Q3FY24 Review: ICICI Lombard General: Steady quarter; on track to achieve FY25 target

17 Jan 2024 , 01:41 AM

ICICI Lombard (ILOM) reported 22% YoY growth in PAT in Q3FY24, led by better-than-expected combined ratio, even as growth in GDPI was healthy (13% 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 the end of FY25. Analysts of IIFL Capital Services continue to believe that ILOM’s earnings will grow strongly at 23% Cagr over FY24-26, 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. Improvement in combined ratio is progressing on track to achieve analysts of IIFL Capital Services estimate of 102% by FY26. Analysts of IIFL Capital Services cut FY24-26 EPS by 2-6% and TP to Rs1,750 on lower yields in FY24. They forecast 14%/23% GDPI/EPS Cagr over FY24-26. The stock is trading at 27x FY25 P/E, significantly below its historical average of 35x. Maintain BUY. 

Broad-based growth across segments: 

ILOM’s GDPI growth of 13% YoY in Q3FY24 was driven by the Health segment, led by steady growth in Retail (16% YoY); while Corporate was strong (27% YoY). Motor OD also saw some pickup with 13% YoY growth, as the competitive intensity starts to cool off in the OD segment, especially in PVs. Improvement in Retail Health, new-vehicle sales, easing competition and impact of price hikes in Health may continue to support growth in 2024 and would be the key stock driver. 

Pace of combined ratios improvement on track: 

Loss ratio at 70% improved by 70bps QoQ, led by 3.1ppt improvement in the Health segment. Motor OD continues to see sharp improvement of 810bps YoY in 3Q. Total expense ratio improved by 90bps YoY, though commission ratios increased by 250bps QoQ. However, management believes that 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. 

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 sustain a strong trajectory, with the stock trading at 27x FY25 P/E, offering 23% EPS Cagr over FY24-26. Analysts of IIFL Capital Services maintain BUY with 12-month TP of Rs1,750 based on 30x 2YF EPS. Key risk: rise in competition, regulatory changes