Insurance and Capital Markets and... · Insurance and Capital Markets : 4QFY20 Results Preview Life...

11 April 2020 4QFY20 Results Preview

Insurance and Capital Markets

4QFY20 Preview Brokers and general insurers to post stronger 4QFY20 vs. asset managers and life insurers.

Life insurance. Growth for pvt. indiv. APE was lower at just 6.1% YoY during Jan/Feb-20. Additionally, APE growth will get impacted by the lock-down in Mar-20. Overall, we believe the lock-down will have significant impact on 4QFY20E and FY21E on both sales and earnings of life insurers. Contribution from March month was high in FY19 for HDFCLIFE/MAXL at 16.7/22.2% vs. for SBILIFE/IPRU at 13.2/13.2%. Additionally, we estimate ~40-60% of business in March is generated in the last 10-12 days. Accordingly our FY20E APE estimates stand revised downwards by 3.7-17.1%, with SBILIFE least impacted (-3.7%) and MAXL most impacted (-17.1%). Lower scale will also result in slightly lower margins for FY20E. We have reduced our FY20 VNB margin expectations by 30-90bps across companies. SBILIFE is our top pick with a TP of Rs 1,046 (+41.0%).

General Insurance. Total industry GDPI (ex. crop) growth in Jan/Feb-20 is 14.4% YoY; pvt. multi-line insurers have grown at 19.1% YoY, while public insurers have grown just 6.7%. We expect sharp slowdown in the month of Mar-20 given the lock-down. Accordingly, we expect 4QFY20 premium growth to be significantly impacted. While premium growth is expected to remain weak, CORs are expected to improve as claims ratios will decline for motor, property and other misc. segments (higher share in mix), vs. increasing for health (lower share). ICICIGI: Driven by higher motor TP and health segments, we expect ICICIGI to deliver a 9.7% YoY growth in NEP (ex. crop). Decline in new vehicle sales in Mar-20 is expected to adversely impact GDPI growth in 4QFY20. CORs are expected to remain stable in 4QFY20.

Asset Managers. Despite a difficult 4QFY20 where Nifty/Midcap index plunged 29.3/31.6%- Total equity (ex. ETF and ex. arb) inflows sustained at Rs 252.6bn (+42% YoY). 4QFY20 lumpsum inflows were Rs (4)bn. We expect lumpsum redemptions to continue into FY21 as investors tap into their savings as a result of the lockdown. We also believe that SIPs too, may take a hit. Mutual fund revenues and profits will get impacted as AAUM for 4QFY20 is hit. Additionally, this also flows into FY21. We have accordingly revised our FY21E APAT estimates downwards for lower flows and MTM. Given sharp price correction we upgrade Nippon Life India Asset Management (NAM) to a BUY with a lowered price target of Rs 349 (40x Mar-22E NOPLAT + cash & investments). At CMP of Rs 287 stock trades at a FY21E/22E P/E of 31.8/27.8x.

Brokers. We expect increased ADTVs and market volatility to contribute positively to broking revenues and earnings in 4QFY20. However lower prices will impact broking ADTVs and revenues in FY21. Over medium to longer term we do believe that industry will consolidate and larger brokers will survive. Distribution income will get negatively impacted with lower equity prices and lower upfront revenues from sale of PMSs. ISEC: Post recent stock price correction (-41.9% in Mar-20) we maintain SELL with TP of Rs 285. Our TP implies a multiple of 18x and FY21E/22E EPS estimate of Rs 13.7/15.9. At CMP of Rs 335 stock is trading at FY21E/22E P/E of 24.4/21.1x.

Company CMP (Rs)

Reco. TP

(Rs) HDFCLIFE 477 NR 500*

IPRU 341 BUY 415

MAXF 355 BUY 442

SBILIFE 743 BUY 1,046

GICRE 117 BUY 180

ICICIGI 1,169 REDUCE 1,100

NIACL 109 REDUCE 111

HDFCAMC 2,447 NR 2,677*

MOFS 518 BUY 668

NAM 287 BUY 349

ISEC 335 SELL 285 *Fair Value

Madhukar Ladha [email protected] +91-22-6171-7323

HDFC securities Institutional Research is also available on Bloomberg ERH HDF <GO> & Thomson Reuters

Insurance and Capital Markets : 4QFY20 Results Preview

Life Insurance

The high base set after strong growth of 22.8% CAGR during FY17-19, slowing sales of NPAR products (compared to 2Q and 3QFY20), a slowing economy and finally the lock-down is expected to severely hit sales of life insurers in 4QFY20.

Growth for pvt. indiv. APE was lower at just 6.1% YoY during Jan/Feb-20. Additionally, APE growth of life insurers will get impacted by the lock-down in Mar-20.

Pvt. life insurers group business APE continued to remain strong in Jan/Feb-20 with growth of 45.0% YoY. Growth in group premiums despite slowdown in credit growth seems more as a result of increase in group term insurance and the fund management business.

