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Stock pick of the week: Why analysts are bullish on ICICI Prudential Life Insurance

Improving margins, better product mix, focus on high-margin term and endowment plans, improving customer stickiness, fall in valuations has made it analysts pick.

, ET Bureau|
Feb 05, 2018, 06.30 AM IST
The net profit growth of ICICI Prudential Life Insurance remained flat in the third quarter of 2017-18—net profit for the quarter was Rs 452 crore compared to Rs 450 crore last year. Despite this, analysts are getting bullish on the counter because it beat the Street expectations on several fronts. Strong growth in its new business was one such metric where the company exceeded expectations. In fact, the 89% year-on-year (y-o-y) jump in the its commission cost—the reason behind its flat net profit growth—was because of the increased share of its new business in overall commissions.

Margin improvement due to a better product mix was another positive that surprised analysts. Due to better cost management, the company’s cost-to-total premium ratio fell from 13.3% to 13.2% y-o-y. The new unit-linked investment plans (ULIPs), launched in the first quarter of 2017-18, have better margins and their increased sale helped boost overall margins. Still, since the margin is higher in protection plans—term and endowment plans—compared to ULIPs, ICICI Pru Life is focusing on the former. This shift though requires more capital— need for capital is less in the case of ULIPs where investors bear the risk.

Since the growth in non-ULIP products was more in the third quarter, the company’s solvency ratio—indicative of the size of its capital relative to risks it has taken—fell from 276% in September 2017 to 252% in December 2017. However, it is still much higher than the minimum regulatory requirement of 150%, leaving enough capital with ICICI Pru Life to push its growth, without equity dilution.

Improvement in the percentage of policyholders who renewed the policy after one year (thirteenth month persistency ratio) from 84.7% in 2016-17 to 85.7% in the first nine months of 2017-18, was another positive surprise. Besides the increased share of protection plans—probability of policyholders discontinuing ULIPs is higher—the rise in the share of insurance purchases directly by consumers, from 12% to 14.5% y-o-y, also contributed to the improved persistency ratio.

The recent correction in ICICI Pru Life’s counter has also furthered analysts’s interest. With more life insurance companies getting listed, competition has intensified, resulting in a ICICI Pru Life’s substantial under performance over the past seven months. The counter fell 16%, even as the Sensex rose 15%. The company is now trading at a priceto-embedded value ratio of 3.4 compared to 4.4 in the first week of July 2017.

Analysts’ views
Buy: 13
Sell: 8
ICICI Pru Life

Selection Methodology
We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts.

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