Insurance stocks rally as insurance bill gets Rajya Sabha nod

Stock prices of insurance-related finance companies saw a significant surge on Thursday, as the much-anticipated insurance bill was finally passed in the Rajya Sabha post the market close thus paving way for the much-needed funds and product expertise for the sector. However, stocks of big banks and NBFCs such as SBI and HDFC with presence in insurance business ended on subdued note.

The insurance bill had been in a limbo for almost a decade and experts were hoping the bill once passed would help foreign investors increase their stake from 26% to 49% and spur liquidity in the cash-strapped sector. Industry experts believe that the sector has the potential to attract foreign direct flows to the tune of Rs 40,000 crore to Rs 50,000 crore in the near term.

Analysts say companies in which foreign players have already showed an intent to increase the stake and entities in which the domestic partner does not have a significant role to play will be the biggest beneficiaries of foreign funds into the sector.

Stocks of companies like Max India and Reliance Capital, which derive significant part of their revenues from their insurance business, went up 10.92% and 5.49% respectively. On the other hand, stocks of HDFC and SBI, which are also present in the insurance business, closed with gains of less than 1%.

Arundhati Bhattacharya, chairman, SBI on the decision to increase FDI limit in insurance sector, said, "With financial inclusion proceedings in full force, the timing of increase in limit for FDI in insurance sector is a blessing in disguise. In our estimate, the FDI limit hike in insurance could result in immediate inflow of around Rs 20,000 crore. Furthermore, FDI hike in insurance is de jure increase in FDI limits for pension sector also."

Vaibhav Agarwal, VP and head of research, Angel Broking, says as per the current market price of Rs 1,332 for HDFC, only Rs 81 constitutes the insurance business, while the rest comes from their holding in HDFC Bank, home loan and other businesses. "Similarly, we have a target of Rs 401 for ICICI Bank, in which a meagre Rs 24 is contributed by insurance business while Rs 383 comes from its banking and other operations," said Agarwal.
Meanwhile, insurance contributes to almost 30% of the business of Reliance capital while Max India derives most of its revenues from the insurance business, a market expert said.

Deepak Mittal, CEO and MD, Edelweiss Tokio Life Insurance, says, "The timing of the bill getting passed is apt as the growth seems to be bottoming out and green shoots can be seen in the economy."

"The clearance of the bill with political consensus will help improve the image of the country and reflect a paradigm shift in the policy making," said Mittal.

Anuraag Sunder, managing consultant, financial services, PwC India, said,"This Act holds enough and more potential to jumpstart the sector on a long sustainable basis. There would be all round impact across new players, deeper capital, top line growth, focus on technicals. Value unfolding may also take place through IPOs, consolidation and other possible routes."

Market participants, however, are cautious about the future rally in insurance stocks and believe going forward fundamentals will play a major role as positives triggers for these stocks have already been priced in.

Andrew Holland, CEO, Ambit Capital, said that one can continue to hold insurance stocks if bought at lower valuations, but for fresh buyers fundamentals of the companies should be an important criteria.