Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities
Highly levered to capital market buoyancy
AMCs - buoyant capital markets to drive treasury profits: Active equity has witnessed net outflows of INR676bn in FY21 with 4QFY21 accounting for INR 109bn. Nifty-50/Nifty-200 are up just 5.1/6.1% in 4QFY21, which has driven industry equity AUM higher by 6.5% QoQ. Debt schemes witnessed outflows of INR430bn in 4QFY21 vs. inflow of INR1,451bn during the prior quarter as institutions redeem funds towards the year end. Sequentially higher equity prices are expected to boost treasury profits. We continue to monitor trends around sustained reversal in equity flows, management commentary around flows and market share. We continue to recommend UTIAM as our top BUY with an increased TP of INR680 (19.8x FY23E NOPLAT + cash + investments) as we roll our earnings forward to Mar'23.
Broking - Tailwinds galore: Despite the second phase of upfront peak margin requirement for cash and derivatives kicking in, ADTVs (ex-prop) for cash/derivatives increased 20%/36% QoQ. We expect sustained market share consolidation in favour of organised larger players. High volatility during Feb-21 (Union Budget) contributed to high broking activity, thereby boosting broking revenues. Distribution income is also expected to improve sequentially as industry active equity AUM grew 6.5% QoQ. Commentary around new customer acquisition, new pricing plans, and the impact of regulatory changes will be key monitorables. We expect ISEC to deliver APAT growth of 50.6/-12.1 % YoY/QoQ. We retain ADD with an unchanged TP of INR560 (i.e. 23x FY23E EPS).
GI - loss ratios to deteriorate: GDPI (ex-crop) growth for the sector improved during the first two months of 4QFY21 by +6.3/7.4% YoY/QoQ. Amongst the two large segments, growth in Health moderated to 6.2% QoQ while Motor declined 3% sequentially. We expect a marginal deterioration in overall loss ratios on the back of normalization in business activity. We expect a slightly higher loss ratio for the health segment as COVID-related claims and elective surgeries are on a rise. We expect lower interest rates to impact investment income, while FV change accounts should see higher unrealised gains as equity prices improved. We maintain REDUCE on ICICIGI with an increased TP of INR1,290 (FY23E P/E of 26.6x and a P/ABV of 5.1x) as high valuations appear to ignore the risks from lower price hikes and potential de-tarification action for motor TP. In the case of GICRE, given the sharp run-up since the Union Budget announcement of possible privatisation, we downgrade our rating to REDUCE with an increased TP of INR190.
LI - Return of savings growth: Private life insurers' reported an indiv. APE 2yr CAGR of 10.2% in the first two months of 4QFY21 vs. 9.3% in 3QFY21. Savings business growth returned over the quarter, as reflected in non-single premium sum assured/premium ratio moderating to 25.2 (-13% QoQ, upto Feb-21). Channel checks indicate that ULIP sales are improving while the mix of protection business is likely to further moderate in 4Q. With consummation of MaxLife-AXSB deal, MaxLife secures a long-term strategic distribution partner, which, coupled with MAXL's compounding growth narrative offers legs for a further rerating. We trim the hold-co discount on MFSL to 10% (from earlier 20%), resulting in an increased TP of INR1,000. Our preferred pick is SBILIFE (BUY, TP INR1,220).