Add HDFC Life Insurance Ltd For Target Rs.640 - Yes Securities
Negative economic variance erodes EV on sequential basis
Result Highlights
* VNB margin: Calculated VNB margin de-grew by -257bps QoQ but grew 65bps YoY to 26.8% ? VNB growth: VNB de-growth/growth was -43%/25% QoQ/YoY, where the YoY growth was aided by strong growth in APE and improvement in VNB margin
* APE growth: New business APE de-growth/growth was -37.6%/22% QoQ/YoY, driven YoY by Par, Non-par saving, Annuity and Group business
* Expense control: Expense ratio rose 199bps/237bps QoQ/YoY to 19% as opex ratio rose 239bps/243bps QoQ/YoY
* Persistency: 37th month ratio rose 330 bps/560bps QoQ/YoY to 70.3% whereas 61st month ratio declined/rose -210 bps/60 bps QoQ/YoY to 52.3%
Our view – Negative economic variance erodes EV on sequential basis
Embedded value declined on sequential basis driven by negative economic variances: Embedded value declined from Rs 300.5bn as of FY22 to Rs 297.1bn as of June 2022. Economic variances caused a Rs 12bn hit to EV, of which about Rs 4bn was due to equities and the remaining was due to interest rates. The sensitivity table talks about a parallel shift of the yield curve, which is not what transpired. At the shorter end of the yield curve, rates rose ~130 bps QoQ, which was more than that at the longer end, impacting EV materially.
The decline in VNB margin was material on a sequential basis primarily on account of expense evolution:
Faster expense evolution was on account of various company activities rising on sequential basis. There is seasonality involved here since the first quarter usually brings in about 15% of the year’s business whereas the expenses are upfronted. The company does not normalize expenses throughout the year.
We maintain ‘ADD’ rating on HDFL with a revised price target of Rs 640: We value HDFL at 3.4x FY24 P/EV for an FY23E/24E/25E RoEV profile of 16.2/16.9%/17.0%.
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