Buy SBI Life, target price Rs 860: JM Financial

JM Financial has given a buy rating to SBI Life Insurance with a 12-month target price of Rs 860.

Given the Covid-19 disruption, the insurer expects growth to slow down to single digits – this was reflected in the (1.3 per cent) hit to NBV (new business valuation) margins from operating assumption change to reflect negative operating leverage in FY21. Distribution wise, others (digital, Mconnect, YONO mobile app) recorded a 60 per cent year on year growth in new business premium in FY20 with channel share at 20 per cent, up 5pps year on year.

Solvency ratio as of March’20 stood at 194 per cent, down 35 per cent quarter on quarter impacted by weak equity markets. In line with the IRDA directive, the insurer cancelled the dividend for FY20.


The share price moved up by 2.59 per cent 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


SBI Life is better placed to weather the Covid-19 disruption given significant brand equity, an expansive multi-channel, pan India distribution network (35 per cent offices in rural & semi urban areas), cost leadership and access to parent’s huge client base. The brokerage expects an 18 per cent EV CAGR over FY20-22E with 17-18 per cent operating RoEVs with key risks being growth, persistency and unfavourable yield movement. The target price of Rs 860 valued the insurer at 2.4 times FY22E EV.

Financials

For the quarter ended March 31, 2020, the company reported standalone sales of Rs 920.92 crore, up 240.15 per cent from last quarter sales of Rs 270.74 crore and up 104.16 per cent 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.

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.