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Healthy performance backed by fundamental strength

HDFC Life Insurance reported a steady performance led by healthy new business (led by diversified product mix) and renewal premium, steady persistency and investment income. Gross premium growth remained healthy at 21.6% YoY to | 12911 crore, led by steady traction in renewal to | 6350 crore (up 14.9% YoY) and new business premium to | 6560 crore (up 28.9% YoY). On an APE basis, growth in premiums increased 36.3% YoY to | 2806 crore. Individual APE for FY21 was at | 7120 crore, up 16% YoY.

Growth in protection business remained slower with 4% YoY growth in individual premium to | 480 crore while group premium declined 21% YoY to | 3440 crore for FY21, primarily due to slowdown in credit disbursement. The company is seeing improving traction in business both in individual segment (term & par products) and group business (owing to revival in credit protect in Q4FY21).

Partner tie-up in FY21 has started to witness business traction. Commission ratio increased 50 bps YoY to 4.6% owing to increased business. Opex ratio (management expense) ratio remained steady YoY at 11.7%. Claims ratio increased YoY though healthy premium accretion led to surplus at | 434 crore, up 219% YoY, 58% QoQ. PAT for the quarter was at | 318 crore, flattish YoY, and lower than our estimate (due to higher contribution to policyholder’s fund).

AUM growth for the quarter was at | 173839 crore, up 37% YoY owing to base effect. Persistency ratio largely remained buoyant with 13th month persistency at 90% and 61st month persistency at 53%. New business margins continued to increase 60 bps QoQ to 27%, led by balanced product mix. Indian embedded value was at | 26620 crore as of March 2021, up 18.5% YoY. Solvency ratio remained steady at 2.01x.

Valuation & Outlook

Product innovation and launches, diversified business mix and improving traction from recent tie-ups is seen keeping business momentum healthy. Focus on non-metro and non-salaried segment is expected to enhance customer base and thereby business traction. Revival in credit protect and focus on retirement products are seen aiding business growth and margins. We expect gross written premium (GWP) to grow at ~18% CAGR in FY21- 23E to | 53890 crore.

Steady traction in individual term insurance and gradual pick up in credit protect is seen keeping VNB margin at ~25%. PAT is expected to grow at 10% CAGR over the same period to | 1634 crore. HDFC Life currently trades at ~4.1x FY23E embedded value (EV), which is at a premium compared to its peers. Given the superior business franchise and continued focus on profitability, valuations are expected to remain at a premium. Considering the current business franchise and building anticipated improvement in business momentum and profitability metric, we maintain our target price of | 820/share, valuing the company at ~4.7x FY23E EV. We maintain BUY recommendation on the stock.

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