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FOR IMPORTANT DISCLOSURE INFORMATION, INCLUDING DISCLOSURES RELATED TO THE U.S. DISTRIBUTOR OF THIS REPORT, PLEASE REFER TO THE FINAL PAGES OF THIS REPORT - Please refer to the final pages of this report for important disclosures, analyst certifications and additional information. Espirito Santo Investment Bank does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA (v1.0.5.2)
FUNDAMENTAL INSIGHT
India | Insurance | 5-June-2014
India Life Insurance
Coming back to Life
The life insurance sector is slowly but surely turning a corner after
four difficult years as the outlook for the economy improves and
most of the destabilizing regulatory changes are now behind it. Our
analysis points to margins bottoming out in H1FY15 and improving
from there. With the top players sitting on capital surpluses and
enjoying significant operating leverage, we expect RoEVs of large
insurance players to reach 15% in the next three years. Another big
potential trigger is the Insurance Amendment Bill. Max Life, ICICI
Life and HDFC Life remain the top companies in this space. We
remain BUYers of Max India, Reliance Capital and Bajaj Finserv. Max
India remains our top BUY.
On the verge of a turnaround
Over the past four years the insurance industry was in a state of flux as it was
buffeted by several headwinds — regulatory shift, deteriorating distribution
structure, weak macro environment and declining savings rate. However, we
think most of the sector’s troubles are now in its rear-view mirror and the
industry is now on the verge of a turnaround and see substantial value in it.
Growth is coming back: Our interaction with insurers indicates new business
premium growth after many years, driven by a general optimism about the
economy and equity markets kicking into growth mode. Also, with most of the
regulations on products now over we expect some regulatory stability and
certainty, at least on the product structuring side. We expect the industry to
grow at 5%-10% in FY15 and then register c.15% growth rate for the next few
years. The life insurance sector has a strong correlation with the savings rate
and if the savings rate were to grow then the sector could see stronger
growth rates.
Increasing shareholder value creation: We see shareholder value creation
getting a boost — a) with traditional product guidelines already in place we
expect margins to bottom out in H1FY15 and then as companies arrive at an
optimal product mix and engage in more active investment management we
see margins improving; and b) there is significant operating leverage in the
system and with the economy in revival mode we see both growth and
persistency improving, which will have a significant impact on over-runs
leading to increased RoEV. We expect most of the large life insurance
companies to move to c.15% RoEV in the next three years, with Max, HDFC
and ICICI registering RoEVs above that.
Insurance Bill can be a big trigger: If the insurance bill were to be passed in
the parliament with 49% FDI then it could be a big positive catalyst for
insurance-related stocks as this could push more insurance entities to go for
primary market listings, thereby providing better valuation benchmarks and
attract investor attention to the sector. Also it would help capital starved
smaller companies access capital more easily.
Recommendation – Positive on the sector
A recovering economy and regulatory certainty augur well for the life
insurance industry. Despite life insurance stocks moving up (50% YTD vs
Sensex 35%) we remain buyers of Max India (new FV of Rs405 from Rs308),
Reliance Capital (new FV of Rs692 from Rs592), and Bajaj Finserv (new FV of
Rs1027 from Rs868) as we believe there is more upside left. .
Max India
BUY 24% upside
Fair Value Rs405.00
Bloomberg ticker MAX IN
Share Price Rs326.00
Market Capitalisation Rs86,695.00m
Free Float 65%
Bajaj Finserv
BUY 12% upside
Fair Value Rs1,027.00
Bloomberg ticker BJFIN IN
Share Price Rs917.00
Market Capitalisation Rs145,915.24m
Free Float 41%
Reliance Capital
BUY 11% upside
Fair Value Rs692.00
Bloomberg ticker RCAPT IN
Share Price Rs622.00
Market Capitalisation Rs152,784.00m
Free Float 50%
Source: Espirito Santo Investment Bank Research, Company
Data, Bloomberg
Analysts Santosh Singh, CFA +91 22 43156822 santosh.singh@espiritosantoib.co.in Espirito Santo Securities India Private Limited Nidhesh Jain +91 22 4315 6823 nidhesh.jain@espiritosantoib.co.in Espirito Santo Securities India Private Limited
Why should you read this note?
For our analysis on why the Indian Life
Insurance industry is set to enter a
growth phase and micro-level analysis
of seven companies discussed in the
report
Page 1 of 47
Page 2 of 27
The industry has been through a tough
transformational phase as changing
regulatory winds and unfavourable
macro environment buffeted it.
Looking back before we look ahead
Before we look ahead, we think it’s important to look back at the past four
years to see the path the industry has traversed through. The past four years
have been transformational years for the industry, with many life insurers
forced to change their business model to adapt to the regulatory changes.
This period is significant from the regulatory activism point of view — the
regulator came out with pro customer regulations which we believe has
spurred structural changes within the industry. Key regulations were the unit-
linked guidelines brought out in October 2010 and the traditional product
guidelines effective 1 January 2014. In our opinion these regulations were
required but the speed and timing of this can be deliberated. The problems of
the industry were exacerbated by the fact that this was the period of weak
equity markets and a slowing economy. Following are the key highlights of the
past four years.
New business premiums declined: Over the past four years new business
premiums declined by 25% for the sector from the highs in 2011 (see chart
below), driven by the change in regulations and the general slowdown in
the economy.
Figure 1 Total new business premium has stabilised in 2014… Figure 2 …however private sector premiums continue to decline
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Product mix changed substantially: During the past four years the
product profile in India has changed substantially. At one point in time the
market was dominated by unit-linked products, accounting for 80% of the
private market but now it accounts for just 30% of the private market.
Now the traditional products led by par products (see Figure 3&4) are in
demand.
Figure 3 ICICI Prudential Life Product Mix Figure 4 HDFC SL product mix
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
-
200
400
600
800
1,000
1,200
1,400
20
01
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14
To
tal
Fir
st
Ye
ar
Pre
miu
ms (
Rs
Bn
)
-
50
100
150
200
250
300
350
400
450
20
01
20
02
20
03
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04
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20
11
20
12
20
13
20
14
Pri
vate
Se
cto
r F
irst
Ye
ar
Pre
miu
ms (
Rs B
n)
96% 97% 97% 97% 98%
72%
56% 60%
73%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
ICIC
I P
ruL
ife
Pro
du
ct
Mix
Par Non-Par Linked
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY11 FY12 FY13 FY14
Par Non-Par Linked
Page 2 of 47
Page 3 of 27
Figure 5 First Year Premium (private sector) Figure 6 First year premium (private sector) break-up
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Distribution mix changed substantially: As the unit-linked guidelines
reduced the life insurer’s ability to pay intermediaries the distribution mix
changed significantly. The proportion of agency has declined substantially
over the past four years and now accounts for less than 40% of the total
sales of the top-7 private players. Bancassurance became the core
channel to sell products and increased its market share to 47%. Going
forward we think that the agency channel will start picking up again (with
the impact of regulations fading off) and regain some of its lost market
share.
Figure 7 Distribution share of bancassurance has increased… Figure 8 …for the top-7 private players
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Margins declined substantially: As a result of all these changes and the
changing product mix, the margins in the system have been declining and
now have moved down by almost 400-500bps over the past four years.
FY14 margins are an aberration (as for the first 6 months of FY14 the
companies were able to sell high margin products) and we expect the
margins to decline further by 2%-6% in FY15 (given the new product
guidelines) which should see margins bottoming out for life insurance
companies.
-
50
100
150
200
250
300
350
400
450
2009 2010 2011 2012 2013
Fir
st
Ye
ar
Pre
miu
m (
Rs B
n)
Linked Non-Linked
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009 2010 2011 2012 2013
Linked Non-Linked
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Ind
ivid
ual
Bu
sin
ess
Agency Bancassurance Corporate Agents Brokers
Micro Agents Direct Business Referral
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Gro
up
Bu
sin
ess
Agency Bancassurance Corporate Agents Brokers
Micro Agents Direct Business Referral
Page 3 of 47
Page 4 of 27
Figure 9 VNB margins for Max Life Figure 10 VNB margins for HDFC Life
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Figure 11 VNB margins for Reliance Life Figure 12 VNB margins for Bajaj Allianz Life
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Companies became profitable both on EV and cash: Majority of the life
insurance companies were incurring losses for the first 10 years of
business, which led to a need for regular capital infusion. Also, majority of
the companies were not registering any growth in embedded value (EV)
on an organic basis (i.e. without capital infusion). However, over the past
four years as companies focused on reining in costs we have seen most of
the companies starting to make profits. Also, surrender of past ULIP
policies helped boost the profits of some companies substantially. High
quality companies like Max and HDFC started showing significant growth
in EV on an organic basis. Given that there was no growth and the
companies were generating excess cash a lot of the life insurance
companies started paying dividends.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2010 2011 2012 2013 2014
VN
B M
arg
ins
0%
5%
10%
15%
20%
25%
30%
2010 2011 2012 2013 2014
VN
B M
arg
ins
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2010 2011 2012 2013 2014
VN
B M
arg
ins
0%
5%
10%
15%
20%
25%
2011 2012 2013 2014
VN
B M
arg
ins
Page 4 of 47
Page 5 of 27
Figure 13 EV growth excluding dividend Figure 14 Statutory PAT
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Better days ahead?
The last four years have been tough for the life insurance industry with
companies facing myriad challenges — a) the weak equity markets, b) decline
in savings rates, c) regulatory shift which drove a structural change in the
industry and d) increased criticism and scrutiny of the life insurance industry
by the media and public. However, a lot seems to be changing with a) equity
markets starting to perform, b) outlook for the economy brightening, c)
regulations on products over and we expect more regulatory clarity from here
on and d) insurance companies working hard to make the products customer
friendly. Hence we can expect the industry to do well over the next few years.
Regulatory: Regulations are part and parcel of the financial sector and we see
them evolving over time; however the regulatory activism of the past four
years is unlikely in the near future. Following are the key areas where we
expect some regulatory changes over years.
Regulations around Bancassurance: This is one long awaited regulation
by industry players and market participants. The current draft suggests
banks may be allowed to work as brokers. However, if the regulations
were to be implemented in the form as suggested in the draft (refer to
figure below) we do not think a lot of banks will turn into brokers in the
near term given that a lot of them either have binding agreements with an
insurance company or they hold significant stake in life insurance
companies. However, there were news flows (LINK) around the
government and the regulator (IRDA) forcing the banks to become
brokers. In our view it makes sense for the sector to have an open
architecture of distribution; however, it needs to be done in a manner
which is less disruptive. We believe open architecture is the way forward
and it will be positive for the sector if the regulator acts in a calibrated
fashion.
Figure 15 Regulatory guidelines on banks acting as brokers
Date Guidelines
Aug-13
IRDA issued final guidelines on Banks acting as Insurance Brokers
Banks can act as brokers for distribution of insurance products after securing an Insurance Broking license from IRDA.
Not more than 50% of the business for a bank acting as Insurance broker shall come from a single client.
Not more than 25% of the business for a bank acting as Insurance broker shall come from insurance companies within the
promoter group.
Nov-13
RBI issued draft guidelines for banks undertaking Insurance broking business.
Banks' net worth>Rs5bn, CRAR>10%, NNPA<3%.
Bank should be profitable for the last three years and performance of subsidiaries/JVs should be satisfactory.
Banks acting as Insurance brokers cannot act as corporate agents or refer customers for insurance either departmentally
or through subsidiaries/group companies.
Source: Espirito Santo Investment Bank Research, Company Data
(2,000)
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Max Bajaj HDFC Birla
EV
PA
T (
in R
s M
n)
2012 2013 2014
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
ICICI Pru HDFC SL BAJAJ SBI MAX
FY
13 P
AT
(In
Rs M
n)
Page 5 of 47
Page 6 of 27
Insurance amendment bill: This is a key piece of regulation (see figure
below for key features) pending in the parliament for the last many years.
Now with a new government with absolute majority at the helm we
expect this bill to go through in the parliament in the near term. The
Insurance Amendment Bill if passed could be a significant positive for
insurance companies as it will open up the sector for IPOs and foreign
investors. On a fundamental basis we do not think the larger life insurance
companies need capital in the near term to grow (refer table 39-41 on
page 12) however it will provide investors clarity on valuation benchmarks
and we may also see a lot more standardization in the way life insurance
companies report. This could be most helpful for smaller life insurance
companies that are starved for capital and also from an M&A perspective
we think the insurance industry in its current form is unsustainable and
some amount of consolidation is inevitable for healthy growth of the
industry.
Figure 16 Insurance Amendment Bill 2008
Key highlights of Insurance Amendment Bill
Definition of Indian Insurance Company (which defines the extent of foreign ownership) changed to allow 49% FDI in Insurance.
Health Insurance business to be recognized as a separate line of business.
Minimum Capital requirement for health insurance and re-insurance companies operating in India increased to Rs1bn.
Recognition of Tier-II capital for Insurers.
Liberalization of restrictions on sanctions of loans and advances by insurers.
Minimum business in third party risks for motor vehicles for general insurance companies.
Recognition of partial assignments of insurance policies.
Vesting powers with IRDA on prescribing ceilings, payment of commission on orphan policies and fixing ceilings on expenses
of management.
Dispensing with the process of licensing of agents and entrusting responsibility of appointing of agents to insurers.
Payment of renewal commissions after termination of agents.
Fixing timelines for denial of claims by insurers on grounds of misstatements etc.
Substantial increase in penalties for violations.
Source: Espirito Santo Investment Bank Research
DTC: This is the much awaited regulation around tax reforms. DTC in its
current form suggests that the tax rate for life insurance companies
should be increased from the current levels of 12.5% to a normal rate of
c.30%. This in our view could be negative for life insurance companies;
however the house panel (led by BJP) talked about a 15% tax rate which
in our opinion could be the way forward.
Figure 17 Direct tax code and House panel recommendations
Direct tax code House Panel recommendations
1 Applicable tax rate for life insurance companies to
increase to 30% from 12.5%.
Applicable tax rate for life insurance companies to
increase to 15% from 12.5%.
2
Sum insured should be at least 20x annual premium
from the current 10x for policy holder to claim tax
benefit.
No Change
3
5% distribution tax on income to policyholders of a
scheme with investments in excess of 65% in
equities.
Insurance policy dividends should be exempted from
dividend distribution tax.
