Analysts bullish on SBI Life after FY20 earnings, expect 20-36% upside

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SBI Life Insurance Company share price gained 4.4 percent intraday on May 6 on growth numbers in FY20 despite disruption due to COVID-19 in the last 10 days of March.

The stock shot up 38.5 percent since March 23's closing, while today, it was quoting at Rs 745, up Rs 29.35 or 4.10 percent on the BSE at 13:34 hours IST.

Brokerages are bullish on the stock and expect 20-36 percent potential upside on likely steady growth in operating parameters in coming years, though there could be slowdown in overall business in first half of FY21 due to COVID-19.

The insurance company closed FY20 with an embedded value (EV) of Rs 26,300 crore aided by 30 percent YoY growth in embedded value operating profit (EVOP) mainly coming from a) healthy new business value (NBV) growth (17 percent), b) jump in persistency variance (Rs 240 crore versus Rs 5 crore last year) from steady product level persistency and modification in the treatment of group renewable business and c) other operating variances (Rs 190 crore versus Rs 6 crore) owing to release of risk margins baked in last year.

Margins improved 100bps YoY to 18.7 percent in FY20 aided by a) rising share of non PAR (7 percent of APE versus 0.4 percent last year) and protection (9 percent versus 7 percent) and b) 135-265bps YoY improvement in 25th-61st bucket regular persistency.

JM Financial, which has a buy rating with price target at Rs 860, believes SBI Life is better placed to weather the COVID-19 disruption given significant brand equity, an expansive multi-channel, pan India distribution network, cost leadership and access to parent's huge client base.

The brokerage expects an 18 percent embedded value CAGR over FY20-22E with 17-18 percent operating return on embedded value (RoEVs) with key risks being growth, persistency and unfavourable yield movement.

Prabhudas Lilladher also retained its buy rating with a revised price target of Rs 880 (from Rs 1,127 earlier) as it expects overall operating metrics like persistency, margins, costs etc to remain steady, though growth is expected to slow down a bit going ahead.

Annual premium equivalent (APE) for FY20 increased 11 percent YoY – inline with the industry, with a market share of 11 percent making it the largest private life insurer.

However, given the COVID-19 disruption, SBI Life expects growth to slow down to single digits. This was reflected in the (1.3 percent) hit to new business value (NBV) margins from operating assumption change to reflect negative operating leverage in FY21, JM Financial said.

Distribution wise, others (digital, Mconnect, YONO) recorded a 60 percent YoY growth in new business premium in FY20 with channel share at 20 percent, up 5 percentage points YoY.

Solvency ratio as of March 2020 stood at 194 percent, down 35 percent QoQ impacted by weak equity markets. In line with IRDA directive, the insurer cancelled dividend for FY20.

ICICI Direct also feels SBI Life seems to be well placed to stem the tide, though lockdown and economic slowdown is expected to make FY21 a challenging fiscal.

"Change in product mix, excellent operating efficiency, competitive position in individual protection business remain key drivers. Steady persistency, strong banca partnership, focus on improving digital footprint is seen supporting growth as well as earnings," said the brokerage.

ICICI Direct expects SBI Life's business growth at around 11 percent CAGR and VNB margins at 17-17.5 percent in FY21-22.

"Preferring to stay with businesses having lower balance sheet (unlike banks) and healthy fundamentals, we remain structurally positive on the stock," said the brokerage which maintained its buy rating on the stock with a target price of Rs 850 per share (earlier Rs 800).

Sharp movement in capital/debt market or significant claims remains a risk, it feels.

The private life insurer reported a 15.9 percent year-on-year rise in its March quarter (Q4) profit at Rs 530.67 crore, while its net investment income stood at a negative of Rs 6,677.19 crore in Q4 as against investment income of Rs 4,150.73 crore in the year-ago period.

SBI Life's net premium income stood at Rs 11,862.98 crore in Q4FY20, showing a 4.7 percent YoY increase. Company has made an additional reserve of Rs 60 crore for novel coronavirus (COVID-19) pandemic over and above the policy level liabilities.

The life insurer had set aside a provision of Rs 107.26 crore in Q4 for diminution in value of investments and provisions for standard, non-standard assets.

SBI Life's solvency ratio stood at 1.95 in Q4 compared to 2.13 in the year-ago period and as against regulatory requirement of 1.50.

In Q4FY20 protection APE was at Rs 320 crore (up 28.0/39.1 percent YoY/QoQ, 11.8 percent share). Retail/group protection grew 6.2/66.7 percent YoY.

Emkay view

We assume coverage on SBI Life with a buy rating (overweight in NBFC Emkay Alpha Portfolio) and a revised target of Rs 892 at 2.5x March’22E EV (earlier Rs 1,100).

We believe that SBI Life's margin will improve owing to a gradual rise in protection plans' share along with the elevated share of non-par products. However, management needs to re-price its existing protection plans amid a rise in prices for reinsurance. We expect VNB margins to improve to around 19.6 percent by FY22 against around 18.7 percent during FY20.

HDFC Securities view

SBI Life's Q4FY20 performance was marginally below expectations, as NBP/APE declined 11.8/12.6 percent YoY due to the lockdown, while VNBM sustained at 20.7 percent (+90bps YoY). Despite SBI Life's ambition to post APE growth in FY21, given the macros, we remain skeptical.

Growth in Mar/Apr-20 has been severely impacted. Business is expected to decline over Q1FY21, however SBILIFE still believes that a single digit APE growth is possible in FY21E.

Over FY21, we expect COVID-19 and changes in personal taxation to cause significant disruption to insurance sales. 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 percent, up 212bps YoY), lowest operating cost ratios (9.9 percent), and improving margins (VNBM: 20.7 percent). We expect SBI Life to deliver strong FY20-22 VNB CAGR of 23.3 percent and RoEVs of around 13.4/15.1 percent.

We rate SBI Life a buy with a TP of Rs 975. Lower growth, renewals, and protection share are key risks to our call.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.