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Business momentum remains strong, attractive valuations

There is a possible volume traction in life insurance companies as evinced by premium sales in the months of Dec’20, Jan’21 and Feb’21. There will be growth levers ahead which include (1) revival of traditional bancassurance channels (new tie-ups will become productive), which were subdued due to covid, (2) opening of medical tests for protection, (3) revival of ULIP sales with broad market performance and (4) weak base of H1FY21. In most of these parameters, SBI Life is better placed among peers. A mark-to-market exercise indicates possible Rs200bn new business premium and Rs110bn APE in FY21E which is a commendable achievement on a large base. Based on average 15% APE growth and ~21.5% VNB margin for FY22/23E, SBI Life (SBLI) may reach an embedded value of Rs443bn in FY23E. Higher margin (possible) and higher APE growth (possible) provide an upside risk. At 2.2x FY23E P/EV, valuations remain attractive.

* Maintain BUY with FY23E-based target price of Rs1,223. Basis effective tax rate, the embedded value of SBLI is expected to grow from Rs276.4bn in FY20 to Rs443bn in FY23E driven by the addition of Rs75bn unwind and Rs81bn of VNB, which has grown from Rs16bn in FY18 to Rs22bn in FY20. VNB margin (basis effective tax) is expected to be 20.5/21.5/21.5% in FY21/22/23E, respectively. This can increase with higher protection mix and favourable revision in assumptions. The VNB walk till 9MFY21 continues to have the same assumptions as of FY20-end. As experience improves (persistency, mortality, cost), there is scope for improvement in VNB margins if volumes support in Q4FY21.

* FY21 business momentum recovering on APE, NBP and sum assured. Growth in individual APE, total APE and individual sum assured has made a V-shaped recovery for SBI Life (refer chart 1 to 4). New business premium / APE can close 20%/5% higher in FY21E and individual sum assured market share has climbed back to 10% in Feb’21. Volume growth will be aided by banca tie-ups (UCO Bank in Jun’20, Yes Bank in Sep’20, Indian Bank in Dec’20, Indian Overseas Bank in Mar’21).

* FY21 can end with 5% APE growth, 20% NBP growth and flattish VNB. This is on assumption that SBI Life is able to clock the same numbers in March 2021 as in March 2019. This will lead to Rs110bn APE, Rs200bn NBP and Rs22bn VNB in FY21E.

* There is a possible upside to VNB estimates along with expansion in multiples: Volume growth track record (average 25% APE growth in FY15-20) and improving margin outlook (levers being increasing protection mix, volume growth, improving persistency and cost efficiency) underline a strong business franchise. Against this backdrop, our APE estimates (~15% growth in FY22/23E) and margin estimates (~21.5% for FY23E) do have an upside risk. Our VNB multiple in case of appraisalbased valuation (25x FY23E EVNB) as well as 2.2x FY23E P/EV remains low.

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