APE growth down 20% y-y led by ULIPs; FY21/22 EPS cut by 12/18% to factor in softer growth; TP revised to Rs 430; ‘Buy’ maintained.
IPRU Life (IPRU) reported weak business trends due to the ongoing lockdown and volatile markets. APE growth declined by 20% y-o-y led by ULIPs while protection business growth was steady. Persistency remained under pressure with 13th/25th month persistency declining by 140bp/50bp y-o-y, mainly in the ULIP segment. FY20 VNB growth remained steady at 21% y-o-y led by improvement in asset mix (protection/annuity segment).
VNB margins, thus, improved to 21.7% during FY20 (470bp y-o-y increase). We have cut our EPS estimates by 12%/18% for FY21/FY22e, mainly to factor in the softer business growth. Maintain Buy with revised PT of Rs 430.
VNB margins expand led by protection business; cost ratios improve: Q4FY20 PAT declined by 31% y-o-y to Rs 1.8 bn impacted by weak business trends due to the lockdown in Mar’20. Gross premium income moderated by ~5% y-o-y led by 26% y-o-y decline in the first year premium while single premium grew ~111% y-o-y. Renewal premium declined by 4% y-o-y as persistency in the ULIP segment suffered.
In Q4FY20, total APE declined by ~20% y-o-y (5.4% decline in FY20) led by ULIPs plunging 43% y-o-y. Protection APE grew 35% y-o-y, and thus, share of the protection business improved to 17.8% (15.1% in FY20). Share of ULIPs declined to 54% (~65% in FY20 v/s ~80% in FY19). VNB margins improved to 23.8% (21.7% in FY20) due to higher share of the protection/annuity business driving 12% y-o-y growth in VNB to Rs 4.7 bn.
Highlights from mgmt commentary
COVID-19 impact: Market risk exists due to the decline in interest rates and choppy equity markets while the stress in certain sectors builds in credit risk; however, ~94% of the fixed income portfolio is invested in Government bonds/AAA corporate bonds. Under stress scenario, solvency ratio remains comfortable.
The entire reinsurance price hike would be passed on to customers, and thus, would not impact VNB margins. Further, the protection segment is significantly underpenetrated and should continue witnessing strong trends.
Valuation and view
ULIP demand is likely to remain muted amidst challenging macros due to the COVID-19 pandemic, thus, putting pressure on overall premium growth. Protection/annuity segments are though likely to see healthy growth and should help drive steady margins (23% by FY22e). We, thus, estimate IPRU Life to deliver CAGR of ~12% in VNB over FY20-22e led by 11% new business APE while operating RoEV should moderate to ~16% for FY22e. Maintain Buy with a revised target price of Rs 430 (2.2x Sep’21e EV).