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Post the strong performance of Retail new business during Jul-Aug 2023, SBILIFE shares have not moved much, given investor concerns on such growth being a factor of ULIP-led growth and that, hence, margins are likely to come under pressure. However, our channel checks and discussions with the company suggest that these concerns are unfounded and that Company is well on track to deliver ~20% Retail APE growth in FY24 with VNB margin upholding at ~29%. Overall, SBILIFE’s franchise strength powered by brands and distribution remains intact, thus giving it an edge in terms of ability to distribute a variety of life insurance products. Against this backdrop, we increase FY24- 26E APE and VNB by ~2-3% each, and reiterate our BUY rating on the stock with Sep-24E target price of Rs1,690/share (FY25E P/EV: 2.6x).

Nothing unusual about the recent growth; margin trajectory remains stable Recent two months’ growth for SBILIFE illustrated ‘business as usual’, and is driven by the good show in the SBI channel as well as improvement in the agency channel. Growth remains balanced in terms of products as well, and is not extraordinarily driven by an excessive ULIP push. Some of the short-term shift in the product mix is driven by product launches, channel mix and market environment which is quite normal; on full-year basis, the company is well on track to deliver overall product mix of ~55% ULIP and ~45% non-ULIP (Par, Non-par, Annuity, Protection, etc). Given the yield curve shift this year and focus on growth, industry VNB margins are expected to stay flat or see a minor decline, with SBILIFE also seeing some moderation. However, both VNB margin and APE growth for FY24 appear to be shaping up better than our earlier estimation and we up our FY24E APE growth (to 15.4% from 13.6%) and VNB margin (to 28.5% from 27.9%).

ULIP, one of the most transparent LI products; ability to sell ULIP, a strength “Money doesn't grow on trees” is the most frequently-faced reality by life insurers — when selling savings products, they need to balance the interest of policyholders, employees & distributors, and shareholders. In this context, ULIP in its current avatar — where the gap between gross yield and net yield is explicitly capped by the regulator, leading to limit on shareholders’ return and operating expenses — is clearly the most transparent and customer friendly life insurance savings product. However, the ability of a life insurer to sell a ULIP is governed by the product’s cost structure, as the room for commission and operating expense is limited. And this is the arena where SBILIFE has the strength, of low-cost distribution and operations.

We revise our estimates upwards; reiterate BUY with Sep-24E TP of Rs1,690 To factor in the past two months’ (Jul-Aug) strong growth trends and the likelihood of margin improvement on the back of pick-up in non-par savings and credit life performance in H2, we increase our APE growth estimates for FY24 from 13.6% to 15.4% and our VNB margin for FY24E to 28.5% from 27.9%. Overall, FY24-26E VNB increases by ~3-4%. We reiterate our BUY rating on the stock, with our Appraisal Value methodbased Sep-24E Target Price of Rs1,690/share (implied FY25E P/EV: 2.6x). 

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