SBI Life, ICICI Pru Life to enter MSCI India index. What should you do?

Morgan Stanley Capital International (MSCI) recently re-balanced its India index under its semi-annual review. Of the eight additions it did to the index, two belong to the insurance sector – SBI Life and ICICI Prudential Life Insurance, possibly underlining brighter prospects in the segment.

“Insurance as a sector is a must have in an investor’s portfolio because of the potential the sector has in terms of penetration. Two reasons why the sector is bound to see an uptick is because firstly, more and more people are getting insurance done, and secondly, the value for which you get the policy done is rising, leading to higher premium incomes for the companies,” says Dharmesh Kant, Head of Retail Research at IndiaNivesh Securities.

According to a report by Edelweiss Securities, insurance premiums are likely to grow by 16 per cent over the next decade despite 30 per cent annual projected growth for pure protection. At the bourses, sector players have outperformed the benchmark S&P BSE Sensex thus far in 2019. SBI Life gave the most returns to investors, rising 64.71 per cent year-to-date (YTD), followed by ICICI Pru Life (up 60.29 per cent YTD), ACE Equity data show. This is followed by advances in ICICI Lombard General Life (up 52.46 per cent YTD) and HDFC Life (up 46.47 per cent YTD). In contrast, the headline Sensex rose 11.7 per cent during the same period.

“Being a mature business with high capital productivity product offerings (for the chosen few), trend line business growth will always lag capital productivity (RoE). Second is that the balance sheet risk is incredibly low vis-à-vis profitability, as the business is primarily savings with a smattering of insurance on top,” analysts at Edelweiss note.

Insurance: A long-term buy

Given the double digit returns so far in calendar year 2019, analysts believe the stocks could see mild correction in the near term, but remain a buy from a long term perspective. According to G. Chokkalingam, founder and managing director of Equinomics Research, valuations of SBI Life and ICICI Pru Life are “not sustainable” in the near term as the counters are trading near life-time high valuations.

“While long-term outlook is stable (for the stocks), near term valuations are not sustainable and it’s time to book profit in these two counters,” he says, adding, “Competition is too high and more than Rs 15,000 crore have come through foreign direct investment (FDI). Additionally, the sector is not growing in strong double digits, with some segments not offering great margins in the insurance sector”.

Analysts at Edelweiss Securities peg the FY20 P/E valuation of SBI Life at 106.9, while that of ICICI Pru Life at 75.6. Further, the FY20 P/E for HDFC Life is pegged at 97.3. These are much higher than an average P/E of 13 estimated for global insurance firms. The brokerage, however, has a ‘buy’ rating on, both, ICICI Pru Life and SBI Life, with a 1-year target price of Rs 700 (upside 37.6 per cent) and Rs 1,220 (upside 22.3 per cent), respectively. It, however, has ‘hold’ rating for HDFC Life with a 1-year target price of Rs 590 (downside 3.7 per cent).

SBI Life touched a life-time high of Rs 1,030 per share on October 30, 2019, while ICICI Pru Life hit record high on November 8, 2019. HDFC Life, too, recorded a fresh-high of Rs 646 on October 31, 2019. Chokkalingam suggests booking profit if the stocks spurt. "Most of the times, stocks enter benchmark indices after their mega success, and therefore, all such entrants may not really offer value buying. Smart investors whould always hunt at an early stage for stocks which could eventually enter such reputed indices," he explains.

“Some time-correction may happen in the near future as stocks have risen 50 per cent YTD, but I don’t see stocks seeing any price-correction. The market price is likely to remain in the same range for the next 3-6 months,” says Kant. Gaurang Shah, head investment strategist at Geogit Financial Services, too, feels addition by MSCI may lead to some liquidity in the near-term but won’t change the fundamentals of the counters. He sees short-term correction but remains positive from the long-term perspective.