Overall we believe the lock-down will have significant impact on 4QFY20 and even FY21E sales and earnings of life insurers.

On an average for companies, March contributes a significant 13-22% of indiv. annual APE. Contribution in FY19 was higher for HDFCLIFE/MAXL at 16.7/22.2% vs. for SBILIFE/IPRU at 13.2/13.2%.

Additionally, we estimate ~40-60% of business in March is generated in the last 10-12 days. Thus we believe that 4QFY20 for life insurers will be severely dented.

We believe lower business volumes in FY20 will also result in lower margins for FY20. Accordingly we have reduced our VNBM estimates b 30-90bps across companies to account for the same.

FY21E expectations:

We expect 1HFY21 life insurance policy sales to be impacted due to the lock-down and social distancing. Consequently we have cut our FY21E APE estimates by 20.2-33.3% for the top 4 pvt. life insurers.

Lower scale will also result in lower margins for the companies. We have reduced margin expectations across companies by 150-340bps vs. previous expectations. YoY VNB margin declines are in the range of 70-200bps.

We expect persistency to have a limited impact in 4QFY20 but believe there will be some negative impact on persistency in FY21- accordingly we are building in some negative variances and assumption changes.

We have not made any material changes to our mortality assumptions and hence any changes to EV due to the same.

Company specific comments

We expect IPRU to report a total APE decline of 14.3% YoY in 4QFY20E as the company reported a 9.9% decline in Jan/Feb-20 sales. We expect VNB margins to moderate to 20.6% largely due to lower than expected scale.

We expect HDFCLIFE to post strong business growth and 4QFY20 APE is expected to decline by 5.3%. New product Jeevan Sanchay PAR continues to do well.

We expect SBILIFE to report 4QFY20 total APE decline of 3.5% YoY. We expect protection share to improve in 4QFY20 as the company increased its focus on same.

MAXL is expected to deliver a weak FY20 APE growth of 1.5% YoY. Growth for the company has decelerated in Jan/Feb-20 to just 7.6% YoY, and contribution from Mar-20 is expected to be muted. We expect margins to decline.

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View

After a strong FY17-19 where indiv. NBPs have grown at CAGR of 22.8%, pvt. life insurers now confront a formidable base. FY20TD indiv. NBP/APE has still grown at 17/14%.

At current stock price levels SBILIFE is our top pick with a TP of Rs 1,046 (+41.0%).

COMPANY FY20E

OUTLOOK WHAT’S LIKELY KEY MONITORABLES

HDFC Life GOOD

FY20E APE expected to grow at 18.7% YoY

Product mix to change more towards PAR and ULIP.

VNB margins expected at 26.2%, +160 bps YoY.

Management commentary on impact of lockdown and preparedness in FY21E.

Persistency trends

Commentary on low interest rate environment.

Commentary on new product launches and growth outlook

ICICI Pru Life MUTED

Expect FY20 APE decline of 3.7%.

VNB margin is expected to dip 50bps QoQ to 20.5% as scale in 4QFY20 lowers.

Lockdown performance and FY21E sales guidance.

Protection share and persistency trend.

Margin levers and guidance

Max Life MUTED

FY20E APE growth expected at ~1.5% YoY.

VNB margin expected to moderate to 21.3% (-40bps YoY).


Comments on Axis Bank deal.

New product launch and margins.

Persistency trend

SBI Life AVG

Expect FY20E APE growth at +14.9% YoY.

FY20 adj. VNB margin is expected at 20.5% (+70bps QoQ).


Persistency trends and protection share

SBI branches activation

Margin levers

FY20E estimates

COMPANY APE (Rs bn) VNB Margin (%) VNB (Rs bn)

FY20E YoY (%) FY20E YoY (bps) FY20E YoY (%)

HDFC Life 74.3 18.7 26.2 160 19.5 26.6

ICICI Prudential 75.1 -3.7 20.6 360 15.5 16.6

Max Life 40.1 1.5 21.3 -40 8.5 -0.4

SBI Life 111.3 14.9 20.5 70 22.8 19.0

Aggregate 300.8 8.6 22.1 168 66.8 17.5 Source: HDFC sec Inst Research

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Estimate change HDFC Life

(Rs bn)

FY20E FY21E FY22E

Old New Change (%)

Old New Change (%)

Old New Change (%)

APE 78.3 74.3 -5.1 87.9 66.4 -24.5 102.0 76.6 -24.9

VNB 20.8 19.5 -6.5 23.7 16.9 -28.7 28.0 19.8 -29.0

VNB Margin 26.6% 26.2% -40bps 27.0% 25.5% -150bps 27.3% 26.4% -90bps

EV 209.8 208.4 -0.6 246.2 237.9 -3.4 289.1 272.6 -5.7 Source: HDFC sec Inst Research ICICI Prudential

