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Strong volume and margin performance; better bancassurance lending structural advantage

SBI Life Insurance Company (SBI Life) has reported strong H1FY23 performance with APE growth of 21.5% YoY, VNB growth of 53% YoY and record VNB margin at 31%. The company maintains an outlook of 25% APE growth in FY23 and may register better traction than peers in key product categories like protection and non-par guaranteed. We expect this business momentum to continue and result in healthy core RoEV of 20% in FY23/24E. Maintain BUY.

* Non-par mix increased sharply in H1FY23: Total APE came in at Rs68bn, up 21.5% YoY. Key highlight of H1FY23 was the sharp increase in non-par mix from 12% in FY22 to 26% in H1FY23 and sharp decline in ULIP mix from 66% to 49% during the same period. Growth in non-par mix was driven by new product Smart Platina Plus, which was launched in Mar’22. Total protection/par mix increased from 10.8%/5.2% in FY22 to 11.3%/6%. Group savings improved from 3.8% in FY22 to 4.7%% in H1FY23 while annuity/group protection mix improved from 2.4%/4.3% to 2.9%/5.1%. Basis total APE, H1FY23 banca/agency mix remained stable at 63%/25%.

* VNB margin increased QoQ driven by increase in margin profile within non-par products. SBI Life’s quarterly VNB has grown an average Rs5bn in FY20 to Rs5.8bn in FY21 to Rs9.6bn in FY22 and now 10.6bn in FY23-TD (Rs12.6bn in Q2FY23), while VNB margin has increased to 31.7% in Q2FY23.

* Sensitivity to interest rates has increased. Sensitivity of embedded value to (+/-) 100bps in reference rates has increased from (-)1.8%/(+)2.1% in FY22 to (-)4.1%/ (+)3.6% in H1FY23. Sensitivity to decline 10% in equity value remains ~(-)1.6%.

* Volume levers include: (1) Growth in non-par/annuity product segment (230%/40% YoY in H1FY23 basis individual APE), (2) continued traction in ULIPs (company launched a new ULIP pension product in Q2FY23), (3) growth in new distribution (ex-SBI and agency). Ex-SBI banks now contribute 3% of total APE and the company has also tied up with India Post Payments Bank (IPPB), 4) number of individual agents has risen sharply from 146k as on Mar’22 to 162k as on Jun’22 and 178k as on Sep’22, (5) traction in pure protection product e-shield Next with embedded optionalities, and (6) continued traction in core bancassurance channel with increasing activation rate of SBI branches.

* Attractive valuations, maintain BUY: We estimate 17%/12% APE growth and margins of 31/30% each in FY23/24E. Based on current trends, these are tenable assumptions. This can put EV of FY23E/FY24E at Rs451bn/514bn, implying 2.8/2.4x FY23E/FY24E EV based on CMP, respectively. We maintain BUY on the stock with a revised target price of Rs1,640 (earlier: Rs1,585) based on 20x FY24E VNB. At our target price, SBI Life will trade at 3.2x FY24E embedded value. We believe stable and well-performing bancassurance should lead to industry-leading multiple for SBI Life.

* Risks include: Volatile interest rates and weak demand.

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