Buy Life Insurance Corporation of India Ltd For Target Rs.770 - Yes Securities
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Achieving VNB growth outcomes no easy task
Result Highlights
* VNB margin: Calculated VNB margin for 3QFY23 fell -62bps QoQ to 14.6%
* VNB growth: VNB de-grew -21% QoQ, due to de-growth in total APE and margin contraction
* APE growth: New business APE de-grew -18% QoQ, driven by de-growth in group business
* Expense control: Expense ratio declined -592bps/-202bps QoQ/YoY to 12.3%, QoQ driven lower by a decline of -717bps in opex ratio ? Persistency: 37th month ratio rose 463/412 bps QoQ/YoY to 65.3% whereas 61st month ratio rose/declined 58/-87 bps QoQ/YoY to 56.4%
Our view – Achieving VNB growth outcomes no easy task
Product mix changes and product re-pricing has had a negative impact on VNB margin: The ULIP product line, which is low-margin, has risen faster than other Non-Par products. Management states that LIC’s market share in ULIP is small and there is more headroom for this product line to grow. However, its impact on margin will be offset by Non-Par Savings (Non-ULIP) and Annuities. It may be noted that there have been 6 new product launches in 9M, all in the Non-ULIP Non-Par segment, barring one. On repricing, Annuity prices had been revised in August, which also impacted margin negatively. The repricing on Annuity products was done to make the product more competitive and growth will more than offset the negative impact on margin.
While banca is growing well from a low base, the agency channel has been relatively sluggish: The banca (including alternate) channel has grown 48% YoY and has contributed 3.50% to individual NBP in 9MFY23 compared with 2.56% in 9MFY22. On the other hand, the agency channel has grown 7.6% YoY. Agent count has been flattish over 9M since there have been agent dropouts along with recruitment. Management explained that agents are undergoing training on the new products and they would be back on the street in Feb and Mach with renewed vigour. From a longer-term perspective, LIC sees agent productivity improving significantly over 5 years.
We maintain ‘BUY’ rating on LIC with a revised price target of Rs 770: We value LIC at 0.7x FY24 P/EV for an FY23E/24E/25ERoEVprofile of 10.7/10.8/10.9%.We prefer IPRU, SBIL and MFS in the life insurance space.
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