Hero MotoCorp Ltd.    
15 May 2021, 11:12AM
Hero Motocorp: playing catch-up with competitors

By Suhani Adilabadkar

Hero MotoCorp stock price lost 19% of its value over the past three months, making it the worst performer among the top three Indian two-wheeler companies. Its peer Bajaj Auto fell 7% while TVS Motors stock lost only 4% of its value since early February. Hero MotoCorp reported strong numbers in March 2021 but with double digit sequential deceleration YoY on all significant parameters, as pent-up demand and festive zeal petered out by the end of FY21. Amid the resurgence of Covid-19, localized lockdowns and plant closures, it is déjà vu for the auto sector in the upcoming June 2021 quarter.

Quick Takes 

  • The management expects commodity inflation of around 6-7% in FY22 and plans to absorb costs through price hikes and cost rationalization programs 

  • The company has entered into an alliance with Harley Davidson to service their motorcycles, parts, accessories, merchandise and developing and selling licensed Harley Davidson bikes in India 

  • Hero is developing its own electric two-wheelers in its Jaipur and Germany R&D centres, to be launched in FY22

  • Hero MotoCorp halted its plant operations in a staggered manner for four days from April 22 to May 1, and extended it till May 9 

Double digit sequential decline amidst worsening macros

Hero MotoCorp’s consolidated revenues in the quarter ended March 2021 rose 37% YoY to Rs 8,690 crore helped by good volume growth. Volumes grew at 18.5% YoY in Q4 FY21. Revenue growth was powered by scooters, premium motorcycles, spare parts business and the rejuvenation of global business. Higher revenue growth was also a result of the lower base last year due to lockdowns. Net profit came in at Rs 880 crore a 46% YoY rise, but with a sequential decline of 14% in the quarter ended March 2021. Operating profit came in at Rs 1,226 crore in March 2021, rising 1.8 times YoY.

On a sequential basis though, indications of a worsening macro environment were already visible - revenues declined 12% and net profit fell by 14%. Operating profit fell 15% QoQ. Operating margins  came in at 14.1%, expanding 330 basis points (bps) YoY. Hero has been able to maintain its superior margins through a cost savings program that has helped it offset the impact of higher commodity prices and other input costs.  

Hero MotoCorp continues to depend on rural demand

Hero MotoCorp has lost roughly 500 bps of market share in the 2-wheeler industry over the past six years. This is mostly because it lost share in the  scooters and premium motorcycle segments. It owns a 35% market share in the 2-wheeler industry. Revenues are highly dependent on the domestic market, with only 12% revenues coming from exports in Q4 FY21. Motorcycles make up 90% of total revenues catering mainly to the entry level segment accounting 70% of its motorcycle revenue pie. 

Hero was favourably positioned to benefit from customers preferring cheaper motorcycles due to the pandemic with its strong product line-up powered by Hero Splendor, Hero HF Deluxe, Hero HF Deluxe 13s and Hero Passion Pro. It saw heavy volumes from September to November last year, but volume growth started slowing from December 2020 onwards as pent-up demand waned post the festive season. Motorcycle volumes January 2021 and February 2021 volumes declined 9% and 3% YoY respectively. In March 2021, motorcycle volumes rose 70 % YoY due to a low base in March 2020, while peers TVS Motors and Bajaj Auto volumes  rose 136% and 84% YoY, respectively.

Hero derives 50% of its business from rural areas, and 20 of its top markets are either rural or semi-urban. With the rapid rise in Covid19 infections across the country, and rural India too being engulfed in the second Covid wave, Hero MotoCorp has a tough ride ahead. 

Hero lacks some of the advantages of its competitors. It’s close peer TVS Motor’s base is far more diversified across scooters (32% of volume mix), motorcycles (46%), moped (17%) and 3-wheelers (4%). The company also gets 35% of total volume growth from exports in Q4 FY21. 

For Bajaj Auto, in addition to its strong hold in the premium segment turning out to be a surprise Covid tailwind, exports have also been a major stabilizing factor which contributes more than half of its volume mix. In fact, Bajaj Auto reported the highest number of motorcycles sold in the month of April 2021, amidst lockdowns, as more than 60% of its total volumes came from exports.

