New Year Picks - 2018 New Year Picks – 2018 Company CMP Target Potential Upside SBI Life Insurance 702 850 21% InterGlobe Aviation 1199 1505 26% Endurance Technologies 1355 1550 14% Godrej Agrovet 568 648 14% CMP as on 26th Dec 2017 2 CMP: Rs 702 | Target price: Rs 850 SBI Life Insurance Upside: 21% Unmatched potential SBI Life with its unparalleled distribution network, leadership in New Business Premium (NBP) among private insurers, strong management team and top quartile service ratios is a proxy play to the huge opportunity in India’s life insurance space. The company is yet to harness benefits from a large part of State Bank of India’s (SBIN) unmatched branch network – a single factor that itself can drive exponential growth in NBP in ensuing years. Robust premium growth along with increasing share of high-margin products and operating leverage to drive return on Embedded Value (EV) of ~19% by FY20E. We expect 19.5% EV CAGR over FY17-20E to Rs 282 bn driven by ~30% CAGR in Value of New Business (VNB) to Rs 22.7 bn in FY20E. We initiate coverage with BUY rating and TP of Rs 850 (~30% upside from CMP). In a sweet spot for growth Consistent market leadership Unparalleled distribution network ♦ Insurance penetration, density and protection ♦ India’s largest private life insurer (in NBP) ♦ Bancassurance with SBIN (23,000+ gap indicates India is still significantly under since FY10 branches), P&S Bank (1,500+ branches), insured SIB (850+ branches) and 17 RRBs ♦ Second largest in terms of Individual Rated ♦ Under insured market = room for growth Premium (IRP) ♦ Largest network of 96,000+ agents (~23% NBP CAGR over FY17-FY20E) ♦ 808 offices across 29 states and 7 UTs Strong customer service metrics Significant brand equity Risks to investment thesis ♦ Top quartile claim settlement ratio (98% in ♦ JV between India’s largest bank (State Bank ♦ Changes in tax regime and regulatory FY17) of India) and the leading global insurance framework company BNP Paribas Cardif (BNPCC) ♦ Lowest mis-selling rate (0.2%) and grievance ♦ Termination/adverse change in ratio (0.61%) in FY17 among private life ♦ Recognized as 'Most Trusted Brands' by The bancassurance arrangements with SBIN insurers in India Economic Times Brand Equity 3 SBI Life Insurance Valuations: Insurance – a long-term business BANKS & FINANCIAL SERVICES We have used Appraisal Value (AV) based Bull, base and bear case methodology to compute the valuation for SBI Life. APE CAGR VNB FY19E VNB FY20 AV TP Appraisal Value = EV (FY19E) + Structural value growth margin EV multip le Assumptions (Rs b n) (Rs) (FY20E VNB * NB multiple) (FY17-20E - %) (%) (Rs b n) (x) Bull case 31.0 17.5 253.8 31 1,050 1,050 SBI Life reported an EV of Rs 180.8 bn in H1FY18, Base case 26.9 16.8 236.9 27 850 850 while for FY17, EV was Rs 165.4 bn (up 31.8% YoY). Bear case 19.9 14.8 221.2 23 600 600 We expect EV to rise to Rs 282.1 bn by FY20E, Source: Axis Securities; Target price (TP) is Rs/ share growing at 19.5% CAGR over FY17-20E. EV growth will be primarily driven by VNB CAGR at 29.8% to Rs 22.7 bn in FY20E on the back of strong operational performance. We expect further expansion in VNB Our bull case value is 60% above the CMP margin by FY20 to 16.8% (15.4% in FY17) aided by 1200 increased share of protection and better persistency. 1100 Rs 1050 (60%) 1000 Operating RoEV was highest amongst private peers in 900 Rs 850 (30%) FY17 at ~23%; however, we expect some gradual 800 moderation to 19.8% by FY20 700 600 Rs 600 (-9%) We give an FY20 NBP multiple of 27x to arrive at a 500 structural value of ~Rs 613 bn. Hence, AV post FY19E Jul-17 Jun-17 Jan-18 Oct-17 Sep-17 Dec-17 Aug-17 EV of Rs 236.9 bn is ~Rs 850 bn, which translates into Nov-17 target price of Rs 850 (upside of ~30% from CMP) Source: Company, Bloomberg, Axis Securities NB multiple is an implied multiple based on key assumption of long term average growth rate of 12%, terminal growth rate of 3% and discounting factor of 12.5% 4 Multiple structural growth levers; private plays SBI Life Insurance to outgrow industry BANKS & FINANCIAL SERVICES Growth trajectory of life insurance products is expected Expected growth in NBP over FY22 to be significantly stronger over the next five years led 3,500 by gradual growth in economy and structural drivers like (Rs bn) 3,000 rising life expectancy, increase in share of working 2,500 population, healthcare spending, and pension needs 2,000 1,500 India’s large working population, rapid urbanization 1,000 and rising affluence are expected to aid India’s life 500 1,142 1,142 1,070 1,131 1,750 3,100 1,196 1,196 1,387 insurance space. In addition, improving economic 0 growth and rising awareness of insurance as investment FY12 FY13 FY14 