Buy SBI Life Insurance Company Ltd For Target Rs.1,017 - HDFC Securities
We are quite optimistic on the future of highly underpenetrated Indian life insurance industry. SBI Life is our Top Pick in the sector backed by its largest bancassurance footprint, lowest expense ratio and best-in-class solvency ratio which is mainly driven by strong parentage of SBI. Given the untapped distribution reach, management’s conscious approach toward margin improvement, we believe SBI Life is well poised to notch-up market share gains. It currently maintains leadership position in NBP (New Business Premium) with a private market share of 23.9%. The company has balance sheet with an excellent capital positioning.
We also think that Covid-19 and changes in personal taxation to cause significant disruption to insurance sales in FY21. But for the long term, we feel that this Covid-19 could be blessing in disguise for the industry as it will create renewed push for insurance coverage by Government and increase need for coverage felt by the general public
View & Valuation:
We expect FY21E to be a challenging year for the SBILIFE. We expect company to obtain approvals and launch newer high margin products over Q2FY21 and hence improvement in metrics is more likely over H2FY21E. Overall we think FY21E to be a muted year for the company. We expect SBI Life to deliver CAGR of 2% for Value of New Business (VNB), 5% New Business Premium (NBP) and 14% for Embedded Value (EV) over FY19 to FY22E. We have incorporated RoE improvement by 420bps between FY20-22E. Despite significant price appreciation from recent lows, SBI Life is still trading at 2.38x FY22 Embedded Value (~45% discount to HDFC Life- Second largest Private Player).
We feel that investors can BUY SBI Life at CMP of Rs.848 and add on dips to Rs.764-770 band (2.15xFY22E EV) for Base case fair value of Rs.928 (2.60xFY22E EV) and the Bull case fair value of Rs.1017 (2.85xFY22E EV) over next 6 months. We are also expecting the company to give 10-12% CAGR return over next 2-3 years.
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