Life Insurance Industry - Sep09

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					                 Life insurance
                                           Back to basics
INDIA RESEARCH


SEPTEMBER 2009     Pathik Gandotra   ●   Neha Agrawal   ●   Chinmaya Garg
                                       IDFC - SSKI INDIA



                 Content
                 Investment Argument ........................................................................................ 4

                    Indian Life Insurance: Turning another corner .....................................................4

                    Evolving regulatory landscape: A balancing act .....................................................7

                    Valuing life insurance businesses: Back to basics! ..................................................8

                    Valuations & View .............................................................................................13

                    Key risks .............................................................................................................14

                    How the players stack up ....................................................................................16

                 Companies.......................................................................................................20

                   Birla Sunlife ....................................................................................................... 21

                   HDFC SL ......................................................................................................... 31

                   ICICI Pru ......................................................................................................... 41

                   Reliance Life ..................................................................................................... 53

                   SBI Life ............................................................................................................ 63




SEPTEMBER 2009                                                                                                                              2
                                                                                                                                                       Sector report
     INDIA RESEARCH


          September 2009         Life Insurance
       BSE Sensex: 15689
                                 Back to basics
                                 The Indian life insurance market has witnessed unprecedented volatility in its growth
                                 rates, margins and valuations over the past 24 months, quite an antithesis to the
                                 annuity nature of the business. While the industry is witnessing weak growth, we
                                 believe in its long-term potential. We expect favorable demographics, low social
                                 security cover and high level of household savings to drive ~18% CAGR for the
                                 industry over FY10-15, and growth to stabilize at least at nominal GDP growth rates
                                 in the longer term. We expect our coverage universe to break even over FY12-13, and
                                 deliver reasonably attractive long-term RoEs of 20-25%; though evolving regulation
                                 remains a key risk. While the industry’s high beta can be justified given the unit-
                                 linked product mix, a pendulous swing in valuations for an annuity-based business is
                                 definitely out of sync. In this context, we propose an alternate approach based on
                                 DCF of long-term accounting profits/ cash flows to be used in conjunction with the
                                 widely used appraisal method. The sector is poised for public listings over next 12
                                 months, which means value unlocking for the sponsors. We are Overweight.
                                 Growth potential intact: Given its unit-linked nature, the downturn in capital markets
                                 since mid-Jan ‘08 has steered the industry away from scorching and seemingly invincible
                                 growth rates of FY05-07 to a phase of decline. However, we believe in the industry’s
                                 long-term potential as growth drivers are intact. We expect the industry to outperform
                                 nominal GDP growth rates over the next 10 years and penetration levels to rise to ~6.5%
                                 of nominal GDP from 4.8% as of March’09.

                                 Industry transitioning to the next life-stage; need to change approach: Most private
                                 insurers would achieve P&L break-even by FY12-13E, driven by reviving business
                                 volumes, declining expense ratios and improving conservation ratios. In this light, we
                                 advocate an alternative methodology based on DCF of their long-term accounting profits
                                 which would be rid of the near-term volatility in premiums, margins and consequently
                                 profits. In the eventual analysis, we are valuing insurers based on both the appraisal and
                                 DCF methodologies.

                                 We are Overweight on the sector: Combined value of our universe amounts to
Pathik Gandotra                  ~US$20bn, and at our target price contributes ~33% of the parents’ market
pathik@idfcsski.com              capitalization. The evolving regulatory landscape, however, is a key risk to our estimates.
91-22-6638 3304                  The imminent IPOs and relaxation in foreign ownership are near-term catalysts.
Neha Agrawal
neha@idfcsski.com                Valuation metrics
91-22-6638 237
                                     Gross Premium            CAGR over Appraisal             DCF Val   Value attributable (Rs) Value per % of CMP
Chinmaya Garg                            FY09 (Rs bn) FY09-13E (%) Val (Rsbn)                 (Rs bn)   to parent (Rs bn)*   parent share of parent
chinmaya@idfcsski.com             ICICI Pru       153.6                 20         346.2        361.9        241.0- 230.6        207-217     28-29
91-22-6638 3325                  HDFC SL           55.7                 23         131.7        155.1          103.3-87.7        305-359     12-15
                                 Reliance Life     49.3                 35         197.3        183.1         197.3-183.1        746-803     82-89
IDFC - SSKI Securities Ltd.      SBI Life          72.1                 21         172.1        159.2           114.6-106        168-181          10
701-702 Tulsiani Chambers,       Birla Sunlife      44.7                  26        126.3       110.9           84.1-73.9        778-885     79-90
7th Floor (East Wing),           * % of economic interest less 10% holding company discount
Nariman Point, Mumbai 400 021.
Fax: 91-22-2204 0282             “For Private Circulation only”                       “Important disclosures appear at the back of this report”
                                                  IDFC - SSKI INDIA


                                  INVESTMENT ARGUMENT
                                  After an extremely tough period for the Indian life insurers over FY07-09, we
                                  expect the industry to outperform the nominal GDP growth rate over the longer
                                  term with growth driven by fundamental factors like favourable demographics,
                                  low social security cover and high savings ratio. While the predominantly unit-
                                  linked nature of the portfolios of Indian insurers aligns with the customer
                                  psyche, it also implies a high beta for the industry. Nonetheless, we believe the
                                  steep correction in life insurers’ peak valuations (60-80% over Jan-Nov ’08), as
                                  NBAP multiples gyrated to market tunes, was definitely unwarranted. In this
                                  context, we propose a re-look at the valuation methodology based on players’
                                  long-term profitability. As companies are on the threshold of break-even,
                                  traditional valuation metrics such as DCF of long-term accounting profits/ cash
                                  flows, price to book, and earnings multiple impart higher transparency and
                                  investor confidence. We continue to use the appraisal method (embedded value
                                  + structural value) in conjunction with our new approach. The evolving
                                  regulatory landscape remains a key risk to our estimates. We are Overweight.

                                  INDIAN LIFE INSURANCE: TURNING ANOTHER CORNER
                                  The Indian life insurance industry is most certainly at an inflexion point with various
                                  competing forces at play from volatile capital markets challenging the growth
                                  trajectory to an evolving regulatory landscape. The verdict is unequivocal – that the
                                  industry would transition from a phase of ‘scorching growth’ to ‘efficiency focus’
                                  over the next few years. However, we remain convinced of the long-term growth
                                  potential of the industry on the back of India’s strong demographic profile, low
                                  social security cover and high savings ratio. We believe industry penetration would
                                  increase to 6.4% of nominal GDP by FY20 from 4.8% as of FY09, with steady-state
                                  growth expected to run at least at nominal GDP growth. Our coverage universe of
                                  five insurers is expected to gain a ~7.5% market share (aggregate) to ~23% over
                                  FY09-20.

                                      Indian life insurance industry – at an inflexion point
  Distribution-driven growth      Over FY06-09, the hot appetite for ULIP products led to huge investments in
       likely to take a hiatus;   distribution networks by private players – fuelling steep growth in the industry. In
      efficiency-focus would
             take precedence
                                  contrast, near-term growth prospects appear challenging given the volatile capital
                                  markets and slowdown in economic activity. In this context, the Indian life
                                  insurance industry is currently at another inflexion point with distribution-driven
                                  growth likely to take a hiatus, and instead an efficiency-focus take precedence.

                                  •   On the back of increasing efficiency and cost control focus, we expect our
                                      coverage universe of five insurers to become profitable over the next 24 months.

     We expect 160bp rise in      •   Long-term growth potential remains intact given the strong underlying drivers of
      penetration by FY20 to          favourable demographics, low social security cover in India and a high savings
       6.4% of nominal GDP            ratio. Consequently, penetration is expected to increase by ~160bp over FY09-20.
                                  •   We expect our coverage universe to gain critical mass over the period with their
                                      combined market share likely to increase to 23% from ~16% in FY09. Steady-
                                      state industry growth is expected to at least track the nominal GDP growth rates.



SEPTEMBER 2009                                                                                                          4
                                                                         IDFC - SSKI INDIA


                                  Exhibit 1: Indian Life Insurance – life stage cycle
                                                        High-growth                                  Efficiency           P&L and Capital                               Steady state growth
                                                                                                       focus                break-even
                                                                                      Total Premium (Rs bn - LHS)                                      % of nominal (RHS)                                 8.0
                                  10,000



                                   7,500                                                                                                                                                                  6.0



                                   5,000                                                                                                                                                                  4.0



                                   2,500                                                                                                                                                                  2.0



                                          0                                                                                                                                                               0.0
                                                 2004

                                                          2005

                                                                    2006

                                                                             2007

                                                                                      2008

                                                                                              2009

                                                                                                         2010E

                                                                                                                  2011E

                                                                                                                           2012E

                                                                                                                                    2013E

                                                                                                                                               2014E

                                                                                                                                                        2015E

                                                                                                                                                                2016E

                                                                                                                                                                          2017E

                                                                                                                                                                                  2018E

                                                                                                                                                                                          2019E

                                                                                                                                                                                                  2020E
                                                                 Coverage universe - Gross Premium (Rs bn - LHS)                            % of total industry premium (RHS)
                                  3,200                                                                                                                                                                   32



                                  2,400                                                                                                                                                                   24



                                  1,600                                                                                                                                                                   16



                                   800                                                                                                                                                                    8



                                      0                                                                                                                                                                   0
                                              2004


                                                        2005


                                                                  2006


                                                                           2007


                                                                                    2008


                                                                                             2009


                                                                                                       2010E


                                                                                                                 2011E


                                                                                                                          2012E


                                                                                                                                   2013E


                                                                                                                                               2014E


                                                                                                                                                        2015E


                                                                                                                                                                2016E


                                                                                                                                                                          2017E


                                                                                                                                                                                  2018E


                                                                                                                                                                                          2019E


                                                                                                                                                                                                  2020E
                                  Source: RBI, IRDA, IDFC-SSKI Research estimates

                                              The game is changing
                                  •   FY05- 07 – the distribution marathon…
      Pace of growth a direct     With the industry still in infancy, the imperative to set up distribution networks has
        function of access to     entailed hefty investments, and thus huge capital needs, for players even as
         capital and speed of     distribution muscle has led to rapid growth over FY05-07. Pace of growth, thus, was
          distribution roll-out
                                  a direct function of access to capital and speed of distribution roll-out. For instance,
                                  Reliance Life’s aggressive distribution roll-out led to a scorching 270%+ CAGR in its
                                  premium over FY06-08.
                                  •   …FY08- 09 – the baton passed on
      Larger players nearing      Although this period coincided with high volatility in the capital markets, larger
   optimal distribution levels    insurers saw their distribution scale-up taper off as they neared optimal levels.
                                  Subsequently, players like Birla Sunlife and Max New York Life (MNYL) stepped on
                                  the distribution accelerator, thereby playing catch-up. Consequently, while the
                                  polarized growth rates of FY05-07 were amiss due to adverse market conditions, the
                                  relatively smaller or marginalized players fared better than the leaders.
                                  •  Accounting losses – the current reality
          Upfront set-up and      Almost all Indian insurance companies currently report accounting losses due to high
        customer acquisition      upfront set-up and customer acquisition costs (Indian GAAP does not permit
       costs against revenue      amortization of these costs over the policy period), while revenues accrue during the
   accrual over policy tenure
     have meant accounting
                                  tenure of the policy. Evidently, accounting losses are aggravated depending on the
          losses for insurers     company’s growth posture. In our coverage universe, SBI Life (given its significantly
                                  low cost structure) is currently the only player reporting accounting profits.
SEPTEMBER 2009                                                                                                                                                                                             5
                                                             IDFC - SSKI INDIA


                                Exhibit 2: Trend line of accounting losses thus far
                                             (Rs m)          ICICI Pru               HDFC SL               Reliance Life           SBI Life            Birla Sunlife
                                    4,000


                                        0

 In our coverage universe,
                                    -4,000
 SBI Life currently the only
               one in black
                                    -8,000


                                -12,000


                                -16,000
                                                     FY04                   FY05                FY06                FY07                 FY08                   FY09

                                Source: Companies

                                •   FY09 onwards – profitability takes centre-stage; break-even by FY12-13E
     Players revisiting their   Volatile capital markets have served as a crucial sanity check for all life insurers.
      growth plans and cost     Players are revisiting their growth plans as well as cost structures in the wake of weak
  structures given the weak     business volumes. The cost focus is further sharpened by IRDA’s policy measures,
          business volumes      like the cap on ULIP charges. Most insurers are at the cusp of a break-even with
                                expense ratios and growth posture being the primary determinants of timing. Even as
                                SBI Life, Bajaj Allianz and Kotak Life are some of the larger insurers already
                                generating profits, the ‘high-growth torch-bearers’ like I-Pru, Reliance Life and
                                HDFC SL would also turn profitable by FY12-13.

                                Exhibit 3: Our coverage universe to break even over FY12-13E
                                                                                Profit/ Loss after tax - Coverage universe (Rs m)
                                200,000


                                150,000


                                100,000


                                    50,000


                                        0


                                -50,000
                                              FY04

                                                      FY05

                                                              FY06

                                                                     FY07

                                                                              FY08

                                                                                      FY09

                                                                                             FY10

                                                                                                    FY11

                                                                                                             FY12

                                                                                                                    FY13

                                                                                                                           FY14

                                                                                                                                  FY15

                                                                                                                                         FY16

                                                                                                                                                FY17

                                                                                                                                                         FY18

                                                                                                                                                                 FY19

                                                                                                                                                                        FY20




                                Source: IDFC-SSKI Research

                                •   ‘Capital Guzzlers’ to ‘Cash Cows’
   Capital break-even likely    Within 3-4 years post break-even, most of our coverage companies are likely to
    to follow 2-3 years after   achieve capital break-even (FY15-17E), with accumulated losses getting wiped off.
 P&L break-even in FY12-13      Our life insurance universe is likely to require incremental capital of up to US$1.2bn
                                before achieving P&L break-even over FY12-13E. Subsequently, each of these
                                insurers would generate copious profits to self-sustain their solvency needs and
                                growth capital as well as to distribute sizeable dividends to shareholders.




SEPTEMBER 2009                                                                                                                                                                 6
                                                 IDFC - SSKI INDIA


                                 EVOLVING REGULATORY LANDSCAPE: A BALANCING ACT
                                 The Indian life insurance regulatory landscape is evolving and holds the potential to
                                 further the long-term growth prospects of life insurers on the one hand (rein in mis-
                                 selling, create a level-playing field, etc), while threatening to erode the super-normal
                                 profitability on the other. The recent cap on ULIP charges is a case in point. Given
                                 the pivotal role of the life insurance industry in India’s economic development and
                                 progress, we believe IRDA’s policy stance would be ‘pro-insurers’ over the long term.
                                 Some of the recent regulatory developments and those on the anvil are briefly
                                 discussed below:

                                     Recent cap on ULIP charges
   Difference between gross      On 22 July 2009, IRDA introduced a ceiling of 300bp on ULIP charges for
  yield and net yield on ULIP    contracts up to 10 years and 225bp for contracts over 10 years, effective October
    contracts capped at 225-
    300bp, depending on the
                                 2009. Subsequent to an industry representation, IRDA has excluded mortality and
              policy's tenure    morbidity charges in the calculation of the net yield for logical reasons. Also, the cost
                                 of explicit guarantees falls outside the ambit providing flexibility to insurers.

                                 In addition, IRDA has capped the fund management charge (FMC) at 135bp
                                 irrespective of the policy tenure. Currently, FMC charge structure for debt funds
                                 typically stands at 0.8-1.5%, and for equity funds at 1.5-2.5%. Also, IRDA has
                                 stipulated that no surrender charge can be levied by an insurer for policies
                                 surrendered from the fifth policy year, i.e. the policyholder would be entitled to
                                 receive the full fund value on surrender after five years.

    The cap on ULIP charges      We believe the cap on ULIP charges would impact life insurers’ NBAP margins by
        could have a 10-15%      10-15%. Players with scale would, however, be less impacted than smaller peers
      impact on life insurers’   owing to the former’s ability to absorb costs on a larger premium base. While we do
              NBAP margins
                                 not see much headroom for players to cut commissions, we believe additional
                                 charges would be introduced to recoup part of the profitability. The flexibility
                                 offered by the nature of the regulation leaves substantial scope for product
                                 innovation.

                                     Increase in foreign ownership
             A rise in foreign   The government proposes to raise the foreign ownership ceiling for private sector
      ownership limit will be    insurance companies from 26% currently to 49%. The Insurance Laws
    directionally positive for
      the insurance industry
                                 (Amendment) Bill 2008, introduced in December 2008 to give effect to the rise, is
                                 pending in the Rajya Sabha. We believe that a rise in foreign ownership limit is
                                 directionally positive for the insurance industry. Such a step will facilitate access to
                                 international capital, in turn enabling players to enhance their capital base for
                                 business expansion and aid value unlocking in the sector. All major players would be
                                 key beneficiaries, except Reliance Capital due to its current 100% ownership in the
                                 life insurance business and given the fact that the company is awaiting clearance for
                                 an IPO.

                                     Other regulatory changes on the anvil – IFRS and direct tax code
       IFRS implementation       It is still early days on implementation of IFRS (International Financial Reporting
   proposes amortization of      Standards) and the direct tax code, with the blueprint open for interpretation. Also,
   expenses over the tenure      industry quarters widely believe that the draft bills would be revised significantly
               of the policy
                                 from their current form. Among other clauses, IFRS implementation proposes
                                 amortization of expenses over the tenure of the policy as against the current
SEPTEMBER 2009                                                                                                           7
                                                     IDFC - SSKI INDIA

                                 accounting treatment of up-fronting it under Indian GAAP. The direct tax code calls
                                 for only shareholder P&L account to be taxed as against the current practice which
                                 treats the combined revenue and shareholder P&L account as taxable. With only
                                 shareholder P&L taxable, tax liability would stand reduced, but the bill implies a tax
                                 rate of 25% as against an effective rate of 14.16% currently.

                                      Regulatory stance expected to be ‘pro-insurers’
     Life insurance industry     Given the pivotal role of the life insurance industry in India’s economic development
       plays a pivotal role in   and progress, we believe IRDA’s policy stance would be ‘pro-insurers’ over the long
            India’s economic     term. The Indian life insurance industry is fast emerging as a source of long-term
  development and progress
                                 financing for Corporate India (specifically as seen during the liquidity crunch of Oct-
                                 Dec ’08), thereby providing depth to the capital markets. Also, life insurers aid the
                                 government’s borrowing programme, given their appetite for government securities.
                                 In addition, given the long-term nature of the insurers’ liability profile, they
                                 naturally lend themselves for exposure to long-gestation infrastructure projects.
                                 Insurance products have for sure emerged as lucrative long-term saving instruments
                                 for the populace, not to mention the direct and indirect employment opportunities it
                                 generates. The rural obligations prescribed for the industry also help the government
                                 further its social objectives.

                                 Exhibit 4: Insurance industry – a cornerstone of the Indian economy

                                                                    Deepening capital markets
                                                                  -a long-term financing source
                                                                        for Corporate India


                                                                                                        Aids Government borrowing
                                       Direct & Indirect
                                                                                                                programme
                                          employment                                                   -Given the appetite for G-Secs
                                                                           Insurance
                                                                    ( Savings + Protection)
                                                                                                         Rural obligations further
                                       Economic progress                                                  Govt’s social objective



                                                                     Liability profile makes
                                                                           well-placed
                                                                        for investment in
                                                                          long-gestation
                                                                     infrastructure projects

                                 Source: IDFC-SSKI Research



                                 VALUING LIFE INSURANCE BUSINESSES: BACK TO BASICS!
                                 The extreme cyclicality witnessed in life insurers’ valuations since December 2007 is
                                 difficult to defend, given the long-term annuity nature of the business. Bull markets
                                 saw NBAP multiples of these stocks swell to 20-30x, with bear markets leading to a
                                 haircut of more than 70% in growth multiples and 60-80% from peak valuations.
                                 While Indian life insurance industry’s higher beta may be merited on grounds of a
                                 high share of unit-linked products, we believe excessive volatility beyond market risk
                                 premiums is unjustified. In this context, we propose an alternative valuation
                                 approach based on DCF of long-term accounting profits/ cash flows. We believe the
                                 model offers higher transparency and lower volatility, and inspires investor
                                 confidence.

SEPTEMBER 2009                                                                                                                          8
                                                                                                        IDFC - SSKI INDIA

                                                                             Insurance – a valuation bubble?
                                                                    FY05-07 – ‘insurance plays’ have a dream run…
      Valuations of Indian life                                     Over FY05-07, investor interest in the Indian life industry was ripe on the back of (i)
    insurers at first based on                                      enabling regulation around unit-linked products – seen as a natural blend of Indian
             growth potential;                                      consumers’ savings-and-protection-oriented psyche; and (ii) low penetration levels
   benchmark valuations the
       order of the day now…                                        being a precursor to the vast demographic-driven potential. While valuations of
                                                                    Indian life insurers were at first centered on the growth potential, benchmark
                                                                    valuations have been the order of the day with the largest private insurer – ICICI
                                                                    Prudential Life (I-Pru) – often setting the tone.

     …with I-Pru setting the                                        I-Pru was the first Indian life insurer to disclose its NBAP margins and the
       tone; the first among                                        underlying economic assumptions in FY03. In the absence of disclosures from other
  peers to disclose its NBAP                                        insurers, and given the broadly similar product mix (predominantly unit-linked),
    margins and underlying
       assumptions in FY03                                          NBAP margins in the range of 17-20% were assigned to other private life insurers.
                                                                    Concurrently, valuations of life insurers moved in tandem with benchmark
                                                                    valuations – sparking wide-spread re-ratings over FY05-07.

Exhibit 5: Indian life insurers – the chronology of events over the past six years

                                                                                  FY05-07 – ‘insurance plays’ have a dream run                                                            …investor conviction often tested
                                     ICICI Bank                                       BSE Sensex                                                     Max India                                           Reliance Capital
1,200                                                                                                                                                                                                                                                         7,000

                                                                                 ICICI Bank and Prudential UK valued
                                                                                 their life insurance JV at $14 billion
                                                                                 (~Rs 560bn) in Feb ‘08 after jointly
                                                                                 infusing around Rs4bn
  900                                                                                                                                                                                                                                                         5,250


                                                                                                                                                                                                                                Max New York life
                                                                             I-Pru Life valued at                                                                                                                                 disclosed EV
                  ICICI Pru-Life disclosed                                        US$11.7bn
  600                                                                                                                                                                                                                                                         3,500
                           NBAP




  300                                                                                                                                                                                                                                                         1,750
                                                                                                                                                          Max India troughed at Rs90
                                                                                                                                                          (disclosed EV + value of                                                        ULIP guidelines
                                                                                                                                                          hospital business)                                                              Cap on ULIP charges


    0                                                                                                                                                                                                                                                         0
              Jun-03




                                                  Jun-04




                                                                                      Jun-05




                                                                                                                          Jun-06




                                                                                                                                                               Jun-07




                                                                                                                                                                                                     Jun-08
     Mar-03




                                         Mar-04




                                                                             Mar-05




                                                                                                                 Mar-06




                                                                                                                                                      Mar-07




                                                                                                                                                                                            Mar-08



                                                                                                                                                                                                              Aug-08

                                                                                                                                                                                                                       Nov-08




                                                                                                                                                                                                                                                     Aug-09
                                                                                                                                                                                                                                            May-09
                       Sep-03

                                Dec-03




                                                           Sep-04

                                                                    Dec-04




                                                                                               Sep-05

                                                                                                        Dec-05




                                                                                                                                   Sep-06

                                                                                                                                            Dec-06




                                                                                                                                                                        Sep-07

                                                                                                                                                                                 Dec-07




                                                                                                                                                                                                                                 Feb-09




Source: Bloomberg, Companies, Press

                                                                    …investor conviction often tested subsequently
                                                                    However, the lower extent of disclosures and limited understanding are evidently a
                                                                    double-edged sword as volatile capital markets left investor conviction wanting
                                                                    (Exhibit 5):




SEPTEMBER 2009                                                                                                                                                                                                                                                    9
                                                                                         IDFC - SSKI INDIA


        Valuations corrected by
                                                 Jan ’08-Mar ’09 – growth tanked due to volatile capital markets: As the Indian
       17-30% over Apr-Nov ’08                   capital markets bled consistently due to the economic slump and given the unit-
       and by 20-50% over Nov                    linked nature of life insurance products, top-line growth slowed at first.
       ’08-Jan ’09 following the                 Subsequently, the industry witnessed muted growth on yoy basis despite increasing
       capital market meltdown
                                                 distribution penetration. Consequently, despite the annuity nature of life insurance
                                                 business, valuations corrected by 17-30% over Apr-Nov ’08 and by 20-50% over
                                                 Nov ’08-Jan ‘09. As investor conviction evaporated, Max India – the closest listed
                                                 proxy for an insurance play – hit a trough as the stock was trading at its reported
                                                 embedded value, with no credence paid to future business of the company.
 Exhibit 6: Business volumes decline for life insurers as the Sensex slumps
             Total First Year premium (Rs bn - LHS)                Sensex (RHS)                                                                                 Industry APE yoy growth (%)                                                                                          Sensex
                                                                                              18000            150                                                                                                                                                                                                                      25,000
1000                                                                                                                                                                                                                                                                                      135.6
                                                                9,299
                                                                            8,712
                                                                                                                                                          101.7
                                                                                                               100                                                                                                                                                                                                                      20,000
                                             7,541                                            13500
 750                                                                                                                                                                           68.7

                                                                                                                 50 39.4                                                                                                                                                                                        43.9
                                                                                                                                                                                                                                                                                                                                        15,000
                                                                                                                                                                                                                      19.9
                                                                                                                                    14.2                                                 15.6                                                           19.0
                                                                                                                                                                                                                                                                  12.7                                                     9.0
                                                                                              9000                                                                                                           1.7                             4.2
 500                                                                                                              0                                                                                                                                                                                                                     10,000
                                                                                                                                                                                                   -4.4
                                3,590                                                                                                           -9.7
                                                                                                                                                                                                                                                                                -14.3
                                                                                                                                                                                                                                 -25.8
                    2,519                                                                                       -50                                                                                                                                                                                                                     5,000
 250                                                                                          4500
         1,943
                                                                                                                                                                                                                                                                                                      -77.3
                                                                                                               -100                                                  -81.3                                                                                                                                                              -




                                                                                                                                                                                                    Jul-08
                                                                                                                                     Jan-08




                                                                                                                                                                                                                                                                       Jan-09
                                                                                                                                                                                          Jun-08




                                                                                                                                                                                                                                                                                                                           Jun-09
                                                                                                                                                 Feb-08




                                                                                                                                                                                                                        Sep-08




                                                                                                                                                                                                                                                                                 Feb-09
                                                                                                                                                           Mar-08

                                                                                                                                                                      Apr-08




                                                                                                                                                                                                                                                                                             Mar-09

                                                                                                                                                                                                                                                                                                       Apr-09
                                                                                                                                                                                                             Aug-08



                                                                                                                                                                                                                                  Oct-08
                                                                                                                                                                                May-08




                                                                                                                                                                                                                                                                                                                  May-09
                                                                                                                           Dec-07




                                                                                                                                                                                                                                                         Dec-08
                                                                                                                                                                                                                                               Nov-08
  0                                                                                           0
        Mar-04     Mar-05      Mar-06       Mar-07           Mar-08            Mar-09

 Source: IRDA, Bloomberg


                                                 Exhibit 7: Valuations shrink across the board as the Sensex tanked #
                                                                                            ICICI Bank * 0.22                                                 HDFC * 0.12                                                                           RCFT * 0.55
                                                      Stock price (Rs)
                                                                                            MAX India * 0.84                                                  BSE Sensex 30 Index (RHS)                                                                                                                                             22000
                                                  2600



                                                  1950                                                                                                                                                                                                                                                                              16500



                                                  1300                                                                                                                                                                                                                                                                              11000



                                                      650                                                                                                                                                                                                                                                                           5500



                                                        0                                                                                                                                                                                                                                                                           0
                                                                                                                  Jan-08




                                                                                                                                                                                                                                           Jan-09
                                                            Mar-07




                                                                                                      Nov-07




                                                                                                                                       Mar-08




                                                                                                                                                                                                                      Nov-08
                                                                      May-07




                                                                                                                                                            May-08




                                                                                                                                                                                                                                                              Mar-09

                                                                                                                                                                                                                                                                                    May-09
                                                                                Jul-07




                                                                                                                                                                               Jul-08




                                                                                                                                                                                                                                                                                                         Jul-09
                                                                                           Sep-07




                                                                                                                                                                                                   Sep-08




                                                                                                                                                                                                                                                                                                                           Sep-09




                                                 Source: IDFC - SSKI Research, Estimates, Bloomberg; # average insurance valuations * stock price of parent



                                                 NBAP multiples and margins gyrate to market tunes – double valuation
        Over Jan ’08- Jan ’09,
             consensus NBAP                      whammy: During the shake-out, life insurers battled (i) shrinking NBAP multiples
       multiples halved across                   given the clouded near-term growth prospects; and (ii) a suspected decline in profits
                   the industry                  exerting downward pressure on NBAP margins, in turn a function of lower growth,
                                                 dipping persistency and low investment returns. Over Jan ’08- Jan ’09, consensus
                                                 NBAP multiples halved across the industry and NBAP margins were also discounted
                                                 on concerns around growth, persistency behaviour of customers in a bear phase and
                                                 woes of a lower premium base to absorb expenses.


SEPTEMBER 2009                                                                                                                                                                                                                                                                                                                              10
                                                                                                          IDFC - SSKI INDIA


Exhibit 8: NBAP multiples gyrate to market tunes
             Sensex (LHS)         Reliance Capital Implied NBAP multiple (x - RHS)                                                                                                          Sensex (LHS)                               MNYL- Implied NBAP multiple (x - RHS)                                                               18
25,000                                                                                                                       40               24,000


20,000                                                                                                                       30
                                                                                                                                              18,000                                                                                                                                                                                       12

15,000                                                                                                                       20

                                                                                                                                              12,000                                                                                                                                                                                       6
10,000                                                                                                                       10


                                                                                                                             -                     6,000                                                                                                                                                                                   -
 5,000


   -                                                                                                                         (10)
       Mar   Jul   Nov      Apr    Aug     Dec     Apr            Aug            Dec            Apr            Aug                                      -                                                                                                                                                                                  (6)
       06    06    06       07     07      07      08             08             08             09             09                                           Apr-07                      Aug-07            Dec-07             Apr-08                  Aug-08                         Dec-08                      Apr-09           Aug-09
Source: IDFC – SSKI estimates, Bloomberg

                                                     Cyclicality in valuations – unwarranted
          The steep valuation                        Given the long-term annuity nature of life insurance businesses, the extent of
   correction undermines the                         cyclicality in valuations to capital market movements is evidently fallacious. During
         industry’s long-term                        the period, valuations of life insurance plays corrected by 60-80% from the peak,
    potential and profitability                      relatively steeper than other annuity-based businesses. While part of the correlation is
                   prospects
                                                     justified by the product mix, we believe the long-term growth and profitability
                                                     prospects have been undermined to an unjustifiable extent by a capital market cycle.

