Looking for post-Covid themes to invest in? Here is a cue

NEW DELHI: If past experiences of epidemics in China and Hong Kong are any cue, select stocks could be a key beneficiary of the Covid-19 mauling.Several brokerages have already gone overweight on them, as they expect this pandemic to bring about a change in Indian mindset and nudge people to pay more attention to protection against unforeseen threats to life.Should that happen, one set of direct beneficiaries would be life insurers. Stocks from this sector are down up to 30 per cent year to date.“Until now, insurance has always been sold in India as a tax-saving instrument, never for protection. But no more,” says Susmit Patodia of Motilal Oswal AMC.Data showed protection sales by life insurers account for just 8-17 per cent of their annual premium equivalent (or APE) but contribute 35-70 per cent of new business value (NBV). "The experience of China and Hong Kong SAR (HK) post SARS, H1N1 epidemics pointed to strong growth in protection sales in the subsequent quarters, lifting NBV growth outlook,” JP Morgan said.Covid-19 will trigger a reset in the mindset for a large part of the population on the idea of protection, said Edelweiss Securities.It will now be harder to live in denial of life’s uncertainties, the brokerage said. It projected protection demand to pick up once the dust settles, as wallet share inevitably tracks ‘new’ mind share."Undoubtedly, insurance and protection will be one place where we will see a boom in business," said Nilesh Shah, MD of Kotak AMC.Analysts said life insurers’ source of profits is largely based on fee income rather than investment spread margin. Falling bond yield, they said, has limited the impact on liability reserve provisioning. Besides regulatory mandates mean their asset allocation is highly conservative.More than 50 per cent of insurance AUM is allocated to central government and local government bonds, analysts said.Edelweiss said the virus-led disruption has spared no business, but the impact on life insurers has well-defined outer bounds."Even a sharp drop in Ulip sales and the hit on operating leverage from a concurrent spike in surrender rates were principally P&L-only problems. MTM hits from proprietary equity portfolios are minor in the overall context," it said, adding that the problems are dwarfed by the balance sheet stress driven by ‘residual equity’ uncertainty of banks and NBFCs.Shares of SBI Life are down 28 per cent year to date, ICICI Prudential Life 25 per cent, HDFC Life Insurance 21 per cent and Max Financial by 19 per cent.Prior to the Covid-19 outbreak, India’s life insurance companies traded at a 2.5-4.5 times P/EV, or 25-37 times new business value. They now trade at 1.8-4.1 times P/EV."Even if we assume zero NBV in FY21, it only makes 2-3 per cent difference to our estimate of fair value,” JP Morgan said.Edelweiss said it has built in a 50 per cent YoY dip Ulip volumes in FY21 and a 10 per cent drop in persistencies. “Even so, we estimate our coverage universe to report a positive return on embedded value (RoEV) of 3-8 per cent in FY21," it said.DSP Investment Managers said while valuation history is limited for insurance companies, it expects the life insurance segment to deliver 15 per cent earnings compounding over next three years.JP Morgan is overweight on HDFC Life (target Rs 580), ICICI Prudential Life (Rs 500) and SBI Life (Rs 880). HDFC Institutional Equities likes SBI Life (1046) and ICICI Prudential Life (Rs 415). Edelweiss prefers ICICI Pru Life (Rs 500) and SBI Life (Rs 860).

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