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With Exide Life merger behind, focus shifts to HDFC-HDFCB merger

HDFCLIFE reported a satisfactory performance in H1FY23, with pre-merger APE, VNB, VNB margin and Embedded Value (EV) coming broadly in line with our estimates, and showing growth and improvement over the previous-year and prior-quarter. With the Exide Life merger with HDFC Life approved, the company reported merged numbers for the first time; the merged-entity VNB margin at 26.2% was almost on par with HDFCLIFE’s 26.4% in H1FY22, thus granting added confidence on the merged-entity’s FY23 margin being at parity with HDFCLIFE’s FY22 margin. Given that the merger process is now behind, synergy and integration will play out over the next 12-24 months. However, besides HDFCLIFE’s operating performance, the merger process and modalities of the HDFC-HDFC Bank merger are likely to be the key drivers for HDFCLIFE shares in the near term. We change our estimates for FY23-25, to reflect the Exide Life merger and reiterate our BUY rating, with revised Target Price of Rs670/share.

* No surprise on operating or financial performance: For H1FY23, on pre-merger basis, HDFCLIFE reported APE of Rs45.5bn, VNB of Rs12.6bn, VNB margin of 27.6% and EV of Rs330bn that came in marginally better than our estimates of Rs45.6bn, Rs12.4bn, 27.2% and Rs321bn, respectively. As expected, on actual cost basis, Exide Life’s VNB margin stood at ~8%, leading to ~Rs0.3bn VNB in H1FY23 on an APE of Rs3.65bn. The GAAP PAT for H1 (on merged basis), at Rs6.9bn, was broadly in line with our estimate of Rs6.8bn (on pre-merger basis), with that for Exide Life being generally negligible. In product terms, strong growth in Group Protection, especially Credit Life, more than offset the continued decline in Retail Protection, thus driving the overall Protection APE growth to 24% YoY.

* Stable-to-improving operating parameters; capital-raise drives a marked jump in Solvency: On pre-merger basis, persistency across most cohorts improved. With Exide Life persistency showing gradual improvement, post the merger, the merged-entity’s persistency in FY23 should be broadly in line with that of pre-merger HDFCLIFE’s in FY22. On the cost front, with productivity of the Exide Life agent and employee improving, cost ratios are likely to improve hereon. The Solvency ratio for H1 at 210% was markedly better than that in Q1FY23 and FY22, largely led by the Rs20bn preferential capital-raise in Q2.

* HDFC-HDFC Bank merger modalities key for HDFCLIFE shares: With approval received for the Exide Life merger, the company will now focus on complete integration of Exide Life, with target to achieve synergy benefits in productivity and cost terms over the next 12-24 months. H1FY23 VNB margin of the merged entity, at 26.2%, is already broadly on par with HDFCLIFE’s H1FY22 margin and, hence, reflects an earlier-than-expected margin neutrality of the merged entity with the HDFCLIFE pre-merger. Going ahead, the key for HDFCLIFE shares, however, will be the modalities of the HDFC-HDFC Bank merger, along with operating performance. Given that HDFC Bank, the largest distributor of HDFCLIFE (currently contributing ~46-48% of Retail APE), is its promoter shareholder too, a more synergetic performance in terms of new business growth and cost is a likely possibility.

* Multiple lever for future growth; innovation in product and distribution remains core: Despite the volatile macro environment, the company is confident of delivering sustainable growth, better than the industry, led by its innovative approach in product and distribution (an industry-first). The company expects improving its reach among masses, with its latest tie-up with India Post Payment Bank. On the product & distribution front, the company will continue with its omni-channel and balance productmix approach.

* We change our estimates to account for the H1 development and Exide Life merger; reiterate BUY, with revised TP of Rs670: We change our FY23-25 estimates to factor-in: i) the slower growth in H1 vs FY23E; ii) Exide Life merger lifting topline numbers by ~8% and entailing a slightly negative impact of ~40-80bps on the VNB margin. Further, we now value the merged entity using the ‘appraisal value’ method and increase the Cost of Equity to 13%; we also increase our terminal growth to 5.8%. On net, we arrive at Sep-23E fair value TP of Rs670 (Rs680 earlier), implying FY23E P/EV of 3.4x; we reiterate BUY.

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