A tough and bumpy ride ahead

Lower exports and missing strengths in the fast growing segments of premium motorcycles and scooters are major concern areas for Hero MotoCorp. Though export share in revenues is still in low double digits (12%) in March quarter 21, there was a 40% YoY rise from Rs 751 crore, a year ago to Rs 1,050 crore. The company aims to scale up its exports by identifying key markets and introducing specific products in countries such as Nigeria where motorcycles require long seats. 

There are also orders coming in from Mexico and Columbia. The company has managed to double its market share in Columbia to 6% in Q4FY21 over the past three quarters. Hero is also reworking its strategy in Bangladesh. The management sees exports as a major growth driver in the next 3-5 years. 

While cheaper motorcycles may find it tough to find buyers as Covid hits the purchasing power of lower income groups in the near term, the high salaried class and wealthier sections are buying premium and ultra-premium motorcycles and sports bikes. To take advantage of this Hero has entered into a partnership with Harley Davidson to accelerate and enhance its premium segment strategy by selling Harley bikes. The company also outlined a plan of introducing more than 10 models every year over the next 3-5 years from its own stable, including refreshes. This will span across the entire middle-weight segment, and across different classes like adventure, commuters, sports bikes etc.

The scooter segment is also a work in progress. The management said that after a long time, the company has reached 10% market share in the March 2021 quarter in this segment. Hero’s Pleasure and Destini scooters face tough competition against TVS Jupiter, NTORQ and Honda Activa. 

The street is also waiting to see how Hero MotoCorp’s three-pronged electric vehicle strategy plays out. The company owns a roughly 35% stake in startup Ather Energy, which  makes electric scooters. Hero is also developing its own models in its Jaipur and Germany R&D centres to be launched in FY22. And lastly along with its own models based on fixed charging, the company has also tied up with Taiwan’s Gogoro which will help in utilizing its battery swapping platform for Hero MotoCorp. 

How all of these pieces of the puzzle fit in to deliver future growth will be interesting to watch for investors.

Hero MotoCorp Ltd. has gained 25.48% in the last 1 Year
Trendlyne Marketwatch    
14 May 2021
Markets close lower, PowerGrid Infra Invit lists at a 4% premium

Nifty 50 closed at 14683.85 (-12.7, -0.1%) , BSE Sensex closed at 48732.55 (41.8, 0.1%) while the broader Nifty 500 closed at 12476.60 (-61.4, -0.5%)

Market breadth is in the red. Of the 1747 stocks traded today, 641 showed gains, and 1082 showed losses.

  • Cyient, Bajaj Holdings & Investment, Schaeffler India, and Aavas Financiers are trading with higher delivery volume compared to the previous day.

  • ICICI Securities maintains a 'Buy' rating on Sonata Software expecting a revival in non-essential retail and manufacturing which will further boost revenue growth. The brokerage's target price is at an upside of 17.7%.

  • TCNS Clothing, and Mas Financial Services are trading in the green with 20 and 11 times the weekly average trading volume respectively. 

  • Happiest Minds' Q4 net profit declines nearly 17% QoQ to Rs 37 crore due to an increase in expenses by 17.8% QoQ.

  • Indian Energy Exchange's revenues rise by 35% to Rs 93.8 crore YoY in Q4FY21 due to a 63% increase in the volume of power traded to 22.4 billion units.

  • Motilal Oswal maintains a 'Buy' rating on Granules India on the back of the pharma company's strong performance in the formulations and intermediates division in Q4.

  • Cipla, Dr. Reddy's Laboratories and SKF India are trading higher whereas Just Dial, Larsen & Toubro, and Jindal Stainless are trading lower ahead of their Q4FY21 results later today.

  • Pharmaceutical company Lupin reports a total income of Rs 3,783 crore in Q4FY21, a 2% decline YoY, with net profits of Rs 460 crore, an 18% YoY jump.