Source: Espirito Santo Investment Bank Research
Sector is dependent on the economy: Given the nature of the insurance
products, which are more of savings in nature, the new business flows as well
as persistency of the policies are a lot geared towards the economy. We see a
clear correlation between the GDP growth, savings rate and penetration of life
insurance. Also, across geographies we have seen that the persistency of the
policies is correlated with the performance of the markets.
Page 6 of 47
Page 7 of 27
Figure 18 Insurance premiums are highly correlated with savings rates
Source: Espirito Santo Investment Bank Research
Hence, with the expectation of the improvement in economy we can see
savings rate as well as new business premiums going up. Also, we may see the
persistency of policies improving.
Margins may bottom out in H1 2015: With the new product guidelines in place
most life insurance companies have seen a significant decline in margins since
2010. However, margins may have bottomed in Q4 as it was one of the most
difficult quarters given a) this was the transitional quarter from old products
to new products, b) economy was weak and c) significant redemption
pressure from old ULIPs. However, going forward we may see some
improvement in margins mainly from FY16 given
a) Operating leverage starting to play out: We expect the economy to
improve leading to higher new business premiums. As is visible from our
analysis below the life insurance companies have very high operating
leverage given that a vast proportion of their costs are fixed.
Figure 19 Operating cost analysis for top-7 life insurers (FY14)
% of total cost Max Life HDFC Life Birla
Sunlife
Bajaj
Allianz*
Reliance
Life
ICICI
PruLife SBI Life
Investing for future growth 14% 14% 13% 25% 26% 10% 15%
Cost for new business acquisition in current year
63% 59% 63% 55% 54% 63% 60%
Cost of servicing existing business 23% 27% 24% 19% 20% 26% 25%
Cost as % of AUM Max Life HDFC Life Birla
Sunlife
Bajaj
Allianz*
Reliance
Life
ICICI
PruLife SBI Life
Investing for future growth 0.8% 0.4% 0.6% 1.2% 2.2% 0.2% 0.3%
Cost for new business acquisition in current year
3.6% 1.7% 2.8% 2.7% 4.4% 1.4% 1.4%
Cost of servicing existing business 1.3% 0.8% 1.0% 0.9% 1.6% 0.6% 0.6%
Cost as % of NBP Max Life HDFC Life Birla
Sunlife
Bajaj
Allianz*
Reliance
Life
ICICI
PruLife SBI Life
Investing for future growth 7.9% 4.8% 8.2% 13.6% 18.9% 4.4% 3.6%
Cost for new business acquisition in current year
35.2% 20.6% 38.5% 29.5% 38.5% 27.2% 14.4%
Cost of servicing existing business 12.8% 9.6% 14.4% 10.4% 14.3% 11.4% 6.1%
-
200
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1,000
1,200
1,400
20%
22%
24%
26%
28%
30%
32%
34%
36%
38%
40%
Ne
w B
usin
ess P
rem
ium
(R
s B
n)
% o
f G
DP
First Year Premiums Savings Rate (HH Savings/GDP)
Financial Savings/GDP
Page 7 of 47
Page 8 of 27
Figure 19 Operating cost analysis for top-7 life insurers (FY14)
Cost as % of Total Premium Max Life HDFC Life Birla
Sunlife
Bajaj
Allianz*
Reliance
Life
ICICI
PruLife SBI Life
Investing for future growth 2.5% 1.6% 2.9% 5.9% 8.5% 1.3% 1.7%
Cost for new business acquisition in current year
10.9% 6.9% 13.5% 12.8% 17.4% 8.2% 6.8%
Cost of servicing existing business 4.0% 3.2% 5.1% 4.5% 6.5% 3.4% 2.9%
Source: Espirito Santo Investment Bank Research, Company Data, * FY13 numbers
Figure 20 Operating cost analysis by products for Life Insurance companies
Source: Espirito Santo Investment Bank Research, Company Data
b) product structure should start evolving: Uncertainty around regulations
and weak equity markets meant that the products structure for
companies started to get dominated by par policies, given that par
policies have low margins but a) have little or no strain on cash flow and
also are b) highly capital efficient. However with capital not a problem
(see figures 33 to 38 for solvency margins of top players) for large
insurance companies and regulatory certainty we expect some of the
large insurance companies to start changing their business mix over the
next few years. We would expect higher sales of non-par products, higher
mix of protection and even health-related product sales to pick up. This
should mean that we may see some improvement in margins over the
next couple of years
Figure 21 Max Life VNB margins Figure 22 Bajaj Allianz Figure 23 HDFC Standard Life
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Figure 24 Birla SunLife Figure 25 Reliance Life
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
2012 2013 2014 2012 2013 2014 2012 2013 2014Cost recovery
Driver
Shareholders'
surplus Driver
% of NBP 79% 79% 75% 44% 62% 0% 21% 53% 114%
% of Total Premium 32% 25% 21% 27% 25% 0% 11% 15% 32%
% of AUM 25% 17% 12% 18% 15% 0% 3% 3% 6%
% of NBP 46% 52% 47% 11% 19% 0% 54% 53% 65%
% of Total Premium 21% 22% 14% 5% 8% 0% 30% 26% 12%
% of AUM 25% 23% 10% 4% 6% 0% 27% 21% 6%
% of NBP 103% 118% 55% 350% 338% 0% 64% 45% 42%
% of Total Premium 7% 8% 10% 19% 34% 0% 12% 12% 11%
% of AUM 2% 2% 2% 3% 3% 0% 2% 2% 2%
Comments
Acquistion costs and other operating costs
are recovered through premium payments.
Shareholders' surplus is driven by return on
AUM
Acquistion costs and other operating costs
are recovered through premium payments.
Shareholders' surplus is driven by return
(higher than guaranteed) on AUM
Acquistion cost, other operating costs and
shareholders' surplus is driven by AUM
Comments
First year and
subsequent year
premiums
Returns generated
on policyholders'
AUM
First year and
subsequent year
premiums
Returns (higher
than guaranteed)
generated on
policyholders' AUM
AUM AUM
Bajaj Allianz ICICI Pru
Par
Non
Participating
Linked
business
Operating
expenses
Max Life
11.0%
11.2%
11.4%
11.6%
11.8%
12.0%
12.2%
12.4%
12.6%
2015E 2016E 2017E 2018E
VN
B M
arg
ins
11%
11%
11%
12%
12%
12%
12%
12%
12%
12%
2015E 2016E 2017E 2018E
VN
B M
arg
ins
15%
16%
16%
16%
16%
16%
17%
17%
17%
17%
2015E 2016E 2017E 2018E
VN
B M
arg
ins
12%
13%
13%
13%
13%
13%
14%
14%
14%
14%
2015E 2016E 2017E 2018E
VN
B M
arg
ins
14%
14%
14%
14%
14%
14%
14%
14%
15%
15%
2015E 2016E 2017E 2018E
VN
B M
arg
ins
Page 8 of 47
Page 9 of 27
c) More active management of investments: This is one area of life
insurance where the insurance companies have invested the least.
Companies till now have been very risk averse and have also not looked at
the value proposition being offered to the customers. However, with all
the arbitrages now blocked by the regulator, if an insurance company
wants to increase its margins within products then they will have to look
at generating more returns for customers specifically in par and non-par
structures (see table below for illustration).
Figure 26 Impact of investment returns on EV (Max Life FY14 disclosures)
Source: Espirito Santo Investment Bank Research, Company Data
Upside from persistency: One of the key ingredients while calculating margins
of the life insurance company is persistency, in our previous note (LINK) we
had highlighted what caused the reduction in persistency amongst Indian
insurance companies. We think there could be an upside on this front as
various roadblocks that hindered persistency have been addressed or are in
the process of being addressed.
Mis-selling: IRDA’s efforts over the past 5 years and companies focus
on this aspect have helped, with definite improvement compared to
the past.
Poor product performance: This was also driven by mis-selling and
the performance of equity markets. Customers were losing money
even after couple of years of investments. We think that with the
market starting to hold up and mis-selling reducing there could be
some upside on this metric as well.
Changes in product structure: There were frequent changes in
product structure over the past four years by IRDA, which caused
some amount of lapsation. Now with the expectation of product
structure stabilizing, things may be changing for good for life
insurance companies
Economic environment: This plays a really important part in
persistency of policies. Our analysis of global persistency suggests
there is a strong correlation between the economic environment and
persistency (see charts below). With improvement in the economic
environment we expect persistency to improve.
2.3%
-2.4%
7.7%
-7.4%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Investment Return + 100bps Investment Return - 100bps
Value of In force Value of New Business
Page 9 of 47
Page 10 of 27
Figure 27 Persistency in lead life insurance geographies Figure 28 Historical persistency in Japan
Source: Espirito Santo Investment Bank Research Source: Espirito Santo Investment Bank Research
Figure 29 Historical persistency in UK Figure 30 Historical persistency in US Figure 31 Historical persistency for LIC
Source: Espirito Santo Investment Bank Research Source: Espirito Santo Investment Bank Research Source: Espirito Santo Investment Bank Research
This could be the single most important factor that could drive the
profitability of life insurance companies and move up margins. More so in the
current environment when the surrender charges on policies have been
capped and the company can make higher margins only if it is able to retain
its customers for a longer duration.
Renewal and inflow growth: Over the past three year’s renewal premiums as
well as net inflows for life insurance companies were declining. This was on
account of a) new business premiums declining, b) persistency deteriorating
and c) considerable redemption pressure on old ULIP policies.
0%
2%
4%
6%
8%
10%
12%
14%
16%
Pre
miu
m L
ap
se
Rate
(Jap
an
)
Persistency improved as
industry matured
Persistency declined in periods of
economic activity
Persistency declined in periods of
economic uncertainty Persistency declined in periods of
economic uncertainty
Persistency declined in periods of
economic uncertainty and as
competition increased
Page 10 of 47
Page 11 of 27
Figure 32 Renewal premiums for leading private life insurance companies in India
Source: Espirito Santo Investment Bank Research, Company Data
However going forward we may see renewal premiums as well as net inflows
growing for life insurance companies as a) new business premiums should
start growing, b) persistency starts improving and c) majority of the old ULIP
policies have already been redeemed.
-
20
40
60
80
100
HDFC Life SBI Life Birla SunLife Bajaj Max ICICI Reliance
Re
ne
wal
Pre
miu
m (
Rs b
n)
2006 2007 2008 2009 2010 2011 2012 2013 2014
23% 25% 12% -12% 20% 0% 11%CAGR (09-14)
Page 11 of 47
Page 12 of 27
Capital Position looks strong
Over the past few years the capital position of the companies have been
strengthened, mainly driven by three factors:
a) Companies getting profitable on statutory basis
b) Slower growth in AUM and new business premiums
c) Increase in composition of par portfolio, where companies can to an
extent even utilize policyholder money as capital
Figure 33 HDFC SL solvency ratio Figure 34 Birla Figure 35 Max Life
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Figure 36 Bajaj Figure 37 Reliance Figure 38 ICICI Pru
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Figure 39 Solvency capital calculations for Max Life
Max Life 2009 2010 2011 2012 2013 2014
(01) Available Assets in Policyholders' Fund: 50,385 92,908 125,163 150,254 183,260 225,349
Deduct:
(02) Mathematical Reserves 49,854 91,711 122,731 146,594 174,848 216,523
(03) Other Liabilities 1,195 (3)
(04) Excess in Policyholders' funds (01)-(02)-(03) 531 1,197 2,432 3,660 7,217 8,829
(05) Available Assets in Shareholders Fund: 11,224 14,490 20,735 30,650 33,529 34,007
Deduct: 0 0 - - -
(06) Other Liabilities of shareholders’ fund 5,732 7,145 10,881 13,355 15,889 13,226
(07) Excess in Shareholders' funds (05)-(06) 5,492 7,345 9,854 17,294 17,640 20,781
(08) Total ASM (04)+(07) 6,023 8,542 12,287 20,954 24,856 29,610
(09) Total RSM 1,981 2,657 3,367 3,924 4,773 6,106
(10) Solvency Ratio (ASM/RSM) 3.0 3.2 3.7 5.3 5.2 4.9
Source: Espirito Santo Investment Bank Research, Company Data
0%
50%
100%
150%
200%
250%
300%
350%
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
0%
50%
100%
150%
200%
250%
300%
350%
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
0%
100%
200%
300%
400%
500%
600%
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
0%
100%
200%
300%
400%
500%
600%
700%
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
500%
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Page 12 of 47
Page 13 of 27
Figure 40 Solvency capital calculations for HDFC Life
HDFC Life 2011 2012 2013 2014
(01) Available Assets in Policyholders' Fund: 257,921 312,200 387,241 487,042
Deduct:
(02) Mathematical Reserves 256,465 308,910 377,720 485,470
(03) Other Liabilities - 1,053 5,384 -
(04) Excess in Policyholders' funds (01)-(02)-(03) 1,457 2,237 4,136 1,571
(05) Available Assets in Shareholders Fund: 6,423 9,102 13,588 19,275
Deduct:
(06) Other Liabilities of shareholders’ fund - - 0 -
(07) Excess in Shareholders' funds (05)-(06) 6,423 9,102 13,588 19,275
(08) Total ASM (04)+(07) 7,879 11,339 17,724 20,846
(09) Total RSM 4,571 6,025 8,152 10,751
(10) Solvency Ratio (ASM/RSM) 1.7 1.9 2.2 1.9
Source: Espirito Santo Investment Bank Research, Company Data
Figure 41 Solvency capital calculations for Birla Life
Birla Life 2011 2012 2013 2014
(01) Available Assets in Policyholders' Fund: 190,854 201,221 217,592 236,567
Deduct:
(02) Mathematical Reserves 185,201 195,683 213,671 234,801
(03) Other Liabilities 0 (2) 4 41
(04) Excess in Policyholders' funds (01)-(02)-(03) 5,653 5,539 3,925 1,726
(05) Available Assets in Shareholders Fund: 5,524 7,756 9,353 8,602
Deduct: - - - -
(06) Other Liabilities of shareholders’ fund - - - -
(07) Excess in Shareholders' funds (05)-(06) 5,524 7,756 9,353 8,602
(08) Total ASM (04)+(07) 11,177 13,295 13,278 10,328
(09) Total RSM 3,871 4,446 4,965 5,540
(10) Solvency Ratio (ASM/RSM) 2.9 3.0 2.7 1.9
Source: Espirito Santo Investment Bank Research, Company Data
Hence, although we do not expect capital infusion in any of the life insurance
companies, we would just like to highlight that in absolute terms these
surpluses are not really high and if some of the companies keep paying
everything they generate as surplus as dividends to shareholders, then we
may see solvency levels decline significantly as the new business strains will
mean that the company may need to strengthen their Balance Sheets.
