Covid claims high; growth is expected to be strong, with stock re-rating in H2; ‘Buy’ retained with TP of Rs 775
ICICI Prudential Life continued its strong VNB growth journey in Q2FY22 (up 28% y-o-y) aided by a low base, new partnerships and shifting business mix at ICICI Bank. APE growth remains strong, crucial to drive VNB, in the backdrop of increasing ULIP and slowing protection. Higher Covid claims in H1 likely offset positive investment variance – both the items are anyway non-core in the EV walk. We retain Buy with FV of Rs 775.
Limited drivers for VNB expansion; topline remains strong
ICICI Prudential Life delivered 28% VNB growth in Q2 on the back of 35% APE growth and contraction in VNB margin to 26% from 27.4% (down 135 bps y-o-y). We expect increasing share of ULIPs to likely continue in H2 on the back of strong capital markets and drive high APE growth for ICICI Prudential Life. Falling share of the protection business, mostly retail term – a segment in which the company expects to take tariff hike shortly, coupled with higher ULIPs, will put pressure on VNB expansion. We model 26.5% VNB margin in H2FY22e versus 27.3% in H1FY22. Higher operating leverage and increasing non-par and pension products will underpin to some extent.
ICICI Prudential Life’s new bank partnerships reported ~100% APE growth in Q2 and will likely continue to remain strong over the next few months as well; ICICI Prudential Life’s penetration in these banks will continue to increase, driving superior growth for the next few months. On a low base, firm reported ~6% APE growth in Q2.
Covid claims high
ICICI Prudential Life expensed ~Rs 8.5-9 bn of Covid claims in H1 – Rs 9.4 bn before adjustments with par fund – this included Rs 5 bn in Q1FY22, Rs 3.6 bn in Q2FY22 and increase in provisions by ~Rs 0.8 bn; this is significantly higher than mortality variance estimates on account of Covid. The item is anyway one-off in the EV walk and may not have long-term impact. A high investment variance in H1 on the back of strong equity markets (average Nifty-50 up 54% in H1FY22) largely helped offset the impact of higher Covid claims.
Growth remains strong, retain BUY
We retain Buy on ICICI Prudential Life with AV-based FV of Rs 775 (2.6X EV, rolled over from Rs 750). We remain positive on ICICI Prudential Life’s diversifying product portfolio and partnership with new players that will provide more multi-year legs to growth, with limited impact of idiosyncratic factors. High growth on a low base of H1FY21 has driven the stock performance, even as two-year APE CAGR was down 9% in Q1FY22 and up 2% in Q2FY22; we expect further stock rerating as the company delivers positive growth on two-year CAGR basis in H2FY22e (two-year individual APE CAGR of 4% in September 2021).