                                                     Exhibit 9: Performance of sectoral indices…
                                                                                                                             BSE Sensex 30 Index                                                     Bank Index                           Metal Index
                                                                                                                             Oil & Gas Index                                                     Power Index                              IDFC-SSKI Life Index #
                                                     440



                                                     330



                                                     220



                                                     110



                                                         0
                                                         Apr-04


                                                                        Jun-04




                                                                                                                                                             Apr-05


                                                                                                                                                                               Jun-05




                                                                                                                                                                                                                                                Apr-06


                                                                                                                                                                                                                                                                  Jun-06
                                                                                                      Oct-04




                                                                                                                                          Feb-05




                                                                                                                                                                                                          Oct-05




                                                                                                                                                                                                                                 Feb-06




                                                                                                                                                                                                                                                                                                       Oct-06




                                                                                                                                                                                                                                                                                                                                 Feb-07
                                                                                       Aug-04




                                                                                                                        Dec-04




                                                                                                                                                                                            Aug-05




                                                                                                                                                                                                                    Dec-05




                                                                                                                                                                                                                                                                                     Aug-06




                                                                                                                                                                                                                                                                                                                     Dec-06

                                                     Source: Bloomberg; IDFC-SSKI Life Index # = stock prices * average insurance valuations for coverage


                                                     Exhibit 10: … shows high beta for life insurers
                                                                                                                             BSE Ssensex 30 Inex                                                       Bank Index                           Metal Index
                                                                                                                             Oil & Gas Index                                                           Power Index                          IDFC-SSKI Life Index #
                                                     120



                                                      90



                                                      60



                                                      30



                                                         0
                                                                                   Mar-08




                                                                                                                                                                                                                                                         Mar-09
                                                                                                                                                   Jul-08
                                                             Jan-08




                                                                                                 Apr-08

                                                                                                               May-08

                                                                                                                                 Jun-08




                                                                                                                                                                                                                              Jan-09




                                                                                                                                                                                                                                                                           Apr-09




                                                                                                                                                                                                                                                                                                            Jun-09

                                                                                                                                                                                                                                                                                                                        Jul-09
                                                                        Feb-08




                                                                                                                                                                                                          Nov-08




                                                                                                                                                                                                                                            Feb-09




                                                                                                                                                                                                                                                                                              May-09
                                                                                                                                                                                              Oct-08
                                                                                                                                                                      Aug-08

                                                                                                                                                                                   Sep-08




                                                                                                                                                                                                                   Dec-08




                                                                                                                                                                                                                                                                                                                                 Aug-09




                                                     Source: Bloomberg; IDFC-SSKI Life Index # = stock prices * average insurance valuations for coverage

SEPTEMBER 2009                                                                                                                                                                                                                                                                                                                            11
                                                       IDFC - SSKI INDIA

                                       Valuing life insurance – an alternate approach
  With players at the cusp of
                                  We believe the widely used appraisal valuation method falls short of reflecting the
  breaking even, we find the      durability of the life insurance business. Not only is the NBAP multiple prone to
      DCF valuation method        high volatility, the stable ‘embedded value’ component of the appraisal approach
                    more apt      contributes only a small proportion of the valuations for ‘high-growth’ companies.
                                  Therefore, we believe a DCF-based valuation approach based on accounting profits
                                  of insurance companies is an apt alternative, as (i) it is premised on long-term
                                  profitability, and (ii) the amplitude of volatility is not as high as in the case of
                                  appraisal value. This DCF approach also scores higher on transparency as against the
                                  ‘incomprehensible’ actuarial NBAP margins.

                                  Appraisal method – prone to volatility in early stages
                                  Traditionally, insurance companies are valued using the appraisal value method,
                                  which is the sum of embedded value (EV) and structural value (SV). However, the
                                  appraisal method is prone to extreme volatility as:
   The stable EV component        •   When a life insurance company is in the growth phase, its EV is typically a small
        of appraisal approach         component compared to the potential. Hence, an EV-based valuation may
           contributes a small        undervalue the company in bear markets and vice versa. The extent of damage is
     proportion of valuations
   for ‘high-growth’ insurers         further aggravated by insurers’ aggressive growth plans – implying that majority
                                      of the business value rests in future policies, and not existing policies.
                                  •   Moreover, the structural value is vulnerable to capital market swings as outlook
   The NBAP multiple prone
          to high volatility          on near-term growth changes, resulting in either ‘euphoric’ or ‘despondent’
                                      NBAP multiples. Therefore, insurance valuations using the appraisal method are
                                      more prone to cyclicality.
                                  Exhibit 11: Appraisal value methodology


                                                                          Embedded value                +           Structural Value


                                      Appraisal Value      =
                                                                                                        +
                                                                      Value of Inforce business
                                                                                                                     NBAP Multiple
                                                                              Network



                                                                 EV typically represents the present        Captures the growth potential of
                                                                 value of the future profitability of       the insurance company ie, the
                                                                 the existing business (value of in-        present value of policies to be
                                                                 force business and net worth).             underwritten in the future by a
                                                                                                            company.
                                  Source: IDFC - SSKI Research

                                  Our alternate valuation approach – long-term profits the mantra!
     DCF methodology less         Given the long-term annuity nature of the life insurance business, and the fact that
  prone to cyclicality as it is   most Indian companies are on a high-growth path and on the verge of reporting
      based on companies’         accounting profits, we believe a valuation approach based on long-term profitability
   long-term profits and not
            growth potential      of the business is a pertinent method. Unlike the appraisal methodology, the DCF
                                  methodology is less prone to cyclicality as it is based on companies’ long-term profits
                                  and not growth potential captured in the ‘effervescent’ NBAP multiple of the
                                  appraisal approach. Once accounting profits are forecast using ground-level
                                  assumptions such as growth rates, persistency, allocation charges and fund
                                  management fees of life insurance companies, traditional and less esoteric valuation
                                  metrics like Price to Earnings multiple, Price to Book value and DCF can be
SEPTEMBER 2009                                                                                                                                 12
                                                           IDFC - SSKI INDIA

                                          applied. This alternate method also reduces investors’ dependence on corporate
                                          disclosures.

Exhibit 12: Appraisal vs DCF method

                      Appraisal Method                                            DCF Method

   Visibility         Understanding restricted to NBAP margins                    Whilst given the complexity of the insurance
                      disclosed by compa nies. Dependence on                      industry, assumptions abound. Our DCF method
                      companies higher                                            enables us to understand growth and
                                                                                  profitability drivers better

   Sensitivity        •      Eupho ria in bull markets and despondency in         •    Helps appreciate the annuity nature of the
                             bear markets is extreme.                                  life insurance business
                      •      More importantly valuation is destro yed as          •    Enables us to access impact of market
                             NBAP multiples are discounted heavily in a                movements, regulatory changes better
                             bear capital market phase, given the unit-                than the appraisal valuation model
                             linked nature of insurance products.

   Durability         •      Lends itself to huge cyclicality in capital          •    Long-term profits are less vulnerable to
                             markets, as NBAP multiples widely fluctuate               market swings, however (i) market risk
                             with markets                                              premium/ cost of equity fluctuates and (ii)
                                                                                       near-term returns are impacted on account
                                                                                       of mark-to-market as well as erosion of
                                                                                       investment inco me.

Source: IDFC-SSKI Research


                                          VALUATIONS & VIEW
                                          We combine the valuation approaches, as the embedded value currently comprises a
                                          small proportion of the total appraisal value for most Indian insurers, being in the
                                          growth phase. Subsequently as the company matures, the appraisal value also
                                          becomes less volatile. In the interim, we believe the DCF method is better poised to
                                          reflect the annuity nature of the business being based on long-term profits. On the
                                          other hand, the appraisal method, would take valuations to significant premium/
                                          substantial discounts in line with market movements. Near-term public listings
                                          would a key re-rating catalyst for the sector.
                                                 DCF method
                                          We have discounted the long-term profits of our coverage universe at cost of equity
                                          to arrive at our DCF valuation. Target valuations for our coverage universe range
                                          from 10-30% of the parents’ current market capitalization for SBI, ICICI Bank and
                                          HDFC. For Reliance Capital and Birla SL, life insurance comprises ~80% of the
                                          current market cap.
Exhibit 13: DCF Valuation Summary
                               Total Valuation      Val attributable     No. of       Value        PAT (Loss)            Net worth
                              (Rs m)   (USD m)      to listed parent shares (m)   per share             (Rs m)                (Rs m)
                              2011E       2011E       (Rs m) 2011E      2011E         2011E    2011E         2020E   2011E         2020E
ICICI Prudential             361,913      7,540            241,034       1,113          217     (931)       63,341   14,545      239,038
HDFC Standard Life           155,134      3,232            103,319         288          359   (4,624)       34,833    7,472      148,340
Reliance Life                183,121      3,815            183,121         246          746   (2,114)       42,122    6,592      147,755
SBI Life                     159,150      3,316            105,994         632          168    2,408        20,141   13,499      110,770
Birla Sunlife              110,927        2,311              73,878         95          778   (2,796)       27,053    6,439       96,707
Source: IDFC - SSKI Research

SEPTEMBER 2009                                                                                                                         13
                                                           IDFC - SSKI INDIA

                                           Appraisal method
  We assign NBAP multiples
                                       We have assigned NBAP multiples of 13-16.8x to our coverage universe, with a
               of 13-16.8x             premium given to Reliance Life and I-Pru for their high-growth posture and/or
                                       NBAP margins. Also, we have conservatively trimmed NBAP margins to price in
                                       competitive pressures as well as impact of the minimum 225-300bp ceiling on ULIP
                                       charges to customers depending on the tenure of the policy.

Exhibit 14: Appraisal valuation summary
                      APE      Embedded Total appraisal        Value attributable to        Value per      NBAP                 NBAP
                   (Rs bn) Value (Rs bn)       valuation     parent (% of economic     share of parent    margins (%)      multiple (x)
                    FY11E         FY11E         (Rs bn)            interest) - Rs bn   (Rs per share)    FY10E    FY11E         FY11E
 ICICI Pru             78.2        117.8          346.2                       230.6              207      18.2      17.7          16.5
 HDFC SL               30.7         34.1          131.7                        97.4              305      19.5      19.0          16.8
 Reliance Life         48.9         42.3          197.3                       177.6              803      20.4      19.2          16.5
 SBI Life              62.9         53.5          172.1                       127.4              181      14.5      14.5          13.0
 Birla Sunlife         38.3         37.2          126.3                        93.4              885      16.0      15.5          15.0
Source: IDFC - SSKI Research

                                           Public listings – a near-term re-rating catalyst
                                       The existing regulations allow life insurers to undertake a public listing after
       Most of the Indian life
  insurers looking tto public          completing 10 years of operations, which is FY10 for most of the larger companies.
      listings; which implies          The IPO norms for insurers are currently on the drawing board, due to be ratified by
  value unlock for sponsors            SEBI by October 2009 (as per press reports). Reliance Life has recently sought
                                       permission from the regulator to list before it completes 10 years of operations. A
                                       public listing implies value unlock for the promoters as well as lower demands for
                                       further capital infusion. A listing would also translate into improved investor
                                       disclosures by the companies.

                                       KEY RISKS
                                       Given the complexity of profit and growth drivers for the life insurance business, the
                                       multiplicity of assumptions is inevitable when forecasting long-term accounting
                                       profits of players. Based on our understanding of the dynamics involved in the life
                                       insurance business, we are convinced that our alternative valuation approach imparts
                                       transparency and, more importantly, reflects the true annuity nature of the life
                                       insurance business.

                                           Regulatory landscape – swinging potential
  Regulatory changes a risk
                                       Insurance is a heavily regulated industry in India, currently governed by the Insurance
    to long-term profitability         Act, 1938. As the industry evolves, the regulatory framework continues to be
  and growth trajectory, and           strengthened by IRDA (Insurance Regulatory and Development Authority). However,
   thereby valuations, of life         from an investor’s perspective, regulatory changes remain a risk to long-term
       insurance companies
                                       profitability and growth trajectory, and thereby valuations, of life insurance companies.
                                       A case in point is the recent change in ceiling on ULIP charges as well as the direct
                                       tax code, which are likely to have a bearing on the profitability of life insurers. Going
                                       forward, implementation of IFRS, easing of FDI/ FII limit to 49% from 26%
                                       currently and IPO norms are a few regulations under consideration. However, we
                                       expect the regulatory stance to be ‘pro-insurers’ – aimed at strengthening long-term
                                       growth prospects of the industry as also safeguarding the interests of policyholders.



SEPTEMBER 2009                                                                                                                       14
                                                  IDFC - SSKI INDIA

                                       Capital market ties – a deep and symbiotic correlation
    ULIP products comprise        •   Growth trajectory: Popularity of unit-linked products has been a major growth
    70-90% of total premium           driver for the Indian life insurance industry. While well-aligned with the Indian
     for most large players;
   exposed to the cyclicality         customers’ investment psyche, appetite for these ULIP products (comprising 70-
          of capital markets          90% of total premium for most large players) reduces drastically during volatile
                                      capital markets. As seen during the recent capital market meltdown, insurance
                                      companies were forced to innovate and launch guaranteed unit-linked products
                                      to maintain customer interest. Low penetration levels reinforce the industry’s
                                      potential, though customer responsiveness and non-disruptive industry practices
                                      would hold the key to long-term industry growth.
                                  •   Direct impact on expense ratios: In the context of subdued near-term growth,
                                      managing expense ratios is crucial for industry players. Rapid expansion of the
                                      recent years, coupled with high attrition rates, has made it difficult to contain
                                      expense overruns. As margins are under pressure on this count, the break-even
                                      period for players could be extended as expenses remain high and players are
                                      unable to absorb costs on a lower premium base.
                                  •   Investment income/ Mark-to-market: Volatile capital markets dent insurers’
               Capital market
                                      profitability either directly or indirectly due to:
          performance has a           (i) controllable growth rates driven by distribution penetration being thrown
       significant bearing on               off-track
        insurers’ profitability
                                      (ii) low investment income which on the linked book implies lower fund size
                                            and thereby fees. For the traditional business, lower investment income
                                            directly hits insurers’ profitability
                                      (iii) mark-to-market requirements: While MTM are notional gains/ losses on
                                            investment portfolios, the hit on the linked business is passed on to the
                                            policyholders. This in turn negates fees earned as the fund size dips to the
                                            extent. Also, MTM – to the extent of equity fund on the non-linked
                                            business and shareholders’ investments – dilutes insurers’ profitability.




SEPTEMBER 2009                                                                                                        15
                                                             IDFC - SSKI INDIA



                                 HOW THE PLAYERS STACK UP
                                 We expect our coverage companies to continue gaining market share, buoyed by the
                                 bright long-term growth prospects of the life insurance industry. Over the next 24
                                 months, we expect our universe to achieve P&L break-even. While Reliance Life and
                                 Birla Sunlife would remain the fastest growing insurance companies, we expect I-Pru
                                 to retain the top slot. Over the long term, profitability pressures may lead to
                                 consolidation in the industry with small and marginal players getting bought out.

                                        Market share – I-Pru seen to remain the largest private insurer
    While larger peers would     Market shares cannot be forecast with absolute accuracy given that there are multiple
  play catch-up, we expect I-    variables in the equation in the form of a company’s product strategy, market
            Pru to sustain its
                                 responsiveness, brand strength, promoter commitment/ access to capital and/ or
                  dominance
                                 management incentives among others.

                                 On the back of strong fundamentals, we see I-Pru well-poised to maintain its
                                 dominance in the private insurers’ league table, while other players would certainly
                                 bridge the gap over the years. Having said that, we concede the escalating
                                 competitive intensity, inorganic growth and/ or consolidation moves have the
                                 potential to topple the order. Evidently, players with scale would find the business
                                 viable over the long term despite the tapering growth rates given that they have
                                 headroom to absorb costs. On the other hand, capital investment could taper off for
                                 marginal players on account of unattractive returns for the promoters.

                                 Exhibit 15: Total premium market shares now and as seen in 2020E
                                                       (%)                              2009                  2020E


                                                                                      2.8
                                  Birla Sunlife
                                                                      1.9

                                                                                                  3.8
                                      SBI Life
                                                                                            3.0
    Players with scale would
     find the business viable                                                                           4.8
                                 Reliance Life
  over the long term despite                                              2.1
   the tapering growth rates
                                                                                                  3.8
                                    HDFC SL
                                                                                2.3

                                                                                                                                              8.3
                                    ICICI Pru
                                                                                                                            6.5

                                                 0.0         1.0    2.0               3.0         4.0   5.0           6.0         7.0   8.0         9.0

                                 Source: IRDA, IDFC-SSKI Research




SEPTEMBER 2009                                                                                                                                      16
                                                                                                  IDFC - SSKI INDIA

                                                                                     Key operating metrics – how players stack up
                                                                                 With efficiency attaining focus in the life insurance industry’s current phase, we have
                                                                                 mapped our coverage universe across some key operating/ profitability metrics to
                                                                                 evaluate their strengths/ differentiators/ areas of improvements.

                               Conservation ratio                                •   Conservation ratio: Higher stickiness of new business enables life insurers to
80
         69
              73
                         FY09
                       65 78               69
                                                     FY20E
                                                                         66
                                                                                     absorb acquisition costs, thereby making the policy at least profit-neutral.
60                                   61
                                                    44
                                                           49
                                                                   53
                                                                                     Conservation ratios (defined as renewal premium of current year as a per cent of
40

20
                                                                                     first year premium and renewal premium of last year) were severely tested during
 0                                                                                   the recent market correction, with five of our six coverage companies seeing a
       ICICI Pru      HDFC SL       Reliance        SBI Life     Birla Sunlife
                                      Life                                           decline. MNYL fared well ahead of peers in FY09 with conservation ratio dipping
                                                                                     only marginally against a 10-30% decline for competitors.
                        Opex/ Total weighted premium*                            •   Expense ratio – high sensitivity: Indian life insurers were, up to now, saddled
                             FY09                     FY20E
50.0
                                      43                                             with high expense ratios as they invested aggressively in building distribution
37.5                    33
                                                                    26
                                                                                     muscle. With the growth rates tapering and competition intensifying, expense
25.0
          18
                                                                         12.9
                                                                                     rationalization is the order of the day for the larger players. Ability of companies
12.5                                       11.1      10 8.6
                8.6           8.5
                                                                                     to contain cost ratios in the near term would have a significant bearing on the
 0.0
         ICICI Pru     HDFC SL Reliance Life         SBI Life    Birla Sunlife       break-even point.
*APE + Return on premium
                                                                                 •   Commission costs: Insurance being a push product, and with product features
                       Commission/ Total Premium                                     easy to replicate, a vast distribution network has thus far been the growth engine
12                     FY09                 FY20E
                                                                   10.3
                                                                                     for life insurers. However, it has also translated into high commission rates for the
                                                                       9.5
 9
                       7.6
                                     9.0
                                                     7.2
                                                                                     players. Going forward, regulation may lead to commission rates trending down,
                                           6.1             6.2
 6      6.0
              4.4
                             5.7
                                                                                     as the recent ceiling on ULIP charges is likely to lead insurers to pass on some
 3
                                                                                     impact to distribution channels, as well as SEBI restricting commissions for
 0
       ICICI Pru      HDFC SL       Reliance        SBI Life     Birla Sunlife       mutual fund products. In addition, permissible first-year commission rates for the
                                      Life
                                                                                     industry would also come down to 35% after 10 years of operations vis-à-vis 40%
                                                                                     at present. Linked products continue to attract lower commission rates than
                                                                                     traditional products.

              Blended return on average linked AUM (FY16-20)
                                                                                 •   Investment returns – not a differentiating factor as yet: Most large insurers
12.0
              9.3
                                       10.4
                                                                      9.3
                                                                                     have predominantly unit-linked portfolios with a bias towards equity funds. FY09
 9.0                         7.8
                                                         6.3                         was a washout year with investment returns dented due to low investment income
 6.0

 3.0
                                                                                     and MTM hit on the portfolios. While investment returns add to insurers’ AUM,
 0.0
                                                                                     and thereby profitability, we are currently building in investment returns of a
         ICICI Pru HDFC SL           Reliance
                                       Life
                                                     SBI Life        Birla
                                                                    Sunlife
                                                                                     similar order across our coverage universe. Going forward, given the multiplier
                                                                                     effect, the extent of returns generated would further augment insurers’
                                                                                     profitability through fund management fees, etc.
                               (FY16-20)
                       Return on Networth (%)                                    •   Return ratios: Post break-even, insurers are well-poised to deliver high return
36
         28.6
                                   32.2
                                                                    29.9             ratios of 28-35% with internal accruals sufficient to meet solvency capital needs,
27                      24.7
                                                     22.0                            growth capital and dividend payouts. Our coverage companies tend to trend
18                                                                                   towards the same broad range of return on net worth – both on linked and non-
 9                                                                                   linked business. Going forward, a changing product mix, higher investment
 0
                                                                                     returns and expense rationalization would determine a company’s return profile.
       ICICI Pru HDFC SL            Reliance        SBI Life        Birla
                                      Life                         Sunlife




SEPTEMBER 2009                                                                                                                                                          17
                                                               IDFC - SSKI INDIA


Exhibit 16: Insurers’ score card
 Life Insurers                           Comparative Scoring                           Rationale/ Recommendation

                     Conservation   Expense    Commission        Growth      Return
                        ratio        ratio       costs         trajectory     ratios
                                                                            (RoNW %)

                                                                                       • Distribution scale-up, strong management bandwidth, and product
 Birla Sunlife                                                                           innovation to drive above industry growth

                                                                                       • Scores on core profitability metrics – highest conservation ratio, but
                                                                                         a blip in FY09 as for peers
 HDFC SL
                                                                                       • Growth trajectory to accelerate given the scale-up in distribution
                                                                                         network

                                                                                       • Expected to sustain its leadership position in the private space
 ICICI Pru Life                                                                        • Revival in premium growth, recovering conservation ratio and
                                                                                         declining expenses likely to be near-term profit drivers

                                                                                       • To remain a growth leader on the back of innovative products,
 Reliance Life                                                                           strong promoter brand and access to capital
                                                                                       • Aggressive focus on cost control

                                                                                       • Profit leader on the back of a low cost structure and strong parent
 SBI Life                                                                                support
                                                                                       • On the cusp of high profitability and capital break-even


             Criteria met           Criteria not met


Source: IDFC SSKI Research




SEPTEMBER 2009                                                                                                                                                    18
                  IDFC - SSKI INDIA




                 THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK




SEPTEMBER 2009                                                 19
                 IDFC - SSKI INDIA




                               COMPANIES




SEPTEMBER 2009                             20
                                                IDFC - SSKI INDIA




                                                                                                                                            Company update
                           Birla Sun Life Insurance
                           Reincarnation
        4 September 2009
                            Birla Sun Life Insurance (BSL) is currently one of the fastest growing life
       BSE Sensex: 15689    insurers in our coverage universe. With a rapid ramp-up in distribution,
                            focus on innovative products and strong parent, BSL is fast catching up with
                            peers and set to surpass industry growth. We expect BSL to achieve P&L
                            break-even by FY12 with acceleration in premium growth, revival in
                            conservation ratio and declining expenses being near-term profit drivers. We
                            estimate ~Rs13bn of incremental capital requirement by BSL before it
                            achieves capital break-even in FY17. On the basis of DCF, we assign a value
                            of ~Rs111bn to BSL, imputing a value of ~Rs74bn of Aditya Birla Nuvo’s
                            stake or ~Rs778 per share. Our EV based valuation indicates a value of
                            Rs885 per share of the Indian parent.
                            Gaining critical mass: After conceding the number two position in FY05 due to
                            its staid approach, BSL is back in the reckoning. Strong parent commitment and
                            aggressive distribution roll-out have infused a new vigor in BSL, as is reflected in
                            total premium market share recovery from 1.1% in FY07 to 1.9% in FY09 (2.7x
                            increase in APE share to 5.3% of industry). We see further market share gains as
                            the full potential of the initiatives undertaken accrues over time.

                            Renewed vigor – strategy on track: BSL has a sharp focus on product
                            innovation – as is evident in the aggressive launch of linked guarantee products.
                            BSL appears well-placed to sustain the high growth trajectory owing to its
                            expanding distribution muscle and continuous product innovation. While
                            conservation ratio dipped in FY09, we expect a steady uptick over FY09-13 with
                            stabilization at ~68% over the long run.

                           Return ratios on an uptrend; value creation potential: Increasing share of
                           renewal premium, robust growth and operating leverage are expected to drive
                           P&L break even for BSL in FY12 with ~29% RoNW in steady state over FY16-
                           20. A DCF of BSL’s long-term profits indicates a value of ~Rs74bn or Rs778 per
                           share for Aditya Birla Nuvo’s stake. For our appraisal approach, we assign
                           benchmark NBAP margins, while keeping the NBAP multiple lower to reflect the
                           limited disclosures. The EV method, at 15x FY11E NBAP, gives a value of Rs885
                           per share of the parent, after assuming a 10% holding company discount.
Pathik Gandotra            Key operating metrics
pathik@idfcsski.com
91-22-6638 3304            (Rs m)                                                 FY09        FY10E        FY11E        FY12E     FY13E
                           Gross Premium                                         44,694      58,620       74,879        93,356   113,373
Neha Agrawal               APE*                                                 27,059       32,465       38,304        45,193    51,517
neha@idfcsski.com          yoy growth (%)                                          40.6         20.0        18.0          18.0      14.0
91-22-6638 237             Income on Investments (Policyholders)                (6,707)        9,527      13,869        19,260    25,603
                           Total expenses (commissions, opex, claims)           22,746       28,627       36,982        46,891    57,700
Chinmaya Garg              yoy growth (%)                                         58.4         25.9         29.2          26.8      23.1
chinmaya@idfcsski.com      Change in valuation of liabilities                   21,122       45,172       54,421        65,989    79,668
91-22-6638 3325            Profit/Loss After Tax                               (7,021)        (5,947)      (2,796)        302      1,854
                           Source: Company, IDFC - SSKI Research; * APE is 10% of single premium plus regular premium


SEPTEMBER 2009                                                                                                                         21
                                                                                     IDFC - SSKI INDIA


                                                       INVESTMENT ARGUMENT
                                                       BSL is back in the reckoning with a 2.7x increase in APE market share over
                                                       FY07-09 to 5.3% of the industry. Amidst escalating competition from
                                                       incumbents and entry of new insurers, BSL had lost market share over FY05-
                                                       07. We expect BSL’s above-industry growth momentum to be sustained on
                                                       the back of strong sponsor commitment, heavy investment in distribution and
                                                       product innovation. While conservation ratio suffered in FY09, we expect it to
                                                       stabilize at higher levels of 68% over the medium term. Our analysis indicates
                                                       that BSL would require ~Rs13bn of capital and achieve P&L break-even in
                                                       FY12. A DCF of BSL’s long-term profits indicates an overall value of
                                                       ~Rs111bn, implying value of Rs74bn and Rs778 per share of Aditya Birla
                                                       Nuvo. The EV method, at 15x FY11E NBAP, gives a value of Rs885 per share
                                                       of the Indian parent, after assuming a 10% holding company discount.


                                                       BSL: GAINING CRITICAL MASS
                                                               Market share on an upswing…
      APE market share up 2.7x                         BSL’s new business premium (APE) market share has increased by 2.7x over FY07-09
      over FY07-09 from 5.3% of                        to 5.3% of the total industry. During the period, BSL’s market share in total
                  total industry
                                                       premium (including renewal premium) has increased by ~75bp to ~1.9%. The
                                                       above-industry growth rates appear sustainable on the back of renewed focus on the
                                                       financial services space at the Aditya Birla Group. The ensuing significant scale-up in
                                                       distribution network and product innovation have placed BSL in a position to move
                                                       up the industry league table.

  Exhibit 1: Market share improving…                                                           …driven by expansion in distribution network
                                                                                                               Agents ('000s - LHS)      Agents % of total industry (% - RHS)
                         BSL's market share ( % of total industry premium)                      180                                                                 166         6.0
      (%)                                                                                                                                                               6
3.5                                                                                                                                           5
                                                                                                135                                                                             4.5
                                                                                         3.3
                                                                                                                                             115
                                                                                                                                 3
                                                                                                 90                                                                             3.0
2.8
                                                                                                                                57
                                                                                                 45       1
                                                                                                                                                                                1.5
                                                                                                          18

2.1                                                                                              -                                                                              0.0
                                                                                                         FY06                  FY07          FY08                 FY09
                                                                               1.9
                                                            1.6
                                                                                                               Branches (no - LHS)    Branches % of total industry (% - RHS)
                                                                                                700                                                                             6.0
1.4                                                                                                                                                                600
                   1.1           1.2          1.1                                               525                                                                 5           4.5
                                                                                                                                              4
            0.8
                                                                                                350                                           339                               3.0
0.7                                                                                                                             3
                                                                                                          2

                                                                                                175                             137                                             1.5
                                                                                                          85
0.0
                                                                                                 -                                                                              0.0
        2004      2005         2006          2007          2008         2009         …2020E              FY06                  FY07          FY08                 FY09

  Source: Companies, IRDA, IDFC-SSKI Research

                                                       Over FY05-07, when private players registered a healthy APE CAGR of 87% CAGR,
                                                       BSL’s growth languished at 18%. FY07 was a challenging year for BSL as it managed
                                                       to post just 30% yoy growth compared to over 100% increase in business for the
                                                       industry. The sluggishness can be attributed primarily to (i) a re-jig in top
                                                       management, (ii) slower ramp-up in distribution compared to competition, and (iii)
                                                       stringent IRDA guidelines on ULIPs. Further, BSL lost the opportunity to capitalize


SEPTEMBER 2009                                                                                                                                                                  22
                                                                                                                       IDFC - SSKI INDIA

                                                                              on its first-mover advantage in the ULIP business, as it was focusing on debt products
                                                                              in a booming equity market.

 Exhibit 2: Over FY05- 07, BSL’s growth lagged industry…                                                                                       …debt: equity mix added to woes
                                                      APE yoy growth (%)                                                                                                                                  (% of debt in total AUM)

                                        Birla Sunlife                                       Total industry                                    88                                         BSL                I-Pru                  Reliance Life                       HDFC SL
  140
                                                                                             131                                                        78        79
                                                                                                                                                             73                      71
                                                                                                                                                                         68                                         69
                                                     104                                                                                      66                                                                                                                                       65
  105                                                                                                                                                                                                                      60                        60
                                                                                                                 High growth –                                                                   57 55                                                                                                55
                                                                                             84                                                                                                                                         52
                      72                                                                                         on a low base                                                             48                                                                          46
                                                                                                                                                                                                                                                                                            51

      70                                                                                                                                      44                                                                                   42                                                            42
                                                                                                                                                                                                                                                                  38
                                                                                                                                                                                                                                                             32
                                                                                                                              41
      35                                            30                                                                                        22

                           7
                                                                                                                              6
       0                                                                                                                                       0
                    2006                            2007                             2008                              2009                                  FY05                          FY06                            FY07                              FY08                           FY09
 Source: Companies, IRDA



                                                                              CATCHING UP WITH INDUSTRY LEADERS
                                                                              With a new management team in place, BSL is well poised to accelerate growth.
                                                                              Buoyed by the expanding distribution muscle and product innovation, we expect
                                                                              BSL to grow above the industry average. First year premium is estimated to register a
                                                                              CAGR of 19% over FY09-12, ahead of our coverage universe.

                                                                                            Strong top-line growth…
           Aggressive launch of                                               We expect traction in BSL’s top-line growth as agency force is indicated to be built
      linked guarantee products                                               up to 250,000-300,000 over the medium term – up 50-80% from the current levels.
          and ramp-up in agency                                               In the near term, the branch network may not increase significantly from the current
            force to drive growth
                                                                              strength of 600. Also, BSL has been aggressively launching linked guarantee products,
                                                                              comprising 50% of the linked business. At 97% of Gross Premium (as of March ’09),
                                                                              BSL’s product mix is heavily skewed towards linked products. Going forward,
                                                                              traditional business or cross-over products are likely to gain momentum. However,
                                                                              single premium as a proportion of total premium is expected to remain insignificant.

