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Strong overall quarter; rerating on the cards

On expected lines, ICICI Prudential (IPRU) reported APE of INR 33bn registering a growth of 26.5% YoY higher than industry growth of 15% YoY. APE growth was driven by strong nonlinked products growth at 104.5% YoY; with other key focused products – annuities and group also witnessed strong growth trends growing at 102% and 41.5% YoY resp. More importantly, management indicated that they do not foresee any material impact on FY24E growth due to high base of FY23 and new taxation regulations on account of: a) their share in high ticket non-par is low (6% in 9MFY23), b) expectations of investors continuing with the product even after tax changes and c) degrowth of ICICI bank channel played out. However, we have conservatively built in APE growth of c.12% for FY24E and will remain watchful of the growth in the coming quarters. Margins have improved to 32.0% for FY23 (+400bps YoY) driven by favourable product mix and improvement in persistency despite higher cost ratios. Overall cost/TWRP inched up to 21.5% in FY23 (vs 18.6% in FY22) as IPRU Life continues to invest in its business. With a favourable product mix and costs control, we believe ICICI Pru Life’s NBMs should be in the range of 31-32% over next few years. IPRU reported an ROEV of 17.4% for FY23 (vs 11.0% for FY22) resulting in its EV increasing to INR 356.3bn. We expects key parameters to change in favour of ICICI Pru Life – a) comeback of APE growth, b) balanced product mix with NBMs stabilised at higher levels, and c) non-ICICI Bank channels gaining dominance, which, in turn, should help ICICI Pru Life to rerate upwards. We remain watchful on the key strategic changes post the transition in leadership (due to happen in 1Q24). IPru Life is currently trading at an undemanding valuation of 1.4x FY25E EV, and we expect a material rerating in it, going ahead. We value ICICI Pru Life at 1.8x FY25E EV to arrive at our TP of INR 600. Maintain BUY.

* Strong APE growth; guiding for robust FY24E growth:

In 4QFY23, ICICI Prudential (IPRU) reported APE of INR 33bn registering a growth of 26.5% YoY higher than industry growth of 15% YoY; though still lower than 34% for private peers. Management indicated that IPRU Life’s growth has been more broad based and not just driven by high ticket product growth unlike peers. For FY23, IPRU reported APE growth of 11.7% YoY vs 24% for private peers and 19% for the industry. Accordingly, IPRU’s market share has dipped 130bps and 50bps YoY in the private sector and overall life insurance industry APE. However, ex-ICICI bank channel (which has seen degrowth for last few years), APE growth was at 28.2% YoY (higher than industry APE growth). Further, management indicated that degrowth in ICICI bank channel has now played out, and incrementally they do not expect it to impact the overall APE growth. Further, management indicated that they do not see any material impact of FY24E APE growth given a) their share in high ticket non-par is low (6% in 9MFY23), b) expectations of investors continuing with the product even after tax changes and c) degrowth of ICICI bank channel played out. However, we have conservatively built in APE growth of c.12% for FY24E and will remain watchful of the growth in the coming quarters.

* Favourable product mix: APE growth in 4Q23 was driven by strong non-linked products (on account of impending tax changes though management argued that large part was also organic) growing at 104.5% YoY; thus the proportion of non-linked in overall APE increased 22ppts QoQ which we expect to subside going ahead. Even other key focused products – annuities and group witnessed strong growth trends growing at 102% and 41.5% YoY resp. While overall protection was flat YoY, retail protection witnessed strong growth of 28% YoY. For FY23, IPRU Life’s growth has been driven by focused products – non-linked, annuities, group and protection (+52%, +69%, +17% and +14.5% YoY resp.) while ULIP has seen a decline of 17% YoY. We expect ICICI Pru Life to continue to strive to achieve a more balanced product mix (with lower volatility) with share of protection, annuity and non-par increasing

* Non-ICICI Bank distribution channel contribute to growth: One of the key factors hurting IPRU Life’s APE growth has been the steady degrowth in ICICI Bank banca channel. However, IPRU Life has been increasingly focusing on other channels with a view to setoff the impact. Further, management indicated that the degrowth for ICICI Bank channel has now played out and incrementally it should not impact the overall APE growth. For, FY23, partnership channel was the fastest growing channel at +78% YoY, followed by group, agency and banca (ex-ICICI Bank) at 24-25% YoY. Direct channel witnessed a growth of 7% YoY.

* New business margins expected to have stabilised: For FY23, IPRU generated NBV of INR 27.65bn, a growth of 28% YoY driven by a) better product mix with higher share of traditional savings (incl. annuities) and protection, and b) improvement in retail persistency across buckets, even though APE growth was tepid. This led to improvement in VNB margins to 32.0% (+400bps YoY). With a favourable product mix and costs control, we believe ICICI Pru Life’s NBMs should be in the range of 31-32% over next few years.

* Expect valuation to rerate: We expects key parameters to change in favour of ICICI Pru Life – a) comeback of APE growth, b) balanced product mix with NBMs stabilised at higher levels, and c) non-ICICI Bank channels gaining dominance, which, in turn, should help ICICI Pru Life to rerate upwards. We remain watchful on the key strategic changes post the transition in leadership (due to happen in 1Q24). IPru Life is currently trading at an undemanding valuation of 1.4x FY25E EV, and we expect a material rerating in it, going ahead. We value ICICI Pru Life at 1.8x FY25E EV to arrive at our TP of INR 600. Maintain BUY

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