Exposure to Indian infrastructure sector helps LIC, SBI outperform peers PSUWatch
New Delhi: Shares of state-owned Life Insurance Corporation (LIC) have outperformed rivals HDFC Life and ICICI Prudential Life. The company has bet on India’s growth sectors, including infrastructure, while the private sector has focused on technology, consumer and consumer-related BFSI companies.
According to stock market data, LIC’s share price rose nearly 79 per cent from Rs 620 on July 18, 2023 to Rs 1,109.15 at close on Tuesday.
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HDFC Life, on the other hand, posted negative returns, compared with Tuesday’s closing price of Rs 646.55 on the BSE from Rs 666.55 a year ago.
ICICI Prudential Life Insurance Co achieved a return of 12 per cent, taking into account the rise in its share price from Rs 582 on July 18, 2023 to Rs 654.10 on July 16, 2024.
Over the past one year, shares of SBI Life Insurance have risen from Rs 1,314 to Rs 1,621.20, giving a return of 23 per cent.
According to capital market analysts, insurance companies make money in two ways: by charging premiums for policies and then investing the premiums in assets. It is the latter that generates the largest delta in profits, which affects value creation and risk management.
Large international companies, including Berkshire Hathaway, owned by Warren Buffet, have succeeded because of their ability to make superior investments.
According to analysts, most Indian insurance companies are yet to benefit from the rise of the country’s infrastructure sector.
Indian insurance companies have concentrated their investments in BFSI, IT and consumer sectors, all of which have underperformed in the recent past. Only 8-10 percent of their investments are in the infrastructure sector. This is much less compared to global standards.
Analysts noted that large international insurance companies such as Allianz, Nippon Life Insurance and Metlife, and other insurers such as Berkshire Hathaway, have much higher exposure to the infrastructure sector, ranging from 15 percent to 30 percent.
In recent years, global insurers have increasingly viewed infrastructure investments as “core” investments, as the stable and long-term cash flows of infrastructure assets naturally align with insurers’ liabilities.
Furthermore, infrastructure assets have defensive characteristics, such as high barriers to entry, strong pricing power, structural growth and predictive cash flows. Furthermore, listed infrastructure can offer investors inflation-proof income and solid capital growth.
For India, a strong government focus on the sector with large expenditures, supportive initiatives and policy incentives, and improved governance, has made the infrastructure industry a thing of the past. This has helped the infrastructure sector outperform all other sectors, analysts say.
They argue that the heavy focus on retail lending and the strategic reluctance to look at infrastructure as a source of growth opportunities is detrimental to the shareholders of such companies.
SBI, which has a higher exposure to the infrastructure sector, saw its share price rise 48 per cent in the year (from Rs 592 to Rs 880.95 on Tuesday), while those of its private peers HDFC Bank, Kotak Mahindra Bank, ICICI Bank and Axis Bank rose only (-)3 per cent to 24 per cent.
Kotak and HDFC Banks, which have little exposure to the infrastructure sector, are the worst performers, with their stocks delivering negative returns, stock market data shows.
Shares of Kotak Mahindra Bank were trading at Rs 1,895 on July 18, 2023 and closed at Rs 1,805.20 on Tuesday. HDFC Bank closed at Rs 1,619.20 on BSE on Tuesday, down from Rs 1,679 a year ago.
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