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ICICI Lombard (ICICIGI) INSTITUTIONAL EQUITY RESEARCH ICICI Lombard (ICICIGI) Bharti AXA: Expensive but strategically sound INDIA | Insurance | Company Report 23 Aug 2020 ICICI Lombard on 21st Aug 2020 entered into a definitive agreement to acquire Bharti AXA BUY (Maintain) General Insurance in an all stock deal, according to the scheme of arrangement ICICIGI will CMP RS 1292 issue 35.7mn shares to Bharti Enterprises (18.2 mn) and AXA Group (17.5mn) valuing the TARGET RS 1450 (+12%) company at Rs 46.1bn. The combined entity will have a market share of about 8.7% (based on FY20 premiums) with annual premium of Rs 164.5 bn. Proposed transaction is subject to SEBI CATEGORY: LARGE CAP various conditions precedent and regulatory approvals COMPANY DATA O/S SHARES (MN) : 454 Merger Rational: Transaction is expected to provide a significant opportunity for ICICI MARKET CAP (RSBN) : 585 Lombard to consolidate its market leading position in the non‐life insurance sector. Post MARKET CAP (USDBN) : 7.9 integration combined entity will have a market share of 8.7% (FY20) and will be third largest 52 ‐ WK HI/LO (RS) : 1440 / 806 LIQUIDITY 3M (USDMN) : 17.9 non‐life insurer. Gain in market share will be predominantly in Motor‐OD and Marine PAR VALUE (RS) : 10 segment which have been focus area for Bharti AXA. Banca tie‐ups and OEMs relationship will further augment ICICIGI’s distribution strength. Combined entity will also benefit from SHARE HOLDING PATTERN, % strategic partnership with Bharti and AXA group Jun 20 Mar 20 Dec 19 PROMOTERS : 51.9 55.9 55.9 FII / NRI : 31.9 26.0 26.4 Deal slightly on expensive side: According to agreement Bharti AXA GI is being valued at Rs FI / MF : 10.5 10.6 10.2 46.1bn or c.6.5x of its FY20 book value and at 1.0x of its FY20 Float. While this is c.30% NON PRO : 3.2 3.1 3.2 discount to ICICIGI’s valuation multiples, but given that Bharti AXA is a loss making entity PUBLIC & OTHERS : 4.3 4.4 4.4 (FY20: Loss of Rs 2.4bn) with a combined ratio of 120%, valuation seems to be on higher side in our view. Further cost of float of c.9.5% is higher than investment yield of c.8%. However PRICE VS. SENSEX deal makes sense from strategic point in our view as it will help ICICIGI to consolidate its 200 market leader position. Further Banca tie‐ups and Motor OEMs relationships of Bharti AXA 170 will provide ICICIGI inroads into some of the large retail banks and strengthen its position across OEMs thus provide long term growth opportunities. 140 Operating leverage and cost savings to bring down combined ratio: Higher combined ratio 110 for Bharti AXA is mainly on account of high expense ratio at 37% (advertisement, promotion 80 and IT expenses) compared to 24% for ICICIGI. Claim ratio is marginally higher at 78% compared to ICICIGI claim ratio of c.75%. Strong brand value, wide distribution network and 50 economies of scale offered by ICICIGI should provides significant headroom to bring down Jan‐18 Sep‐18 May‐19 Jan‐20 these costs over time and increase efficiencies resulting in lower combined ratio in our view. ICICI Lom BSE Sensex Revenue Synergy to come from Banca tie‐ups and OEMs: Bharti AXA has tie‐up with 42 KEY FINANCIALS corporate agents (including 8 banca tie‐ups), of these only 10 are common (1 banca). Thus Rs bn FY20 FY21E FY22E ROE (%) 20.5% 21.1% 20.0% this deal will provide ICICIGI access to 7 more banca channel including some of large retail ROA (%) 3.4% 3.8% 3.9% banks such as HDFC bank and Axis bank. Further Bharti AXA has significant market share in Net Profit 11.9 14.6 16.6 several OEMs which could bring further revenue synergies. % growth 14% 23% 13% EPS (Rs) 26.3 32.2 36.5 th BVPS (Rs) 125.6 162.2 196.9 Tax benefit from unabsorbed losses: As of 30 June 2020, Bharti AXA had unabsorbed Combined Ratio 100.4% 98.9% 98.3% losses of Rs 15bn; ICICIGI will get tax benefits out of these losses as it will be carried forward P/E (x) 49.2 40.1 35.4 to resulting entity. While management has not given any guidance, we expect tax benefits to P/BV (x) 10.3 8.0 6.6 be spread over the years as these losses get absorbed. Source: Phillip Capital India Research Sujal Kumar, Research Analyst Valuation and outlook: Strong brand value and resilient balance sheet should provide ICICGI ([email