Hold ICICI Prudential Life Insurance Ltd For Target Rs.760 - Emkay Global
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In-line performance; no surprises
ICICI Prudential’s H1FY22 results were broadly on the expected lines. Since IPRU’s monthly new business numbers were already known, the key monitorablesin the results were VNB margin, EV growth, Covid-19 claims development and future guidance.
* VNB and VNB margin growth on estimated lines: The value of new business (VNB) grew 45% YoY to Rs 8.7bn in H1FY22, led by ~40% yoy APE growth (from low base of H1FY21) and 1ppt VNB margin expansion to 27.3%. The margin contracted from 29% seen in Q1, but it was on expected lines as with the increasing share of savings in the product mix slightly softened the VNB margin over the year. For FY22, we estimate a VNB margin of 26.7% (up 1.5ppts YoY).
* EV growth softer on Covid-19 second wave claims and dividend payout: The EV for H1FY22 stood at Rs302bn - modest ~4% growth from FY21 EV of Rs291bn. The VIF grew at a healthy rate by ~17bn (or 8.5%) from FY21, but ANW came down by ~Rs6bn or 6% to Rs89bn, due to Rs2.8bn dividend payouts in H1 and ~Rs5bn adverse claim experience on account of the Covid-19 second wave.
* Operating parameters broadly stable: Operating parameters, including persistency, product mix and distribution mix, were broadly stable. Management said that given the changes in the product mix and investment in distribution, the cost ratio will remain slightly elevated but it still remains one of the best in the industry. On lapses and surrenders, the surrenders remain higher but that is not very different from the management’s estimation.
* Renewal premium growth anemic; growing retail policy count to be key focus: Driven by negative growth in retail new business in the last 3 financial years, renewal premium growth for H1FY22 was -2% and it is likely to stay weak for the near term. Despite forging a new partnership, focusing on retail protection products and increasing digital outreach, IPRU has struggled to increase its retail policy count. With Covid-19 disruptions behind, the company expects that it will be able to deliver sustainable growth in new business policy.
* Management aims to double FY19 VNB by FY23; we keep our estimates unchanged: Management sounded confident of delivering 2x FY19 VNB by FY23. We have built in 2.1x by FY23E. Based on H1 progress, we have kept our estimates unchanged.
* Hold; TP of Rs760 based on appraisal value method, implies a FY23E P/EV of 2.9x: We value IPRU based on the appraisal value method, using FY23E EV and then adding discounted VNB of future years. We assume: 1) 12% cost of equity; 2) 5% terminal growth rate of VNB in FY38; 3) FY23-38e APE CAGR of ~10.5% and FY23-38e VNB CAGR of ~10.6%; and 4) VNB margin (effective tax rate) of 27.6% flat from FY24. Considering its volatile track record of growth, slightly poorer EV returns and a relatively tough road ahead, we believe that the implied multiples for IPRU need to be at a discount to peers.
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