Limited upside for life insurance-related stocks

The bullish view of the Street on the life insurance space may be petering out. For instance, stocks of Max Financial Services and HDFC, which saw an exponential rise in their prices when the HDFC Life-Max Life merger was announced, haven’t seen much incremental gains after the initial surge. Likewise, stocks such as Aditya Birla Nuvo and Exide Industries, after re-rating of 7–15 per cent following the merger of HDFC Life and Max Life, are just about sustaining gains. 

Also, ICICI Prudential Life is marginally above the upper end of its IPO price. In fact, State Bank of India, too, didn’t react much to its recent stake sale which placed it (Rs 46,000-crore valuation) a notch above ICICI Prudential Life in the pecking order. All this  indicates that the market has probably lost interest in life insurance-oriented stocks. As R Sreesankar, head, institutional equities, Prabhudas Lilladher, puts it, “Till the time HDFC Life-Max Life deal happened, we didn’t have any valuation benchmark in the life insurance sector. But from here on, we need to monitor how the sector grows and growth may not be secular across companies.” Suhas Harinarayanan, head of research, JM Financial, says as most life insurance stocks are already trading at reasonable multiples, it limits the possibility of a further rerating.   

For this reason, analysts say taking fresh exposure to life insurance-led stocks in anticipation of gains as seen in 2016 may not quite reward investors in the medium term. This is even after reports suggesting strong business growth for private insurers, which was sustained even in December 2016. Analysts say that vital information on segmental performance and steps taken to curtail expense ratios, if provided periodically, could help them arrive at valuations more accurately. In fact, additional information becomes particularly important now to support the view that the insurance sector may benefit most from the recent note ban as investors will turn to structured insurance products for secure returns at reasonable reward. 

But that said, with the life insurance stocks not having much to offer, the tide could turn in favour of the general insurance space. 

“We expect more re-rating for these stocks. There could be additional lines of businesses added; like crop insurance is another emerging segment. Plus, the segment is largely undiscovered,” Harinarayanan of JM Financial says.

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