We raise our EPS estimates for ICICI Prudential Life Insurance (I-Pru) by 2-3% over FY18-19 as we believe that the company can deliver stronger topline growth driven by market share gains in a fast growing industry. Stock is currently trading at 3.8x our FY18E embedded value (EV) per share. We believe it can trade on similar multiples on FY19E EV per share due to: (i) superior topline growth aided by better product mix and leveraging of technology, (ii) rising persistency led by superior product offerings, and (iii) increased focus on expanding the higher margin protection business. We raise our PO to Rs 540 (vs. Rs 466) and reiterate our Buy rating on the back of (i) likely 17% EPS CAGR over FY17-19E (vs. <5% CAGR in FY14-17), (ii) low-risk balance sheet, (iii) 17% return on EV.
Gaining share despite market leadership in private space
I-Pru is consistently gaining disproportionate market share on an incremental basis in the industry despite leadership position at 28% market share (as of May’17) among the private players. I-Pru saw a 29% growth in First Year Premium (FYP) y-o-y in FY17 (vs 19% for sector) largely due to rising focus on customer relationship development and strong agent network.
Key operational metrics on consistent uptrend
I-Pru is showing positive traction in most of its operational parameters: (i) Value of New Business grew 61.7% y-o-y to Rs 6.6 bn in FY17; (ii) while the distribution channel mix is still dominated by Bancassurance (56.9%), the Direct channel is also gaining momentum (11.9% FY17 vs 9.8% FY16); (iii) Persistency, a key parameter for gauging stickiness of the business, continues to rise and stood at 85.7% for FY17 vs. 82.4% in FY16, and is one of the best in industry; (iv) Protection business (10 products) saw an APE growth of 87.1% y-o-y; (v) 96% of product mix (APE basis) consists of Savings products—which are likely to benefit from growing inclination towards financial assets. Being the market leader with traditional focus and expertise, we expect I-Pru to be a key beneficiary of strong growth in industry over the medium term.
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We rate ICICI Pru a Buy. Market leadership position is likely to be retained led by bancassurance driven model. Business growth is likely to accelerate on the back of largely stabilised regulations. Importantly, we reckon improvement in margins driven by rising persistency, change in product mix and cost efficiencies. This should lift RoEV to 17% by FY19 vs. 9% in FY16.