 Exhibit 3: Premium growth seen at above industry levels…                                                                                     …a CAGR of 14% in FYP over FY09-2020E
                                        Industry - Total premium yoy growth (%)                                                                                 First Year Premium (Rs bn - LHS)                                   First Year Premium yoy growth (% - RHS)
                                                                                                                                               120                                                                                                                116
                                                                                                                                                                                                                                                                        160
       (%)                              Birla Sunlife - Total premium yoy growth (%)                                                                                                                                                                         104
100
                                                                                                                                                                                         131.7                                                                         94
                                                                                                                                                   90                                                                                                         85                                 120
 75                                                                                                                                                                                                                                                  76
                                                                                                                                                                                                                                             67
                                                                                                                                                                                                                                    59
                                                                                                                                                   60                                                                      51                                                                    80
 50                                                                                                                                                                                                                45
                                                                                                                                                                                                           38
                                                                                                                                                                                                  32
                                                                                                                                                                                          27
 25                                                                                                                                                30                                            40.6                                                                                            40
                                                                                                                                                                                   19
                                                                                                                                                                                 30.2             20
                                                                                                                                                                           8                               18      18      14           14 14        14
                                                                                                                                                         6        6                                                                                           11       11      11 11
  0                                                                                                                                                                      7.3
                                                                                                                                                    0                                                                                                                                            0
      2004

             2005

                    2006

                               2007

                                      2008

                                             2009

                                                    2010E

                                                            2011E

                                                                    2012E

                                                                            2013E

                                                                                    2014E

                                                                                              2015E

                                                                                                      2016E

                                                                                                              2017E

                                                                                                                      2018E

                                                                                                                              2019E

                                                                                                                                      2020E




                                                                                                                                                                                                  2010E

                                                                                                                                                                                                           2011E

                                                                                                                                                                                                                   2012E

                                                                                                                                                                                                                           2013E

                                                                                                                                                                                                                                    2014E

                                                                                                                                                                                                                                             2015E

                                                                                                                                                                                                                                                     2016E

                                                                                                                                                                                                                                                              2017E

                                                                                                                                                                                                                                                                       2018E

                                                                                                                                                                                                                                                                               2019E

                                                                                                                                                                                                                                                                                        2020E
                                                                                                                                                         2005

                                                                                                                                                                  2006

                                                                                                                                                                          2007

                                                                                                                                                                                  2008

                                                                                                                                                                                          2009




 Source: IRDA, IDFC-SSKI Research




SEPTEMBER 2009                                                                                                                                                                                                                                                                                         23
                                                                                                                            IDFC - SSKI INDIA

                                                                                             …coupled with an improving conservation ratio
                   We expect BSL’s                                         In FY09, BSL saw a sharp dip in its conservation ratio – partly attributable to the
              conservation ratio to                                        volatile capital markets and lock-in period expiring for a tranche of products. The
            stabilize at ~68% in the                                       ratio was also subdued relative to peers due to lower persistency of the group business
                           long term
                                                                           (at ~6% of total premium in FY09). We expect a steady uptick in BSL’s conservation
                                                                           ratio over FY09-13, before it stabilizes at 66-68% over the long run.

 Exhibit 4: An improving conservation ratio over FY09-13E…                                                                                             ….to drive a CAGR of ~18% in Gross Premium over FY09-2020E

80                               76                    Conservation ratio (%)                                                                                                Gross Premium (Rs bn - LHS)                                           Gross Premium yoy growth (% - RHS)
     72                   73                                                                                                                               300                                                                                                                                                        286 100
                                                                         66          68         68       68      66         66       66      66
                   66                                            64                                                                                                                                                                                                                                           257
                                                         62                                                                                                                                                    84.4
            57                                 58                                                                                                                                                                                                                                                   231
60                                      53                                                                                                                 225                                                                                                                                                                  75
                                                                                                                                                                                                                                                                                           207
                                                                                                                                                                                    70.3
                                                                                                                                                                                                                                                                                  185
                                                                                                                                                                                                                                                                         160
40                                                                                                                                                         150                                                                                                 136                                                              50
                                                                                                                                                                                                                   37.2                              113
                                                                                                                                                                                                  40.7                 31.2                93
                                                                                                                                                                                    37.2                                           75
20                                                                                                                                                          75                                                            59               24.7 21.4                                                                            25
                                                                                                                                                                                                                                                     20.0
                                                                                                                                                                                                                45                 27.7                                  17.4 16.0
                                                                                                                                                                                                       33                                                                                  11.9 11.5 11.3 11.2
                                                                                                                                                                                     13      18
                                                                                                                                                                    5        9
 0                                                                                                                                                              0                                                                                                                                                               0
                                               2010E

                                                         2011E

                                                                 2012E

                                                                         2013E

                                                                                     2014E

                                                                                                2015E

                                                                                                         2016E

                                                                                                                 2017E

                                                                                                                            2018E

                                                                                                                                     2019E

                                                                                                                                             2020E
     2004

            2005

                   2006

                          2007

                                 2008

                                        2009




                                                                                                                                                                                                                          2010E

                                                                                                                                                                                                                                   2011E

                                                                                                                                                                                                                                           2012E

                                                                                                                                                                                                                                                       2013E

                                                                                                                                                                                                                                                               2014E

                                                                                                                                                                                                                                                                          2015E

                                                                                                                                                                                                                                                                                   2016E

                                                                                                                                                                                                                                                                                           2017E

                                                                                                                                                                                                                                                                                                      2018E

                                                                                                                                                                                                                                                                                                              2019E

                                                                                                                                                                                                                                                                                                                        2020E
                                                                                                                                                                    2004

                                                                                                                                                                             2005

                                                                                                                                                                                      2006

                                                                                                                                                                                             2007

                                                                                                                                                                                                        2008

                                                                                                                                                                                                                 2009
 Source: IRDA, Company, IDFC-SSKI Research

                                                                                             Economies of scale to accrue
          We see expense ratio                                             On the back of an expanding premium base and tapering investments in distribution
      heading south but limited                                            network, we expect BSL’s expense ratio (operating expenses/ total premium) to
     scope as BSL has to catch                                             consistently trend down. However, the decline in expense ratio would be restricted as
         up on distribution and
      needs enhanced visibility
                                                                           the company (i) is currently in the growth phase – thereby requiring infrastructure
                                                                           creation, and (ii) is likely to undertake heavy advertising to enhance visibility of the
                                                                           Aditya Birla Group as an integrated financial services company.

                                                                           Exhibit 5: Expense ratio to decline further
                                                                           (%)
                                                                                                                                                                Expense/ Weighted Premium
                                                                           35

                                                                                       28.0
                                                                           28                                                                           25.9

                                                                                                                                    21.8                            21.6
                                                                                                        19.9      20.0                        20.8
                                                                                                                                                                                    19.8
                                                                           21                                                                                                                  17.9
                                                                                                                                                                                                                16.4
                                                                                                                                                                                                                                  15.2        14.4             13.9               13.7         13.4           13.1              12.9
                                                                           14


                                                                                 7


                                                                                 0
                                                                                         2004

                                                                                                        2005

                                                                                                                     2006

                                                                                                                                    2007

                                                                                                                                                2008

                                                                                                                                                         2009

                                                                                                                                                                     2010E

                                                                                                                                                                                     2011E

                                                                                                                                                                                                    2012E

                                                                                                                                                                                                                  2013E

                                                                                                                                                                                                                                  2014E

                                                                                                                                                                                                                                                   2015E

                                                                                                                                                                                                                                                                 2016E

                                                                                                                                                                                                                                                                                  2017E

                                                                                                                                                                                                                                                                                                   2018E

                                                                                                                                                                                                                                                                                                                2019E

                                                                                                                                                                                                                                                                                                                                2020E




                                                                           Source: Company, IDFC SSKI Research




SEPTEMBER 2009                                                                                                                                                                                                                                                                                                                      24
                                                                                                                           IDFC - SSKI INDIA

                                                                                   Commission rates may remain elevated to fuel growth
           With increasing scale and                                     To factor in BSL’s high-growth phase and changing product mix towards non-linked
                  bargaining muscle,                                     products (albeit limited), we have maintained commission ratios at the higher end of
           commission ratios would                                       our coverage universe. Nevertheless, with increasing scale and the resultant bargaining
              eventually head south
                                                                         muscle, commission ratios would eventually head south.

                                                                         Exhibit 6: Commission costs to reflect growth posture and changing product mix
                                                                                 (%)                                                 Commission/ APE                                                                         Commission/ Gross Premium
                                                                         28
                                                                                                                 24.9       24.2
                                                                                                                                                                                                                            22.6       22.6              22.9        23.0           23.1               23.4      23.4
                                                                                            21.7                                                                                                21.3     22.1
                                                                                 18.1                                                                           20.1           21.0
                                                                         21
                                                                            20.5                                                             17.4 17.8

                                                                         14
                                                                                            14.5                 14.1
                                                                                                                            12.7
                                                                                                                                        11.4                    10.8           11.2             10.7
                                                                                                                                                      10.3                                               10.3               10.0        9.7                                                                        9.5
                                                                           7                                                                                                                                                                             9.5              9.5       9.4                9.4



                                                                           0
                                                                                   2004

                                                                                                  2005

                                                                                                                  2006

                                                                                                                              2007

                                                                                                                                             2008

                                                                                                                                                       2009

                                                                                                                                                                     2010E

                                                                                                                                                                                 2011E

                                                                                                                                                                                                 2012E

                                                                                                                                                                                                            2013E

                                                                                                                                                                                                                             2014E

                                                                                                                                                                                                                                             2015E

                                                                                                                                                                                                                                                          2016E

                                                                                                                                                                                                                                                                          2017E

                                                                                                                                                                                                                                                                                       2018E

                                                                                                                                                                                                                                                                                                        2019E

                                                                                                                                                                                                                                                                                                                         2020E
                                                                         Source: Company, IDFC-SSKI Research

                                                                                   P&L break-even expected in FY12E…
                                                                         An increasing share of renewal premium in the total mix, robust growth rates and
                                                                         operating leverage are likely to drive break even for BSL in FY12. By FY20E, BSL’s
                                                                         profit is seen at ~Rs27bn – a CAGR of 27% over FY15-20E.

  Exhibit 7: Increasing share of renewal business…                                                                                                  …buoys P&L break-even by FY12E
      (%)            First Year Premium                     Renewal Premium                              Single Premium                                                               PAT (Rs bn)                                             Accumulated profits/losses (Rs bn)
100                                       1       1       1       1       1        1       1              1         1        1        1                80
       3     3      3      1      1

                                                                                                                                                       60
      32                   40     38
75                                       44      48
             46     50                                   51      54      56      58       58             59        59       59       59                40

                                                                                                                                                                                                                P&L
                                                                                                                                                       20
50                                                                                                                                                                                                              breakeven
                                                                                                                                                        0
      65
25
                           59     60     55                                                                                                                                                                                                                                          Capital
             51                                  51      48
                    47                                           45      43      42       41             41        41       41       40               -20                                                                                                                            breakeven

 0                                                                                                                                                    -40
                                                                                                                                                                                                                    2010E

                                                                                                                                                                                                                             2011E

                                                                                                                                                                                                                                     2012E

                                                                                                                                                                                                                                                 2013E

                                                                                                                                                                                                                                                         2014E

                                                                                                                                                                                                                                                                  2015E

                                                                                                                                                                                                                                                                            2016E

                                                                                                                                                                                                                                                                                    2017E

                                                                                                                                                                                                                                                                                               2018E

                                                                                                                                                                                                                                                                                                         2019E

                                                                                                                                                                                                                                                                                                                 2020E
                                                                                                                                                              2004

                                                                                                                                                                        2005

                                                                                                                                                                               2006

                                                                                                                                                                                         2007

                                                                                                                                                                                                  2008

                                                                                                                                                                                                         2009
      2005

             2006

                    2007

                           2008

                                  2009

                                         2010E

                                                 2011E

                                                         2012E

                                                                 2013E

                                                                         2014E

                                                                                 2015E

                                                                                          2016E

                                                                                                         2017E

                                                                                                                   2018E

                                                                                                                            2019E

                                                                                                                                     2020E




      Source: Company, IDFC-SSKI Research




  SEPTEMBER 2009                                                                                                                                                                                                                                                                                                           25
                                                                          IDFC - SSKI INDIA


                                Exhibit 8: Profits trend line
                                                                                                      PAT (Rs bn - LHS)                                                                           yoy growth (% - RHS)
                                30                                                                                                                                                                                                                                             600
                                                                                                                                                                                                                                                                     27.1
                                                                                                                                                                       514
                                                                                                                                                                                                                                                          21.6
                                20                                                                                                                                                                                                                                             400
                                                                                                                                                                                                                                           16.7
                                                                                                                                                                                                                            12.7
                                                                                                                                                                                                                10.3
                                10                                                                                                                                                   7.2                                                                                       200
                                                                                                                                                                                 131
                                                                                                                                                                               4.3   69                         43
                                                                                                                                              0.3              1.9                                                              23              31          29          25
                                 0                                                                                                                                                                                                                                             0
                                       -0.8         -0.6          -0.6         -1.4
                                                                                                                                -2.8
                                                                                           -4.5                     -5.9
                                -10                                                                    -7.0                                                                                                                                                                    -200
                                        2004

                                                     2005

                                                                  2006

                                                                                2007

                                                                                           2008

                                                                                                        2009

                                                                                                                     2010E

                                                                                                                                2011E

                                                                                                                                               2012E

                                                                                                                                                               2013E

                                                                                                                                                                                2014E

                                                                                                                                                                                                2015E

                                                                                                                                                                                                                2016E

                                                                                                                                                                                                                                2017E

                                                                                                                                                                                                                                                2018E

                                                                                                                                                                                                                                                            2019E

                                                                                                                                                                                                                                                                       2020E
                                Source: Company, IDFC-SSKI Research

                                        …capital break-even in FY17E
       Expect BSL to require    On the back of robust new business premium growth, improving conservation ratio
       Rs13bn of incremental    and operating leverage, we expect BSL to require Rs12.7bn of incremental capital
        capital over FY10-13.
               Subsequently,
                                over FY10-13. Subsequently, accumulated losses are likely to be wiped out by FY17.
     accumulated losses are     In line with the industry, we expect BSL to be cash-rich to sustainably fund growth
    likely to be wiped out by   needs, solvency capital requirements and dividend payouts.
                        FY17.
                                Exhibit 9: Capital break-even in FY17E
                                      (Rs bn)                                                  Capital requirement                                                             Incremental capital requirement
                                32
                                                                                                                                        31.1            32.0
                                                                                                                   26.9

                                24

                                                                                                     19.7

                                16
                                                                                       12.7

                                                                               6.7                           6.9          7.3
                                 8                                                              6.0
                                                                  4.6                                                                       4.2
                                       2.9          3.5
                                                                                     2.1
                                                            0.6          1.1                                                                            0.9              0.3
                                              0.0
                                 0
                                                                                                                        2010E


                                                                                                                                    2011E


                                                                                                                                                       2012E


                                                                                                                                                                       2013E


                                                                                                                                                                                        2014E


                                                                                                                                                                                                        2015E


                                                                                                                                                                                                                        2016E


                                                                                                                                                                                                                                        2017E


                                                                                                                                                                                                                                                        2018E


                                                                                                                                                                                                                                                                    2019E


                                                                                                                                                                                                                                                                               2020E
                                       2004


                                                    2005


                                                                  2006


                                                                                2007


                                                                                              2008


                                                                                                            2009




                                Source: Company, IDFC-SSKI Research

                                        Strong growth in AUM ahead
                                We expect 28% CAGR in BSL’s AUM over FY09-20 to ~Rs1.3tn by FY20, with
                                linked AUM scaling up to ~87% of the total. Our numbers build in an average
                                return of ~9% on the linked book over FY09-20.




SEPTEMBER 2009                                                                                                                                                                                                                                                                  26
                                                                                                                                            IDFC - SSKI INDIA


 Exhibit 10: Healthy growth in AUMs
                             Linked AUM (Rs bn - LHS)                                          yoy growth (% - RHS)                                                                                 Non-Linked AUM (Rs bn - LHS)                                                    yoy growth (% - RHS)
1,200                                                                                                                                                      140          180                                                                                                                                                               360



 900                                                                                                                                                       105          135                                                                                                                                                               270



 600                                                                                                                                                       70            90                                                                                                                                                               180




 300                                                                                                                                                       35            45                                                                                                                                                               90



                                                                                                                                                                           0                                                                                                                                                              0
   0                                                                                                                                                       0




                                                                                                                                                                                                                                     2010E

                                                                                                                                                                                                                                             2011E

                                                                                                                                                                                                                                                     2012E

                                                                                                                                                                                                                                                                2013E

                                                                                                                                                                                                                                                                        2014E

                                                                                                                                                                                                                                                                                   2015E

                                                                                                                                                                                                                                                                                           2016E

                                                                                                                                                                                                                                                                                                   2017E

                                                                                                                                                                                                                                                                                                               2018E

                                                                                                                                                                                                                                                                                                                       2019E

                                                                                                                                                                                                                                                                                                                                 2020E
                                                                                                                                                                               2004

                                                                                                                                                                                          2005

                                                                                                                                                                                                 2006

                                                                                                                                                                                                          2007

                                                                                                                                                                                                                   2008

                                                                                                                                                                                                                          2009
                                                  2010E

                                                          2011E

                                                                  2012E

                                                                          2013E

                                                                                  2014E

                                                                                              2015E

                                                                                                             2016E

                                                                                                                     2017E

                                                                                                                             2018E

                                                                                                                                       2019E

                                                                                                                                               2020E
        2004

               2005

                      2006

                             2007

                                    2008

                                           2009




 Source: Company, IDFC-SSKI Research


                                                                                  Exhibit 11: Linked AUM to continue dominating the mix
                                                                                                                                                           Linked AUM (% of total)                                        Non-Linked AUM (% of total)
                                                                                  100                                                                  3        3
                                                                                                      4                3             3                               8       7     6                              6         6      7    8      9      10                                                   10            12              13

                                                                                   75



                                                                                   50                                                              91            91
                                                                                                  79                 87              90                                 87            93          94             94          94              93              92            91              90              90            88              87

                                                                                   25



                                                                                          0
                                                                                                      2004

                                                                                                                     2005

                                                                                                                                     2006

                                                                                                                                                   2007

                                                                                                                                                                 2008

                                                                                                                                                                        2009

                                                                                                                                                                                      2010E

                                                                                                                                                                                                  2011E

                                                                                                                                                                                                                 2012E

                                                                                                                                                                                                                             2013E

                                                                                                                                                                                                                                             2014E

                                                                                                                                                                                                                                                             2015E

                                                                                                                                                                                                                                                                           2016E

                                                                                                                                                                                                                                                                                           2017E

                                                                                                                                                                                                                                                                                                           2018E

                                                                                                                                                                                                                                                                                                                         2019E

                                                                                                                                                                                                                                                                                                                                         2020E
                                                                                  Source: Company, IDFC-SSKI Research




SEPTEMBER 2009                                                                                                                                                                                                                                                                                                                                27
                                                           IDFC - SSKI INDIA


                                        VALUATIONS & VIEW
                                        Owing to limited disclosures, we have assigned lower NBAP multiples and
                                        benchmark NBAP margins to BSL. Our EV based valuation indicates BSL’s total
                                        valuation at Rs126bn. We also value the company on the basis of long term profit
                                        projections. Our DCF valuation indicates BSL’s total valuation at Rs111bn implying
                                        Rs778 per share of Aditya Birla Nuvo (a 74% economic interest in BSL), after
                                        factoring in a 10% holding company discount.

                                            DCF valuation
      DCF of long-term profits          Post break-even in FY12E, Birla SL’s PAT is expected to show a 188% CAGR over
       imputes a valuation of           FY12-15 on a low base. Thereafter, profits are expected to increase at ~30% CAGR
        ~Rs107bn for Birla SL           over FY15-20. A DCF of the long-term profits imputes a valuation of ~Rs111bn for
                                        Birla SL. Concurrently, Aditya Birla Nuvo’s 74% stake stands valued at ~Rs74bn or
                                        Rs778 per share (after applying a 10% holding company discount).

 Exhibit 12: DCF valuation
 (Rs m)                        FY09 FY10E FY11E FY12E FY13E              FY14E    FY15E    FY16E    FY17E    FY18E    FY19E FY20E
 Profit after tax             (7,021) (5,947) (2,796)      302   1,854    4,282    7,221   10,328   12,742   16,719   21,568 27,053
 Total PV of net profit (A)                   33,727 36,168 35,938       34,703   32,211   28,542   23,959   19,021   13,361   6,985


 PV of terminal value (B)                     77,201
 Total value (Rs mn) - A+B                   110,927
 Total value ($)                               2,311


 AV Nuvo's Stake value (74%)                  73,878
 AV Nuvo - outstanding shares (m)                 95
 Value per share of parent (Rs)                  778
 CMP of parent (Rs)                           984.25
 Price Date                                 5th Sept '09
 % of value contributed by Birla Sun Life       79%
 Discount rate                                 14.5%




SEPTEMBER 2009                                                                                                                    28
                                                     IDFC - SSKI INDIA

                                        Appraisal value method – widely used
   At 15x NBAP multiple, we       Despite BSL’s high near-term growth visibility, we are assigning a higher discounting
    arrive at a total appraisal   to the NBAP multiple and NBAP margins relative to peers as the company currently
   value of Rs126bn for BSL       does not disclose its NBAP margins. At 15x NBAP multiple, we arrive at a total
                                  appraisal value of Rs126bn. This translates into Rs885 per share of Aditya Birla Nuvo
                                  after providing for a 10% holding company discount.

                                  Exhibit 13: Appraisal valuation
                                  (Rs m)                                       FY08      FY09       FY10E        FY11E
                                  APE                                         19,246    27,059      32,465       38,304
                                  yoy growth (%)                               130.8      40.6        20.0         18.0
                                  NBAP Margins (%)                              16.0      16.5        16.0         15.5
                                  NBAP                                         3,079     4,465       5,194        5,937
                                  Net shareholders funds                       3,846     3,750       5,058        6,438
                                  Embedded Value: {A}                         12,741    18,482      27,028       37,221
                                  Structural Value: {B}
                                  NBAP                                                                            5,937
                                  Multiple (x)                                                                      15
                                  Value                                                                          89,057
                                  Appraisal Value: {A}+{B}                                                      126,277
                                  Appraisal Value: (US$ m)                                                        2,631
                                  Aditya Birla Nuvo's stake (%)                                                     74
                                  Value of Aditya Birla Nuvo Stake                                               93,445
                                  Less: 10% Holding company discount                                              9,345
                                  Value of Aditya Birla Nuvo Stake                                               84,101
                                  Value per share of Aditya Birla Nuvo (Rs)                                        885
                                  Source: Company, IDFC - SSKI Research




SEPTEMBER 2009                                                                                                      29
                                                                     IDFC - SSKI INDIA


Profit & Loss account
Year to 31 March (Rs m)               FY09     FY10E     FY11E     FY12E    FY13E     FY14E     FY15E     FY16E     FY17E     FY18E     FY19E     FY20E
Gross Premium                        44,694    58,620    74,879    93,356 113,373    136,066   159,736   185,223   207,279   231,175   257,314   286,070
yoy growth (%)                         37.2      31.2      27.7      24.7     21.4      20.0      17.4      16.0      11.9      11.5      11.3      11.2
FYP Premium                          27,002    32,403    38,236    45,118   51,434    58,635    66,844    76,202    84,585    93,889   104,217   115,681
yoy growth (%)                         40.6      20.0      18.0      18.0     14.0      14.0      14.0      14.0      11.0      11.0      11.0      11.0
Renewal Premium                      17,126    25,594    35,958    47,484   61,117    76,535    91,916   107,957   121,545   136,046   151,757   168,942
yoy growth (%)                         31.9       9.5      40.5      32.1     28.7      25.2      20.1      17.5      12.6      11.9      11.5      11.3
Single Premium                          566       623       685      754      822       896       976      1,064     1,149     1,241     1,340     1,448
yoy growth (%)                         48.8      10.0      10.0      10.0      9.0       9.0       9.0       9.0       8.0       8.0       8.0       8.0
APE                                  27,059    32,465    38,304    45,193   51,517    58,725    66,942    76,309    84,699    94,013   104,351   115,825
yoy growth (%)                         40.6      20.0      18.0      18.0     14.0      14.0      14.0      14.0      11.0      11.0      11.0      11.0
Investment Income                    (6,707)    9,527    13,869    19,260   25,603    33,188    42,102    52,340    63,830    76,455    90,256   105,369
yoy growth (%)                       (237.6)   (242.1)     45.6      38.9     32.9      29.6      26.9      24.3      22.0      19.8      18.1      16.7
Commission                            4,818     6,542     8,033     9,644   11,375    13,266    15,139    17,507    19,501    21,692    24,409    27,100
Operating expenses                   11,463    12,551    14,670    16,606   18,421    20,552    22,933    25,594    28,232    30,808    33,611    36,634
Benefits                              6,464     9,534    14,278    20,641   27,904    36,868    48,928    63,245    77,917    93,308   110,017   127,984
Change in valuation of liabilities   21,122    45,172    54,421    65,989   79,668    94,451   107,695   120,956   133,122   145,568   158,516   173,386
yoy growth (%)                        (22.4)    113.9      20.5      21.3     20.7      18.6      14.0      12.3      10.1       9.3       8.9       9.4
Strain Funding / Contribution from
Shareholders account                  6,323     6,301     3,505
yoy growth (%)                          (61)        0       (44)
Return on Solvency Capital              342       354       451      536      687       862      1,052     1,277     1,497     1,710     2,008     2,316
Profit/Loss Before Tax               (7,021)   (5,947)   (2,796)     352     2,160     4,989     8,412    12,031    14,844    19,477    25,126    31,515
Profit/Loss After Tax                (7,021)   (5,947)   (2,796)     302     1,854     4,282     7,221    10,328    12,742    16,719    21,568    27,053
yoy growth (%)                                                                                    68.6      43.0      23.4      31.2      29.0      25.4


Balance sheet
Year to 31 March (Rs mn)              FY09     FY10E     FY11E     FY12E    FY13E     FY14E     FY15E     FY16E     FY17E     FY18E     FY19E     FY20E
AUM                                  91,684 132,835 187,590 252,467 332,878          430,216   543,387   672,411   815,057   973,367 1,148,598 1,343,156
yoy growth (%)                         33.0      44.9      41.2      34.6     31.9      29.2      26.3      23.7      21.2      19.4      18.0      16.9
Linked AUM                           79,798 123,545 175,624 238,200 313,259          401,668   501,831   614,548   737,608   871,186 1,014,756 1,169,422
yoy growth (%)                         26.7      54.8      42.2      35.6     31.5      28.2      24.9      22.5      20.0      18.1      16.5      15.2
Non-Linked AUM                        7,789     9,290    11,966    14,266   19,619    28,548    41,556    57,862    77,449   102,181   133,842   173,734
yoy growth (%)                        346.0      19.3      28.8      19.2     37.5      45.5      45.6      39.2      33.9      31.9      31.0      29.8
Networth                              4,075     5,059     6,439     6,741    8,595    12,877    20,098    30,425    43,167    57,379    75,065    96,707


Key ratios (%)
Year to 31 March                      FY09     FY10E     FY11E     FY12E    FY13E     FY14E     FY15E     FY16E     FY17E     FY18E     FY19E     FY20E
Conservation ratio                     53.2      58.0      62.0      64.0     66.0      68.0      68.0      68.0      66.0      66.0      66.0      66.0
Commission/Total Premium               10.3      10.8      11.2      10.7     10.3      10.0       9.7       9.5       9.5       9.4       9.4       9.5
Opex/ Weighted premium
(including Renewal premium)            25.9      21.6      19.8      17.9     16.4      15.2      14.4      13.9      13.7      13.4      13.1      12.9
Benefits/ Gross Premium                14.5      16.3      19.1      22.1     24.6      27.1      30.6      34.1      37.6      40.4      42.8      44.7
Surrender Ratio                         9.5      11.3      11.4      11.7     11.7      11.8      12.3      12.8      12.9      12.9      12.9      12.9
Return on / Avg Linked AUM             (9.9)      9.7       9.6       9.5      9.4       9.4       9.3       9.3       9.3       9.3       9.2       9.2
Return on / Avg Non-Linked AUM          5.3       5.8       6.9       6.3      6.2       6.3       6.4       6.4       6.3       6.3       6.3       6.3
Return on / Avg shareholders fund       9.7       8.0       7.8       7.6      7.9       7.8       7.7       7.7       7.6       7.5       7.6       7.5
Return on Networth (%)                                                                            35.9      33.9      29.5      29.1      28.7      28.0




SEPTEMBER 2009                                                                                                                                      30
                                                IDFC - SSKI INDIA




                           HDFC Standard Life Insurance




                                                                                                                                            Company update
                           Past the trough
        4 September 2009
                            HDFC Standard Life Insurance (HDFC SL) has built a profitable franchise at the
       BSE Sensex: 15689    core, and focus on underwriting quality business rather than pursuit of market
                            share augurs well for long-term growth. With historically the highest
                            conservation ratio among peers and access to group branches, HDFC SL is
                            well placed to grow rapidly. Owing to higher proportion of participating
                            policies in business mix, we expect HDFC SL to achieve break even in FY13E
                            (slightly later than peers) with a rebound in conservation ratio and declining
                            expenses being near-term profit drivers. HDFC SL is estimated to require
                            ~Rs16bn of incremental capital before achieving P&L break-even. Based on
                            DCF, we arrive at a valuation of ~Rs155bn for HDFC SL, imputing a value of
                            ~Rs359 per share of HDFC Ltd. Our appraisal method valuation indicates a
                            value of Rs305 per share of the parent.
                            Profitable franchise – at the core: HDFC SL has historically had the highest
                            conservation ratio among peers, which dipped in FY09 due to a higher
                            proportion of limited pay products in the mix. However, we expect the ratio to
                            rebound as the final tranche of these products is due to run out of the system in
                            October 2009. With access to group branch network fortifying the company’s
                            distribution strength, HDFC SL is set to gain ~140bp in market share, to 3.8%
                            of total premium, over FY09-20.
                            Product mix delays break-even to FY13E: While HDFC SL scores over peers
                            on key operating metrics, the company’s break-even point is likely to be a year
                            later in FY13. Given the higher proportion of participating business (13% of
                            total premium) and rapid distribution roll-out translating into elevated expense
                            ratios, we expect HDFC SL to require relatively higher incremental capital of
                            ~Rs16bn before it starts generating sustainable accruals.
                            Robust return profile; Outperformer: A rebound in conservation ratio, coupled
                            with utilization of expanded distribution and benefits of operating leverage,
                            should drive a 37% CAGR in HDFC SL’s accounting profits over FY15-20 with
                            steady state RoE of ~25%. Our DCF of the company’s long-term profits
                            indicates a value of ~Rs155bn (Rs359 per HDFC share). The EV based method,
                            at 16.8x FY10E NBAP with Embedded Value added, assigns a value of Rs305
                            per share of HDFC, after assuming a 10% holding company discount.

Pathik Gandotra            Key operating metrics
pathik@idfcsski.com
                           (Rs m)                                                   FY09       FY10E        FY11E        FY12E    FY13E
91-22-6638 3304
                           Gross Premium                                          55,650       65,444       79,950      100,057 127,106
                           APE*                                                   23,675       25,575       30,656       37,657   46,264
Neha Agrawal
                           yoy growth (%)                                            2.0           8.0        19.9         22.8     22.9
neha@idfcsski.com
                           Income on Investments (Policyholders)                (17,231)        8,927       13,211       18,604   25,529
91-22-6638 237
                           Total expenses (commissions, opex, claims)             28,662       27,756       31,137       37,080   44,986
                           yoy growth (%)                                           53.6         (3.2)        12.2         19.1    21.3
Chinmaya Garg
                           Change in valuation of liabilities                     14,057       50,702       64,400       81,675 104,594
chinmaya@idfcsski.com
                           Profit after Tax (loss)                               (5,423)       (6,113)       (4,624)    (2,226)     706
91-22-6638 3325            Source: Company, IDFC - SSKI Research; * APE is 10% of single premium plus regular premium



SEPTEMBER 2009                                                                                                                         31
                                                                                              IDFC - SSKI INDIA


                                                             INVESTMENT ARGUMENT
                                                             HDFC SL has one of the most profitable product portfolios in the industry.
                                                             The company’s distribution network is well-aligned to drive the HDFC SL
                                                             machinery. HDFC Bank, a group company, is the main bancassurance partner
                                                             – offering HDFC SL a greater control over its network and, therefore, the pace
                                                             of growth. While persistency dipped in FY09 owing to limited pay products,
                                                             we expect the conservation ratio to rebound sharply in the coming period.
                                                             Our analysis indicates that the company would require incremental capital of
                                                             Rs16bn before achieving capital break-even in FY17E. Our DCF of HDFC SL’s
                                                             long-term profits indicates a value of ~Rs155bn or Rs359 per share of HDFC.
                                                             The widely used appraisal method, at 16.8x FY10E NBAP with Embedded
                                                             Value added, assigns a value of Rs305 per share of the parent, after assuming
                                                             a 10% holding company discount.