Rs bn FY20E FY21E FY22E

Old New Change(%)

Old New Change(%)

Old New Change(%)

APE 80.0 75.1 -6.0 88.2 68.4 -22.4 99.6 77.3 -22.4

VNB 16.7 15.5 -7.4 18.6 13.2 -29.0 21.4 15.7 -26.7

VNB Margin 20.9% 20.6% -30bps 21.1% 19.3% -180bps 21.5% 20.3% -120bps

EV 241.8 241.0 -0.3 271.3 261.5 -3.6 304.5 288.5 .-5.2 Source: HDFC sec Inst Research Max Life


Old New Change(%)

Old New Change(%)

Old New Change(%)

APE 48.4 40.1 -17.2 53.3 35.6 -33.3 57.7 38.8 -32.7

VNB 10.7 8.5 -20.6 12.1 6.9 -43.3 13.2 7.8 -40.6 VNB Margin (%)

22.2 21.3 -90bps 22.7 19.3 -340bps 22.9 20.2 -270bps

Embedded Value

103.0 98.8 -4.1 117.5 104.7 -10.9 133.7 114.3 -14.5

Source: HDFC sec Inst Research SBI Life


Old New Change(%)

Old New Change(%)

Old New Change(%)

APE 115.6 111.3 -3.7 128.1 102.3 -20.2 149.8 119.8 -20.1

VNB 24.2 22.8 -5.6 27.4 20.1 -26.9 33.3 24.6 -26.2 VNB Margin (%) 20.9 20.5 -40bps 21.4 19.6 -180bps 22.2 20.5 -170bps

Embedded Value

277.5 276.3 -0.4 323.0 311.0 -3.7 377.5 356.7 -5.5

Source: HDFC sec Inst Research

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General Insurance

Total industry GDPI (ex. crop) growth in Jan/Feb-20 is 14.4% YoY; pvt. multi-line insurers have grown at 19.1% YoY, while public insurers have grown just 6.7%.

Given weak auto sales and impact of lockdown we expect premium growth to be tepid in 4QFY20.

While premium growth is expected to remain weak, CORs are expected to improve as claims ratios will decline for motor, property and other misc. segments, while increasing for health (lower in mix).

Industry OD premiums for Jan/Feb-20, increased only 3.4% YoY on the back of stiff pricing competition and tepid new vehicle sales.

Driven by tighter regulations, price hikes and compulsory long term insurance, growth for the motor TP segment continued at a strong 12.7% YoY for Jan/Feb-20.

Steep decline in equity markets will likely result in high MTM losses thus FV change accounts for insurers will take a hit. Hit will be higher for government owned insurers- NIA and GICRE, compared to ICICIGI.

ICICIGI:

Driven by higher motor TP and health segments, we expect ICICIGI to deliver a 3.5% YoY growth in NEP. Low new vehicle sales in Mar-20 is expected to adversely impact premiums written in 4QFY20.

ICICIGI has discontinued writing crop business- thus on a like to like basis premium growth (ex-crop), is expected to be higher at 9.7% YoY. Driven by lower vehicle movement we expect CORs to improve marginally.

We expect NIA to report a NEP growth of 8.9% YoY.

FY21E

We expect the current Covid-19 situation and lockdown to significantly impact business in FY21.

As new motor vehicle sales dip, we expect motor premiums to come under pressure. However, current lockdown and any extension of the same or partial working conditions should also result in lower motor CORs.

We also expect higher health premiums as more individuals look for purchasing health insurance. There may be some spike in claims ratio under this segment, but we believe new product filings by companies will build in higher pricing.

Incrementally, lower interest rates will also result in lower investment incomes.

We have adjusted our numbers to build in the above, as seen in our estimate change tables.

View

We believe that the current covid-19 situation and lock-down will negatively impact premium growth but will result in improving underwriting margins as share of motor is significantly higher in the mix for most insurers.

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Significant under penetration coupled with regulatory changes will aid growth for the industry in the short term. However, we believe competitive forces will limit profitability.

We also expect regulatory action on MISP commission payouts, and believe TP pricing environment will tighten. We expect this to result in a tapering of growth for motor TP after the initial spurt which will be seen over FY20-21E.

Accordingly, our estimates are lower than consensus for ICICIGI.

After recent price correction we upgrade ICICIGI to REDUCE with a TP of Rs 1,100.

Post recent steep price correction we retain our REDUCE on NIACL with a TP of Rs 111 (4.2%). We value the stock at 0.6x P/BV less 10% discount for additional supply for shares as GoI is required to sell an additional 10.44% stake in the company.

We continue to rate GICRE as a BUY with a reduced price target of Rs 180 (62.3%). Our price target is based on a reduced P/BV multiple of 0.7x less a 10% discount for additional supply of shares as GoI is required to sell an additional 10.78% stake in the company.

