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Business momentum remains strong with available growth volume and margin levers

SBI Life reported strong Q3FY22 performance with 30%/54% YoY APE/VNB growth in Q3FY22 along with stable VNB margin of 25.7%. However, the bigger takeaway is the combination of multiple levers ahead for volume and margin improvement, which include new products, pricing and improved distribution efficiency. We expect the business momentum to continue and should result in record high core RoEV of 18% in FY22E which is a potential rerating event. Maintain BUY.

* QoQ VNB growth of 13% and VNB margin at >25% is superlative performance for Q3FY22. Management commentary remains strong on volume as well as margin outlook ahead. In absolute terms, VNB has been Rs10.3bn/11.7bn in Q2/Q3FY22. We expect VNB to record ~45% growth in FY22E.

* SBI Life has been an outperformer in 9MFY22 on multiple counts. This includes absolute VNB growth (66%), retail protection growth (27%), growth in bancassurance APE (34%) and growth in agency APE (42%).

* Levers for volume growth include: (1) Attractive rates being offered in non-par product Platina, (2) continued traction in ULIPs, (3) growth in new distribution (ex SBI and agency), (4) launch of new pure protection product e-shield Next with embedded optionalities, and (5) continued traction in the core bancassurance channel with increasing activation rate of SBI branches (61% of the branches now sell more than Rs50k and up to Rs300k premium per month while more than 85% of the branches sell atleast Rs25,000 premium per month. The productivity metrics are also on the rise for agents at Rs270k per agent in 9MFY22 compared to Rs240k in H1FY22 and ~Rs233k in in FY21. The activation rate for agents is 16%, which can increase to 20- 25%. Corporate agents (3% of APE) have also grown 45% in 9MFY22.

* Margin levers include: (1) Active pricing strategy across products; (2) expected increase in non-par savings product mix from 9% in H1FY22 to ~12% in FY22E; and (3) new pure protection product e-shield Next, which was launched in Aug’21. No incremental price hike is required in protection considering the already-taken higher reinsurance rates during the launch of e-shield Next. Agency share of protection remains small at 3% (17% for banca) and has room to improve. There is no change in retention policy for the company.

* Attractive valuations; maintain BUY: Based on current trends, 15% APE growth in FY23E/FY24E and margins of 25%/27% (9MFY22 margin is 25.5%) are tenable assumptions. This can put the EV of FY23E/FY24E at Rs480bn/565bn implying 2.6/2.2x FY23E/FY24E EV based on CMP. We maintain BUY with a target price of Rs1,540, based on 25x FY23E VNB. At our valuation, SBI Life will trade at 3.2x FY23E Embedded Value.

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