Upgrade to BUY on ICICI Prudential Life - Non-linked business drives margin beat - HDFC Securities

Mr. Madhukar Ladha, Institutional Research Analyst, HDFC Securities

We like IPRU's re-engineered business model, which is focused on a more diversified product mix (increasing PAR + NPAR) along with an increased protection share. This is expected to drive margins higher by 405bps YoY in FY21E to 25.8%. We expect VNB to grow at FY21E-23E CAGR of 14.9%. Given the improved margin trajectory, we upgrade our VNB estimates over FY21-23E by 7.6-9.8%. Given revised margin trajectory and recent stock price correction, we upgrade the stock to a BUY with a higher DCF-derived target price of Rs 495 (Sep-22 EV + 22.7x Sep-22E VNB). The stock is currently trading at FY21/22E P/EV of 2.3/2.0x and P/VNB of 23.4/18.9x. Key risks are lower-than-expected growth, protection share or higher mortality as a result of the pandemic.

2QFY21 highlights: IPRU reported a total APE at Rs 14.7bn (-22.9/+78.0% YoY/QoQ). Protection share moderated to 15.8% (+100/-1,020bps YoY/QoQ) as individual protection declined 33.0/2.9% YoY/QoQ to Rs 1.4bn (price increases taken from July-20), while group protection grew 20.0/29.7% YoY/QoQ (pick up in credit growth). VNB margins shot up to 27.4% (+630/290bps YoY/QoQ), driven by (1) strong growth in non-linked savings business at 30.1% share +49.7/118.9% YoY/QoQ, (2) higher protection margins post price increases. IPRU added 18 distributor partners (including IndusInd Bank). Partnership with IndusInd Bank is expected to add significant value over the next few years. Driven by a recovery in equity markets, EV improved 11.6% in 1HFY21 to Rs 257bn.

Persistency for 1HFY21 declined 150 to 390bps across cohorts on YoY basis (except 49th and 61st month). Renewal premium growth was weak at 6.8% YoY. AUM grew 9.7% YoY to Rs 1.8tn, while solvency deteriorated to 205.5% (-550bps YoY). PAT was at Rs 3.0bn (+0.3/5.6% YoY/QoQ).

Outlook: We expect FY21E to be a muted year in terms of APE/VNB growth (FY21E: -18.7/-3.6% YoY); however, increased non-linked business in the mix, improved protection margins and strong vigil over costs are expected to drive VNBM to 25.8% (VNB of Rs 15.5bn, -3.6% YoY).

Shares of ICICI Prudential Life Insurance Company Ltd was last trading in BSE at Rs.413.5 as compared to the previous close of Rs. 404.75. The total number of shares traded during the day was 80553 in over 3513 trades.

The stock hit an intraday high of Rs. 414.9 and intraday low of 404.3. The net turnover during the day was Rs. 33070902.

Source : Equity Bulls

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