  • PowerGrid Infrastructure Investment Trust lists at Rs 104 per share, a 4% premium to the IPO issue price of Rs 100 per share.

  • Maharashtra Seamless' promoters sell 80,000 shares (0.11% of the company) worth Rs 2.4 crore via an insider trade. Earlier this month, L&T Mutual Fund sold 14 lakh shares or 2.1% of the company.

  • Jindal Steel & Power reports a 34% jump YoY in revenue for Q4FY21 at Rs 11,900 crore with net profits up by nearly 23 times to Rs 1,900 crore due to rising steel prices and a 27% growth YoY in exports.

  • Motilal Oswal upgrades its rating on Godrej Consumer Products to 'Buy' from 'Hold' following the appointment of Sudhir Sitapati as the managing director of the FMCG company.

  • UPL’s Q4 net profit rises 73.5% YoY to Rs 1,361 crore with revenues rising by 15% YoY to Rs 12,796 crore.

  • Nifty 50 was trading at 14663.35 (-33.2, -0.2%) , BSE Sensex was trading at 48656.98 (-33.8, -0.1%) while the broader Nifty 500 was trading at 12504.65 (-33.3, -0.3%)

  • Market breadth is in the green. Of the 1662 stocks traded today, 886 were on the uptrend, and 728 went down.

Riding High:

Largecap and midcap gainers today include Asian Paints Ltd. (2773.60, 8.50%), UPL Ltd. (743.55, 7.50%) and ITC Ltd. (212.35, 4.48%).


Largecap and midcap losers today include Adani Total Gas Ltd. (1192.00, -9.25%), Jindal Steel & Power Ltd. (417.15, -8.64%) and NMDC Ltd. (185.70, -8.50%).

Volume Rockets

27 stocks in BSE 500 are trading on high volumes today.

Top high volume gainers on BSE included Omaxe Ltd. (83.80, 13.63%), Welspun India Ltd. (101.25, 10.96%) and Asian Paints Ltd. (2773.60, 8.50%).

Top high volume losers on BSE were Jindal Steel & Power Ltd. (417.15, -8.64%), Vinati Organics Ltd. (1677.80, -4.73%) and Honeywell Automation India Ltd. (42000.00, -4.49%).

TCNS Clothing Co. Ltd. (534.00, 4.96%) was trading at 29.6 times of weekly average. Mas Financial Services Ltd. (861.50, 3.18%) and GlaxoSmithKline Pharmaceuticals Ltd. (1503.80, 1.78%) were trading with volumes 15.8 and 7.0 times weekly average respectively on BSE at the time of posting this article.

BSE 500: highs, lows and moving averages

16 stocks took off, crossing 52 week highs,

Stocks touching their year highs included - Adani Transmission Ltd. (1143.50, -4.99%), Birla Corporation Ltd. (1054.00, 1.06%) and Chambal Fertilisers & Chemicals Ltd. (270.25, 5.69%).

12 stocks climbed above their 200 day SMA including Omaxe Ltd. (83.80, 13.63%) and SIS Ltd. (399.95, 3.43%). 10 stocks slipped below their 200 SMA including Granules India Ltd. (321.65, -4.47%) and DCB Bank Ltd. (96.10, -4.28%).

Tata Consumer Products Ltd.    
14 May 2021
Rise in raw tea prices is a thorn in the side for Tata Consumer Products

By Vivek Ananth

The trend in Q4FY21 among consumer products companies is rising raw material costs. This has dented quite a few companies’ margins, and as a result their profitability. Tata Consumer Products is no different. It was already facing headwinds on raw tea costs since the beginning of ...

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Number of FII/FPI investors decreased from 842 to 831 in Mar 2021 qtr
The Baseline    
14 May 2021
Five Interesting Stocks Today
  1. UPL: This chemicals company, which has been historically at a low average PE compared to its peers, has been rising steadily through the year and hit a fresh 52 week high today after a strong performance in its Q4 results. The company's year returns have outperformed the Nifty by over 37%. 

