India’s Tax Tinkering Clouds Insurers’ Earnings Outlook
The Bombay Stock Exchange (BSE), right, stands on Dalal street in Mumbai, India. (Photographer: Adeel Halim/Bloomberg)

India’s Tax Tinkering Clouds Insurers’ Earnings Outlook

(Bloomberg) -- India’s steps in the budget to end some exemptions given for tax planning and the removal of a dividend-distribution tax for companies will weigh on the earnings prospects of insurers.

The lower tax rates under the alternative tax slabs will only apply to those forgoing exemptions, which include investments in certain insurance products. Insurers will be taxed on dividend income, a key source of their profit before tax.

Separately, the government’s plan to sell part of its stake in Life Insurance Corp. of India, which has $434 billion in total assets, may also take investors’ focus away from insurers that are already listed in the stock market.

Insurance stocks were trading mixed on Monday after suffering declines on the budget day. SBI Life Insurance Co. advanced 1.9%, HDFC Life Insurance Co. rose 0.7%, while ICICI Prudential Life Insurance Co. fell 1.8% as of 1:28 p.m. in Mumbai. Shares in the three insurers turned oversold for the first time in nearly one year in Saturday’s special trading session.

Here is what analysts said about the budget’s impact on the insurers:

UBS Group AG

Sanjena Dadawala and Vishal Goyal.

  • “There is a worry that tax benefit was an important demand driver for the industry and people will no longer ‘need’ to invest in life insurance if they switch to the new regime.”
  • The taxing dividend income in the hands of insurers will increase their effective tax rate.

Morgan Stanley

Sumeet Kariwala, Subramanian Iyer, Anil Agarwal, Rahul Gupta, Himanshu Khona.

  • “For private insurers, dividend income has a material contribution to overall profit-before-tax, given relatively higher shares of equities in their assets under management.”
  • “Talks around removal of exemptions over the long term could be a new overhang.”
  • Stay equal-weight on ICICI Prudential Life Insurance Co. Life and HDFC Life Insurance Co. and overweight on SBI Life Insurance Co.

Jefferies Financial Group Inc.

Harshit Toshniwal and Nilanjan Karfa.

  • “The budget sent insurers a strong message to shift their sales pitch away from tax-exempt instruments and toward solutions for savings & protection.”
  • “The removal of the dividend distribution tax benefit will affect the margins.”

Edelweiss Financial Services Ltd.

Santanu Chakrabarti and Vinayak Agarwal.

  • “The clear enunciation of the policy intent to move towards an exemption-free income tax regime over time.”
  • A large part of the ULIP sales are often linked to personal income tax planning, so the demand for such product “now comes under a long-term shadow.”
  • “We await more information on the mix of the ULIP sales of individual players before revisiting the target multiples, but reckon 10–15% reductions are probable.”

©2020 Bloomberg L.P.

Also read: Budget 2020: What ICICI Prudential AMC’s S Naren Made Of Nirmala Sitharaman’s Proposals

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