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Robust margin drive in line VNB; persistency trend improves

Reiterates guidance to double FY19 VNB by FY23

* IPRU posted a 24.7% YoY growth in new business APE, led by an all-round growth of 25%/22% in Savings/Protection. Within Savings, Annuity/NonLinked/ULIPs grew 69%/41%/15% YoY

* VNB grew 31.6% YoY to INR4.7b (in line). This was primarily driven by a 128bp QoQ improvement in VNB margin to 31% in 1QFY23.

* IPRU remains on track to achieve its stated objective of doubling FY19 VNB by FY23. With adequate growth and margin levers available, we estimate the IPRU to meet its guidance, which entails ~23% VNB growth in FY23.

* We expect IPRU to deliver 24% CAGR in VNB over FY22-24, largely led by healthy premium growth and steady margin, thereby enabling operating RoEV at 17% in FY24. We maintain our Buy rating.

Margin accretion encouraging; distribution mix getting broad-based

* Net premium income grew 4% YoY in 1QFY23, led by healthy new business premium. However, it missed our estimate by 16% due to decline in renewal premium. PAT fell 16% QoQ to INR1.56b in 1QFY23.

* The share of Protection in the overall mix improved by 420bp QoQ to 21.7% in 1QFY23. Within Protection, demand for Retail Protection remains weak, while Credit Life saw a strong traction, led by buoyed disbursements.

* Annuity APE grew 69% YoY in 1QFY23. On a NBP basis, it constitutes 18% of the mix. The pension subsidiary clocked a strong performance. IPRU remains committed to scaling this segment further.

* ULIPs grew 15% in 1QFY23, lower than the overall growth of 25% due to a volatile capital market. The ULIP mix declined to 41% from 45% in 4QFY22.

* On the distribution side, slack in the banca channel was picked up by new partnerships and the agency channel. While sales at new bank partnerships is performing well (up 71% YoY), sales from ICICIBC (down 11% YoY) continues to drag overall banca growth.

* The management’s strategy on the direct channel, which contributes 11% to APE, remains to upsell to its existing customers through data analytics.

* Persistency improved across cohorts, with 13th/61st month persistency improving 90bp/100bp QoQ to 85.5%/55.7%.

* VNB growth of 32% YoY to INR4.7b in 1QFY23 was led by a higher share of higher margin products like Non-PAR savings, Annuity, and Protection.

Highlights from management commentary

* The management is satisfied with the performance of the 4Ps of its business strategy. It should achieve its objective of doubling FY19 absolute VNB by FY23. Beyond FY23, the VNB growth rate should be in line with that of the industry.

* The industry has addressed only 12-13% of the addressable market for Protection, and hence the opportunity size remains huge.

* Volatility in the capital market and muted demand for Retail Protection drove the weakest sales performance from the ICICIBC channel.

Valuation and view

IPRU has maintained a steady traction in VNB growth, led by a healthy product mix and APE growth. The share of banca (excluding ICICIBC) has risen to 15% v/s 4% in FY19, thus aiding growth and diversification in the distribution mix. The increase in agent recruitment and the strong pace of adding new partnerships will continue to support premium growth. The idea of approaching customers with a wider product bouquet, through all channels, will further boost premium growth. We expect VNB margin to improve marginally and expect IPRU to deliver 18%/24% CAGR in new business APE and VNB over FY22-24, thus enabling an operating RoEV of 17% in FY24. We maintain our Buy rating with a TP of INR630/share (2.1x FY24E EV).

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