The deal that created India’s biggest private general insurer fails to cheer analysts

NEW DELHI: Analysts tracking the insurance sector said ICICI Lombard‘s merger with Bharti AXA‘s general insurance business could bring in significant cost optimisation and give the former access to Bharti’s strong motor segment.

But the deal is not what one may call a ‘game-changer’ and it would be EPS dilutive in the short run, they said.

At ICICI Lombard’s market capitalisation of Rs 58,800 crore, the share issue implies a valuation of Rs 4,600 crore for Bharti AXA’s General Insurance business, valuing the latter at 2.3 times FY20 net written premium and

6.5 times FY20 price to book value.

Kotak Institutional Equities called the deal expensive. It says the deal brings in little on the table for ICICI Lombard, other than offering some synergies in the motor insurance segment.

“The business is sub-optimal with a 120 per cent combined ratio in FY2020, negligible profit after tax in FY2019 and net loss in FY2020. Yet, the deal valuation at 7 times FY2020 book is expensive. The only argument here is relative lower valuation. We retain a ‘sell’ rating on ICICI Lombard with a fair value target of Rs 950. The overhang of stake sale by the promoters will weigh on stock performance in the near term,” the brokerage said.

According to the deal details, Bharti AXA General Life Insurance’s shareholders will receive two listed shares of ICICI Lombard for every 115 shares of Bharti AXA held by them. The merger would create the third largest non-life insurers in India, with a combined annual premium of Rs 16,447 crore and a market share of nearly 8.7 per cent.

Bharti AXA had 1.7 per cent market share in general insurance segment in FY20, with a 3.3 per cent share in motor OD (own damage) insurance and 1.4 per cent in motor TP (third party) segment. The motor segment constituted 47 per cent of Bharti AXA’s premiums in FY20. Crop business accounted for 26 per cent and health business another 12 per cent.

Kotak said Bharti AXA is valued at a 27 per cent discount to ICICI Lombard, but the latter’s premium valuations reflect its steady performance and industry-leading profitability. “Bharti AXA, on the other hand, is a sub-optimal business and is yet to deliver strong financials. In that sense, the deal is expensive,” it said.

On Monday, ICICI Lombard stock edged 0.6 per cent higher to Rs 1,300.80 on BSE.

“We view this as a significant but not really game-changing ramp-up of ICICI Lombard’s distribution capacity –accomplished at a not-too-onerous valuation. Our chief concerns are two-fold: first, is the integration challenges and net capacity gain after elimination of redundancies and the second, implications of this acquisition for its appetite and bandwidth for acquiring a monoline health insurance business, whose agency channel-driven healthy indemnity capability could potentially drive its dominance in every business line that matters.

The brokerage still sees ICICI Lombard as its preferred long- term BFSI pick and has a target of Rs 1,600 on the scrip, suggesting a 23 per cent potential upside over current market price.

CLSA maintained its ‘buy’ call on ICICI Lombard with a price target of Rs 1,560 against Tuesday’s trading price of Rs 1,275, signalling a potential 20 per cent upside. Calling the deal as near-term EPS-dilutive, the brokerage said the scale and synergy would allow ICICI Lombard to optimise expense ratio in the future.

The management so far believes synergies may include renegotiation of distribution contracts from a position of greater balance sheet strength as well as business size; and integration of agency channels and product capabilities. While gauging merger benefits, one must also contextualise the overlap in product and distribution capabilities — particularly considering the shared strengths in auto OEM relationships, Edelweiss said.