The quarter was a mixed bag – (i) new business growth picked up, but driven by lower margin fund management business, (ii) VNB margins improved, but losses from PMJJY led to negative operating variance, (iii) cost ratios & persistency stable, but limited room for further improvement.
We expect overall margins to improve, driven by increasing protection mix. At 2.2x FY20 EV, valuations appear reasonable. Maintain ‘buy’, PT Rs 681 (Rs 804 earlier). Superior- than-industry new business growth in individual savings and protection, (ii) preventing high negative assumption or experience variance to EV, & (iii) greater clarity on strategy w.r.t government pushed schemes and lower margin group savings business.
New business for Q2 grew 40.2%
Y-o-Y, driven by group fund management business (+226% Y-o-Y). ULIP grew 20%, protection 164%. As against 10% APE growth for H1FY19, management has guided for 20% APE growth in FY19 (implying 27% APE growth for H2). Factoring in head-winds from weaker capital markets, we believe this to be a tall task to achieve. Build in 16% APE growth for FY19 and 17% CAGR for FY18-21.
Protection mix in APE has been stable (5.4% for FY18 & H1FY19), but there has been 100 bps margin improvement (17.3% for H1 vs 16.3% for FY18) due to: (i) Higher component of retail protection (50% of protection APE for H1 vs 13% for FY18) (ii) Single premium paying structure for credit protect. Increasing focus on cross-selling retail protection & margin accretive tweaks in credit protect should drive overall profitability. We build 17.8%, 19.1% and 19.5% VNB margin for FY19/20/21 as protection APE mix increases 400 bps from 5.4% in FY18 to 9.4% by FY21.
