Q1FY24 Review: ICICI Lombard General: Decent quarter, continuous execution is key

19 Jul 2023 , 11:56 AM

ICICI Lombard (ILOM) reported 12% YoY growth in net profit in Q1FY24, led by lower than expected combined ratio even as growth in GDPI was strong (19% YoY). Management reiterated that in order to grow faster, ILOM will continue to invest in digital and health agency channel. Analysts of IIFL Capital Services continue to believe that ILOM’s earnings will grow strongly at 26% Cagr over FY23-25, led by a combination of: (1) pick up in the motor segment as competition eases, (2) increased focus and investments in Retail Health, (3) materializing merger synergies, and (4) higher yields. The improvement in combined ratio is progressing on track to achieve their estimate of 102% by FY26. Analysts of IIFL Capital Services maintain their EPS estimates TP. Analysts of IIFL Capital Services forecast 16%/26% GDPI/EPS Cagr over FY23-25. Stock is trading at 24x FY25 P/E, significantly below its historical average of 37X. Maintain BUY.

Investment benefits visible in Health: 

ILOM’s GDPI growth of 19% YoY in 1QFY24 was driven by Health segment, led by pickup in Retail (23% YoY) as well as Corporate (43% YoY) segments. Motor also saw some pick up with 5% YoY growth as competitive intensity starts to cool off in the OD segment, especially in PVs. Improvement in retail health, improvement in new-vehicle sales and impact of price hikes in health/P&C may support growth in FY24 and would be the key stock driver, in Analysts of IIFL Capital Services view.

Pace of combined ratios improvement on track: 

Loss ratio at 74.1% was lower by 10bps QoQ, led by 14.1ppt improvement in motor TP segment. Motor OD continues to see sequential improvement by 240bps in Q1. Expense of management ratio improved by 120bps YoY though internal re-classifications from sales promotion costs (-63% YoY) to commission expense (611%), potentially in light of the new EoM regulations, led to 12.1ppt higher commission ratios but 11.5ppt lower other operating expenses. ILOM reiterated its intent to keep investments high in Health and Digital, resulting in a path to achieve 102% combined by FY25.

Maintain BUY: 

While secular under-penetration story is intact, ILOM’s valuations had de-rated to trough levels, owing to multiple headwinds on earnings. However, analysts of IIFL Capital Services believe earnings should continue to show a strong trajectory, with the stock trading at 24x FY25 P/E, offering 26% EPS Cagr over FY23-25. Analysts of IIFL Capital Services maintain BUY with 12-mth TP of Rs1,700 (unchanged) based on 30x 2YF EPS. Key risk: rise in competition, regulatory changes.