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SBI Life Insurance - Challenging Year Ahead - Q4FY20 Result Review - HDFC Securities

Posted On: 2020-05-06 14:10:22

SBILIFE's 4QFY20 performance was marginally below expectations, as NBP/APE declined 11.8/12.6% YoY due to the lockdown, while VNBM sustained at 20.7% (+90bps YoY). Despite SBILIFE's ambition to post APE growth in FY21E, given the macros, we remain skeptical. We rate SBILIFE a BUY with a reduced TP of Rs 975 (Mar-21E EV + 28.9x Mar-22E VNB).

4QFY20 protection APE was at Rs 3.2bn (+28.0/39.1% YoY/QoQ, 11.8% share). Retail/group protection grew 6.2/66.7% YoY. For FY20, total protection share improved 212bps YoY to 8.9%.

4QFY20 NPAR sales continued at a strong pace growing 17x/-5.3% YoY/QoQ to Rs 1.8bn. For FY20, the higher margin NPAR product share grew to 6.6% (+647bps YoY). As a result of lower interest rates, incremental contribution from NPAR is expected to reduce considerably in FY21E.

FY20 VNBM improved 90bps YoY to 20.7%. Margin improved as a result of 1) better product mix (+480bps), 2) change in operating assumptions (CRNHR mainly, -130bps), and 3) change in eco. assumptions (-250bps).

Covid-19 impact: Growth in Mar/Apr-20 has been severely impacted. Business is expected to decline over 1QFY21, however SBILIFE still believes that a single digit APE growth is possible in FY21E. The company is using digital sales methods- video calling, tele-medicals etc and is focusing on training agents. SBILIFE is also in the process of reworking its arrangement with re-insurers to increase tele-medical limits (IPRU has already done this). The company is also seeing only ~65% renewal rates. With lowest cost ratios, SBILIFE will continue to invest in its business. Any cost reduction initiative will only be undertaken in 2HFY21.

Over FY21E we expect covid-19 and changes in personal taxation to cause significant disruption to insurance sales (FY21E APE: -13.1% YoY). We however take a longer term view on the business and appreciate the strong distribution footprint of its parent SBI (24k+ branches), improving protection share (FY20: 8.9%, +212bps YoY), lowest operating cost ratios (9.9%), and improving margins (VNBM: 20.7%). We expect SBILIFE to deliver strong FY20-22E VNB CAGR of 23.3% and RoEVs of ~13.4/15.1%. We rate SBILIFE a BUY with a TP of Rs 975 (Mar-21E EV + 28.9x Mar-22E VNB). Lower growth, renewals, and protection share are key risks to our call.

Shares of SBI Life Insurance Company Ltd was last trading in BSE at Rs.715.65 as compared to the previous close of Rs. 688.2. The total number of shares traded during the day was 90899 in over 6570 trades.

The stock hit an intraday high of Rs. 734.15 and intraday low of 699.4. The net turnover during the day was Rs. 65457392.

Source: Equity Bulls

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