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M NEY BEE KNOW VENTURE KNOW GAIN MONEYBEE SECURITIES PVT.LTD. 212 Veena Chambers, 21 Dalal
  • M NEYBEE

KNOW VENTURE KNOW GAIN

MONEYBEE SECURITIES PVT.LTD. 212 Veena Chambers, 21 Dalal Streets, Fort, Mumbai- 400001

t: +91 22 40302010

f: +91 22 40302000

e: info@moneybee.in

w: www.moneybee.in

RESEARCH REPORT

INDUSTRY: INSURANCE

Chairman:

Sanjeev Bajaj Corporate Office:

Bombay-Pune Road, Akurdi, Pune – 411035, Maharashtra, Tel, 91-020-27406063 Website: www.bajajallianz.co.in

COMPANY: BAJAJ FINSERVICES LTD (BFL)

BSE Code

: NA

Face Value

: 5/-

M.Cap

: NA

52 Week H/L

: NA

Eq.Cap

: 723

B.V

: 290

EPS TTM

: NA

P/B

: NA

PE

: NA

Div Yield %

: NA

Recommendation: BUY

CMP

: NA

 

Target Price

: Rs.1857

Research Analyst

Priyakant Dave

Bajaj Finservices Ltd (BFL) is the demerged company from Bajaj Auto ltd engaged in the business of life & non life insurance. Bajaj Allianz ltd, an insurance arm of Bajaj Finservices Ltd is undisputed leader in the life insurance space no.1 company among New Business Policies issued in private sector. On the back of aggressive distribution scale-up, branding & constant product innovation Bajaj Allianz has retained position of second largest insurance player in the private sector. It is also a beneficiary of strong brand name of Bajaj Auto Ltd. Bajaj Allianz is 74:26 joint ventures between Bajaj Auto & Allianz. We value at 18x FY09 NBAP and arrive at a price target of Rs.1857.

HIGHLIGHTS OF THE COMPANY

Premium Annualised Market Share as on Dec 07 Source: Company website 27% 21% 7% 9% 27%
Premium
Annualised
Market Share as on Dec 07
Source: Company website
27%
21%
7%
9%
27%
9%
ICICI Pru
Bajaj Finser
SBI Life
Others
HDFC
Reliance Life

Bajaj Allianz is second largest insurance company with market share of 20.1%. The company has managed to maintain its position on the back of multi-channel distribution network & aggressive advertising to create

brand awareness. Innovative product range which fulfill need of different

age group & different income class. Highest no. of offices in private sector, at present

company has opened 876 offices.

Huge agent network, Personal relationship with client is

the key thing in the insurance which is being well

handled by the company on the back of huge agent

network of 2,13,000 no of agent.

Popularity of ULIP as a potent combination protection

with return has been a major driver.

Bajaj Allianz has issued over 45 lakh individual policies since its inception in Oct, 2001 & received a premium income of over Rs.10,000 cr in total.

M NEY BEE KNOW VENTURE KNOW GAIN MONEYBEE SECURITIES PVT.LTD. 212 Veena Chambers, 21 Dalal
ICICI Pru 26% 7% 7% 7% New Business Policy Market Share as on Dec 07 Source:
ICICI Pru
26%
7%
7%
7%
New Business Policy
Market Share as on Dec 07
Source: Company website
Bajaj Finser
Max Newyork
Others
HDFC
Reliance Life
23%
30%

As on Dec 2007, Company has AUM of Rs.12, 579 cr out of which Rs.10,100 cr is from ULIP & it is growing at an Avg. CAGR of 86%.

In some

of the

ULIP

product Bajaj Allianz offers least

charges to compete against other player & mutual

funds. Company offers wide range of plan such as child plan,

pension plan, woman insurance, term plan, and

traditional plan. Company is also launching few plans in

near future.

Bajaj Allianz has been witnessing decline in its

commission ratio

due

to

ULIP

which

typically

carry

lower commission vis-à-vis traditional plan.

INDIAN LIFE INSURANCE INDUSTRY

Explosive growth going forward is reinforced by the macro variables of a low social security cover, untapped and rising household savings as also an encouraging demographic profile. While believe the sector will deliver ~33% CAGR over FY07-10 (46% for pvt sector), the growth could come at the expense of margins and believe that the NBAP (New Business achieved profit) margins will moderate by 150-200bps over the next three years. A strong brand, deep pockets and an aggressive posture on distribution will be the key differentiators.

45% 55% Data as on FY 06 Non- linked Linked
45%
55%
Data as on FY 06
Non-
linked
Linked
53% 47% Non- FY07 Linked Linked Data as on
53%
47%
Non-
FY07
Linked
Linked
Data as on

The chief trigger driving the growth was the changing

regulations for unit-link insurance plans (ULIPs). The popularity of ULIP as a potent combination of

protection with returns has been a major driver for the accelerated growth.

Due to long term commitment for the payment of

premium like 10 years & 20 years growth of insurance industry was moderate. With liberalization Pvt player came with the product which is suitable to investor namely ULIP. In ULIP investor’s commitment for the payment of premium has drop down to 3 & 5 years from 20 years. This has

given boost in the penetration of insurance in India. In ULIP investor can also withdraw part of his money as per his requirement as against in the case of LIC’s traditional plan investor need to borrow money from LIC on which LIC use to charge 15 to 18% as a interest component.

ULIP emerge as better product compared to mutual fund as IRR from ULIP is greater than that on mutual fund in longer term i.e greater than 12 years.

ICICI Pru 26% 7% 7% 7% New Business Policy Market Share as on Dec 07

Expanding Distribution:

 

Concentrated sales efforts fro

m both private & public sector has increased the pe netration of life insurance

products. In the current yea r almost all private player have aggressively inv ested in expanding their

distribution reach. Insurance b eing a push product, and with product innovatio n easy to replicate, a vast

distribution network will be the

key to future growth acceleration, specifically in t he under-penetrated semi-

urban and rural areas. Again th e posture taken towards distribution scale up will

shape success. Initial ramp

ups are often less profitable bu t the single mindedness of the management to co mmit capital and resources to increase distribution will det ermine success.

 

Distribution

 

2006

2007

 
 

Branches

Agents

Branches

Agents

ICICI Pru

177

72,000

583

2,34,000

Bajaj Allianz

601

1,09,000

876

2,13,000

HDFC Standard

169

33,000

438

74,000

Reliance Life

153

20,231

217

1,06,000

Falling service charge: Before

liberalization LIC was the only player in the indus try & use to charge huge

expense ratio around 45% to 6 0% in almost all the product which has now came

own to 20%. Reduction in

the commission has added va lue to investor’s fund & motivate them to look in surance product not only

from the point of risk cover bu t also from better investment product, this change boost in the premium volume.

in mind set of people has

Returns: Return generated in t raditional plan like endowment and money back pla n which comprises 80% of

the total product has never be

more than 9% which is due to IRDA rules which sa ys that atleast 80% of the

corpus has to be in Govt paper & equity exposure should not exceed 10% of the

corpus. But in a longer run

equity market has given highes t return. With the introduction of ULIP investor ha s choice to allocate money

as per his risk appetite in differ ent asset class.

ECONOMIC PARAMETER

Global GDP % growth rate: GDP% as on Y.E 2007 11.4 9.2 7.7 7 .3 6.3
Global GDP % growth rate:
GDP% as on Y.E 2007
11.4
9.2
7.7
7
.3
6.3
5.1
2.1
2.2
China
India
Singapore Phili ppines Malaysia South Africa
Japan
US
Source: International Monetary
Fund

From the chart one can make out that India &

China

is

growing

country

&

it

is

expected

that

India

will

post

GDP

of

atleast 7.5% to 8% till

2015 on

the

back of

service industry which

is

growing at

10%

&

constitute 60% of the

total GDP.

• Expanding Distribution: Concentrated sales efforts fro m both private & public sector has increased

Life Insurance Penetration as o n 2007:

10 8 6 8.9 4 8.3 7.3 6 2 4.2 4.1 4 3.6 1.8 0 UK
10
8
6
8.9
4
8.3
7.3
6
2
4.2
4.1
4
3.6
1.8
0
UK
Japan
Korea
Singapore
Australia
US
Malaysia
In dia
China
Source: Swiss Re

Penetration of insurance products

(total premium as a per cent of GDP), though highe r at 4% vis-à-vis 1.2% seen

in FY00, still lags penetration levels in developed economies. According to industry est imates, only 35% of India’s insurable population is currently co vered by insurance, which indicates tremendous po tential. Only a third of the target population of 400 mn is insu red.

Insurance Density (premium per c apita US$) as on 2007

6000 5140 5000 4000 2829 3000 2456 1790 1617 2000 1480 1000 189 38 40 0
6000
5140
5000
4000
2829
3000
2456
1790
1617
2000
1480
1000
189
38
40
0
UK
Japan
Hong Kong
US
Singapore
Korea
Malaysia
China
India
Source: Swiss Re

Though penetration has more th an doubled over seven years, we still see scope

for a further increase in

insurance business on the back of low insurance density. At present per capita insura nce in India is around US$

40 which is very less compared to o ther matured country.

Low household equity ownership : At present only 6% of the savings is come in th e equity & equity related

instrument but with the introduc tion of ULIP participation of Indian household in improve. Going forward we expect saving o f Indian household will increase from current level share of working age group in the t otal population.

equity market is likely to

on the back of increasing

Life Insurance Penetration as o n 2007: 10 8 6 8.9 4 8.3 7.3 6

Industry Since liberalization:

Number of Player

NB Premium (Rs bn)

Total Premium ( % of GDP)

Penetration ( as % of GDP)

Insurance Premium p.capita

FY 2000

1

64

270

1.2%

280

  • CAGR 42%

  • CAGR 30%

FY 2007

16

754

1696

4.1%

1510

ABOUT BAJAJ FINSERV LTD (BFS)

The company is currently engaged in life insurance; general insurance and consumer finance businesses and

has plans to expand its business by offering a wide array of financial products and services in India. Apart from financial services, BFS is also active in wind-energy generation. For life insurance business Bajaj auto has done JV with Allianz life insurance company in the ratio of 74:26.

