher compared to its Asian

counterparts.

Government has recently announced its plans to divest USD1.63 billion worth of stake in PSU general

insurance companies to execute the steep disinvestment target of USD10.78 billion, in FY17.

Oriental Insurance Company, National Insurance Company, New India Assurance, United India Insurance and

national reinsurer General Insurance Corporation of India, or GIC Re, are the five companies that will be

listed on stock exchanges. This will attract more investors in the insurance sector.

Premium as a % GDP as of FY15


Insurance Density (Prem. Per Capita (in$)) as of FY15


PCG RESEARCH


The Indian life insurance sector was opened for private companies in 2000, which witnessed the

commencement of operations by four private companies in the first year itself and 22 companies between

2000 and 2010. As of March 31, 2016, there are a total of 24 companies in the Indian life insurance sector

with Life Insurance Corporation being the only public sector life insurer. The private sector has grown

significantly since 2000 and it accounted for 51.5% of the life insurance sector, on an RWRP basis, in fiscal

2016. Historically, life insurance products were savings oriented. However, since 2000, there was a shift from

largely tax savings-based par sales to multiple products.

New Business:

Growth FY13 FY14 FY15 FY16 9MFY17

Private 1.9% -3.4% 15.9% 13.6% 22.7%

LIC -4.1% -3.4% -26.3% 2.9% 16.6%

Industry -1.9% -3.4% -10.3% 8.1% 19.8%

Evolution of life insurance industry in India:


PCG RESEARCH


INVESTMENT RATIONALE:

Favorable demography to drive macro growth

As we see above, India has huge Insurance market but the penetration in the market is very low compared

to other emerging economies. India presents immense opportunities to expand the life insurance business

given the vast untapped potential, favorable demographics, rising prosperity, rising household income and

the increasing awareness of the need for financial protection.

Growth rate of total premium written by the insurance industry has outpaced the GDP growth rate over the

period of FY2002-FY2016. Going forward also we believe the trend will continue and Insurance industry has a

whole will have tremendous change and ICICI Pru is in best place to augur benefit.

Consistent Leadership in the Industry with Strong Brand name

ICICI Pru has consistently generated the most new business premiums on a retail weighted received

premium basis among all private sector life insurers in India for every year since fiscal 2002. Its market

share, on a retail weighted received premium basis, in the Indian life insurance sector increased from 5.9%

in fiscal 2012 to 11.3% in fiscal 2016 and its market share among the 23 private sector life insurance

companies in India has also increased from 16.1% to 21.9% in the same period. From fiscal 2012 to fiscal

2016, its retail weighted received premium grew at a CAGR of 15.2% compared to a CAGR of 6.7% in the

private sector and a decline of 2.1% per annum in the overall Indian life insurance sector for the same

period.

ICICI Pru’s has leveraged the strong and established brands of its Company’s shareholders, “ICICI Bank” and

“Prudential”, to build “ICICI Prudential” into a recognized and trusted brand in its own right. The brand has

been ranked as one of the best brands in the insurance category as per “BrandZ Top 50 Most Valuable Indian

Brands” in 2014 and 2015, a study published by WPP and conducted by Millward Brown.

ICICI Pru a market leader in private market

Market Share FY2012 FY2013 FY2014 FY2015 FY2016 9MFY2017

LIC 64% 62% 62% 51% 49% 47%

ICICI Prudential 6% 7% 7% 11% 11% 13%

SBI Life 4% 5% 6% 8% 10% 11%

HDFC Life 6% 7% 5% 7% 8% 6%

Max Life 3% 3% 4% 5% 5% 5%

PNB Met Life 1% 1% 1% 2% 2% 2%

Bajaj Allianz 3% 3% 2% 2% 2% 2%

(RWRP basis Source: Company, HDFC sec Research)

PCG RESEARCH


Experienced Senior Management Team

The company has a management team with extensive experience and know-how in the Indian Life insurance

industry. Company’s CEO, Mr. Sandeep Bakhshi has been with the Company for over five years. He joined

ICICI Group in 1986 in the project financing group of ICICI Limited. He has over 32 years of experience in

the banking, financial services and insurance sector.

28 of the top 36 members of the management team have worked within the ICICI Group for over 10 years

and have an average work experience of 20 years. Senior managerial personnel in the actuary, investment,

underwriting and claims department have an average functional experience of over 16 years. The

management’s experience will help the company make timely strategic and business decisions in response to

evolving customer needs and market conditions.

Strong Financials Healthy Balance Sheet

The Company has strong balance sheet with an excellent capital positioning, which leads solvency ratio

to 320.0% compared to the IRDAI-prescribed control level of 150.0%.