protected]) (combined entity) opportunity to capture market share and consolidate its position as market leader. Under current scenario we expect ICICIGI to disproportionately benefit from Manish Agarwalla, Research Analyst ([email protected]) any long‐term positives emerging for the industry. With solvency of weaker players under pressure we may witness price rationalization leading to better underwriting profitability. At the current price, the stock is trading at an FY21/FY22 PE of 40/35x and P/BV of 8.0/6.6x, with an RoE of 20%. We maintain BUY rating on the stock with TP of Rs 1,450 valuing stock at 7.4x FY22 BV of Rs 197 Page | 1 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker‐dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a‐6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA‐member broker‐dealer. ICICI LOMBARD COMPANY UPDATE Third largest Non Life insurer post merger Post integration, combined entity will have a market share of c.8.7% based on FY20 premiums. For 4M21, market share for combined entity has a market share of c.9.2% on Proforma basis. Market share of non‐life insurers (FY‐20) 16% 14% 12% 10% 8% 6% 4% 2% 0% Source: IRDAI, PhillipCapital India Research Market share gain will predominantly be in Motor‐OD and Marine segment, where market share of combined entity will increase by c.2.5‐3.5%. In health segment while market share of Bharti AXA is relatively small, its share has been increasing over past few years. Bharti AXA has been largely focusing on group health which contributes c.70% of Bharti AXA’s total health GDPI. Market Share by Segment FY20 4M21 Segment ICICI Lombard Bharti AXA Merged Entity ICICI Lombard Bharti AXA Merged Entity Fire 9.8% 1.4% 11.2% 11.2% 1.6% 12.8% Marine 13.8% 2.3% 16.1% 14.3% 2.4% 16.7% Motor OD 13.9% 3.3% 17.2% 13.2% 2.6% 15.8% Motor TP 7.3% 1.4% 8.7% 7.5% 1.2% 8.7% Health 5.5% 0.7% 6.2% 5.3% 0.8% 6.1% Crop 0.0% 2.6% 2.6% 0.6% 2.8% 3.4% Total 7.0% 1.7% 8.7% 7.8% 1.4% 9.2% Source: IRDAI, PhillipCapital India Research Banca Tie ups and OEMs relationships to provide revenue synergy Banca tie‐ups and healthy market share in several OEMs is likely to provide significant revenue synergy. As shown in the table below ICICIGI has tie‐ups with 100 corporate agents (including 9 banks) compared to 42 tie‐ups for Bharti AXA (8 banks), excluding 10 common agents combined entity will have 132 tie‐ups. Deal will provide ICICIGI access to some of the large retail banks which has tie‐ups with Bharti AXA such as HDFC Bank, Axis bank and DBS Bank. Further strategic partnership with Bharti group will provide access to Airtel payment banks and could offer significant cross selling opportunity. Page | 2 | PHILLIPCAPITAL INDIA RESEARCH ICICI LOMBARD COMPANY UPDATE Revenue Synergy Corporate Agents ICICIGI Bharti AXA Common Merged Bank 9 8 1 16 Co‐op/ Gramin Bank 24 7 0 31 SFB 4 0 0 4 HFC 5 3 1 7 NBFC 26 10 4 32 Others 32 14 4 42 Total 100 42 10 132 Source: Investor Presentation, IRDAI, PhillipCapital India Research Cost Synergy: Operating leverage and cost rationalisation As shown in the chart below, Bharti AXA has a combined ratio of 120% (FY20) largely on account of higher expense ratio at 37% compared to 24% for ICICIGI. On a closer look, higher expense ratio is mainly due to higher Advertisement and publicity cost, which accounted to c.45% of its total cost for FY20. We believe strong brand value, wide distribution network and economies of scale offered by ICICI Lombard provides significant headroom to bring down these costs over time and increase cost efficiencies resulting in lower combined ratio. Opex ratio is pushing Combined ratio higher Operating expenses breakup Claim Ratio Commission Ratio Expense Ratio Employee Cost Advertisement and Publicity 140% Information technology Other cost 120% 100% 100% 37% 22% 34% 29% 21% 24% 80% 80% 6% 8% 60% 60% 31% 45% 40% 77% 75% 78% 73% 40% 20% 20% 0% 33% 28% Bharti AXA ICICIGI Bharti AXA ICICIGI 0% FY19 FY20 FY19 FY20 Source: Company, PhillipCapital India Research Page | 3 | PHILLIPCAPITAL INDIA RESEARCH ICICI LOMBARD COMPANY UPDATE Investment book and Asset Quality As of March 2020, Bharti AXA had an investment book of Rs 47.5 bn. Post integration combined entity will have an investment book of c.Rs 310bn (FY20).
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