IGI Logo

As good as it gets

SBI Life continued to report strong performance in H1FY23 and surprised with its 31% VNB margin versus our 28.8%, driving VNB to Rs21.2bn, 8% ahead of our estimates. The slowdown in APE growth in Q2 was largely known and had a strong base effect. Going ahead, management remains confident of delivering robust growth with margins stable around current levels. We believe SBI Life is on the right track with its powerful distribution channels firing up and delivering better-than-industry growth and as its product mix and cost efficiencies are offering best-in-industry margins. We have marginally tweaked our estimates to reflect H1 developments. We reiterate our Buy rating on the stock with a revised TP of Rs1,675. Powered by its formidable combination of brand and distribution reach, SBI Life remains our top pick in the sector.

* Impressive margin performance continues: SBI Life reported a 6.3ppts YoY increase in VNB margin to 31% in H1FY23. Margin improvement was largely driven by strong 17ppts increase in the share of non-par savings in the product mix (H1FY23: 26%; H1FY22: 9%). APE for H1FY23 came at Rs68.2bn, implying Q2FY23 APE of Rs39.3bn (-1.3% YoY) on account of a strong base of Q2 last year. Embedded value and AUM at H1FY23 came at Rs424bn (+16% YoY) and Rs2.83 trillion (+16% Yoy), respectively. On net basis, results were impressive and demonstrated the ability to sustainably deliver VNB margin of 28-31%.

* Operating parameters continue to improve: SBI Life continues to improve on key operating parameters such as persistency across most cohorts and opex ratios. Its cost leadership (commission + opex) is well established and continues to further improve. So far in FY23, the opex, persistency, and mortality experiences have been better than assumptions built in its EV and VNB, and this leaves some scope for positive operating variances by year-end. On the capital front, the solvency ratio at H1FY23 was robust at 219% (Q1FY23: 221%).

* With all its distribution engines firing up, growth likely to bounce back; Management guides for a stable margin trajectory: SBI Life should see a bounce back in its growth trajectory with the SBI channel (~60% of total) continuing to deliver good performance, increased agent headcount (178K), and newer distribution partners showing stronger growth (albeit on a lower base). The company is positive about its new tie-up with India Post Payments Bank and believes that, given its brand and deep reach of India Post, it should see a long growth runway among the masses of rural India. The minor decline in APE in Q2 was an outcome of a much stronger base effect of Q2 last year. Management remains confident of delivering 20%+ APE growth in FY23 and, at the same time, maintaining its VNB margin at a stable range of 28-31%. The cost leadership advantage of SBI Life added with continued operating leverage playout drives the confidence of a stable margin trajectory, even with some changes in the product mix.

* Tweak estimates to reflect H1 developments; Reiterate Buy with a revised TP of Rs1,675: We have tweaked our FY23-25E estimates to reflect H1 developments. This has broadly led to unchanged APE numbers and a slight increase in VNB margins, driving 1-3% increase in VNB. Our EV estimates have come down by ~1% to reflect the impact of higher yield-led MTM losses. We have increased our cost of equity to 13.5% (previous: 12.5%), in line with the increase for other peers. Using the appraisal value method, we have arrived at our revised Sep-23E fair value TP of Rs1,675 (previous: Rs 1,710) and reiterate our Buy rating on the stock. SBI Life remains our top pick in the sector.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer