Shares of insurance companies took a beating on the bourses on Thursday on concerns that higher taxation could impact profitability and valuations.
The fear was triggered after the finance ministry set up a task force to have a re-look at direct taxation.
Shares of HDFC Standard Life Insurance declined the most at 5.4 per cent — its first single-day fall since its listing on Friday. ICICI Prudential Life and SBI Life fell close to four per cent each.
The 2009 Direct Tax Code had proposed to bring the tax paid by life insurance companies on a par with corporate tax rates. While insurance companies pay income tax of 14.3 per, corporates have to pay 25 per cent. The Street fears if the recommendation is adopted, it would adversely hit the insurance companies.
Analysts said the decision could have an impact on the embedded value (EV) of life insurers, thereby affecting their margins. EV, a key metric to value an insurance company, is a sum of the present value of future profits and adjusted net asset value.
According to a report by Kotak Institutional Equities, the EV of the top life insurers could reduce by up to nine per cent, leading to an erosion of up to 17 per cent in new business value.
“Insurance actuaries (and our estimates) are currently building in tax rate of 14.3 per cent. Increase in tax rate will have one-time impact on EV, and going forward lower new business-achieved profit margins,” said the brokerage.
Market experts said the tax uncertainty could continue to weigh on the shares of insurance companies in the near-term.
“The move would have some impact on the life insurance stocks from a near- to medium-term basis, as the business value of the company would change due to the increased tax and this reduces the profit. However, from a long-term perspective, the impact might not be that wide considering the growth potential and business opportunities in the sector,” said Prateek Agrawal, business head and chief investment officer, ASK Investment Managers.
Following Thursday’s decline, shares of SBI Life are trading five per cent below their issue price. HDFC Life is up close to 30 per cent and ICICI Prudential Life, which listed in September 2016, has gained 14 per cent over its IPO (initial public offering) price.