COMPANY 4QFY20E


GICRE GOOD

Premium (NEP) growth to moderate (12.7% YoY) on back of strong domestic growth.

Growth expected to pick up in fire and crop, where retention rates are low and where pricing has hardened.

COR is expected to improve to 98.0% (+728/-3124 bps YoY/QoQ), as most of the provisioning is done in 3QFY20 and 4QFY20 has largely been along expected lines.

High Investment profits are expected as company books equity gains to shore up solvency.

Understand overall impact as a result of Covid-19 and lock-down.

Business growth in foreign operations and CORs.

Overall commentary on CORs

Stress in investment book

Management commentary on hardening of global reinsurance rates

ICICIGI GOOD

NEP expected to increase 3.5% YoY, as the company has exited the crop business.

Motor growth is expected to be muted as new vehicle sales come in muted.

COR to increase sequentially by 168bps to 101.1%.


Business growth and COR trajectory

Impact of lower yields on investment income.

NIACL AVG

NEP expected to increase at 8.9% YoY.

COR is expected at 110.8% (-490 bps QoQ).


Watch for stress in health segment.

Stress in investment book

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COMPANY Net earned premiums (Rs bn) Underwriting profits (Rs bn) PAT (Rs bn)

4QFY20 YoY (%) 4QFY20 YoY (%) 4QFY20 YoY (%)

GIC Re 60.2 12.7 0.0 NM 27.1 205.4

ICICI Lombard 22.7 3.5 0.1 NM 3.2 41.6

New India Assurance 61.5 8.9 -6.8 NM 1.8 NM

Aggregate 144.4 9.5 -6.7 NM 32.2 278.0 Source: HDFC sec Inst Research GIC Re

Rs mn FY20E FY21E FY22E

Old New Change(%) Old New Change(%) Old New Change(%)

Net written premium 449,500 447,037 -0.5 483,462 442,785 -8.4 531,808 460,496 -13.4

Net earned premium 427,025 424,685 -0.5 468,958 429,501 -8.4 515,854 446,681 -13.4

COR (%) 113.4 113.4 0bps 104.1 105.8 169bps 103.5 104.2 69bps

COR (%) IRDAI 113.4 113.4 0bps 104.1 105.8 169bps 103.5 104.2 69bps

Underwriting profits # -61,132 -60,797 NM -21,768 -27,198 NM -20,834 -21,126 NM

PAT 17,612 17,065 -3.1 39,638 29,986 -24.3 45,238 38,261 -15.4

Investment book 807,598 758,495 -6.1 896,754 811,508 -9.5 1,022,052 906,206 -11.3

ROE (%) -5.3 -13.2 -793bps 9.6 8.2 -145bps 9.9 9.3 -61bps Source: HDFC sec Inst Research ICICI Lombard


Old New Change (%) Old New Change (%) Old New Change (%)

Net written premium 97,033 95,721 -1.4 112,374 107,349 -4.5 129,424 123,348 -4.7 Net earned premium 94,607 93,328 -1.4 109,452 104,558 -4.5 125,930 120,018 -4.7 COR (%) 100.9 100.2 -65bps 98.4 95.7 -264bps 97.7 98.6 91bps COR (%) IRDAI 100.0 99.3 -66bps 98.3 95.7 -266bps 97.6 98.5 89bps Underwriting profits # -1,502 -878 NM 1,058 3,786 257.7 2,029 853 -57.9 PAT 13,091 12,721 -2.8 17,248 16,489 -4.4 20,533 18,756 -8.7 Investment book 256,785 247,563 -3.6 304,171 283,369 -6.8 349,621 348,676 -0.3 ROE (%) 21.4 21.4 2bps 23.9 23.8 -10bps 23.6 22.3 -130bps Source: HDFC sec Inst Research New India Assurance


Old New Change(%) Old New Change(%) Old New Change(%)

Net written premium 246,999 245,049 -0.8 265,803 254,103 -4.4 288,964 276,548 -4.3

Net earned premium 238,477 236,595 -0.8 257,829 246,480 -4.4 280,295 268,252 -4.3

COR (%) 114.6 114.5 -7bps 111.8 111.8 3bps 110.6 110.6 0bps

COR (%) IRDAI 114.4 114.4 -7bps 111.6 111.7 2bps 110.4 110.4 -1bps

Underwriting profits # -36,870 -36,415 NM -32,506 -31,148 NM -31,967 -30,593 NM

PAT 26,134 22,532 -13.8 19,877 17,833 -10.3 23,609 19,828 -16.0

Investment book 628,079 618,040 -1.6 636,445 620,976 -2.4 655,757 640,318 -2.4

Adj. ROE (%) 6.0 3.6 -246bps 6.1 6.1 -1bps 7.1 6.1 -100bps Source: HDFC sec Inst Research

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Asset Management

Despite a difficult 4QFY20 where Nifty/Midcap index plunged 29.3/31.6%- Total equity (ex. ETF and ex. arb) inflows sustained at Rs 252.6bn (+42% YoY).