ICICI Pru has delivered consistence return to its shares holders. Since 2012 ROE of the company has

remain above 30%. It also has decent track record of distributing income in terms of dividend to its

shareholders. Its dividend payout ratio stood at 64.52%

The 13th month persistency ratio, which has been increasing in recent years, has reached to 82.4% in

FY16, one of the highest in the Indian life insurance sector. Likewise 49th month persistency ratio, at

62.2% in FY16, was also one of the highest in the Indian life insurance sector.

The ratio of cost to total weighted received premium, which is used to monitor expenses, declined from

17.9% in fiscal 2012 to 14.6% in fiscal 2016.

As on June 30, 2016, the company had 1.14 trillion of AUM, which is one of the largest insurance AUM

in India. Of these, 72.0% were in linked assets. Funds representing linked assets with identified

benchmarks had performed better than their respective benchmarks since inception.

Total gross premium collected by the Company grew 25.2% from 153.07 bn in FY2015 to 191.64 bn in

FY2016. Total expenses increased to 25.45 bn in FY2016 as compared to 22.58 bn in FY2015. While

the Profit after tax for the Company stood at 16.50 bn in FY2016 compared to 16.34 bn in FY2015.

PCG RESEARCH


Diversified Multi-channel Distribution Network

The Company has diversified Multi-channel Distribution Network. They offer products and services through

the branches of bank partners, individual agents, corporate agents, employees, offices and website. The

company has one of the largest agency channels among private sector life insurance companies in India in

terms of premium, with 121,016 individual agents at March 31, 2016. And as of July, 2016, bank partners

had over 4,500 branches.

While talking about Direct Sales (through Employees, Offices and Websites) the growth reported CAGR of

52.8% between FY 14-16 and accounted 10% of retail annualized premium equivalent in fiscal 2016.

Strong Bancassurance Network: ICICI Pru has leverage the extensive and growing branch network of

partner banks to reach a growing number of customers and geographies. The Company has entered into a

bancassurance relationship with ICICI Bank, Standard Chartered Bank, Capital Small Finance Bank Limited

etc. The annualized premium equivalent through bancassurance was 29.64bn in fiscal 2016, which

constituted 58.6% of company’s retail annualized premium equivalent.

Focus on improving new business

ICICI Pru has consistently generated the most new business premiums on a retail weighted received

premium basis among all private sector life insurers in India for every year since fiscal 2002. And going

further also company has adopted strategies like Expanding protection business, improving customer

retention, maintaining market-leading cost efficiency etc. to generate new business at high level of growth.

ULIPS will remain growth driver

The household saving in the country has been continuously increasing and along with that the awareness

among the people for the financial planning has also been increased. This has lead the growth of ULIP

business. The AUM Size of the company at the end of 9MFY2017 stood at 1136.11 bn. Fund performance of

ICICI Pru has also remain high among the other players.

The focus of the people has been changed from Gold and Real estate to new investment avenues because of

recent demonetization drive of Government. So huge capital inflow is expected in the ULIP schemes.

ICICI Prudential Life has focused more on ULIPs than all other large peers. ULIPs comprised 80.8% of its

FY2016 APE as compared 25-50% for peers. This is the key driver of growth for ICICI Prudential Life. But

ULIPS have low margins as compared to protection business. So focusing on pure life protection business is

necessary for the high profitability of the company.

