Buy SBI Life Insurance Ltd For Target Rs.1,900 by Motilal Oswal Financial Services Ltd
VNB margins in-line with estimates; guidance maintained
Beat on APE and absolute VNB
* SBI Life Insurance (SBILIFE) reported strong performance in 3QFY25. APE grew 13% YoY to INR69.4b (5% beat). For 9MFY25, it grew 11% YoY to INR159.7b.
* Absolute VNB grew 11% YoY to INR18.7b (5% beat). For 9MFY25, it grew 6% YoY to INR42.9b. VNB margins came in at 26.9% vs. 27.4% in 3QFY24 and 26.9% in 2QFY25 (est. 27%). The 46bp YoY margin contraction was mainly due to the shift of the product mix toward ULIPs.
* In 3QFY25, shareholder PAT grew 71% YoY to INR5.5b (10% beat on estimates). For 9MFY25, it grew 48% YoY to INR16b. This strong growth was supported by higher investment income from the non-par segment and healthy growth of 15% YoY in the renewal book.
* Management has guided for individual APE/total APE to be in the range of 14-17%/10-11% for FY25 (in-line with 9M). Absolute VNB growth is expected to be in the range of 8-10%. Long-term VNB margins are likely to be in the range of 27-29%.
* We expect SBILIFE to deliver 15%/14% CAGR in APE and VNB over FY24-27, while RoEV is likely to remain at ~19% over FY27. We have largely maintained our VNB estimates as higher VNB margins have been offset by slower APE growth. We reiterate our BUY rating on the stock with a TP of INR1,900 (premised on 2.1x Sept’26E EV).
ULIP share in individual APE increases to 64% in 3QFY25
* SBILIFE reported 8% YoY growth in NBP to INR105b. For 9MFY25, it remained flat YoY at INR262.6b.
* Gross premium grew 11% YoY to INR250b (in-line) on account of 14% YoY growth in the renewal premium at INR144.7b (in-line). The first-year premium grew 14% YoY to INR64.5b and the single-year premium remained flat YoY at INR40.8b.
* The total cost ratio was 10.2% vs. 10.6% in 3QFY24. The commission ratio was 4.8% vs. 5% in 3QFY24. The operating expense ratio was 5.4% vs. 5.6% in 3QFY24. Costs remained high due to an increase in agent count, branch expansions, and enhancing digital initiatives.
* On the product front, ULIP grew 25% YoY, contributing 64% to the individual APE, supported by a positive movement in equity markets and consumer preferences. The group business has faced headwinds, leading to a decline in NBP contribution to INR64b in 9MFY25 from INR82.4b in 9MFY24. The pure protection segment witnessed a pickup, with its share increasing to 37% in 3QFY25.
* It recently launched a new product in the non-par segment (Smart Patina Supreme), which has received a good initial response. APE collections have reached INR2.5b in 20 days, and the momentum is expected to continue, subject to interest rate risks.
* On the distribution front, SBILIFE will continue to invest in expanding its agency channel, recording 30%+ growth, while the banca channel is expected to grow 10%+. With the launch of Agency 2.0, the productivity of agents has improved 19% YoY and the growth contribution in the non-par segment has been in the higher double digits. The digital channel at SBIN has attracted over 50K customers in the protection segment. It has also led to 52% growth in online selling.
* Credit Life APE grew 17% YoY to INR1.7b in 3QFY25 and management guides the growth momentum to sustain.
* Strong growth has been observed in the 13th month and 61st month persistency (based on premium) in 9MFY25, increasing 83bp and 521bp, respectively. This is attributed to the continuous focus on improving the quality of business and customer retention.
* AUM grew 19% YoY to INR4.4t (in-line with our estimates).
Highlights from the management commentary
* The company has added 46 new branches in the last 12 months, and management guides to add additional 40 branches in the coming year to expand its presence to tier 3 and 4 cities.
* There has been no change in the commission structure due to a minimal impact of new surrender guidelines, as the product mix is skewed toward ULIP.
* The company will continue to focus on expanding the agency and banca channels with growth guidance at 29-30%/10%, respectively, for FY25.
Valuation and view
SBILIFE reported a strong performance during the quarter, with APE and VNB reporting 5% each above our estimates. VNB margin contracted 46bp YoY to 26.9% in 3QFY25 due to a shift toward ULIP. Continued investments in the agency channel and digital enhancements will boost overall growth. Further, the impact of surrender charges is likely to be minimal. We expect SBILIFE to clock 15%/14% CAGR in APE and VNB over FY24-27, while RoEV is likely to remain at ~19% over FY27. We have largely maintained our VNB estimates as higher VNB margins have been offset by slower APE growth. We reiterate our BUY rating on the stock with a TP of INR1,900 (premised on 2.1x Sept’26E EV).
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