IGI Logo

Strong FY21 validates execution capability

HDFC Life (HDLI) has pulled off a strong FY21 with 14%/13% VNB/APE growth on FY20 APE base of >Rs70bn. This was driven by banca (29% individual APE growth in FY21) and par (107% individual APE growth in FY21). With available growth levers for volumes as well as margins, we remain optimistic on the company’s ability to maintain more than 15% APE growth trajectory with improving margins. Upgrade to BUY (from Add).

* Multiple growth levers remain in place: 1) recovery of credit protect NBP (26% YoY growth in Q4FY21 though it declined 19% in FY21) (this was always an available lever and will remain so in FY22E notwithstanding possible disruption due to covid second wave; this is also a margin lever); 2) higher growth in agency/direct business, up 8% / 0.1% in FY21 (HDLI also forged new partnerships in FY21 with Yes Bank, SBI Capital Markets, State Bank of Mauritius, Doha Bank, Edelweiss); 3) better enablement of medical underwriting (HDLI followed a calibrated growth strategy in retail protection due to supply-side constraints and headwinds to medical testing, especially beyond tier-1 locations).

* Banca / PAR outperformed in FY21 (whereas direct / agency / non-par outperformed in FY19 and FY20). ULIP APE improved from Rs2.9bn in Q1FY21 to Rs3.6bn in Q2FY21, Rs4.2bn in Q3FY21 and Rs6.4bn in Q4FY21. Credit protect (NBP basis) also witnessed steady recovery from Rs2.4bn in Q1FY21 to Rs7bn in Q2FY21, Rs10bn in Q3FY21 and Rs14.8bn in Q4FY21. Total protection remained flat in Q4FY21 as retail protection decline (6.5% YoY) got offset with growth in group protection (5.9% YoY). Retail / group protection APE was Rs1.2bn / Rs0.4bn in Q1FY21, Rs.1.44bn / Rs1.1bn in Q2FY21, Rs0.7bn / Rs2.4bn in Q3FY21, and Rs1.7bn / Rs1.8bn in Q4FY21. Basis individual APE, non-par savings grew 78% / (-)12% in Q4/FY21 and par savings grew 32% / 107% in Q4FY21 / FY21, while annuity was up 76% / 45% in Q4 / FY21.

* Operating performance has improved with better persistency in four out of five cohorts (FY21 13m / 25m / 37m / 49m persistency improved by 160bps / 400bps / 90bps / 240bps) while the FY21 cost ratio [(commission + operating expenses) / total premium (including renewals)] stood at 16.3%, which is lower than the 17.6% in FY20. Negative mortality variance on account of excess covid claims was offset by positive variance on persistency and expenses. Company has increased mortality assumptions by Rs1.8bn, already factored in our EV estimates.

* Upgrade from Add to BUY. We factor VNB margins of 28% / 30% with APE growth of 18% / 15% in FY22E / FY23E. We expect HDLI to accumulate Rs60bn of new business and Rs46.4bn of unwind (@ 8%) over FY22E / FY23E to reach an embedded value (EV) of Rs373bn by FY23E. We value HDLI based on 40x new business value of Rs33bn in FY23E to arrive at a target price of Rs841. At our target price, the stock will trade at 4.5x FY23E P/EV.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer