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Buy SBI Life Insurance Company Ltd For Target Rs.1,137

Multiple triggers ahead

Traction in Credit protect to aid margin expansion

Credit protect business had been lackluster for SBI Life in H1FY21 (‐57%), however, in Q3FY21, it has shown a strong come back with 20% growth. In conjunction with uptick in new retail lending, SBI Life’s strategy to increase attachment rates for existing loans and access to SBI’s huge retail loan portfolio book is expected to continue facilitating this growth momentum. Furthermore, Credit protect is one of the most margin accretive segment (in line with Pure term), which shall assist scaling up of SBI Life’s VNB margin and bridging its gap with the other listed players.

SBI Life at greater advantage from recovery in ULIP business

SBI Life’s product mix is heavily tilted towards ULIP as it derives 62% of its total APE from ULIP business. The recovery exhibited by ULIP on account of strong equity market performance, reduced income uncertainty and expanding ticket size is expected to positively contribute to SBI Life’s premium growth. In addition, as Bancassurance is a key distribution channel for selling ULIP products, increased footprints in bank branches, we believe the demand for ULIP shall see a faster recovery.  

Well positioned to seize the opportunity in Non‐Par segment

The benign interest regime in addition with favorable yield curve providing an adequate hedging opportunity in the form of FRA has posed an excellent opportunity for the Non‐Par products. HDFC Life and Max life had been quick enough to capitalize this opportunity and derive 1/3rd of their APE from Non‐Par product. However, both these players have expressed a conscious view and are deliberately restricting any further expansion in the share of Non‐Par segment to maintain a healthy balanced product mix.   This provides an opportunity for players such as SBI Life to increase their presence in Non‐par segment as it currently derives merely 11% of its business from this segment. We believe, the growth in Credit protect and Non‐Par to move at a faster pace compared to ULIP, thereby, moving towards a margin accretive better product mix.  

Significant stock underperformance, cheap valuations, Conviction BUY  

As compared to NBP growth of 6.5% yoy private players and a 1.7% yoy decline for the industry, SBI Life has demonstrated a relative strong performance for 9MFY21 with 13% yoy growth. Amongst top private players only Max Life with a 15% growth has been able to outperform. HDFC Life with 11% and ICICI Prudential with a decline of 3%, have underperformed. Despite the robust performance, the stock has relatively underperformed with just 8% return as compared to 33% for HDFC Life, 29% for ICICI Prudential and 48% for Max Life over the past eight months. We believe, this makes SBI life a good investment opportunity with favorable risk reward ratio.

Trading at FY23E P/EV of 2x as compared to 2.2x of ICICI Pru and 4.0x for HDFC Life in spite of being the lowest cost operator and better growth as compared to ICICI Pru

Result Highlights

* NBP – NBP was at 54bn and registered a growth of 9%, which was in line with our forecast. The growth was led by a strong growth of 16% in single premium while First year premium registered a growth of 5%.  

* APE – APE at Rs35bn was slightly lower than our estimates of Rs35.7bn. APE grew by 3.6% yoy and 29% qoq. The growth was led by 89.5% jump in Non‐Par business and doubling of Individual Protection business.   

* APE Mix – Share of Protection surged 303bps and that of Non‐Par increased by 466bps. This was offset by decline of 149bps, 481bps and 52bps in share of Par, ULIPs and Group business respectively.  

* VNB & VNB Margin – Q3FY21 VNB at Rs7.6bn was higher than our forecasts of Rs6.9bn, while VNB margin at 21.7% was above our estimates of 19.4%. On a yoy basis VNB margins expanded by 71bps.  

* Persistency improvement – Sequentially, persistency except for 49th Month saw a decline across all time periods. On a yoy basis only 61st month persistency saw a decline.

* Opex and commission ratios – Commission ratios remained stable on yoy basis, however, witnessed an increase of 58bps on sequential basis. Whereas, Opex ratio improved by 91bps yoy to 4.6%. and remained stable sequentially.  

* Profits  ‐  PAT came at Rs2.3bn, which was a de‐growth of 40% on y/y basis and 22% sequentially on back of new business strain.

* Channel Mix – Mix of other channel increased by 63bps on YoY basis and that of banca grew by 261bps. On QoQ basis, share of other channel contracted by 656bps.

* Change in forecasts – 9MFY21 APE is 77% of our FY21 estimates and 81% VNB share of our forecasts.  

* Valuations ‐ The stock currently trades at FY23E P/EV of 2x.  

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