LIC, SBI Life, ICICI Pru, HDFC Life: Emkay shares target prices amid 'exaggerated fear'

Emkay Global on Thursday said a sustained underperformance of life insurance stocks seems to be pricing-in the exaggerated fear of regulatory changes while completely ignoring the franchise strength such as brand, distribution and scale of listed players. The domestic brokerage has turned positive on life insurers from a medium-term perspective, led by a favourable demography and economy. It upgraded ICICI Prudential Life Insurance Company Ltd to 'Buy' while maintaining its buy rating on SBI Life Insurance. The broking firm suggested 'ADD' on HDFC Life Insurance Company Ltd, Life Insurance Corporation of India (LIC), and Max Financial Services Ltd.

Emkay said it had had flagged likely challenges for life insurers in FY24 that, effectively, would have a bearing on growth and margins. And one year later, life insurers have adjusted to the new reality, and current valuations seem to be completely ignoring the franchise strength of these listed companies as well as their performance delivery over the last 5-7 years, during which period they have compounded their EV and VNB at an impressive rate despite a series or regulatory shocks.

"With a large part of the big regulatory interventions now behind, and the underlying structural factors remaining supportive, we turn more positive on the medium-term growth outlook of the sector. With a de-risked product mix and a de-risked distribution mix, ICICI Pru is well positioned for growth over the medium term, as most of the growth headwinds have now eased," it said,

The brokerage has suggested a revised target price for ICICI Prudential with a target of Rs 700 per share against Rs 550 earlier, implying FY26E P/EV of 1.9 times.

It reiterated 'Buy' rating on SBI Life with a target of Rs 1,800. It suggested a target of HDFC Life of Rs 700. Emkay has a target of Rs 1,200 on LIC shares. It suggested a target of Rs 1,150 on Max Financial. Here's what it said on life insurer players

HDFC Life

Excellent franchise, with an established track record of being the leader in innovation; is currently trading at attractive valuations. Post HDFC Bank becoming its promoter, branch expansion plans by HDFC Bank bode well for HDFC Life. However, the convergence of growth and profitability with those of peers will limit the valuation premium. Cost optimization will be the key for HDFC Life, for it to sell products matching customer demand under the prevailing market conditions. The upside risk to the view will be sharp acceleration in business in HDFC Bank.

ICICI Prudential Life

ICICI Prudential Life has had a tumultuous past, which reflects in its valuation multiple. At present, it has one of the most diversified and de-risked product profiles (lesser impact from any changes in surrender regulations) and the most diversified (largest distributor ICICI Bank contributing 13 per cent of APE) and de-risked (distributor with open architecture contributing only 1/3rd of the APE) distribution. Most growth headwinds are largely behind and, with ICICI Bank's new business now almost stabilised, the impact of the high-ticket, non-linked decline coming in the base in FY24, and moderation in the group business mostly complete in FY24, the company is now better positioned for growth against the industry. As regards margins, they should stabilise around current levels, with volume growth leading to better cost absorption, and protection, annuity and non-par savings in the product mix are likely to improve from present levels. Once the company is able to deliver sustained growth, the gradual re-rating of shares should continue.

Life Insurance Corporation

As LIC has just started its journey in non-par products, its VNB margin expansion should continue. On the growth and cost fronts, the worst is largely behind, as the growth differential with private peers should narrow going forward, and the huge one-off costs have already been absorbed in the last 3-4 years. However, the higher sensitivity of its EV to equity market movements and operating RoEV (11.4 per cent) staying below the Cost of Equity, the stock will continue trading below its EV. "As per our fair value, at present, the price of LIC shares offers a good upside of 20 per cent," it said.

Max Financial

Axis Bank now having become the promoter of Max Life has resulted in a franchise that has all the ingredients for success in the Indian Life Insurance sector. However, a few near-term concerns will keep valuation multiples under check: i) Lack of clarity on the process and timeline of the Max Life structure collapse. FY25 may see Birla Life and Tata AIA pushing their products at Axis Bank branches, although the CEO of Axis Bank has reiterated his commitment to maintain Max Life's share in their life insurance business at 65-70 per cent. The Surrender regulation changes overhang is perceived to be higher for Max Life, Emkay said.

SBI Life

The powerful brand and distribution machinery of SBI makes it a formidable franchise in the sector. Its superior cost structure allows SBI Life to sell products as per customer demand under the prevailing market conditions. With its ‘SBI’ brand and distribution reach, the company is well positioned to respond to the evolving regulatory environment.