  2. Coforge: This tech company's promoter has sold off 1.9 million shares in the company via a market sale, amounting to 3.14% of traded shares. It saw its share price rise sharply over the past week on high volumes following its Q4 results, however analysts see limited upside on the stock owing to its already sky-high valuations.

  3. Vedanta: This metals company has seen its share price gain at a steady clip as metals prices recover globally, and the stock hit a fresh year high in the past week. The company reported a sharp jump in  both YoY and QoQ net profit growth in its Q4 results (see stocks with similar performance).  While mutual funds have been reducing their holdings in the stock, FIIs/FPIs have increased their stake

  4. Persistent Systems: This product engineering company has got analysts across brokerages enthusiastic after its Q4 results, receiving six target price upgrades in the past couple of weeks. Analysts have cited improving deal wins, and strong Q4 growth despite seasonality in some verticals. 

  5. Castrol India: This oil lubricant company's stock has had a tough year, underperforming the Nifty by over 50%, and seeing a profit decline in CY20 due to Covid19 disruptions and the decline in auto demand. The stock is in the Buy Zone compared to both its historical PE and PBV. Analysts are however positive on the stock citing its wide distribution network and brand - but with the second wave, the company is likely to see ups and downs continue in the short term. 

16 May 2021, 05:18PM  Like
16 May 2021, 05:18PM  Like
The Baseline    
13 May 2021
Chart of the week - Tata Motors' retail sales rise in FY21

Automobile makers had a tough year. In FY21, 23 lakh passenger vehicles (PVs) were sold at a retail level, a 14% decline YoY. The country's largest carmaker Maruti Suzuki India (48% market share) sold 1.7 lakh fewer cars than the previous year. Mahindra & Mahindra sold 85,000 fewer cars in FY21 than FY20. Tata Motors and Kia Motors were the only PV makers to sell more cars in FY21 than the previous year among the top-10 carmakers in the country.

Reliance Industries Ltd.    
12 May 2021
Reliance’s cash machine still heavily dependent on its oil to chemicals business

By Vivek Ananth

When the pandemic hit last year, there were worries about Reliance Industries’ businesses (especially in refining and retail) being impacted by a lack of demand. Then came a series of choreographed announcements on fundraises by its digital and retail businesses, and long-pending asset monetisation plans of its ...

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Reliance Industries Ltd. has gained 34.91% in the last 1 Year
The Baseline    
11 May 2021
Five Interesting Stocks Today
  1. SBI Life Insurance Company: This life insurance company’s promoter Ca Emerald Investments cut its stake by 4.2% selling 4.2 crore shares. This share sale invited a host of foreign institutional investors (FIIs), domestic institutional investors (DIIs), and sovereign wealth funds. Among the top buyers - Axis Mutual Fund, HDFC Life Insurance Company, the Government of Singapore, Societe Generale, and the Vanguard Fund.

  2. Caplin Point Laboratories: This pharmaceutical company’s stock is up by nearly 30% in one month and is 8% off its 52-week high. Its valuations remain cheap as the company’s trailing 12-month price to earnings ratio is 18.2, below the average historical PE of 27.9 times, putting it in the neutral zone.

  3. Happiest Minds Technologies: This IT services stock is buzzing ahead of its Q4 results. In one week, the share is up by 14%. The Q4 results will be declared on 13 May.

  4. Deepak Nitrite: This commodity chemicals company reported a 39% growth YoY in revenues and a 68% jump in net profits. However, some brokers are not convinced. In a report post the Q4 earnings, HDFC Securities downgraded its rating on the company to ‘Sell’ from ‘Add’ expecting no further growth in phenolic production and declining prices of isopropyl alcohol, a chemical used to produce sanitizers. The brokerage’s target price is at a downside of 14% against the market price.

  5. Indian Energy Exchange: Foreign institutional investors (FIIs) are accumulating this power trading company’s stock, while domestic institutional investors (DIIs) are exiting. At the close of the March 2021 quarter, FIIs held a 37% stake in the company, against 29% in the previous quarter. On the other hand, DIIs sold 1.3 crore shares decreasing their holding in the company by 22% QoQ in Q4.

