LICI reported strong traction in Q1FY23 and printed APE of Rs 102.7 bn. VNB margin moderated 150bp q-o-q to 13.6%, while shareholders’ PAT stood at Rs 6,829 m in Q1FY23 v/s Rs 29 m in Q1FY22. Individual NBP grew 36% y-o-y to Rs 109.4 bn. The Individual/Group business constituted 63%/37% of APE. Within the Individual business, the share of PAR products remained stable at ~92%. In terms of NBP, the share of PAR products was lower at 70%. Annuity or Pension/ULIPs constituted the bulk of residual with a 23%/5% share. Both these segments saw strong growth in Q1FY23. We expect the momentum to sustain, led by the introduction of new products.

The 150bp q-o-q moderation in VNB margin was driven by a revision in Annuity rates and a shift in the product mix sold within the Group business. This was offset by the positive impact of an assumption change (up 80bp). The upward revision in the Annuity rate was undertaken to bridge the gap with its peers and gain market share. Within the Group business, LICI sold more fund-based products that are usually a lower margin business.

We revise our FY23/FY24 VNB margin by ~200bp/~100bp to 14.2%/14.6%, and raise our VNB estimate by 24%/18%. We expect LICI to deliver a 13?GR in APE over FY22-24, thus enabling 14% VNB CAGR. However, we expect operating RoEV to remain modest at 12.4%, given its lower margin profile than private peers. We maintain our Buy rating at an unchanged TP of Rs 830 (0.8x FY24E EV).

Plugging gaps; share of banca channel up

LICI reported a 20% y-o-y growth in net premium, led by a 35%/9% growth in the new/renewal business. Within the distribution mix, sales (Individual NBP) in the banca channel grew 135% y-o-y to Rs 2.9 bn. However, this was on a low base. As a result, the share of the banca channel improved 120bp y-o-y to 2.7%. LICI is committed to driving higher sales in the banca channel, led by an expanded product suite and incremental focus on this channel. Growth in the agency channel remains strong (up 35% y-o-y) and constitutes 97% of the mix. Agents are being continuously trained to sell Non-PAR products. This will play an essential role in driving sales of the same.

Highlights from commentary

LICI continuously increased its market share in CY22. It launched two new Non-PAR products in Q1FY23. The management said it will focus on the launch of Non-PAR products only. It also launched a channel-specific product for the first time.

Valuation and view

LICI has all the levers in place to maintain its leading position and ramp up growth in the highly profitable segments (mainly Protection, Non-PAR, and Savings Annuity). However, changing gears for such a vast entity requires a superior and well-thought-out execution. LICI’s valuation, at 0.7x FY24E EV, seems reasonable, considering the gradual recovery in margin and diversification in the business mix. We maintain Buy.