Life insurance sector in good health: Siddhartha Khemka prefers HDFC Life, SBI Life on margin gains

Synopsis

Siddhartha Khemka highlights promising sectors like capital goods, expecting strong growth due to frontloaded government capex, and cement, projecting a 35% earnings increase. Electronic manufacturing services and healthcare are also favored, while retail faces some pressure. Within life insurance, HDFC Life and SBI Life are preferred due to steady growth and improving margins.

"Government seems to have frontloaded the capex for this year and that effect is clearly being visible in capital goods. Cement is other sector where we are expecting an aggregate 35% earnings growth," says Siddhartha Khemka, Head-Retail Research, MOSL.

We have talked much about the IT space, so why do not you help us understand that which are the sectors that are looking good to you and interesting to you right now given the fact that we have already started the earning season, it is through. But other than that, upcoming days we have some of the retail counters as well which will be posting their numbers.
Siddhartha Khemka: If you look at, it just started with TCS. We expected a better commentary even last time. If you look at Q4 commentaries, except for TCS and Wipro the commentaries looked pretty much better or came pretty much better from the other IT companies.

So, we really have to wait for the likes of an Infosys and Tech Mahindra and HCL Tech also to come out with their commentary to have a better view. In this quarter what we are looking at is some of the domestic focused sectors to come out with strong numbers.

For example, capital goods, we are seeing that the government capex in the first two months of the financial year April, May has been the strongest after a lacklustre spending last year.

Government seems to have frontloaded the capex for this year and that effect is clearly being visible in capital goods. Cement is other sector where we are expecting an aggregate 35% earnings growth.

Volume growth is decent. Price on an average has sequentially moved up by 5%. Costs have remained benign, so that is another sector which is looking good. Another sector is a new sector EMS, electronic manufacturing, pretty high order book, consistent delivery.

So, overall, we are expecting about 46% earnings growth there. Healthcare, pharma, as you rightly said, a pretty steady quarter, has been consistently delivering low to mid double-digit earnings growth for the last seven-eight quarters. For this quarter also we are expecting 11% growth in healthcare space.

Retail, there is some pressure especially if you look at what the value retail business updates have come in from the likes of some of the bigger names plus including the likes of Trent where the earnings growth has subdued compared to the earlier high growth. So, still expecting an earnings growth of about 20% for retail, but that is a little bit lower than what the street was expecting.

Help us understand that how are you looking at the whole life insurance space because we had that insurance data as well and coming up the next week we will have HDFC Life numbers within the insurance pack that will be the first one who will come out with the numbers and the stock I remember gets very volatile during that time. So, what on the earnings front as well as the industry growth wise what is your expectation and any of your preferred bets that you are recommending to your clients right now within this space.
Siddhartha Khemka: The numbers that have come out on the monthly basis there are pretty strong set of numbers for some of the companies. If you look at Max Financial, came out with strong numbers. Overall, the growth for private players improved to around 13%.

Improvement has been fuelled the industry growth to about 10% in the weighted premium terms and some of the listed players, for example, Max continues to grow fastest in the individual WRP with a growth of 22%. SBI and HDFC both a stable growth of 12% to 14%.

Overall, the expectation has been a decent earnings growth for insurance companies, especially the life insurance players in this quarter and some of our preferred picks in this space are HDFC Life and SBI Life as our preferred picks given the steady growth.

Margins are improving for both HDFC Life because of the changing the product mix that they are doing and the steady growth that we are seeing, plus valuation have been comfortable for both of them. So, SBI Life and HDFC Life are our preferred pick within the life insurance space.

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