PCG RESEARCH


Channel Mix - Retail Business


Growth in Net Premium Income


Product Mix of New Business Premium FY16


Group Insurance still at nascent stage


PCG RESEARCH


Persistency Ratio of ICICI Pru FY14 FY15 FY16 9MFY17

13th Month 72% 79% 82% 83%

25th Month 68% 66% 71% 73%

37th Month 57% 64% 62% 64%

49th Month 20% 54% 62% 61%

61st Month 13% 15% 46% 65%

Cost Efficiency of ICICI Pru FY14 FY15 FY16 9MFY17

Expense ratio 13.6% 11.6% 11.0% 12.2%

Commission ratio 5.2% 3.8% 3.5% 3.7%

Cost/TWRP 18.8% 15.4% 14.5% 15.9%

Cost/ Average AUM 2.9% 2.5% 2.5% 2.7%


PBT and margin trend…


PAT to have 16% CAGR growth in FY15-19

1634 16531896

2461

2939

FY15 FY16 FY17E FY18E FY19E


PCG RESEARCH


Policy Holder’s Account/ Technical Account

(Rs Cr) FY15 FY16 FY17E FY18E FY19E

Net Premium Income 15160 18999 21761 25689 30707

Growth% 23 25 7 8 5

Income from Investments 18739 1208 1426 1540 1679

Growth% 103 -94 18 8 9

Other income 18 21 20 25 27

Total Income 33956 20228 23207 27254 32413

Commission 553 620 732 936 1199

Operating expenses 1968 2253 2591 3109 3792

Benefits paid (Net) 12248 12406 14267 16407 19278

Interim bonus paid 12 19 19 19 19

Change in valuation of policy liabilities 17956 3515 4043 4649 5486

Provision for taxation -51 -70 -50 -50 -80

Balance being funds for future appropriation 31 134 50 50 80

Transfer to Shareholders' A/C 1137 1210 1456 2034 2479


Shares Holders Account


Amounts transferred from

Technical A/C 1137 1210 1456 2034 2479

Income from investments 536 602 662 742 816

Revenue From

Operations(Net) 1673 1812 2118 2775 3294

Other income 1 0 0 0 0

Total Income 1674 1812 2118 2775 3294

Growth % 1 8 17 31 19

Total Expenses 90 38 80 100 100

PBT 1584 1774 2038 2675 3194

Growth % 4 12 15 31 19

Margin % 95 98 96 96 97

Tax Expenses -50 121 143 214 256

PAT 1634 1653 1896 2461 2939

Growth % 4 1 15 30 19

EPS 11 12 13 17 21

BV 37 37 42 50 61


PCG RESEARCH


Balance Sheet

As at March FY15 FY16 FY17E FY18E FY19E

SOURCE OF FUNDS

Share Capital 1431.7 1432.3 1432.3 1432.3 1432.3

Reserves 3431 3640 4315 5555 7201

Fair value change account 403 251 250 180 100

Shareholders' Funds 5265.5 5323.3 5997.5 7167.7 8733.4

Total Policy holder's Fund 93265.7 96578.4 104196.1 109347.4 115844.5

Funds for Future Appropriations 527.5 661.9 600.0 500.0 420.0

Total Source of Funds 99059 102564 110794 117015 124998

APPLICATION OF FUNDS

Investments 99491 103024 111158 117396 125294

Shareholders’ 5855.2 6212.4 6709.4 7246.1 7680.9

Policyholders’ 18858.0 21515.6 25388.4 27927.3 31278.5

Asset held to cover linked liabilities 74777.5 75295.8 79060.6 82223.0 86334.2

Loan 20.0 44.3 50.0 50.0 50.0

Fixed Assets 215 220 231 235 242

Total Current Assets 1489 1477 1614 1667 1831

Total Current Liabilities 2154.9 2201.3 2259.7 2333.1 2418.6

Net Current Assets -666.1 -724.0 -645.3 -666.5 -587.9

Debit Balance in P & L Account 19.1 44.2 50.0 50.0 50.0

Total Application of Funds 99059 102564 110794 117015 124998


Key Ratio %


PROFITABILITY

PBT Margin 94.7 97.9 96.2 96.4 97.0

APAT Margin 97.7 91.2 89.5 88.7 89.2

NBV growth 28.7 29.4 42.5 25.3 28.5

RoE 31.9 31.2 33.5 37.4 37.0

PER SHARE DATA

EPS 11.4 11.5 13.2 17.2 20.5

BV 36.8 37.2 41.9 50.0 61.0

Dividend 5.8 8.4 8.5 8.5 9.0

VALUATION

P/E 32.4 32.1 28.0 21.5 18.0

P/BV 10.1 10.0 8.8 7.4 6.1

Dividend Yield (%) 1.6 2.3 2.3 2.3 2.4


PCG RESEARCH


Rating Chart

R E T U R N

HIGH

MEDIUM

LOW

LOW MEDIUM HIGH

RISK

Ratings Explanation:

RATING Risk - Return BEAR CASE BASE CASE BULL CASE

BLUE LOW RISK - LOW RETURN STOCKS

IF RISKS MANIFEST PRICE CAN FALL 20% OR MORE

IF RISKS MANIFEST PRICE CAN FALL 15%

& IF INVESTMENT RATIONALE

FRUCTFIES PRICE CAN RISE BY 15%

IF INVESTMENT RATIONALE

FRUCTFIES PRICE CAN RISE BY 20% OR

MORE

YELLOW MEDIUM RISK - HIGH RETURN STOCKS






FRUCTFIES PRICE CAN RISE BY 35% OR

MORE

RED HIGH RISK - HIGH RETURN STOCKS







OR MORE

PCG RESEARCH


Rating Definition:

Buy: Stock is expected to gain by 10% or more in the next 1 Year. Sell: Stock is expected to decline by 10% or more in the next 1 Year.

PCG RESEARCH


I, Nisha Sankhala, MBA, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or her relative or HDFC Securities Ltd. or its associate does have material conflict of interest. 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