                                                             HDFC SL: ROBUST PROFIT METRICS
                                                                        HDFC SL – scores on profitability metrics
       Conservation ratio should                             HDFC SL ranks well ahead of peers on key profitability metrics. Historically, the
          steadily increase as the                           company has had the highest conservation ratio. In FY09, HDFC SL evidenced a dip
      final tranche of limited pay
                                                             in premium persistency on account of limited pay products (later discontinued by the
         products runs out of the
                 system in Oct 09                            company). According to the management, the final tranche of these products will run
                                                             out of the system in October 2009, after which conservation ratio/ persistency should
                                                             steadily increase.

Exhibit 1: HDFC SL’s conservation ratio among the highest …                                                       …a temporary blip
                                                Conservation ratio                                                (%)                                       HDFC SL
(%)                                                                                                                                   Premium persistency             Policy persistency
                                       FY06       FY07           FY08             FY09                            100
100
                                                                        93
                              91 89
                                      86
                   78                                                                                   76         75
 75     74                                                                                         73
              70         69                      69 70                                                                                                                                      8
                                           65                                                 66
                                                         61 61
                                                                             52                              53    50
 50
                                                                                         44                                91                   89                     86
                                                                                   40
                                                                                                                                                                                            65
 25                                                                                                                25



  0                                                                                                                 0
             ICICI Pru         HDFC SL           Reliance Life               SBI Life          Birla Sunlife              FY06                 FY07                   FY08                 FY09

Source: Companies

                                                                        Market share gains limited by aggressive distribution roll-out by peers
      We expect HDFC SL’s total                              HDFC SL lost APE market share in FY07 as other players ramped up distribution at
             premium (including                              a more aggressive pace. With investments in distribution to yield results with a lag
       renewal premium) market                               and given HDFC SL’s calibrated growth pace, its market share has been range-bound
      share to increase by 140bp                             over FY07-09. On the back of increasing share of renewal premiums and healthy new
          over FY09-20 to ~3.8%
                                                             business premium growth, we expect HDFC SL’s total premium (including renewal
                                                             premium) market share to increase by ~140bp over FY09-20 to ~3.8%.




SEPTEMBER 2009                                                                                                                                                                                    32
                                                                                 IDFC - SSKI INDIA


 Exhibit 2: APE market shares – FY07 saw a dip…                                                …as peers expanded networks aggressively
                                                                                               (nos)
                                                                                                                                         Agents FY06              Agents FY07
(%)                                                                                            250,000
                                                                                                                       3.3x
          APE market share (% of private industry)          APE market share (% of industry)                                                       HDFC SL’s agents increased by
12.0                                                                                           200,000
                                                                                                                                                   2.1x in FY07 over FY06 as against
         10.7                                                                                                                                      much stronger rise for peers
                                                                                               150,000

                                                                                               100,000                                                   4.7x
 9.0                                                                                                                                2.1x
                                  8.3
                                                      7.9                                       50,000
                                                                                7.6                                                                                           3.1x          1.6x
                                                                                                       0
                                                                                                              ICICI Pru         HDFC SL          Reliance Life          SBI Life     Birla Sunlife
 6.0
                                                                                               (nos)
                                                                                                                                 Branches FY06                Branches FY07
                                                                                               600              3.3x
                                                                                       4.5
                                                               4.1
                3.8
                                         3.1                                                   450                                2.6x
 3.0

                                                                                               300
                                                                                                                                                       1.4x
                                                                                                                                                                              2.9x          1.6x
                                                                                               150
 0.0
           FY06                     FY07                FY08                       FY09
                                                                                                 0
                                                                                                           ICICI Pru          HDFC SL         Reliance Life            SBI Life      Birla Sunlife

 Source: IRDA, Companies



                                                     P&L BREAK-EVEN IN FY13E
                                                     Ironically, while HDFC SL has historically scored over peers on key profitability
                                                     metrics like conservation (implying a more profitable business franchise), the
                                                     company’s break-even point is likely to be a year later than peers on account of (i) a
                                                     greater proportion of participating business, and (ii) higher expense ratios in the wake
                                                     of distribution expansion while peers undertake significant rationalization.
                                                     Consequently, we expect HDFC SL to require a relatively higher capital of ~Rs16bn
                                                     before its starts generating sustainable internal accruals.

                                                             P&L break-even likely in FY13
         HDFC SL’s profits are                       We expect HDFC SL to achieve break-even in FY13E, buoyed by an improving
   likely to scale up at a rapid                     conservation ratio, reviving growth and declining expense ratios. HDFC SL has
     pace of 220% CAGR over                          historically scored higher on profitability metrics like conservation ratio; however, a
                       FY13-15                       high proportion of non-linked business may delay P&L break-even relative to peers.
                                                     The traditional business comprises 15% of total premium as of Mar ’09, of which
                                                     ~90% is participating business. Post break-even in FY13E, HDFC SL’s profits are
                                                     likely to scale up at a rapid pace of 220% CAGR over FY13-15, before stabilizing at
                                                     37% compounded rate over FY15-20.




SEPTEMBER 2009                                                                                                                                                                                     33
                                                                                                                                                             IDFC - SSKI INDIA


 Exhibit 3: P&L break-even likely in FY12E…                                                                                                                                           …delayed relative to peers by the high share of participating business
              (Rs bn)                                   PAT                                                 Accumulated profits/losses                                                                                     PAT (Rs bn - LHS)                                                      yoy growth (% - RHS)
  105                                                                                                                                                                                       40                                                                                                                                                                 600
                                                                                                                                                                   101
                                                                                                                                                                                                                                                                                                                                                    34.8

                                                                                                                                                                                            30                                                                                                                                            29.1                 450
   70                                                                                                                                                                                                                                                                                      372
                                                                                                                                                              66
                                                                                                                                                                                                                                                                                                                                 22.6
                                                                                                                                                                                            20                                                                                                                                                                 300
                                                                                                                                                 37                          34.8                                                                                                                                       16.8
   35
                                                                                                                                              16.8                                                                                                                                                             11.2
                                                                                                                        7.2
                                                                                                                                 11.2                                      29.1             10                                                                                                        7.2                                                      150
             -0.2 -0.9 -1.3 -1.3 -2.5                     0.7 3.3                                                                                            22.6                                                                                                                           3.3          55 50 35
                                      -5.4 -6.1 -4.6 -2.2                                                                                             14                                                                                                                          0.7                             29 20
       0                                                                                                                                                                                                                                                                                             117
                                                                                                                                             -3
                                                                                                                                                                                             0                                                                                                                                                                 0
             -1        -2       -3       -4       -7                              -23 -25 -25                                                                                                     -0.2 -0.9 -1.3 -1.3
                                                          -12                                                                   -14                                                                                                -2.5                                -2.2
                                                                   -18                                                -21                                                                                                                  -5.4 -6.1 -4.6                             -132
  -35                                                                                                                                                                                      -10                                                                                                                                                                 -150




                                                                                                                                                                                                                                            2009
                                                                                                                                                                                                                                                     2010E
                                                                                                                                                                                                                                                               2011E
                                                                                                                                                                                                                                                                          2012E
                                                                                                                                                                                                                                                                                  2013E
                                                                                                                                                                                                                                                                                             2014E
                                                                                                                                                                                                                                                                                                       2015E
                                                                                                                                                                                                                                                                                                                2016E
                                                                                                                                                                                                                                                                                                                         2017E
                                                                                                                                                                                                                                                                                                                                  2018E
                                                                                                                                                                                                                                                                                                                                           2019E
                                                                                                                                                                                                                                                                                                                                                     2020E
                                                                                                                                                                                                   2004
                                                                                                                                                                                                            2005
                                                                                                                                                                                                                    2006
                                                                                                                                                                                                                            2007
                                                                                                                                                                                                                                    2008
                                                            2009

                                                                     2010E

                                                                                 2011E

                                                                                           2012E

                                                                                                    2013E

                                                                                                              2014E

                                                                                                                        2015E

                                                                                                                                     2016E

                                                                                                                                                  2017E

                                                                                                                                                           2018E

                                                                                                                                                                   2019E

                                                                                                                                                                             2020E
              2004

                        2005

                                 2006

                                          2007

                                                   2008




Source: Company, IDFC-SSKI Research

 Exhibit 4: Higher share of traditional business…                                                                                                                                                                …predominantly participating
                                                                                                                                                                                                                                                        Total Premium Mix - % of total
                                                                                                                                                     ~89% of which is participating
 (%)                                           Unit-linked                               Traditional Busines                                         business
                                                                                                                                                                                                                                                    Linked Group, 6%
100                                                                                                                                                                                                                                                                                       Participating, 12%
                                                                                                                                                                                                                                                                                                                         Non-Participating,
                                                                             5                                                   4
                               16                                                                                                                                                     16                                                                                                                                       1%

                                                                                                                                                                                                                                                                                                                           Non-linked pension,
 75
                                                                                                                                                                                                                                                                                                                                   1%



 50
                                                                             95                                                 96
                               84                                                                                                                                                     84


 25


                                                                                                                                                                                                                             Linked Individual
  0                                                                                                                                                                                                                        (including pension),
                            FY06                                           FY07                                             FY08                                                  FY09                                             79%

Source: Company, IDFC-SSKI Research

                                                                                                                      Near-term profit drivers
                                                                                                     Conservation ratio to rebound sharply
            We expect conservation                                                                   In FY09, HDFC SL (in line with peers) saw a sharp dip in its conservation ratio –
                     ratio to improve                                                                reflecting the volatility in capital markets and impact of limited pay products. Over
             significantly to ~74% in                                                                FY10-11, we expect the conservation ratio to improve significantly to ~74% from
            FY11 from ~65% in FY09
                                                                                                     ~65% in FY09. While management has indicated that the share of renewal premium
                                                                                                     would increase to ~60% of total premium mix over the next couple of years, we have
                                                                                                     conservatively factored in those levels by FY13.

 Exhibit 5: Conservation ratio – significant improvement ahead
                                                                                                                                                                                                                          First Year Premium                           Renewal Premium Single Premium
                                                                     Conservation ratio (%)                                                                                                100
100 94
                               91                                                                                                                                                                                                 8 6 5                                5 4 4 3 3 3 2 2 2                                                                            2
                     87                 89
                                                 86                                                                                                                                                       15 14 12
                                                                                                                                                                                                 23
                                                                                                   80         80        80           80           78       78      78        78
                                                                                          77
                                                                             74
 75                                                                70                                                                                                                      75
                                                          65                                                                                                                                              29 34 42 45 52
                                                                                                                                                                                                                         56 57 59 60 61 64 65 66 67 67 68
                                                                                                                                                                                                 30
 50                                                                                                                                                                                        50


 25                                                                                                                                                                                        25 47 56 53 46 47
                                                                                                                                                                                                             42 39 38 37 36
                                                                                                                                                                                                                            35 33 32 32 31 30 30

  0                                                                                                                                                                                         0
                                                                   2010E

                                                                             2011E

                                                                                          2012E

                                                                                                   2013E

                                                                                                              2014E

                                                                                                                        2015E

                                                                                                                                     2016E

                                                                                                                                                  2017E

                                                                                                                                                           2018E

                                                                                                                                                                   2019E

                                                                                                                                                                              2020E
           2004

                     2005

                               2006

                                        2007

                                                 2008

                                                          2009




                                                                                                                                                                                                                                                       2010E
                                                                                                                                                                                                                                                                  2011E
                                                                                                                                                                                                                                                                              2012E
                                                                                                                                                                                                                                                                                          2013E
                                                                                                                                                                                                                                                                                                     2014E
                                                                                                                                                                                                                                                                                                               2015E
                                                                                                                                                                                                                                                                                                                        2016E
                                                                                                                                                                                                                                                                                                                                  2017E
                                                                                                                                                                                                                                                                                                                                            2018E
                                                                                                                                                                                                                                                                                                                                                       2019E
                                                                                                                                                                                                                                                                                                                                                                   2020E
                                                                                                                                                                                                 2004
                                                                                                                                                                                                          2005
                                                                                                                                                                                                                   2006
                                                                                                                                                                                                                            2007
                                                                                                                                                                                                                                    2008
                                                                                                                                                                                                                                             2009




 Source: Company, IDFC-SSKI Research


SEPTEMBER 2009                                                                                                                                                                                                                                                                                                                                                     34
                                                                                                                                                                   IDFC - SSKI INDIA

                                                                                                          Growth rates to pick up
                                                                                                          As HDFC SL leverages its expanded distribution network, new business premium is
                                                                                                          likely to see an uptick in growth. Concurrently, the improving conservation ratio
                                                                                                          would lead to a robust 23% CAGR in gross premium over FY09-13E. We see the
                                                                                                          potential of a long-term CAGR of ~20% in HDFC SL’s gross premium.

 Exhibit 6: HDFC SL to see a robust 23% CAGR in gross premium over FY09-13E
                                                                                                                          Gross Premium (Rs m)                                                                                                                                                           FYP Premium (Rs m)
                                                                                                   FY09                                  FY13E                            CAGR FY09-13E (%)                                                                                    FY09                           FY13E                         CAGR FY09-13E (%)
    ICICI Pru                                                                              153,562                               320,332                                                                                  20                                                60,174                        111,779                                                                                       17
    HDFC SL                                                                                      55,650                          127,106                                                                                  23                                                23,360                           45,802                                                                                     18
    Reliance Life                                                                                49,325                          166,015                                                                                  35                                                29,657                           69,967                                                                                     24
    SBI Life                                                                                     72,121                          152,539                                                                                  21                                                45,649                           86,253                                                                                     17
    Birla Sunlife                                                                                44,694                          113,373                                                                                  26                                                27,002                           51,434                                                                                     17
    Coverage                                                                               375,353                               879,365                                                                                  24                                          185,843                             365,236                                                                                       18


    Exhibit 7: Premium growth to pick up                                                                                                                                                                   Total premium mix
                    First Year Premium (Rs bn - LHS)                                             First Year Premium yoy growth (% - RHS)                                                                                            Gross Premium (Rs bn - LHS)                                               Gross Premium yoy growth (% - RHS) 387
160                                                                                                                                                                                                  200        400                                                                                                                                                                                             140
                                                                                                                                                                                                                                     131
                                                                                                                                                                                                                                            129                                                                                                                                          345
                           171.3
                                                                                                                                                                                                                                                                                                                                                                               306
120                                                                                                                                                                                      116 150                300                                                                                                                                             268                                             105
                                                                                                                                                                         105
                                                                                                                                                                                                                                                                                                                                                   231
                                       116.1                                                                                                              95                                                                                                         82
                                                                                                                                              86                                                                                                                                                                                         194
 80                                                                                                                               75
                                                                                                                                                                                                    100         200                                                            70                                                                                                                               70
                                                                                                                                                                                                                                                                                                                              159
                                                                                                                       65
                                                          73.2                                               56                                                                                                                                                                                                     127
                                                 59.5                                              46                                                                                                                                                                                                    100
 40                                                                                      37                                                                                                        50           100                                                                              80                                                                                                             35
                                                                        25
                                                                                30                                                                                                                                                                                     49       56 6518               22       25           27 25
                                                                                                                                                                                                                                                                                                                                                  22 19
                                                    23        23                        23.0 23.0 23.0                                                                                                                                                                            15
                                                                               20.0                                   15.0 15.0 15.0 10.5                                                                                                                 29                                                                                                              16          14         13
                                           13                                                                                                                                            10.5                                                   16                                                                                                                                                         12
                                  8                                    8.0                                                                10.5                                                                           3           7
                1          4                                     2.4
     0                                                                                                                                                                                               0            0                                                                                                                                                                                             0
                                                                       2010E

                                                                               2011E

                                                                                        2012E

                                                                                                  2013E

                                                                                                            2014E

                                                                                                                      2015E

                                                                                                                                 2016E

                                                                                                                                             2017E

                                                                                                                                                         2018E

                                                                                                                                                                         2019E

                                                                                                                                                                                         2020E
           2004

                     2005

                                2006

                                          2007

                                                   2008

                                                             2009




                                                                                                                                                                                                                                                                                         2010E

                                                                                                                                                                                                                                                                                                 2011E

                                                                                                                                                                                                                                                                                                           2012E

                                                                                                                                                                                                                                                                                                                    2013E

                                                                                                                                                                                                                                                                                                                              2014E

                                                                                                                                                                                                                                                                                                                                          2015E

                                                                                                                                                                                                                                                                                                                                                      2016E

                                                                                                                                                                                                                                                                                                                                                                      2017E

                                                                                                                                                                                                                                                                                                                                                                                 2018E

                                                                                                                                                                                                                                                                                                                                                                                           2019E

                                                                                                                                                                                                                                                                                                                                                                                                      2020E
                                                                                                                                                                                                                         2004

                                                                                                                                                                                                                                     2005

                                                                                                                                                                                                                                                2006

                                                                                                                                                                                                                                                              2007

                                                                                                                                                                                                                                                                        2008

                                                                                                                                                                                                                                                                                 2009




Source: IRDA, IDFC-SSKI Research

                                                                                                          Operating leverage driven by robust premium growth
                                                                                                          As for peers, increasing scale of new business premium and rising share of renewal
                                                                                                          premium in the total mix would help HDFC SL report a consistent decline in
                                                                                                          commissions and operating expense ratios. Commission ratios may be elevated
                                                                                                          relative to peers given the higher share of traditional products.

 Exhibit 8: Expense and commission ratios to consistently trend downwards
                                                                       Expense/ Weighted Premium                                                                                                                 (%)                                   Commission/ APE                                                                   Commission/ Gross Premium
40                                                                                                                                                                                                         28
                           38.9                                                                                                                                                                                         26.2
                                                            33.3
30                              29.0
                                                                                                                                                                                                           21
                                                                                                                                                                                                                                                                                                                                 18.7 18.9
                                                                        23.7
                                                                                                                                                                                                                                18.6                                           17.9 18.3 18.2 18.1 18.4 18.3 18.4 18.2 18.3 18.6
                                          22.6                                                                                                                                                                                                       15.6 15.1
                                                          22.5                   20.5                                                                                                                                                    14.2
                                                                                                                                                                                                                 13.0
20                                                                                         17.4                                                                                                            14
                                                                                                                                                                                                                          10.6
                                                                                                     15.1
                                                                                                                13.6 12.2
                                                                                                                                         11.1 10.5                                                                                       7.7           7.4           7.2       7.6      7.2      7.0
                                                                                                                                                   9.7 9.1 8.7                                                                                                                                              6.8       6.7        6.5              6.2         5.9             5.9        5.8          5.7       5.7
10                                                                                                                                                                                                         7



0           0.0
                                                                                                                                                                                                           0
                                                                       2010E

                                                                                2011E

                                                                                         2012E

                                                                                                    2013E

                                                                                                              2014E

                                                                                                                         2015E

                                                                                                                                     2016E

                                                                                                                                                 2017E

                                                                                                                                                                 2018E

                                                                                                                                                                                 2019E

                                                                                                                                                                                                 2020E
                                                             2009




                                                                                                                                                                                                                                                                               2009
                                                                                                                                                                                                                 2004

                                                                                                                                                                                                                             2005

                                                                                                                                                                                                                                         2006

                                                                                                                                                                                                                                                       2007

                                                                                                                                                                                                                                                                     2008



                                                                                                                                                                                                                                                                                        2010E

                                                                                                                                                                                                                                                                                                 2011E

                                                                                                                                                                                                                                                                                                            2012E

                                                                                                                                                                                                                                                                                                                      2013E

                                                                                                                                                                                                                                                                                                                                 2014E

                                                                                                                                                                                                                                                                                                                                              2015E

                                                                                                                                                                                                                                                                                                                                                              2016E

                                                                                                                                                                                                                                                                                                                                                                              2017E

                                                                                                                                                                                                                                                                                                                                                                                         2018E

                                                                                                                                                                                                                                                                                                                                                                                                   2019E

                                                                                                                                                                                                                                                                                                                                                                                                                2020E
         2004

                    2005

                               2006

                                         2007

                                                   2008




 Source: Company, IDFC SSKI Research


SEPTEMBER 2009                                                                                                                                                                                                                                                                                                                                                                                             35
                                                                                                                                        IDFC - SSKI INDIA

                                                                                                Capital break-even in FY17E
       We expect HDFC SL to                                                          We expect HDFC SL to require ~Rs16bn of incremental capital by FY17, which is
    deliver an average RoE of                                                        relatively higher than peers. Incremental capital requirement is somewhat offset by
       20-25% in steady state                                                        HDFC SL’s higher solvency ratio of ~2.4x as against the regulatory prescription of
                                                                                     1.5x. We expect HDFC SL to deliver an average RoE of 20-25% in steady state.

                                                                                     Exhibit 9: Capital break-even in FY16E
                                                                                              (Rs bn)                                            Capital requirement                                                                                Incremental capital requirement
                                                                                     36
                                                                                                                                                                                                                        32.1          33.0           32.1
                                                                                                                                                                                                      29.2
                                                                                     27
                                                                                                                                                                                   23.2

                                                                                                                                                                        16.8
                                                                                     18
                                                                                                                                                             13.3

                                                                                                                                                8.1
                                                                                      9                                      6.3
                                                                                                                                                                                                  6.4
                                                                                               2.5               3.2                                                  5.2                                          6.0
                                                                                                                                        3.1                                                                                       2.9
                                                                                                        0.4                                              1.7                       3.5                                                            0.9
                                                                                      0                                    0.6



                                                                                                                                                                                          2010E

                                                                                                                                                                                                           2011E

                                                                                                                                                                                                                          2012E

                                                                                                                                                                                                                                          2013E

                                                                                                                                                                                                                                                        2014E

                                                                                                                                                                                                                                                                        2015E

                                                                                                                                                                                                                                                                                         2016E

                                                                                                                                                                                                                                                                                                         2017E

                                                                                                                                                                                                                                                                                                                         2018E

                                                                                                                                                                                                                                                                                                                                      2019E

                                                                                                                                                                                                                                                                                                                                                      2020E
                                                                                               2004

                                                                                                                 2005

                                                                                                                                 2006

                                                                                                                                                2007

                                                                                                                                                               2008

                                                                                                                                                                            2009


                                                                                     Source: Company, IDFC-SSKI Research

                                                                                                Healthy growth in AUM
                                                                                     We project a 31% CAGR in HDFC SL’s AUM to ~Rs2tn by FY20, with linked
                                                                                     AUM comprising 81% of the total. Our estimates factor in investment returns of 7%
                                                                                     on the linked book over the period.

 Exhibit 10: Healthy growth in AUM
                              Linked AUM (Rs bn - LHS)                                         yoy growth (% - RHS)                                      1200                                                      Non-Linked AUM (Rs bn)                                                    yoy growth (%)
1,800                                                                                                                                                                  400                                                                                                                                                                             100
                                                                                                                                                1,631                                              92                                                                                                                                         374
               1059

                                                                                                                                     1,370                                                79
                                                                                                                                                                                                                                                                                                                                    305
1,350                                                                                                                                                    900           300                                                                                                                                                                             75
                                                                                                                           1,138
                                                                                                                                                                                                                                                                                                                           246
                                                                                                                  933                                                                                              52
                                                                                                                                                         600           200                                                                                                                                       196                                   50
 900                                                                                                     751
                              522                                                                                                                                                                                                                                                                   154
                                                                                               586                                                                                                                        31                                                     31              31 30
                                                                                                                                                                                                                                            29                           28                                      28
                                                                                      447                                                                                                                                                             27        23                                                           26     24
 450                                                                                                                                                     300           100                                                                                                       91 118                                                       23       25
                                                                             333
                                                                     241                                                                                                                                                           15                                    69
                                                             170                                                                                                                                                                            34                  54
                         139           108   114                                                                                                                                                               18       23                           44
                                          71 62                      42 38            34                                                                                           3       6       12                              27
                                                 49                                            31        28         24        22        20       19
         0       2     12       29     59 19
   0                                                                                                                                                     0                  0                                                                                                                                                                          0
                                                     2010E

                                                             2011E

                                                                     2012E

                                                                             2013E

                                                                                      2014E

                                                                                                2015E

                                                                                                         2016E

                                                                                                                   2017E

                                                                                                                             2018E

                                                                                                                                        2019E

                                                                                                                                                 2020E
        2004

                2005

                       2006

                                2007

                                       2008

                                              2009




                                                                                                                                                                                                                                            2010E

                                                                                                                                                                                                                                                     2011E

                                                                                                                                                                                                                                                                2012E

                                                                                                                                                                                                                                                                         2013E

                                                                                                                                                                                                                                                                                 2014E

                                                                                                                                                                                                                                                                                                 2015E

                                                                                                                                                                                                                                                                                                         2016E

                                                                                                                                                                                                                                                                                                                 2017E

                                                                                                                                                                                                                                                                                                                            2018E

                                                                                                                                                                                                                                                                                                                                    2019E

                                                                                                                                                                                                                                                                                                                                              2020E
                                                                                                                                                                                   2004

                                                                                                                                                                                          2005

                                                                                                                                                                                                    2006

                                                                                                                                                                                                               2007

                                                                                                                                                                                                                         2008

                                                                                                                                                                                                                                   2009




 Source: Company, IDFC-SSKI Research




SEPTEMBER 2009                                                                                                                                                                                                                                                                                                                                          36
                                                                      IDFC - SSKI INDIA


                                        Exhibit 11: Linked AUM to continue dominating the mix
                                                                           Linked AUM (% of total)                    Non-Linked AUM (% of total)
                                        100
                                                                                                      20      18         17      17      17      17      17       18      18        19
                                                                               27     25     23
                                                                        38
                                         75                    49

                                                        76
                                         50   96

                                                                                                      80      82         83      83      83      83      83       82      82        81
                                                                               69     67     77
                                                                        62
                                         25                    51

                                                        24
                                          0    5




                                                                                      2009
                                              2004

                                                        2005

                                                               2006

                                                                        2007

                                                                               2008




                                                                                             2010E

                                                                                                      2011E

                                                                                                              2012E

                                                                                                                         2013E

                                                                                                                                 2014E

                                                                                                                                         2015E

                                                                                                                                                 2016E

                                                                                                                                                         2017E

                                                                                                                                                                  2018E

                                                                                                                                                                          2019E

                                                                                                                                                                                    2020E
                                        Source: Company, IDFC-SSKI Research


                                        VALUATIONS & VIEW
                                        We have valued HDFC SL based on DCF of long-term profits, while we continue to
                                        use the widely-accepted appraisal method. We prefer the DCF method, as it reflects
                                        the long-term potential of the business, while the appraisal method valuations may be
                                        skewed due to lower near-term growth visibility and no disclosures made by the
                                        company currently on NBAP margins and embedded value.

                                              DCF valuation – reflects a total valuation of Rs155bn
      A DCF of the long-term            Post break-even in FY13E, HDFC SL’s profits are likely to scale up at a rapid pace of
   profits of HDFC SL gives a           220% CAGR over FY13-15, before stabilizing at 37% compounded rate over FY15-
              total valuation of
      ~Rs155bn for HDFC SL
                                        20E. A DCF of the long-term profits of HDFC SL culminates into a total valuation
                                        of ~Rs155bn for the business. HDFC’s 74% stake stands valued at ~Rs103bn or
                                        Rs359 per share, after applying a 10% holding company discount.

 Exhibit 12: DCF valuation
 (Rs m)                        FY09 FY10E FY11E FY12E FY13E                            FY14E         FY15E            FY16E          FY17E       FY18E           FY19E FY20E
 Profit after tax             (5,423) (6,113) (4,624) (2,226)                  706       3,333        7,220           11,174         16,755      22,647          29,144 34,833
 Total PV of net profit (A)                      38,514 42,570 44,283                  43,807        41,833           38,084         32,993      26,297          18,358           9,396


 PV of terminal value (B)                     116,620
 Total value (Rs m) - A+B                     155,134
 Total value ($)                                     3,232


 Value attributable to parent (74%)           103,319
 HDFC Ltd's - outstanding shares (m)                 287.7
 Value per share of parent (Rs)                        359
 CMP of parent (Rs)                                   2463
 Price Date                                   5th Sept '09
 % of value contributed by HDFC Standard Life         15%
Discount rate                                        14.0%
Source: Company, IDFC-SSKI Research




SEPTEMBER 2009                                                                                                                                                                       37
                                                  IDFC - SSKI INDIA

                                    Appraisal valuation
   Appraisal method gives a
                              We expect HDFC SL’s NBAP to show 11% CAGR over FY09-11 to reach Rs5.8bn
   value of Rs305 per share   by FY11. NBAP margins are assumed to decline by ~100bp over FY09-11E from
    of HDFC after providing   ~20% in FY09 given the profitability pressures arising from increasing competition,
          for a 10% holding   volatile capital markets and new regulations. As we remain convinced of HDFC SL’s
         company discount
                              long-term growth prospects, we have assigned an NBAP multiple of 16.8x to arrive at
                              the Structural Value. Coupled with HDFC SL’s Embedded Value, we arrive at a
                              value of Rs305 per share of HDFC after providing for a 10% holding company
                              discount.

