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Profitability surges; APE and VNB trajectory on a strong footing

Gradual diversification in the product and channel mix underway

* LICI reported a strong financial performance in 2QFY23, with a 48% YoY growth in APE to INR252b in 1HFY23. VNB grew 132% YoY to INR36.8b as VNB margin improved by 530bp to 14.6% in 1HFY23. VNB margin rose 160bp QoQ to 15.2% in 2QFY23. Shareholder PAT rose 10x YoY to INR159b in 2QFY23 due to the INR143b transfer from non-PAR to the shareholders’ account as it relates to accretion on available solvency margin.

* The Individual/Group business constituted 53%/47% of APE in 1HFY23. Within the Individual business, the share of PAR products remained stable ~92%. In terms of NBP, the share of PAR products was lower at 68%. Annuity/Pension and ULIPs constituted the bulk of the residual at 24%/6%. We expect the momentum to sustain led by incremental focus and the introduction of new products.

* The 160bp QoQ increase in VNB margin was due to higher margin in the Group segment and Individual PAR business. However, the same was partially offset by a 470bp QoQ decline in margin in the individual Non-PAR segment, led by a revision in Annuity rates to make it more competitive v/s its peers. Within the Group segment, a higher share of Annuity drove the 230bp QoQ expansion in margin to 17.6% in 1HFY23.

* We raise our FY23/FY24 VNB margin higher by ~160bp/~180bp to 15.7%/16.4%, and raise our VNB estimate by 24%/28%. We now expect LICI to deliver a 20% CAGR in APE over FY22-24, thus enabling 28% VNB CAGR. We expect operating RoEV to remain modest at 11.8%, given its lower margin profile than private peers. We maintain our Buy rating.

EV compounding remains soft; the share of banca on the rise

* LICI reported a 27% YoY growth in net premium, led by a 53%/2% growth in the New/Renewal business. Total NBP grew 51% YoY to INR780b in 2QFY23, led by 71% growth in the Group segment. However, the same was partially offset by a 2% YoY decline in Individual NBP.

* On an NBP basis, the business mix was stable, with the share of PAR products marginally lower QoQ at 68%. Annuity/Pension and ULIP formed the bulk of the residual at 24%/6%. Term products contributed only 0.4%.

* Sales (Individual NBP) in banca and the alternate channel grew 63% YoY to INR8.3b in 1HFY23. This channel now contributes 3.4% to overall sales v/s 2.3% in 1HFY22. Incremental focus and a wider product offering will continue to drive higher sales from this channel.

* Growth in the agency channel (Individual NBP) was soft (down 3% YoY) at INR130b. However, LICI is continuously training its agents to sell non-PAR products. The agency channel contributed 96% to individual NBP in 1HFY23.

* EV growth stood flat YoY at INR5.4t, and thus remains a concern. As contribution of VNB to EV is marginal, we need to monitor other variables for a better understanding of the EV drivers.

Highlights from the management commentary

* The management aims to achieve a product mix of 75:25 between PAR and the non-PAR business in a couple of years.

* Moderation in margin in the Individual Non-PAR business is due to the re-pricing of Annuity to make it more competitive v/s its peers.

* In line with its strategy of launching only Non-PAR products, three new products were launched in 1HFY23. This includes LIC Bima Ratna, LIC Dhan Sanchay, and LIC Pension Plus.

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 Savings, and Annuity). However, changing gears for such a vast organization requires a superior and a well-thought out execution. We expect 20% APE CAGR over FY22- 24, thus enabling 28% VNB CAGR. However, we expect operating RoEV to remain modest at 11.8%, given its lower margin profile than private peers. Valuation at 0.6x FY24E EV appears reasonable, considering the gradual recovery in margin and diversification in the business mix. We maintain our Buy rating with a revised TP of INR870 (0.8x FY24E EV).

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