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Why are domestic & foreign institutional investors gung ho on this insurer?

As the second wave of the Covid-19 pandemic gripped India, it resulted in an increased demand for insurance products. The institutional players on the Street saw it as an opportunity and lapped up shares of the largest private player - SBI Life Insurance Company. Moreover, an impressive March quarter show made them even more gung-ho on the prospects of the firm.

As recent as Friday, Carlyle offloaded its 4.2 per cent stake in the firm, and more than three dozen institutional investors bought the shares. Meanwhile, the shareholding pattern for the quarter ended March 2021 (Q4FY21) also shows that foreign portfolio investors hiked their stake in the firm by 3.5 per cent while domestic institutional investors by 1 per cent.

The stock since then has rewarded them handsomely with a rise of 11 per cent from March-end, outperforming the benchmark Sensex which has gained 3 per cent in the same period, show data available on ACE Equity.

The growth prospects for the industry remain robust, underscored by the latest data.

In April, the insurance industry posted Annual Premium Equivalent (APE) growth - a measure of new business sales growth in the insurance industry growth - of 70 per cent YoY, coming off a low base with private insurers growing 80 per cent and LIC at 57 per cent. In terms of market share, SBI Life was the major gainer as it added around 300 bps YoY in APE market share during April, shows a report by JM Financial.

With more than half the country presently under some restrictions and lockdown and life insurers' management practising self-restraint, for the safety of their employees, the business will be affected in May, warned Jefferies but said the YoY growth should still continue to be good on a low base.

As regards SBI Life, analysts expect the stock to outperform peers over the next one-two years, riding on the stock growth prospects for the sector. Meanwhile, its valuations also make it a compelling bet, they say.

"SBI Life has quickly transformed itself in the digital world with 99 per cent of its applications being submitted digitally. It has the advantage of 24,000-plus branches of the parent SBI, plus 947 own offices. In the private market, it is among the top league with a 22.6 per cent market share. The cost ratios for SBI Life continue to be best in the industry," said independent market analyst Ambareesh Baliga.

Valuation wise, it is quoting at a 40 per cent discount to HDFC Life, which probably could be the PSU discount but seems steep, Baliga said, adding that even otherwise, looking at the excellent growth prospects, it is a good long term portfolio bet.

The life insurance firm posted a strong set of numbers during the March quarter. Its APE growth bounced to 48 per cent year-on-year (YoY), resulting in 7 per cent APE growth in FY21. Value of new business (VNB) margins stood at 23.2 per cent, up 250 basis points (bps). Its non-par savings stood at 12 per cent. The profit growth, meanwhile, was flat at Rs 532 crore.

"A low-cost structure and low share of non-par saving versus peers give SBI Life significant headroom for growth and margin expansion. We expect 12 per cent/17 per FY22/23 YoY APE growth and build in 24.5 per cent long-term average VNB margins," said CLSA in a post-earnings note. It raised the target price for the stock to Rs 1,250 from Rs 1,125.

Meanwhile, Edelweiss Research has a target price of Rs 1,570, implying an upside potential of 56 per cent from current levels.

"Lower-cost ratio, improved persistency and strong growth in premium have pushed SBI Life to the top of the pile in Q4FY21 performance. While margins still lag peers, it comes married to the highest room for improvement over FY21–23E," the brokerage said.


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