Yesterday’s Market Performance

Nifty: 18266.60 I 152.20 (0.83%)
FII Sell Net: INR 1,843.09 Cr
DAX: 15,522.92 I 7.09 (0.05%)

Sensex: 61259.96 I 456.09 (0.74%)
DII Sell Net: INR -1,680.73 Cr
FTSE: 7,223.10 I 5.57 (0.08%)

Howdy Toasters!

In today’s issue of the Morning Toast, we discuss:

• Private Life Insurance players have all the structural drivers in place for long-haul growth.
• Jubilant FoodWorks Q2 Results: Net profit rises 58% YoY
• Past Stock Coverage
• An education concept to keep you chugging along

Private Life Insurance players have all the structural drivers in place for long-haul growth; What’s up and what do you need to know? 🧐

We’ll do a deep dive on the Insurance Sector in this piece, delving on which players are most likely to benefit.

Slowing population growth, and increasing Mortality Protection Gap (MPG) make for a strong demand environment

• Significant ageing of the population (population growth decline coupled with improved life expectancy) are likely to push India’s population to peak out by 2030 in terms of the working age (20-64 years) population as a % of total population, thereby increasing the need for retirement products

• In growing economies, which typically migrate from tradionally being low income generating to middle income generating (think: India), ability to access good quality insurance is limited (owing heavily to the pace of growth), leading to increased Mortality Protection Gap

• MPG is defined as the gap between available financial resources and assets required to replace income in case of death of primary earning member to pay-back household debt

• India’s MPG presently stands at USD 16.5 TN, and is expected to compound at ~7% over 2020-30E; similarly, retirement fund gap (pensions + more) was pegged at USD 3.5 Tn in 2015 and is expected to growth 10% CAGR to USD 85 Tn in 2050

Massive! So there’s an opportunity at hand. Tell me more? 🤨

• The two decades of Indian Life Insurance after liberalisation (categorised as the time regulators allowed private players into the space) can be broadly categorised as

  • FY01-09 – rapid market share gains from LIC, strong growth in ULIPs (more on this below) albeit on low base, buoyant financial markets

  • FY10-14 – regulatory changes in ULIPs forced insurers to re-invent their most successful product

  • FY14-present- insurers got regulatory approval on re-christened ULIP, developed strong distribution & fintech capabilities, and continued strong market share gains through Band + Legacy

• In the recent past, the Top 8 Private life-insurers have consistently gained market share, through a strong Bancassurance network development (Insurance nomenclature that encapsulates distribution through parent Bank & other banking tie-ups)

Interesting! What’s the on-ground report? Which insurance players are best placed to benefit? (Yess my man) 🧐

Embedded Value (EV) growth

• EV is the present value of future profits, including adjusted net asset value and is used to value insurance companies

• EV Return for the last 4-5 years across the four listed leading players (think: SBI Life, IPRU, HDFC Life & Max Life) has been in the range of 19-22% CAGR

• In comparison to banking, that has a variety of returns across players, in Insurance the return parameters for the leaders tends to remain in a narrow band

VNB Margin or Value of New Business Margins

• VNB margins are an outcome of Product & Distribution Mix and cost efficiencies
• Products include Retail Protection, Credit Life and Non-Par Savings have high profitability (HDFC Life & Max have heavy portfolio) vs ULIPs or par savings (SBI Life & IPRU), which are on the lower side of margins
• Like EV, margins for the four leaders have converged in recent years, with similar product profile & distribution capabilities leading a 23-25% margin range continuing

So, how do you differentiate then? (Good q)  😎

• Cost + Product Mix, coupled with Bancassurance + other distribution partners (including costs associated) and brand perception drive valuations mis-match amongst the four leaders

• SBI Life is a cost leader, primarily because of its extremely superior Bancassurance network (SBI branch network is miles ahead in comparison to HDFC)

• Likewise, IPRU, with a heavy focus towards ULIP (Unit Linked Insurance plans, comprises of insurance & investments) have limited commission costs associated
• MAX & HDFC Life, with elevated cost structures, down to limited ULIPs and sub-par (in comparison) distribution network are forced to pay higher commissions & distribution fees towards customer acquisition

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Jubilant Foodworks (Dominos & More) dropped their Q2 numbers: What do we know & what can we infer for Zomato’s performance? 🤯

• Topline grew 37% to INR 11 bn (in line with Bloomberg estimates), with 2 yr Sales CAGR at 6%; Same Store Sales Growth came in at 26% (new stores not counted)

• Delivery revenues grew 37% vs pre-COVID (2019) levels, however declined sequentially; Takeaway channel continued to grow, touching 72% grow vs Q2FY20 (interesting, Zomato shareholders take note)

• The company added 55 new Dominos stores & 5 new stores across other franchisees (Dunkin, Hong’s Kitchen, Ekdum); 60 new stores is the highest ever new store count in a quarter for the company

• EBITDA / PAT grew 33% / 58%, which were 2% / 6% below Bloomberg Estimates on account of steep increase in other overheads; employee costs also were up 15% (cost of increased operations?

Interesting! Tell me more? Business dynamics, Valuations et al.? (Yess my man) 😉

• Online order contribution to overall delivery continued to remained strong at 97.8% for the quarter (98.9% in Q1FY21), with mobile ordering sales contributing ~97.2%
• The company recorded 7.2 Mn downloads of the mobile app, taking cumulative downloads (during the quarter) to 71.3 Mn
• Sales recovery trends, on a sequential basis veered towards Takeaway, with delivery % recovery cooling (from ~150% in Q1FY22 to 137% in Q2FY22); similarly dine-in as a % also increased in the overall scheme of things
• Takeaway + Dine-In proportion increasing as % overall sales recovery can be precursor for Zomato’s quarterly results (although they will only answer shareholder questions through a blog, good luck with that :PP)
• And valuations? 
• The stocks expensive (you don’t say :P), and currently trades at 77x FY23E & 64x FY24E earnings
• The company has a strong return profile, healthy gross margins & consistent growth but at what cost?

We covered the stock at the time of Q1 performance. Check it out here. 

What else caught our eye? 👀

Reliance x Ritu Kumar 

• Reliance Retail Ventures Ltd. (RRVL) acquired a majority stake (>52%) in Ritu Kumar’s Ritika Pvt Ltd
• This comes against the backdrop of Reliance acquiring a stake in other premium labels like Manish Malhotra and Sabyasachi
• The company aims to leverage the sophistication, style and originality of the Indian design ecosystem

Ola Cabs having some internal issues 

• ANI Technologies Ltd (Parent company to Ola Cabs) has restructured  the roles of its key leaders including the CEO and co-founder
• Both Ola’s CFO and COO have resigned in the past few months
• Meanwhile Ola is looking to go public for a valuation between $1.5 and $2 billion next year

Gita Gopinath no longer in the picture? 

• The International Monetary Fund (IMF) chief economist Gita Gopinath will be leaving from January next year
• She will return to her earlier job of Harvard professor of Economics while the search for her successor has begun
• Her various fields of contribution included the vaccination and pandemic recovery strategies as well as fighting climate change

Past Stock Coverage

Thursday, 21st October: Asian Paints, Biocon, Container Corp, ICICI Lombard, IDBI Bank, Indian Hotels, JSW Steel, LIC Housing Finance, MPhasis, TVS Motor,

Friday, 22nd October: Crompton Gr Con, Federal Bank, Gland Pharma, HDFC Standard Life, Hindustan Zinc, INOX Leisure, Polycab India, PVR, Reliance Industries, Supreme Industries, Tata Consumer Products, Yes Bank

Check out our website “FinLearn Academy” to know more details on various trading & investing topics.