                              Exhibit 13: Appraisal valuation
                              (Rs m)                                   FY08       FY09       FY10E       FY11E
                              APE                                     23,209    23,675       25,575      30,656
                              yoy growth (%)                              72         2            8         20
                              NBAP Margins (%)                          21.1      20.0         19.5        19.0
                              New Business Value                       4,896     4,735        4,987       5,825
                              Net Shareholder Funds                    6,380     6,520        7,000       7,470
                              Add back Strain                           377        636         616         648
                              Embedded Value: {A}                     17,188    22,323       27,769      34,096
                              Structural Value: {B}
                              NBAP                                                                        5,825
                              Multiple (x)                                                                 16.8
                              Value                                                                      97,562
                              Appraisal Value: {A} +{B}                                                 131,658
                              Appraisal Value: USD$ m                                                     2,743
                              HDFC Stake (Economic Interest)                                               74%
                              Value of HDFC Stake                                                        97,427
                              Less: 10% Holding company discount                                          9,743
                              Value of HDFC Stake                                                        87,684
                              Value per share (Rs)                                                         305
                              Source: Company IDFC - SSKI Research




SEPTEMBER 2009                                                                                                38
                  IDFC - SSKI INDIA




                 THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK




SEPTEMBER 2009                                                 39
                                                                      IDFC - SSKI INDIA


Exhibit 14: Profit & Loss account
Year to 31 March (Rs m)                FY09     FY10E     FY11E     FY12E     FY13E     FY14E     FY15E     FY16E     FY17E     FY18E     FY19E     FY20E
Gross Premium                         55,650    65,444    79,950 100,057 127,106       159,405   193,834   231,247   267,957   305,758   345,372   387,458
yoy growth (%)                          14.5      17.6      22.2      25.1      27.0      25.4      21.6      19.3      15.9      14.1      13.0      12.2
FYP Premium                           23,360    25,229    30,275    37,238    45,802    56,337    64,787    74,506    85,681    94,678   104,619   115,604
yoy growth (%)                            2.4      8.0      20.0      23.0      23.0      23.0      15.0      15.0      15.0      10.5      10.5      10.5
Renewal Premium                       29,140    36,750    45,864    58,627    76,692    97,995   123,466   150,603   175,584   203,787   232,803   263,189
yoy growth (%)                          34.1      26.1      24.8      27.8      30.8      27.8      26.0      22.0      16.6      16.1      14.2      13.1
Single Premium                         3,150     3,465     3,812     4,193     4,612     5,073     5,580     6,138     6,691     7,293     7,949     8,665
yoy growth (%)                         (22.2)     10.0      10.0      10.0      10.0      10.0      10.0      10.0       9.0       9.0       9.0       9.0
APE                                   23,675    25,575    30,656    37,657    46,264    56,844    65,346    75,119    86,351    95,407   105,414   116,471
yoy growth (%)                            2.0      8.0      19.9      22.8      22.9      22.9      15.0      15.0      15.0      10.5      10.5      10.5
Investment Income                    (17,231)    8,927    13,211    18,604    25,529    34,443    45,529    58,950    74,512    92,074   112,007   134,632
yoy growth (%)                        (408.4)   (151.8)     48.0      40.8      37.2      34.9      32.2      29.5      26.4      23.6      21.6      20.2
Commission                             4,249     4,680     5,566     6,823     8,500    10,400    12,056    13,697    15,808    17,702    19,743    21,958
Operating expenses                    17,601    14,784    15,714    16,762    18,544    21,018    22,979    25,149    27,410    29,055    30,914    32,935
Benefits                               6,813     8,292     9,856    13,495    17,941    25,229    36,049    49,074    70,698    91,681   110,674   132,037
Change in valuation of liabilities    14,057    50,702    64,400    81,675 104,594     130,809   157,243   186,230   206,346   230,709   260,203   292,130
yoy growth (%)                         (62.9)    260.7      27.0      26.8      28.1      25.1      20.2      18.4      10.8      11.8      12.8      12.3
Strain Funding / Contribution
from Shareholders account              4,475     4,737     3,126       893
yoy growth (%)                            5.9    (34.0)    (71.4)
Return on Solvency Capital               330       329       428       475      585       755       932      1,137     1,335     1,555     1,803     2,081
Profit/Loss Before Tax
(Excluding participation surplus)     (5,423)   (6,113)   (4,624)   (2,226)     822      3,882     8,411    13,018    19,519    26,383    33,952    40,579
Profit/Loss After Tax                           (6,113)   (4,624)   (2,226)     706      3,333     7,220    11,174    16,755    22,647    29,144    34,833
yoy growth (%)                                                                                      1.17      0.55      0.50      0.35      0.29      0.20




Exhibit 15: Balance sheet
Year to 31 March (Rs m)                FY09     FY10E     FY11E     FY12E     FY13E     FY14E     FY15E     FY16E     FY17E     FY18E     FY19E     FY20E
AUM                                  105,950 148,780 213,929 295,231 401,965           537,805   704,154   904,100 1,129,523 1,384,817 1,675,611 2,005,171
yoy growth (%)                          23.7      40.4      43.8      38.0      36.2      33.8      30.9      28.4      24.9      22.6      21.0      19.7
Linked AUM                            70,733 114,389 170,124 241,196 332,868           447,241   585,745   750,550   933,228 1,138,362 1,370,310 1,631,024
yoy growth (%)                          19.0      61.7      48.7      41.8      38.0      34.4      31.0      28.1      24.3      22.0      20.4      19.0
Non-Linked AUM                        26,694    34,391    43,806    54,035    69,097    90,564   118,409   153,550   196,294   246,455   305,301   374,147
yoy growth (%)                          14.6      28.8      27.4      23.4      27.9      31.1      30.7      29.7      27.8      25.6      23.9      22.6
Networth                               6,520     7,000     7,472     8,714    11,750    18,213    29,533    45,961    65,802    89,617   116,783   148,340




Exhibit 16: Key ratios (%)
Year to 31 March                       FY09     FY10E     FY11E     FY12E     FY13E     FY14E     FY15E     FY16E     FY17E     FY18E     FY19E     FY20E
Conservation ratio                      65.4      70.0      74.0      77.0      80.0      80.0      80.0      80.0      78.0      78.0      78.0      78.0
Commission/Total Premium                  7.6      7.2       7.0       6.8       6.7       6.5       6.2       5.9       5.9       5.8       5.7       5.7
Opex/ Total premium                     31.6      22.6      19.7      16.8      14.6      13.2      11.9      10.9      10.2       9.5       9.0       8.5
Benefits/ Gross Premium                 12.2      12.7      12.3      13.5      14.1      15.8      18.6      21.2      26.4      30.0      32.0      34.1
Surrender Ratio                           7.6      8.3       6.0       5.8       5.5       5.8       6.5       7.0       8.3       8.8       8.8       8.8
Return on avg Linked AUM               (30.5)      8.1       8.0       8.0       7.9       7.9       7.9       7.8       7.8       7.8       7.7       7.7
Return on avg Non-Linked AUM              8.4      6.8       6.8       6.7       6.8       6.8       6.8       6.8       6.8       6.8       6.7       6.7
Return on avg shareholders fund           7.3      7.2       7.9       7.4       7.7       7.9       7.7       7.7       7.6       7.5       7.5       7.5
Return on Networth (%)                                                                              24.4      24.3      25.5      25.3      25.0      23.5




SEPTEMBER 2009                                                                                                                                        40
                                                IDFC - SSKI INDIA




                           ICICI Prudential Life Insurance




                                                                                                                                             Company update
                           A born leader!
        4 September 2009
                           ICICI Prudential Life (I-Pru), the traditional market leader among private
       BSE Sensex: 15689   insurers, is expected to retain its dominance despite the recent growth blues.
                           I-Pru offers strong business fundamentals, further fortified by management
                           bandwidth. I-Pru is expected to achieve P&L break-even by FY12E with
                           reviving premium growth, recovering conservation ratio and declining
                           expenses as near-term profit drivers. Our analysis indicates Rs10bn of capital
                           requirement before I-Pru achieves P&L break-even. Using our DCF approach,
                           we arrive at a valuation of ~Rs362bn for I-Pru, imputing a value of ~Rs241bn
                           or ~Rs217 per share of ICICI Bank. Our appraisal method valuation also
                           indicates a similar value of Rs207 per share of the Indian parent.
                           A leader for long: I-Pru leads the Indian private sector insurance space with an
                           overall market share of 6.5% in total premium (FY09). Though growth was
                           recently muted due to the volatile capital markets and tapering growth in
                           distribution network, we are convinced that I-Pru is well-equipped to sustain
                           leadership, even as other players would play catch-up. The management team has
                           been strengthened, and we believe it is capable of delivering profitable growth.

                           Profitable franchise – at the core: We expect I-Pru to achieve P&L break-even
                           by FY12 and capital break-even by FY15 with cumulative incremental capital
                           requirement pegged at Rs10bn. On the back of core strengths around brand
                           strength, vast distribution and management bandwidth, we expect I-Pru to return
                           to the high-growth path.

                           High return ratios; value creation potential: Expense and commission ratios are
                           expected to trend down led by strong top-line growth and efficient operations. On
                           the back of prudent product innovation, we expect I-Pru to register 30% CAGR
                           in accounting profits over FY15-20 with steady state RoE of 26%. Our DCF of I-
                           Pru’s long-term profits indicate a value of ~Rs362bn (Rs217 per ICICI Bank
                           share). The widely used EV based method, at 16.5x FY10E NBAP with
                           Embedded Value added, assigns a value of Rs207 per share of ICICI Bank, after
                           assuming a 10% holding company discount.



Pathik Gandotra            Key operating metrics
pathik@idfcsski.com
                           (Rs m)                                                     FY09       FY10E        FY11E       FY12E     FY13E
91-22-6638 3304
                           Gross Premium                                          153,562      181,174      220,720      267,440   320,332
                           APE*                                                     60,641       65,200       78,240      93,888   112,666
Neha Agrawal
                           yoy growth (%)                                           (18.5)           7.5        20.0        20.0      20.0
neha@idfcsski.com
                           Income on Investments (Policyholders)                  (61,471)       34,575       50,425      69,761    92,951
91-22-6638 237
                           Total expenses (commissions, opex, claims)               56,451       60,116       74,265      95,189   124,043
                           yoy growth (%)                                             (1.7)         6.5        23.5         28.2      30.3
Chinmaya Garg
                           Change in valuation of liabilities                       42,422     161,835      200,185      240,640   284,131
chinmaya@idfcsski.com
                           Profit/Loss after Tax                                   (7,794)      (5,198)          (931)     2,683     6,767
91-22-6638 3325            Source: Company, IDFC - SSKI Research; * APE is 10% of single premium plus regular premium



SEPTEMBER 2009                                                                                                                         41
                                                                                           IDFC - SSKI INDIA


                                                                INVESTMENT ARGUMENT
                                                                I-Pru has historically dominated the market share pie among private life
                                                                insurers. Despite muted growth in FY09, we expect I-Pru to retain leadership
                                                                on the back of its fundamental strengths around brand resonance, fortified
                                                                management team and product innovation strategy. However, we see the
                                                                market share gap between I-Pru and private peers narrowing over FY10-20.
                                                                Our analysis indicates that the company would require incremental capital of
                                                                Rs10bn before achieving P&L break-even in FY12E. Our DCF of I-Pru’s long-
                                                                term profits indicates a value of ~Rs362bn or Rs217 per share of ICICI Bank.
                                                                The widely used appraisal method, at 16.5x FY10E NBAP with Embedded
                                                                Value added, assigns a value of Rs207 per share of ICICI Bank, after
                                                                assuming a 10% holding company discount.


                                                                I-PRU: A BORN LEADER
                                                                         Recent growth blues…
         I-Pru conceded ~570bp of                               I-Pru saw its quarterly APE growth slow to a sedate pace at first and then decline by
           APE market share (% of                               40-50% over Dec ’08-Jan ’09 as the Sensex tanked by 60% from the peak over the
          private share) over FY08-
                  09 to larger peers
                                                                period. While peers too were hit, I-Pru bled more profusely than competitors given
                                                                that (i) expansion in distribution network plateaued (7% yoy growth in branches and
                                                                almost stable agency force in FY09) as the company hit near-optimal levels while
                                                                other competitors continued to invest; and (ii) given the predominantly unit-linked
                                                                book (94% of gross premium in FY08) and larger equity exposure of 70-75% of total
                                                                linked AUM. As a result, I-Pru conceded ~570bp of APE market share (% of private
                                                                industry) over FY08-09 to larger peers.

  Exhibit 1: Growth tanked amidst volatile markets…                                                          …and distribution network hitting near-optimal levels
                           ICICI Pru-Life Qtrly APE (Rs m - LHS)          Sensex (RHS)                                          Gross Premium (Rs bn - LHS)            Branches (no - RHS)
34,000                                         33,052                                               25,000      160                                                                                         2,400
                                                                                                                                                                                             154
                                                                                                                                  Lower 7% growth in branches over FY08-
                                                                                                                                                                             136
                                                                                                                                  09; premium growth lower at 13%                                   2,099
                                                                                                                                                                                    1,956
25,500                                                                                              20,000      120                                                                                         1,800
                                                                                                                             A strong 160%+ CAGR in
                                    20,173                                        20,173                                     branches led to 79% CAGR in
         19,557
                                                                17,751                                                       Gross premium over FY05-08         79
17,000                                                                                              15,000       80                                                                                         1,200
                           14,477                      45,569

                                                                         11,432
                  9,378                                                                                                                            43
 8,500                                                                                     7,327    10,000       40                                                                                         600
                                                                                                                                                                      583
                                                                                                                                      24
                                                                                                                      10
                                                                                                                           70                           177
    0                                                                                                                                      107
                                                                                                    5,000       -                                                                                           -
         Mar-07   Jun-07   Sep-07 Dec-07 Mar-08       Jun-08    Sep-08 Dec-08 Mar-09       Jun-09                     FY04          FY05         FY06          FY07          FY08            FY09

  Source: Companies, Bloomberg

                                                                         …but business fundamentals – as also leadership – intact
         Strong promoter brand, a                               While volatility in capital markets and change in top management weighed down on
         vast distribution network,                             I-Pru’s leadership among private peers, we believe the long-term success factors
          management bandwidth                                  remain intact. The strong promoter brand and commitment (ICICI Bank and
         and product innovation –
                                                                Prudential Plc), a vast distribution network, management bandwidth and product
                    to drive growth
                                                                innovation strategy fundamentally fortify I-Pru’s ability to retain leadership in the
                                                                years to come. Our FY20 projections for the large private players reflect I-Pru’s
                                                                continued dominance, even as the other larger competitors play catch-up.



SEPTEMBER 2009                                                                                                                                                                                                  42
                                                                                                                         IDFC - SSKI INDIA


                                                                            Exhibit 2: I-Pru to remain the leader in FY20E
                                                                                                         (%)                                                           2009                                                 2020E


                                                                                                                                                                     2.8
                                                                                 Birla Sunlife
                                                                                                                                                    1.9

                                                                                                                                                                                                                                             I-Pru likely to maintain its
                                                                                                                                                                                           3.8
                                                                                      SBI Life
                                                                                                                                                                           3.0
                                                                                                                                                                                                                                             leadership, though differential
                                                                                                                                                                                                                                             with peers narrows
                                                                                                                                                                                                             4.8
                                                                            Reliance Life
                                                                                                                                                     2.1

                                                                                                                                                                                           3.8
                                                                                   HDFC SL
                                                                                                                                                           2.3

                                                                                                                                                                                                                                                                                              8.3
                                                                                   ICICI Pru
                                                                                                                                                                                                                                                     6.5

                                                                                                   0.0                   1.0                   2.0                   3.0                   4.0                5.0                     6.0                    7.0                     8.0                      9.0

                                                                            Source: IRDA, IDFC SSKI Research



                                                                            P&L BREAK-EVEN LIKELY IN FY12…
                                                                            We expect I-Pru to achieve break-even in FY12 with reviving growth, recovering
                                                                            persistency and declining expense ratios being the key near-term profit drivers.

 Exhibit 3: Profits trend line (Rs m; yoy growth – %)                                                                                                            P&L break-even likely in FY12E
                                  PAT (Rs bn - LHS)                                 yoy growth (% - RHS)
80                                                                                                                                             160                   (Rs bn)                        PAT (LHS)                                    Accumulated profits/losses (RHS)
                                                                             152                                                                            300

                                                                                                                                       63.3
60                                                                                                                                             120
                                                                                     102                                      52.9                          200

40                                                                                                            40.2 41.0                        80
                                                                                            60 31.5
                                                                                                                                                            100
                                                                                           21.9          43
20                                                                                                             28              29              40
                                                                                   13.7                                                20
                                                                         6.8
                                                                 2.7                                                   2                                         0
 0                                                                                                                                             0
      -2.2 -2.1 -1.9                                     -0.9
                           -6.5           -7.8 -5.2
-20                               -13.9                                                                                                        -40         -100
                                                                                                                                                                                                                    2010E
                                                                                                                                                                                                                             2011E
                                                                                                                                                                                                                                     2012E
                                                                                                                                                                                                                                             2013E
                                                                                                                                                                                                                                                     2014E
                                                                                                                                                                                                                                                             2015E
                                                                                                                                                                                                                                                                     2016E
                                                                                                                                                                                                                                                                             2017E
                                                                                                                                                                                                                                                                                      2018E
                                                                                                                                                                                                                                                                                              2019E
                                                                                                                                                                                                                                                                                                      2020E
                                                                                                                                                                     2004
                                                                                                                                                                             2005
                                                                                                                                                                                    2006
                                                                                                                                                                                             2007
                                                                                                                                                                                                    2008
                                                                                                                                                                                                           2009
      2004
             2005
                    2006
                           2007
                                   2008
                                          2009
                                                 2010E
                                                         2011E
                                                                 2012E
                                                                         2013E
                                                                                   2014E
                                                                                           2015E
                                                                                                    2016E
                                                                                                              2017E
                                                                                                                      2018E
                                                                                                                               2019E
                                                                                                                                       2020E




 Source: Company, IDFC-SSKI Research

                                                                                           Key operating metrics show signs of rebound
      Top-line growth, and                                                  In the near term, an uptick is expected across operating metrics ranging from top-line
 conservation, expense and                                                  growth, and conservation, expense and commission ratios. Together, these metrics
    commission ratios – on                                                  would drive I-Pru to break-even while the expanding premium base would tend to
                 an uptrend
                                                                            benefit from economies of scale, and impart increased bargaining power.

                                                                            Growth rates to pick up
                                                                            We expect I-Pru’s near-term growth to be sluggish due to high capital market
                                                                            linkages and no significant distribution expansion. However, the appetite for
                                                                            insurance market-linked products remains strong which, coupled with robust
                                                                            business fundamentals, could lead to 18% CAGR in APE for I-Pru over FY10-15E
                                                                            and 12% CAGR over FY15-20E.




SEPTEMBER 2009                                                                                                                                                                                                                                                                                          43
                                                                                                                                                         IDFC - SSKI INDIA


 Exhibit 4: Premium growth to revive after an initial hiccup
               First Year Premium (Rs bn - LHS)                                                First Year Premium yoy growth (% RHS)                                                                                             Gross Premium (Rs bn - LHS)                                         Gross Premium yoy growth (% - RHS)
                                                                                                                                                                                                        900                                                                                                                              160
  300
                                                                                                                               283 160                                                                                       138.9
                                                                                                                                                                                                                                                                                                                                     839
               131.2                                                                                                      252                                                                                                                                                                                                    744
  240                                                                                                                                           222                                             120                                                                                                                                                         659
                                                                                                                                                                                                        675                                                                                                                                                                           120
                              90.6                                                                                                  196                                                                                                                                                                                                            579
                                                                                                                        170                                                                                                                                                                                                               509
  180                                 68.7                                                                                                                                                      80                                              85.7
                                                                                                             148                                                                                                                                                                                                               439
                                                                                                  129                                                                                                   450                                               71.4                                                   378                                                                  80
                      57.7                                                             112                                                                                                                                           80.3                                                            320
  120                                                                                                                                                                                           40
                                                                     93                                                                                                                                                                                                                  267
                                     74                         78 20.0 20.0 20.0 15.0 15.0 15.0 15.0 13.5 13.5                                                                                                                                                               221
                                             60       65                                                                                                                                 12.5                                                                        181
                                                               7.5                                                                                                                                      225                                                                                                                                                                           40
   60                         44                                                                                                                                                           0                                                          136 154
                       23
                                                                                                                                                                                                                                                                              21.8 21.2 19.8 18.1
               15                                                                                                                                                                                                                              79          13.2                                   16.1 15.8 13.9 13.8 12.8 12.8
         6                                          -18.4                                                                                                                                                                    24       43
                                                                                                                                                                                                                   10                                                18.0
    0                                                                                                                                                                                           -40         0                                                                                                                                                                         0




                                                                                                                                                                                                                                                                     2010E

                                                                                                                                                                                                                                                                              2011E

                                                                                                                                                                                                                                                                                         2012E

                                                                                                                                                                                                                                                                                                     2013E

                                                                                                                                                                                                                                                                                                                     2014E

                                                                                                                                                                                                                                                                                                                                 2015E

                                                                                                                                                                                                                                                                                                                                           2016E

                                                                                                                                                                                                                                                                                                                                                    2017E

                                                                                                                                                                                                                                                                                                                                                            2018E

                                                                                                                                                                                                                                                                                                                                                                    2019E

                                                                                                                                                                                                                                                                                                                                                                            2020E
                                                                                                                                                                                                                   2004

                                                                                                                                                                                                                             2005

                                                                                                                                                                                                                                      2006

                                                                                                                                                                                                                                               2007

                                                                                                                                                                                                                                                       2008

                                                                                                                                                                                                                                                              2009
                                                      2010E

                                                                 2011E

                                                                             2012E

                                                                                       2013E

                                                                                                  2014E

                                                                                                             2015E

                                                                                                                        2016E

                                                                                                                                    2017E

                                                                                                                                                2018E

                                                                                                                                                                2019E

                                                                                                                                                                                2020E
        2004

               2005

                       2006

                              2007

                                     2008

                                             2009




 Source: IRDA, IDFC-SSKI Research

                                                                                           Conservation ratio to stabilize at ~73% over the long term
                                                                                           In FY09, I-Pru (in line with peers) saw a sharp dip in its conservation ratio –
                                                                                           reflecting the volatility in capital markets and impact of limited pay products. On the
                                                                                           back of slower new business growth, we expect the conservation ratio to improve
                                                                                           significantly to ~75% in FY10 from ~69% in FY09.

 Exhibit 5: Conservation ratio                                                                                                                                                                       Total premium mix
                                                          Conservation ratio (%)                                                                                                                            (%)                              First Year Premium                          Renewal Premium                                           Single Premium
 100                                                                                                                                                                                                  100                                                  3   3                  3        3    3    3   3                                         3     3    3   4                        4
        91     90                                                                                                                                                                                           12  6                   7         10     5

                                     78                            78          78        77          77         76          76
                       74                              75                                                                               74          74                  73              73
  75                          70              69                                                                                                                                                       75 24              33
                                                                                                                                                                                                                                    39        35       41
                                                                                                                                                                                                                                                              58      61         62          62              62              63          63        64       63      63       63           62

  50
                                                                                                                                                                                                       50


  25                                                                                                                                                                                                        64            62
                                                                                                                                                                                                       25                           54        55       54
                                                                                                                                                                                                                                                              39      36         35          35              35              34                                              34
                                                                                                                                                                                                                                                                                                                                         34        33       34      34                    34
   0
                                                       2010E

                                                                     2011E

                                                                               2012E

                                                                                          2013E

                                                                                                     2014E

                                                                                                                2015E

                                                                                                                            2016E

                                                                                                                                        2017E

                                                                                                                                                        2018E

                                                                                                                                                                        2019E

                                                                                                                                                                                        2020E
        2004

               2005

                       2006

                              2007

                                     2008

                                              2009




                                                                                                                                                                                                        0
                                                                                                                                                                                                                                                                      2010E

                                                                                                                                                                                                                                                                                 2011E

                                                                                                                                                                                                                                                                                             2012E

                                                                                                                                                                                                                                                                                                             2013E

                                                                                                                                                                                                                                                                                                                             2014E

                                                                                                                                                                                                                                                                                                                                         2015E

                                                                                                                                                                                                                                                                                                                                                   2016E

                                                                                                                                                                                                                                                                                                                                                            2017E

                                                                                                                                                                                                                                                                                                                                                                    2018E

                                                                                                                                                                                                                                                                                                                                                                              2019E

                                                                                                                                                                                                                                                                                                                                                                                          2020E
                                                                                                                                                                                                            2004

                                                                                                                                                                                                                          2005

                                                                                                                                                                                                                                    2006

                                                                                                                                                                                                                                              2007

                                                                                                                                                                                                                                                       2008

                                                                                                                                                                                                                                                              2009




 Source: Company, IDFC-SSKI Research

                                                                                           Operating leverage plays out
                                                                                           Historically, I-Pru has driven efficiency – as is evident in an improving expense ratio
   Efficiency at the core of I-
        Pru’s growth strategy                                                              (operating expenses/ total premium). We see the trend as sustainable on the back of
                                                                                           increasing scale, rising proportion of renewal premium, strategic focus on cost control
                                                                                           and no imminent expansion of the distribution network.




SEPTEMBER 2009                                                                                                                                                                                                                                                                                                                                                                        44
                                                                                                                                     IDFC - SSKI INDIA


                                                                                  Exhibit 6: Expense ratio to decline further as gains scales and tightens belt!
                                                                                           (%)                                                                                            Expense/ Weighted Premium
                                                                                  35
                                                                                                     32.7

                                                                                  28
                                                                                                                                                        22.5
                                                                                                             20.5                       21.2
                                                                                  21                                      18.2                                  18.3
                                                                                                                                                                            16.4
                                                                                                                                                                                                 14.8
                                                                                                                                                                                                                 13.5
                                                                                                                                                                                                                            12.5
                                                                                  14                                                                                                                                                          11.5         10.8             10.2              9.8          9.3               8.9             8.6

                                                                                     7


                                                                                     0
                                                                                             2004

                                                                                                             2005

                                                                                                                              2006

                                                                                                                                           2007

                                                                                                                                                        2008

                                                                                                                                                                2009

                                                                                                                                                                              2010E

                                                                                                                                                                                                 2011E

                                                                                                                                                                                                                 2012E

                                                                                                                                                                                                                              2013E

                                                                                                                                                                                                                                               2014E

                                                                                                                                                                                                                                                                2015E

                                                                                                                                                                                                                                                                             2016E

                                                                                                                                                                                                                                                                                              2017E

                                                                                                                                                                                                                                                                                                            2018E

                                                                                                                                                                                                                                                                                                                             2019E

                                                                                                                                                                                                                                                                                                                                             2020E
                                                                                  Source: Company, IDFC-SSKI Research

                                                                                  Commission rates trimmed
                                                                                  In FY09, I-Pru reported a 60bp decline in its commission ratio, i.e. commission
  Commission ratio down by
              60bp in FY09                                                        expense/ total premium income (ULIPs typically carry lower commissions vis-à-vis
                                                                                  traditional products). Additionally, an increasing proportion of renewal premium in
                                                                                  the overall premium income has led to lower commission costs.

                                                                                  Exhibit 7: Commission costs to decline
                                                                                                                                         Commission/ APE (%)                                                                                      Commission/ Gross Premium (%)
                                                                                  16          14.9

                                                                                                                                                                                                                                                          12.9              13.0             12.9       13.2                13.2       13.2
                                                                                                                                                                             12.4                12.5            12.6       12.6              12.7
                                                                                                              12.1            12.2         11.7
                                                                                  12                                                                            11.5
                                                                                                                                                        10.9


                                                                                                             9.7
                                                                                     8
                                                                                             8.6
                                                                                                                              7.5
                                                                                                                                          6.7           6.6
                                                                                                                                                                6.0
                                                                                     4
                                                                                                                                                                            4.6                  4.5             4.5         4.4              4.4               4.4          4.4              4.4           4.4              4.4             4.4


                                                                                     0
                                                                                              2004

                                                                                                              2005

                                                                                                                              2006

                                                                                                                                            2007

                                                                                                                                                         2008

                                                                                                                                                                 2009

                                                                                                                                                                                  2010E

                                                                                                                                                                                                  2011E

                                                                                                                                                                                                                  2012E

                                                                                                                                                                                                                              2013E

                                                                                                                                                                                                                                               2014E

                                                                                                                                                                                                                                                                2015E

                                                                                                                                                                                                                                                                             2016E

                                                                                                                                                                                                                                                                                              2017E

                                                                                                                                                                                                                                                                                                            2018E

                                                                                                                                                                                                                                                                                                                             2019E

                                                                                                                                                                                                                                                                                                                                             2020E
                                                                                   Source: Company, IDFC-SSKI Research

                                                                                              Healthy growth in AUM – Rs4tn by FY20E
                                                                                  We expect I-Pru’s AUM to increase at a CAGR of 27% over FY09-20 to ~Rs4tn by
                                                                                  FY20, with linked AUM comprising 96% of the total.

 Exhibit 8: Healthy growth in AUM
                             Linked AUM (Rs bn - LHS)                                       yoy growth (% - RHS)                                                                                          Non-Linked AUM (Rs bn - LHS)                                                       yoy growth (% - RHS)
5,000                                                                                                                                             240            400                                                                                                                                                                           88



3,750                                                                                                                                             180            300                                                                                                                                                                           66
                                                                                                                                                                                                                                                                               32% CAGR
                                                                                  19% CAGR
2,500                                                                                                                                             120            200                                                                                                                                                                           44


                                              36%CAGR                                                                                                                                                                              17 %CAGR
1,250                                                                                                                                             60             100                                                                                                                                                                           22



   0                                                                                                                                              0                    0                                                                                                                                                                       0
                                                                                                                                                                                                                                      2010E

                                                                                                                                                                                                                                                2011E

                                                                                                                                                                                                                                                        2012E

                                                                                                                                                                                                                                                                    2013E

                                                                                                                                                                                                                                                                            2014E

                                                                                                                                                                                                                                                                                     2015E

                                                                                                                                                                                                                                                                                                2016E

                                                                                                                                                                                                                                                                                                        2017E

                                                                                                                                                                                                                                                                                                                    2018E

                                                                                                                                                                                                                                                                                                                             2019E

                                                                                                                                                                                                                                                                                                                                     2020E
                                                                                                                                                                           2004

                                                                                                                                                                                          2005

                                                                                                                                                                                                 2006

                                                                                                                                                                                                          2007

                                                                                                                                                                                                                     2008

                                                                                                                                                                                                                            2009
                                                  2010E

                                                          2011E

                                                                  2012E

                                                                          2013E

                                                                                  2014E

                                                                                          2015E

                                                                                                     2016E

                                                                                                              2017E

                                                                                                                      2018E

                                                                                                                                2019E

                                                                                                                                        2020E
        2004

               2005

                      2006

                             2007

                                    2008

                                           2009




 Source: Company, IDFC-SSKI Research



SEPTEMBER 2009                                                                                                                                                                                                                                                                                                                                 45
                                                          IDFC - SSKI INDIA


                               Exhibit 9: Linked AUM to continue dominating the mix
                                         (%)              Linked AUM (% of total)                          Non-Linked AUM (% of total)
                               100
                                                                            8     6                 5        5      5   5    5      6                 7       7       8
                                                       14 15 12 11
                                                21
                                         35
                                   75


                                   50
                                                                            87     92      94      95        95      95      95      95      94      93      93      92
                                                       80     84     87
                                                69
                                         52
                                   25


                                    0
                                         2004

                                                2005

                                                       2006

                                                              2007

                                                                     2008

                                                                            2009

                                                                                   2010E

                                                                                           2011E

                                                                                                   2012E

                                                                                                             2013E

                                                                                                                     2014E

                                                                                                                             2015E

                                                                                                                                     2016E

                                                                                                                                             2017E

                                                                                                                                                     2018E

                                                                                                                                                             2019E

                                                                                                                                                                     2020E
                               Source: Company, IDFC-SSKI Research

                                        Limited impact of recently announced cap on ULIP charges
        Blended equity fund    I-Pru is likely to see a limited impact of the cap on ULIP charges recently introduced
        management charge      by IRDA. The regulation would have a direct bearing on the current fund
     stands at 150-160bp as    management fees and allocation charges. Management has indicated that I-Pru’s
      against the stipulated   blended equity fund management charge stands at 150-160bp as against the
         maximum of 1.35%
                               stipulated maximum of 1.35%. In addition, most of the products are indicated to lie
                               within the ceiling of 300bp on ULIP charges.

                               While the change may hit I-Pru’s NBAP margin, we believe I-Pru has the following
                               options to absorb the impact:

                               •        The company can implement additional policy administration charges.
                               •        Given the scale of operations, I-Pru can rationalize its operating expenses further.
                                        However, owing to already low commission charges, capacity to cut commissions
                                        is limited.




SEPTEMBER 2009                                                                                                                                                               46
                                                           IDFC - SSKI INDIA


                               ...CAPITAL BREAK-EVEN IN FY15E
                               Assuming a broadly stable product mix, we expect I-Pru to require ~Rs10bn of
                               incremental capital by FY15, before accumulated losses are wiped out and internal
                               accruals suffice for additional solvency capital requirement. Subsequently, I-Pru – as
                               also the other larger insurers – would generate substantial cash profits to cover
                               incremental solvency needs, growth capital requirements and dividend pay-outs,
                               while maintaining a high steady state RoE of 26%.

