Brokerages cut target prices of insurers, see de-rating risk

Mumbai: Brokerages said the new tax regime announced in the budget could have limited impact on sales of insurance companies as most taxpayers are likely to stay with the existing slabs.

However, the government has indicated that it will remove most exemptions and move completely towards the new regime over the next few years. This could adversely impact insurance companies over the long run, said brokerages. Factoring in this long-term uncertainty, Investec has cut target prices on insurance companies by 7-13 per cent.

Kotak Institutional Equities has reduced fair value of HDFC Life to Rs 590 from Rs 615; of ICICI Prudential Life to Rs 580 from Rs 610; and of SBI Life to Rs 1,010 from Rs 1,030.

Morgan Stanley has cut target prices on SBI Life, ICICI Prudential Life and HDFC Life by 2-9 per cent.

Here are the brokerage views:

Investec

Investec sees risk of de-rating in insurance stocks because of growth uncertainty in the sector and rich valuations. The simplification of income tax structure will have limited impact in the short run but the impact on the long run could be significant, it said. The FM indicated a removal of most exemptions and move completely towards the new regime over the next few years, which Investec believes, is a possibility and could lead to higher impact on insurance sales. Investec has cut target prices on insurance stocks by 7-13 per cent.

Jefferies

Providing option under the personal tax regime disadvantages insurance products but given that the alternative tax system does not benefit individuals with over Rs 15 lakh income or those claiming the full deduction, the impact on growth for insurers may not be that large, said Jefferies. It added that the removal of dividend distribution tax benefit will affect the margins of ICICI Prudential and HDFC Life, with a oneoff impact on enterprise value.

Kotak Institutional Equities

The relevance of Section 80C has been reducing over the years and hence impact on volumes may not be significant, said Kotak. Change in effective tax rates can, however, lead to 100-150 basis points value of new business (VNB) margin reduction and 3-5 per cent haircut in value-of-in-force business (VIF), said Kotak. The impact will be higher for ICICI Life, followed by HDFC Life, then SBI Life and Max Life, the brokerage said.

Motilal Oswal

The removal of major exemptions/ deductions under the new tax regime will impact sales of life insurance products as individuals migrating to the new tax regime will lose on tax savings on their insurance purchases, said Motilal Oswal. Under the new tax regime, tax liability for individuals (availing exemptions) will actually increase, and a large section of individuals might not prefer to migrate, resulting in a modest impact on the new business sales of life insurers, the brokerage said. The brokerage said the structural story for the sector is intact but near-term stock performance may be volatile.

Morgan Stanley

Dividend income is now taxable for insurers, thereby driving up effective tax rates. “We do not view the new tax slabs, sans deductions, as attractive, and hence see limited impact,” said Morgan Stanley. However, talks around removal of exemptions over the long term could be a new overhang. The brokerage has equal-weight rating on HDFC Lie and ICICI Prudential due to high valuation and SBI Life is its relative overweight. Morgan Stanley has cut target price on SBI Life, ICICI Prudential Life and HDFC Life by 2-9 per cent.

Source: The Economic Times