Low growth, rising costs and market conditions weigh on insurance stocks: Amnish Aggarwal

“They are all where they are very-very reasonably priced, but if you look at four years, five years back, they were trading at a valuation like banks used to trade at four, four-and-a-half times in India,” says Amnish Aggarwal, Prabhudas Lilladher.

I am little lost to understand that what is happening in insurance. Government is not supporting the sector. Growth is not there. Competition is intensifying. Stocks are underperforming. So, I used to always think that insurance is this big picture. Indians are under insured. Insurance premium will go up. After COVID the importance of life and health had come back. But I just look at the data which is the growth, the profitability, and the dynamics, they are just not supporting. Why is that? I mean, what is that which is troubling this sector where the big picture is so strong?
Amnish Aggarwal: India has always been very strong. You look at any segment, we can say we are consuming one-fourth, one-fifth the world average so whether it is insurance, whether it is consumption, whether it is auto.
The big picture will look good. When it comes to, the smaller nitty-gritties of that, then if we look at past few years, you see insurance costs have also been rising.

And today, if we look practically, a lot of insurance products they are not like your typical pure insurance products, a lot of them have got the investment which is ingrained into that.

And obviously, when the markets are not good, there is some erosion, so there is some impact of that and if you look at all the life insurance companies five years back, the kind of valuation they were trading at, yes, today, they have become much more reasonable.

Today, they are all where they are very-very reasonably priced, but if you look at four years, five years back, they were trading at a valuation like banks used to trade at four, four-and-a-half times in India.

So, yes, the growth is low. Likely, the growth will come back. Valuations today are much more nimble than what they used to be three-four years back, but it is not a sector where you will see 20%, 25% growth and in this kind of environment if you ask me, the stocks will look quite defensive, so the downside in all these stocks, even if you look at last month or so stock like an HDFC Life or some of the others, they have been holding on during this market rout.So, from that angle, it looks good. But is it a segment which will grow very fast or which will give you very high returns? I think that has not been the case. But yes, at the current level, the stocks look good. Practically, many of these stocks, they have corrected to very reasonable levels. But it is one sector which is also not understood that well by the investors over the years.
But yes, if you are looking at defensive stocks in these volatile markets, many of the stocks in insurance, they look reasonably good.

Other than insurance, what is looking like ripe post the correction that we have had in the market and where is it that you would be comfortable now deploying money?
Amnish Aggarwal: Actually, we do not have coverage on the insurance sector, so I would not be able to give you any names exactly where the upside is or where we are headed in many of these stocks.

No, other than insurance, what is looking good in the market right now after the recent fall?
Amnish Aggarwal: The market, as I said, they seem to be quite stabilising and if you look at two buckets in particular, you see external sector, I am not very convinced about because due to what is happening globally, what US is doing, there is little bit of, or rather, I would say there might be prolonged uncertainty for the coming few months till the time the situation stabilises, some trade agreements are in place.

So, if we look at on the domestic side, there are two big buckets. One is your capex and one is consumption. So, capex last four-five months, the things have started stabilising, orders are coming in. Will they grow profit by 40%, 50% like many of the companies have done in the past, I think that is not going to happen.

Will they grow at 10%, 15%, that looks likely, the valuations are now more nimble and selectively capex is one basket which looks interesting to us. The second is consumption, which has been under pressure, but with the combined effect of, I would say, lowering food inflation, cut in tax rates, and even cut in interest rate is happening, so this basket should bottom out and the performance from them should start coming in in terms of, say, absolute growth, maybe by the end of 1Q, so that is one basket where there are many stocks which can give you 15-20% kind of returns.

So, these are the two baskets where I do not see any problem on the domestic front and as we go along towards the course of the year, in both the baskets, I expect a reasonable return from all the front-line stocks.