                               Exhibit 10: Capital break-even in FY15E
                                    (Rs bn)                                   Capital requirement                                            Incremental capital requirement
                               75

                                                                                                        59.5      57.8            57.7
                               60                                                            55.9
  We expect I-Pru to require                                                   49.6
   ~Rs10bn of incremental      45
    capital by FY15, before                                          37.8
   accumulated losses are
                               30
                  wiped out                                   21.0
                                                                              16.7
                               15                     12.1                             11.9
                                             9.3
                                    6.8                                 8.9                         6.3
                                                                                                          1.9      1.7
                                            2.5      2.5      2.8
                                0
                                                                                                2010E

                                                                                                          2011E

                                                                                                                  2012E

                                                                                                                          2013E

                                                                                                                                     2014E

                                                                                                                                             2015E

                                                                                                                                                     2016E

                                                                                                                                                             2017E

                                                                                                                                                                     2018E

                                                                                                                                                                             2019E

                                                                                                                                                                                     2020E
                                     2004

                                              2005

                                                       2006

                                                                 2007

                                                                            2008

                                                                                      2009




                               Source: Company, IDFC-SSKI Research




SEPTEMBER 2009                                                                                                                                                                       47
                                                                 IDFC - SSKI INDIA


                                           DU-PONT ANALYSIS: LINKED BUSINESS SCORES OVER NON-LINKED
                                               Linked business – higher RoE due to lower capital requirements
                                           Profits from unit-linked business amount to ~0.9x of aggregate linked income (i.e.
    We expect RoE of 25-30%
       for linked business in              fund management fees, policy administration fees and mortality income) over the
               steady state…               long term as operating expenses trend down sharply and commission rates stabilize.
                                           Increasing scale of the linked book and rising share of renewal premium lead to
                                           increasing profitability which, coupled with sufficient internal accruals to fund any
                                           incremental solvency capital needs, would translate into return ratios of 25-30%.

 Exhibit 11: Du-Pont analysis – linked business
 (% of linked AUM)                FY09 FY10E FY11E FY12E                    FY13E FY14E FY15E          FY16E FY17E       FY18E     FY19E     FY20E
 Linked Gross Premium
 (net of allocation)             14,317      17,567    20,425     24,574    27,341   31,729   36,316   41,834   47,931    54,453    61,687    69,486
 Linked Income                    8,100       8,663    11,637     15,506    20,313   25,860   32,461   39,794   48,441    57,227    67,676    78,529
 Linked FFA write-back                0         968     2,373      1,497     2,206    3,171    4,334    5,711    7,308     9,100    11,128    10,684
 Total Income                    22,416      27,198    34,435     41,577    49,860   60,759   73,110   87,339 103,680    120,780   140,492   158,700
 Linked Commission                6,385      7,154      8,639     10,410    12,476   14,529   16,659   19,191   21,934    24,903    28,156    31,690
 Linked Operating Expenses       24,620      26,075    28,412     31,336    33,915   36,415   39,159   42,733   46,687    49,667    53,777    58,024
 Total Expenses                  31,005      33,229    37,051     41,746    46,391   50,944   55,818   61,924   68,621    74,570    81,932    89,714
 PBT                             (8,589)     (6,031)   (2,616)     (169)     3,469    9,816   17,292   25,415   35,059    46,210    58,559    68,986
 Tax                                   -           -         -          -     491     1,390    2,449    3,599    4,964     6,543     8,292     9,768
 PAT                             (8,589)     (6,031)   (2,616)     (169)     2,978    8,426   14,844   21,816   30,094    39,667    50,267    59,217
 Du-Pont Analysis (% of linked
 Gross Premium)                    2009        2010      2011      2012      2013     2014     2015     2016     2017      2018      2019      2020
 Linked Gross Premium             100.0       100.0     100.0      100.0     100.0    100.0    100.0    100.0    100.0     100.0     100.0     100.0
 Linked Income                     56.6        49.3      57.0       63.1      74.3     81.5     89.4     95.1    101.1     105.1     109.7     113.0
 Commission                        44.6        40.7      42.3       42.4      45.6     45.8     45.9     45.9     45.8      45.7      45.6      45.6
 Operating Expenses               172.0       148.4     139.1      127.5     124.0    114.8    107.8    102.1     97.4      91.2      87.2      83.5
 PBT                              (60.0)      (39.8)    (24.4)      (6.8)      4.6     20.9     35.7     47.1     57.9      68.2      76.9      83.9
 PBT/ Linked Income               (1.06)      (0.70)    (0.22)    (0.01)      0.17     0.38     0.53     0.64     0.72      0.81      0.87      0.88
 Source: IDFC-SSKI Research




SEPTEMBER 2009                                                                                                                                  48
                                                                     IDFC - SSKI INDIA

                                                   Non-linked business to deliver ~20% RoE over the long term
       …and RoE of ~20% over                   I-Pru’s traditional business stood at ~6% of total premium as of March 2009 and the
        FY16-20 for non-linked                 proportion is likely to remain limited over the long term. Based on our projections, I-
                     business                  Pru’s non-participating non-linked business breaks even later than FY12E on account
                                               of higher reserve requirements, higher commission rates and lower investment
                                               income. Post break-even, I-Pru’s traditional businesses are expected to generate return
                                               ratios of ~20% over FY16-20 – slightly lower to those in the linked business.

 Exhibit 12: Du-Pont analysis – Non-linked business
 (% of non-linked AUM)                 FY09 FY10E FY11E FY12E                  FY13E FY14E         FY15E     FY16E FY17E         FY18E    FY19E    FY20E
 Non-Linked Gross Premium              8,529      8,378    10,615     13,175   16,025    19,115    23,827    28,823    33,774    39,164   44,751   50,928
 Non-Linked Investment income          2,350      1,848     2,038      2,223    2,553     3,135     4,094     5,500     7,414     9,903   13,050   16,943
 Total Income                         10,879     10,226    12,653     15,397   18,578    22,250    27,921    34,323    41,188    49,067   57,802   67,871
 Expenses/ Outflows
 Non-Linked Commission                   613        948     1,154      1,398    1,684     1,956     2,628     3,063     3,539     4,038    4,588    5,173
 Non-Link Linked Operating Expenses 2,767         2,897     3,512      3,873    5,068     5,928     6,910     7,541     8,239     9,814   10,627   11,466
 Non-Linked Benefits                   1,584      1,613     2,278      3,372    4,963     5,875     8,096    10,429    13,609    16,306   20,153   23,704
 Non-Linked Change in valuation liabilities 5,597 6,177     7,195      8,049    8,728    10,445    12,157    14,321    16,002    18,881   21,231   24,807
 Total Expenses/ Outflows             10,561     11,634    14,139     16,692   20,443    24,203    29,791    35,354    41,389    49,039   56,598   65,150
 PBT                                     318     (1,408)   (1,486)   (1,295)   (1,865)   (1,953)   (1,869)   (1,031)    (201)       28     1,204    2,721
 Tax                                      44           -         -         -         -         -         -         -         -       4      171      385
 PAT                                     273     (1,408)   (1,486)   (1,295)   (1,865)   (1,953)   (1,869)   (1,031)    (201)       24     1,034    2,336
 Du-Pont Analysis (% of Non-Linked
 Gross Premium)                           11         12        13        14        15        16        17        18        19       20       21       22
 Non-Linked Gross Premium              100.0      100.0     100.0      100.0    100.0     100.0     100.0     100.0     100.0     100.0    100.0    100.0
 Investment income                      27.6       22.1      19.2       16.9     15.9      16.4      17.2      19.1      22.0      25.3     29.2     33.3
 Commission                              7.2       11.3      10.9       10.6     10.5      10.2      11.0      10.6      10.5      10.3     10.3     10.2
 Operating Expenses                     32.4       34.6      33.1       29.4     31.6      31.0      29.0      26.2      24.4      25.1     23.7     22.5
 Claims                                 18.6       19.3      21.5       25.6     31.0      30.7      34.0      36.2      40.3      41.6     45.0     46.5
 Non-Linked Reserves                    65.6       73.7      67.8       61.1     54.5      54.6      51.0      49.7      47.4      48.2     47.4     48.7
 PBT                                     3.7      (16.8)    (14.0)     (9.8)    (11.6)    (10.2)     (7.8)     (3.6)     (0.6)      0.1      2.7      5.3
 Source: IDFC-SSKI Research




SEPTEMBER 2009                                                                                                                                       49
                                                                IDFC - SSKI INDIA


                                        VALUATIONS & VIEW
                                        Given the annuity nature of the insurance business, we have valued I-Pru based on
                                        DCF of long-term profits, while we continue to use the widely-accepted appraisal
                                        method (Embedded Value + Structural Value). At a discount rate of 13.75%, the
                                        approaches value I-Pru at Rs217 and Rs207 per share of ICICI Bank respectively.

                                                DCF valuation
     DCF of long-term profits           Post break-even in FY12E, I-Pru’s profits are expected to show an impressive CAGR
          and terminal value            of 120% over FY12-15 and 30% over FY15-20. Discounting the long-term profits
         indicates a value of           and terminal value (assumed growth of 6.5%) culminates into a valuation of
           Rs362bn for I-Pru            ~Rs362bn for I-Pru. Concurrently, ICICI Bank’s 74% stake stands valued at
                                        ~Rs241bn or Rs217 per share, after factoring in 10% holding company discount.

 Exhibit 13: DCF valuation
 (Rs m)                        FY09 FY10E FY11E FY12E FY13E                    FY14E    FY15E    FY16E    FY17E    FY18E    FY19E FY20E
 Profit after tax             (7,794) (5,198)      (931)       2,683   6,767   13,677   21,926   31,460   40,164   41,000   52,873 63,341
 Total PV of net profit (A)                     105,067 105,885 103,811 99,213          91,042   79,527   65,000   48,695   34,063 17,473


 PV of terminal value (B)                       256,847
 Total value (Rs m) - A+B                       361,913
 Total value ($)                                   7,540


 ICICI Bank's Stake value (74%)                 241,034
 ICICI Bank - outstanding shares (m)               1,113
 Value per share of parent (Rs)                      217
 CMP of parent (Rs)                                743.9
 Price Date                                     5th Sept '09
 % of value contributed by ICICI Prudential         29%
 Discount rate                                   13.75%




SEPTEMBER 2009                                                                                                                         50
                                                     IDFC - SSKI INDIA

                                      Appraisal valuation
                                We expect I-Pru’s NBAP to show 10% CAGR over FY09-11 to reach Rs13.8bn by
    Using appraisal method,     FY11. NBAP margin conservatively builds in a decline of ~120bp over FY09-11E
      we arrive at a value of   from 18.9% reported in FY09 as a result of increasing competition, volatile capital
    Rs207 per share of ICICI
   Bank after providing for a   markets and IRDA’s new ULIP charge norms. As we remain convinced of I-Pru’s
      10% holding company       long-term growth prospects, we have assigned an NBAP multiple of 16.5x to arrive at
                    discount    the Structural Value. Coupled with I-Pru’s Embedded Value, we arrive at a value of
                                Rs207 per share of ICICI Bank after providing for a 10% holding company discount.

                                Exhibit 14: Appraisal valuation
                                (Rs m)                                       FY08     FY09       FY10E      FY11E
                                APE                                         74,382   60,641      65,200     78,240
                                yoy growth (%)                                67.2   (18.5)         7.5       20.0
                                NBAP Margins (%)                              19.2     18.9        18.2       17.7
                                New Business Value                          14,281   11,461      11,860     13841
                                Net Shareholders Funds                       7,785   10,044      13,346     14,368
                                Add back Strain                              1,167    1,892       1,519      1,571
                                Embedded Value: {A}                         50,209   70,120      92,617    117,835
                                Structural Value: {B}
                                NBAP                                                                        13,841
                                Multiple (x)                                                                  16.5
                                Value                                                                      228,372
                                Appraisal Value: {A} +{B} - Rs m                                           346,207
                                Appraisal Value US$ m                                                        7,213
                                ICICI Bank's stake                                                          74.0%
                                Value of ICICI B's Stake                                                   256,193
                                Less: holding company discount                                              10.0%
                                Less: 10% holding company discount                                          25,619
                                Value attributable to ICICI's Stake (74%)                                  230,574
                                No. of shares of ICICI Bank (m)                                              1,113
                                Value per ICICI Bank share (Rs)                                               207
                                Source: ICICI Bank, IDFC - SSKI Research




SEPTEMBER 2009                                                                                                  51
                                                                     IDFC - SSKI INDIA


Exhibit 15: Profit & Loss account
Year to 31 March (Rs m)                FY09     FY10E     FY11E    FY12E    FY13E     FY14E     FY15E     FY16E     FY17E     FY18E     FY19E     FY20E
Gross Premium                        153,562 181,174 220,720 267,440 320,332         378,351   439,273   508,559   579,067   659,070   743,578   838,854
yoy growth (%)                          13.2      18.0      21.8     21.2     19.8      18.1      16.1      15.8      13.9      13.8      12.8      12.8
FYP Premium                           60,174    64,687    77,625   93,150 111,779    128,546   147,828   170,003   195,503   221,896   251,852   283,333
yoy growth (%)                         (18.4)      7.5      20.0     20.0     20.0      15.0      15.0      15.0      15.0      13.5      13.5      12.5
Renewal Premium                       88,723 111,355 136,938 166,901 199,685         239,163   278,675   323,234   365,176   415,109   465,248   523,747
yoy growth (%)                          60.5      25.5      23.0     21.9     19.6      19.8      16.5      16.0      13.0      13.7      12.1      12.6
Single Premium                         4,665     5,132     6,158    7,390    8,867    10,641    12,769    15,323    18,388    22,065    26,478    31,774
yoy growth (%)                         (29.6)     10.0      20.0     20.0     20.0      20.0      20.0      20.0      20.0      20.0      20.0      20.0
APE                                   60,641    65,200    78,240   93,888 112,666    129,610   149,105   171,535   197,342   224,102   254,500   286,511
yoy growth (%)                         (18.5)      7.5      20.0     20.0     20.0      15.0      15.0      15.0      15.0      13.6      13.6      12.6
Investment income                    (61,471)   34,575    50,425   69,761   92,951   120,301   151,765   187,553   227,763   273,532   325,391   383,329
yoy growth (%)                        (310.3)   (156.2)     45.8     38.3     33.2      29.4      26.2      23.6      21.4      20.1      19.0      17.8
Commission                             6,998     8,101     9,793   11,808   14,160    16,484    19,287    22,254    25,473    28,941    32,743    36,863
Operating expenses                    27,387    28,972    31,923   35,209   38,982    42,343    46,069    50,274    54,926    59,481    64,403    69,489
Benefits                              22,066    23,042    32,548   48,172   70,901    97,920   134,928   173,814   226,820   271,761   335,877   395,069
Change in valuation of liabilities    42,422 161,835 200,185 240,640 284,131         329,905   370,564   419,969   461,377   535,281   587,309   659,738
yoy growth (%)                         (64.6)    281.5      23.7     20.2     18.1      16.1      12.3      13.3       9.9      16.0       9.7      12.3
Strain Funding / Contribution
from Shareholders account              7,354     6,751     3,954
yoy growth (%)                         (54.2)     (8.2)   (41.4)
Return on Solvency Capital               353       677      727     1,134    1,434     1,777     2,176     2,621     3,090     3,628     4,204     4,852
Profit/Loss Before Tax                (8,804)   (5,106)    (854)    3,254    7,949    15,997    25,699    36,913    47,182    48,166    62,168    74,560
Profit/Loss After Tax                 (7,794)   (5,198)    (931)    2,683    6,767    13,677    21,926    31,460    40,164    41,000    52,873    63,341
yoy growth (%)                                                                                    60.3      43.5      27.7       2.1      29.0      19.8


Exhibit 16: Balance sheet
Year to 31 March (Rs m)                FY09     FY10E     FY11E    FY12E    FY13E     FY14E     FY15E     FY16E     FY17E     FY18E     FY19E     FY20E
AUM                                  327,880 480,745 676,036 913,715 1,197,244 1,531,841 1,913,494 2,352,136 2,841,063 3,413,482 4,049,427 4,770,189
yoy growth (%)                          14.7      46.6      40.6     35.2     31.0      27.9      24.9      22.9      20.8      20.1      18.6      17.8
Linked AUM                           285,479 441,137 634,127 866,717 1,142,119 1,461,580 1,819,987 2,225,635 2,671,010 3,187,410 3,753,488 4,388,419
yoy growth (%)                          14.8      54.5      43.7     36.7     31.8      28.0      24.5      22.3      20.0      19.3      17.8      16.9
Non-Linked AUM                        36,055    39,608    41,910   46,998   55,125    70,261    93,507   126,501   170,053   226,073   295,939   381,769
yoy growth (%)                            4.5      9.9       5.8     12.1     17.3      27.5      33.1      35.3      34.4      32.9      30.9      29.0
Networth                              10,044    13,544    14,545   17,229   23,996    37,672    59,598    91,059   131,222   164,022   201,033   239,038


Exhibit 17: Key ratios (%)
Year to 31 March                       FY09     FY10E     FY11E    FY12E    FY13E     FY14E     FY15E     FY16E     FY17E     FY18E     FY19E     FY20E
Conservation ratio                      68.8      74.8      77.8     77.8     76.8      76.8      75.8      75.8      74.0      74.0      73.0      73.0
Commission/Total Premium                  6.0      4.6       4.5      4.4      4.4       4.4       4.4       4.4       4.4       4.4       4.4       4.4
Opex/ Weighted premium
(including Renewal premium)             18.3      16.4      14.8     13.5     12.5      11.5      10.8      10.2       9.8       9.3       8.9       8.6
Benefits/ Gross Premium                 14.4      12.7      14.7     18.0     22.1      25.9      30.7      34.2      39.2      41.2      45.2      47.1
Surrender Ratio                         10.5       7.6       7.1      7.4      8.1       8.6       9.3       9.7      10.4      10.4      10.8      10.8
Return on avg Linked AUM               (24.4)      9.7       9.6      9.5      9.4       9.4       9.3       9.3       9.3       9.3       9.3       9.2
Return on avg Non-Linked AUM              6.8      5.1       5.0      5.1      5.1       5.2       5.2       5.3       5.3       5.2       5.2       5.2
Return on avg shareholders fund          2.9       5.2       5.2      6.8      6.7       6.6       6.6       6.6       6.5       6.5       6.4       6.4
Return on Networth (%)                                                                            36.8      34.5      30.6      25.0      26.3      26.5




SEPTEMBER 2009                                                                                                                                      52
                                                IDFC - SSKI INDIA




                                                                                                                                            Company update
                           Reliance Life Insurance
                           Growth leader
        4 September 2009
                            Reliance Life Insurance (RLI) has been the growth leader on the back of hefty
       BSE Sensex: 15689    investments in distribution network over FY06-09. Being a relatively new
                            entrant with an aggressive sponsor eager to gain scale, RLI was expected to
                            be a loss leader. However, with distribution muscle in place, RLI has
                            switched gears to aggressive cost control and is set to attain P&L break-
                            even in FY12E, in line with peers. Going forward, we expect RLI to sustain its
                            above-industry growth driven by the increased leverage of existing network,
                            strong parent brand and capital access. This, in turn, will translate into the
                            highest market share gains in total premium (of ~270bp to 4.8%) over FY09-
                            20E among our coverage universe. Using the DCF approach, we assign a
                            value of ~Rs183bn – imputing a value of ~Rs746 per share of Reliance
                            Capital to RLI, while EV based valuation indicates a value of Rs803 per share.
                            Aggressive player…but not a loss leader: After a late start, RLI has
                            commendably doubled its market share over FY06-09 to 9.8% of private
                            industry APE. Over the period, it embarked upon a rapid distribution roll-out
                            with ~95% CAGR in branches and agents vis-à-vis industry average of 45% and
                            27% respectively. Despite the brisk scale-up, focus on containing costs, rise in
                            productivity, improving conservation ratio and healthy growth would enable RLI
                            to break even along with peers in FY12.

                            Building blocks in place: RLI is well-placed to sustain its position as a growth
                            leader. While growth was subdued in FY09 given capital market volatility, its vast
                            distribution, innovative products, strong promoter brand and ready access to
                            capital would help RLI sustain growth momentum. We expect RLI to gain
                            ~270bp of premium market share over FY09-20 to 4.8%.

                            Significant scale-up; value unlock in the offing: High growth and improving
                            conservation ratio would lead to 36% CAGR in RLI’s profits over FY15-20E.
                            RLI’s profitability metrics are comparable to other leading private insurers with
                            RoNW of ~30% over FY16-20E. RLI offers high near-term growth visibility,
                            and DCF and appraisal valuation methods indicate valuations of Rs746 and
                            Rs803 per share of Reliance Capital respectively. RLI is likely to be the first listed
                            life insurer in India with regulatory approvals under consideration.
Pathik Gandotra
pathik@idfcsski.com        Key operating metrics
91-22-6638 3304            (Rs m)                                                    FY09      FY10E        FY11E       FY12E     FY13E
                           Gross Premium                                           49,325      73,083     101,026 131,256        166,015
Neha Agrawal               APE*                                                    30,206      39,158       48,917      59,664    70,992
neha@idfcsski.com
                           yoy growth (%)                                             56.1       29.6         24.9        22.0      19.0
91-22-6638 237             Income on Investments (Policyholders)                   (9,735)      8,618       15,350      24,469    36,443
                           Total expenses (commissions, opex, claims)              26,754      30,186       38,887      52,897    64,483
Chinmaya Garg              yoy growth (%)                                            82.1        12.8         28.8    36.0          21.9
chinmaya@idfcsski.com      Change in valuation of liabilities                      23,512      55,135       79,846 102,038       135,074
91-22-6638 3325            Profit/ Loss After Tax                                (10,849) (3,369)            (2,114)     1,129     3,148
                           Source: Company, IDFC - SSKI Research; * APE is 10% of single premium plus regular premium

SEPTEMBER 2009                                                                                                                         53
                                                                            IDFC - SSKI INDIA


                                                  INVESTMENT ARGUMENT
                                                  RLI has been the growth leader among India’s life insurers on the back of
                                                  aggressive distribution roll-out (95% CAGR in branch network over FY06-09 as
                                                  against 45% for the industry). While the high capital burn implied that RLI would
                                                  be a ‘profit’ laggard, the company is set to break even in line with peers (by
                                                  FY12E) given its strategic focus on cost control and productivity improvements.
                                                  Our long-term profit projections indicate incremental capital requirement of
                                                  ~Rs9bn before break-even for RLI. With sustained above-industry growth rates,
                                                  we expect RLI to gain maximum premium market share over FY12-20 among our
                                                  coverage universe. RLI offers a relatively higher near-term growth visibility, and
                                                  both our valuation approaches indicate converging valuations. DCF of long-term
                                                  profits indicates a value of ~Rs183bn or Rs746 per share of Reliance Capital,
                                                  while the appraisal method assigns Rs178bn of value on a 16.5x FY11E NBAP
                                                  multiple.


                                                  RELIANCE LIFE: FOCUS SHIFTING TO COST CONTROL
                                                          Distribution network pays off during challenging markets…
      Despite choppy capital                      RLI invested heavily into building its distribution muscle with a 7.5x rise in agents
   markets, RLI remained the                      and branches over FY06-09 as against the industry growth of 3x in branches and 2x
  fastest growing life insurer
                       in India
                                                  in agents. Consequently, its APE market share grew by over 100% to 9.8% of total
                                                  private life insurers’ business over the period. During FY09, as capital markets
                                                  remained volatile, near-term growth prospects for the industry turned bleak given the
                                                  unit-linked nature of the business. However, RLI maintained the distinction of being
                                                  the fastest growing insurance company. As RLI leveraged its distribution franchise,
                                                  APE grew by 56% yoy (to ~Rs30.3bn as of Mar ‘09), as against a decline of ~7% for
                                                  the total industry and a sedate growth of 6% for private insurers.

Exhibit 1: Steep investments in distribution have aided APE growth and market share gains even when markets tanked
                      Branches (nos - LHS)           Agents (nos - RHS)                                                      APE market share (% of private)
1,400                                                                          200,000    (%)
                                                184,200                                                                      Mar-07         Mar-08             Mar-09
                                                                                         40.0
          Reliance Life's way ahead of                                                                                                                                                    37.2
                                                                    1,145                                                                                                                        36.0
          industry, with a CAGR over FY06-09
          in branches and agents of 95-96% as                                                                                                                                                       32.7
1,050                                                                          150,000
          against 45% and 27% respectively                                               30.0 28.5
                                                                   149613                            26.3
          for the industry
                                                  744                                                  20.7
 700                        95,711                                             100,000   20.0
                                                                                                                      15.0
                                                                                                              11.311.9
                                                                                         10.0                                                         9.8                           9.0
                                                                                                                                                            8.3 7.9 7.6
 350                                                                           50,000                                                           6.6
                                                                                                                             4.94.6 5.2   4.5                             5.3 6.6
                                217
            20,231
                                                                                          0.0
            153                                                                                 ICICI Pru-       SBI Life    Max New      Reliance Life     HDFC Std      Birla Sunlife      Other
    0                                                                          0
                                                                                                   Life                        York                                                          private
            FY06               FY07               FY08              FY09
                                                                                                                                                                                            insurers
Source: Companies, IRDA, Life insurance council

                                                          Excessive ramp-up behind…massive cost control is the strategic focus
        Optimal size attained in                  RLI’s aggressive distribution roll-out over the last four years has enabled it to achieve
        distribution; benefits to                 an optimal size to sustain growth in the medium term. Over the last year, RLI has
                  start accruing                  turned its strategic focus to (i) substantial cost control from re-negotiating rentals to
                                                  rationalizing the agency force, reflected in reduction in the agent force by ~35,000 in
                                                  FY09; and (ii) driving productivity improvements from the current distribution
                                                  network. In FY10, RLI’s operating cost ratio (excluding commission) is expected to


SEPTEMBER 2009                                                                                                                                                                                      54
                                                                                                                                    IDFC - SSKI INDIA

                                                                                decline by ~17% from 39% as of Mar ’09. As efficiencies accrue from the existing
                                                                                distribution network and proportion of renewal premium in total mix rises further,
                                                                                cost ratios would continue to trend downwards in the long term.

                                                                                Exhibit 2: Cost ratios to decline sharply
                                                                                                (%)                                                                                   Expense/ Weighted Premium
                                                                                220
                                                                                                       200.9


                                                                                165
                                                                                                                          152.4


                                                                                110
                                                                                                                                        99.9


                                                                                  55                                                               53.942.2 43.3

                                                                                                                                                                                   23.8 19.7 17.5
                                                                                                                                                                                                  15.7 14.5 13.8 13.2 12.7 12.4 11.9 11.6
                                                                                    0
                                                                                                  2004

                                                                                                                   2005

                                                                                                                                 2006

                                                                                                                                                2007

                                                                                                                                                              2008

                                                                                                                                                                        2009

                                                                                                                                                                                   2010E

                                                                                                                                                                                                  2011E

                                                                                                                                                                                                                 2012E

                                                                                                                                                                                                                            2013E

                                                                                                                                                                                                                                            2014E

                                                                                                                                                                                                                                                        2015E

                                                                                                                                                                                                                                                                        2016E

                                                                                                                                                                                                                                                                                    2017E

                                                                                                                                                                                                                                                                                                    2018E

                                                                                                                                                                                                                                                                                                                  2019E

                                                                                                                                                                                                                                                                                                                                  2020E
                                                                                Source: Company, IDFC-SSKI Research Estimates



                                                                                NOT A LOSS LEADER…BREAK-EVEN IN LINE WITH PEERS
                                                                                After a late start, RLI burnt capital in the last few years to create a formidable
                                                                                distribution network. On the back of this aggressive growth posture, RLI was
                                                                                expected to be a ‘profit’ laggard. On the contrary, the company is well-poised to
                                                                                achieve break-even along with competitors in FY12 on the back of its efficiency and
                                                                                productivity initiatives, coupled with improving conservation ratio and healthy
                                                                                growth rates. We see RLI turning in a profit CAGR of ~36% over FY15-20E.

Exhibit 3: Profits trend line                                                                                                                                        P&L break-even likely in FY12
                                  PAT (Rs bn - LHS)                               yoy growth (% - RHS)
                                                                                                                                                                                                      PAT (Rs bn)                                                Accumulated profits/losses (Rs bn)
                                                                                                                                                                     140
50                                                                                                                                                       200
                                                                                                                                                                                                                                                                                                                           126
                                                                            179                                                                 42

                                                                                                                                                                     105
                                                                                                                                        33
33                                                                                                                                                       140
                                                                                                                            27                                                                                                                       Capital break                                                   84
                                                                                                                                                                      70                                                                             even point
                                                                                                                   19
                                                                                          94                                                                                                          P&L break                                                                                                                      42
15                                                                                                       14                                              80                                                                                                                                                 50            33
                                                                                                9             62                                                                                      even point                                                                                                 27
                                                                                  6                                                                                   35                                                                                                                               19
                                                                        3                                                                                                                                                                                                                   14
                                                                1                          45                        34          40                                                                                                                                        6       9
                                                                                                                                                 26
                                                                                                                                                                            -1     -1      -1                                                         1          3
 -3                                                                                                                                                                                                       -3                        -3       -2
                                                                                                                                                         20                                                      -8      -11                                                                           23
      -1     -1     -1                                  -2                                                                              23                             0
                           -3                   -3
                                  -8                                                                                                                                        -1     -2      -3                                                                                                4
                                                                                                                                                                                                          -6                        -28 -30 -29                 -25
                                         -11                                                                                                                                                                     -13
-20                                                                                                                                                      -40                                                                                                             -19 -10
                                                                                                                                                                      -35                                                -24
                                                2010E

                                                        2011E

                                                                2012E

                                                                        2013E

                                                                                  2014E

                                                                                               2015E

                                                                                                         2016E

                                                                                                                    2017E

                                                                                                                            2018E

                                                                                                                                        2019E

                                                                                                                                                 2020E
      2004

             2005

                    2006

                           2007

                                  2008

                                         2009




                                                                                                                                                                                                                                    2010E

                                                                                                                                                                                                                                             2011E

                                                                                                                                                                                                                                                     2012E

                                                                                                                                                                                                                                                                2013E

                                                                                                                                                                                                                                                                          2014E

                                                                                                                                                                                                                                                                                  2015E

                                                                                                                                                                                                                                                                                            2016E

                                                                                                                                                                                                                                                                                                       2017E

                                                                                                                                                                                                                                                                                                                 2018E

                                                                                                                                                                                                                                                                                                                          2019E

                                                                                                                                                                                                                                                                                                                                     2020E
                                                                                                                                                                            2004

                                                                                                                                                                                   2005

                                                                                                                                                                                           2006

                                                                                                                                                                                                          2007

                                                                                                                                                                                                                 2008

                                                                                                                                                                                                                         2009




Source: Company, IDFC-SSKI Research




SEPTEMBER 2009                                                                                                                                                                                                                                                                                                                      55
                                                                                                                                                                  IDFC - SSKI INDIA

                                                                                                                            Product innovation to drive improving persistency…
                                                                                                             Historically, RLI’s conservation ratio (‘proxy for persistency’) has been below the
                                                                                                             industry average in the context of its aggressive growth posture. Over FY09, RLI has
                                                                                                             launched new products with a high first year allocation charge ranging from 80-
                                                                                                             100%. These products by construct imply a high persistency/ conservation ratio. We
                                                                                                             expect RLI’s conservation ratio to improve significantly over the next 4-5 years to
                                                                                                             ~70% in FY13 from ~61% in FY09.

