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SBIL rides on guaranteed business to surprise on margin

Result Highlights

* VNB margin: Calculated VNB margin for 1QFY23 rose 340bps QoQ and 689bps YoY to 30.3% (on effective tax rate basis)

* VNB growth: VNB de-growth/growth was at –20.7%/131.6% QoQ/YoY where the robust YoY growth is due to low base effect

* APE growth: New business APE de-growth/growth was at -29.6%/79% QoQ/YoY dragged sequentially due to seasonality of business

* Expense control: Expense ratio increased 249/101 bps QoQ/YoY to 11.5%, QOQ driven by increase of 74bps in commission ratio and 175bps in opex ratio

* Persistency: 37th month ratio de-grew/grew -116/151 bps QoQ/YoY to 69.8% whereas 61st month ratio de-grew/grew -17/472 bps QoQ/YoY to 51%

Our view – SBIL rides on guaranteed business to surprise on margin

VNB margin expansion was driven by change in product mix, mainly a rise in the share of Non-Par Guaranteed business: The newly launched Smart Platina Plus, which is a variant with income stream, did robust business, bringing in 30% of the total Non-Par business. While the share of Non-Par has risen to 28% of total APE, its share will stay broadly stable in a 25-30% range. There is no internal limit as such to the share of NonPar Guaranteed business and SBIL would do this business to meet the healthy demand that exists as long as hedging is possible. The margin of the new income-based Non-Par product is not too different from earlier products. With changing interest rates, the goal has been to maintain the spread for the Non-Par Guaranteed product and, therefore, the margin.

Apart from strength in Non-Par Savings, Par business made a relative comeback, when viewed from a YoY lens: Par product has grown 38% YoY to Rs 1.8bn NBP for the quarter. Earlier, Par had been affected due to a shift from Par to Non-Par but Par has made a comeback, driven by attractive products. ULIPs grew 42% YoY to an NBP of Rs 17.6bn for the quarter. ULIP growth has been generally healthier for SBIL than other players. Growth had been driven by equity ULIP but management is not certain how much this would be sustainable.

We maintain ‘BUY’ rating on SBIL with a revised price target of Rs 1675: We value SBIL at 3.0x FY24 P/EV for an FY23E/24E/25E RoEV profile of 21.2/21.1%/21.0%.

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