Statutory profit may not grow sharply
Statutory profits grew so sharply between 2010 and 2013 for some of the life
insurance companies due to a) accumulated surrenders in their book and also
b) for last few years new business premiums were declining, leading to lower
strain on new business. However with the expectations of growth, cap on
surrenders and existing book of Funds for Future appropriation declining we
expect reduction/muted growth in profitability for these life insurance
companies. However PAT growth will be different for different companies
Max and HDFC may be the best placed company on this metric given they
have been able to manage their persistency better than others and also they
were not the biggest beneficiaries of surrenders in the past.
Page 13 of 47
Page 14 of 27
Figure 42 Max Life PAT Figure 43 Bajaj Life PAT Figure 44 Reliance PAT
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
EV growth rate may improve
Most of the companies, barring Max Life and HDFC Life, were incurring high
cost overruns and hence EV growth was disappointing. However, if the new
business premium growth rate were to pick up for the industry we expect a lot
companies breaking even on cost over the next four years. Also, if the
persistency of companies were to improve from here (as discussed on page 9)
we may see the variance reducing. We would expect most of the large
companies to generate c.15% RoEV over the next three years, with the leaders
being Max and HDFC Life (for whom we expect the ROEV to be more around
20%).
Figure 45 Max Life (CAGR of 14% over 2010-2014) Figure 46 Bajaj Allianz (CAGR of 6% over 2011-2014)
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Figure 47 HDFC Life (CAGR of 20% over 2010-2014) Figure 48 Birla Sun Life (CAGR of 3% over 2010-2013)
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2014 2015E 2016E 2017E
Max L
ife
PA
T (
Rs M
n)
-
2,000
4,000
6,000
8,000
10,000
12,000
2014 2015E 2016E 2017E
Baja
j L
ife
PA
T (
Rs M
n)
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2014 2015E 2016E 2017E
Re
lian
ce
Lif
e P
AT
(R
s M
n)
-
5
10
15
20
25
30
35
40
45
50
2010 2011 2012 2013 2014
Em
be
dd
ed
Valu
e b
efo
re
Div
ide
nd
s (
Rs B
n)
56
58
60
62
64
66
68
70
72
74
76
78
2010 2011 2012 2013 2014
Em
be
dd
ed
Valu
e b
efo
re
div
ide
nd
s (
Rs b
n)
-
10
20
30
40
50
60
70
80
2010 2011 2012 2013 2014
Em
be
dd
ed
Valu
e b
efo
re
div
ide
nd
s (
Rs. B
n)
36
37
38
39
40
41
42
2010 2011 2012 2013 2014
Em
be
dd
ed
Valu
e b
efo
re
div
ide
nd
s (
Rs b
n)
Page 14 of 47
Page 15 of 27
Performance of companies on different parameters
On the quantitative parameters a lot of Indian insurance companies may have
not done that well, however qualitatively we have tried to compare the
various insurance companies
Persistency
We have been talking about this as one of the key variable to measure when
we one compares life insurance companies. If we see the recent development
in persistency we can see that HDFC Life and Max India are at the top. Higher
persistency gives a sense of the quality of the business and the company’s
focus on retaining customers.
The impact of higher persistency is clearly visible from the fact that HDFC, SBI
and Max have the highest growth in renewal premiums.
Figure 49 13th
month Persistency of life insurers Figure 50 49th
month persistency for life insurers
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Table 51 Relative positioning of Life Insurers
ICICI
Prudential
SBI life
Insurance Bajaj Allianz Max Life
HDFC
Standard life Reliance life Birla Sunlife
Persistency
Source: Espirito Santo Investment Bank; full green coloured circle = best, full white = worst
Distribution
This is the backbone of the life insurance industry. As explained earlier in the
note the life insurance industry has moved from agency-dominated
distribution model to banks-dominated distribution over the past four years;
however, we think the key for success of a life insurance company is a
multichannel approach as each channel has its own strengths. ICICI Prudential
Life, SBI Life and Max Life score well on this metric.
40%
50%
60%
70%
80%
90%
100%
200520062007 20082009 2010 2011 2012 2013 2014
13th
Mo
nth
Pe
rsis
ten
cy
Bajaj Allianz Max Life Reliance Life
ICICI Pru SBI Life HDFC SL
Persistency declined
due to economic
uncertainity
0%
10%
20%
30%
40%
50%
60%
70%
80%
2008 2009 2010 2011 2012 2013 2014
49
th m
on
th p
ers
iste
ncy
Bajaj Allianz Max Life Reliance Life
ICICI Pru SBI Life HDFC SL
Persistency declined due
to ULIP book for pre-
2010 completed three
years.
Page 15 of 47
Page 16 of 27
Figure 52 Distribution Mix for Life Insurers (2014)
Source: Espirito Santo Investment Bank Research, Company Data
Table 53 Relative positioning of Life Insurers
ICICI
Prudential
SBI life
Insurance Bajaj Allianz Max Life
HDFC
Standard life Reliance life Birla Sunlife
Distribution
Source: Espirito Santo Investment Bank; full green coloured circle = best, full white = worst
Operating expenses
This is another key metric as cost overruns have been one of the key problems
for the industry. Again ICICI, HDFC and Max compare favourably on this metric
with Max and ICICI being the only two companies not showing overruns
amongst the companies who provide EV disclosure.
Figure 54 Opex as % of FUM (FY14) Figure 55 Opex as % of APE (FY14)
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Bajaj Birla Reliance SBI ICICI Max HDFC
Agency Banks Corporate Agents
Brokers Micro Agents Direct Business
Referral
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
ICICI Pru SBI Life HDFC Max India Birla
SunLife
Bajaj
Allianz
Reliance
Life
As a
pe
rce
nt
of
FU
M
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
ICICI Pru SBI Life HDFC Max
India
Birla
SunLife
Bajaj
Allianz
Reliance
Life
As a
pe
rce
nt
of
AP
E
Page 16 of 47
Page 17 of 27
Figure 56 Opex as % of NBP Figure 57 Opex as % of total premium
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Table 58 Relative positioning of Life Insurers
ICICI
Prudential
SBI life
Insurance Bajaj Allianz Max Life
HDFC
Standard life Reliance life Birla Sunlife
Operating expense
Source: Espirito Santo Investment Bank; full green coloured circle = best, full white = worst
M&A within the sector
There has been a lot of news flow (LINK) around the consolidation in the
sector in the past. Below we discuss the M&A opportunity:
Figure 59 Recent M&A deals in Indian Life Insurance space
Source: Espirito Santo Investment Bank Research, Company Data
Figure 60 Deals in the news in Indian Life Insurance sector
Source: Espirito Santo Investment Bank Research, Company Data
0%
10%
20%
30%
40%
50%
60%
70%
80%
ICICI Pru SBI Life HDFC Max India Birla
SunLife
Bajaj
Allianz
Reliance
Life
As a
pe
rce
nt
of
NB
P
0%
5%
10%
15%
20%
25%
30%
35%
ICICI Pru SBI Life HDFC Max India Birla
SunLife
Bajaj
Allianz
Reliance
Life
As a
pe
rce
nt
of
To
tal
Pre
miu
m
Company Seller Buyer % stake sold Valuat ion Date Comments
Max Life NewYork Life Mitsui Somitomo 26%10,500 (2.5x
EV)Jun-12
Foreign partner exited as per their st rategy of
concentrat ing on business in local geography
Reliance Life Reliance Capital Nippon Life 26%11,500
(3.3x EV) Mar-11
Nippon Life entered Indian Life Insurance
sector through Reliance Life
MetLife Met Life Punjab Nat ional Bank 30% Sep-12PNB provides a st rong bancassurance
partner
ING LifeING Group, Hemendra Kothari
Group, Enam GroupExide Industries Ltd. 50% 1,100 Jan-13 Sellers wanted to exit the Insurance venture
Company Promoters Strengths AUM (FY13) NBP PAT Comments Outcome
Aviva India Aviva PLC, Burman Family
Strong bancassurance
partner (Indus Ind Bank),
Agency network
Rs71bn Rs6.8bn Rs0.3 Aviva wants to exit St ill in process
Canara HSBC Canara Bank, HSBC, OBC Bancassurance partners Rs60bn Rs6bn Rs0.2 HSBC wanted to sell its stake in the ventureCanara bank and OBC
opposed the stake sell
Page 17 of 47
Page 18 of 27
Uncertainty on FDI has acted as a catalyst
Many companies invested in the sector over the past 14 years based on the
assumption that FDI in the sector will increase from 26% as a 26% stake for a
lot of large companies in small Indian ventures were miniscule. The bigger
problem was in ventures where the foreign partner was willing to put money,
however the Indian partner was not interested in investing further in the life
insurance venture, this led to subscale business as the foreign partner could
not infuse the capital needed for growth. We think this disappointment was a
reason why some foreign partners left or are trying to leave the Indian
markets.
Promoters’ expectations were different
The Life insurance companies entered this sector in two phases (see chart
below), however in our opinion the expectations of the promoters who
entered in 2008-9 were a little bit stretched given that they entered looking at
the fast growth and the type of valuation which these ventures were getting
then. However, that situation has totally changed over the past four years and
hence some of these promoters are finding that their JVs are subscale and
they do not have either the ability or the willingness to infuse capital in these
ventures.
Figure 61 Various times at which life insurance companies entered the sector
Source: Espirito Santo Investment Bank Research, Company Data
Insurance companies are in totally different phases of growth
One of the other reasons that support a consolidation within the sector is the
different phase of evolution each companies are in.
-
50
100
150
200
250
300
350
400
450
2001
(4)
2002
(11)
2003
(12)
2004
(12)
2005
(13)
2006
(14)
2007
(15)
2008
(17)
2009
(21)
2010
(22)
2011
(22)
2012
(23)
2013
(23)
2014
(23)
Fir
st
Ye
ar
Pre
miu
m (
Rs b
n)
HDFC,
ICICI,
Max,
Birla.
ING
Kotak
Bajaj
TATA
SBI
MetLife
Reliance
Aviva
Sahara
Shriram
Bharti
Future
IDBI
Canara
DLF
Star
Religare
IndiaFirst
Edelweiss
Page 18 of 47
Page 19 of 27
Figure 62 Top-7 players are profitable… Figure 63 …and adequately capitalised
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Will it happen?
However the bigger question is, are we going to see frequent M&As in the life
insurance sector? Unlikely in our view as
The vast chasm between what sellers want and what buyers are willing to
pay: The couple of deals in the life insurance industry (which were closed at 3x
EV) has set the benchmark for valuation. However we think the idea of an
Indian insurance company buying another Indian life insurance at similar
valuation (ie, at 3x EV) is too farfetched as the value accretion from any
merger or acquisition is limited for an Indian insurer. Complicating things
further is the difference in the quality of the books among life insurance
companies. An Indian insurer may be willing to pay some discount to EV for
the book, but the premium over EV is totally dependent on the value accretion
which can happen mainly through distribution as most of the other
infrastructure is overlapping to a vast extent. Hence, there have been gaps
between the expectation of the buyer and the seller. This has is one of the key
reasons why we have not seen many deals happening in the past.
FDI cap a constraint: With a FDI cap of 26%, foreign companies are now less
enthusiastic to enter the space/ buy stakes in Indian entities as they have seen
that their Indian partners have failed to pull their weight (having stopped
contributing to life insurance companies that badly needed capital).
Regulatory: IRDA is yet to come out with a clear set of M&A guidelines in the
sector and with Indian life insurance companies not allowed to hold partial
stake in each other this is a big challenge for M&A to happen within the sector.
India insurers VS Global Insurance companies
Although Indian insurance companies are at a totally different stage of growth
compared with their Asian peers, we believe a comparison between the two is
warranted to give investors a look at the relative positioning of the life
insurance companies.
Margins: Most of the bigger Asian life insurance companies enjoy higher
margins than their Indian counterparts. A key reason for this is we believe the
product profile of Indian insurance companies (which are dominated by
savings products).
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
ICICI Pru HDFC SL BAJAJ SBI MAX
FY
13 P
AT
(In
Rs M
n)
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
ICICI BAJAJ IFFCO HDFC ERGO TATA AIG
So
lve
ncy
Marg
in
Page 19 of 47
Page 20 of 27
Figure 66 Risk discount rates
Discount Rates
AIA 7.75%-19.0%
China Life 11.50%
Ping An 11%
Aviva 7.50%
Axa 7.00%
Source: Espirito Santo Investment Bank Research, Company Data
Figure 64 VNB (2013) Figure 65 RoEV (2013)
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Growth: Although Indian life insurance companies have experienced muted
growth over the past three years we would be expect the growth rate for the
Indian markets to be in excess of most of the economies going forward given
all the drivers that can drive life insurance are present in India. We would
expect the life insurance industry to show c.5%-10% growth rate for FY15.
RoEV: Despite one of the lowest margins globally Indian companies have one
of the highest ROEVs as the capital requirements have been lower and also
the companies have been making losses for the last many years (which has
meant that the net worth has also deteriorated). One more reason for the
higher RoEVs of Indian firms could be the discount rate they use for margin
calculation, which is one of the highest globally (see table).
Leverage: We have measured the leverage of Insurance companies based on
FUM/EV, which identifies the quality of the book and riskiness. It is clearly evident
that the FUM/EV is one of the lowest for the Indian insurance companies despite
underwriting low margin products implying low risk and higher profitability.
