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Gradually diversifying its distribution and product mix

VNB margin moderates on a revision in Annuity pricing

* NB margin moderates on a revision in Annuity pricing LICI reported a strong traction in 1QFY23 and printed APE of INR102.7b. VNB margin moderated 150bp QoQ to 13.6%, while shareholders’ PAT stood at INR6,829m in 1QFY23 v/s INR29m in 1QFY22. Individual NBP grew 36% YoY to INR109.4b in 1QFY23

* The Individual/Group business constituted 63%/37% of APE. Within the Individual business, the share of PAR products remained stable ~92%. In terms of NBP, the share of PAR products was lower at 70%. Annuity or Pension/ULIPs constituted the bulk of residual with a 23%/5% share. Both these segments saw a strong growth in 1QFY23. We expect the momentum to sustain, led by the introduction of new products.

* The 150bp QoQ moderation in VNB margin was driven by a revision in Annuity rates and a shift in the product mix sold within the Group business. This was offset by a positive impact of an assumption change (up 80bp). The upward revision in the Annuity rate was undertaken to bridge the gap with its peers and gain market share. Within the Group business, LICI sold more fund-based products that are usually a lower margin business

*  We revise our FY23/FY24 VNB margin by ~200bp/~100bp to 14.2%/14.6%, and raise our VNB estimate by 24%/18%. We expect LICI to deliver a 13% CAGR in APE over FY22-24, thus enabling 14% VNB CAGR. However, we expect operating RoEV to remain modest at 12.4%, given its lower margin profile than private peers. We maintain our Buy rating.

Plugging the gaps; the share of the banca channel in mix rises 120bp to 2.7%

* LICI reported a 20% YoY growth in net premium, led by a 35%/9% growth in the new/renewal business. PAT stood at INR6,829m in 1QFY23 v/s INR29m in 1QFY22.

* Individual NBP grew 36% YoY to INR109.4b in 1QFY23. The share of PAR products was stable at 70%, while Annuity or Pension/ULIP constituted 23%/5%. The share of Term plans remains low at 0.4%.

* Within the distribution mix, sales (Individual NBP) in the banca channel grew 135% YoY to INR2.9b in 1QFY23. However, this was on a low base. As a result, the share of the banca channel improved 120bp YoY to 2.7%. LICI is committed to driving higher sales in the banca channel, led by an expanded product suite and incremental focus on this channel.

* Growth in the agency channel remains strong (up 35% YoY) and constitutes 97% of the mix. Agents are being continuously trained to sell Non-PAR products. This will play an essential role in driving sales of the same.

Highlights from the management commentary

*  LICI continuously increased its market share in CY22.

* It launched two new Non-PAR products in 1QFY23. The management said it will focus on the launch of Non-PAR products only. It also launched a channel-specific product for the first time.

Valuation and view

LICI has all the levers in place to maintain its industry-leading position and ramp up growth in the highly profitable product segments (mainly Protection, Non-PAR, and Savings Annuity). However, changing gears for such a vast organization requires a superior and a well thought out execution. We expect LICI to deliver ~13% CAGR in APE during FY22-24, while VNB margin is likely to improve to 14.6%. However, we estimate operating RoEV to remain modest ~12.4% on a lower margin profile than its private peers. LICI’s valuation, at 0.7x FY24E EV, appears reasonable, considering the gradual recovery in margin and diversification in the business mix. We maintain our Buy rating with an unchanged TP of INR830 (0.8x FY24E EV).

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