4QFY20 lumpsum inflows were Rs (4)bn. We expect lumpsum redemptions to continue into FY21 as a result of the lockdown as investors tap into their savings. We also believe that even SIPs may take a hit.

4QFY20 equity AUM is down 18.8/22.2% YoY/MoM as both equity markets sold off sharply in Mar-20.

Debt/liquid funds saw large redemptions at Rs 509/642bn. Beginning Mar-20, corporates began to hoard cash due to the Covid-19 and lockdown situation.

Churn remains high, which we believe will impact asset managers back book adversely.

During the quarter PMS regulations were changed- Ticket sizes for PMSs have been increased to Rs 5mn from Rs 2.5mn, and additionally asset managers are not allowed to pay distributors any upfront commission. This we believe will change structure of the business considerably and make fund raising difficult.

View

Regulatory changes had made distribution of mutual funds difficult. The changed regulations now impact even PMS distribution. To that extent we believe new fund raising will get difficult.

Additionally, volatile financial markets (both debt and equity) are negatively impacting retail flows to domestic mutual funds and PMSs.

Key monitorable remain overall flows, and direct TER changes.

Given sharp price correction we upgrade Nippon Life India Asset Management (NAM) to a BUY with a lowered price target of Rs 349 (40x Mar-22E NOPLAT + cash & investments). We reduce APAT for FY21E/22E by 15.0/16.6%. At CMP of Rs 287 stock trades at a FY21E/22E P/E of 38.5/31.8x.

We lower our TP on MOFS to Rs 668 and retain our BUY rating. We like MOFS’s differentiated business model and unique client franchise. There are headwinds in the near term in the form of a difficult fund raising environment due to regulatory changes and tough market conditions. We are also concerned of increased competition in broking. Lastly, MOHL too needs to display scalability. Having said the above valuations are compelling- at CMP of Rs 518 MOFS(ex. MOHL) trades at FY21E/22E P/E of 15.3/12.6x.

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COMPANY 4QFY20E


HDFC AMC MUTED

Total AAUM for 4QFY20 expected to grow (+8.4/-2.8% YoY/QoQ).

Total revenue expected to be muted at Rs 5.1bn as equity AUMs decline QoQ.

Other income is expected to be negative as a result of MTM impact on equity fund investments.

Fund-raising environment and any insights on retail investor psyche.

Any significant impact on yields due to run-off of back book.

Any guidance on additional cost leverage.

MOFS MUTED

AUM expected to decline as a result of the sharp correction in stock prices and some redemptions.

The capital markets segment is expected to register strong growth as volumes were strong in 4QFY20.

MOFS to report MTM losses in its treasury as equity prices take a sharp hit.

MOHF is expected to report stable profits, however disbursements are expected to remain muted.

Fund-raising environment and any insights on retail and HNI investor psyche.

Management commentary on how new PMS regulations will impact business.

Any rise in stressed assets in the housing finance subsidiary.

NAM MUTED

Total AAUM is expected to decline by (13.8/1.8% YoY/ QoQ), led by steep fall in debt AUM and MTM hit on equity assets.

Revs are expected to decline 14.6/3.3% YoY/ QoQ.

Other income expected to be negative as equity AUMs decline due to MTM hit.

Strategy to increase market share, specifically on the HNI and institutional lines of business.

Commentary on cost reduction initiatives.

4QFY20E estimates:

COMPANY Revenue (Rs mn) EBITDA (Rs mn) APAT (Rs mn)

4QFY20E YoY (%) QoQ (%) 4QFY20E YoY (%) QoQ (%) 4QFY20E YoY (%) QoQ (%)

HDFC AMC 5,074 4.3 -3.3 3,990 8.8 -3.5 2,520 -11.6 -28.5

MOFS 3,729 - 25.6 -26.0 1,217 -41.4 -42.8 247 -82.2 -83.5

NAM 2,932 - 14.6 - 3.3 1,393 -1.5 -5.3 644 -53.4 -56.8

Aggregate 11,735 - 11.8 -11.9 6,600 -7.8 -14.7 3,411 -39.2 -47.6 Source: HDFC sec Inst Research

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Estimate change table HDFC AMC

(Rs mn.) FY20E FY21E FY22E

Old New Change

(%) Old New Change

(%) Old New Change

(%) Revenues 20,851 20,361 -2.3 22,927 18,080 21.1 25,240 20,150 -20.2

EBITDA 16,477 16,012 -2.8 18,391 14,095 -23.4 20,351 16,086 -21.0

EBITDA margin (%) 79.0 78.6 -39bps 80.2 78.0 226bps 80.6 79.8 -80bps

NOPLAT 12,102 11,792 -2.6 13,538 10,293 -24.0 15,033 11,818 -21.4

NOPLAT margin (%) 58.0 57.9 -13bps 59.1 56.9 -212bps 59.6 58.6 -91bps

PAT 13,775 12,663 -8.1 15,386 12,614 -18.0 17,077 14,097 -17.5

RoE (%) 39.9 37.3 -262bps 37.1 32.1 -504bps 35.7 31.4 -432bps Source: HDFC sec Inst Research MOFS