1 Comment
sona11 Why is then Trendlyne valuation score is in red for Caplin?
12 May 2021  Like
Navin Fluorine International: Will the bet on specialty fluorochemicals pay off?

by Aakash Athawasya

When the Covid-19 pandemic began in March 2020, Navin Fluorine International (Navin Fluorine) was unfazed. Operations at the commodity chemicals company’s Gujarat and Madhya Pradesh plants were uninterrupted even during the lockdown. The management in Q1FY21 was confident of demand sustaining even with falling economic activity, but this ...

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Navin Fluorine International Ltd. has gained 119.02% in the last 1 Year
Caplin Point Labs: Being different continues to make a difference

By Ketan Sonalkar

Caplin Point Laboratories is different from most Indian pharmaceutical companies  in its choice of a growth path of exports to lesser penetrated and relatively unregulated markets. This is a different strategy from its competitors, which has paid off in the long run. 

The company is now a dominant player in the semi-regulated generic markets of Latin America (LatAm) and Africa. It forayed into these geographies in the early 2000s and established a strong and deep network, monetizing its early mover advantage in then untapped markets. 

Caplin Point Labs has also worked to keep up with changing circumstances and environments, making strategic decisions that have ultimately added up to the bottomline. These include the conversion of fast selling generics into branded generics for higher profitability. Caplin Point Labs then entered the regulated markets of the US, which now form a small percentage of sales. There are plans afoot  to enter Canada, Australia, China and Brazil shortly. The company’s stock was up 7% on the day of  the results, showing that investors were reposing their faith in the company.

Quick Takes:

  • Total revenue of Rs 1084.8 crore for FY21, registered a growth of 20% over FY20 total revenue of Rs 904.5 crore.

  • Q4 FY21 revenues grew 29.5% year-on-year (YoY) to Rs. 278.7 crore

  • US sales increased 31% YoY, despite a pandemic situation prohibiting many outpatient services in the US.

  • There are agreements in place for registration of products in Canada, Australia and Brazil; revenues from these markets are expected to start in the next 18-24 months

The Response to Covid - Converting a stumbling block into opportunities

As with all other industries, the pandemic situation in FY21 affected Caplin Point Labs too. However, the company moved swiftly to make changes in the inventory and supply via online models. 

In the US markets, prescription drugs sales dropped, but was more than compensated by online sales and  pharmacy driven sales, where Caplin Point Labs had a strong presence. Secondly, the company rationalised a part of its inventory, and moved from non-critical to critical products, focused on the fastest moving products recommended by WHO and was able to ensure supply to customers.

The management evaluated an opportunity for contract manufacturing of Covid19 vaccine but is not keen on pursuing it. According to the management, vaccine manufacture comes under the spectrum of biologicals, while Caplin Point Labs is a pharmaceutical company. This would need remodelling of their plants, impairing production, and will consequently take time.  Management decided not to address this opportunity at this point of time and instead focus on the company’s existing plans.

Consistently increasing revenues in last four quarters

Caplin Point Labs has seen a YoY revenue growth of 27.2% to Rs 288.2 crore in Q4 FY21. The firm was able to cross a revenue of Rs 1000 crore for the first time in a financial year with total revenues of Rs 1,084.8 crore.

Despite being in a challenging year, the company was able to supply to Latin American markets from India or China, where it also has operations, depending on the availability and better pricing of the raw material. Online sales with Quentenx in US markets generated a sales of $9,85,000 in Q4 FY21. Emergency orders from Brazil and Mexico, where operations are yet to begin, helped generate revenue from newer markets in response to pandemic dependent emergency supplies.

Newer markets and opportunities – Emergency approvals give a boost

Caplin Point Labs is planning to enter newer markets in LatAm, and is looking at Bolivia, Peru, Chile and Columbia. The company expects to replicate its business model based on its experience in other LatAm countries.

According to the management, the bigger opportunity in LatAm lies in Brazil and Mexico, where they have registered for business but currently are only supplying emergency orders. With this, the company will  move from smaller geographies  to larger ones in LatAm.

Major growth in LatAm is expected from Mexico. Apart from emergency supplies, further expansion plans  in these countries would be evaluated by the company as soon as  the Covid19 curve flattens. In Brazil, the company is pretty optimistic about the approval process coming down from four years initially, to much lower in the near future.

The other new markets that the company plans to enter are Canada and Australia. Partners for these countries have been finalised and revenue contribution from these geographies can be expected in the next 18-24 months.

The US opportunity is crucial in the next few years

Caplin Point Labs is already present in the US, with revenue contribution of 8% in Q4 FY21. The growth plans in the US are going to be driven through its subsidiary, Caplin Steriles. The company has a 75% stake in its US subsidiary, Caplin Steriles and the rest (25%) is held by other investors. 

According to the company’s estimates, the market size of products that are approved or under approval is $670 million, while they are looking at a market size of around $3 billion over the next 5 years, counting approved products and products in the pipeline. As on date, 20 ANDAs (Abbreviated New Drug Application) have been filed and 15 ANDAs have already been approved. In the next four years, there are around 40 more ANDAs in the pipeline that will come onstream.

The strategy for US business is to move from simple molecules to complex ones that would lead to high value products. The Research & Development team has expanded from 107 members in 2017 to more than 300 at present count. 

However, there are a couple of challenges in the US business. The capacity utilisation of the US business at present stands at 40% to 45%. The company expects to ramp this up once approvals for ANDAs come through, and expects to utilise unused capacity to launch the products. Regulatory compliance also poses a big hurdle in the US.

Backward integration with an eye on US expansion

Current expansion plans include investments for API (Active Pharmaceutical Ingredient) plants. According to the management, this was a conscious decision based on a few factors. Firstly, there was a need to reduce the dependency on China for APIs and for ease of regulatory compliance.

For US business, approvals can sometimes be a challenge if raw material is outsourced. To mitigate this the company has chosen a backward integration approach where they would have control over the whole process of manufacturing, right from the raw material (APIs) to the finished product.

Capex plans – another two years for impact

While the company has outlined a capex plan of 300 crore, this would take at least two years to fructify - being spent primarily on three projects.

  • Oncology plant - commitment of Rs 160-165 crore

  • API plant - commitment of Rs 70-100 crore

  • Expansions and maintenance at current plants - commitment of Rs 30-35 crore

Current Status:

  • Oncology plant – Acquired a ready building. Design and engineering stage has been completed. Estimated to be ready in a year. 

  • API plant - This would be a greenfield project. The land for the same has been acquired. It would take about two years for the plant to get fully operational.

  • Expansions at the current plants are on track and these would take another fifteen months for completion. (Rs 30-35 crore)

Caplin Point’s CAGR for the last 10 years for Revenue, EBITDA, PBT and PAT is above 28%. This is a good number for any company, particularly in the pharma industry. If we take a look at the returns of the stock for the last 5 years, Caplin Point Labs has been a multibagger and fared better than most of the other stocks from this sector. The other stock that has outperformed the industry is Divis Laboratories.

With revenues crossing Rs 1,000 crore in FY21, the plans in place for expansion in new markets, growing market share in the US and the company delivering in FY21 despite challenges faced by the pandemic, FY22 will be interesting to see in terms of the growth trajectory.

Caplin Point Laboratories Ltd. has gained 21.58% in the last 6 Months
SBI Life makes a comeback, but the road ahead isn’t paved with good fortune

By Vivek Ananth

After a couple of tepid quarters in the beginning of FY21, SBI Life Insurance saw robust growth in gross written premium in the second half of FY21. The company ended Q4FY21 with a nearly 50% year-on-year growth in gross written premium to Rs 15,650 crore, which helped it close FY21 with a 24% YoY rise in this metric to Rs 40,630 crore. Net profit for Q4FY21 came in at Rs 532.4 crore, compared to Rs 530.7 core a year ago.

This growth in premiums during H2FY21 came mainly through individual customers paying to renew the insurance and savings plans i.e. renewal premiums. While new business premium (i.e. premiums received on new products sold) rose 24% in FY21 to Rs 20,520 crore, renewal premium rose 23% to Rs 29,630 crore.

SBI Life Insurance is the largest private insurer in new business premium with a market share of 21.9% at the end of FY21. After the company announced its results, the stock touched its 52-week high of Rs 1,044.70 on Friday. During trade on May 7, 2021, buyout firm Carlyle sold its 3.5% stake in SBI Life for Rs 3,300 crore, according to reports.

We dig in to SBI Life’s FY21 and Q4FY21 numbers to figure out how FY22 will pan out for the life insurer.

Strong H2FY21 raises FY21 performance

As new business premiums from both individual and group products fell during the first two quarters of FY21, the new business margin (NBM) also took a hit. NBM indicates the expected profitability of the new businesses i.e. premiums the company has written. After finishing Q4FY20 with NBM of over 20%, this fell below 19%.

Business saw a revival due to customers loosening their purse strings as economic prospects improved.  Improving customer confidence came with  increased buying in insurance policies and investments in insurance savings plans. The latter was mostly because the stock market’s stellar performance led to more customers buying savings plans and unit-linked insurance policies or ULIPs.

However, despite the revival in SBI Life’s business in the second half of FY21, the company’s annual premium equivalent (or APE) in FY21 rose at a slower pace of 6.6% over FY20. (APE is the sum of annualised premium written by a life insurer during a financial year and includes 10% of single premiums).

This shows the impact of  lockdowns and the resultant economic pain on customer willingness to buy a life insurance policy or a savings plan/ULIP.

Among the three listed life insurance players, SBI Life has the lowest operating expense ratio. In fact, it is the lowest cost life insurance player in India. Using its parent State Bank of India’s pan-India branch network, the company plans to increase its market share, via this network. The company ended FY21 with an operating expense ratio of 4.8% (vs 5.9% in FY20) and commission ratio of 3.5% (vs 4% in FY20).

This suggests that as the company’s business grows in the future, its margins will improve as it has managed to control its costs.

Protection product’s share rises in FY21

A positive signal is the rising share of protection products (protection against risk of death) over the past four financial years. This shows that SBI Life isn’t relying on just one category of products for growth.

Out of the new business premium of Rs 20,620 crore written in FY21, nearly 12% came from protection products compared to 12.5% a year ago. This might seem confusing unless we look at the share of annual premium equivalent that the company has written over the years.

 What the graphic above shows is that in terms of APE, the share of protection (both group and individual) has been rising steadily over the past few years. This ties in with the company’s policy of not pushing one particular product. The management claims that it presents the available product options to its customers, and lets them make the choice.

This could be the reason that the proportion of ULIPs in total APE in the past four years has gone up from around 66% in FY18 to 70% in FY19 and FY20, and now down to 66% again in FY21. ULIPs have been hit by a change in the laws that taxes income from ULIPs above a certain threshold. This is expected to impact large ticket ULIPs, and the impact on SBI Life is expected to be limited.

What is also encouraging is the rising persistency of customers’ paying their premiums across various time periods. Persistency denotes the stickiness of customers paying their premiums on insurance policies.

 The management said that they are taking all necessary measures to revive lapsed policies. The results of this will have to be seen in the renewal premiums that the company earns every year.

Covid and future risks

SBI Life has created a specific provision, like other life insurers, of Rs 183 crore for Covid related death claims. There were a total of 5,076 claims worth Rs 320 crore that pertained to Covid in FY21. On an overall basis, the company settled nearly Rs 3,000 crore worth of claims in FY21.

The current environment with lockdowns does make it difficult to guess how customers of life insurance companies will behave. Any turmoil in the markets can impact the sale of ULIP products as well. The company is also focussing on credit protection business (insurance on life of a borrower mandated by lenders).

How that will pan out in the current environment is unclear, considering the economic uncertainty. The management for now, seems confident of a good performance in FY22.

SBI Life Insurance Company Ltd. is trading above all available SMAs