Stock Recommendation | ICICI Prudential Life - REDUCE - Target price : 475

▶ Tweaking down growth forecasts. We are revising down our EVOP forecasts to factor lower APE growth in FY2019E and higher margins largely due to increasing share of the protection business. The company struggled on APE growth in 1QFY19 but is gradually picking up. We expect the APE trajectory to improve further over the next few quarters.
▶ We expect our margin expansion thesis to play out. We expect VNB margins at 18.5% in FY2020E from 17.5% in 1HFY19 due to the following: (1) Increasing share of the protection business-up to 7.9% in 1HFY18, secular growth from 2.7% in FY2016; the company has seen growth across all three segments of protection, viz. individual, group and credit life. (2) Improvement in persistency assumptions-current experience for 13th month bucket is running at 250-270 bps higher than its assumptions. With improvement in persistency across buckets, we find scope for upgrade in persistency assumptions by March 2019.
▶ Two factors lead to downgrade in our EV forecasts. (1) Lower-than-expected growth and (2) large investment variance due to MTM hit on its bond portfolio (about 1.5% of opening EV). About 100 bps rise in interest rate reduces its EV by 2.1%.
▶ Business trajectory to remain strong, retain BUY. Post the revision in estimates, we expect the company to deliver 19% EVOP CAGR during FY2017-21E and 19% medium-term operating RoEV. At our TP, the company will trade at 2.8X EV and 17X EVOP FY2020E. Lower margins in the protection business due to heightened competition and increase in surrenders due to prolonged weakness in capital markets are key risks.

ICICI Prudential Life reported PAT of ₹3 bn, down 29% yoy, largely on the back of new business strain, MTM hit on investments and higher expenses during the period. Cash flows to business (post expenses and commissions) improved to ₹28.6 bn from ₹14.6 bn in 2QFY18; it would, however, be inaccurate to track this on a qoq basis.

ICICI Prudential Life reported expense-to-premium ratio of 15% in 2QFY19 as compared to 13.9% in 2QFY18 (17.3% in 1QFY19). Lower volume during the period coupled with elevated expenses (publicity and marketing) led to rise in expense ratios. The cost/premium of the savings business increased marginally (12.7% in 2QFY19 from 12.4% in 2QFY18, 11.8% in FY2018). Rising share of protection business will keep the ratio at elevated levels though higher volumes in 2H will lead to some improvement.

ICICI Prudential Life reported stable persistency (retail, excluding single premium) of 85.2% in the 13th month bucket in 5MFY19. Persistency improved across all other buckets over 1HFY18. The company has currently built in 13th month persistency of 82.5% in its assumptions; it achieved persistency of 85% in FY2018 and 1HFY19. With improving trends continuing in FY2019E, we find upside to persistency assumptions, leading to higher VNB margins.

ICICI Prudential Life reported 2% growth in EV in 1HFY19 to ₹192 bn. While VNB growth was high at 41% (discussed above) leading to ₹13 bn of EVOP (7.1% of EV), large investment variance of ₹3 bn (KS estimate) and dividend payout of ₹5.8 bn pulled down EV growth.

ICICI Prudential Life's solvency ratio remained stable qoq at 234% in 2QFY19 but declined from 276% in 2QFY18 on the back of high growth in protection business. The company has two tools to manage solvency-(1) stop special dividend payouts and (2) raise tier-II capital up to 25% of net worth. As of now, the company does not envisage capital issuance.

Definitions of ratings

BUY	-	We expect this stock to deliver more than 15% returns over the next 12 months.
ADD	-	We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE	-	We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL	-	We expect this stock to deliver

Our target prices are also on a 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst's overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR	=	Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.
CS	=	Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC	=	Not Covered. Kotak Securities does not cover this company.
RS	=	Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
NA	=	Not Available or Not Applicable. The information is not available for display or is not applicable.
NM	=	Not Meaningful. The information is not meaningful and is therefore excluded.

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