Old New Change

(%) Old New Change

(%) Old New Change

(%) Revenues 18,005 16,654 -7.5 19,409 16,633 -14.3 20,979 18,981 -9.5

EBITDA 7,042 5,709 -18.9 7,704 6,019 -21.9 8,319 7,298 -12.3

EBITDA margin (%) 39.1 34.3 -483bps 39.7 36.2 -350bps 39.7 38.5 -120bps

PAT 5,481 4,141 -24.4 5,973 4,645 -22.2 6,440 5,625 -12.7

RoE (%) 18.2 14.1 -411bps 17.7 14.6 -310bps 17.0 16.0 -102bps Source: HDFC sec Inst Research

NAM


Old New Change (%)

Old New Change (%)

Old New Change (%)

Revenues 12,406 12,215 -1.5 13,465 11,471 -14.8 14,929 12,613 -15.5

EBITDA 6,064 5,859 -3.4 7,233 5,749 -20.5 8,481 6,721 -20.7


NOPLAT 4,322 4,163 -3.7 5,220 4,096 -21.5 6,176 4,852 -21.4

NOPLAT margin (%) 34.8 34.1 -76bps 38.8 35.7 -306bps 41.4 38.5 -291bps

APAT 5,552 4,699 -15.4 6,687 5,687 -15.0 7,793 6,498 -16.6

ROE (%) 21.1 18.2 -296bps 23.8 21.0 -278bps 25.3 21.9 -339bps

ROIC (%) 137.1 131.8 -525bps 192.2 146.7 -4546bps 228.0 169.5 -5845bps Source: HDFC sec Inst Research

Page | 10


Broking

4QFY20 was marked with steep negative price action and increased market volatility. The quarter saw price declines as the Nifty 50 and midcap index declined 29.3% and 31.6% respectively.

Total market estimated ADTV (ex-prop) for 4QFY20, continued to grow at a healthy pace of 54.1/9.4% YoY/QoQ; cash ADTV (higher yielding) growth improved 22.3/16.6% vs. derivatives growth of 55.4/9.2% YoY/QoQ. Consequentially derivative: cash mix was at 96.9:3.1%.

We believe that a down trending market is negative for margin funding, T+5, LAS and ESOP financing books. We expect a sharp reversal in funding books in Mar-20.

With increased market volumes we expect broking revs to improve for 4QFY20; however MF distribution revenues are expected to be under pressure as negative MTM hits distribution fees for distributors.

Additionally, we believe that an increased minimum ticket size for PMS of Rs 5mn (up from Rs 2.5mn), and ban of upfront commission payment to PMS distributors will also have a negative impact on distribution income.

View We expect increased ADTVs and market volatility to contribute positively to

broking revenues and earnings in 4QFY20. However lower prices will impact broking ADTVs in FY21.

Over medium to longer term, due to changing regulations which do not allow margin financing to smaller brokers, we believe that the industry will consolidate and only larger brokers will survive.

Distribution income will get negatively impacted with lower equity prices. Additionally we expect flows to remain muted in FY21. Inflows will probably be under higher degree of pressure for the PMS business due to changed regulations.

ISEC: We continue to appreciate ISEC’s strong client franchise and are enthused by its emerging cost consciousness. However, meaningful cost benefits have not yet flowed in and we remain watchful of the same. As ISEC’s business will get impacted due to lower volumes and distribution revenues we reduce our FY21E/22E earnings estimates by 35.7/34.4%.

Despite recent stock price correction (-41.9% in Mar-20) we maintain the SELL on ISEC with TP of Rs 285. Our TP implies a multiple of 18x and FY21E/22E EPS estimate of Rs 13.7/15.9. At CMP of Rs 335 stock is trading at FY21E/22E P/E of 24.4/21.1x.

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COMPANY 4QFY20E OUTLOOK

WHAT’S LIKELY KEY MONITORABLES

ISEC GOOD

Pure broking revenues expected at Rs 2.4bn (+4.9/6.9% YoY/QoQ) as ADTVs improve significantly.

MF distribution revenues are expected to remain stable on QoQ basis as negative MTM impact was largely in Mar-20.

Productivity improvements to drive costs down.

Commentary on impact of regulatory changes on businesses of brokers.

Pick up in new plans and the cost of the same for ISEC.

Management commentary on costs trajectory.