Figure 67 FUM/EV showing leverage of different players Figure 68 EV profit/ FUM of different players
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
0%
10%
20%
30%
40%
50%
60%
70%
Sta
nd
ard
Lif
e
All
ian
z
Sam
su
ng
Lif
e
Av
iva
Pin
g A
n
Axa
Ch
ina L
ife
AIA
Pru
de
nti
al
0%
2%
4%
6%
8%
10%
12%
14%
Ch
ina L
ife
Sta
nd
ard
Lif
e
Sam
su
ng
Lif
e
Aviv
a
Axa
AIA
Pru
de
nti
al
All
ian
z
Pin
g A
n
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
FU
M/E
V
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
EV
Pro
fits
/F
UM
Page 20 of 47
Page 21 of 27
Valuation of life insurance ventures
Table 19 Relative valuation of Life Insurers
Implied Market
Value ($ mn) P/EV P/VNB P/FUM FY14E RoEV
Indian Life Insurers
Reliance Life 1,224 2.3 24.6 0.43 11%
Birla Sun Life 1,212 1.8 33.6 0.31 10%
Bajaj Allianz 1,868 1.5 74.5 0.33 12%
Max Life 1,574 2.4 38.9 0.43 16%
HDFC Life 2,144 1.8 19.3 0.26 18%
Implied Market
Value ($ mn) P/EV P/VNB P/FUM
EV growth
(2013)
Foreign Insurance Players
AIA 61,234 1.8 41.1 0.51 10%
China Life 77,108 1.4 22.6 0.26 1%
Ping An 51,467 1.7 17.7 0.31 14%
Samsung Life 19,085 0.8 17.0 0.13 5%
Aviva* 25,818 1.2 18.5 0.06 5%
Axa* 58,932 1.0 20.3 0.11 8%
Prudential* 58,670 1.5 12.4 0.12 11%
Standard Life* 15,629 1.1 29.2 0.04 3%
Allianz* 76,891 3.0 59.4 0.12 12%
Source: IRDA, Espirito Santo Investment Bank, ** Our numbers for Reliance Life, *Also includes other businesses
Relative positioning of life insurance companies
We analyse life insurance companies on various parameters including
distribution product mix, persistency and conclude that Max Life and HDFC
Life are at the top on most of the metrics.
Page 21 of 47
Page 22 of 27
Table 16 Relative positioning of Life Insurance companies
ICICI
Prudential
SBI life
Insurance Bajaj Allianz Max Life
HDFC
Standard life Reliance life Birla Sunlife
Distribution
Product Mix
Expense ratio
Persistency
Agents’ productivity
Cash flow trends
EV growth
Source: Espirito Santo Investment Bank; full green coloured circle = best, full white = worst
Page 22 of 47
Page 23 of 27
Annexure -1
Figure 69 Explanation of cost analysis
Source: Espirito Santo Investment Bank Research, Company Data
Heads Cost heads
AInvesting for future (100%
allocation)
Advertisement cost, Training expenses
and Business development expenses
BCost of new business acquisition
(100% allocation)
Travel, conveyance cost, Comminication
expenses, Medical fees, Policy issuance
and servicing cost
CCost of new business acquisition
(75% allocation)
75% of Employee cost, Rents, Printing &
staintionery, Repairs, Computer
expenses, general office expenses and
service tax
DCost of servicing existing
businesses
Other costs not accounted above and
25% of costs accounted in C
Page 23 of 47
Research
FOR IMPORTANT DISCLOSURE INFORMATION, INCLUDING DISCLOSURES RELATED TO THE U.S. DISTRIBUTOR OF THIS REPORT, PLEASE REFER TO THE FINAL PAGES OF THIS REPORT - Please refer to the final pages of this report for important disclosures, analyst certifications and additional information. Espirito Santo Investment Bank does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA (v1.0.5.2)
MARKET UPDATE
India | Financial Services | Small & Mid Cap | 5-June-2014
Max India
Firing on all cylinders
Max India remains our top pick in the life insurance space given the
quality of its franchise and industry leading operating metrics. Its Q4
results further strengthens our view on the company. With the
economy expected to revive over the next year we expect its new
business premium growth rates to pick up further and RoEV to
improve from current levels. The passage of the Insurance
Amendment Bill in the parliament can further help the stock to
rerate. We remain Buyers, with a new fair value of Rs405 (from
Rs308).
All businesses on track to deliver more growth
At its Q4 results on 28 May 2014, Max India reported growth on all metrics
across its businesses, with consolidated profitability growing more than 100%
for the quarter on a YoY basis. We are of the view Max is the best placed
listed play on Indian life insurance, with its subsidiaries providing further
upside.
Consistent performance from Life insurance: Notwithstanding investor
concerns — from the impact of new regulations to the cobrapost expose —
Max registered 17% growth in new business for FY14. It also reported 13%
growth in new business profits. We have consistently argued that this is a top
quality business and we expect business to grow at more than 15% over the
next few years. The company reported a RoEV of c.15% (operating profits) in
FY14; with the economy stabilising we expect RoEV to be >17% over the next
three years.
Subsidiaries showing good results: The healthcare business had been burning
capital through its expansion phase over the past four years; however, with
1,440 beds now operational, it has shown a significant improvement in
margins, with the current quarter EBITDA margins at 10.3%. With the
utilisation levels improving we expect this business to break even and start
generating profits in FY15. The company expects to increase the bed capacity
by a further 1000-1500 over the next few years (it intends to raise the capital
at the healthcare level).
The Health insurance business (Max Bupa) could need a further c.Rs2bn in the
next few years (assuming Gross Premium CAGR of 30% over the next three
years). This business is growing very fast and is complementary to the
Healthcare franchise. These two businesses should add to the valuation in
future, though in the near-term the subsidiaries do complicate the equity
story.
Insurance bill can act as a catalyst: There are widespread expectations that
the long awaited insurance bill could be passed in the parliament with an
increase in FDI cap. This could be a big catalyst for the stock given that it can
bring a lot of investor interest in the sector and in the company which could
be the best way to play a structural story.
Valuation
Our SOTP model values the company at Rs405, implying an upside of 24%
from current market price. We value the insurance business at Rs116bn, valuing
it FY16E EV + 18x FY16E NBAP, and the healthcare business at Rs45 per share
(see table 4 for detailed valuation).
Accounting & corporate governance GREEN
Franchise Strength GREEN
Earnings Momentum GREEN
BUY 24% upside
Fair Value Rs405.00
Bloomberg ticker MAX IN
Share Price Rs326.00
Market Capitalisation Rs86,695.00m
Free Float 65%
INR m Y/E 31-Mar 2013A 2014E 2015E 2016E
Revenues 106,236 116,832 120,620 133,228
Operating Expenditure 94,110 111,777 115,000 125,799
EBITDA 12,126 5,056 5,619 7,429
PBT 9,914 2,744 3,309 5,043
PAT after MI 7,841 1,394 1,985 3,026
EPS 29.4 5.2 7.5 11.4
EVPS 141.0 148.4 160.6 175.2
Exceptional gain of Rs8022mn in 2013 on account of stake sell
in Life Insurance
Y/E 31-Mar 2013A 2014E 2015E 2016E
RoEV (Max Life) 10% 13% 17% 19%
NBAP Margin (Max Life) 13.6% 13.1% 11.5% 12.5%
P/EV (Max Life) 2.5 2.4 2.2 2.0
P/E 11.1 62.3 43.7 28.7
P/B 3.0 2.9 2.8 2.6
Debt/Equity 0.3 0.3 0.3 0.3
RoA 3.7% 0.6% 0.7% 0.9%
RoE 29% 5% 6% 9%
Source: Espirito Santo Investment Bank Research, Company
Data, Bloomberg
60
80
100
120
140
160
Jul 2013
Aug 2013
Sep 2013
Oct 2013
Nov 2013
Dec 2013
Jan 2014
Feb 2014
Mar 2014
Apr 2014
May 2014
Jun 2014
MAX IN vs BSE500 Index
Share Price Performance
Analysts Santosh Singh, CFA +91 22 43156822 santosh.singh@espiritosantoib.co.in Espirito Santo Securities India Private Limited Nidhesh Jain +91 22 4315 6823 nidhesh.jain@espiritosantoib.co.in Espirito Santo Securities India Private Limited
Page 24 of 47
Page 2 of 12
Source: Espirito Santo Investment Bank, Company Data and Bloomberg
Valuation Metrics 2013 2014 2015E 2016E 2017E
Recommendation: BUY Equity Value
Fair Value: INR 405 P/E 11.1 62.3 43.7 28.7 21.6
P/B 3.0 2.9 2.8 2.6 2.4
Share Price: INR 326 P/EV 2.5 2.4 2.2 2.0 1.8
Upside / Downside 24% P/FCF 22 21 20 17 16
Debt/Equity 0.3 0.3 0.3 0.3 0.3
3 Month ADV ($m) 2 RoA 3.7% 0.6% 0.7% 0.9% 1.1%
Free Float 65% RoE 29.0% 4.7% 6.5% 9.3% 11.4%
52 Week High / Low 151-295 Div yield 2.7% 3.3% 4.0% 5.0%
Bloomberg: MAX IN
Model Published On: 05 June 2014 Life Insurance 2013 2014 2015E 2016E 2017E
APE 15,663 18,348 21,613 26,938 33,587
Shares In Issue (mm) 266 NBAP 2,130 2,400 2,486 3,367 4,198
Market Cap ($mn / Rs bn) $1447 mn/Rs.87bn NBAP Margin 14% 13% 12% 13% 13%
Return on Net worth/Unwind 3,920 3,790 4,546 5,132 5,600
PAT 3,740 5,060 7,031 8,499 9,798
ROEV 10% 13% 17% 19% 20%
Embedded Value (Balance Sheet) 37,560 39,530 42,768 46,666 50,658
EV per Share 141 148 161 175 190
Forthcoming Catalysts
FDI in Insurance P&L Summary 2013 2014 2015E 2016E 2017E
Revenues 106,236 116,832 120,620 133,228 155,730
Life Insurance 65,697 72,118 74,349 79,469 95,709
Espirito Santo Securities Analyst Health Insurance 1,183 2,377 3,436 4,871 6,656
Santosh Singh, CFA Health Care 7,384 9,679 12,262 14,611 16,550
(91) 22 43156822 Speciality Films 7,673 7,332 9,350 10,800 10,800
santosh.singh@espiritosantoib.co.in Investment Income 23,792 26,921 21,736 24,691 27,878
Nidhesh Jain Other Subsidiaries 1,046 886 886 886 886
(91) 22 43156823 Operating Expenditure 94,110 111,777 115,000 125,799 146,128
nidhesh.jain@espiritosantoib.co.in Raw material costs 9,243 8,519 12,600 14,546 15,167
Change in Policy Reserves 30,507 42,289 27,977 34,346 41,958
Employee expenses 8,796 9,568 10,613 11,679 12,751
Shareholding Pattern (Mar'14) Benefits Paid 27,530 30,680 42,978 41,909 48,001
Commissions 6,269 7,107 7,826 9,386 11,683
Other Expenses 11,765 13,614 13,006 13,935 16,568
EBITDA 12,126 5,056 5,619 7,429 9,602
Depreciation 1,368 1,379 1,448 1,520 1,673
Finance cost 845 932 863 866 868
Exceptionals - - - - -
Profit before tax 9,914 2,744 3,309 5,043 7,061
Taxes 1,419 650 662 1,009 1,554
Profit after Tax 8,495 2,094 2,647 4,034 5,508
Minority Interest 654 700 662 1,009 1,487
Net Profit/ (Loss) 7,841 1,394 1,985 3,026 4,021
EPS 29.4 5.2 7.5 11.4 15.1
Growth YoY 2013 2014 2015E 2016E 2017E
Revenue Breakdown - FY14 Revenues 10% 3% 10% 17%
PBT -75% 26% 52% 37%
EPS -82% 42% 52% 33%
Life Insurance (Growth YoY) 2013 2014 2015E 2016E 2017E
New premium 0% 19% 16% 22% 22%
Renewal Premiums 6% 6% -2% -1% 19%
Total Premiums 4% 10% 3% 7% 20%
Commissions 6% 11% 9% 19% 24%
Operating Expenses -2% 3% 3% 6% 20%
Commissions as % of Premium 9.2% 9.4% 9.9% 11.0% 11.3%
Opex as % of Total Premium 19% 17% 17% 17% 17%
Balance Sheet Summary 2013 2014 2015E 2016E 2017E
Margin Trends
Net Worth 29,028 29,841 31,390 33,659 36,674
Preference Share 1,250 655 655 655 655
Minority Interest 7,350 8,205 8,867 9,876 11,363
Borrowings 6,763 7,070 7,023 7,107 6,781
Deferred tax liability 190 148 148 148 148
Policyholders' Liabilities 187,900 226,609 265,084 299,430 341,389
Total Liabilities 232,481 272,528 313,167 350,875 397,009
Fixed Assets 13,610 14,945 15,363 16,223 17,211
Goodwill on consolidation 3,287 3,142 3,142 3,142 3,142
Investments 210,913 251,336 290,574 326,904 370,297
Loans and Advances & Treasury Assets 4,932 3,969 4,951 5,469 7,222
Net current assets -260 -863 -863 -863 -863
Total assets 232,481 272,528 313,167 350,875 397,009
Max India
Promoter
40%
FII
28%
DII
24%
Others
8%
Life
Insurance
83%
Health
Care
8%
Speciality
Films
7%
Others
2%
0%
5%
10%
15%
20%
25%
30%
35%
FY13A FY14A FY15E FY16E
Opex Ratio RoE
Page 25 of 47
Page 3 of 12
Max Life remains the best placed life
insurer amid regulatory uncertainty
which is evident from its exceptional
performance of last three years.
Stock rerated in the recent past
Max India stock is up by more than 35% YTD on the back of strong numbers in
the life insurance company, general bullishness in the market and also
expectation of insurance bill getting passed in the parliament. We think
despite this strong performance there is significant upside left in the stock
given
Operational performance has been exceptional
In a challenging environment Max is again proving why it has such a strong
business, and is gaining significant market share. The healthcare business also
has shown significant improvements in operations, with margins improving
(see figure below). The health insurance business has seen premium growing
at more than 38% on a YoY basis.
Life insurance outperforming: Our discussion with investors suggest that they
were not expecting any growth from the life insurance business in FY14 and
many were even concerned about statutory profitability; however, the
performance of the company over the last year clearly shows a materially
better picture.
Premiums have grown: The company registered growth of more than 15% for
FY14 with Q4FY14 seeing growth in excess of 20% despite the tough
backdrop. It is the only firm that has consistently seen growth in new business
premiums for the last four quarters; and has also increased its market share
significantly (market share chart), now with more than 6% market share of
private sector life insurance business. We expect it to grow at more than 15%
for next four years with potential upgrade if the savings rate were to improve
from here.
Figure 1 Max Life has gained market share in last five years
Source: Espirito Santo Investment Bank Research, Company Data
NBP margin fall in line with expectations: We expected the current year
margin to be in the range of 12%-13%, however it came at 13.5%. For the next
year we expect margins to be in the range of 11%-12%. From then we expect
margins to start improving;
We would expect the product profile to change: More than 65% of its
premium comes from the par business, which is capital light but low margin
(c.10%) on account of its long-term nature and shift in customer preference
towards these products. We expect the company to change its product profile
more towards higher margin businesses with a higher proportion of mortality
and longevity risk. Writing more par business made sense in the previous
regime due to the arbitrage opportunity (high charges and lower surrender
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2009 2010 2011 2012 2013 2014
Max L
ife
's m
ark
et
sh
are
am
on
g
pri
vate
pla
ye
rs
Page 26 of 47
Page 4 of 12
We expect product profile to change
with higher proportion of high margin
non-participating products.
