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FY19 has been a high performance year
HDFC Life Insurance (HDLI) FY19 annual report reiterates its strategy of continued stress on product innovation and maintaining focus on diversified distribution and product mix. The key achievements in FY19 for HDLI include strong execution to overcome the challenges of open architecture in bancassurance, increasing protection/annuity to cumulative 12% of individual APE and growing credit protect business by 36% despite weak NBFC markets. Maintain BUY with a target price of Rs540 (4.2x FY21E Price/Embedded Value).
* Product innovations leading to market disruption is a strong objective. As per HDLI chairman, the initiative by the IRDAI (Insurance Regulatory and Development Authority of India) to develop a “regulatory sandbox” to keep pace with the fast evolving financial technology (fintech) landscape will be leveraged by the company to launch more innovative solutions and disrupt the market. HDLI has made prudent investments to remain ahead of the curve in terms of digital capabilities.
* New products launched in FY19 include
(i) HDFC Life Classic One: This offers joint life cover on second-death basis, thereby, reducing the cost of insurance for higher investment return
(ii) Click 2 Wealth: This is a ULIP that incentivises every premium during the first five years and returns mortality charges at maturity.
(iii) HDFC Life Sanchay Plus: This is a non-par savings product providing guaranteed income for a range of durations such as from 10 years to 30 years or even up to the age of 99 years with best in class returns. At the end of FY19, HDFC Life had 38 individual (12 ULIP Life, seven par Life, four non-par Life and eight pension/annuity) and 11 group products, with eight riders.
* Strong performance of credit protect despite macro headwinds and high base laudable. Credit protect business grew 36% in FY19 (63% in FY18) and it remained diversified across partners, with HDFC Group contributing 28% and no single partnership (ex-HDFC group) contributing more than 10%. Within credit protect, loan segments remain diversified between housing and LAP (37%), microfinance (29%) and personal, vehicle and tractor (34%).
* Significant hurdles crossed in FY18-FY19; tailwinds to accrue ahead: There were three clear achievements in FY19 that will accrue significant benefits in times ahead. (1) Internalising the hurdle of open architecture (2) going beyond protection products in the online channel and (3) establishment of annuity as a core segment.
* Maintain BUY. We ascribe 35x multiple to FY21E new business estimate of Rs24bn. Adding our embedded value estimate of Rs257bn for FY21E, we arrive at an appraisal value of Rs1,089bn, leading to a target price of Rs540. At our target price, HDLI will trade at 4.2x price to EV. The rich valuations reflect strong growth and margin outlook. Lower sensitivity to interest rates, largely due to balanced product portfolio, also adds to the investment rationale and higher multiple.
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