4QFY20E estimates

COMPANY Adj. Revenue (Rs mn) EBITDA (Rs mn) APAT (Rs mn)

4QFY20E YoY (%) QoQ (%) 4QFY20E YoY (%) QoQ (%) 4QFY20E YoY (%) QoQ (%)

ICICI Securities 3,918 6.5 1.8 1,862 30.8 1.3 1,336 51.5 -2.7

Estimate change table

(Rs mn) FY20E FY21E FY22E

Old New Change

(%) Old New

Change (%)

Old New Change

(%) Revenues 15,767 15,452 -2.0 17,207 13,892 -19.3 18,386 14,555 -20.8

EBITDA 7,892 7,590 -3.8 9,389 6,405 -31.8 10,481 7,021 -33.0


PAT 5,596 5,380 -3.9 6,894 4,429 -35.7 7,785 5,107 -34.4

RoE (%) 48.5 47.1 -144bps 49.2 35.0 -1416bps 46.2 36.8 -940bps Source: HDFC sec Inst Research

Peer Comparison Life Insurance Bloomberg Ticker

Unit IPRU MAXF SBILIFE HDFCLIFE

Rating BUY BUY BUY Not Rated

Current market price Rs 341 355 743 477 Market Capitalisation Rs bn 489 122 743 959 Target price Rs 415 442 1046 500* Upside/(Downside) % 21.8 24.4 40.8 4.9

Profitablity

FY20E FY21E FY22E FY19 FY20E FY21E FY22E FY19E FY20E FY21E FY22E FY19 FY20E FY21E FY22E

VNB Margin % 20.6 19.3 20.3 21.4 21.3 19.3 20.2 19.8 20.5 19.6 20.5 24.6 26.2 25.5 26.4 Total RoEV % 14.9 12.0 13.9 27.1 17.9 13.3 16.9 18.9 17.8 13.5 15.6 22.5 15.9 16.0 16.3 Operating RoEV % 13.5 12.0 13.9 21.9 19.0 13.3 16.9 17.7 15.7 13.5 15.6 20.1 14.8 16.0 16.3 Non-operating RoEV % 1.4 0.0 0.0 5.1 -1.1 0.0 0.0 1.2 2.1 0.0 0.0 2.4 1.1 0.0 0.0 RoE % 20.9 21.1 20.9 21.0 20.2 20.4 19.6 19.2 16.9 15.1 14.3 24.6 24.5 20.8 20.3

Valuation at CMP


P/EV x 2.0 1.9 1.7 2.0 1.3 1.3 1.1 3.1 2.7 2.4 2.1 5.2 4.6 4.0 3.5 P/EVOP x 16.7 16.9 13.5 12.6 8.8 11.4 8.3 20.9 20.0 20.0 15.4 31.3 35.4 28.8 24.8 Implied P/VNB x 17.6 18.8 14.5 15.5 6.3 6.1 4.3 28.2 22.2 23.3 17.6 52.4 39.9 44.4 36.3 Implied P/VIF x 3.2 2.9 2.7 3.8 2.5 2.3 2.1 4.9 4.3 3.9 3.5 7.7 7.1 6.3 5.5 P/B x 6.4 5.8 5.2 6.3 5.6 5.1 4.6 10.0 8.7 7.7 6.8 17.0 14.3 12.3 10.7 P/E x 32.4 28.9 26.2 31.5 29.8 27.5 25.8 56.0 54.7 53.8 50.4 75.3 63.3 63.7 56.4 P/AUM x 0.3 0.2 0.2 0.3 0.2 0.2 0.2 0.5 0.4 0.4 0.3 0.8 0.6 0.6 0.5

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Valuation at TP


P/EV x 2.5 2.3 2.1 2.4 1.7 1.6 1.4 4.4 3.8 3.4 2.9 5.5 4.8 4.2 3.7 P/EVOP x 20.3 20.6 16.4 15.6 10.9 14.1 10.3 29.5 28.2 28.1 21.6 32.9 37.1 30.2 26.0 Implied P/VNB x 24.5 26.9 21.3 22.1 11.1 12.0 9.6 44.0 35.5 38.4 29.9 55.4 42.3 47.1 38.7 Implied P/VIF x 3.9 3.6 3.3 4.8 3.1 2.8 2.6 6.9 6.1 5.5 4.9 8.1 7.4 6.6 5.8 P/B x 7.8 7.0 6.3 7.8 7.0 6.3 5.7 14.0 12.2 10.8 9.6 17.8 15.0 12.9 11.2 P/E x 39.4 35.2 31.9 39.2 37.1 34.2 32.1 78.8 77.0 75.8 71.0 79.0 66.4 66.8 59.1 P/AUM x 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.7 0.6 0.5 0.4 0.8 0.7 0.6 0.5

