Motilal Oswal Bets On Large Cap Insurance Sector Stock, Recommends Buy For Robust 26% Upside

Motilal Oswal in its recent report on SBI Life Insurance Company Limited (SBILIFE) has initiated with a positive outlook, recommending "buy" for a target price of Rs 1,600/share. Given the target price, if you buy the stock at the current market price, it could fetch you a potential gain of up 26%. SBILIFE has delivered a robust NBP growth of 26% in FY23YTD, outperforming the leading private players. It is an SBI group's Insurance sector company having a market capitalisation of Rs 1,27,411 crore. It is a large-cap insurance sector company.

Stock Outlook & Returns On Investment

The stock of SBILIFE last traded at Rs 1,273.50/share on NSE, gaining 0.30% compared to its previous close of Rs 1,269.75/share. On NSE, its 52-week high level is Rs 1,340.35 recorded on 8 September 2022 and its 52-week low level is Rs 1.003.50 recorded on 8 March 2022, respectively.

It has given 1.13% positive returns in the past 1 month, whereas, in the past 3 months, it fell, giving 1.66% negative returns. The stock over a year has given 8.42% positive returns and 30.63% positive returns in past 3 years. In the past 5 years, it has given a maximum 84.83% positive returns. 

Well positioned for growth; market share gains to continue

SBILIFE is well poised for growth with a wide array of product offerings and an expanding distribution base with emphasis on improving productivity of the banca channel. In FY23YTD, the company gained 160bp of market share on the basis of individual NBP, though it lost a market share of 80bp on the overall NBP. In 7MFY23, NBP grew 26%, led by growth in individual as well as group business. However, this is lower than industry growth due to strong performance by LIC during the same period. We expect SBILIFE to claw back its market share as the year progresses, led by rising focus on protection and nonpar savings, annuity segment. This will also have a positive effect on margins.

Resilient performance in protection segment; growth to recover further

Protection is a strong focus area for SBILIFE as it offers a multi-decade growth opportunity, given high under-penetration and large protection gap. In FY22, there was a lack of aggression to underwrite retail protection at large, due to a raging pandemic coupled with price hikes by reinsurers. However, SBILIFE bucked the industry trend and grew overall/retail protection APE at 22%/17% YoY, respectively, in 1HFY23. As the mortality fear of pandemic continues to recede, we are witnessing growing comfort to underwrite retail protection. Credit life is also witnessing a healthy traction, led by improved disbursements and loan growth.

Non-par savings/annuity to be a primary growth driver

Insurers are realizing the growing opportunity size of retirement space, led by improving longevity and limited social security schemes. Thus, growth in pension/annuity business will be driven by changing demographics, increase in life expectancy, and lack of formal social security for wider population. To capture this large growth opportunity, SBILIFE offers different annuity products to individual and group customers. Non-par savings APE (including annuity) grew 191% YoY in 1HFY23 and forms 29% of overall APE vs 12% in FY21.

Expanding presence through a robust distribution network

The distribution machinery of SBILIFE has exclusive access to over 22,000 branches of SBIN, thereby, strengthening its banca channel. An increasing focus on improving the productivity of this channel will further boost the overall performance. While banca hogs the limelight, SBIN's digital footprint has expanded across various mobile and web-based applications, enhancing presence in several touch points. This is further supported by a wide network of more than 1,78,000 individual agents as of Sep'22 with a high productivity of INR0.23m.

Strengthening cost leadership

SBILIFE has consistently demonstrated significant control over its cost ratios. The company's total cost ratio (Commissions and Opex.) increased to 10.2% in 1HFY23 from 8.8% in FY22. However, SBILIFE continues to be the lowest cost player by a wide margin as it continues to focus on improving cost efficiency and adopting cost containment activities. However, the ratio will be remain elevated in the near term, as the company continues to invest in the brand, build a wider distribution network, and grow the share of protection and non-par savings/annuity in business mix. We estimate a modest increase of ~60bp (vs. FY22) to 9.4% by FY24E.

Worst of COVID claims behind; adequate COVID reserves going into FY23

In FY22, SBILIFE received Covid claims (net of reinsurance) of INR15.9b across various lines of businesses, higher than INR10.2b and INR8.2b claims of IPRU and HDFCLIFE, respectively. SBILIFE also carries a reserve of INR2.9b for delayed claim intimations due to the pandemic. We believe this should be sufficient to cover residual claims in FY23.

VNB contribution to EV increased to 11%; RoEV to see a structural uplift

SBILIFE's VNB margin spiked to 31% in 1HFY23 vs 20% in FY19, leading to a sharp jump in contribution of VNB to EV accretion. We expect this trend to continue and estimate the contribution of VNB in Operating RoEV to rise to ~15% by FY24 from 9% in FY19. We believe a higher operating RoEV at 22-23% is sustainable, given the sharp improvement in margins on the back of a more optimal product mix. We estimate EV to register a CAGR of at 21% over FY22-24 with a robust operating RoEV of ~23% by FY24.

Valuation and view: Attractively priced for stable business fundamentals

SBILIFE has witnessed strong traction in premium growth across all products segments (barring PAR) with agency and banca channel contributing to overall growth in FY22. The trends in 1HFY23 are strong with the company gaining further market share among private players. "We expect this trend to continue on the back of wider product offerings combined with robust distribution capabilities. We estimate APE CAGR of 26% over FY22-24, led by continued momentum in non-par savings and protection products. We also estimate VNB margins to improve to 31.4% by FY24, driving 38% CAGR in VNB over FY22-24E. We expect operating RoEV to improve to ~23% and estimate 21% CAGR in EV over FY22-24E. SBILIFE is our preferred pick in the life insurance space and we reiterate our BUY rating with a revised TP of INR1,600 (2.5x Sep'24E EV)," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.