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Result Highlights

* VNB margin: Calculated post-merger VNB margin de-grew by -307bps QoQ (comparable) but grew 111bps YoY (comparable) to 26.2%

* VNB: The post-merger VNB de-growth was -59.6% QoQ (comparable), aided by de-growth in APE and deterioration in VNB margin

* APE: The post-merger APE was Rs 23,280 mn down by -54.9 QoQ (comparable) but up by 12.8% YoY (comparable)

* Expense control: Post-merger Expense ratio decreased -82bps QoQ to 19.9% as opex ratio decreased -86bps QoQ but comm. ratio increased by 4bps QoQ

* Persistency: Post-merger, 37th month ratio fell -170bpsQoQto 69.8% and 61st month ratio rose 20bps QoQ to 52.7% (comparable)

Our view – Both FY24 growth and margin guidance soft

HDFL is heading towards single-digit APE growth in FY24 due to high base in FY23 but is confident of long-term underlying growth of 17-18%: The prior guidance is ~15% growth in FY24, adjusting for the up-fronting of business that happened in 4Q, which implies about ~7% growth on reported basis. However, management stated that the company is on track to getting back to a 17-18% growth path i.e. doubling every 4 years.

While VNB margin contracted materially on sequential basis, management sounded confident of retaining FY23 margin in FY24: Management stated that, going forward, VNB growth is to be driven by APE growth. VNB margin in FY25 would improve over FY24. Management explained that margin in 1QFY24 would have remained neutral but for the tax rule change, which led to an upfronting of large-ticket business in the March quarter, most of it falling in the high-margin guaranteed product bucket.

Management alluded to early signs of counter share rise on the HDFC Bank platform, stopping short of expansive claims on the same: The counter share was 55% earlier and there has been a 50-100 bps improvement in counter share, depending on which zone one is referring to. The company is not articulating reaching the 70% counter share mark on the HDFC Bank platform, as such, and that is upto the bank.

We maintain a less-than-bullish ‘ADD’ rating on HDFL with a revised price target of Rs 720: We value HDFL at 3.1x FY25 P/EV for an FY24E/25E/26E RoEV profile of 18.9%/19.3%/19.7%.

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