Q2FY24 Review: ICICI Lombard General: Strong quarter; on track to achieve FY25 target

19 Oct 2023 , 01:30 PM

ICICI Lombard (ILOM) reported 25% YoY growth in normalised PAT in Q2FY24, led by better-than-expected combined ratio even as growth in GDPI was strong (17% YoY). Management reiterated that in order to grow faster, ILOM will continue to invest in Digital and Health agency channels; but are also on track to achieve 102% combined ratio by end of FY25. Analysts of IIFL Capital Services continue to believe that ILOM’s earnings will grow strongly at 22% Cagr over FY23-25, led by: (1) Pickup in the Motor segment as competition eases. (2) Increased focus and investments in Retail Health. (3) Materialising merger synergies. (4) Higher yields. The improvement in combined ratio is progressing on track to achieve analysts of IIFL Capital Services estimate of 102% by FY26. We maintain our EPS/TP. We forecast 16%/22% GDPI/EPS Cagr over FY23-25. The stock is trading at 26x FY25 P/E, significantly below its historical average of 37x. Maintain BUY.

Broad-based growth across segments: 

ILOM’s GDPI growth of 17% YoY in Q2FY24 was driven by Health segment, led by pickup in Retail (19% YoY) as well as Corporate (22% YoY) segments. Motor also saw some pick up with 11% YoY growth, as competitive intensity starts to cool off in the OD segment; especially in PVs. Improvement in retail health and new-vehicle sales, and impact of price hikes in health/P&C — may support growth in FY24, and will be the key stock driver, in analysts of IIFL Capital Services view. 

Pace of combined ratios improvement on track: 

At 70.7%, loss ratio improved by 340bps QoQ, led by 12.4ppt improvement in the Motor TP segment. Motor OD continues to see sequential improvement by 290bps in Q2. Expense of management ratio improved by 420bps QoQ, though commission ratios increased by 280bps QoQ. However, management believes they will remain within the new EoM caps, while many players will struggle to maintain the same. They reiterated intent to keep investments high in Health and Digital, resulting in 102% combined by the end of 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 26x FY25 P/E, offering 22% EPS Cagr over FY23-25. Analysts of IIFL Capital Services maintain BUY with 12-mth TP of Rs 1,750 (unchanged) based on 30x 2YF EPS. Key risk: rise in competition, regulatory changes.