Exhibit 4: Conservation ratio on an improving trend…                                                                                                                                      …leading to increasing share of renewal premium
 (%)                                                                                                                                                                                                                                                    % of total premium
                                                                     Conservation ratio                                                                                                                                 First Year Premium                            Renewal Premium                                 Single Premium
 80
                                                                                                                                                                                           100
                               70                                                                            70          70                                                                                                                                     8      7             7       6        6        6       5        5       5            5          5
                       69                                                68                  68                                     69         69        69       69      69      69                                                               11
                                                             65                                                                                                                                      18                        23
                                         61       61                                                                                                                                                                                   28
 60 60        60
                                                                                                                                                                                             75      12                                            29
                                                                                                                                                                                                                        54     7                            39
                                                                                                                                                                                                                 59                                                   45            49      52       54       55      56       56      57        57            57
                                                                                                                                                                                                                                       15
 40
                                                                                                                                                                                             50

                                                                                                                                                                                                                        14
                                                                                                                                                                                                     69          14            70
 20                                                                                                                                                                                                                                                60
                                                                                                                                                                                             25                                        57                   53        48            45      42       40       39      39       38      38        38            38
                                                                                                                                                                                                                        33
                                                                                                                                                                                                                 27
  0
                                                                                                                                                                                               0
                                                             2010E

                                                                             2011E

                                                                                             2012E

                                                                                                             2013E

                                                                                                                         2014E

                                                                                                                                    2015E

                                                                                                                                               2016E

                                                                                                                                                         2017E

                                                                                                                                                                  2018E

                                                                                                                                                                          2019E

                                                                                                                                                                                  2020E
       2004

              2005

                       2006

                               2007

                                         2008

                                                  2009




                                                                                                                                                                                                                                                            2010E

                                                                                                                                                                                                                                                                      2011E

                                                                                                                                                                                                                                                                                    2012E

                                                                                                                                                                                                                                                                                            2013E

                                                                                                                                                                                                                                                                                                     2014E

                                                                                                                                                                                                                                                                                                              2015E

                                                                                                                                                                                                                                                                                                                      2016E

                                                                                                                                                                                                                                                                                                                               2017E

                                                                                                                                                                                                                                                                                                                                       2018E

                                                                                                                                                                                                                                                                                                                                                 2019E

                                                                                                                                                                                                                                                                                                                                                               2020E
                                                                                                                                                                                                     2004

                                                                                                                                                                                                                 2005

                                                                                                                                                                                                                        2006

                                                                                                                                                                                                                               2007

                                                                                                                                                                                                                                       2008

                                                                                                                                                                                                                                                   2009
  Source: Company, IDFC-SSKI Research

                                                                                                                            …to remain a ‘growth leader’
                                                                                                             We expect RLI to continue growing at above industry rates, buoyed by improving
                                                                                                             productivity of the existing distribution network, strong promoter brand and access
                                                                                                             to capital. Over FY15-20E, total industry premium CAGR is pegged at ~11%, while
                                                                                                             RLI is expected to clock a higher ~15% CAGR. In our coverage universe, RLI is
                                                                                                             expected to see maximum gains (up ~270bp to 4.8% in FY20) in its total premium
                                                                                                             market share.

 Exhibit 5: Premium growth above industry average…                                                                                                                                   …to continue driving market share gains
              Gross Premium (Rs bn - LHS)                                                      Gross premium yoy growth (% - RHS)                                                                               (%)                                         2009                                     2020E
500                                                                                                                                                                       487 400

                                     348.1                                                                                                                        425                                                                                     2.8
                                                                                                                                                                                           Birla Sunlife
                                                                                                                                                                                                                                        1.9
 375                                                                                                                                                     370                      300                                                                                                                        Market share gain
                                                                                                                                                322
                                                                                                                                                                                               SBI Life
                                                                                                                                                                                                                                                                           3.8                               of 270 bps to 4.8%
                     243.1                                                                                                                                                                                                                                      3.0
                                                                                                                                      278
                                              221.0
 250                                                                                                                        239                                                   200
                                                                                                                202                                                                                                                                                                           4.8
                                                                                                                                                                                          Reliance Life
                                                                                                                                                                                                                                            2.1
                                                                                                 166
 125                       110.4                                                     131                                                                                          100
                                                                     101                                                                                                                                                                                                      3.8
                                                                                                                                                                                             HDFC SL
                                                  49 73                                                                                                                                                                                           2.3
                                                              48.2 38.2
                                       32                               29.9 26.5 21.7 18.3
                              10                         52.9                               16.6 15.6 15.0 14.7
   0          1        2                                                                                       14.6
                                                                                                                                                                                  0                                                                                                                                                                      8.3
                                                                                                                                                                                             ICICI Pru
                                                         2010E

                                                                     2011E

                                                                                     2012E

                                                                                                     2013E

                                                                                                                 2014E

                                                                                                                            2015E

                                                                                                                                       2016E

                                                                                                                                                 2017E

                                                                                                                                                          2018E

                                                                                                                                                                  2019E

                                                                                                                                                                          2020E
       2004

              2005

                      2006

                              2007

                                       2008

                                                2009




                                                                                                                                                                                                                                                                                                                        6.5

                                                                                                                                                                                                          0.0           1.0           2.0                 3.0                 4.0              5.0            6.0             7.0              8.0                     9.0

 Source: IRDA, IDFC-SSKI Research

                                                                                                             Commission rates to trend below industry average
                                                                                                             On the back of rapid scale-up, increasing proportion of renewal premium and given
                                                                                                             the heavily unit-linked biased product portfolio (ULIPs typically carry lower
                                                                                                             commissions vis-à-vis traditional products), RLI’s commission ratio is expected to be
                                                                                                             lower than the industry average over the long term.


SEPTEMBER 2009                                                                                                                                                                                                                                                                                                                                                 56
                                                                                                                                                                          IDFC - SSKI INDIA


Exhibit 6: Declining commission costs…                                                                                                                                                                        …stabilize at below industry average
     (%)                                                                                                                                                                                                                                                                  Coverage commission ratios
 28 24.7                                             Commission/ APE                                                          Commission/ Gross Premium
                                                                                                                                                                                                                                   ICICI Pru            HDFC SL                       Reliance Life                 SBI Life
                                                                                                                                                                                                                (%)
                      22.4                                                                                                                                                                                     12.0
                                                                                                                                                                                                                                   Birla Sunlife             Coverage average
 21
      25.9
                                                     19.8          19.8 19.6                                                              18.7
                                                                                                   18.6 18.1 18.5                                                                                                                                                10.3
                            16.8                                                                                                                    17.7 16.8
                                                                                                                                                              15.9 15.9 16.0                                                                 9.0                                                                                    9.1
                                                                                                                                                                                                                9.0
                                    13.7               15.0                                                                                                                                                                                                               8.4
 14            17.6                                                                                                                                                                                                                  7.6
                                                                                                                                                                                                                                                      7.2
                                                                                                                                                                                                                                                                                                                  6.1        6.3           6.5
                                                                                                                                                                                                                6.0          6.0
                                                                     12.1                                                                                                                                                                                                                              5.1
  7                                             9.8                               10.6                                                                                                                                                                                                        4.5
                                                         9.0                                           9.5
                       7.4                                                                                         8.5 7.7
                                    6.4                                                                                    7.6 7.5 6.9
                                                                                                                                       6.5 6.1 6.1                                                              3.0
  0
                                                                       2010E

                                                                                       2011E

                                                                                                       2012E

                                                                                                                   2013E

                                                                                                                              2014E

                                                                                                                                          2015E

                                                                                                                                                    2016E

                                                                                                                                                               2017E

                                                                                                                                                                        2018E

                                                                                                                                                                                 2019E

                                                                                                                                                                                               2020E
        2004

               2005

                           2006

                                    2007

                                                2008

                                                          2009




                                                                                                                                                                                                                0.0
                                                                                                                                                                                                                                                      FY09                                                                FY20E

 Source: Company, IDFC-SSKI Research

                                                                                                                                      Robust growth in AUM ahead
                                                                                                                      Despite the relatively lower first year premium allocation, we expect RLI’s AUM to
                                                                                                                      increase at a CAGR of 37% over FY10-20, to ~Rs2.8tn by FY20, driven by robust
                                                                                                                      premium growth, high investment returns of ~11% on the linked portfolio and
                                                                                                                      improving conservation ratio. While traditional AUM would build up over the years,
                                                                                                                      unit-linked AUM is expected to continue comprising 90%+ of the total.

Exhibit 7: Robust growth in AUM…                                                                                                                                                                               …despite expected lower first year allocation charges*
                                   AUM (Rs bn - LHS)                                                     yoy growth (% - RHS)                                                                                  (%)
2,800                                                                                                                                                                           2,737 240                                                                                       Allocation to Fund- First Year Premium
                                                                                                                                                                                                               90
                                                                                                                                                                                                                                                                                                         85
                                                                                                                                                                                                                            80
                                                   212                                                                                                                                                                                                                                                                               78
                                          201                                                                                                                          2,215
2,100                                                                                                                                                                                      180                                                     65                            65
                                                                                                                                                             1,770                                             60

                                  124                                                                                                               1,392
1,400                                                                                                                                                                                      120
                                                                                                                                           1,072
                                                                      82
                                                                                                                                  818                                                                          30
                      72                                                           70
 700                                                          67                                                      606                                                                  60
                                                                                                         53
                                                                                                                      46
                                                                                                                                  39       35         31        30     27        25
                                                                                               297 435                                                                                   24
                                                                               194
                                                         63        114
   0      1      2          4       12          38                                                                                                                                         0                    0
                                                                   2010E

                                                                               2011E

                                                                                               2012E

                                                                                                           2013E

                                                                                                                      2014E

                                                                                                                                  2015E

                                                                                                                                            2016E

                                                                                                                                                     2017E

                                                                                                                                                               2018E

                                                                                                                                                                        2019E

                                                                                                                                                                                2020E
        2004

               2005

                        2006

                                   2007

                                            2008

                                                       2009




                                                                                                                                                                                                                         ICICI Pru           HDFC SL                    Reliance Life                  SBI Life                 Birla Sunlife


  Source: Company, IDFC-SSKI Research; * IDFC-SSKI Estimates


                                                                                                                      Exhibit 8: Unit-linked AUM to continue dominating the mix
                                                                                                                       (%)                                                        Linked AUM (% of total)                                               Non-Linked AUM (% of total)
                                                                                                                      100                                                                                                             3        2             2           3
                                                                                                                                                                                                        7           5       3                                                          3        4            5           5          6       7
                                                                                                                                                                                        12
                                                                                                                                                        10             17

                                                                                                                           75              8




                                                                                                                           50                                                                                                        97        98           98          97
                                                                                                                                                                                                       87           90     97                                                         97       96            95         95         94       93
                                                                                                                                                                                        76
                                                                                                                                                        42             58

                                                                                                                           25              9




                                                                                                                              0
                                                                                                                                          2004

                                                                                                                                                        2005

                                                                                                                                                                       2006

                                                                                                                                                                                        2007

                                                                                                                                                                                                       2008

                                                                                                                                                                                                                 2009

                                                                                                                                                                                                                           2010E

                                                                                                                                                                                                                                     2011E

                                                                                                                                                                                                                                              2012E

                                                                                                                                                                                                                                                            2013E

                                                                                                                                                                                                                                                                        2014E

                                                                                                                                                                                                                                                                                      2015E

                                                                                                                                                                                                                                                                                               2016E

                                                                                                                                                                                                                                                                                                          2017E

                                                                                                                                                                                                                                                                                                                        2018E

                                                                                                                                                                                                                                                                                                                                   2019E

                                                                                                                                                                                                                                                                                                                                           2020E




                                                                                                                      Source: Company, IDFC-SSKI Research

SEPTEMBER 2009                                                                                                                                                                                                                                                                                                                                  57
                                                          IDFC - SSKI INDIA

                                    Incremental capital requirement of ~Rs9bn
    We expect RLI to require   Assuming a broadly stable product mix, we expect RLI to require ~Rs9bn of
    ~Rs10bn of incremental     incremental capital before achieving capital break-even in FY16. Subsequently, RLI –
    capital before achieving   as also the other larger insurers – would generate substantial cash profits to cover
  capital break-even in FY16
                               incremental solvency needs, growth capital requirements and dividend pay-outs,
                               while maintaining a high RoE of 25-30%.

                               Exhibit 9: Capital break-even likely by FY16
                               (Rs bn)
                                                                   Capital requirement                                         Incremental capital requirement
                               40
                                                                                                                     37

                                                                                                 33        36
                               30
                                                                                28


                               20

                                                                    15
                                                                                            13
                               10
                                                            7                   8
                                                  3                                                   4    4
                                    2      2                    3                                                         1
                                0           1         1
                                    2004

                                           2005

                                                  2006

                                                            2007

                                                                         2008

                                                                                     2009

                                                                                                  2010E

                                                                                                          2011E

                                                                                                                  2012E

                                                                                                                              2013E

                                                                                                                                      2014E

                                                                                                                                              2015E

                                                                                                                                                      2016E

                                                                                                                                                              2017E

                                                                                                                                                                      2018E

                                                                                                                                                                              2019E

                                                                                                                                                                                      2020E
                               Source: Company, IDFC-SSKI Research




SEPTEMBER 2009                                                                                                                                                                            58
                                                                IDFC - SSKI INDIA


                                      DU-PONT ANALYSIS
                                            Linked business to deliver higher return ratios
                                      RLI is expected to deliver an average RoNW of ~31% from FY16 to FY20. After
                                      excluding costs, profits from unit-linked business broadly amount to ~0.9x of
                                      aggregate linked charges (i.e. fund management fees, policy administration fees and
                                      mortality income) over the long term. As expected, the higher first year allocation
                                      charge indicates a relatively more profitable business for RLI.

 Exhibit 10: Du-Pont analysis – linked business
 Year to 31 March (Rs m)          FY09 FY10E FY11E FY12E                   FY13E FY14E FY15E FY16E FY17E FY18E                   FY19E     FY20E
 Linked gross premium
 (net of allocation)             10,977    14,669     18,817      23,352   26,912   31,678   36,061   41,533   46,511   53,350    59,571    68,235
 Linked Income                    2,198     3,914      5,944       8,593   11,533   14,786   18,533   22,999   27,390   33,136    39,630    47,020
 Linked Funds for Future
 appropriations write-back             -          -         -       159      332      568      873     1,277    1,769    2,375     3,090     3,982
 Total Income                    13,176    18,584     24,761      32,104   38,777   47,032   55,467   65,809   75,669   88,861   102,290   119,237
 Linked Commission                5,803     7,367      9,127      10,549   11,941   14,205   16,474   17,764   19,331   20,919    24,008    27,524
 Linked Operating Expenses       18,726    15,622     18,048      20,487   23,454   26,452   29,777   33,267   37,151   41,561    46,118    51,239
 Total Expenses                  24,529    22,989     27,175      31,037   35,395   40,657   46,251   51,031   56,482   62,480    70,125    78,764
 PBT                            (11,354)   (4,405)    (2,414)      1,067    3,382    6,375    9,215   14,778   19,187   26,382    32,165    40,473
 Tax                                   -          -         -       151      479      903     1,305    2,093    2,717    3,736     4,555     5,731
 PAT                            (11,354)   (4,405)    (2,414)       916     2,903    5,473    7,911   12,685   16,470   22,646    27,610    34,742
 Linked AUM                      56,319 110,525 189,401 290,974 425,560 589,759 791,806 1,029,851 1,327,262 1,675,098 2,081,971 2,554,625
 Du-Pont Analysis
 (% of linked Gross Premium)       2009      2010       2011       2012     2013     2014     2015     2016     2017     2018      2019      2020
 Linked Gross Premium             100.0     100.0      100.0       100.0    100.0    100.0    100.0    100.0    100.0    100.0     100.0     100.0
 Linked Income                     20.0      26.7       31.6        36.8     42.9     46.7     51.4     55.4     58.9     62.1      66.5      68.9
 Commission                        52.9      50.2       48.5        45.2     44.4     44.8     45.7     42.8     41.6     39.2      40.3      40.3
 Operating Expenses               170.6     106.5       95.9        87.7     87.1     83.5     82.6     80.1     79.9     77.9      77.4      75.1
 PBT`                            (103.4)    (30.0)     (12.8)        3.9     11.3     18.3     23.1     32.5     37.4     45.0      48.8      53.5
 PBT/ Linked Income               (5.16)    (1.13)     (0.41)       0.12     0.29     0.43     0.50     0.64     0.70     0.80      0.81      0.86
Source: IDFC-SSKI Research




SEPTEMBER 2009                                                                                                                                 59
                                                                  IDFC - SSKI INDIA

                                                  Lower scale of non-linked business to impact profitability
                                             RLI’s traditional business stood at ~3% of its total premium as of March 2009 and
                                             the proportion is likely to remain limited over the long term. Based on our
                                             projections, the non-linked business breaks even later than FY12E on account of
                                             higher reserve requirements, higher commission rates and lower investment income.
                                             Post break-even, RLI’s traditional businesses is likely to deliver ~20% RONW in the
                                             long-run - slightly lower than the linked business.

 Exhibit 11: Du-Pont analysis – non-linked business
 Year to 31 March (Rs m)                 FY09 FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E                                 FY19E     FY20E
 Non-Linked Gross Premium                1,720    2,274   2,992     3,799    4,758     5,765     6,803    7,928    9,173   10,569    12,147    13,940
 Non-Linked Investment income              126     275     354        450      616     1,020     1,702    2,738    4,261    6,373     9,112    12,551
 Total Income                            1,846    2,550   3,346     4,249    5,374     6,785     8,505   10,666   13,434   16,943    21,259    26,491
 Expenses/ Outflows
 Non-Linked Commission                     166     388     480        555      899     1,069     1,433    1,545    1,681    1,819     2,088     2,393
 Non-Link Linked Operating Expenses        504     483     558      1,078    1,234     1,392     1,567    1,751    1,955    2,187     2,427     2,697
 Non-Linked Benefits                       290     759    1,281     2,427    3,235     3,109     3,800    5,026    4,993    6,354     7,943     9,798
 Non-Linked Change in valuation liabilities 645    929     970        465      487     1,693     2,329    2,808    5,052    6,520     8,435    10,846
 Total Expenses/ Outflows                1,604    2,559   3,289     4,526    5,855     7,263     9,128   11,129   13,681   16,881    20,893    25,734
 PBT                                       243     (10)     57       (277)   (481)     (478)     (623)    (463)    (247)      62       366       757
 Tax                                        34        -      8           -        -         -        -        -        -       9        52       107
 PAT                                       208     (10)     49       (277)   (481)     (478)     (623)    (463)    (247)      53       315       650
 Non-Linked AUM (Rs m)                   3,124    3,761   5,080     6,177    9,234    16,256    26,303   42,149   64,372   94,960   132,837   180,931
 Du-Pont Analysis (% of Non-Linked
 Gross Premium)                             11      12      13         14       15        16       17       18       19       20        21        22
 Non-Linked Gross Premium                100.0    100.0   100.0     100.0    100.0     100.0     100.0    100.0    100.0    100.0     100.0     100.0
 Investment income                         7.3     12.1    11.8      11.9     13.0      17.7      25.0     34.5     46.4     60.3      75.0      90.0
 Commission                                9.6     17.0    16.1      14.6     18.9      18.5      21.1     19.5     18.3     17.2      17.2      17.2
 Operating Expenses                       29.3     21.2    18.7      28.4     25.9      24.1      23.0     22.1     21.3     20.7      20.0      19.3
 Claims                                   16.8     33.4    42.8      63.9     68.0      53.9      55.9     63.4     54.4     60.1      65.4      70.3
 Non-Linked Reserves                      37.5     40.9    32.4      12.2     10.2      29.4      34.2     35.4     55.1     61.7      69.4      77.8
 PBT                                      14.1    (0.4)     1.9      (7.3)   (10.1)     (8.3)    (9.2)    (5.8)    (2.7)      0.6       3.0       5.4
 Source: IDFC-SSKI Research



                                             VALUATIONS & VIEW
                                             Within our coverage universe, RLI offers relatively higher near-term growth visibility
                                             and both our valuation approaches indicate converging valuations. DCF of long-term
                                             profits indicates a value of ~Rs183bn or Rs746 per share, while the appraisal method
                                             assigns a Rs178bn value on a 16.5x FY11E NBAP multiple. RLI is one of our
                                             preferred picks in the life insurance space.

                                                  DCF valuation
          Around 100% CAGR                   Post break-even in FY12E, RLI’s profits are expected to show an impressive ~100%
       expected in profits over              CAGR over FY12-15, before stabilizing at 36% over FY15-20E, buoyed by stringent
                      FY12-15
                                             cost control. DCF of long-term profits imputes a valuation of ~Rs183bn for RLI or
                                             Rs746 per share of Reliance Capital (given the 100% economic interest).




SEPTEMBER 2009                                                                                                                                     60
                                                              IDFC - SSKI INDIA


 Exhibit 12: DCF valuation
 (Rs m)                         FY09 FY10E FY11E FY12E FY13E                    FY14E    FY15E      FY16E    FY17E    FY18E      FY19E FY20E
 Profit after tax             (10,849) (3,369) (2,114)      1,129       3,148    6,116    8,890     14,389   19,226   26,975     33,310 42,122
 Total PV of net profit (A)                       51,321 53,159 52,305          50,232   46,729     42,299   36,062   28,812     19,963 10,457


 PV of terminal value (B)                                131,800
 Total value (Rs m) - A+B                                183,121
 Total value ($)                                            3,896


 Reliance Capital's Stake value (100%)                   164,809
 Reliance Capital - outstanding shares (m)                    246
 Value per share of parent (Rs)                               671
 CMP of parent (Rs)                                         904.7
 Price Date                                              5th Sept '09
 % of value contributed by Reliance Life Insurance           74%
 Discount rate                                            14.95%



                                               Appraisal valuation
  Appraisal-based valuation              Both the DCF and appraisal methods indicate converging valuations for RLI. We
  works out to Rs178bn, i.e.             expect RLI’s NBAP to show 22% CAGR over FY09-11 to reach Rs9.4bn by FY11.
         Rs723 per share of
                                         We are building in a ~170bp compression in NBAP margins (reported at 20.9% for
            Reliance Capital
                                         FY09) over FY09-11 to factor in the impact of increasing competition and recently
                                         introduced ceiling on ULIP charges. We remain convinced that RLI would continue
                                         to be a growth leader in the near term as well as in the long run. We have assigned a
                                         16.5x FY11E NBAP multiple which, together with the embedded value, translates
                                         into a total valuation of Rs197bn (Rs803 per share) to Reliance Capital.

                                         Exhibit 13: Appraisal value
                                         (Rs m)                                               FY08            FY09        FY10E         FY11E
                                         APE                                                 19,347          30,206       39,158        48,917
                                         yoy growth (%)                                       167.4            56.1            29.6       24.9
                                         NBAP Margins (%)                                         18.9         20.9            20.4       19.2
                                         New Business Achieved Profits - NBAP - (I)           3,657           6,313        7,988         9392
                                         Net Shareholder Funds                                2,068           3,460        5,003         6,592
                                         Embedded Value: {A}                                  7,847          16,591       28,151        42,310
                                         Structural Value
                                         New Business Achieved Profits - NBAP - (I)                                                      9,392
                                         NBAP Multiple (x)                                                                                16.5
                                         Structural Value: {B}                                                                         154,969
                                         Appraisal Value: {A} + {B}                                                                    197,279
                                         Appraisal Value US$ m                                                                           4,110
                                         Reliance Capital's Stake                                                                        100%
                                         Value of Reliance Capital's Stake                                                             197,279
                                         Number of shares of Reliance Capital (m)                                                        245.6
                                         Value per share (Rs)                                                                             803




SEPTEMBER 2009                                                                                                                              61
                                                                      IDFC - SSKI INDIA


Exhibit 14: Profit & Loss account
Year to 31 March (Rs m)                FY09     FY10E     FY11E     FY12E    FY13E     FY14E     FY15E     FY16E     FY17E     FY18E     FY19E     FY20E
Gross Premium                         49,325    73,083 101,026 131,256 166,015        201,983   238,937   278,493   321,813   370,223   424,804   486,681
yoy growth (%)                          52.9      48.2      38.2      29.9     26.5      21.7      18.3      16.6      15.6      15.0      14.7      14.6
FYP Premium                           29,657    38,555    48,193    58,796   69,967    81,162    94,148   107,799   123,430   141,327   161,820   185,283
yoy growth (%)                          60.8      30.0      25.0      22.0     19.0      16.0      16.0      14.5      14.5      14.5      14.5      14.5
Renewal Premium                       14,186    28,498    45,596    63,777   85,801   109,037   131,237   155,516   181,687   210,531   242,782   279,175
yoy growth (%)                         199.0     100.9      60.0      39.9     34.5      27.1      20.4      18.5      16.8      15.9      15.3      15.0
Single Premium                         5,482     6,031     7,237     8,684   10,247    11,784    13,552    15,178    16,696    18,366    20,202    22,222
yoy growth (%)                         (39.6)     10.0      20.0      20.0     18.0      15.0      15.0      12.0      10.0      10.0      10.0      10.0
APE                                   30,206    39,158    48,917    59,664   70,992    82,340    95,503   109,317   125,099   143,164   163,840   187,506
yoy growth (%)                          56.1      29.6      24.9      22.0     19.0      16.0      16.0      14.5      14.4      14.4      14.4      14.4
Investment Income                     (9,735)    8,618    15,350    24,469   36,443    51,786    70,781    93,821   122,116   156,491   196,965   244,381
yoy growth (%)                        1320.6    (188.5)     78.1      59.4     48.9      42.1      36.7      32.6      30.2      28.1      25.9      24.1
Commission                             5,969     7,755     9,607    11,104   12,840    15,274    17,907    19,308    21,012    22,738    26,095    29,918
Operating expenses                    19,230    16,105    18,606    21,566   24,688    27,844    31,345    35,018    39,107    43,749    48,545    53,936
Benefits                               1,555     6,326    10,673    20,227   26,955    38,862    47,499    62,820    62,408    79,429    99,290   122,477
Change in valuation of liabilities    23,512    55,135    79,846 102,038 135,074      165,892   204,375   240,853   302,463   354,356   415,308   483,500
Strain Funding / Contribution
from Shareholders account             10,903     3,820     2,707
Return on Solvency Capital               215       450       593      814     1,092     1,414     1,781     2,197     2,703     3,282     3,952     4,726
Profit/Loss before Tax               (10,849)   (3,369)   (2,114)    1,313    3,661     7,112    10,338    16,732    22,356    31,366    38,733    48,980
Profit/Loss after Tax                (10,849)   (3,369)   (2,114)    1,129    3,148     6,116     8,890    14,389    19,226    26,975    33,310    42,122
yoy growth (%)                                                                                      45        62        34        40        23        26



Exhibit 15: Balance sheet
Year to 31 March (Rs m)                FY09     FY10E     FY11E     FY12E    FY13E     FY14E     FY15E     FY16E     FY17E     FY18E     FY19E     FY20E
AUM                                   62,897 114,285 194,481 297,151 434,794          606,015   818,109 1,072,000 1,391,634 1,770,058 2,214,808 2,735,556
yoy growth (%)                          66.5      81.7      70.2      52.8     46.3      39.4      35.0      31.0      29.8      27.2      25.1      23.5
Linked AUM                            56,319 110,525 189,401 290,974 425,560          589,759   791,806 1,029,851 1,327,262 1,675,098 2,081,971 2,554,625
yoy growth (%)                          70.6      96.2      71.4      53.6     46.3      38.6      34.3      30.1      28.9      26.2      24.3      22.7
Non-Linked AUM                         3,124     3,761     5,080     6,177    9,234    16,256    26,303    42,149    64,372    94,960   132,837   180,931
yoy growth (%)                          23.5      20.4      35.1      21.6     49.5      76.0      61.8      60.2      52.7      47.5      39.9      36.2
Networth                               3,460     5,003     6,592     7,721   10,870    16,986    25,876    40,266    57,256    81,094   110,531   147,755



Exhibit 16: Key ratios (%)
Year to 31 March                       FY09     FY10E     FY11E     FY12E    FY13E     FY14E     FY15E     FY16E     FY17E     FY18E     FY19E     FY20E
Conservation ratio                      61.2      65.0      68.0      68.0     70.0      70.0      69.0      69.0      69.0      69.0      69.0      69.0
Commission/Total Premium                  9.0     12.1      10.6       9.5      8.5       7.7       7.6       7.5       6.9       6.5       6.1       6.1
Commission/Weighted Premium
(including Renewal premium)             13.4      11.5      10.2       9.0      8.2       8.0       7.9       7.3       6.8       6.4       6.4       6.4
Opex/ Total premium                     39.0      22.0      18.4      16.4     14.9      13.8      13.1      12.6      12.2      11.8      11.4      11.1
Benefits/ Gross Premium                   3.2      8.7      10.6      15.4     16.2      19.2      19.9      22.6      19.4      21.5      23.4      25.2
Surrender Ratio                           7.8      8.8       8.0       9.6      8.4       8.4       7.4       7.4       5.6       5.6       5.6       5.6
Return on Avg Linked AUM               (24.2)     11.2      11.0      10.8     10.7      10.6      10.5      10.5      10.4      10.4      10.4      10.4
Return on Avg Non-Linked AUM              4.6      8.3       8.4       8.3      8.6       8.8       8.7       8.7       8.6       8.5       8.5       8.4
Return on Avg shareholders fund           6.4      9.9      10.2      10.4     10.3      10.2      10.0       9.9       9.9       9.9       9.8       9.8
Return on Networth (%)                                                                             34.4      35.7      33.6      33.3      30.1      28.5
Source: Company, IDFC - SSKI Research




SEPTEMBER 2009                                                                                                                                       62
                                                 IDFC - SSKI INDIA



                           SBI Life Insurance




                                                                                                                                             Company update
                           In the black!
        4 September 2009
                            SBI Life Insurance (SBI Life) has been a profit leader on the back of its
       BSE Sensex: 15689    strong parentage, which offers a robust distribution franchise and thus lends
                            a competitive cost structure. The powerful parent brand, a key differentiator
                            for SBI Life, gives it extensive mileage to acquire customers in under-
                            penetrated areas. While the company’s conservation ratio lags that of peers,
                            we expect the differential to narrow led by management’s renewed focus. As
                            SBI Life has already achieved break-even, we assess minimal incremental
                            capital requirement of ~Rs3.5bn. Revival in premium growth, a gradual rise
                            in conservation ratio and competitive cost structure are expected to aid
                            profitability. Based on DCF, we assign a valuation of Rs159bn for SBI Life,
                            imputing a value of Rs106bn or Rs168 per share of SBI. Appraisal method
                            valuation indicates a value of Rs180 per share of the parent.
                            Profitable life insurer; aided by strong parentage: SBI life has been a profit
                            leader among Indian peers. It derives considerable operating leverage in terms of
                            lower infrastructure and employee costs from access to the promoter’s
                            distribution franchise of 16,000+ branches. Together with a lower corporate
                            branding bill, this converts into a competitive cost structure and provides
                            sustainable advantage to SBI Life.

                            Expansion in profitability ahead: Owing to a high proportion of group
                            business, SBI Life’s conservation ratio has historically lagged peers. While group
                            business will remain a drag, we expect management focus on renewal premiums
                            to drive a gradual rise towards industry average. On the back of core strengths
                            around brand resonance, vast distribution and cost competitiveness, we expect
                            SBI Life to register traction in its growth rates.

                            Conservation ratio to rise gradually: A gradually inching up conservation ratio,
                            strong top-line growth and efficient operations are expected to drive SBI Life’s
                            profitability. We expect SBI Life to register 9% CAGR in accounting profits over
                            FY15-20, with steady-state RoE of ~22%. The EV method, at 13x FY11E
                            NBAP, gives a value of ~Rs180 per share of SBI, after assuming a 10% holding
                            company discount. A DCF of the insurer’s long-term profits indicates a value of
                            ~Rs159bn or Rs168 per share of SBI.