FY15 FY17 FY16 FY18E FY19E FY20E FY22E and savings product are expected to be the key growth FY21E drivers of life insurance products CRISIL research expects India’s new business premium / Expected growth in total premium over FY22 total premium of life insurance industry to post CAGR of 10,000 11-13%/13-15% over FY17-FY22 (Rs bn) 8,000 Market share of private life insurers has been rising over 6,000 the past two years and expected to grow at a faster clip 4,000 than the industry average in the coming years 2,000 874 , 2,869 2,869 3,136 3,279 3,667 8,000 2 4,181 0 FY13 FY15 FY16 FY17 FY12 FY14 FY18E FY20E FY21E FY22E FY19E Source: IRDAI, CRISIL Research 5 SBI Life Insurance Superior metrics – #1 on NBP, #2 on IRP BANKS & FINANCIAL SERVICES SBI Life is India’s largest private life insurer in terms of New Business Premium (NBP) since FY10 and the second largest player in terms of Individual Rated Premium (IRP) (largest being ICICI Pru Life) NBP posted CAGR of 14.7% over FY07-FY17 --- faster than that of private life insurance industry in India; whereas, SBI Life posted CAGR growth at 35.5% over FY15-17 -- the highest among Top 5 private insurers in India We expect its market share to improve given its aggressive stance on utilization of SBIN branches for sourcing and improving agent productivity. We have factored in NBP CAGR of ~23% over FY17-FY20 It has issued ~1.28 mn individual life policies annually -- the highest among private life insurers in India since FY14 -- CAGR of 6.4% over FY15-FY17 leading to a more granular book NBP to continue rising significantly over FY17-20E Growth rates of NBP of Top 5 private players FY13 FY14 FY15 FY16 FY17 H1FY18 200 188 (Rs bn) SBI LIFE (20.7) (2.2) 9.1 28.5 4 2.7 (7.7) 154 160 IPRU LIFE 8.3 (21.8) 41.8 26.9 16.2 34.5 123 HDFC LIFE 15.7 (9.0) 36.1 18.1 34.0 30.4 120 101 MAX LIFE (0.5) 19.0 13.8 12.0 27.3 15.5 71 80 BALIC 10.1 (13.2) 4.2 6.8 14.1 43.5 52 51 55 40 0 The decline in H1FY18 for SBI Life growth was due to conscious effort of management to go slow in low margin group savings FY14 FY15 FY16 FY17 FY13 product (fund management) FY18E FY19E FY20E 6 Source: Companies, IRDAI, Axis Securities Superior distribution model – twin engines of SBI Life Insurance Banca and agency… BANKS & FINANCIAL SERVICES SBI Life’s New Business Premium – channel-wise mix SBI Life over the years has developed unparalleled distribution network among private insurance players (%) Individual agents Banks Others 100 well supported by its twin engines of growth 9.3 24.7 19.1 19.3 18.1 24.7 (bancassurance partnership with SBIN and large and 80 productive individual agent network) 60 40.2 48.1 47.8 54.4 66.1 53.0 Agency and Banca are prominent channels providing a 40 well-diversified distribution model supported by 20 35.1 32.8 32.8 additional branches (from 750 offices as of FY15 to 27.5 22.3 24.6 801 offices as of FY17), increasing the number of sales 0 and customer support employees FY13 FY14 FY15 FY16 FY17 H1FY18 As of H1FY18, SBI Life had 808 offices, located across Comparision of channel-wise mix for NBP (H1FY18) 29 states and seven union territories, and (%) Individual Agents Banks Others 12,910 employees 100 9.3 14.8 30.3 SBI Life’s diversified distribution network reduces the risk 80 64.6 of dependence on any particular channel, leverages 60 73.8 66.1 60.5 economies of scale, and allows it access to a wide 45.9 range of customer segments 40 1.6 20 29.2 24.6 23.9 24.7 24.6 0 6.2 NBP through SBIN represented 38.3%, 42.7% and SBILIFE IPRULIFE HDFCLIFE MAXLIFE BALIC 41.5% of its NBP in FY15, FY16 and FY17 Source: Companies, Axis Securities Others includes brokers, corporate agents, micro agents, direct business, referrals etc. 7 Developing multi-channel distribution to scale SBI Life Insurance up, cut concentration BANKS & FINANCIAL SERVICES Company has been building one of the largest multi-channel distribution networks among private life insurers in India, which not only enables it to reduce the risk of dependence on any particular channel, but also ensures economies of scale and easy access to a larger number of customer segments Apart from twin channel, SBI Life is also working on expanding its other distribution channels primarily direct sales, including online sales, sales by non-bancassurance corporate agents, brokers, micro-agents, common service centres and insurance marketing firms (currently contributes >2% of NBP) SBI Life has tied up with more than 50 corporate agents and 120 insurance brokers, which are supported by dedicated sales team of business development managers and area managers SBI Life is in the process of developing new sales partners through the appointment of micro-agents and Common Service Centres (CSCs).