Citigroup has a buy call on ICICI Prudential Life Insurance Company with a target price of Rs 525.The current market price of ICICI Prudential Life Insurance Company is Rs 412.50.Time period given by the brokerage is 'Long Term' when ICICI Prudential Life Insurance Company price can reach the defined target.
Investment rationale:Strong Operating RoEV IPRU Life has delivered VNB margin much ahead of our expectations FY18 VNB margin improved to 16.5 per cent vs.
Citi estimate of 12 per cent, resulting in VNB growth of 93 per cent in FY18.
This is being driven by increasing share of high margin protection business and also new savings products launched in early FY18.
While there were two accounting changes which led to higher VNB margin and operating RoEV, even adjusted for that operating RoEV was strong at nearly 18 per cent.
We expect operating RoEV of nearly 19 per cent over FY19E-20E, which in turn should drive stock valuations.
Upgrade to Buy with a revised target price of Rs 525 (from Rs 450).VNB margin could expand further VNB margin has steadily improved from 5.7 per cent in FY15 to 16.5 per cent in FY18.
Most of this expansion has been driven by better product mix and favorable operating variance.
13th persistency is at 86.9 per cent against assumption of 82.5 per cent for VNB calculation.
IPRU has not yet changed its base case persistency assumption as it wants the number to stabilize.
If and when IPRU makes this change there could be an additional leg-up in VNB margin.
APE growth was muted (FY18E +18 per cent YoY, 4QFY18 -4 per cent YoY) partly due to high base and partly due to IPRU clamping on errant intermediaries; growth should improve in FY19E.Operating parameters strong, even adjusted for one-offs IPRU has made two accounting changes to bring it in line with industry peers.
It has changed the way it accounts for one-year group term insurance, which led to higher protection APE.
Protection APE growth was 71.5 per cent for FY18; adjusting for this change it would still have been 35-40 per cent.
Also, for EV and VNB calculations it is now taking effective tax rate, which is lower than the earlier assumption of marginal tax rate.
Impact of this on EV is one-off while that on VNB is recurring.
Adjusted for tax rate change, operating RoEV would be nearly 18 per cent against reported 22.7 per cent.
Out of total VNB margin expansion of 640bps for FY18, tax rate change contributed nearly 130bps.Raising target price We now estimate VNB margin of 17.5 per cent / 18 per cent in FY19E / FY20E against earlier estimates of 12 per cent / 13 per cent.
We roll forward our appraisal value based valuation to Sep 19E and raise TP to Rs 525 (3.1x Sep 19E P/EV).