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APE growth strong; persistency trends improving

VNB margins improve sequentially

* HDFC Life (HDFCLIFE) reported improvement in new business APE (led by the Non-PAR and PAR businesses), while the trend in Retail Protection remained muted. VNB margins improved to 27%, aided by a rise in Non-PAR as well as cost control. Thus, absolute VNB grew 52% YoY in 4QFY21. On the persistency front, better trends were witnessed in the PAR/Protection business. As a result, 13th/25th month individual premium persistency improved ~200bp/500bp YoY.

* Overall, we expect HDFCLIFE to reflect 22% VNB growth over FY21–23E. We estimate margins to remain steady at ~26.4%, and operating RoEV would sustain at a healthy ~18%. However, we remain watchful of the lockdown impact on various key states due to resurgence in COVID-19 cases. Maintain Neutral.

Trends in traditional biz stay robust; VNB margin improves further

* In 4QFY21, HDFCLIFE posted net premium growth of 23% YoY, led by new business premium growth of 29% YoY. Moreover, renewal premiums grew at 15% YoY. Persistency trends in the 13th/25th month for individual premiums improved ~200bp/500bp YoY, led by an improvement in the PAR and Protection segments. Overall, shareholders’ PAT growth was muted at 2% YoY to ~INR3.2b (below estimates) in 4QFY21.

* Individual/Group APE grew ~40%/~17% YoY in 4Q, leading to total new business APE growth of 36% YoY. Total APE growth was largely led by the PAR (39% YoY) and Non-PAR segments (78% YoY). Also, ULIP growth recovered to 19% YoY (v/s 10% YoY decline in 9MFY21). On the other hand, Protection growth remained muted (v/s 16% decline over FY21). Thus, the share of Protection in the total APE fell to ~13% in FY21 (v/s 17% in FY20).

* VNB margins improved to 27% in 4QFY21 (v/s 24.3% in 4QFY20 and 26.4% in 3QFY21) on the back of improvement in Non-PAR/Annuity and cost efficiency. Absolute VNB grew 52% YoY in 4QFY21and 14% YoY over FY21.

* The share of the banca channel in individual APE increased to 61% (~600bp YoY), while that of the agency/direct channel declined 100bp/300bp to 13%/19% in FY21.

* Total operating expenses (incl. commissions) grew 25% YoY and the total expense ratio improved to 16.3% (190bp QoQ improvement).

Highlights from management commentary

* Robust upward trends are seen in Individual Protection queries in Apr’21 on account of the second COVID wave. Also, it is seeing encouraging trends in the Credit Life business.

* Post the recent lockdown announcements in various states, slowdown is seen in new business premiums in April’21.  HDFCLIFE settled COVID claims with gross payouts of INR2.3b.

* Strong growth was seen in the banca channel over FY21, with HDFC Bank performing very well. Growth in IDFC First / Bandhan was also strong.

Valuation and view

HDFCLIFE remains focused on maintaining a balanced product mix across the business, with an emphasis on product innovation and superior customer service. However, in the near term, the Non-PAR and PAR segments are likely to see healthy growth, while ULIP also continues to recover.

However, we remain watchful of the impact of lockdown announced in various key states due to resurgence in COVID-19 cases. Overall, we estimate VNB margins to reflect stable trends and estimate operating RoEV to remain healthy at 18% over FY23E. The stock currently trades at rich valuations of 3.9x FY23EV (25x FY23 EVOP). We value the stock at INR730, corresponding to 4x FY23E EV. Maintain Neutral.

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