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More balanced product mix and execution trackrecord remain key differentiators

We believe HDFC Life is well on track to record more than Rs25bn VNB and close to Rs100bn APE in FY22E. This would imply 24% VNB CAGR over last 5 years (FY17-22E). More balanced product mix than peers, well-entrenched distribution mix, more than 15% growth potential in APE, possibility of improving VNB margins, and >18% steady-state operating RoEV remain safe long-term investment thesis on HDFC Life.

* Maintain BUY. We factor-in VNB margins of 27%/28% with APE growth of 23%/18% in FY22E/FY23E for HDFC Life. We value the stock at 35x new business value (40x earlier) of Rs33.2bn in FY23E to arrive at a target price of Rs756 (Rs806 earlier). The cut in VNB multiple factors-in relatively gradual VNB/margin growth outlook compared to past. We have also added the 2x EV of Exide Life and incremental shares in our valuation. At our target price, the stock will trade at 4x FY23E P/EV.

* Change in retention policy will naturally evolve with underwriting data and ability. Company will retain now 35% of total sum assured compared to 20% earlier. In terms of individual ticket size, company will reinsure policies with more than Rs40mn sum assured now compared to Rs20mn earlier

* Distribution mix is stable between FY21 and 9MFY22 with 61% bancasssurance, ~19% direct, 14% agency and 6% brokers (all based on individual APE).

* Product mix continues to have lowest ULIPs among peers, which lends more support to margin outlook: In terms of total APE, savings mix increased from 83% in FY20 to 87% in FY21 and stood at 86% in 9MFY22. Within savings, mix of ULIP decreased from 23% in FY20 to 20% in FY21 but increased to 22% in 9MFY22. Share of par had seen a sharp increase from 16% in FY20 to 29% in FY21 but declined to 25% in 9MFY22. Non-par mix declined from 34% in FY20 to 26%/ 27% in FY21/9MFY22. Protection mix has increased from 13% in FY21 to 14% in 9MFY22. Improvement in mix was led by group protection, which increased from 7% in FY21 to 9% in 9MFY22, while share of retail protection declined to 5% in 9MFY22 from 6% in FY21. Credit protect, which grew 76% YoY in 9MFY22 on low base of FY21, remains a key growth lever ahead buoyed by new partnerships.

* Total Covid impact of Rs6.5bn in 9MFY22 and Rs1.65bn in FY21 due to Covid totaling to 2.7% of current EV of Rs295bn. The adequacy of reserves assumes less importance considering the decrease in Covid cases and increase in overall vaccination. HDFC Life carries Rs1.1bn of extra mortality reserves related to Covid as of Q3FY22-end compared to Rs7bn in Q1FY22 and Rs2.04bn in Q2FY22.

* Exide Life transaction update: Exide Life is a 100% subsidiary of HDFC Life from 1 st January 2022. Merger is expected to happen in H2FY23E. Integration of the two companies and subsequent synergy realisation will require 18-24 months from now.

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