In a chat with ET Now, Santosh Singh, BFSI & HoR, Haitong Securities, says most of the growth in insurance sector has taken place in banker-led entities. Edited excerpts
ET Now: What is your thought on the bit of a frenzy in the listed insurance space? Until now we only had Max, now we will have one more player and then maybe a spree of other players joining in?
Santosh Singh: From the availability of stock perspective, definitely the insurance sector is now offering many more stocks and going into future, there would be some more large stocks actually. Earlier, Max was midcap stock, so now we can have some few large stocks in the sectors. So from that perspective, definitely things are moving quite fast. However, if I am looking at the sector itself and from a fundamental perspective, there also things are changing positively because now for last at least 6 to 12 months, we are seeing growth after four to five years for the entire sector. Earlier, we used to see one or two companies growing and the sector de-growing, but for last, almost like 6 to 12 months, we are seeing the entire sector growing so that is a positive sign. And then the profitability also is growing for the sector, so that is where it started looking much more attractive now.
ET Now: What about the valuations though because most insurance deals have happened in 2015 and they are between two times to three times the embedded value. Do you think these are fair valuations?
Santosh Singh: I would expect these valuations to sustain given that the return ratios for some of these companies are very high. So if I am looking at say Max-HDFC combined entity, the return ratio could be somewhere between 18 percent return on embedded value and 20 per cent return on embedded value which is significantly higher than most of the insurance companies globally. Even if am not expecting 18-20 percent, but I would still be looking at in double-digit returns on embedded value. So definitely the return ratios for these companies are really good and hence the valuations are expected to sustain at these levels.
ET Now: It is relatively easier to value a Max because it is now a pure play insurance firm. What about some of the others which have got the embedded value in them, like for example, the Aditya Birla Group or ExideBSE 1.11 % which has a small life insurance arm as well. How do you assign a value to some of these and which amongst these, according to you is growing and can have a great valuation, two or three or four years down the line?
Santosh Singh: If I am looking at the players both the names which you have pointed out are not banker-led players. So actually if you look at the growth, it is mainly in the banker-led players. Exide definitely is doing well despite not being a banker-led player that sees that is one company amongst the non-banker-led player which is doing well. However, nonbanker-led players are not doing well as of now. My personal view is bank agency is going to be very important;I much more bullish on the players who have got both the channels available. So in this particular space, see outside say Max or maybe ICICI or SBI, if I am looking at someone else, it is definitely Bajaj FinservBSE 0.24 %. Although, they do not have bank assurance in tie-ups but definitely their general insurance entity is significantly better than any other entity in India in the general insurance space. So that is another stock which I think from longer-term perspective can create a lot of value.
ET Now: What is your view per se so to speak about the consolidation which is currently happening in the sector and a case in point being Max Life and HDFC Life as well? Would you say there is likely to be more consolidation in the sector considering there are 23 players existing right now?
Santosh Singh: See for last three years we are thinking or three or four years we are thinking that why there are so many players when you are seeing clearly that the top players are gaining market share and bottom ones are losing market share. However, for consolidation what you also need is synergies. You do not want one plus one to become one-and-a-half that is not why you would want a consolidation. In the case of Max and HDFC, a clear synergy is available and both are top quality companies with sort of very high-quality distribution. However, for other players for a fit, you would need players who can add value even on the new business and hence we have got very good quality distribution available as well. But amongst the smaller players if you buy some of the smaller players, what are you going to get? A larger player buying a smaller player, he is only going to get the scale and nothing more than that because the distribution site for most of the players is not that great. Hence the consolidation, although expected, and there have been so many companies which have been trying to sell out or who have been trying to find partners have not been able to do it simply because the value addition is not going to be that significant and then the question comes around valuations . If the value addition is not going to be significant, then you do not get multiple to embedded value and that is where most of the companies would not because what they have seen is that the deals are happening at two times or three times embedded value.
I have my own doubts that if it can happen in a significant way in the sector.
