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Volume leadership continues to impress; Core ROEV likely to surpass 20%

SBI Life Insurance Company (SBI Life) reported strong 9MFY23 performance with APE growth of 20% YoY, VNB growth of 44% YoY and VNB margin at 29.6% YoY. While there has been a sequential decline of 400bps in Q3FY23 margin due to increase in ULIP mix, we expect the overall business momentum to continue and result in a healthy core RoEV of more than 20% in FY23E/FY24E. Distribution advantage with the parent branch network and low cost ratios remain structural business moats. Risks include lower demand in high-margin segments such as non-par and protection, and introduction of open architecture within the SBI channel.

* Maintain BUY with a target price of Rs1,600 (earlier: Rs1,640), or 3x FY24E EV (long-term average stands at 2.5x). We have changed our valuation method from VNB to EV multiple considering the volatility in interest rates / equity markets, which impacts EV (more so with higher non-par mix). We factor-in a VNB margin of 30%/32% with APE growth of 22%/12% for FY23E/FY24E. This will likely result in an EV of Rs532bn by FY24E adjusted for variances (we take into account a likely impact of 100bps increase in interest rates in each year of FY23E and FY24E based on sensitivity to EV – see table 3 and 4 inside).

* We are not worried about high ULIP mix and an intermittent margin drop as seen in Q3. We prefer a combination of sustained volume growth with margins reflective of product mix and, in turn, demand.

* ULIP mix increased in Q3FY23, but there has been good growth in all other key segments in 9MFY23: In terms of 9MFY23 total APE, non-par growth remained strong at 151% YoY followed by annuity / group protection / par / individual protection at 31% / 25% / 23% / 11.5% YoY. Group savings declined 9% while ULIP grew 1.6% YoY (+77% QoQ) in the same period.

* Distribution highlights – noteworthy outperformance of SBI channel: SBI and the regional rural banks associated with it grew by 25% in 9MFY23 accounting for 70% of total individual APE while agency share was 26% with growth of 15% (193k agents in total with net addition of 45k in 9M, which should help growth ahead). Partnerships accounted for ~4% of total APE with growth of 42% in 9MFY23. Basis 9MFY23, non-par outperformed in agency and other channels while both par and non-par portfolios outperformed in the banca channel. On QoQ basis, there was very strong outperformance of ULIP in banca / agency / other channels (82% / 63% / 50% QoQ growth

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