CMP: ₹731.55

Target: ₹764

Highlights: a) Q4 FY20 APE (annual premium equivalent) at ₹2,690 crore was weaker than estimates of ₹2,750 crore, APE declined by 13.2 per cent y-o-y, protection APE was higher by 6 per cent while ULIP was down 14.5 per cent y-o-y; b) Share of individual protection has increased to 6.3 per cent in Q4 FY20 vs 5.2 per cent in Q4 FY19, whereas share of ULIPs has fallen from 71.3 per cent in Q4 FY19 to 70.3 per cent in Q4 FY20; c) VNB (value of new business) margins at 20.1 per cent for Q4 FY20 was lower than estimate of 20.5 per cent attributed to the change in yield curve assumptions.

Our view: Management aspiration of a single digit growth in premiums looks aggressive. For ULIPs, SBI Life relatively better placed given higher exposure to debt funds. Despite minimal hike in protection tariffs, management expects to maintain VNB margins (70-75 per cent) for protection. We find this challenging to achieve. Product mix shift towards protection can drive VNB margin improvement of 230bps during FY20-22E to 21 per cent.

Valuation: SBI Life trades at FY22E P/EV and P/VNB of 2.0x and 31.9x respectively, at a discount to HDFC Life. Based on our discounted VNB approach to valuation, we arrive at a fair P/EV of 2.1x to yield a fair value of ₹764.

Risks: a) Aggressive pricing in the protection products can drive higher than expected growth in the segment; b) Weaker than priced in persistency can be a risk to our EV assumptions.