Add SBI Life, target price Rs 764: Yes Securities

Yes Securities has given an add rating to SBI Life Insurance with a target price of Rs 764.

Management aspiration of single digit growth in premiums looks aggressive to the brokerage. For ULIPs, SBI Life is relatively better placed given higher exposure to debt funds. Despite minimal hike in protection tariffs, the management expects to maintain VNB margins (70-75%) for protection. The brokerage finds this challenging to achieve. Product mix shift towards protection can drive VNB margin improvement of 230 bps during FY20-22E to 21%.

The share price moved up by 2.59% from its previous close of Rs 713.55. The last traded stock price is Rs 732. Incorporated in 2000, SBI Life has a market cap of Rs 71566.88 crore.


Investment Rationale

Aggressive pricing in the protection products can drive higher than expected growth in the segment. Weaker than priced in persistency can be a risk to our EV assumptions.

SBI Life trades at FY22E P/EV and P/VNB (value of new business) of 2.0 times and 31.9 times respectively, at a discount to HDFC Life . Based on its discounted VNB approach to valuation, the brokerage arrived at a fair P/EV of 2.1 times to yield a fair value of Rs 764 for the share.


Financials

For the quarter ended March 31, 2020, the company reported standalone sales of Rs 920.92 Crore, up 240.15 % from last quarter Sales of Rs 270.74 Crore and up 104.16 % from last year's same quarter Sales of Rs 451.07 Crore. The company reported net profit after tax of Rs 530.67 Crore in the latest quarter.

Annual premium equivalent (APE) at Rs 26.9 billion in the fourth quarter of FY20 was weaker than estimates of Rs 27.5 billion, APE declined by 13.2% year on year, protection APE was higher by 6% while ULIP was down 14.5%. Share of individual protection has increased to 6.3% in the fourth quarter of FY20 against 5.2% in Q4 of FY19. The share of ULIPs has fallen from 71.3% in Q4 FY19 to 70.3% in Q4 FY20.

VNB margins at 20.1% for Q4 FY20 was lower than estimate of 20.5% attributed to the change in yield curve assumptions While 13-month persistency was steady at 84.3%, 61-month persistency saw a sharp improvement of 450 bps to 59.4% EV for FY20 was at Rs 263/share, growth of 17% year on year as gains from favourable operating assumption changes (persistency, mortality) was offset by economic assumption changes primarily risk free yield curve change

Promoter/FII Holdings

Promoters held 62.80 per cent stake in the company as of March 31,2020, while FIIs held 25.87 per cent, DIIs 5.73 per cent and public and others 5.59 per cent.