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Stable quarter; focus on topline growth outlook

ICICI Prudential’s 9MFY22 results were broadly on the expected lines. Since IPRU’s monthly new business numbers were already known, the key monitorables in the results were VNB margin, trends in protection and growth outlook. The key to management’s target of doubling FY19 VNB by FY23 is stronger APE growth in FY23 (on a relatively stronger base) as the scope of margin improvement is relatively limited. We maintain our Hold rating with a target price of Rs725.

* Results on expected lines; higher retention and launch of Return of Premium (RoP) product to support retail protection growth: The value of new business (VNB) grew 35% YoY to Rs13.9bn in 9MFY22, led by ~30% YoY APE growth to Rs51.3bn (from low base of 9MFY21) and 1ppt VNB margin expansion to 27.1%. IPRU maintains a sharp focus on the protection business. To mitigate the reinsurance price hike and utilize its capital efficiently, the company has increased its retention limit in retail protection to Rs10mn from Rs2mn. Additionally, the company has launched one RoP product to target its mass customer base with protection offerings. The higher retention strategy could mitigate the steep reinsurance price hike, but the outcome of this strategy will be evident in the coming years. Management has assured that their mortality assumptions remain prudent and that the increased retention does not reflect any changes to their risk management philosophy.

* Operating parameters broadly stable, no surprises from Covid-19: Operating parameters, including persistency, product mix and distribution mix (including ICICI Bank and other banca partners), were broadly stable. Management said that given the changes in the product mix and investment in distribution, the cost ratio will remain slightly elevated but it still remains one of the best in the industry. Covid-19 claims in Q3 were lower than anticipated, and that too included delayed claims estimations from previous quarters.

* Management confident of doubling FY19 VNB by FY23; looks achievable but FY23 APE growth holds key: Management sounded confident of delivering 2x FY19 VNB by FY23. We have built in 2.04x by FY23E. In FY19-22E, the VNB is expected to grow by ~74%, but ~63% of that growth has been achieved due to the margin expansion alone. With relatively limited room for margin expansion, the heavy-lifting part of VNB growth in FY23 has to be done by APE growth, which management is confident about due to wider product offerings and distribution channels starting to fire.

* Maintain Hold; reduce our TP to Rs725, implying a FY23E P/EV of 2.7x: Our TP change is the outcome of three minor changes: 1) Rollover to Mar’23 from Dec’22 leading to ~3% increase; 2) Reduction in VNB estimates by ~5% and; 3) Increasing cost of equity from 12.0% to 12.5%. We value IPRU based on the appraisal value method, using FY23E EV and then adding discounted VNB of future years. We assume: 1) 12.5% cost of equity; 2) 5% terminal growth rate of VNB in FY38; 3) FY23-38E APE CAGR of ~10% and FY23-38E VNB CAGR of ~10%; and 4) VNB margin (effective tax rate) of 28.1%, flat from FY24. Considering its volatile track record of growth, slightly poorer EV returns and a relatively tough road ahead, we believe that the implied multiples for IPRU need to be at a discount to peers.

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