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  • Stock Recommendation | SBI Life Insurance - BUY - Target price : 715

    Publish date: OCTOBER 22, 2018

    Strong VNB growth. SBI Life delivered 22% VNB growth in 1HFY19 despite 10% APE growth largely on the back of margin expansion from increasing share of protection business; protection NBP was up 107% yoy; protection at 6% of APE in 1HFY19. With improving productivity and product profile, we expect its profitability to remain high (18.5-19.6% operating RoEV during FY2019-21E as compared to 17.9% in FY2018). We tweak estimates, upgrade the stock to BUY from ADD and revise TP to Rs715, down from Rs785.

    SBI Life reported 22% VNB growth with VNB margin of 17.3% in 1HFY19, up from 15.6% in 1HFY19 (16.3% in FY2018). Increase in VNB margins over FY2018 was largely due to a change in its business composition in favor of protection business. On NBP basis, the share of protection (individual and group) increased to 10.4% from 5.6% in 1HFY18. Individual and group protection NBP was up 256% and 127% yoy respectively. On APE basis, individual APE was up 2.8X while group APE was down 45% due to the shift of group protection business to single premium from regular business (this is in line with most peers). Protection business was 6% of APE in 1HFY19. Management highlighted that the protection business contributed to 30% of the VNB; a back of the envelope calculation suggests ~95% VNB margin in the protection business and 12.5% in the savings business.

    SBI Life’s APE growth inched up to 15% in 2QFY19 from 5% growth in 1QFY19 but remained lower than 27% in FY2018. The company has focused on process restructuring and pushing protection products, largely in the SBI ecosystem. Management highlighted that business should pick up from 2HFY19 and guided for 20% growth for the year. We expect an increase in the share of its protection business and marginal shift to traditional savings business (29% of APE in 1HFY19).

    SBI Life continues to deliver strong performance with 22% VNB growth in 1HFY19 driven by expansion in margin from protection business even as volume growth has been moderated. Variance on government insurance scheme was negative. We are tweaking down our EV estimates by 2-3% but continue to expect healthy (19%) operating RoEV over the mediumterm. The stock has been under pressure likely from (1) lower (APE) topline growth at SBI Life, (2) general weak sentiment on capital market inflows and hence for ULIPs and (3) higher cost of equity in general. We believe that its strong and on-track performance will help alleviate some of the concerns. We revise TP to Rs715 (2.7X EV FY2020E) and upgrade to BUY post the recent correction.

    SBI Life’s PAT increased 11% yoy to Rs2.5 bn in 2QFY19. Overall premium grew 50% (even as APE was up 15% yoy), lower expenses and benefits paid helped increase net cash flows post expenses to Rs39 bn versus Rs19 bn in 2QFY18. We believe that net cash flow can’t be monitored on a quarterly basis but remains an important parameter.

    Persistency continues to improve
    SBI Life’s persistency improved across most buckets. 13th month persistency increased to 83.2% in 2QFY19 from 81.3% in 2QFY18. The company revised its assumption on persistency upwards in FY2018 and hence we don’t find any immediate benefit on our VNB assumptions. While surrender ratio improved, the impact of correction in capital markets may not yet be reflected in these ratios - an important monitorable.

    Negative investment variance and losses
    SBI reported 4% growth in EV in 1HFY19 as compared to 9% in 1HFY18 and 6% in 2HFY19. All three key parameters viz. expenses, persistency and mortality had a positive operating variance. The company reported a negative variance of Rs1.2 bn contributed almost equally by (1) losses on Government life insurance scheme (the business is generated by SBI and management will try to slow down in this segment) and (2) group term insurance (the company is already going slow on this; lower renewals led to the variance). The company reported a negative investment variance of Rs5.5 bn; while the MTM loss on account of movement in interest rate was about Rs12 bn, the company booked about Rs5 bn of capital gains as well. We expect higher volumes, marginally positive operating variance to drive 9% EV growth in 2HFY19E. Any further rise in interest rate poses risk.

    Key assumptions in our EV forecasts

    20% APE CAGR during FY2020-21E
    With shifting focus to protection business and productivity, SBI Life has reported reduction in APE growth to 10% in 1HFY19 from ~30% in the past. Management has guided for 20% growth for FY2019E, which for now appears to be a tall task. We are building in 15% i.e. 18% in 2HFY19 (15% in 2QFY19). On this base, we are modeling 20% growth over the next two years.
    VNB margins inching up

    We expect VNB margins to inch up to 18-18.5% in FY2020E from 16.3% in FY2018 and 17.3% in 1HFY19, largely driven by the increasing protection business. Seasonal trends suggest that margins expand in 2H. ULIPs have contributed to about 65% of SBI Life’s APE in FY2018 and 1HFY19- the ratio may inch down a bit in favor of par and protection business.

    Marginal operating variances
    We are building in marginal operating variances in our estimates, contributing 3% to EVOP in FY2019E and 5% in FY2020-21E (5% in FY2018); lower ratio in FY2019E is due to losses from PMJJBY scheme. We assume moderate but consistent improvement on all three parameters viz. persistency, expenses and mortality.

    Tax assumption conservative than peers
    Unlike its peers (HDFC Life and ICICI Prudential Life) that factor the effective tax rate (net of available tax credits), SBI Life assumed the gross tax rate in its EV calculation. On assuming effective tax rate, SBI Life’s margins would be 19% as compared to 17% reported in 1HFY19.

    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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