Add HDFC Life Insurance Ltd For Target Rs.680 - Yes Securities
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HDFL achieving margin neutrality ahead of time
Result Highlights
* VNB margin: Calculated post-merger VNB margin was at 26.8% (non- comparable) as against pre-merger VNB margin of 28.3% in 2QFY23
* VNB: The post-merger VNB was Rs 8,750 mn (non-comparable) as against pre- merger VNB of Rs 6,940mn in 3QFY22 and Rs 7,480mn in 2QFY23
* APE: The post-merger APE was Rs 32,600 mn (non-comparable) as against pre- merger APE of Rs 25,970mn in 3QFY22 and Rs 26,450mn in 2QFY23
* Expense control: Post-merger Expense ratio increased 33bps QoQ to 19.6% as opex ratio increased 72bps QoQ (numbers comparable sequentially)
* Persistency: Post-merger, 37th month ratio fell-610bps QoQ to 67.9% whereas 61st month ratio declined -50bps QoQ (numbers comparable sequentially)
Our view – HDFL achieving margin neutrality ahead of time
The merged entity is achieving its stated goal of margin neutrality ahead of time: Management stated that, for full year FY23, margin neutrality is expected to be maintained, implying FY22 un-merged entity margin would be sustained. It may be noted that there has been an improvement in the pre-merger margin on QoQ basis.
The key areas of growth for HDFL have been credit life and annuities, while retail protection has grown on sequential basis: HDFL has leadership in the credit life segment, displaying a growth of 52% YoY. The annuity business grew 68% YoY in APE terms. The sequential growth in retail protection was 13% and the share of ROP in retail protection is about 20%. Share of guaranteed product is about 15% in policyholder AUM. The company is comfortable with this level as it is using hedging tools to manage the interest rate risk arising from this product.
Market share on HDFC Bank platform remains a key monitorable after merger announcement: The company is working from the senior management down and expects an improvement in its market share on the HDFC Bank platform. About 45-47% of individual business comes from HDFC Bank.
We maintain ‘ADD’ rating on HDFL with a revised price target of Rs 680: We value HDFL at 3.6x FY24 P/EV for an FY23E/24E/25E RoEV profile of 16.8/17.7%/17.9%.
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