The Union Cabinet has approved the Insurance Amendment Bill and it is likely to sail through Parliament this session. In an interview to CNBC-TV18, Nidhesh Jain, Analyst at Espirito Santo, discusses the impact of the move on insurance stocks.
Below is the transcript of Nidhesh Jain’s interview with Sumaira Abidi and Reema Tendulkar on CNBC-TV18.
Reema: The stocks haven’t been able to sustain their gains. I was reading an old report of yours and you said that this development can cause a rerating to the sector but do you think the stocks at current levels have already priced in all the positives?
A: If you look at the performance for the last two months, most of the insurance led stocks have run up significantly. From current levels also we think that there is still value in these stocks. The valuation that they are implying in their life insurance subsidiary we see upside from those levels. For example, for Max India we currently see upside of around 25 percent from current levels.
Sumaira: What do you think would be the biggest cause of worry right now for the investors? Is it the fresh capital that is coming, is it the lack of clear definition of Indian management control, what is it that is the biggest concern at the moment?
A: From institutional investor perspective, I don’t think there will be any concern because there have clearly laid out that the composite limit will include FII also. So from that perspective, there should not be any cause of worry but from FDI perspective, from the perspective of foreign partners, there maybe a worry that the control will still be with the Indian partner.
Reema: One of the concerns that has been raised is that the FII/FDI if you want to increase the stake it has to be done via fresh capital infused in to the insurance company, it cannot be done via a secondary sale between the Indian promoter as well as the foreign entity. Do you think this criterion about increasing the FDI equity only being done via infusing fresh equity can be a deterrent?
A: Yes. As far as my understanding, this clause is not mandatory and if it is mandatory, definitely for some of the companies who are top 5-6 companies in the life insurance space, they don’t need capital. So this clause can be a deterrent for their listing but as far as my understanding, it is not mandatory as of now. So they have given up that clause in the draft report.
Sumaira: Do you see any listings happening in the next one year to 18 months?
A: I definitely see couple of listing in life insurance space.
Sumaira: Do you want to name any, what would be the most probable candidates?
A: Top three life insurance companies in the private sector are the probable candidates for listing. Reema: You spoke about 25 percent upside in Max India . So that would take you to close to about Rs 500, would a Bajaj Finserv or Reliance Capital , AB Nuvo be a buy for you at current levels and what would your target price be? A: For Reliance Capital we have a target price of around Rs 690. It is still a buy from current levels. There is significant potential in the life insurance companies.
Secondly in Bajaj Finserv, there is still some confusion around the call option with Allianz. So if we assume that the call option will go worthless, we see our target price increasing to Rs 1,600. Currently, we are just pricing in 51 percent stake in both entities. So our target price is around Rs 1,300 level. So from that perspective, if you assume that the Allianz will be able to exercise the call option, we see limited upsides from current levels but I believe that the deal between Allianz and Bajaj Finserv may happen at fair value. In that case, there is still significant upside from current levels.