Quarterly April 2025 – Uncertain times
These are unprecedented times; we are witnessing an event threatening to append a global trading system established over the last sixty years. US has taken effective tariff rates to 22% (up from 2.5%), Asia has been hit with highest tariffs. A tariff of 54% has been imposed on China and 46% on Vietnam. India has been hit with a tariff of 26% which seems moderate compared to other Asian countries.
Going forward, there are three possible scenarios: 1) tariffs are just a negotiation tactic and will be reversed soon, 2) Tariff war escalates, and 3) this move is larger part of a well thought out plan to get the American deficit and debt level down. Given the facts today, tariff war escalating looks the most likely outcome. Events will unfold over the next few weeks, but the growing uncertainty is wrecking the global markets.
| US down 14% last week | India – Defensive sectors have started outperforming |
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Source: ELC, Bloomberg, ACE Equity
Relative to other Asian economies India seems to be relatively better off, US exports are only 2% of GDP and services exports have not been included in the trade war. However, slowdown in global growth will have negative implications for all, including India. Can the Indian government usher in renewed push to reforms, to tackle the slowdown?
| Reciprocal tariffs imposed on Asia = US$481bn | Trade Weighted Average Tariff Rates on US | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Source: ELC, Ministry of Commerce
One thing is certain, near-term will be painful. Markets tend to overreact both on the upside and downside. There are many uncertainties, and we can only think in terms of scenarios. What looks likely is global growth will slow down; India will get impacted. Slowing growth will result in correction in valuations. Instead of 20-25x earnings, market multiples in India may settle at 15-16x.
Our job as fundamental analyst is to take these new facts into account and ascertain what is the long-term earning potential for the businesses we own, build scenarios to ascertain potential impact of slowdown on near-term profitability, keeping the long-term in right perspective. Previous cycles teach us that fundamentals ultimately prevail. Market dislocations always provide attractive investment opportunities.
Implications for Indian macro
Given the increased uncertainty, slowdown in GDP growth from current forecast of 6.5% is likely. Short-term movement in currency will depend on how US dollar behaves. RBI is likely to infuse more liquidity in the system. Bank balance sheets are in good shape and corporate leverage is low. The most positive outcome could be if the government hastens the reform process to make India a more attractive investment destination.
GDP growth may slow down given external events
| FY18 | FY19 | FY20 | FY21 | FY22 | FY23 | FY24 | FY25E | FY26E | |
| Real GDP growth % | 6.8 | 6.5 | 3.9 | (5.8) | 9.7 | 7.0 | 8.2 | 6.5 | 6.5 |
| Fiscal deficit % of GDP | (3.5) | (3.4) | (4.6) | (9.2) | (6.7) | (6.5) | (5.9) | (4.8) | (4.4) |
| Current Account % of GDP | (1.8) | (2.1) | (0.9) | 0.9 | (1.2) | (2.0) | (0.7) | (1.0) | (1.4) |
| GFCF % of GDP | 28.2 | 29.5 | 28.5 | 27.3 | 29.6 | 30.7 | 30.8 | 30.0 | 30.0 |
| CPI growth % | 3.6 | 3.4 | 4.8 | 6.2 | 5.5 | 6.7 | 5.4 | 4.8 | 4.2 |
| 10-Year Note % – YE | 7.4 | 7.4 | 6.1 | 6.2 | 6.8 | 7.3 | 7.1 | 6.8 | 6.8 |
| USDINR – Average | 64.5 | 69.9 | 70.9 | 74.2 | 74.5 | 80.4 | 82.8 | 84.6 | 87.6 |
| INR depreciation % | 4.1 | (7.8) | (1.4) | (4.5) | (0.4) | (7.3) | (2.9) | (2.1) | (3.4) |
Source: ELC, MOSPI, RBI, Kotak
| Corporate leverage at decade low | Private capex cycle yet to pick-up |
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Source: ELC, ACE Equity, *excluding IT services & financials
Earnings downgrade cycle had started 2-3 quarters back and further downgrades are coming, especially for export-oriented sectors.
| Earnings expected to grow at 13-14% | But more downgrades are in the offing |
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Source: ELC, MOSL, Bloomberg, Avendus Spark
Slowing growth will also impact the valuations. Markets may settle at 15-16x forward earnings?
| FII outflows of $14bn in first 3 months of CY25 | Valuations at the higher end of trading range |
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Source: ELC, MOSL
We take a closer look at ICICI Lombard, a holding in our portfolio
A market leader with good longer-term potential. Our focus is to ascertain if the long-term moat sustains and how to think about a fair price for this business. ICICIGI is a multiline non-life insurance company with market leadership in motor and commercial lines businesses. Given the competitive dynamics and the market potential ~15% growth is sustainable over the long-term. Company has compounded its book value by 18% over the last 10 years and we believe it would continue to compound at similar rates going forward.
| Industry premium growth of 15% since FY15 | Insurance remains under-penetrated in India | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Source: IRDA, ELC
A diversified portfolio
ICICIGI is India’s largest general insurance company with a market share of 8.9%. Its market share across different segments is 11% in motor, 3% retail health, 8% in group health, 14% in fire, and 17% in marine cargo. Motor and commercial lines are most profitable segments with ROE of 20%+.