Max India’s subsidiaries except Max
Bupa will not need further capital.
rates on traditional policies) available to the life insurance company to
generate higher returns without taking any risk. However, with the new rules
impinging the arbitrage opportunity considerably and companies such as Max
Life sitting on a huge solvency surplus (485%) we would expect the product
suite to be more risk based, leading to higher margins. We expect the margins
to settle to 12%-13% over the long term.
Persistency provides for some upside: Regular changes in regulation meant
that there was considerable stress on persistency, although Max India has
done really well in not showing material reduction in persistency; however
there has been some decline in its unit linked portfolio which has completed
three years. With the regulatory environment stabilizing we would expect
persistency levels to get better, which should help margins.
Economies of scale: Max is a big player in the agency-based business, which
has a high fixed cost. With the company taking many initiatives, regulatory
environment stabilizing and agency channel maturing (proportion of higher
vintage agents increasing) we would expect this channel to start showing
economies of scale and higher persistency.
As of now we are not pricing in any increase in margins and we assume
margins of around 12% (FY15 onwards); however, this could be a significant
source of upgrades.
Cash generation will remain high: There were concerns from several investors
that the company would see a reduction in cash generation once the pool of
surrender profits dries up and growth returns. We may expect muted growth
in cash profit FY15 given that the company is trying to change the product mix
to high cash strain and high margin businesses and also we expect the growth
rates to be more than 15% for the company.
Capital consumptive phase in other businesses ending…
The key other businesses, i.e. Healthcare and Health insurance, are capital
intensive in nature and with capital infusion in the healthcare business finishing
and more than 70% of capital infusion in health insurance already done, the
market should start gaining greater confidence in these businesses;
Healthcare on the verge of breakeven: Max India was in a capital infusion
phase in this business until last year, given it was rapidly expanding bed
capacity. However, with it tying up all the capital it needs for this business
from strategic investors (see figure below) and with economies of scale
expected to kick in as the company increases operational beds to 1900 till
H1FY15 we expect this business to break even by the end of the fiscal year and
start generating profits from next year (see table below).
Page 27 of 47
Page 5 of 12
Figure 2 Max healthcare capital employed and equity allocation
Source: Espirito Santo Investment Bank Research, Company Data, Left edge of the box denote the year of equity allocation, Height of the box denotes the implied value of iMax healthcare from the transaction
Figure 3 Operational beds Figure 4 MHC EBITDA
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Figure 5 Max healthcare has been high return generator for Max India
2001-
03 2006 2007 2012
Our
Valuation
Valuation
by IFC
Capital allocation by Max India towards MHC
104 407 216 1,400 8,529 14,160
IRR
29% 39%
Source: Espirito Santo Investment Bank Research, Company Data
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Max h
ealt
hcare
(C
ap
ital
Em
plo
ye
d),
Rs M
n
Total Equity capital employed Preference Share Loan Funds
Alloted 12%
stake. Valuing MHC at 1.65bn
Alloted 14% stake to
Warburg Pincus
valuing MHC at 1.81bn
Alloted 20% stake to
Warburg Pincus valuing
the company at 8.26bn
Alloted 4% stake to IFC
Company valued at 13bn
Alloted 26%
equity to Life
Healthcare
valuing MHC at
19.9bn
IFC converted
preference
shar, valuaing
the compant
at 21.5bn
0
200
400
600
800
1000
1200
1400
1600
1800
2000
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15E
Op
era
tio
nal
Be
ds
330 beds to get
operational in
FY14
-200
0
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ITD
A (
Rs. M
n)
Page 28 of 47
Page 6 of 12
Going by Max Bupa’s last three year
performance, it could be a significant
value creator for shareholders.
Company expects to increase the bed capacity by 1000-1500 over the next
few years which will mean that the healthcare business will need capital
however Max intends to raise that capital at the healthcare company level.
Health insurance fast growing: This business has remained in a capital infusion
phase and will continue for the next few years given its rapid growth (more
than 50% YoY), and with it trying to enter into bancassurance tie ups with
banks more capital will be needed. But we think it could be one of the big
future valuation drivers given the quality of the business (conservation ratio of
more than 80% and claims ratio of less than 60%). In our recent general
insurance thematic (LINK) we argued why we expect health insurance to be
one of major drivers for growth of the non–life insurance sector in India given:
a) Medical costs are increasing, and so more and more people are opting for
the safety net of health insurance
b) The general public is now more aware of medical insurance and how it
works and thanks to the increased awareness this segment is already
registering good levels of growth.
It has shown more than 25% growth over the past five years and we are now
seeing a few independent health insurance companies start up.
Figure 6 Net earned premium growth has been robust… Figure 7 …with strong conservation ratio
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Speciality films business is expected to be hived off: The company has plans
to hive-off its speciality business and bring strategic investors who can
facilitate growth. This would reduce the economic interest of the holding
company and hence reduce the overhang/volatility on account of Speciality
films on Max India.
Nevertheless, the existence of different subsidiaries with distinct drivers, and
at various stages of development, does complicate the overall equity story,
and put off some investors looking for purer exposure to life insurance.
However, as subsidiary performance improves, and insurance overall becomes
an increasingly important driver of profitability and valuation, these concerns
should wane sometime.
0
100
200
300
400
500
600
700
800
Ne
t e
arn
ed
pre
miu
m (
Rs. M
n)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Co
nse
rvati
on
rati
o
Page 29 of 47
Page 7 of 12
Old vs. New
We have tweaked our estimates a bit after the release of FY14 numbers. We
have increased our new business premium numbers and reduced our margin
estimates for FY15. The embedded value estimates are lower than our
previous estimates on account of increase in dividend pay-out ratio.
Figure 8 Old Versus New
Rs millions Old New % Change Comments
First Year Premium (APE)
FY15 20,149 21,613 7% Premium growth for H1 remained in
line with our expectations
FY16 22,554 26,938 19%
VNB
FY15 2,518 2,486 -1%
FY16 2,819 3,367 19%
Embedded Value
FY15 46,178 42,768 -7% EV estimates are lower as company
has increased dividend pay-out
FY16 51,043 46,666 -9%
EVPS
FY15 174 161 -8%
FY16 192 175 -9%
Source: Espirito Santo Investment Bank Research, Company Data
Valuation
We value Max India on a SOTP basis as the company operates four different
business segments to arrive at a fair value of Rs405. The Life Insurance
segment contributes more than 75% to our valuation. We have used the
Appraisal value methodology to value the Life Insurance entity with a NBAP
multiple of 18x. We have used a higher NBAP multiple (versus 12x-15x for other
life insurers under our coverage) for the company given the better visibility on
growth and its high quality franchise.
Max Healthcare is valued using a cash flow methodology. At our valuation the
implied EV/EBITDA multiple for the company is 8.4x FY16E EBITDA which
seems reasonable when compared with listed peers (11x-18x). Max Bupa is
valued on a capital infused basis and Speciality films business is valued at
6xFY16E EBITDA.
Our change in fair value from Rs308 to Rs405 is driven by a) rolling over our
valuation to FY16 and b) upgrades in Life Insurance on account of higher than
expected growth in new business premiums in FY14.
Page 30 of 47
Page 8 of 12
Table 1 Max India SOTP
Business Segment Valuation Max India
Stake
Value per
share Methodology
Life Insurance 115,672 72% 314
Appraisal Value Method
(FY16E EV + 18x FY16 NBAP)
Max Healthcare 18,260 66% 45 Discounted Cash Flow
Max Bupa 6,690 74% 19 Value of Capital Infused
Speciality Films 7,560 100% 28
EV/EBIDTA Multiple (6x
FY16 EBIDTA)
Total SOTP Valuation 405
Source: Espirito Santo Investment Bank Research, Company Data
Page 31 of 47
Page 9 of 12
Valuation Methodology
We have valued the company on sum of the parts basis. We value the Life
Insurance entity using the Appraisal Value Methodology with FY16 as the base
year for embedded value. We have used a NBAP multiple of 18. Max
Healthcare is valued using discounted cash flow methodology with 10 years of
explicit forecast, terminal growth rate of 8% and cost of equity of 12%. Max
Bupa is valued at capital infused basis and Max Specialty films is valued
6xFY16E EBITDA
Risks to Fair Value
We believe the regulatory overhang is over for the Life Insurance sector, and
any further regulatory intervention will be a risk to our fair value. Moreover, we
expect the loss making entities Max Bupa and Max Healthcare to break even
by FY16 and FY15, respectively. Any deterioration in the operating
environment of these entities that could delay the breaking even of these
entities will be a risk to our consolidated profitability estimates and fair value.
Page 32 of 47
Research
FOR IMPORTANT DISCLOSURE INFORMATION, INCLUDING DISCLOSURES RELATED TO THE U.S. DISTRIBUTOR OF THIS REPORT, PLEASE REFER TO THE FINAL PAGES OF THIS REPORT - Please refer to the final pages of this report for important disclosures, analyst certifications and additional information. Espirito Santo Investment Bank does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA (v1.0.5.2)
SILVER BULLETS
India | Financial Services | Small & Mid Cap | 5-June-2014
Bajaj Finserv
Prefered general insurance play
Bajaj Finserv is our preferred pick to play the improvement in the
Indian general insurance sector given the benign regulatory
environment and the growth potential of its general insurance
franchise. With provisioning for the erstwhile Motor third party
losses now over, we expect the company to post PAT growth of
>35% and RoEs of >25% in FY15. Its life insurance performance
remained weak in FY14, with 17% and 20% decline in new business
premiums and PAT respectively. However, AUM continued to grow
for the second consecutive quarter (Q3 and Q4FY14). We think the
life insurance business has bottomed out and expect it to report
growth in NBP from FY15 onwards. We re-iterate our BUY stance
with a revised fair value of Rs1,027 (Rs868 previously).
Best quality General Insurance franchise
We have been highlighting Bajaj Allianz General as the best quality general
insurance company in India, thanks to its consistent claims ratio, combined
ratio and industry leading RoE. With provisioning for motor third party pool
now over, we expect profitability to grow disproportionately to gross
premium (expect PAT growth >35% YoY and RoEs >25% in FY15). Moreover,
with non-life penetration at just 0.5% in India (versus 10% in developed
economies), we remain upbeat about the growth potential of the industry.
Life Insurance seems to have bottomed out
Bajaj Life has been going through a rough patch with new business premiums
continuing to decline post ULIP guidelines. The premium stabilized in FY13 but
declined 17% in FY14 on account of product design guidelines. Positively, AUM
which was declining till Q2 has now shown growth for two consecutive
quarters. With regulatory clarity, we expect the business to stabilize and
register 0%-5% growth in NBP for FY15.
Bajaj Finance is going strong
BAF continued on its growth path with 38% AUM growth, though PAT growth
was below expectations for FY14. The company is increasing the proportion of
low yielding secured loans (mortgages) which has impacted PAT growth.
Despite this, the return ratios remained strong with RoE of 19.5%. We expect
balance sheet growth to remain strong while PAT growth may lag on account
of change in balance sheet composition in FY15.
Increase in FDI limit in insurance remains a risk
Allianz holds a call option to increase its stake to 74% in both life and general
insurance by July’16 and April’16 subject to regulatory approval. In the event of
FDI cap being raised before 2016, its life and general will be consolidated at
51% and we view it as a risk.
Valuation
Our new SOTP valuation for Bajaj Finserv is Rs1,027 per share and this
assumes 49% FDI in the insurance sector. We have valued the Life Insurance,
General Insurance and Financing business at Rs124bn, Rs81bn and Rs95.3bn
respectively.
