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Topnotch performance

SBILIFE reported an impressive all-round performance in Q1FY23 with both growth and margins surprising positively. In terms of overall APE growth and retail protection APE growth, SBILIFE has bucked the trend of slowdown seen at peers. Driven by the exceptionally strong growth in non-par guaranteed saving products, VNB margins grew 6.7ppts YoY to 30.4%, while APE saw 79.0% YoY growth on a favorable base (3Y CAGR: 16.0%). The solid Q1 performance underscores the strength of the formidable combination of brand and distribution reach in terms of geography and demography that SBILIFE has. Management remained confident about delivering growth and maintaining margin trajectory. With its distribution channels firing on all cylinders, expanding product offerings and increasing acceptance, we expect robust growth to continue in FY23 and beyond. Based on the risk-reward proposition, SBILIFE remains our top pick in the sector. We reiterate our Buy rating with a revised target price of Rs1,710.

* Solid all-round performance: SBILIFE delivered a quarter that was impressive on all counts and bucked all the headwinds faced by peers. VNB margins jumped 6.7ppts YoY to 30.4%, and stood 4.5ppts above FY22 levels. The margin improvement was largely driven by an increase in non-par savings in product mix to 28.3% from 6.6% a year ago. The strong offtake of its non-par guaranteed products (Smart Platina Plus variants) across distribution channels resulted in the high-margin nonpar savings products gaining share in product mix. On a Delta wave-affected quarter base, the APE growth was strong at 79% YoY. Even on a 3Y CAGR basis, the APE growth was impressive at 16%. Driven by its Return of Premium (ROP)-led individual protection offering, the company delivered an impressive 54% growth in retail protection APE YoY, a trend opposite to its peers that are struggling with declining retail protection. The accounting profit growth was a bit muted, but this was largely due to the new business strain caused by the exceptional growth in non-par savings. In sum, we are of the view that SBILIFE’s Q1FY23 performance was a top-class act (Exhibit 1-7).

* Operating parameters stable or improving: Operating parameters, including persistency, product mix, distribution mix and cost ratios, were broadly stable or saw improvement. SBILIFE remains the cost leader in the industry. Given the changes in product mix, the slight increase in commission comes on expected lines. As far as the risk management around hedging of this nonpar guaranteed business is concerned, the company should be able to hedge the interest rate risk by using tools such as Forward Rate Agreement (FRA).

* Strong growth outlook; margin trajectory to be an outcome of product mix: With all its old warhorse distribution channels (SBI and agency) re-energized and performing strongly and new banca partners starting to perform well, the growth outlook is strong for the coming years. Management expects the current strong growth momentum to sustain. However, given the strong growth base of FY22, we build in ~18% APE growth for FY23 and ~15% for the next few years. On the margin front, the VNB margin of SBILIFE at 30.4% is already above the 30% medium-term margin guidance. Going ahead, the eventual margin trajectory will be an outcome of product mix. The continued play of operating leverage (led by distribution and opex efficiencies) remains a constant positive driver for SBILIFE’s margins. Overall, helped by strong VNB generation, ~18-19% operating RoEV generation looks realistic in the coming years.

* Raise margin estimates; reiterate Buy with a TP of Rs1,710: Reflecting Q1FY23 results, we have made changes to our estimates (Exhibit 10), leading to a 1.3-1.5ppt increase in FY23-25E VNB margins and a 5-7% rise in VNB estimates. Driven by the margin increase and roll forward to Sep-23E, our appraisal value-based TP increases to Rs1,710 (Exhibit 8), implying a FY23E P/EV of 3.7x (Exhibit 9). Given the formidable combination of brand and distribution, SBILIFE is among the best plays in the sector to deliver robust APE growth with sustained margin expansion. Based on risk-reward, SBILIFE is our top pick in the sector. In our view, notwithstanding the short-term volatility, SBILIFE is a classic EV compounding machine.

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