2 nd highest GWP & new business in the private sector, the company recorded GWP for the Y.E 31.03.2008 of

life insurance business is Rs.97,253 mn as against Rs.53,452 mn for the previous year. Company is growing at a 3 year CAGR of 60% & it is estimated that company will continue to grow at an avg.

CAGR of 35% till 2012. Highest no. of offices in private sector, office location increased from 569 in 2006 to 876 in 2007.

Company has capture 21% market share in terms of annualized premium whereas in terms of new business policy company has capture 30% market share.

BFS is operating with present capacity of 65 MW of wind energy generation plant. With existing capacity company is generating around 666 lacs of units, assuming Rs.2/- p.unit company will get Rs.133 mn. In the consumer finance division company have a network of over 6,000 Bajaj Auto and consumer durable dealerships and 60 branch offices throughout the country to handle all the requirements of our customers.

ABOUT ALLIANZ

Founded in 1896 and based in Minneapolis, Allianz Life Insurance Company of North America (Allianz) provides fixed and variable annuities, life insurance policies, and long term care insurance products in the United States. Known for innovation, performance, and customer service, the company has become a leader in the North American life insurance industry. Allianz products are offered through a network of independent financial professionals. Company is ranked number 15 on the Forbes Global 2000 list of the world’s largest corporations, based on sales, profits, assets, and market value (March 2007). Allianz employs over 177,000 people worldwide. Allianz Life offers an extensive portfolio of value-added wealth management products & offers individual insurance products through over 100,000 independent agents, registered representatives and other financial professionals nationwide. Allianz Life Insurance Company of North America (Allianz Life®) maintains investment portfolios of Rs. 2006 bn as on Sep 2007 in different asset class.

Industry Since liberalization: Number of Player NB Premium (Rs bn) Total Premium ( % of

KEY DRIVERS

Distribution • Increasing advisor base and building competent distribution channels for rural and semi rural India,
Distribution
• Increasing advisor base and building
competent distribution channels for rural
and semi rural India, enhanced focus on
direct marketing and group sales.
Channel
• 22
Regional office, 275 Area office and
601 branch office.
Diversified
Product
Range
Customer
Solutions
Product Focus
• Wide
range of
risk,
investment,
saving
products and pension plans.
• Improve customer service at all
levels, improve turn around time, reduce
error rate, interact with customers
regularly, improve IT systems.
• Increased focus on new verticals
health, women and children, rural and
pension.

VALUATION MODEL

Valuation of insurance compan y can not be done using normal valuation paramete r like PEx or EV/EBDITA.

Life insurance companies wo rldwide require six to eight years to break even

due to

high

set-up and

customer acquisition costs as w ell as conservative solvency (reserves for actuarial liabilities) norms.

Every new policy underwritte n entails a loss in the initial years and starts ma king profits subsequently,

resulting in accounting losses in

the initial years.

In the absence of an accountin g profit, New Business Achieved Profit (NBAP) is the the profitability of a life insurer .

key metric to understand

In the NBAP model we need to

consider new business premium collected for the year under consideration,

as like EBDITA % in other indus try here NBAP % is the key parameter which helps to calculate earning of the company.

In India NBAP % is in the range of 20% to 22% & it is expected that for coming 5 t o 7 years there will not be

major fall in the NBAP %. ULIP constitute 80% of the new business & it yield 22%

to the insurance company,

Endowment plan & term plan

constitute the balance portion and yield 15% & 45 % respectively so the avg.

comes to 20% to 22%. Value derive by multiplying Ne w business with NBAP% is the NBAP. Globally com pany gets NBAPx of 25 to 30 to arrive at EV.

KEY DRIVERS Distribution • Increasing advisor base and building competent distribution channels for rural and

VALUATION

We value Bajaj Allianz at 18x its NBAP for the Y.E 09P & we arrive a Price Target of Rs.1857.

Detail

Y.E 2008E

Y.E 2009P

Premium Collection

67,270

100900

NBAP Margin %

20

20

NBAP

13,450

20,180

Multiple @ 18 x

242160

363240

Holding of Bajaj

74.00

74.00

Share of Bajaj

179200

268800

No of Share

144.7

144.7

 

Value p.share

1,238.40

1,857.61

PEER GROUP VALUATION

Company

NBAP Y.E 2009P

NBAP x

No of Share

Value P.Share

ICICI Prudential

26080

18

1112.6

311.76

Bajaj Allianz

20180

18

144.70

1857.61

HDFC Standard Life

7060

18

283.7

324.98

SBI Life

13200

18

631.5

376.32

Kotak Life

3760

18

344.2

196.83

Reliance Life

11020

18

245.60

807

VALUATION We value Bajaj Allianz at 18x its NBAP for the Y.E 09P & we

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