Accounting & corporate governance GREEN
Franchise Strength GREEN
Earnings Momentum AMBER
BUY 12% upside
Fair Value Rs1,027.00
Bloomberg ticker BJFIN IN
Share Price Rs917.00
Market Capitalisation Rs145,915.24m
Free Float 41%
INR m Y/E 31-Mar 2013A 2014E 2015E 2016E
Total Income 50,749 60,250 72,285 86,154
Total expenses 23,668 31,234 41,446 51,414
Profit before tax 27,081 29,016 30,839 34,740
Profit for the year 15,736 15,441 15,745 17,504
EPS 99 97 99 110
Embedded Value 76,529 76,010 84,672 94,189
EVPS 480.7 477.4 531.9 591.6
Y/E 31-Mar 2013A 2014E 2015E 2016E
RoEV (Life Insurance) 12% -1% 11% 11%
NBAP Margin (Life Insurance) 9% 9% 12% 12%
P/EV 1.5 1.5 1.3 1.2
P/E 9.3 9.5 9.3 8.3
P/B 1.9 1.6 1.3 1.2
Debt/Equity 1.7 2.1 2.2 2.4
RoA 4% 3% 2% 2%
RoE 24% 18% 16% 15%
Source: Espirito Santo Investment Bank Research, Company
Data, Bloomberg
80
100
120
140
Jul 2013
Aug 2013
Sep 2013
Oct 2013
Nov 2013
Dec 2013
Jan 2014
Feb 2014
Mar 2014
Apr 2014
May 2014
Jun 2014
BJFIN IN vs BSE500 Index
Share Price Performance
Analysts Santosh Singh, CFA +91 22 43156822 santosh.singh@espiritosantoib.co.in Espirito Santo Securities India Private Limited Nidhesh Jain +91 22 4315 6823 nidhesh.jain@espiritosantoib.co.in Espirito Santo Securities India Private Limited
Page 33 of 47
Page 2 of 7
Source: Espirito Santo Investment Bank Research, Bloomberg, Company Data
Valuation Metrics 2013 2014 2015E 2016E 2017E
Recommendation: BUY P/E 9.3 9.5 9.3 8.3 6.9
Fair Value: INR 1027 P/B 1.9 1.6 1.3 1.2 1.0
P/EV (Life Insurance) 1.5 1.5 1.3 1.2 1.1
Share Price: INR 917 P/FCF (Life Insurance) 9 11 13 13 11
Upside / Downside 12% Debt/Equity 1.7 2.1 2.2 2.4 2.4
RoA 4% 3% 2% 2% 2%
3 Month ADV ($m) 2 RoE 24% 18% 16% 15% 15%
Free Float 41%
52 Week High / Low 563-939
Life Insurance 2013 2014 2015E 2016E 2017E
Bloomberg: BJFIN IN
Model Published On: 05 June 2014 APE 20,736 16,982 18,341 20,175 22,192
NBAP 1,910 1,487 2,201 2,320 2,663
NBAP Margin 9% 9% 12% 12% 12%
Shares In Issue (mm) 159 Return on Net worth/Unwind 5,421 6,505 6,461 7,197 8,006
Market Cap ($bn / Rs bn) $2355 mn/Rs.146bn PAT 8,771 (519) 8,662 9,517 10,669
ROEV 12% -1% 11% 11% 11%
Embedded Value (Balance Sheet) 76,529 76,010 84,672 94,189 104,858
EV per Share 481 477 532 592 659
Forthcoming Catalysts
Q1 results P&L Summary 2013 2014 2015E 2016E 2017E
Monthly premium numbers
Transfer from Policyholders' account 9,175 6,391 5,180 4,838 5,926
Operating profit from General Insurance 3,339 4,720 7,166 8,356 9,894
Espirito Santo Securities Analyst Interest income from financing 29,248 37,886 48,804 60,267 72,155
Santosh Singh, CFA Wind Mill 734 604 647 692 740
(91) 22 43156822 Investment & other 8,254 10,649 10,488 12,000 13,666
santosh.singh@espiritosantoib.co.in Total Income 50,749 60,250 72,285 86,154 102,381
Nidhesh Jain Contribution to shareholders' account 24 69 - - -
(91) 22 43156823 Employee expenses 3,343 4,407 5,483 6,570 7,721
nidhesh.jain@espiritosantoib.co.in Loan loss provisions 1,818 2,578 3,855 4,426 5,195
Financing cost 12,036 15,619 21,222 27,189 31,672
Depreciation 173 309 309 309 309
Shareholding Pattern (Mar'14) Other expenses 6,276 8,251 10,577 12,920 15,447
Total expenses 23,668 31,234 41,446 51,414 60,343
Profit before tax before exceptionals 27,081 29,016 30,839 34,740 42,037
Exceptionals - - - - -
Profit before tax 27,081 29,016 30,839 34,740 42,037
Taxes 4,939 7,105 8,310 9,561 11,665
Profit after tax 22,142 21,911 22,529 25,179 30,372
Minority Interest and profit from associates 6,405 6,470 6,784 7,674 9,350
Profit for the year 15,736 15,441 15,745 17,504 21,023
EPS 99 97 99 110 132
Growth YoY 2013 2014 2015E 2016E 2017E
Revenues 19% 20% 19% 19%
PBT 7% 6% 13% 21%
EPS -2% 2% 11% 20%
Revenue Breakdown - FY13
Life Insurance (Growth YoY) 2013 2014 2015E 2016E 2017E
New premium 10% -13% 8% 10% 10%
Renewal Premiums -18% -17% 14% 6% 6%
Total Premiums -8% -15% 11% 8% 8%
Commissions -26% 5% 9% 9% 9%
Operating Expenses 14% -27% 0% 8% 2%
Commissions as % of Premium 7% 7% 7% 7% 7%
Opex as % of Total Premium 23% 20% 18% 18% 17%
Balance Sheet Summary 2013 2014 2015E 2016E 2017E
Shareholders' fund 78,015 93,112 108,856 126,361 147,383
Minority Interest 28,989 35,415 42,200 49,874 59,224
Margin Trends Funds for future apprpriation 1,741 1,840 1,840 1,840 1,840
Borrowings 129,907 197,500 244,622 299,156 353,868
Deferred Tax Liabilities 88 88 88 88 88
Other Liabilities 333,490 331,109 344,834 361,557 380,651
Total Liabilities 572,230 659,064 742,440 838,875 943,054
Fixed assets 7,806 8,477 8,192 8,281 8,371
Goodwill on consolidation 4,290 4,290 4,290 4,290 4,290
Investments 432,479 451,099 486,103 526,089 572,412
Deferred tax assets 1,312 1,312 1,312 1,312 1,312
Loan book (financing) 167,436 229,710 284,015 347,052 412,470
Net current assets -51,958 -46,688 -52,337 -59,014 -66,666
Other assets 10,864 10,864 10,864 10,864 10,864
Total assets 572,230 659,064 742,440 838,875 943,054
Bajaj Finserv
Promoter
59%
FII
11%
DII
4%
Others
26%
Life
Insurance
65%
General
Insurance
22%
Finance
13%Others
0%
-5%
0%
5%
10%
15%
20%
25%
FY13A FY14A FY15E FY16E
Opex Ratio RoEV
Page 34 of 47
Page 3 of 7
Change in estimates
We have reduced our FY15 and FY16 new business premium estimates on
account of lower-than-expected growth in new business premium in FY14. We
expect the premium growth to remain at 8% in FY15 and 10% in FY16.
Table 1 Change in estimates
Rs millions Old New
%
Change Comments
First Year Premium (APE)
FY15 26,290 18,341 -30% Due to lower than
expected growth in FY14
FY16 28,919 20,175 -30%
Consolidated Revenue
FY15 73,245 72,285 -1%
FY16 86,731 86,154 -1%
Embedded Value
FY15 96,223 84,672 -12%
FY16 107,872 94,189 -13%
Source: Espirito Santo Investment Bank Research, Company Data
Table 2 Bajaj Finserv - SOTP
Valuation @ 51% Valuation Stake Value of stake Per Share Value
Life Insurance 124,350 51% 63,419 398
General Insurance 81,384 51% 41,506 261
Bajaj Finance 95,274 62% 58,594 368
1,027
Valuation @ 74% Stake Value of stake Per Share Value
Life Insurance 124,350 74% 92,019 578
General Insurance 81,384 74% 60,224 378
Bajaj Finance 95,274 62% 58,594 368
1,324
Valuation @ 26% Stake Value of stake Per Share Value
Life Insurance 124,350 26% 32,331 203
General Insurance 81,384 26% 21,160 133
Bajaj Finance 95,274 62% 58,594 368
704
Source: Espirito Santo Investment Bank Research, Company Data
Page 35 of 47
Page 4 of 7
Valuation Methodology
We have valued Bajaj Finserv on a SOTP basis. The life insurance business is
valued using the appraisal value method. The appraisal value is calculated as
the sum of one-year forward embedded value and a multiple times one year
forward new business profit (FY16E EV + 13x FY16E NBAP). For Bajaj Allianz
Life Insurance we have taken a multiple of 13x, which is lower than its peers
due to embedded value calculation based on a market consistent basis and we
expect its embedded value growth to be lower than its peers.
We have valued the general insurance business on discounted cash flow
methodology on a single stage 10 year horizon, a cost of equity of 14% and a
terminal growth rate of 5%. Bajaj Finance is valued at 10% discount to current
market capitalization of the company.
The fair value change from Rs868 to Rs1,027 is on account of roll over of our
valuations to FY16.
Figure 1 Bajaj Allianz General DCF disclosures
Source: Espirito Santo Investment Bank Research, Company Data
Risks to Fair Value
We have assumed a 51% economic interest in Life Insurance and General
Insurance which is contingent on an increase in FDI limit to 49% in insurance
by 2016. Allianz has a call option, which expires in 2016, to increase its stake to
74% in both Life insurance and General insurance. If the FDI limits are not
increased to 49%, then the stock would appreciate further from here; however
this is too long a period to take risk on. Also, if the insurance industry
improves significantly in the current year then we can see the stock continuing
to outperform.
Cost of Equity 14%
Terminal growth rate 5%
Rs. Mn
Valuation 81,384
Rs. Mn Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22 Mar-23 Mar-24
FCFE 3,394 3,950 4,731 5,640 6,897 8,134 9,576 11,241 13,165 15,363
Discount Factor 0.9 0.8 0.7 0.6 0.5 0.5 0.4 0.4 0.3 0.3
Present Value 2,977 3,040 3,194 3,339 3,582 3,706 3,827 3,941 4,048 4,144
Terminal Value 45,586
Bajaj Allianz General DCF Valuation
Page 36 of 47
Research
FOR IMPORTANT DISCLOSURE INFORMATION, INCLUDING DISCLOSURES RELATED TO THE U.S. DISTRIBUTOR OF THIS REPORT, PLEASE REFER TO THE FINAL PAGES OF THIS REPORT - Please refer to the final pages of this report for important disclosures, analyst certifications and additional information. Espirito Santo Investment Bank does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA (v1.0.5.0)
MARKET UPDATE
India | Financial Services | Small & Mid Cap | 5-June-2014
Reliance Capital
Most levered play on economic revival
Reliance Capital has been an outperformer YTD (up 61% vs 34% for
the Bankex), driven mainly by the positive market sentiment and
improvement in operations of its key life and general insurance
subsidiaries. We expect the company’s earnings to show momentum
given the positive improvement in the general insurance business,
revival of the life insurance business and continued deleveraging of
its balance sheet. We have increased our valuation of its Life
Insurance business and general insurance business (rolling over to
FY16), so our fair value moves up from Rs592 to Rs692 and we
retain our BUY rating. The Insurance Amendment Bill is a key
catalyst for the stock.
Increased earnings momentum
Most of the operating businesses of Reliance Capital have been showing
improvement on the operating front and we would expect the momentum on
earnings to increase given:
The turnaround in the life insurance business: Reliance Life was one of the
worst performing businesses in the life insurance space over 2010-2013 given
its dependence on the agency channel and the change in ULIP guidelines.
However in FY14 the company reversed the trend and registered more than
15% growth in individual NBP. We expect this business to maintain its growth
trajectory, with c.10%-15% growth rate in FY15. We expect statutory profit to
fall in FY15 to Rs2,645mn from Rs3,589mn in FY14, mainly on account of a
significant reduction in surrender penalties; however, on a fundamental basis
we expect the cost overruns to subside and the company to register more
than 10% ROEV over the next three years.
The general insurance turnaround: Reliance Capital‖s general insurance
business has been one of the biggest drags on its profitability, with losses of
Rs3.2bn in FY12 and Rs.0.6bn in FY13. However this business turned around in
FY14, reporting a profit of Rs641mn. We expect this segment‖s profit to more
than double in FY15 as the impact of third party motor losses is now over. We
think general insurance has been one of the biggest turnaround stories in
Reliance Capital, with premiums growing at c.15%-20%, and from FY16 we
expect >15% ROE from this business.
Other businesses are linked to the economy: Two key businesses of Reliance
Capital — commercial finance and asset management — are linked to the
economy. In a difficult economic environment the company did not grow its
book instead it focussed on profitability; however we expect its commercial
finance business to start growing from FY15. Asset management and
specifically equity AUMs have a strong correlation with the equity market; the
equity AUM for the company declined 26% between FY11 and FY14. However,
the company‖s focus on retail debt helped it remain highly profitable; we
expect equity AUMs to start growing from FY15 as market performance
improves.
Valuation
Our revised SOTP valuation is Rs692 (up from Rs592). The SOTP includes
Rs244 for life insurance, Rs169 for asset management (4.5% of FY16E AUM),
Rs93 for general insurance (1.9x FY16E P/BV), Rs123 for the financing business
(1x FY16E BV) and Rs55 for unlisted equities (at 30% discount to book value).
Governance could remain an overhang on realization of Reliance‖s full
potential, but we think the discount is too high.
