IGI Logo

VNB margins contract due to shift in product mix

Focus on protection and non-par to improve margins in FY25E

* SBI Life Insurance (SBILIFE) reported a weak performance in 2QFY25. APE grew 3% YoY to INR53.9b (11% miss). For 1HFY25, it grew 9% YoY to INR90.3b. ? Absolute VNB declined 3% YoY to INR14.5b (14% miss). For 1HFY25, it grew 3% YoY to INR24.2b. The management expects VNB growth to remain in the range 12-15% in FY25.

* VNB margins came in at 26.9% vs. 28.5% in 2QFY24 and 26.8% in 1QFY25 (est. 28%).

* However, the management expects margins to remain in the range of 26- 27% in FY25 on the back of new product launches in the protection segment and a minimal impact of surrender charges.

* In 2QFY25, shareholder PAT grew 39% YoY to INR5.3b (in line). For 1HFY25, it grew 38% YoY to INR10.5b.

* We expect SBILIFE to deliver an 18% CAGR each in APE and VNB over FY24- 27E, while RoEV is likely to remain at ~20% over FY27. Due to strong growth in ULIPs and a blip in protection sales, we have cut our APE/VNB estimates for FY25. We reiterate our BUY rating on the stock with a TP of INR2,100 (premised on 2.3x Sept’26E EV). ULIP share in total APE increases to 65% in 2QFY25 ? SBILIFE reported a decline of 13% YoY in NBP to INR 87b. For 1HFY25, it declined 3% YoY to INR157.3b. Gross premium grew 1% YoY to INR204.1b (8% miss). Renewal premium grew 16% YoY (5% beat).

* VNB margins contracted 160bp YoY to 26.9% (est. 28%) on account of a shift in the product mix toward ULIPs and a delay in product launches of protection business. However, sequentially, the margin improvement was driven by repricing of non-par products. The company expects non-par margins to further improve in 3QFY25.

* The total cost ratio was 9.7% vs. 8.4% in 2QFY24. The commission ratio was 4.1% vs. 3.9% in 2QFY24. The operating expense ratio was 5.6% vs. 4.4% in 2QFY24. Costs remained high owing to an increase in agent count and enhancing digital initiatives.

* On the product front, ULIP grew 16% YoY, contributing 65% of total APE, aided by positive movement in equity markets and consumer preferences. The protection business declined 29% YoY due to delayed product launch. It has recently launched a new product on the YONO platform, which will improve the contribution going forward.

* The credit life segment witnessed flat growth as penetration levels in the bank were lower than expected. The management expects 9-10% growth in credit life for FY25, backed by an ease in the underwriting process with ticket size for housing loans increasing

* On the distribution front, SBILIFE will continue to invest in growing the agency channel and expects 30%+ growth in 2HFY25. Slower growth was seen in the banca channel as the company is prioritizing the digital platform and the usage of data analytics, which will help in scaling the channel and improving customer engagement in the long run. The management guides for 9% growth in the banca channel in 2HFY25.

* Investing in building the online business channel has led to 73% YoY growth in IRNB for the digital channel.

* On a YoY basis, except for the 49th month (flat YoY), persistency improved across all cohorts. AUM grew 27% YoY to INR4.4t in 2QFY25 (in line).

* For 2HFY25, APE/VNB/PAT are expected to grow 14%/11%/21% YoY to INR130.5b/INR35.6b/INR13.7b.

Highlights from the management commentary

* The management expects protection premiums to report strong growth due to the recent launch of two new products, which will boost margins. Guidance for VNB growth is expected to be in the range of 12-15% and VNB margin to be in the range of 26-27% for FY25.

* SBILIFE has introduced another high-ticket protection product recently with a minimum sum assured of INR20m, which is highly competitive compared to protection plans offered by other peers, and the profitability will be similar to other retail protection products. ? Regarding the product mix, the management has guided for Non-par, Protection and Par products to constitute ~40% and ULIP to constitute ~60% of the overall product mix.

* 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.

Valuation and view

SBILIFE reported a weak performance during the quarter, with APE and VNB reporting 11%/14% below our estimates. VNB margin contracted 160bp YoY to 26.9% in 2QFY25. New product launches are likely to kick-start the recovery in the protection segment. Continued investments in agency channel and digital enhancements will boost overall growth. Further, the impact of surrender charges is likely to be minimal. We expect SBILIFE to deliver an 18% CAGR each in APE/VNB over FY24-27E, while RoEV is projected to remain ~20% over FY27. We reiterate our BUY rating on the stock with a TP of INR2,100 (premised on 2.3x Sept’26E EV).

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412