Source: HDFC sec Inst Research *Fair Value

Bloomberg Ticker Unit IPRU MAXF SBILIFE HDFCLIFE Key parameters


APE Rs bn 75 68 77 40 40 36 39 97 111 102 120 60 74 66 77 VNB Rs bn 15 13 16 8 9 7 8 19 23 20 25 15 19 17 20 Total EVOP Rs bn 32 29 36 16 17 13 18 36 37 37 48 34 29 33 39 Operating EVOP Rs bn 29 29 36 16 17 13 18 36 37 37 48 31 27 33 39 Non- operating EVOP

Rs bn 3 0 0 4 -1 0 0 3 5 0 0 4 2 0 0

EV Rs bn 241 261 288 89 99 105 114 237 276 311 357 183 208 238 273 Net worth Rs bn 76 85 94 28 31 34 38 75 86 97 109 56 67 78 90 Net Profit Rs bn 15 17 19 6 6 6 7 13 14 14 15 13 15 15 17 AUM Rs bn 1,839 2,098 2,378 628 735 845 964 1,410 1,679 1,984 2,325 1,255 1,495 1,740 2,026

Growth YOY


APE % (3.7) (8.9) 12.9 23.2 0.2 (11.3) 9.2 13.5 14.8 (8.0) 17.1 12.0 22.9 (10.7) 15.5 VNB % 16.6 (14.7) 18.8 25.5 3.7 (19.6) 14.3 22.3 18.8 (12.1) 22.4 20.3 26.5 (13.1) 17.3 Total EVOP % (12.2) (10.5) 25.5 26.9 3.2 (22.6) 34.3 13.5 4.6 0.2 30.0 16.3 (14.9) 14.5 16.1 Operating EVOP % (22.9) (1.3) 25.5 26.9 3.2 (22.6) 34.3 13.5 4.6 0.2 30.0 14.2 (11.5) 22.9 16.1 Non- operating EVOP

% NM NM NM (921.3) NM NM NM (238.9) NM NM NM 38.5 NM NM NM

EV % 11.5 8.5 10.3 19.3 10.5 6.0 9.2 17.7 16.8 12.6 14.7 20.2 13.9 14.2 14.6 Net worth % 10.9 11.1 11.0 2.9 11.8 11.3 10.6 17.0 14.9 13.2 12.4 20.0 18.9 15.8 15.4 Net Profit % 31.6 12.1 10.1 5.1 5.6 8.3 6.7 15.3 2.3 1.7 6.7 16.2 18.9 (0.6) 13.0 AUM % 14.6 14.1 13.3 20.2 17.0 15.0 14.0 21.3 19.0 18.2 17.2 17.8 19.1 16.4 16.5

Source : HDFC sec Inst Research *Fair Value

General Insurance

MCap (Rs bn)

CMP (Rs)

Reco TP (Rs)

P/E (x) P/ABV (x) EPS (Rs) ABV (Rs) ROAE (%)

FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E

GIC Re 204 117 BUY 180 12.0 6.8 5.3 0.5 0.4 0.4 9.7 17.1 21.8 240.1 260.5 285.9 3.8 6.8 8.0

ICICIGI 532 1,169 REDUCE 1,100 41.8 32.3 28.4 8.5 7.0 5.9 27.9 36.2 41.2 137.0 168.0 199.8 21.4 23.8 22.3

NIACL 180 109 REDUCE 111 8.0 10.1 9.1 0.6 0.5 0.5 13.7 10.8 12.0 194.7 200.2 205.3 7.2 5.7 6.2


AMCs and Brokers

MCap (Rs bn)

CMP (Rs) Reco TP

(Rs)

P/E (x) P/ABV (x) EPS (Rs) ABV (Rs) ROAE (%)


Broking

ISEC 108 335 SELL 285 20.1 24.4 21.1 8.7 8.4 7.3 16.7 13.7 15.9 38.4 40.1 46.0 47.1 35.0 36.8

Diversified

MOFS(ex. MOHL)

76 518 BUY 668 17.2 15.3 12.6 2.3 2.1 1.9 27.9 31.3 37.9 211.4 232.4 256.8 14.1 14.6 16.0


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MCap (Rs bn)

CMP (Rs) Reco TP

(Rs)

P/E (x) Mkt. Cap/AUM (%) EPS (Rs) MF AUM (Rs bn) ROIC (%)


AMC

HDFC AMC 522 2,447 NR 2,677* 41.2 41.4 37.0 17.3 16.9 14.7 59.4 59.2 66.1 3,014 3,080 3,546 903.3 728.0 1,027.3

NAM 180 287 BUY 349 38.5 31.8 27.8 10.1 9.2 8.1 7.5 9.0 10.3 1,789 1,955 2,227 131.8 146.7 169.5

*Fair Value Source: HDFC sec Inst Research

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Rating Criteria BUY: >+15% return potential ADD: +5% to +15% return potential REDUCE: -10% to +5% return potential SELL: > 10% Downside return potential

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