Accounting & corporate governance AMBER
Franchise Strength GREEN
Earnings Momentum GREEN
BUY 11% upside
Fair Value Rs692.00
Bloomberg ticker RCAPT IN
Share Price Rs622.00
Market Capitalisation Rs152,784.00m
Free Float 50%
INR m Y/E 31-Mar 2013A 2014E 2015E 2016E
Revenues 75,190 75,440 83,290 95,403
Total expenses 43,460 41,960 46,041 52,648
Profit before tax (PBT) 8,300 8,470 9,051 11,737
Profit for the year 8,120 7,470 7,763 8,898
EPS 33 30 32 36
Embedded Value * 30,908 31,937 35,224 39,957
* Our estimates for all years
Y/E 31-Mar 2013A 2014E 2015E 2016E
RoEV (Life) -2% 3% 10% 13%
NBAP Margin (Life) 20% 16% 14% 14%
P/EV (Life) 2.4 2.3 2.1 1.8
RoA (Cons.) 1.5% 2.4% 2.0% 1.9%
RoE (Cons.) 4.6% 6.8% 6.1% 6.1%
P/E 18.8 20.5 19.7 17.2
P/B 1.3 1.2 1.2 1.1
Debt/Equity 1.3 1.2 1.2 1.1
Source: Espirito Santo Investment Bank Research, Company
Data, Bloomberg
80
100
120
140
160
180
Jul 2013
Aug 2013
Sep 2013
Oct 2013
Nov 2013
Dec 2013
Jan 2014
Feb 2014
Mar 2014
Apr 2014
May 2014
Jun 2014
RCAPT IN vs BSE500 Index
Share Price Performance
Analysts Santosh Singh, CFA +91 22 43156822 santosh.singh@espiritosantoib.co.in Espirito Santo Securities India Private Limited Nidhesh Jain +91 22 4315 6823 nidhesh.jain@espiritosantoib.co.in Espirito Santo Securities India Private Limited
Page 37 of 47
Page 2 of 11
Source: Espirito Santo Investment Bank Research, Bloomberg and Company Data;
Valuation Metrics 2013 2014 2015E 2016E 2016E
Recommendation: BUY Equity Value
Fair Value: INR 692 P/E 18.8 20.5 19.7 17.2 14.8
P/B 1.3 1.2 1.2 1.1 0.0
Share Price: INR 622 P/EV 2.4 2.3 2.1 1.8 0.9
Upside / Downside 11% RoA 1.5% 2.4% 2.0% 1.9% 2.0%
RoE 4.6% 6.8% 6.1% 6.1% 6.5%
3 Month ADV ($m) 14 Debt/Equity 1.3 1.2 1.2 1.1 0.0
Free Float 50%
52 Week High / Low 596-290
Life Insurance 2013 2014 2015E 2016E 2016E
Bloomberg: RCAPT IN
Model Published On: 05 June 2014 APE 12,072 18,460 21,229 24,414 28,076
NBAP 2,439 2,954 2,972 3,418 3,931
NBAP Margin 20% 16% 14% 14% 14%
Shares In Issue (mm) 246 Return on Net worth + Unwind of discount rate 3,955 4,075 4,315 4,315 40,277
Market Cap ($bn / Rs bn) $2550 mn/Rs.153bn PAT (606) 1,029 3,287 4,733 41,209
ROEV -2% 3% 10% 13% 68%
Embedded Value (Balance Sheet) 30,908 31,937 35,224 39,957 81,166
EV per Share 126 130 143 162 330
Forthcoming Catalysts
Insurance Amendment Bill Passage
Proposed stake sale in General Insurance P&L Summary 2013 2014 2015E 2016E 2016E
Revenues 75,190 75,440 83,290 95,403 104,128
Espirito Santo Securities Analyst Asset management 6,100 6,760 9,455 11,242 13,386
Santosh Singh, CFA General Insurance 24,170 29,450 31,962 37,611 44,266
(91) 22 43156822 Reliance Money 3,190 3,220 4,417 5,157 -
santosh.singh@espiritosantoib.co.in Consumer Finance 21,170 22,100 23,659 26,870 30,901
Profit on sale of investments 21,810 15,050 15,050 15,652 16,591
Nidhesh Jain Standalone finance and others (1,250) (1,140) (1,254) (1,129) (1,016)
(91) 22 43156823 Total expenses 43,460 41,960 46,041 52,648 56,374
nidhesh.jain@espiritosantoib.co.in Reinsurance premium ceded 5,340 5,790 7,659 9,038 10,664
Claims incurred 12,610 16,036 17,039 19,864 23,440
Operating expensses 25,510 20,134 21,343 23,747 22,270
Shareholding Pattern (Mar'14) Asset management 3,520 3,696 4,057 4,454 4,891
General Insurance 4,974 5,766 6,683 7,743 8,892
Reliance Money 2,577 2,876 3,218 3,610 -
Consumer Finance 4,034 4,822 4,262 4,816 5,364
Standalone finance and others 10,407 2,974 3,123 3,123 3,123
Finance Costs 23,430 25,010 28,198 31,018 34,120
Profit before tax (PBT) 8,300 8,470 9,051 11,737 13,634
Taxes 1,270 1,640 1,358 2,934 3,409
Profit after tax (PAT) 7,030 6,830 7,693 8,803 10,226
Minority Interest 1,090 (640) (70) (95) (134)
Profit for the year 8,120 7,470 7,763 8,898 10,360
EPS 33 30 32 36 42
Growth YoY 2013 2014 2015E 2016E 2016E
Revenues 0% 10% 15% 9%
Revenue Breakdown (FY14) PBT 2% 7% 30% 16%
EPS -8% 4% 15% 16%
Life Insurance (Growth YoY) 2013 2014 2015E 2016E 2016E
New premium 53% 15% 15% 15%
Renewal premium -17% 55% 15% 15% 15%
Total premium -24% 40% 15% 15% 15%
Commissions -13% -4% -18% 31% 15%
Commissions/Total premium 0% 0% 0% 0% 0%
Opex/Total premium 32% 33% 34% 30% 30%
Balance Sheet Summary 2013 2014 2015E 2016E 2016E
Margin Trends Shareholder's funds 119,710 123,910 131,603 140,406 150,631
Loan Funds 225,097 255,766 281,343 309,477 340,425
Total sources of funds 349,967 385,116 419,320 457,379 499,899
Fixed assets 2,230 2,500 2,500 2,500 2,500
Investments 150,860 161,570 161,570 161,570 161,570
Cash and Bank Balances 15,822 26,630 26,665 26,666 26,667
Loans and advances 202,126 224,620 245,125 268,706 295,824
Other assets (21,071) (30,204) (16,540) (2,063) 13,338
Total application of funds 349,967 385,116 419,320 457,379 499,899
BVPS 487 504 535 571 612
Reliance Capital
Promoter
54%
FII
20%
DII
6%
Others
20%
Asset
Manageme
nt
11%
General
Insurance
44%
Broking
6%
Consumer
Finance
39%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
FY2013 FY2014 FY2015E FY2016E
Opex Ratio RoEV
Page 38 of 47
Page 3 of 11
Most levered to an economic revival
Reliance Capital‖s stock has been on the move up over the past three months
on expectations of an economic revival. Also, its life insurance and general
insurance subsidiaries have shown significant improvement in underlying
earnings. We believe the company can keep performing well given:
Life insurance business back on growth path
Reliance Capital‖s life insurance business was one of the worst performing
businesses within the life insurance space over 2010-2013, with APE declining
by 65% in that period, as the company was totally dependent on agency
channel for its premium growth. However, FY14 was the year of revival for the
company, with its life insurance business registering 15% APE growth for the
full year on individual life business compared to c.3% decline for the industry.
With the agency channel expected to turnaround we expect Reliance Life to
stay on the growth trajectory (we expect 15% new business premium CAGR
over the next three years).
Figure 1 Reliance Life new business premium
Source: Espirito Santo Investment Bank Research, Company Data
However we expect statutory profit to fall as Rs1,600mn of profit in FY14 was
from earlier policies being surrendered. In our opinion the company has seen
depletion in EV over the past couple of years given the cost overruns on
account of declining new business premiums; we may see the EV depletion
trend reversing from the current year with the company starting to show
some positive EV movement. Over the next three years we would expect the
company to start generating c.15% ROEV.
We value this business using appraisal value method and arrive at a valuation
of Rs.80.9bn
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
FY08 FY09 FY10 FY11 FY12 FY13 FY14
Ne
w B
usin
ess P
rem
ium
(R
s M
n)
Page 39 of 47
Page 4 of 11
Table 1 Appraisal Valuation for Reliance Life
Value
(Rs Mn) Comments
(a) Embedded Value FY16E 39,957 Based on APE growth of 15% for
FY15 and FY16 each
(b) FY16E VNB 3,418 We have assumed 14% VNB
margins for FY16
(c) VNB Multiple 12 We have used lower multiple as
compared to 13-17x for others as its return ratios are weaker
(d) Value of future business (b*c) 41,015
Total Appraisal Value (a+d) 80,972
No. of Shares 246
Value per share 244 Based on 74% stake
Source: Espirito Santo Investment Bank Research, Company Data
General insurance
This has been the turnaround business — from incurring losses of Rs928mn for
FY13 it reported a profit of Rs641mn in FY14 despite writing off c.Rs750mn in
Third Party motor pool losses. With the overhang from Motor Third Party pool
now over profits could more than double for this business in FY15. The
company has significantly improved the quality of its business over the past
two years with dependence on motor business declining slightly. We expect
this business to show Gross Premiums growth of 15%-20% over the next three
years and expect it to generate more than 15% ROE over the next three years.
If media reports (LINK) are to be believed the company has been looking to
offload some of its holdings in this business. If FDI in insurance were to be
increased to 49%, then we expect the company to get good valuation for this
venture.
We use FCFE to value the general insurance business and arrive at a valuation
of Rs22.9bn for this business
Commercial Finance
The company has been on a consolidation phase over the past three years in
this business (see figure 2), with the focus on improving profitability of this
business. The company to a large extent has been successful in strengthening
its book with profitability of the business moving up 220% over the past four
years and the book size hardly changing. However, with the economic
environment getting better we expect Reliance Capital to start expanding this
book. We expect 15% CAGR growth in AUM for this business over the next
three years.
Page 40 of 47
Page 5 of 11
Figure 2 Muted AUM movement over the last four years Figure 3 Profits have increased
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
We use excess return on equity method to value this business and get a
valuation of Rs.30.3bn for this business.
Asset management
Reliance Asset management is the second largest AMC in India. The company
lost its no.1 position to HDFC couple of years back. Its % of high margin equity
portfolio on overall portfolio declined from 36% of AUM in 2012 to 24% AUM in
2014 (figure 4). However, in this period when it was losing equity AUM the
company focused on another high margin product ―retail debt,‖ the proportion
of which increased to 33%. As a result of this strategy and some cost cutting
measures the company was able to maintain its profitability over the past
three years (figure 5). Over the past one year the company has stopped losing
market share and with the economic environment stabilizing and negative
new flows around ADAG group declining we may expect this business to start
growing.
We value this business at 4.5% of AUM, in the past the deals in the sector have
happened at 6% of AUM (see figure 6 below)
Figure 4 Reliance AMC AUM Mix (Rs Bn) Figure 5 Reliance AMC PBT (Rs Mn)
Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
FY08 FY09 FY10 FY11 FY12 FY13 FY14
Co
mm
erc
ial
Fin
an
ce
Lo
an
bo
ok
(Rs M
n)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY08 FY09 FY10 FY11 FY12 FY13 FY14
Co
mm
erc
ial
Fin
an
ce
PB
T
(Rs M
n)
0
200
400
600
800
1000
1200
2011 2012 2013 2014
AU
M (
Rs B
n)
Debt Equity0
500
1000
1500
2000
2500
3000
3500
4000
2011 2012 2013 2014
Re
lian
ce
AM
C P
BT
(R
s M
n)
Page 41 of 47
Page 6 of 11
Figure 6 Deals in the asset management space over the last few years
Transaction Date AUM
(Rs. Bn)
Debt: Equity proportion in
AUM at the time of deal
Valuation paid
by the buyer
as % of AUM
Eton park bought 5% stake in Reliance AMC Dec-07 773 56:44 12.90%
Valiant, Blue Ridge and Eaton Park bought stake in JM MF Jul-08 111 62:38 7.30%
IDFC bought Standard Chart AMC Mar-08 140 71:29 5.70%
T Rowe Price bought 26% stake in UTI AMC Nov-09 768 72:28 3.30%
Nomura bought 35% stake in LIC AMC Jul-08 324 96:04 2.50%
Religare bought Lotus AMC (distress sale) Nov-11 55 90:10 1.80%
L&T bought DBS Cholamandlam AMC Sep-09 29 92:08 1.60%
Nippon bought 26% in Reliance AMC Jan-12 843 60:40 6.64%
L&T Finance bought Fidelity Mar-12 88 32:68 6%+
Source: Espirito Santo Investment Bank Research, Company Data
Balance Sheet has been a cause for concern
Although the performance of all the businesses has improved significantly its
bloated Balance Sheet has been a concern. The company has been trying to
resolve this issue and has been successful partially; however resolving its
balance sheet issue fully would be one of the key areas that can help the
company rerate from here on.
Old vs. New
Figure 7 Old vs. New
Rs millions Old New
%
Change Comments
First Year Premium (APE)
FY15
14,994 21,229 42% On account of higher than expected growth in FY14
FY16 17,243 24,414 42%
Consolidated Revenue
FY15 75,050 83,290 11%
FY16 88,535 95,403 8%
PAT after MI
FY15 6,782 7,763 14%
FY16 8,590 8,898 4%
EPS
FY15 18 32 75%
FY16 35 36 4%
Source: Espirito Santo Investment Bank. We have consolidated life insurance at 38% and Asset management at 70%
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Valuation Methodology
We have valued the company on SOTP basis. The life insurance business is
valued using an Appraisal Value Method. The Appraisal Value is calculated as
the sum of one year forward embedded value and a multiple times one year
forward New Business Profit (FY16E EV + 12x FY16E NBAP). We have taken a
multiple of 12x for Reliance Life Insurance.
We have valued asset management at 4.5% of FY16E AUM. The broking and
general insurance businesses are valued using discounted cash flow
methodology using a cost of equity of 14%. The consumer finance business is
valued using excess return on equity method with cost of equity of 13%.
Figure 8 SOTP Valuation for Reliance Capital
Business Segment Value per
share Methodology
Life Insurance 244 Appraisal value method (EV + 12x
FY16E NBAP)
Asset Management 169 % of AUM (4.5% of FY16E AUM)
Consumer Finance 123 Excess return on equity method
Broking and distribution 8 Discounted Cash Flow
General Insurance 93 Discounted Cash Flow
Unlisted equity 55 30% of listed and unlisted
investments
Total SOTP Valuation 692
Source: Espirito Santo Investment Bank
Figure 9 Reliance General DCF Valuation Disclosures
Source: Espirito Santo Investment Bank Research, Company Data
Cost of Equity 14%
Terminal growth rate 5%
Rs. Mn
Valuation 22,945
Rs. Mn Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22 Mar-23 Mar-24
FCFE 245 548 674 1,472 696 1,278 2,056 3,078 3,920 4,956
Discount Factor 0.9 0.8 0.7 0.6 0.5 0.5 0.4 0.4 0.3 0.3
Present Value 215 422 455 872 362 582 822 1,079 1,205 1,337
Terminal Value 15,595
Reliance General DCF Valuation
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Figure 10 Reliance Commercial Finance Valuation Disclosures
Source: Espirito Santo Investment Bank Research, Company Data
Risks to Fair Value
Although we have highlighted that there is a great deal of value in this stock,
clearly in the shorter term it tends to react to news flow around the ADAG group
and in recent times that news flow has been consistently negative. We recognise
that the management has tried to ring fence the company from group concerns,
implementing a number of initiatives to highlight functional independence and
minimal intercompany linkages, but having a common promoter means there will
always be a perception of linkage, and clearly the quantum of the promoter‖s
stake suggests considerable influence.
Cost of Equity 13%
Shares in Issue 246
Rs. Mn Rs./share
Free cash flow to equity NPV 30,308 123
Rs. Mn Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22 Mar-23 Mar-24 Mar-25 Mar-26 Mar-27 Mar-28 Mar-29 Mar-30 Mar-31 Mar-32 Mar-33 Mar-34
Beginning book Value 26,080 29,832 34,263 39,479 45,540 52,482 60,299 69,020 78,709 89,470 101,423 114,935 130,207 147,461 166,949 188,952 213,787 241,809 273,418 309,061
Net Profit 3,752 4,431 5,216 6,061 6,942 7,817 8,722 9,688 10,762 11,952 13,513 15,272 17,254 19,488 22,003 24,835 28,023 31,609 35,643 40,178
Cost of Equity 3,390 3,878 4,454 5,132 5,920 6,823 7,839 8,973 10,232 11,631 13,185 14,942 16,927 19,170 21,703 24,564 27,792 31,435 35,544 40,178
ROAE 14% 15% 15% 15% 15% 15% 14% 14% 14% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13%
Excess Return 361 553 762 928 1,022 994 883 716 529 321 328 330 327 318 300 271 230 174 98 -
Discount Factor 0.9 0.8 0.7 0.6 0.5 0.5 0.4 0.4 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1
Present Value 320 433 528 569 555 477 375 269 176 95 85 76 67 57 48 38 29 19 10 -
Reliance Commercial Finance
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Please visit our website at www.EspiritoSantoIB.co.uk for up to date recommendation charts.