| ICICIGI FY24 (Rs mn) | Motor | Health | Fire | Marine | Eng | Crop | Other | Total |
| GWP | 96,337 | 76,467 | 35,534 | 7,995 | 9,125 | 11,749 | 18,735 | 255,942 |
| Retention | 95% | 84% | 18% | 68% | 25% | 30% | 44% | 71% |
| U/W Loss | (7,568) | (5,431) | 3,382 | (98) | 694 | 160 | (935) | (9,797) |
| Combined ratio % | 106% | 106% | 45% | 101% | 66% | 95% | 106% | 103% |
| Investment Income | 20,535 | 4,017 | 1,015 | 376 | na | 138 | 1,680 | 27,761 |
| Segmental profits | 12,967 | (1,414) | 4,397 | 277 | 694 | 298 | 745 | 17,963 |
Source: Company, ELC
Dominant position in motor segment with 11% market share
Overall growth in the segment would be driven by new auto sales, higher penetration and premiumization. ICICIGI has a dominant share of the preferred service garage though which ensures better claim service, hence customer satisfaction. The regulators have introduced EOM guidelines, bringing in a cap overall expense. This is expected to reduce irrational pricing in the segment benefiting larger players like ICICIGI.
Market leader in Commercial lines with 14-17% market share
Overall growth in the segment would be driven by economic activity getting better, growing insurance amongst MSME as penetration is still at 3%, and increase in sum assured. ICICIGI market leadership is driven by its ability to underwrite commercial risk, balance sheet size, and knowledge of technical risk. It’s share of losses in catastrophic events is lower, enabling it to earn higher commissions on re-insurance. We believe ICICIGI will continue to drive profitable growth driven by quality underwriting and relations with key reinsurers.
Investment in retail health as company market share is still low at 3.4%
Historically, ICICIGI was focused on payer-payee group insurance, which was profitable as it was bundled for corporates with commercial lines. Since last few years, it has been expanding in retail health – building agency network, expanding into geographies and adding new products. Growth remains high, however combined ratios are elevated as the company is in investment phase. Over the medium term, it expects accelerated growth, combined ratio of 102-103% with mid-teens ROE’s.
| Motor OD | Motor TP | Health | |||||||
| FY17-24 | Claims | Combined | FY17-24 | Claims | Combined | FY17-24 | Claims | Combined | |
| Industry CAGR | 6% | 86% | 131% | 11% | 82% | 110% | 21% | 87% | 114% |
| Private | 12% | 72% | 122% | 20% | 73% | 105% | 33% | 86% | 113% |
| Public | 0% | 108% | 145% | 2% | 94% | 118% | 12% | 102% | 123% |
| SAHI | na | na | na | na | na | na | 33% | 64% | 100% |
| ICICI Lombard | 8% | 63% | 118% | 16% | 67% | 95% | 21% | 90% | 121% |
Source: Companies, IRDA, ELC
Ability to invest in technology due to fair share of industry profits
ICICIGI is using data and analytics for pricing models, fraud preventions and to identify areas/segments of profitable growth. Data usage is at very early stages; however, it is expected to play a key differential with adoption of mandatory KYC. Progressive in US has been capturing market share in motor segment due to scale, data and tech. We believe ICICIGI scale and investments in technology will remain a key moat vs. peers.
ICICIGI remains a significant proportion of private industry profits
| Industry Profits (Rs bn) | FY19 | FY20 | FY21 | FY22 | FY23 | FY24 | FY19-24 | Profit Mix |
| Private Industry | 33 | 37 | 44 | 23 | 51 | 69 | 257 | – |
| ICICI Lombard | 10 | 12 | 15 | 13 | 16 | 19 | 85 | 33% |
| Bajaj GI | 8 | 10 | 13 | 13 | 13 | 16 | 73 | 29% |
| Tata GI | 1 | 3 | 4 | 5 | 6 | 7 | 26 | 10% |
| SBI GI | 3 | 4 | 5 | 1 | 2 | 2 | 18 | 7% |
Source: Companies, ELC
Value creation driven by quality underwriting
While there may be period of low growth, over the longer period EPS and BVPS CAGR has been consistently above 15%. Higher compounding vs. peers is due to ICICIGI’s ability to retain appropriate risk on BS driven by its superior underwriting culture. ICICIGI claims ratio has been lower than industry across segment and it has been consistently delivering redundancy in reserve triangle for the past many years.
Source: Company, ELC
Regulation: Sector has gone through transformation, increased competition, witnessed new reforms and regulatory changes over last many years. We believe regulations have settled down and growth looks promising.
Positive: EOM guidelines would restrict maximum expenses an insurance company can incur to 30% of gross premium. This would reduce irrational commissioning and pricing, thereby benefiting ICICIGI, which has been operating within EOM limits.
Negative: If the government decides to de-regulate Motor Third Party pricing it could create short term disruption in pricing and increase competitive intensity in the segment.
Valuations: Long term, we believe industry can grow at double digits driven by increased economic activity and higher penetration. ICICIGI will continue to gain market share and compound 15% driven by 1) Scale benefits and better claims experience 2) Investment in data and analytics 3) Easing competitive pressure due to EOM guidelines. ICICI Lombard is trading at 25x FY27 earnings.
| Fair PE Multiple assuming growth and ROE | Historical PE trading range has been 25-35x | ||||||||||||||||||||||||||||||||||||||||||||
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Source: Company, ELC, Bloomberg