ICICI Lombard share price slips 1.7% post Bharti Axa deal; should investors buy, sell or hold?

The scheme of arrangement could help ICICI Lombard strengthen its motors segment. Bharti Axa had a 1.7% market share in financial year 2020, with a 3.3% share in motor OD.

ICICI Lombard’s share price since the company announced the acquisition of Bharti Axa’s general insurance business has slipped over 1.7% to trade at Rs 1,276 per share. The definitive agreement reached between ICICI Lombard and Bharti Axa, will see their general insurance business be demerged through a scheme of arrangement.  The exchange ratio has been fixed at 115:2 which gives the two shareholders of Bharti Axa – Bharti and AXA, a combined 7.3% stake in ICICI Lombard post deal. Although the share price has slipped post the announcement, brokerage firms are upbeat on ICICI Lombard post the acquisition. 

The scheme of arrangement could help ICICI Lombard strengthen its motors segment. Bharti Axa had a 1.7% market share in financial year 2020, with a 3.3% share in motor OD and 1.4% in motor TP Brokerage and research firm IIFL Securities said that along with these revenue synergies could be provided through a robust corporate agency, OEM-broker relations and branch distribution network, good track record in crop, and a stronghold in Southern States of Bharti Axa. “Deal valuations are largely in line with recent transactions. Given similar culture, business models and tech infra, we believe this deal would strengthen ICICI Lombard’s positioning and would be value accretive with superior execution,” the brokerage said in a note while giving a ‘Buy’ call with a target price of Rs 1,400 per share.

Adding Bharti Axa could also help ICICI Lombard gain market share. According to calculations done by JM Financial, based on the gross premiums of previous year, ICICI Lombard will see an addition of 170bps to its GWP market share to 8.7%. The brokerage firm did, however, raise some risks that could emerge from the deal for ICICI Lombard. “ Overall, we believe it is an expensive deal offset by the use of richly valued ICICI Lombard stock – currently trading at 10.3x FY20E BV,” JM Financial said in a note.It further added that in the absence of a lock-in period for Bharti and AXA, if the chose to exit post consummation of the deal, it could lead to a supply overhang for ICICI Lombard. On the basis of a strong management of ICICI Lombard and negligible asset quality risk given cash before-cover model, JM Financial has a ‘Buy’ call on the stock with a target price of Rs 1,435 per share.

Post the deal, it will also become necessary for ICICI Bank to reduce its stake in the insurance arm to abide by the Reserve Bank of India’s norms. Bharti Axa has a large crop business, accounting for 26% of the premiums, while the health business is 12% of the premium. Analysts at Kotak Securities, analysing the deal did not find anything attractive for ICICI Lombard except the motors business of Bharti Axa. “Post the merger, the consolidated EPS is down by 4-7% for FY2022-23E,” Kotak Securities said in a note. With a fair value of Rs 950 per share, Kotak Securities has a ‘Sell’ call on the stock.