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IPRU delivered a decent H1FY23 financial performance, led by sharp moderation in APE growth in Q2, and offset by sustained strong margins owing to a favorable product mix. While the robust VNB margins continue to impress, we still have concerns about return of topline (APE) growth. In this backdrop, we adjust our FY23-25 estimates to account for the developments in H1 (higher margin, but weaker growth) and reiterate our BUY rating, with our Sep-23 Target Price at Rs620/share. Post the recent underperformance of IPRU shares, the current valuation at ~FY23E P/EV of 2.1x is attractive, but return of growth is needed to drive a re-rating of the stock, in our view.

* Margin impresses, but topline growth-struggle continues: H1 VNB margin at 31% was better than our estimate of 29.4% and drove the ~5% beat on VNB. This margin surprise was largely an outcome of a favorable product mix, with ~30% YoY growth in Protection APE resulting in share of protection in mix increasing by 3.2ppts YoY to 20.2%. This strong growth in Protection was largely driven by considerably strong volume and pricing-led growth in Group Term Insurance and Credit Life. However, APE growth of 10.1% YoY in H1 was in line with our estimates, and the sharp moderation in Q2 APE growth at 1.1% YoY points to the continued struggle in growth delivery. The APE growth challenge is largely an outcome of prolonged pain in the ICICI Bank channel, industry-related problems in Retail Protection and impact of the volatile capital markets on the ULIP segment. Embedded Value saw a modest 3.2% growth to Rs326bn, from FY22 to H1FY23. The modest EV growth is likely an outcome of dividend payment and material impact of the negative Economic and Investment variance on account of sharp jump in bond yields. On the GAAP front, H1FY23 PAT at Rs 3.6bn was materially lower than our estimate, largely on lower realised gains in Shareholders’ Account and a higher new business strain driven by product mix.

* Stable-to-improving operating metrics; problems at multiple moving parts and the macroeconomic environment curb confidence on growth outlook: Operating metrics (persistency, product mix, cost, etc) continued to improve for IPRU and look stronger relative to the industry’s. However, as regards top-line growth, the many moving parts of IPRU’s business (the non-ICICI Bank channel becoming bigger and hence resulting in growth moderation, the volatile capital market affecting ULIP growth, continued weakness in retail protection, and a likely temperance in GTI prices to moderate GTI growth) and the prevailing difficult macroeconomic environment fail to give reassurance on the growth outlook. On the margin front, there are enough comforting factors, including continued focus on overall protection and annuity, coupled with robust demand of guaranteed non-par savings.

* Doubling FY19 VNB seems slightly difficult to achieve; reiterate BUY on valuation support: Management commentary remained positive on achieving the target of doubling FY19 absolute VNB in FY23. For H1FY23, VNB grew 25.1% to Rs10,920mn, amounting to ~41% of the expected FY23 VNB target. However, to achieve the 2x FY19 VNB target in FY23, the APE growth rebound in H2FY23 remains key. Accounting for the developments in H1FY23, we revise down our growth estimates and revise up our margin estimates. Net net, our VNB and EV estimates remain broadly unchanged. Our TP comes down to Rs620 from Rs670, as we increase our Cost of Equity (CoE) as per the Appraisal Value method, to 13.5% from 12.5%. The change in CoE reflects the addition of some discount on EV that unwinds at a lower rate than CoE. We reiterate our BUY on IPRU, on valuation support (FY23E P/EV of 2.1x).

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