Q3FY24 Review: ICICI Prudential Life: Growth pressure weighing on margins

19 Jan 2024 , 12:09 PM

ICICI Pru Life (IPRU) reported Q3FY24 results with 5% YoY APE growth on a weak base, largely due to muted growth in the Nonlinked segment, even as ULIPs grew 9% YoY. VNB margin collapsed by 11.1/5ppt to 23% on YoY and QoQ basis respectively, led by change in product mix away from high margin non-par towards par, sharp increase in commissions and negativwee operating leverage. Hence, VNB declined 29% YoY. Management indicated higher payouts in multi-insurer distribution channels. Still, they guided for double-digit growth in APE in Q4 (despite high base) and consequent improvement in VNB margins. Analysts of IIFL Capital Services believe that it may be difficult for IPRU to achieve profitable growth, given the difficult industry dynamics and some of the margin contraction could stay for longer. Analysts of IIFL Capital Services cut their VNB estimates by 12-14% for FY24-26 on lower margins, even as they build 12% APE Cagr over FY24-26. Hence, their 12-mth TP reduces to Rs550 (from 670); based on 12X 2YF VNB (from 15X). While valuations may look attractive at 1.5x on FY25 P/EV, analysts of IIFL Capital Services see limited upside due to lack of comfort around growth-margin balance. Hence, they downgrade the stock to ADD. 

APE growth remains subdued: 

Premiums in Q3 were affected by muted Non-linked (2% YoY) including Annuity. Protection (5% YoY) was driven by Retail Protection (27% YoY) even as Group saw 2% decline. Within distribution, growth was supported by the agency/direct/ex-ICICI Bank channels (12%/13%/10% YoY), though ICICI Bank declined 5% YoY but stabilised share at 13.4% of APE. Management indicated share shift away from the Non-par segment towards the Par segment, during the quarter. 

Unfavourable product mix, higher commissions dent margins: 

VNB was down 29% YoY, led by 11.1ppt YoY compression in VNB margins, as APE mix increased towards lower margin ULIPs and Par while commission costs rose sharply (30% QoQ). Renewal premiums were tepid at 6% YoY. Cost/TWRP rose by 440bps YoY, on higher commission costs and investments. 

Down to ADD: 

The stock is trading at 1.5x FY25 P/EV; below the historical average. IPRU’s strong franchise makes it an attractive story, but given the lack of comfort on simultaneous improvement in growth and margins, analysts of IIFL Capital Services believe the stock may remain range-bound. We forecast IPRU to deliver 14% VNB/EV Cagr over FY24-26, off a weak base. Key risk: Regulations.