SBI Life Insurance: Competitive advantages increasing by the day!

29 Jan 2024 , 10:37 AM

SBI Life (SBILI) is analysts of IIFL Capital Services top pick for 2024, as they believe it will continue to deliver top-quartile growth in 2024. This will be backed by competitive advantages from a well-diversified distribution, rational cost structure, strong brand pull and an under-penetrated mass customer base. The recent regulations around commissions (EoM caps), lower exposure to traditional products (surrender charges related proposal) and minimal GST/IT notices — all favour SBILI vs the competition; and could potentially lead to further market share gains. SBILI’s ability to maintain commission payouts in an environment where peers have to increase it substantially within their open architecture distribution channels, gives it an edge to deliver industry-leading VNB margins with the gap increasing further. Hence, analysts of IIFL Capital Services reiterate their BUY rating and the preferred-pick status for SBILI with a 12-month TP of Rs 1,870, implying 2.5x 2YF EV; offering 35% potential upside. Analysts of IIFL Capital Services forecast 16%/19% APE/VNB Cagr over FY24-26. The stock is trading at 8% discount to HDFCLI, despite offering better growth. Maintain BUY. 

Healthy growth in Q3, little margin compression: 

SBILI registered 14% YoY growth in retail savings APE, with continued strength in ULIP (18% YoY). Non-Par remained resilient (9% YoY), despite the industry-wide slowdown due to tax-related changes last year. Among distribution channels, SBI witnessed a healthy 15% growth; while agency was modest at 3% YoY. VNB margin compressed by only 40bps YoY, on higher share of ULIPs even as retail protection declined 12% YoY; and VNB grew 11% YoY. 

Distribution, regulations are key advantages: 

An analysis of SBILI’s geographical distribution suggests it is even better-penetrated than LIC in the non-urban areas and beyond the top-7 premium-paying states, earning 52% of premiums there in FY23. Lower exposure to traditional products and lower dependence on multi-insurer distribution model is protecting SBILI from substantial increase in payouts and deliver better margins too. 

Valuations attractive:

Valuation at 2.1x FY25 P/EV, is at 8% discount to HDFCLI; but offering better growth and VNB margins. Analysts of IIFL Capital Services expect this discount to completely converge. Their TP of Rs1,870 implies 2.5x 2YF P/EV, offering 20%/19% EV/VNB Cagr over FY24-26. Reiterate BUY. SBI Life remains analysts of IIFL Capital Services top pick in the sector. Key risk: open architecture.