Pathik Gandotra            Key operating metrics
pathik@idfcsski.com        Rs m                                                     FY09      FY10E        FY11E         FY12E     FY13E
91-22-6638 3304            Gross Premium                                          72,121     87,097      105,063        126,738   152,539
                           APE*                                                   46,471     53,400       62,940         74,180    87,434
Neha Agrawal               yoy growth (%)                                           33.5        14.9        17.9           17.9      17.9
neha@idfcsski.com          Income on Investments (Policyholders)                (17,610)       9,129      13,737         19,355    26,183
91-22-6638 237             Total expenses (commissions, opex, claims)             14,851     22,739       28,690         36,567    45,241
                           yoy growth (%)                                           23.4       53.1         26.2           27.5      23.7
Chinmaya Garg              Change in valuation of liabilities                     40,181     72,220       87,533        103,037   123,916
chinmaya@idfcsski.com      Profit/Loss After Tax                                    (260)      1,307         2,408        5,788     8,521
91-22-6638 3325            Source: Company, IDFC - SSKI Research; * APE is 10% of single premium plus regular premium



SEPTEMBER 2009                                                                                                                          63
                                                    IDFC - SSKI INDIA


                                INVESTMENT ARGUMENT
                                SBI Life has evolved efficiently to capitalize on under-penetration in the
                                sector. It has achieved the distinction of being a profit leader in the private life
                                insurance space. The strength of SBI Life’s business model rests upon
                                access to the parent’s distribution network with widespread coverage even in
                                semi-urban and rural areas, and the competitive cost structure due to lower
                                infrastructure and employee costs. Being already in the black, we expect SBI
                                Life’s incremental capital requirement to be relatively lower at ~Rs3.5bn. With
                                a higher proportion of group business, SBI Life’s persistency has historically
                                lagged peers. We expect management’s strategic focus to drive the ratio
                                upwards. DCF of long-term profits indicates a value of ~Rs159bn or Rs168 per
                                share of State Bank of India (SBI), while the appraisal method assigns a value
                                of ~Rs180 per share on a 13x FY11E NBAP multiple.


                                SBI LIFE: IN BLACK
                                SBI life has been a profit leader in the Indian life insurance industry. The company
                                has reported accounting profits sporadically over the last few years even as peers
                                reeled under the impact of high unamortized customer acquisition expenses. Having
                                inherited State Bank of India’s (SBI; the largest public sector bank of the country)
                                vast distribution network of 16,000+ branches, SBI Life has an unprecedented
                                parentage advantage given the fact that insurance is a push product.

                                Exhibit 1: SBI Life – accounting profits trend line

                                (Rs m)
                                                                          Profit / (Loss) after tax
                                400

     SBI Life – profit leader
  among private life insurers   225



                                 50



                                -125



                                -300
                                         FY02        FY03        FY04         FY05            FY06    FY07   FY08   FY09

                                Source: Companies

                                       Strong parentage – a key competitive advantage
                                SBI Life has a head-start over peers as it is backed by a strong parent. SBI’s strong
                                distribution network, brand resonance (possibly second to the state-owned Life
                                Insurance Corporation of India) imputes into higher top-line growth and significant
                                cost advantage for SBI Life, both in terms of operating expenses and commission
                                costs.




SEPTEMBER 2009                                                                                                             64
                                                                                     IDFC - SSKI INDIA


 Exhibit 2: Low operating cost structure lends itself to profitability
                             Commission/ Total Premium                                                                                                         Opex/ Weighted Premium
(%)
                    FY05         FY06        FY07            FY08             FY09                                                      FY05                FY06                 FY07               FY08                FY09
20.0                                                                                                         180



15.0                                                                                                         135



10.0                                                                                                          90



 5.0                                                                                                          45



 0.0                                                                                                           0
        ICICI Pru      HDFC SL          Reliance Life          SBI Life              Birla Sunlife                     ICICI Pru           HDFC SL                        Reliance Life                    SBI Life                   Birla Sunlife

 Source: Companies



                                                    AT THE CUSP OF STRONG PROFITS
                                                    We expect SBI Life’s profits to witness a CAGR of ~31% over FY10-20. Low
                                                    operating costs, commission expenses, improving conservation ratio and robust top-
                                                    line growth are the key profit determinants. Going forward, SBI Life’s capital
                                                    requirement is likely to be limited to ~Rs3.5bn (on the lower side of our coverage
                                                    universe) on the back of strong internal accruals supporting growth needs,
                                                    incremental solvency capital requirements and dividend payouts.

                                                    Exhibit 3: Profits trend line
                                                                                                     PAT (Rs bn - LHS)                                              yoy growth (% - RHS)
                                                        23                                                                                                                                                                                             50
                                                                                                                                                       47
                                                                                                                                                                                                                                          20
                                                                                                                                                                                                                             18
                                                                                                                                                                                                   17
                                                                                                                                                                                                                16
                                                        16                                                                                                                            15                                                               35
                                                                                                                                                                         13
                                                                                                                                                            10
                                                                                                                                                                                 25
                                                         9                                                                                      9                   22                                                                                 20
                                                                                                                                    6                                                         16
                                                                                                                                                                                                                                     12
                                                                                                                                                                                                           12                                     11
                                                                                                                          2
                                                         2                                                         1                                                                                                                                   5
                                                                          0                  1

                                                                                                                                                                                                                        -4
                                                        -5                                                                                                                                                                                             -10
                                                                                                               2010E

                                                                                                                         2011E

                                                                                                                                   2012E

                                                                                                                                               2013E

                                                                                                                                                            2014E

                                                                                                                                                                         2015E

                                                                                                                                                                                      2016E

                                                                                                                                                                                                   2017E

                                                                                                                                                                                                                2018E

                                                                                                                                                                                                                             2019E

                                                                                                                                                                                                                                          2020E
                                                             2005

                                                                      2006

                                                                                2007

                                                                                            2008

                                                                                                      2009




                                                    Source: Company, IDFC-SSKI Research

                                                             Conservation ratio to improve – a key monitorable
          We factor in an almost                    SBI Life’s conservation ratio has historically been weaker than peers due to (i) lack of
       stable conservation ratio                    strategic focus on renewal premiums, and (ii) high share of group business. Recently,
         of ~45% over FY10-12E                      the management has adopted an incentive-based commission structure, with first year
                                                    commissions due to agents being determined by renewal behaviour of the
                                                    underwritten business. The management expects to align conservation ratio to
                                                    industry average, but we prefer to be conservative over a short-term horizon and
                                                    factor in an almost stable conservation ratio of ~45% over FY10-12E. However,
                                                    while group business will continue to be a drag on the conservation ratio over the
                                                    medium term, we expect the overall ratio to gradually inch towards the industry
                                                    average and rise to ~50% by FY20.


SEPTEMBER 2009                                                                                                                                                                                                                                         65
                                                                                                                      IDFC - SSKI INDIA


 Exhibit 4: Uptick in conservation ratio on the back of strategic focus…                                                                                            …implies an increasing share of renewal premium
(%)                                                                                                                                                   (%)                        First Year Premium                          Renewal Premium                          Single Premium
                                                         Conservation ratio                                                                           100
100   97
             93                                                                                                                                                                                                                9         8              7    6         6              6    5         5              5
                                                                                                                                                                                                11        10          9

                                                                                                                                                                                29        26
                                                                                                                                                                       34
 75                                                                                                                                                    75                                       25        29         32       34        36                                                          41          41
                                                                                                                                                               56                                                                                  38       39        40          41      41

                                                                                                                                                                                12        15

                    52                                                        49         49      49        49        49      49        49                             23
 50                                                                 47                                                                                 50
                                  44             43         45
                           40            40
                                                                                                                                                              19
                                                                                                                                                                                          59    63        60         59
 25                                                                                                                                                    25                       59                                            58        57         55       54        54          53      53        54          54
                                                                                                                                                                       43

                                                                                                                                                               25
  0                                                                                                                                                     0
                                         2010E

                                                 2011E

                                                            2012E

                                                                    2013E

                                                                              2014E

                                                                                         2015E

                                                                                                 2016E

                                                                                                           2017E

                                                                                                                     2018E

                                                                                                                             2019E

                                                                                                                                       2020E
      2005

             2006

                    2007

                           2008

                                  2009




                                                                                                                                                                                                          2010E

                                                                                                                                                                                                                     2011E

                                                                                                                                                                                                                              2012E

                                                                                                                                                                                                                                        2013E

                                                                                                                                                                                                                                                   2014E

                                                                                                                                                                                                                                                            2015E

                                                                                                                                                                                                                                                                      2016E

                                                                                                                                                                                                                                                                                 2017E

                                                                                                                                                                                                                                                                                          2018E

                                                                                                                                                                                                                                                                                                    2019E

                                                                                                                                                                                                                                                                                                               2020E
                                                                                                                                                              2005

                                                                                                                                                                      2006

                                                                                                                                                                                2007

                                                                                                                                                                                         2008

                                                                                                                                                                                                2009
 Source: Company, IDFC-SSKI Research

                                                                                       Structurally lower expense structure driving profits
        A ready distribution                                                SBI Life historically has a low cost structure relative to peers on the back of its
  network (of the parent) has                                               parent’s vast distribution reach – a trend which is likely to continue. Consequently,
          implied a low cost                                                SBI Life has not been saddled with capital outlays in order to build a distribution
       structure for SBI Life
                                                                            franchise, which is inevitable for a push product like insurance. The expanding
                                                                            premium base as well as increasing share of renewal premium would continue to
                                                                            drive expense ratios southward. While peers would see a significant decline in expense
                                                                            ratios as investments taper, SBI Life’s ratio would stabilize at the current low levels
                                                                            given the limited headroom.

                                                                            Exhibit 5: Expense ratio to decline further as scale is gained
                                                                                      (%)                                                                                    Expense/ Weighted Premium
                                                                            50

                                                                                      41.7
                                                                            40


                                                                            30
                                                                                                         25.6

                                                                            20                                        17.2

                                                                                                                                     10.4 9.6               10.0        9.8                                       8.9          8.9                            9.1             8.9          8.7
                                                                            10                                                                                                         9.5       9.2                                            8.9                                                         8.6



                                                                             0
                                                                                       2005

                                                                                                   2006

                                                                                                                   2007

                                                                                                                               2008

                                                                                                                                               2009

                                                                                                                                                            2010E

                                                                                                                                                                        2011E

                                                                                                                                                                                       2012E

                                                                                                                                                                                                  2013E

                                                                                                                                                                                                                  2014E

                                                                                                                                                                                                                                2015E

                                                                                                                                                                                                                                                2016E

                                                                                                                                                                                                                                                              2017E

                                                                                                                                                                                                                                                                              2018E

                                                                                                                                                                                                                                                                                            2019E

                                                                                                                                                                                                                                                                                                            2020E




                                                                            Source: Company, IDFC-SSKI Research

                                                                                       Healthy growth rates
                                                                            We expect a CAGR of 16% in SBI Life’s gross premium over FY09-20E, leading to
                                                                            an increase of ~70bp in total premium market share over the period to 3.8% by
                                                                            FY20. The lower conservation ratio limits the company’s scale-up, and remains a key
                                                                            monitorable.




SEPTEMBER 2009                                                                                                                                                                                                                                                                                                66
                                                                                                                    IDFC - SSKI INDIA


 Exhibit 6: Healthy growth rates
                  Gross Premium (Rs bn - LHS)                            Gross Premium yoy growth (% - RHS)                                                       First Year Premium (Rs bn - LHS)                                                First Year Premium yoy growth (% - RHS)
440                                                                                                                                  200          280                                                                                                                                                                  280
                                                                                                                                                                                    275.2
                           172.3                                                                                             383
          166.4                                                                                                       341
330                                                                                                                                  150          210                       207.0
                                                                                                                                                                                                                                                                                                              206 210
                                                                                                            304
                                                                                                                                                                                                                                                                                                      183
                                                                                                    270
                                                                                                                                                                                                                                                                                             162
                                                                                             239                                                                                                                                                                                  144
220                                                                                 210                                              100          140                                                                                                                    128                                           140
                                   92.0                                                                                                                                                                                                                        114
                                                                             181
                    78.9                                                                                                                                                                                                                              99
                                                                      153                                                                                                                      94.2                                           86
                                                               127                                                                                                                                                                73
                                                        105                                                                                        70                                                                     62                                                                                           70
110                                                                                                                                  50                                                                          52
                                                 87                                                                                                                                               46
                                          72                                                                                                                     46.5                    33
                               56                                                                                                                                                                        36.9
                                                 28.3 20.8 20.6 20.6 20.4 18.6                                                                                                  17                                       15.0     18.0 18.0 18.0 15.0 15.0
                                                                               16.2 13.9 12.9 12.5 12.3                                                                                                                                                    12.5                              12.5 12.5 12.5
                       29                                                                                                                                   1           5                                                                                                                                             12.5
      6      11                                                                                                                     12.2            0                                                                                                                                                                  0
  0                                                                                                                                  0




                                                                                                                                                                                                                 2010E

                                                                                                                                                                                                                          2011E

                                                                                                                                                                                                                                  2012E

                                                                                                                                                                                                                                              2013E

                                                                                                                                                                                                                                                      2014E

                                                                                                                                                                                                                                                               2015E

                                                                                                                                                                                                                                                                          2016E

                                                                                                                                                                                                                                                                                  2017E

                                                                                                                                                                                                                                                                                             2018E

                                                                                                                                                                                                                                                                                                      2019E

                                                                                                                                                                                                                                                                                                              2020E
                                                                                                                                                          2005

                                                                                                                                                                    2006

                                                                                                                                                                                2007

                                                                                                                                                                                        2008

                                                                                                                                                                                                  2009
                                                 010E

                                                        011E

                                                               012E

                                                                      013E

                                                                             014E

                                                                                    015E

                                                                                             016E

                                                                                                     017E

                                                                                                            018E

                                                                                                                      019E

                                                                                                                             020E
      2005

             2006

                       2007

                               2008

                                          2009




 Source: IRDA, IDFC-SSKI Research

                                                                                      Commission rates may inch up
                                                                             Thus far, SBI Life’s commission ratios have been contained in the context of benefits
                                                                             of access to SBI’s network franchise and a high proportion of group business. Going
                                                                             forward, the commission ratios may rise as the company incentivizes agents to
                                                                             increase renewal business.

                                                                             Exhibit 7: Declining commission costs

                                                                                    (%)                                                Commission/ APE                                                                   Commission/ Gross Premium
                                                                             16
                                                                                                    14.1
                                                                                     12.8
                                                                             12                                              11.6                   11.5                                                                 11.2             11.3        11.4             11.5        11.5              11.5        11.5
                                                                                                              10.9                                                      10.6           10.8           11.0
                                                                                                                                           10.1
    Commission ratios may
        rise as the company
      incentivizes agents to                                                   8
 increase renewal business                                                                                                                 7.2                          7.1
                                                                                                                   6.5       6.7                        6.5                            6.4               6.3              6.3             6.2           6.2            6.2            6.2            6.2              6.2
                                                                               4
                                                                                      4.2           3.9

                                                                               0
                                                                                      2005

                                                                                                    2006

                                                                                                               2007

                                                                                                                             2008

                                                                                                                                           2009

                                                                                                                                                        2010E

                                                                                                                                                                        2011E

                                                                                                                                                                                       2012E

                                                                                                                                                                                                         2013E

                                                                                                                                                                                                                          2014E

                                                                                                                                                                                                                                          2015E

                                                                                                                                                                                                                                                       2016E

                                                                                                                                                                                                                                                                       2017E

                                                                                                                                                                                                                                                                                     2018E

                                                                                                                                                                                                                                                                                                     2019E

                                                                                                                                                                                                                                                                                                                  2020E
                                                                             Source: Company, IDFC-SSKI Research

                                                                                      Group business – the dampener
       By construct, group                                                   On the back of SBI’s vast corporate relationships, SBI Life has a significant group
      business implies low                                                   portfolio – at 33% of gross premium as of Mar ’09. By construct, the group business
 margins, low commissions                                                    implies low margins, low commissions and expenses. Excluding the group business,
             and expenses                                                    SBI Life’s product mix is predominantly unit-linked with the participating portfolio
                                                                             limited at 4% of gross premium.




SEPTEMBER 2009                                                                                                                                                                                                                                                                                                        67
                                                                                                                         IDFC - SSKI INDIA


                                                                             Exhibit 9: Product mix – heavy on group business
                                                                             (%)                                                               Participating                                     Non- Participating                                       Unit-Linked
                                                                             100



                                                                              75
                                                                                                                                           63
                                                                                                                                                                                                                                                          73

                                                                              50



                                                                              25
                                                                                                                                           33
                                                                                                                                                                                                                                                          22

                                                                                 0                                                         4                                                                                                              5
                                                                                                            Premium Mix - % of total - 2009                                                                              Premium Mix - % of total - 2008

                                                                             Source: Company

                                                                                      AUM accretion assumed at 28% CAGR
                                                                             We expect SBI Life’s AUM to increase at a CAGR of 28% over FY09-20 to ~Rs2.3tn
                                                                             by FY20, with linked AUM indicated to be ~64% of the total. Our projections factor
                                                                             in annual investment returns of 6-7% on the linked book over the period.

  Exhibit 9: Healthy growth in AUM ahead
                        Linked AUM (Rs bn - LHS)                                        yoy growth (% - RHS)                               220                                     Non-Linked AUM (Rs bn - LHS)                                                yoy growth (% - RHS)
  1,600                                                                                                                                                 1,000                                                                                                                                                      200



  1,200                                                                                                                                    165           750                                                                                                                                                       150



   800                                                                                                                                     110           500                                                                                                                                                       100



   400                                                                                                                                     55            250                                                                                                                                                       50



     0                                                                                                                                     -               0                                                                                                                                                       0
                                                                                                                                                                                                            2010E

                                                                                                                                                                                                                      2011E

                                                                                                                                                                                                                              2012E

                                                                                                                                                                                                                                          2013E

                                                                                                                                                                                                                                                  2014E

                                                                                                                                                                                                                                                           2015E

                                                                                                                                                                                                                                                                       2016E

                                                                                                                                                                                                                                                                               2017E

                                                                                                                                                                                                                                                                                        2018E

                                                                                                                                                                                                                                                                                                  2019E

                                                                                                                                                                                                                                                                                                          2020E
                                                                                                                                                                   2005

                                                                                                                                                                          2006

                                                                                                                                                                                  2007

                                                                                                                                                                                            2008

                                                                                                                                                                                                   2009
                                             2010E

                                                     2011E

                                                             2012E

                                                                     2013E

                                                                              2014E

                                                                                      2015E

                                                                                                2016E

                                                                                                        2017E

                                                                                                                2018E

                                                                                                                           2019E

                                                                                                                                   2020E
          2005

                 2006

                        2007

                               2008

                                      2009




 Source: Company, IDFC-SSKI Research


                                                                             Exhibit 10: Linked AUM to continue dominating the mix
                                                                             (%)
                                                                                                                                   Linked AUM (% of total)                                                Non-Linked AUM (% of total)
                                                                             100


                                                                                                                                                                          40             39          39             38            38              38               38            37             37            36
                                                                                                                                     35          38         41
                                                                              75
                                                                                                                        51

                                                                                                        68
                                                                              50          70



                                                                                                                                                                          60             61          61             62            62              62               62            63             63            64
                                                                                                                                     50          47         59
                                                                              25
                                                                                                                        37

                                                                                                        12
                                                                                  0
                                                                                         2005

                                                                                                        2006

                                                                                                                        2007

                                                                                                                                    2008

                                                                                                                                                 2009

                                                                                                                                                           2010E

                                                                                                                                                                          2011E

                                                                                                                                                                                         2012E

                                                                                                                                                                                                    2013E

                                                                                                                                                                                                                    2014E

                                                                                                                                                                                                                                  2015E

                                                                                                                                                                                                                                                  2016E

                                                                                                                                                                                                                                                                   2017E

                                                                                                                                                                                                                                                                                2018E

                                                                                                                                                                                                                                                                                                2019E

                                                                                                                                                                                                                                                                                                              2020E




                                                                             Source: Company, IDFC-SSKI Research


SEPTEMBER 2009                                                                                                                                                                                                                                                                                                     68
                                                     IDFC - SSKI INDIA


                                   VALUATIONS & VIEW
                                   We have valued SBI Life based on both DCF of long-term profits and appraisal
                                   value. We prefer the DCF approach due to limited NBAP disclosures by the
                                   company, and given the fact that the company is already reporting accounting profits.

                                        DCF valuation
  DCF implies a valuation of
                                   SBI Life’s profits are expected to post a CAGR of ~31% over FY09-20, with
    Rs159bn for SBI Life, or       profitability subdued by the group business. Consequently, return ratios are relatively
   Rs168 per share of SBI…         lower than those of peers (at an average of 22%), despite the fact that the company has
                                   been the first to achieve break-even. DCF of our projections for SBI Life’s long-term
                                   profits implies a valuation of ~Rs159bn for SBI Life. After applying a 10% holding
                                   company discount, SBI’s 74% stake stands valued at ~Rs106bn or Rs168 per share.

 Exhibit 11: DCF valuation
 (Rs m)                      FY09 FY10E FY11E FY12E FY13E            FY14E    FY15E    FY16E    FY17E    FY18E    FY19E FY20E
Profit after tax               (260) 1,307 2,408 5,788 8,521         10,404   13,018   15,062   16,856   16,190   18,117 20,141
Total PV of net profit (A)           62,153 60,988 58,842 54,244     48,211   41,647   34,325   26,776   19,245   12,799 6,370
PV of terminal value (B)                    100,308
Total value (Rs m) - A+B                    159,150
SBI's stake value (74%)                     105,994
SBI's - outstanding shares (m)                  632
Value per share of parent (Rs)                  168
CMP of parent (Rs)                          1762.45
Price Date                                 5th Sept '09
% of value contributed by SBI Life             10%
Discount rate                                 12.2%
Source: Company, IDFC-SSKI Research

                                        Appraisal valuation
 …while based on appraisal         We expect SBI Life’s NBAP to show 16% CAGR over FY09-11 to reach ~Rs9bn by
   method, value works out         FY11. The company’s NBAP margin has conservatively been built stable at 14.5%
  to Rs180 per share of SBI        (lower than peers) to factor in the lower profitability on group business. Given the
                                   limited disclosures, we have assigned a 13x NBAP multiple. Coupled with SBI Life’s
                                   Embedded Value, we arrive at a value of Rs181 per share of SBI, after providing for a
                                   10% holding company discount.
                                   Exhibit 12: Appraisal valuation
                                   (Rs m)                                          FY08          FY09        FY10E       FY11E
                                   APE                                            34,812        46,471       53,400      62,940
                                   yoy growth(%)                                    93.2          33.5         14.9        17.9
                                   NBAP Margins (%)                                 16.5          14.5         14.5        14.5
                                   Net shareholder funds                           4,610        10,068        9,784      11,091
                                   Embedded Value: {A}                            15,617        29,244       39,196      53,453
                                   Structural Value: {B}
                                   NBAP                                                                                   9,126
                                   Multiple (x)                                                                              13
                                   Value                                                                                118,642
                                   Appraisal Value: {A}+{B}                                                             172,095
                                   Appraisal Value US$ m                                                                  3,585
                                   Value of SBI Stake (74%)                                                             127,350
                                   Less: 10% Holding company discount                                                    12,735
                                   Value of SBI Stake (74%)                                                             114,615
                                   No. of shares (m)                                                                      634.9
                                   Value per share (Rs)                                                                     181
                                   Source: Company, IDFC - SSKI Research


SEPTEMBER 2009                                                                                                               69
                                                                     IDFC - SSKI INDIA


Exhibit 13: Profit & Loss account
Year to 31 March (Rs m)                FY09     FY10E     FY11E    FY12E    FY13E     FY14E     FY15E     FY16E     FY17E     FY18E      FY19E     FY20E
Gross Premium                         72,121    87,097 105,063 126,738 152,539       180,846   210,114   239,270   270,051   303,728    341,115   382,897
yoy growth (%)                          28.3      20.8      20.6     20.6     20.4      18.6      16.2      13.9      12.9      12.5       12.3      12.2
FYP Premium                           45,649    52,496    61,946   73,096   86,253    99,191   114,070   128,328   144,369   162,416    182,718   205,557
yoy growth (%)                          36.9      15.0      18.0     18.0     18.0      15.0      15.0      12.5      12.5      12.5       12.5      12.5
Renewal Premium                       18,255    25,561    33,175   42,804   54,473    68,956    82,392    96,266   110,051   124,666    140,670   158,460
yoy growth (%)                         120.1      40.0      29.8     29.0     27.3      26.6      19.5      16.8      14.3      13.3       12.8      12.6
Single Premium                         8,218     9,039     9,943   10,838   11,813    12,700    13,652    14,676    15,630    16,646     17,728    18,880
yoy growth (%)                         (43.6)     10.0      10.0      9.0      9.0       7.5       7.5       7.5       6.5       6.5        6.5       6.5
APE                                   46,471    53,400    62,940   74,180   87,434   100,461   115,435   129,796   145,932   164,080    184,490   207,445
yoy growth (%)                          33.5      14.9      17.9     17.9     17.9      14.9      14.9      12.4      12.4      12.4       12.4      12.4
Investment income                    (17,610)    9,129    13,737   19,355   26,183    34,406    44,062    55,169    67,794    81,993     97,947   115,921
yoy growth (%)                        (511.4)   (151.8)     50.5     40.9     35.3      31.4      28.1      25.2      22.9      20.9       19.5      18.4
Commission                             4,679     6,145     6,694    8,022    9,602    11,270    13,066    14,826    16,735    18,850     21,211    23,859
Operating expenses                     6,205     7,924     9,467   11,090   13,005    15,092    17,518    20,152    23,194    25,672     28,399    31,423
Benefits                               3,968     8,671    12,529   17,455   22,633    29,774    39,438    48,899    59,635    75,245     89,753   106,139
Change in valuation of liabilities    40,181    72,220    87,533 103,037 123,916     147,465   169,572   193,719   219,552   248,192    279,930   315,453
yoy growth (%)                         (16.9)     79.7      21.2     17.7     20.3      19.0      15.0      14.2      13.3      13.0       12.8      12.7
Return on Solvency Capital               608       447      528      648      798       964      1,140     1,327     1,534     1,755      2,008     2,292
Profit/Loss Before Tax                   (10)    1,523     2,805    6,743    9,927    12,120    15,166    17,547    19,637    18,860     21,105    23,464
Profit/Loss After Tax                    (10)    1,307     2,408    5,788    8,521    10,404    13,018    15,062    16,856    16,190     18,117    20,141
yoy growth (%)                                              84.2    140.4     47.2      22.1      25.1      15.7      11.9      (4.0)      11.9      11.2




Exhibit 14: Balance sheet
Year to 31 March (Rs mn)               FY09     FY10E     FY11E    FY12E    FY13E     FY14E     FY15E     FY16E     FY17E     FY18E      FY19E     FY20E
AUM                                  149,644 200,523 290,633 400,077 533,442         692,385   876,297 1,086,533 1,324,386 1,589,798 1,888,821 2,225,391
yoy growth (%)                          42.6      34.0      44.9     37.7     33.3      29.8      26.6      24.0      21.9      20.0       18.8      17.8
Linked AUM                            70,633 117,357 174,217 243,145 325,894         426,218   542,868   676,802   827,320 1,000,342 1,196,055 1,417,174
yoy growth (%)                          33.6      66.2      48.5     39.6     34.0      30.8      27.4      24.7      22.2      20.9       19.6      18.5
Non-Linked AUM                        56,404    83,166 116,416 156,932 207,548       266,167   333,428   409,731   497,066   589,455    692,767   808,218
yoy growth (%)                          52.0      47.4      40.0     34.8     32.3      28.2      25.3      22.9      21.3      18.6       17.5      16.7
Networth                               9,784    11,091    13,499   19,287   26,319    34,541    44,526    56,079    69,008    81,426     95,321   110,770




Exhibit 15: Key ratios (%)
Year to 31 March                       FY09     FY10E     FY11E    FY12E    FY13E     FY14E     FY15E     FY16E     FY17E     FY18E      FY19E     FY20E
Conservation ratio                      43.8      40.0      42.5     45.0     47.0      49.0      49.0      49.0      49.0      49.0       49.0      49.0
Commission/Total Premium                 7.2       6.5       7.1      6.4      6.3       6.3       6.2       6.2       6.2       6.2        6.2       6.2
Opex/ Weighted premium
(including Renewal premium)              9.6      10.0       9.8      9.5      9.2       8.9       8.9       8.9       9.1       8.9        8.7       8.6
Benefits/ Gross Premium                   5.5     10.0      11.9     13.8     14.8      16.5      18.8      20.4      22.1      24.8       26.3      27.7
Surrender Ratio                           8.4      9.0       8.6      8.8      8.5       8.2       8.7       8.7       8.7       8.7        8.7       8.7
Return on avg Linked AUM               (35.0)      6.9       6.6      6.5      6.5       6.4       6.4       6.3       6.3       6.3        6.3       6.3
Return on avg Non-Linked AUM             6.6       5.3       5.3      5.3      5.2       5.2       5.2       5.2       5.2       5.1        5.1       5.1
Return on avg shareholders fund          5.2       4.7       5.4      5.5      5.5       5.5       5.4       5.4       5.4       5.3        5.3       5.3
Return on Networth (%)                                                                            29.8      27.4      24.9      20.3       19.4      18.2




SEPTEMBER 2009                                                                                                                                       70
                  IDFC - SSKI INDIA




                 THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK




SEPTEMBER 2009                                                 71
                                                                         IDFC - SSKI INDIA
 Analyst                               Sector/Industry/Coverage                                  E-mail                                   Tel. +91-22-6638 3300
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 Shweta Dewan                          Mid Caps, Education, FMCG                                 shweta.dewan@idfcsski.com                91-22-6638 3290
 Nikhil Salvi                          Cement, Construction                                      nikhil.salvi@idfcsski.com                91-22-6638 3239
 Rajeev Desai                          Real Estate                                               rajeev@idfcsski.com                      91-22-6638 3231
 Chinmaya Garg                         Financials                                                chinmaya@idfcsski.com                    91-22-6638 3325
 Aniket Mhatre                         Automobiles, Auto ancillaries                             aniket@idfcsski.com                      91-22-6638 3311
 Probal Sen                            Oil & Gas                                                 probal@idfcsski.com                      91-22-6638 3238
 Rupesh Sonawale                       Database Analyst                                          rupesh@idfcsski.com                      91-22-6638 3382
 Dharmesh Bhatt                        Technical Analyst                                         dharmesh@idfcsski.com                    91-22-6638 3392
 Equity Sales/Dealing                  Designation                                               E-mail                                   Tel. +91-22-6638 3300
 Naishadh Paleja                       MD, CEO                                                   naishadh@idfcsski.com                    91-22-6638 3211
 Paresh Shah                           MD, Dealing                                               paresh@idfcsski.com                      91-22-6638 3341
 Vishal Purohit                        MD, Sales                                                 vishal@idfcsski.com                      91-22-6638 3212
 Nikhil Gholani                        MD, Sales                                                 nikhil@idfcsski.com                      91-22-6638 3363
 Sanjay Panicker                       Director, Sales                                           sanjay@idfcsski.com                      91-22-6638 3368
 V Navin Roy                           Director, Sales                                           navin@idfcsski.com                       91-22-6638 3370
 Suchit Sehgal                         AVP, Sales                                                suchit@idfcsski.com                      91-22-6638 3247
 Pawan Sharma                          MD, Derivatives                                           pawan.sharma@idfcsski.com                91-22-6638 3213
 Dipesh Shah                           Director, Derivatives                                     dipeshshah@idfcsski.com                  91-22-6638 3245
 Jignesh Shah                          AVP, Derivatives                                          jignesh@idfcsski.com                     91 22 6638 3321
 Sunil Pandit                          Director, Sales trading                                   suniil@idfcsski.com                      91-22-6638 3299
 Mukesh Chaturvedi                     SVP, Sales trading                                        mukesh@idfcsski.com                      91-22-6638 3298
 Viren Sompura                         VP, Sales trading                                         viren@idfcsski.com                       91-22-6638 3277
 Rajashekhar Hiremath                  VP, Sales trading                                         rajashekhar@idfcsski.com                 91-22-6638 3243

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SEPTEMBER 2009                                                                                                                                                            72
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