Buy Life Insurance Corporation Ltd for the Target Rs 480 by Motilal Oswal Financial Services Ltd
Strong performance; 730bp YoY expansion in VNB margin
* In 1QFY27, LIC reported net premium income of INR1.3t, which grew 7% YoY. Renewal premium rose 3% YoY to INR618b and single premium grew 9% YoY to INR564b. First-year premium grew 22% YoY to INR92b.
* New business APE increased by 8% YoY to INR137b. Individual APE grew 7% YoY to INR75.3b, while group APE rose 10% YoY to INR61.6b.
* Absolute VNB grew 61% YoY to INR31b, resulting in a 730bp YoY expansion in VNB margin to 22.9%. Shareholder PAT rose 23% YoY to INR135b.
* Management expects VNB margin expansion to continue in the next few quarters. LIC is on track to achieve mid-20% VNB margin, closer to the industry average, with some uncertainty from interest rate movements.
* We have increased our VNB margin estimates for FY27/28 considering the strong performance in 1QFY27 and rising contribution of non-par. We expect operating RoEV in the range of 11.5-12%. Reiterate BUY with a revised TP of INR480 (premised on 0.6x FY28E EV).
Highlights from the management commentary
* Non-par momentum is likely to sustain even if ULIPs recover, with limited risk of product cannibalization. Protection is expected to maintain its growth trajectory over the coming quarters.
* Group business contributed 29.4% of VNB, while non-par contributed 49.3% of VNB and par contributed 19.4%.
* LIC aims to continue growing its par business while outpacing the market in nonpar, supported by new product launches and product enhancements.
Valuation and view
* LIC continues to report strong VNB margin expansion, led by the increasing contribution of the non-par business as well as improving product-level margins. The growth trajectory is expected to improve as ULIP regains momentum, along with higher ticket sizes, improving agency channel productivity and continued growth in alternate channels. A shift toward higher-margin non-par products, cost optimization, and improvement in persistency will boost VNB margin going forward.
* We have increased our VNB margin estimates for FY27/28 considering the strong performance witnessed in 1QFY27 and rising contribution of non-par. We expect operating RoEV in the range of 11.5-12%. Reiterate BUY with a revised TP of INR480 (premised on 0.6x FY28E EV).
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