SBI Life rises 3% after Motilal Oswal initiates coverage with 'Buy' rating

The brokerage expects the company to maintain its cost leadership with GWP remaining at nearly 10 per cent over FY23E.

Shares of SBI Life Insurance rose 3 per cent on the BSE on Wednesday after the global brokerage firm Motilal Oswal Financial Services (MOFSL) initiated the coverage on the stock with a 'BUY' rating. The target price has been set at Rs 1,000 - up 20 per cent against Tuesday's close of Rs 836.30. 

At 11:43 AM, the stock was trading nearly 3 per cent higher at Rs 861 on the BSE as compared to a 0.11 per cent rise in the S&P BSE Sensex. Shares of SBI Life had hit a 52-week high of Rs 1,030 on September 30, 2019, while its 52-week low level stands at Rs 520, hit on March 19, 2020. 

"SBI Life is India’s largest private life insurer with an Individual weighted received premium (WRP) market share of 13.3 per cent in FY20. Over FY16-20, it posted a strong new business WRP compound annual growth rate (CAGR) of nearly 21 per cent, led by a strong distribution network and healthy execution. The company’s strong parentage and wide branch network provide it with a distinct distribution advantage over its peers, helping it to maintain low-cost ratios and capitalise on the large clientele of SBI (449 million), thus, providing it with a long-term structural growth story," says MOFSL in its rating rationale.

The brokerage further notes that SBI Life has one of the lowest cost structures amongst peers. Interestingly, the company has steadily reduced its total expenses as a percentage of the gross written premium (GWP) from 15.9 per cent in FY13 to 9.9 per cent in FY20, led by its strong bancassurance channel. 

Further, SBI Life has lower bancassurance commission rates (v/s peers), which allows it to maintain strong control on cost ratios, the brokerage adds. 

MOFSL expects the company to maintain its cost leadership with GWP remaining at nearly 10 per cent over FY23E. This would help SBI Life maintain higher margins on its products (v/s peers) and improve profitability. It expects SBI Life to deliver profit after tax (PAT) CAGR of 15 per cent over FY20-23E.

The brokerage, however, says that FY21E will be a weak year for SBI Life in terms of premium growth and muted value of new business (VNB) trends. However, premium growth should rebound from FY22E.

"Overall, we expect an operating return on embedded value (ROEV) to normalise toward 18 per cent levels with Embedded Value (EV) reflecting 16 per cent CAGR over FY20-23E. Thus, we value the company at Rs 1,000/share based on 2.8x FY22E EV. We initiate coverage on SBILIFE with a Buy rating," MOFSL said in a report dated September 1. 

Recently, NSE Indices, a subsidiary of the National Stock Exchange (NSE) announced that SBI Life along with Divi's Lab will enter the Nifty50 index from September 25, 2020. 

For the quarter ended June 2020, SBI Life had reported a 5 per cent increase in net profit at Rs 390 crore. The private sector life insurer, promoted by the country's largest lender SBI, had posted a net profit of Rs 370 crore during the corresponding April-June period of 2019-20. The company's gross written premium during Q1 FY21 rose by 14 per cent to Rs 7,640 crore as against Rs 6,690 crore in the same quarter of the preceding fiscal.