SBI Life premium grows only 4%: What keeps brokerages bullish on the stock?

Motilal Oswal Financial Services and JM Financial have Buy ratings on SBI Life with targets of Rs 1,570 and Rs 1,500, respectively.

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SBI Life Insurance reported muted numbers for the quarter ended June 2023, with APE growth at 4 percent. However, brokerages have retained their bullish outlook on the stock, given the company’s brand, distribution and cost advantage.

APE or Annualised premium equivalent is a measure of new business written by a life insurance company. The Street had expected SBI Life‘s APE to grow 10 percent to Rs 3,177.5 crore, however, it came in at Rs 3,030 crore.

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“SBI Life reported muted Q1 APE growth but its four-year CAGR of
12.7 percent is much higher than HDFC Life’s 8 percent and significantly superior to ICICI Pru Life’s 0.1 percent,” said Nuvama Institutional Equities.

VNB or Value of New Business for the quarter fell 1 percent on-year to Rs 870 crore, which was also below estimates of Rs 973 crore. VNB margin declined to 28.8 percent from 30.4 percent in the year-ago period.

The fall in margins was primarily due to weakness in the non-par segment. Non-participating policies, which fetch higher margins for life insurers, have seen cool-off in demand post new tax regulations.

The company’s product mix moved back towards ULIPs or Unit Linked Investment Products — a combination of insurance plus investment — which does not enjoy juicy margins.

In the earnings concall, the management maintained the guidance of better-than-industry premium growth and a range-bound VNB margin of 28-30 percent.

The management also acknowledged that in the near term, product-level margins are probably at optimum levels and the mix will be a key driver for the margin trajectory.

On the distribution front, bancassurance is still the dominant channel with an APE mix share of 65 percent, up 2.8 percentage points on-year, while agency channel saw a decline in its share to 25 percent, given non-par savings is the dominant product in this segment.

On the back of this, Nuvama Institutional Equities has cut its FY24/25 VNB estimates by 3.8 percent/4.6 percent. However, it has retained its target price on the stock at Rs 1,600 with a ‘buy’ rating.

“A growth vector for SBI Life is its parent SBI (23,000 branches) and strong agency force (2,22,000). It also has among the lowest cost ratios, adding to our comfort,” it noted.

Motilal Oswal Financial Services and JM Financial, too, have ‘buy’ ratings on the stock with targets of Rs 1,570 and Rs 1,500. “SBI Life is better placed to maintain sector leadership as the largest private insurer with an APE market share of 22 percent as of FY23, given significant brand equity, an expansive multi-channel, pan-India distribution network, cost leadership and access to parent’s huge client base,” JM Financial noted.

At 1pm, SBI Life shares were trading at Rs 1,290 on the NSE, lower by 0.8 percent from previous close.

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