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Higher Covid claims – near term overhang

About the stock: HDFC Life is among the most dominant players in Indian life insurance industry with strong distribution network, parentage, operating metrics.

* Balanced product mix with focus on non-par and protection business

* Industry leading VNB margins of over 25%

Q1FY22 Results: Business traction healthy, claims rise amid pandemic.

* Gross premium grew at a healthy pace of 31% YoY to | 7657 crore

* VNB margins remained healthy at 26.2% aided by balanced product mix

* Claims rise sharply with peak claims 3-4x higher than during first wave

* Surplus declined to | 59 crore vs. | 283 crore YoY

What should investors do?

HDFC Life’s share price has grown by ~2x over the past four years.

* We retain our BUY rating on the stock

Target Price and Valuation: We value HDFC Life at 4.5x FY23E EV with TP of | 800

Key triggers for future price performance:

* Calibrated growth in credit protect & focus on retirement product to aid growth

* Strong distribution network remains core to maintain business momentum

* VNB margins to be industry leading above ~26%

* Higher Covid claim remains a near term overhang; reserves at | 700 crore

Alternate Stock Idea: Apart from HDFC Life, in our coverage we also like SBI Life

* SBI Life also comes with a strong parentage with strong distribution network and superior cost efficiencies

* BUY with a target price of | 1,100

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