Pricey valuation may not limit upside in SBI Life Insurance stock

Increased business contribution from SBI's branches and lower costs to enable faster growth in earnings

Strong growth in business and an equally robust outlook is a key reason for the rise in SBI Life Insurance Company's stock valuation, which at 3 times FY21 embedded value, is near its peak. The stock has surged 64 per cent in 2019 so far, versus a 15 per cent rise in the S&P BSE Sensex and 21-50 per cent gain in case of ICICI Prudential Life and Max Financial. HDFC Life is the only life insurer to have matched SBI Life stock's returns.

Though SBI Life's pricey valuation is turning some analysts a bit cautious, many others see further upside on the back of strong growth potential led by gains from its bank assurance (banca) channel and improving cost structure.

It is a known fact that literacy about life insurance is only improving and insurers like SBI Life and others would benefit.

For SBI Life, though, it is blessed with a large country-wide branch network (over 24,000) of its parent – State Bank of India (SBI). SBI Life had generated 57 per cent of its new business premium (NBP) during April-September 2019 (H1FY20) through SBI's branch network. Although this could also be seen as a concentration risk, there is also huge room to grow through this channel.

According to HDFC Securities' analysts, even now, only 61 per cent of SBI's branches are activated. The domestic brokerage believes that branch activations will increase and the (business from) SBI channel will easily grow at 15-20 per cent annually over next 3-5 years. The analysts foresee a 25 per cent upside in the SBI Life stock from current levels. In FY19, SBI's network contributed Rs 3.8 million per branch (in terms of NBP, which SBI Life expects to increase to Rs 4.5 million in FY20. A combination of increased branch activation and higher contribution per branch, could help SBI Life growth at a good pace.

Even during April-November 2019, SBI Life clocked 22 per cent growth in new business sales (annual premium equivalent) and analysts expects it to rise by 18 per cent annually during FY19-FY22.

This apart, SBI Life also has the lowest cost ratio at 10.4 per cent in H1FY20 versus 11-23 per cent for other listed players. This along with a satisfactory persistence ratio (indicating policyholders’ stickiness) should help in terms of faster margin improvement. Rising demand for high-margin protection products such as term plans also augurs well for the sector.

Overall, long-term investors can consider the stock on dips.