Max India MAX IN
Report date Recommendation Fair value Share price
2013 May 31 Buy Rs308.00 Rs218.75
May 3 Buy Rs307.58 Rs216.90
April 30 Buy Rs279.00 Rs213.00
2012 August 22 Buy Rs279.42 Rs181.70
April 13 Buy Rs279.00 Rs204.00
February 16 Buy Rs252.00 Rs188.00
Source: Bloomberg, Espirito Santo Investment Bank Research
B
BB
BB
B
100
120
140
160
180
200
220
240
260
280
300
Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14
Buy Trading Buy Neutral Trading Sell Sell Restricted Dropped Coverage
Bajaj Finserv BJFIN IN
Report date Recommendation Fair value Share price
2013 November 22 Buy Rs868.00 Rs707.85
July 2 Buy Rs859.00 Rs643.00
2012 September 24 Sell Rs768.94 Rs779.50
August 22 Sell Rs767.56 Rs942.70
Source: Bloomberg, Espirito Santo Investment Bank Research
B
B
S
S
400
500
600
700
800
900
1000
Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14
Buy Trading Buy Neutral Trading Sell Sell Restricted Dropped Coverage
Reliance Capital RCAPT IN
Report date Recommendation Fair value Share price
2013 July 2 Buy Rs592.00 Rs361.00
2012 September 24 Buy Rs679.11 Rs399.90
August 22 Buy Rs679.16 Rs359.35
February 16 Buy Rs745.00 Rs431.00
2011 September 15 Buy Rs820.00 Rs413.00
Source: Bloomberg, Espirito Santo Investment Bank Research
B
B
B
B
B
200
250
300
350
400
450
500
550
600
650
Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14
Buy Trading Buy Neutral Trading Sell Sell Restricted Dropped Coverage
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Page 10 of 11
IMPORTANT DISCLOSURES
200514
This report was prepared by Espírito Santo Investment Bank Research, a global brand name for the equity research teams of Banco Espírito Santo de Investimento, S.A., with headquarters in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A – Corretora de Câmbio e Valores Mobiliários, in Brazil, Execution Noble Limited, in the United Kingdom, and Espirito Santo Securities India Private Limited, in India, all authorized to engage in securities activities according to each domestic legislation. All of these entities are included within the perimeter of the Financial Group controlled by Espírito Santo Financial Group S.A. (“Banco Espírito Santo Group”).
Analyst Certification
Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; the issuers were not previously informed about the content of the recommendation included in this research report and the assumptions were not validated by the issuers; (2) no part of his or her compensation is directly or indirectly related to: (a) the specific recommendations or views expressed by that research analyst in the research report; and/or (b) any services provided or to be provided by Banco Espírito Santo de Investimento, S.A. and/or by any of its affiliates to the issuer of the securities under recommendation. Moreover, each of the analysts hereby certifies that he or she has no economic or financial interest whatsoever in the companies subject to his or her opinion and does not own or trade any securities issued by the latter.
Ratings Distribution
Espirito Santo Investment Bank Research hereby provides the distribution of the equity research ratings in relation to the total Issuers covered and to the investment banking clients as of end of March 2014.
Explanation of Rating System Ratings Distribution
12-MONTH RATING DEFINITION
BUY Analyst expects at least 10% upside potential to fair value, which should be realized in the next 12 months
NEUTRAL Analyst expects upside/downside potential of between +10% and -10% to fair value, which should be realized in the next 12 months
SELL Analyst expects at least 10% downside potential to fair value, which should be realized in the next 12 months
As at end March 2014 Total ESIB Research
Total Investment Banking Clients (IBC)
Recommendation Count % of Total Count % of IBC % of Total
12 Month Rating:
Buy 199 46.1% 26 81.3% 6.0%
Neutral 135 31.3% 4 12.5% 0.9%
Sell 97 22.5% 2 6.3% 0.5%
Restricted 0 0.0% 0 0.0% 0.0%
Under Review 1 0.2% 0 0.0% 0.0%
TRADING RATING DEFINITION
TRADING BUY Analyst expects a positive short-term movement in the share price (max duration 3 months from the time Trading Buy is announced) and may move out of line with the fair value estimate during that period
TRADING SELL Analyst expects a negative short-term movement in the share price (max duration 3 months from time Trading Sell is announced) and may move out of line with the fair value estimate during that period
Trading Rating:
Trading Buy 0 0.0% 0 0.0% 0.0%
Trading Sell 0 0.0% 0 0.0% 0.0%
Total recommendations 432 100% 32 100% 7.4%
For further information on Rating System please see “Definitions and distribution of ratings” on: http://www.espiritosantoib-research.com.
Share Prices
Share prices are as at the close of business on the day preceding publication, unless otherwise specified.
Coverage Policy
Espírito Santo Investment Bank Research reserves the right to choose the securities it expresses opinions on. The main criteria to choose such securities are: 1) markets in which they trade 2) market capitalisation 3) liquidity, 4) sector suitability. Espírito Santo Investment Bank Research has no specific policy regarding the frequency in which opinions and investment recommendations are released.
Representation to Investors
Espírito Santo Investment Bank Research has issued this report for information purposes only. This material constitutes "investment research" for the purposes of the Markets in Financial Instruments Directive and as such contains an objective or independent explanation of the matters contained in the material.
Any recommendations contained in this document must not be relied upon as investment advice based on the recipient's personal circumstances. This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. The material in this research report is general information intended for recipients who understand the risks associated with investment. It does not take account of whether an investment, course of action, or associated risks are suitable for the recipient. This research report does not purport to be comprehensive or to contain all the information on which a prospective investor may need in order to make an investment decision and the recipient of this report must make its own independent assessment and decisions regarding any securities or financial instruments mentioned herein. In the event that further clarification is required on the words or phrases used in this material, the recipient is strongly recommended to seek independent legal or financial advice. Where an investment is denominated in a currency other than the investor‖s currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation and opinion contained in this report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. The securities mentioned in this publication may not be eligible for sale in some states or countries.
All the information contained herein is based upon information available to the public and has been obtained from sources believed to be reliable. However, Espírito Santo Investment Bank Research does not guarantee the accuracy or completeness of the information contained in this report. The opinions expressed herein are Espírito Santo Investment Bank Research present opinions only, and are subject to change without prior notice. Espírito Santo Investment Bank Research is not under any obligation to update or keep current the information and the opinions expressed herein nor to provide the recipient with access to any additional information.
Espírito Santo Investment Bank Research has not entered into any agreement with the issuer relating to production of this report. Espírito Santo Investment Bank Research does not accept any form of liability for losses or damages which may arise from the use of this report or its contents.
Ownership and Material Conflicts of Interest
Banco Espírito Santo de Investimento, S.A. and/or its Affiliates (including all entities within Espírito Santo Investment Bank Research) and/or their directors, officers and employees, may have, or have had, interests or qualified holdings on issuers mentioned in this report. Banco Espírito Santo de Investimento, S.A. and/or its Affiliates may have, or have had, business relationships with the companies mentioned in this report. However, the research analysts may not purchase or sell securities or have any interest whatsoever in companies subject to their opinion.
Banco Espírito Santo Group has a qualified shareholding (1% or more) in Providência. Bradesco has an indirect qualified shareholding (4.8%) in Banco Espírito Santo, S.A. and a direct qualified shareholding (20%) in BES Investimento do Brasil, S.A., the parent company of BES Securities do Brasil S.A. CCVM.
Pursuant to Polish Ministry of Finance regulations, we inform that Banco Espírito Santo Group companies and/or Banco Espírito Santo de Investimento, S.A. Branch in Poland do not have a qualified shareholding in the Polish Securities Issuers mentioned in this report higher than 5% of its total share capital.
Mr. Rafael Valverde, a member of the board of Banco Espírito Santo de Investimento, S.A., is a non-executive board member of EDP Renováveis. Mr. Ricardo Abecassis Espírito Santo Silva, a member of the board of Banco Espírito Santo de Investimento, S.A., is a board member of Brazil Hospitality Group.
Banco Espírito Santo de Investimento, S.A and/or its subsidiaries are liquidity providers or market makers for Altri, Usiminas and Vale.
Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries participate or have participated in the last 12 months as a syndicate member in share offerings of 4imprint, Brazil Hospitality Group, Capital Park, CTT, EDP, Iguatemi, Just Retirement, Klabin, Liberbank, Mota-Engil, Sports Direct and Zon Optimus.
Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries participate or have participated in the last 12 months as a syndicate member in the bond issues of the following companies: Abengoa, Altri, EDP, Globe Trade Centre, Kredyt Inkaso and Sonae.
Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries provided in the last 12 months investment banking services to the following companies: 4imprint, Abengoa, Altri, Brazil Hospitality Group, Burford Capital, Capital Park, Casino Guichard, Dinamia, EDP, EDP Renovaveis, Ence, Galp Energia, Globe Trade Centre, Godrej Consumer Products, Iguatemi, IQE, Just Retirement, Kcom Group, Klabin, Kredyt Inkaso, Kruk, Laird, Liberbank, Mota-Engil, Novae Group Plc, REN, Semapa, Sonae, Sonaecom, Sports Direct, SVG Capital, Ted Baker, Xchanging and Zon Optimus.
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Banco Espírito Santo Group has been a partner to Mota-Engil in the infrastructure business in Portugal and other countries. Mota-Engil and Banco Espírito Santo Group, through ES Concessões, S.G.P.S., S.A., have created a joint holding company – Ascendi – for all stakes in transportation infrastructure concessions, in Portugal and abroad. Banco Espírito Santo de Investimento, S.A. provided, or continues to provide, investment banking services to Ascendi.
Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries do and seek to provide investment banking or other services to the companies referred to in this research report. As a result, investors should be aware that a conflict of interest may exist.
Market Making UK
Execution Noble Limited is a Market Maker in companies covered and may sell to or buy from customers as principal in certain financial instruments listed or admitted to listing on the London Stock Exchange. For information on Companies to which Execution Noble Limited is a Market Maker please see “Execution Noble Limited UK Market Making” on http://www.espiritosantoib-research.com.
Confidentiality
This report cannot be reproduced, in whole or in part, in any form or by any means, without Espírito Santo Investment Bank Research‖s specific written authorization. This report is confidential and is intended solely for the designated addressee. Therefore any disclosure, replication, distribution or any action taken in reliance on it, is prohibited and unlawful. Receipt and/or review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets without first obtaining express permission from an authorized officer of Banco Espírito Santo de Investimento, S.A.
Regulatory Authorities
For information on the identity of the Regulatory Authorities that supervise the entities included within Espírito Santo Investment Bank Research please see http://www.espiritosantoib-research.com.
IMPORTANT DISCLOSURES FOR U.S. PERSONS
This report was prepared by Espírito Santo Investment Bank Research, a global brand name for the equity research teams of Banco Espírito Santo de Investimento, S.A., with headquarters in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A – Corretora de Câmbio e Valores Mobiliários, in Brazil, Execution Noble Limited, in the United Kingdom, and Espirito Santo Securities India Private Limited, in India, all authorized to engage in securities activities according to each domestic legislation. Neither Banco Espírito Santo de Investimento, S.A. nor these affiliates are registered as a broker-dealer in the United States and therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This report is provided for distribution to U.S. institutional investors in reliance upon the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended.
This report is confidential and not intended for distribution to, or use by, persons other than the addressee and its employees, agents and advisors.
E.S. Financial Services, Inc. is the U.S. distributor of this report. E.S. Financial Services, Inc. accepts responsibility for the contents of this report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. Any U.S. person receiving this report and wishing to effect securities transactions in any security discussed in the report should do so only through E.S. Financial Services, Inc.
Contact Information
Garreth Hodgson Senior Managing Director / Head of Sales (212) 351-6054 ghodgson@espiritosantoib.com
Eva Gendell Vice President (212) 351-6058 egendell@espiritosantoib.com
Hande Cuhruk Vice President (212) 351-6070 hcuhruk@espiritosantoib.com
Jack Fernandez Executive Director (212) 351-6064 jfernandez@espiritosantoib.com
James Kaloudis Executive Director (212) 351-6065 jkaloudis@espiritosantoib.com
Mike Williams Vice President (212) 351-6052 mwilliams@espiritosantoib.com
Pedro Marques Vice President (212) 351-6051 pmarques@espiritosantoib.com
Tatiana Sarandinaki Vice President (212) 351-6055 tsarandinaki@espiritosantoib.com
E.S. Financial Services, Inc. New York Branch 340 Madison Avenue, 12th Floor New York, N.Y. 10173
Each analyst whose name appears in this report certifies the following, with respect to each security or issuer that the analyst covers in this report: (1) that all of the views expressed in this report accurately reflect the personal views of the analyst about those securities and issuers; and (2) that no part of the compensation of the analyst was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the analyst in this report.
The analysts whose names appear in this report are not registered or qualified as research analysts with the Financial Industry Regulatory Authority ("FINRA") and may not be associated persons of E.S. Financial Services, Inc. and therefore may not be subject to the applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account.
Ownership and Material Conflicts of Interest
Banco Espírito Santo de Investimento, S.A. and/or its Affiliates and/or their directors, officers and employees, may have, or have had, interests or qualified holdings on issuers mentioned in this report. Banco Espírito Santo de Investimento, S.A. and/or its Affiliates may have, or have had, business relationships with the companies mentioned in this report.
For a complete list of the covered Issuers in which Banco Espírito Santo de Investimento, S.A. or its Affiliates hold stakes in excess of 1% and for information on possible material conflicts of interest arising from investment banking activities please see “Important disclosures for US persons” on http://www.espiritosantoib-research.com.
Receipt of Compensation
For information on Receipt of Compensation from subject Issuers please see “Important disclosures for US persons” on http://www.espiritosantoib-research.com.
Representation to Investors
Espírito Santo Investment Bank Research has issued this report for information purposes only. All the information contained therein is based upon information available to the public and has been obtained from sources believed to be reliable. However, Espírito Santo Investment Bank Research does not guarantee the accuracy or completeness of the information contained in this report. The opinions expressed herein are our present opinions only, and are subject to change without prior notice. Espírito Santo Investment Bank Research is not under any obligation to update or keep current the information and the opinions expressed herein. This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Where an investment is denominated in a currency other than the investor‖s currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation and opinion contained in this report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. The securities mentioned in this publication may not be eligible for sale in some states or countries. Espírito Santo Investment Bank Research does not accept any form of liability for losses or damages which may arise from the use of this report. Please note that investing in any non-U.S. securities or related financial instruments discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be registered with the U.S. Securities and Exchange Commission or subject to regulation in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in the United States.
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